WNS (Holdings) Limited (NYSE:WNS) Q1 2024 Earnings Call Transcript

WNS (Holdings) Limited (NYSE:WNS) Q1 2024 Earnings Call Transcript July 20, 2023

WNS (Holdings) Limited beats earnings expectations. Reported EPS is $1.01, expectations were $0.93.

Operator: Good morning and welcome to the WNS Holdings fiscal 2024 first quarter earnings conference call. At this time, all participants are in listen-only mode. After management’s prepared remarks, we will conduct a question and answer session and instructions for how to ask a question will follow at that time. As a reminder, this call is being recorded for replay purposes. Now I would like to turn your call over to David Mackey, WNS’ Executive Vice President of Finance and Head of Investor Relations. Please go ahead.

David Mackey: Thank you and welcome to our fiscal 2024 first quarter earnings call. With me today on the call, I have WNS’ CEO, Keshav Murugesh, and WNS’ CFO, Sanjay Puria. A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.wns.com. Today’s remarks will focus on the results for the fiscal first quarter ended June 30, 2023. Some of the matters that will be discussed on today’s call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include but are not limited to those factors set forth in the company’s Form 20-F. This document is also available on the company website. During this call, management will reference certain non-GAAP financial measures which we believe provide useful information for investors. Reconciliations of these non-GAAP financial measures to GAAP results can be found in the press release issued earlier today. Some of the non-GAAP financial measures management will discuss are defined as follows. Net revenue is defined as revenue less repair payments. Adjusted operating margin is defined as operating margin excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, and goodwill impairments.

Adjusted net income, or ANI is defined as profit excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, goodwill impairment, and all associated taxes. These terms will be used throughout today’s call. I would now like to turn the call over to WNS’ CEO, Keshav Murugesh. Keshav?

Keshav Murugesh: Thank you David and good morning everyone. In the first quarter, WNS continued to deliver healthy financial results and position our business for long term success. Despite the challenging macro environment, WNS posted Q1 net revenue of $317.5 million, representing a year-over-year increase of 15.5% on a reported basis and 17.5% constant currency. Sequentially, net revenue increased by 4.1% on a reported basis and 3.6% on a constant currency basis after adjusting for foreign exchange. Our acquisitions added approximately 6% to year-over-year growth and had no impact sequentially. In the first quarter, WNS added six new logos and expanded 36 existing relationships. Sanjay will provide further details on our first quarter financial performance in his prepared remarks.

Today the advance of generative AI and its potential impacts on business and society are being discussed and debated globally. The growth in the size and sophistication of large language models is a significant technological advance that will have meaningful and wide-ranging impacts, but there is still much to be learned in the coming months and years about its costs, benefits, risks and applicability. That being said, WNS is extremely excited about the opportunities gen-AI will create for our business moving forward. As we work to create new and innovative use cases for gen-AI, it is important to remember that gen-AI is a tool that represents only one component of an impactful solution. Leveraging the benefits from this and other technologies will require the expertise of firms like WNS, who can combine deep domain and process expertise, advanced analytics, and global talent to deliver business outcomes.

In fact, we believe that meaningful disruptions to our clients’ models, such as technology advancements, help drive increased opportunities for BPM providers, including expanding the addressable market, growing existing relationships, and accelerating adoption. Over the past 15 years, we have seen several disruptive forces impact our clients’ business, such as macro cost pressure, the internet, the cloud, the emergence of big data, digitization and automation, as well as the COVID pandemic. Each of these themes has now proven to generate increased adoption of new services and process outsourcing. In addition, we also see gen-AI as a catalyst for driving higher value services solutions, as well as engagement models. We believe that gen-AI will enable WNS to continue moving our relationships up the value chain and shift engagements from headcount-based pricing to models based on ownership and accountability for results.

As a result, we will be able to better align relationship objectives, delivering great outcomes for clients and stickier revenues with increased margin opportunities for WNS. As we have seen already, one undisputable impact from gen-AI will be improvements in productivity. Similar to other disruptive technologies, we understand that this will reduce the reliance on some existing skills, enhance the performance of others, and result in the creation of completely new roles. For BPM providers, cumulative year-over-year productivity improvements are business as usual. At WNS, our experience demonstrates that increased productivity headwinds driven by technology and automation have been more than offset by relationship scope expansion and the ability to attract new clients.

This is due to the underpenetrated nature of both our industry and the majority of our client engagements, as well as the need for clients to increasingly leverage new technologies to remain competitive. As a result, despite market fears to the contrary, technology advancements have proven to generate net outsourcing gains for BPM providers. With this backdrop, I want to provide you with a look at WNS’ current approach and capabilities with respect to generative AI. Over the past 10-plus years, WNS has demonstrated a unique ability to leverage our culture of innovative, flexibility and client centricity to adapt and flourish. We have been able to successfully manage several key industry changes and challenges, including Brexit, SMAC, digital, and COVID while delivering industry-leading growth and margins for the company and co-creating differentiated solutions for all our clients.

We believe that with respect to gen-AI, innovation and adaptability will be important requirements for success. In addition, WNS has also the foundational skills necessary to help our clients leverage the capabilities of gen-AI. Our internal investments and strategic acquisitions over the past several years in technology, data and analytics, as well as domain expertise have positioned WNS to meet our clients’ evolving requirements, and today we have approximately 5,000 people in the company with data, AI and gen-AI skills, and another 1,000-plus people with the core skill sets to be rapidly trained and upskilled for growth. These include analysts, engineers, scientists, developers and architects with skills across data, AI, cloud, enterprise, and UI and UX.

In terms of solution development, WNS has already embedded gen-AI capabilities into several of our existing digital assets, which are now enabled and ready to go. In addition, we currently have more 75 gen-AI use cases in various stages of development across horizontals as well as verticals, of which nine are currently built, demoed and ready for deployment. For example, in the healthcare space, we have combined our deep industry knowledge with gen-AI to create a medical summarization solution which can summarize, analyze and synthesize complex clinical as well as medical records. By leveraging gen-AI to process diverse data sets, including patient histories, lab results, medical calls and treatment plans, WNS is able to help healthcare payors and providers access critical information rapidly, improve decision making, and drive better patient outcomes.

Most importantly, we continue to believe that our decades-long focus on domain first remains our key differentiator and that industry knowledge will be the most important enabler to leveraging generative AI. Our role as a domain-centric partner provides us with unmatched visibility and knowledge of industry specific processes, data and operations across a large number of clients. Since domain expertise is critical to data sourcing and selection, model training and utilizing large language models to create new solutions, we feel WNS is uniquely qualified to help our clients leverage gen-AI to solve industry problems, as well as drive great outcomes for them. To summarize, we believe that AI and gen-AI create more opportunity than threat for our business and that WNS is best embracing and well positioned to take advantage of this technological advancement.

With respect to our full year outlook, companies appear to be slightly more cautious about a sustained macro slowdown. As a result, we are seeing defensive behaviors from some clients such as reduced volume projections and delays in decision making. To date, this has not impacted our revenues and we believe the volume projections they are providing are conservative. Despite these challenges, we continue to expect low to mid double-digit revenue growth and stable industry-leading margins for this year. WNS’s new business pipeline remains extremely strong. The company is executing well and we continue to invest in domain, technology and talent in order to drive long term sustainable value for all of our key stakeholders. I would now like to turn the call over to CFO, Sanjay Puria to further discuss our results and outlook.

Over to you, Sanjay.

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Sanjay Puria: Thank you Keshav. In the fiscal first quarter, WNS net revenue came in at $317.5 million, up 15.5% from $274.8 million posted in the same quarter of last year and up 13.5% on a constant currency basis. Sequentially, net revenue increased by 4.1% on a reported basis and 3.6% on a constant currency basis. Acquisitions contributed approximately 6% to year-over-year revenue growth and had no impact versus last quarter. Our sequential revenue growth was driven by broad-based momentum with both new and existing clients and favorable currency movements. This benefit was partially offset by the impact of contractual [indiscernible] commitments to certain clients. In the first quarter, WNS recorded $2.6 million of high margin short term revenue.

Adjusted operating margin in quarter one was 21% as compared to 21.1% reported in the same quarter of fiscal 2023 and 20.6% last quarter. Year-over-year, adjusted operating margin decreased slightly as headwinds from annual rate increases and return to office costs were largely offset by operating leverage on higher volumes and favorable currency movements. Sequentially, margins increased as a result of higher volumes, favorable currency impact including the FX losses on all monetary assets and liabilities [indiscernible], and higher margin short term revenue. This benefit was partially offset by wage increases and higher return to office costs. The company’s net other income/expense was $2 million of net expense in the first quarter as compared to $0.2 million of net income reported in quarter one of fiscal 2023 and $0.4 million of net expense last quarter.

Year-over-year, net interest expense increased driven by higher debt levels, new operating leases, and lower cash balances resulting from acquisitions and share repurchases. These headwinds were partially offset by higher interest rates and interest income on tax refunds. Sequentially, the unfavorable [indiscernible] was a result of reduced benefit from interest income on tax refunds, lower average cash balances, and additional interest expense stemming from $40.2 million of short term debt taken in quarter one. WNS’ effective tax rate for quarter one came in at 21.8%, up from 21.1% last year and up from 15.8% last quarter. Both year-over-year and sequentially, changes in our effective tax rate are largely the result of shifts in our geographical profit mix, changes to the mix of [indiscernible].

Sequentially, the tax rate also increased as a result of a one-time cash accounting benefit of $1.7 million in quarter four of last year. The company’s adjusted net income for quarter one was $50.6 million compared with $45.9 million in the same quarter of fiscal 2023 and to $52.4 million last quarter. Adjusted diluted earnings were $1.01 per share in quarter one versus $0.90 in the first quarter of last year and $1.04 last quarter. As of June 30, 2023, WNS’ balances in cash and investments totaled $242.6 million and the company had $206.2 million in debt. Included in this debt amount is $40.2 million borrowed for general corporate purposes against our line of credit during the quarter. In quarter one, WNS generated $19.5 million of cash from operating activities, incurred $17.8 million in capital expenditures, and made scheduled debt repayments of $10.6 million.

The company also repurchased 1.1 million shares of stock at an average price of $77.84, which impacted quarter one cash by $85.6 million. DSO in the first quarter came in at 24 days as compared to 29 days reported in quarter one of last year and 32 days last quarter. With respect to other key operating metrics, total headcount at the end of the quarter was 59,871, and our attrition rate in the first quarter was 32% as compared to 49% reported in quarter one of last year and 40% in the previous quarter. In the quarter, attrition for entry level wide-based [indiscernible] services reduced significantly. We expect attrition will normalize over time in the low to mid 30% range but will continue to be volatile quarter to quarter in the current labor environment.

[Indiscernible] capacity at the end of quarter one increased to 38,945 and WNS continued our progress towards in-person operations averaging 65% work-from-office during the quarter. In our press release issued earlier today, WNS provided our revised full year guidance for fiscal 2024. Based on the company’s current visibility levels, we expect net revenue to be in the range of $1.296 billion to $1.354 billion, representing year-over-year growth of 12% to 17% on a reported basis and 11% to 16% on a constant currency basis. Our acquisitions are expected to contribute 3% inorganic growth in fiscal 2024 and we currently have 92% visibility to the midpoint of the range. Top line projections assume a British pound to U.S. dollar at average exchange rate of 1.27 for the remainder of the fiscal year.

Our revised [indiscernible] guidance includes a headwind of approximately 1% for reduced volume projections from certain clients. As Keshav mentioned, we have not see this reduction materialize to date, but in a weak and uncertain macro, it is not surprising that clients are being conservative related to the their future volume commitments. We have incorporated these lower estimates into our guidance consistent with the company’s visibility-based approach. Full year adjusted net income for fiscal 2024 is expected to be in the range of $211 million to $223 million, based on an 82 rupee to U.S. dollar exchange rate for the remainder of [indiscernible] 2024. This implies adjusted EPS of $4.21 to $4.25, assuming a diluted share count of approximately 15.1 million shares.

The midpoint of guidance represents more than 12% growth in EPS. With respect to capital expenditures, WNS currently expects our requirements for fiscal 2024 to be up to $60 million. I would also like to mention that beginning this quarter, WNS has changed our segments for financial reporting processes to align with our new SBU structure. You will now see revenue and margin contribution by SBU in our company metrics slide and relevant SEC filings. We’ll now open the call for questions. Operator?

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Q&A Session

Operator: [Operator instructions] The first question comes from Bryan Bergin with TD Cowen. Your line is open.

Bryan Bergin: Hi, thank you. I wanted to start on demand and the growth outlook here. Understand that your actual volumes have not been impacted yet, but can you give us some more color on the industries that are providing the more conservative forward volume projections, and also how broad-based is the slower decision making comment? Anything more you can say on that?

David Mackey: Sure, let me take a first cut at that, Bryan, and Keshav and Sanjay can contribute here. When you look at where we’re seeing the volume slowdowns, I think in terms of the commitments from clients, it’s the places you would expect. We are seeing it in the OTA travel space, we’re seeing it in high tech, we’re seeing it in shipping and logistics, and this is a very similar pattern to what we saw during the pandemic in terms of conservatism. Obviously the way our contracts are structured, clients have a pretty significant incentive to be conservative in that if they give us projections and they’re not able to meet those projections, they’re on the hook for paying for resources, so I think this is just a function of the environment.

Certainly we would prefer that these commitments be stable to increasing in nature, but given the macro, it’s not surprising. In terms of the demand environment, I think overall the demand environment remains extremely healthy. We just wanted to call out here that we have seen for a handful of clients, and it’s not specific to any vertical or any geography, delays in decision making, pulling the trigger on moving forward with an initiative. Don’t view this as an overall trend at this point, but just did want to call out that we are starting to see some of that.

Keshav Murugesh: Yes, I’d just add that we’re actually continuing to see a very healthy pipeline, as I called out earlier, Bryan – one. Second thing is we’re seeing lots of new deals getting added to that pipeline, and as Dave said, because of the current macros, maybe one or two delays, decision cycles taking place with one or two clients, and more importantly we are seeing a lot of conservatism in terms of people providing volume projections. But the core is clients are flying up and down interacting with us across the globe, our people are flying around and interacting with them at a pace never seen before, and overall I am quite happy about the quality of the pipeline and the fact that in this macro, while transformation continues to be very, very important, we also think now that people are starting to look at these cost saving initiatives as well, which is also adding to this pipeline.

So [indiscernible], remember when we went into the first quarter also, we saw similar trends, but the quarter actually has delivered far better than our earlier anticipation.

Bryan Bergin: Okay, makes sense – your conservatism makes sense. Follow-up here on generative AI – obviously it’s very early with all of this, but how are clients viewing WNS as a partner in this type of work, and what type of investments do you need to scale? I hear you on the solution development you’ve made internally, but I’m just curious what the nature is on those external client conversations; and then on the investments, do you see this as an opportunity to lean in incrementally on capability investment, or is this just more so in the existing run rate of what you do in your capability investments?