Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- WNS (Holdings) Ltd added eight new logos and expanded 36 existing relationships in the fiscal first quarter.
- The company made significant progress in improving access to capital and increasing share price stability by exchanging ADSs for ordinary shares and joining the Russell 2000 Index.
- WNS (Holdings) Ltd has transitioned to domestic filer status and is now reporting financials under US GAAP, which should improve ESG visibility and make financials more consistent with peers.
- The company has a strong focus on AI and generative AI, with approximately one-third of company revenue in fiscal 2024 delivered with AI as a component of the solution.
- WNS (Holdings) Ltd's large deal pipeline includes more than 20 deals, each over $10 million in ACV, totaling more than $400 million in ACV, indicating strong future growth potential.
Negative Points
- Net revenue for the fiscal first quarter decreased by 1.6% year-over-year and 4.1% sequentially on a reported basis.
- The company experienced volume reductions with certain clients, particularly in the online travel sector, which were greater than expected.
- Adjusted operating margin decreased to 18.4% from 20.1% last year and 20.9% last quarter, driven by lower revenue, employee utilization, and higher SG&A levels.
- The company's effective tax rate increased to 23.1% from 21.7% last year and the prior quarter, driven by geographical profit mix and the percentage of work delivered from tax incentive facilities.
- Attrition rate increased to 34% from 32% last year and 33% in the previous quarter, indicating potential challenges in retaining talent.
Q & A Highlights
Q: Could you give us some color on how the ramps of these large deals have progressed so far? Was there any revenue contribution from these deals in 1Q? And how much of a revenue contribution from the ramps do you expect in 2Q?
A: The four large deals signed in Q4 had minimal revenue contribution in Q1, which was expected. These deals are staffed and ramping, and they are expected to reach steady state by the end of fiscal Q3. The one large deal signed in Q1 had no contribution in Q1 and minimal contribution expected in Q2. We are confident about closing more large deals in Q2 and Q3 given the expanding pipeline.
Q: What gives you confidence in the implied second-half revenue growth acceleration?
A: The assumption for Q2 is that revenue will be relatively flat. The underlying growth and momentum in the business are healthy. We expect continued weakness in travel volumes in Q3 and Q4, but the expansion of existing relationships and the sale of small- and medium-sized deals give us confidence. We need to close some large deals to meet the numbers, but the large deal pipeline gives us confidence.
Q: Are you able to provide any color on the relative benefit that clients are seeing from gen AI implementations?
A: We have not seen any revenue pressure from gen AI implementations. The goals of the deals have been more about expanded benefits rather than cost reduction. The implementations have been additive to our revenues and capabilities.
Q: Can you provide more details on the attrition rate and its volatility?
A: The attrition rate can move around quarter to quarter. We expect it to be relatively stable in the low- to mid-30% range. The current labor environment contributes to this volatility.
Q: Is there reliance on winning large deals for the fiscal 2025 growth outlook?
A: Yes, we need to close a couple of large deals to meet the guidance. The large deal pipeline is substantial, and we are confident in our ability to convert some of these deals.
Q: Can you provide an update on the volumes in the insurance vertical and the insurance captive?
A: Volumes were impacted by clients exiting lower-profit businesses. We expect volumes to be stable in the near term. The insurance captive remains an opportunity, and we continue to have healthy discussions with them.
Q: What are your expectations for the cadence of operating margin over the course of the year?
A: We expect Q2 margins to be relatively flat compared to Q1. Margin expansion opportunities will come in Q3 and Q4 as we leverage investments and improve productivity.
Q: Are generative AI engagements structured differently than typical engagements?
A: Some gen AI capabilities are being integrated into existing processes, while new deals with gen AI components may have non-FTE structures like transaction-based or outcome-based models. This shift creates margin opportunities.
Q: Are you seeing any changes in client behavior due to gen AI?
A: Clients are focused on strategic priorities like cost leadership and digital transformation. Gen AI continues to be important, and clients seek partners who understand their business and can provide the right solutions.
Q: How should we think about margins for this year and beyond with the shift to US GAAP reporting?
A: Adjusted operating margin will trend about 1% lower under US GAAP. However, the interest cost will also be lower, resulting in a marginal increase in ANI and EPS. We remain confident in achieving 20%-plus margins for the year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
