WNS (Holdings) Limited (WNS) Earnings Call Transcript & Summary

Good morning. My name is Puneet Jain. I am a payment processing and IT services analyst at JPMorgan. I'm glad to have here with us Mr. Sanjay Puria, WNS CFO; and Mr. Dave Mackey, EVP, Finance and Head of Investor Relations at WNS. Welcome, gentlemen. So let's kick off our Ultimate Services Conference with WNS. So Sanjay, for the benefit of investors who may not be as close to the company, could you tell us about WNS, its positioning, why you win in the BPO market? And if you can also quickly recap your recent earnings results for us?

Yes. So WNS is in the BPO space and is one of the leader in this space, where we -- generally, we design, implement and run mission-critical business processes for our clients. I know just from overall BPO market perspective, that's been relatively underpenetrated and there's a really massive opportunity as we move ahead. And specifically after pandemic, the digital transformation requirement and to really improve the competitive positioning, the adoption has been really accelerating. And accordingly, the addressable market is expanding, right? Clients are looking for partners like WNS, who can help them leverage technology and business models to improve really the customer experience, leverage data analytics to make better decisions and increasing operating efficiency and reducing costs. In WNS, we are differentiating ourselves with our vertical model, which is an end-to-end where based on our unique industry-specific knowledge, which enables us to solve problems, leveraging technology, analytics, process expertise and our global delivery footprint. We have executed well over the years and our industry-leading -- having industry-leading organic growth as well as the premium margins. The last earnings, we have discussed about and our -- discussed our results where we had a strong -- the quarterly results as well as we updated our guidance. And we are very, very positive about the overall industry as well as the way ahead.

Can you quickly walk us around the globe, talk about the trends you are seeing across verticals, across regions? How is demand environment for BPO changed as a result of pandemic, something you alluded just now? And how is WNS positioned to win in that trend in that new market dynamic?

Yes. Good question. So demand is really strong for our business across globe, across geographies, verticals, service offerings. And specifically, there has been really strong in the U.S., but it does not mean that it's not having a good growth. It's having healthy growth in other geographies also. And specifically, pandemic has accelerated the demand because, as we know, every client really want to be having a better competitive positioning in this entire digital environment and digital world. WNS has been investing ahead of the curve into this whole digital transformation area and have been really adopting this digital services because clients are in a different maturity curve from their positioning perspective, right? Some are really still early outsourcers, some are transitioning into a digital transformation and some are really mature. And accordingly, you have to be ready with all the models, and that is where we have always invested in helping our client into this digital transformation journey. At the same time, as I said that we are -- we approach and having a differentiator with our vertical and domain expertise, which is very, very important to solve all the unique problems to the client business needs are in the environment which we are operating. So absolutely, as I said, demands are across the globe and across the sectors.

That's really good to know. And the last recession in 2008, 2009, that resulted in a lot of clients selling their in-house operations, looking to outsource more. They're doing a lot more -- they did a lot more employee rebadging deals. Are you seeing any of that like a structural change in how clients think about insourcing versus outsourcing as they come out of this pandemic and like you talked about, that they need all this digital transformation something for which they might have to rely on vendors even more?

Yes, we have been seeing increased opportunity for this rebadging deal as well as the captive carve out because this pandemic, a lot of these clients have actually struggled and specifically in the work-from-home environment, they were not able to transition it very swiftly as well as when you're seeing this whole labor -- this labor challenge from an attrition perspective, they are finding it pretty difficult. And accordingly what we are seeing that instead of looking for a short gap arrangements, they are looking for a long-term solution because the speed is of an access. And accordingly, it's very important for them who have a really trusted partner like us instead of trying to run on its own and keep on struggling. And if you recall in our last earnings call, we spoke about that we completed a captive deal with one of our large shipping and logistics clients when we took over almost 1,000 people. And now managing their very strategic business processes. So yes, there have been really increased discussions as well as clients are looking for to really hive out their captives instead of running on their own.

And one aspect of WNS that I think is unique among your offshore BPO peers is that you have a high mix of revenue that comes from servicing technology customers, the customers that have grown at very high rates. Can you talk about how big that vertical is for WNS? How fast it is growing at? And what do you expect from that vertical over the near term?

Yes. So we are very proud of our ability to service some of our largest digital leading companies in this -- in the globe. And these are all across, right, different verticals, in fact. It is like on the online travel. It can be from a social media or a fintech or e-tail or telemedicine. So we currently spoke about 17% of the company's revenue are coming from this type of companies. And we definitely expect the segments to continuously grow well above the company average. But important is that these are not a vertical, right? As I said, that across all the verticals, the way we report, they are reported within our traditional verticals because it helps to leverage the knowledge and -- to the businesses who still have into the traditional brick-and-mortar where they commit because they need to be getting more smarter. So what the area and the space is very exciting and with really good opportunity to accelerate the growth into the space.

And I think from just a traditional perspective as well, Puneet, one of the key advantages of servicing these types of customers is that it really gives us a unique insight and a unique view into what some of these legacy organizations are trying to accomplish, right? So to the extent that we've got businesses who are looking to transform themselves to be more like these digitally native firms having that visibility, having that expertise, having worked with these firms has clearly been an asset in terms of our ability to engage with other types of companies.

No. Understood. And can you also talk about like near-term trends? How much of the business is still operating below where it would be if there was no pandemic, right? Travel, obviously comes to mind. It is, you have high mix of business there. How much upside potential there is as that vertical returns to normal? Like it looks like flights are full. I flew in from New York last night, it was a packed flight. But is it -- like do you see that like is travel back to where it should be?

Yes. So you are right, Puneet. Travel is the largest part of our business. That's still not fully recovered from the pandemic, right? Just when the start of the pandemic, it was almost like running approximately 25% below pre-pandemic levels. But what we are -- the exciting thing is that we are seeing a good rebound and specifically in the U.S. [Audio Gap] but specifically large airline clients, I think it's still going to take time. We are seeing some good traction. They are recovering, as you mentioned, flights are full. But I think still there are very limited number of flights from an international perspective, which is still have to come back. The focus is absolutely there. And we believe there's been an opportunity approximately like 2% to 3% growth at company level as volumes recover. So I think gradually, we are seeing -- but yes, we are very positive about it.

Look, I think the other exciting thing, Puneet, that's happened is we've been the beneficiaries during the pandemic of also signing new logos in the travel space. So when we look at the opportunity in travel for us, it'd be great to recover some of the volumes that we've lost, and that's the good news, right? We didn't lose clients. We didn't lose ownership of processes. We just lost some of the volume that was moving through those processes. But clearly, there's a bigger opportunity for us in travel now, a, just from a recovery perspective; but b, one of the things that happened as a result of the pandemic is that we saw the travel business needed to change, right? The customer experience needed to be improved. They needed to change their business to deal with additional complexities like vaccines and vaccine passports, right? So we are seeing newer opportunities emerging from the travel vertical as a result of the pandemic. And we've seen that in the new logos that we've been able to add. We've added 4 new logos in travel just in the first half of fiscal 2022 alone. So some exciting things going on within that vertical.

And we can just add one last thing [Audio Gap]. It's also like because we were able to really supportive during the pandemic and some of the other peers were not able to do. So I think that is where they're also consolidating with some of the partners like us. And that's also -- it's a very exciting story for us.

Got you. And remind us like the travel vertical, like the contract structure there is -- they are mostly transaction-based pricing models or they are still FTE?

Yes. It's... I'm sorry, go ahead, Puneet.

Yes, it's a mix, Puneet. Definitely because as I said, different lines are at a different majority though from their journey perspective. So we still have a [Audio Gap] outsourcers were starting from there, the transition phase that they are having [Audio Gap] non-FTE pinnacle model as well as who are the mature [Audio Gap] not only from a non-linear model, but also into the gainshare model, right, where it's [Audio Gap] like an outcome-based. So I think it's a big site at this stage.

Got you. And how is the order book changing in terms of size and scope of contracts? Last year, I think you talked about that clients are splitting large engagements into smaller pieces. Are you still seeing that happening or like you talked about the employee rebadging deal? Are you seeing clients willing to commit to like larger-sized deals now?

Yes. So I would say that there's no major changes over the past year. But definitely, the large transformational deals in the pipeline have been increasing. But still, they are moving into the multiple phases from a transition perspective and over the multiple year period, right? Because as these are large transformation, they want to ensure that every phase is very successful before they move to the new phase. But at the same time, wherever existing relationships are there, we are seeing that those clients are also moving very quickly because they know the capability from a WNS perspective as well as their experience in the last 2 years, the entire transition virtually, right? So that has given a lot of confidence to them. So that's how acceleration is happening. But the newer deals, newer clients, they are taking those multiple phases steps from a longer-term tenure perspective.

And I think we've seen that in the numbers, right, Puneet. I mean when you looked at our ability to close new logos during the pandemic and the ability to accelerate and expand existing relationships, we thought the numbers were really healthy, right? We added over 30 new logos last year. We expanded 71 relationships. But to Sanjay's point, through the first half of this fiscal year, we've expanded 49 relationships already. So we're actually on a pace ahead of that in terms of our existing clients coming to us and saying, "Hey, we appreciate what you're doing for us now, but we need more. And that's really what drives our engine from a growth perspective. We typically don't get more than 3%, 4% of revenue in a given year from new logos. Now obviously, they're critical to continue to add if we want to drive long-term growth. But the real driver for acceleration in our business is expansion of our existing relationships. And we're really pleased with the traction that we've seen in terms of expanding those relationships over the last 18 months.

Understood. And talk about like on the recent call, you talked about South Africa-based client that decided to move away. What were the drivers of that decision? And was that like a one-off client situation? If you can talk about that, it would be helpful.

Yes. So, Puneet, you're right. That was a one-off situation, and it was a business decision what we do because client was still looking for more like a commoditized front-end services, call center provider instead of what we really go up with the more industry-specific custom solution. And again, that South African client is still our customer. We just launched one of that process because, again, it was a business decision and still we continue to provide the high-end services to them, including like finance and accounting and solutions. Because that's more strategic from a long-term perspective.

And I guess there is like a question from the portal. Let me quickly ask those as well. Can you speak to specific initiatives on driving organic growth among the existing clients, specifically the clients that are enterprise or strategic clients? And how do you define a strategic client?

So I think all the relations are very prestigious from a WNS perspective because we work with a lot of marquee logos. But from a strategic initiative perspective all around the digital transformation journey, and where we already spoke about it, how we are -- we have accelerated right time investments what we have been doing over there because it's very essential that along with the domain expertise and effort with the technology as well as the analytics is very important from a long-term perspective. And we have been talking about that how clients are adopting digital transformation, have accelerated over there. And so it's very, very essential. We spoke about that we renewed all the top 3, 4 clients from a WNS perspective, and those were all very digital transformation-led deal long term and why they still choose because we were driving those initiatives with them where to meet them more competitive and to help them accelerate the growth. So various initiatives are around that. Now it's not only about from a client end perspective, but also from internal in the organization, whether we talk about our talent program in this entire pandemic, how we utilize those opportunity to really train the people, upskill them so that they are well over there, so various initiatives were driven around that. So I think those are the initiatives, including continuous investment, what's going to happen into our hybrid operating model, right? As we know that the world going forward may change. And then some portion will be there from either work from anywhere, so what I call and accordingly, those are very critical investments and being ready with all the operating model what helps a client.

Okay. There is one more from the portal. Do you have a dollar estimate of the untapped opportunity within your existing client base? On an average, what percentage of revenue you think you have tapped among your existing clients? Specifically among -- again, like the largest clients, like how much penetration potential there is among your large clients?

Yes, I'll take that, Puneet. So certainly, it'd be very difficult to assess the dollar opportunity within our installed base. Just from the standpoint of what a customer's vision is today for what is outsourceable is clearly changing daily. I think we look at this and we look at our installed base and say, today, we've got 140 customers doing at least $1 million of business with us, which means there is critical mass to the relationship. We're doing something of meaning, we're doing something of scale for that customer. Of those 140 customers that we have, 97 of them are doing between $1 million and $5 million of annual recurring revenue. That's the real rocket fuel for our business. If you think about it in terms of the overall business model, right, if we have roughly 100 customers that are doing between $1 million and $5 million, and the opportunity is to double that spend to take them from $2 million to $5 million, right? You're looking at $300 million of growth opportunity over the next 3 to 4 years within the installed base without touching our larger customers. So $300 million of growth on a $800 billion, $900 billion business is certainly material in terms of the opportunity. And that's really why there's such a hyper focus on expanding those existing relationships.

No, that's fair. And if anyone else also has questions, feel free to send your request through Ask a Question portal. And meantime, I'll continue. So switching gears, let's talk about delivery model. As a result of pandemic, everyone started working from home. Now people are returning back to office. You have talked about like a hub-and-spoke model of delivery in the past. Talk to us like what do you mean by that? How many employees will continue to work from home versus being in office over the long term?

So I think these models are also continuously evolving. When the pandemic started, one thought what will be the model vis-a-vis as we are moving ahead, the expectation and the changes are happening. As I spoke about the hybrid operating model, where it's going to be the most important. Currently, we are operating 70% from office and the balance from the work from home. And I believe that as we move forward, this percentage of work from office is going to continuously improve as we start seeing situations improving and relaxations are being given by various countries and the governments over there. Now one thing I just want to mention that long term, I believe that still the last model is still going to be work from office. Why it'll be there? Because you should remember that all the relaxations given by various countries are temporary in nature, right? We all work into most of the -- into the tax-free zones, so those relaxations were given temporarily that, okay, you can work from home. Say, country like India where there are DOT regulations, right? Some relaxations were given temporarily. So I think we have to just wait and watch that how these regulations are going to change, whether they are going to be in permanent nature. Second, I would say that it's also about the client preferences, right, because it's all about data security, confidentiality, productivity requirements. It's all around that. So I believe that longer term, majority are still going to be work from office, but as clients have really experienced this, the BCP model requirement is going to be different, which is going to have some element of work from home to have the flexibility and never face this kind of a similar situation because we have learned from it. So that is how the mix model is going to be there. And accordingly, WNS has invested into whether it's technology, into the cybersecurity, into the -- because it's all very unique model for customized solutions for each of our clients. And we have done that during this pandemic and completely ready for that.

Got you. And talk to us like how should we think about your margins, like automation picking up, like there is a lot more tools, you're trying to do a lot more digital transformation, which might be more on-site heavy work. And then folks are returning back to office like you mentioned, how should we think about near-term and medium-term margins? What it means like can you pass on some of like the incremental cost to client or like the supply stuff like are you seeing any of that wage inflation and all in -- is there -- are there any margin consequences for any of these?

Yes. So Puneet, again, I think, where -- I think this is -- definitely, it's a mixed lot of whole stuff, what's happening, wage inflations, investment requirement ahead of the curve. What we look from a client definitely perspective is the cost -- what the client look is the total cost of ownership. It's not any more like a bill rate, where the discount has to be there. It's all about -- and when we talk about technology area because it meant automation and digital, that definitely helps to reduce the total TCO from a client perspective. And that is where the clients are more focused, right, that who should be the digital trusted partner who is going to really help them not only from a cost optimization perspective, but also to be really better competitive into the market, right? At the same time, this deal which have more automation, technology-enabled analytics. Definitely, the margin upside is always an opportunity over there, as we do that. But at the same time, we do a lot of the investment what we you keep on doing to be ready for the next year and the next wave from a growth perspective. So I believe that this is -- what we are doing is sustainable from a long-term perspective because of the mix that on one side on the expansion, on the other side, what we are able to really generate by some of this efficiency continuously.

Yes. And I think just to add to what Sanjay said, Puneet, the most important thing for us and obviously deploying technology and automation has the opportunity to help with margins, right, especially if you're able to capture more than your fair share of the savings that, that drives to our customer. But the real critical ability to drive margins over time is really going to be whether or not we have ownership and accountability for the process, right? We need to move away from headcount-based FTE models because the reality is if we operate in those models, the ability to drive margins is extremely limited, right? We can't charge the customer more for the same service and we can't pay the people less. And that's the reality of a headcount-based model. When you move to a non-FTE model or a nonlinear model, whether it's transaction-based or outcome-based or subscription-based. And the client now is holding you accountable for results. This is where the benefits of productivity, whether they're driven by flattening the delivery pyramid, leveraging lower-cost geography, deploying technology and automation, improving process workflows, right? If you're able to do these things in a transaction outcome or subscription-based model, then the benefits accrue to you. And that's what we want to do. We want to help clients solve their problems. We want to move them to models where they don't care about how we do it, just what we deliver, and that's when the margin opportunities come in our business.

We have 1 minute left. Let me quickly ask, I wanted to cover use of cash also. Can you -- very high level, given not much time, talk about your M&A strategy. You have been very disciplined in pursuing M&As. What type of deals you're looking at? And also how you think about capital returns?

Yes. So Puneet, M&A, the philosophy and exactly the strategy is the same. It's all about tuck-in acquisitions with -- from a capability acquisition perspective, which are accretive from overall growth perspective, whatever acquisitions we have done. It all has been successfully integrated and has been delivering a really, really good growth, the share buyback from a capital allocation perspective continues. We are already at 3.3 million shares approval. We did 2.2 million, 1.2 million, 1.1 million is still pending so which will be there. And there also, it has been like a 20% IRR over the last 6 years. What we have been able to deliver. So very actively pursuing M&A into the spaces -- space like the analytics or F&A, digital including some of the very industry-specific capability, what is going to be there. And it's just not about only acquisition. As part of this growth is also -- the focus is also about the carve out, right, where the pipeline has been increasing, including like the shipping and logistics, what we [Audio Gap] of the carve out. So very, very focused on that -- some of these capabilities from an inorganic perspective.

Yes. And I think this is our primary use of cash, right? We're in an industry where growth opportunities are there. We're in early cycle business. It's just making sure that we find the right fit at the right price and if we can't do that, we're not going to do bad M&A just to do bad M&A. And I think we've proven to be good stewards of capital.

And Puneet, just I have not highlighted about the usual stuff anyway, whether the utilization of the cash is going to be there is all about of our geographical expansion, investment in the digital. So that's pretty routine. But I think over and above is about the inorganic growth is going to be a focus up on.

Appreciate it. Thanks a lot. Thank you.

Thank you.

Thank you.