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

All right. Thank you, everybody. My name is Bryan Bergin. I cover services and software here at Cowen. I'm very pleased to have Dave Mackey. He's the EVP of Finance and Head of IR from WNS. Thanks for being here, Dave.

Thanks, Bryan.

WNS is a leading global business process management solutions provider. It has over 52,000 global employees that serve over 400 clients, with a notable presence across insurance, health care and travel.

Dave, we're going to get right into it. And I think to start, let's go with kind of an overall demand level set. So how would you characterize the demand environment? What are the primary themes that you're having with clients today? And how has it evolved here over the last 2 or 3 quarters?

Yes. I mean great question. And we're pretty happy with the fact that we think this is a really healthy, robust environment for demand in the BPM services space. Today, if you look at the primary reason that companies are coming to us for help, it's with their digital requirement. Increasingly, we see clients understand that they need to automate and transform their core business processes in order to remain competitive. They're struggling to improve customer satisfaction, to reduce cycle times, to improve throughput. And most importantly, to compete with not only other traditional players, but to compete with some of the digitally native players within their respective industry. So I think it's not unique to the BPM space. The theme of digitization and automation as a requirement and a business imperative is something that's helping us drive demand. Over the last couple of quarters, what we have also seen, as the macro has weakened, is that one of the other core tenets of our services, which is cost reduction, has increased in importance. So in an environment where cost is increasingly important, in an environment where budgets are increasingly under pressure, our ability to enable clients to save 30%, 40% from what it's costing them internally, day 1, to not have to justify a return on investment for their ability to actually not only save money, but to get their business to where they know it needs to be is a pretty compelling value proposition.

Okay. So obviously, the cost savings side is potentially, you'll see added demand here if things do slow down, but at the same time, business need for digitization. So yes, I think the market obviously is concerned of an imminent slowdown. But from your standpoint, from demand, it doesn't sound concerning.

No. I don't think it is. I mean, certainly, we could see incremental pressure on the existing book of business. But clearly, we've got the ability to deliver those kinds of benefits and savings to clients through the increased implementation and introduction of technology and automation. So we're not really concerned about that at all. We actually think the opportunity in this environment is probably healthier than it's ever been, because we saw a steady acceleration of demand for our services pre-COVID, in an environment where cost was not a major consideration, it was the need to automate. Certainly, our ability to do that, like I said earlier, to continue to do that and to deliver cost savings, I think, becomes compelling. I wouldn't go as far as to say that our services are countercyclical in nature, but certainly have a very, very low macro correlation.

Okay. Okay. You gave -- as we think about the outlook, so your fiscal '23, you gave, I guess a couple of months now, but you started at 11% midpoint constant currency organic, which is among the strongest, right? You typically would. Can you just talk about that outlook that you built it? I know you didn't change much in the guidance process, but what if you consider as the underlying environment economic-wise and then demand-wise?

Yes. Well, with WNS, the approach to guidance is consistent. So we do our guidance visibility based. What we do is we look at the committed business we have walking into a year and then historically what our ability has been to overperform from that perspective. We walked into this year at the midpoint of our guidance, as you said, with 11% growth and 90% visibility or 90% committed to our -- to that growth rate, which is higher than it's ever been in the company. Historically, we've started the year with 90% visibility to somewhere between 9% and 10% growth. In terms of what's included in that, obviously, like I said, it's visibility based. The approach is consistent with prior years. It does not include short-term revenues for us, which have averaged roughly 1% to 2% of overall company revenues. And those are the types of activities that we end up getting throughout the year, but that we don't have visibility to, as we walk into a quarter or walk into a year. It also does not assume a pickup in our travel business beyond where we were in the fiscal fourth quarter of last year. So we still have a recovery opportunity from volumes that were lost during COVID. And none of that pickup or that recovery has been included into our guidance. When our clients have comfort with their need for the acceleration and they're willing to forecast that to us, that's when we'll include that into our visibility in our guidance.

Okay. So you've got a couple of upside catalysts possible when they're on the downside. Is it just uncertainty? How do you think about that?

I think the downside is consistent with where we typically on a year, and it would be lost business, that we have either a client that has a change in strategic direction and decides to either consolidate or move away from the services we provide, M&A activities, bankruptcies, things like that. So I think the risk on the top line is more about something completely unforeseen at this point in time than anything that's systemic or anything that's macro related.

Okay. And then you mentioned digitization, you have cost reduction value proposition. You talked about a very healthy industry. When we kind of think about just the medium-term potential that you're seeing, just based on the activity you're seeing in your business, is there a case or maybe higher levels of medium-term growth than historically have shown?

Yes. I think there clearly is. I mean it takes several years based on the breadth and the depth of the initiatives that we undertake with clients for these to kind of reach their peak, if you will. So it's not uncommon if we sign a large relationship, that it's going to take that client 3, 4, 5 years to go from not having work with us to getting to the point where we've completely transformed, automated, and are now managing those services on behalf of the client. So we've seen good acceleration over the last couple of years in terms of the new logos that we've added and in terms of the expansions of our existing relationships. If you look at the progress that we made as we moved through last fiscal year, the year-over-year growth rate accelerated across the 4 quarters to where we did 16% organic constant currency growth last year. And as we mentioned earlier, we've started this year with 90% visibility to 11% growth, which is higher than we ever had. So clearly, from a WNS perspective, we see good underlying business momentum and the opportunity for acceleration. And I think that's further validated by the peers in the industry. So our direct competitors are also seeing accelerated revenue growth within their respective businesses. And that bodes extremely well for the BPM/BPO space.

Just looking at some of the numbers, you're saying new logo traction last year, 36 ads is up 9%. Your expanded relationship is 108, up 52% year-on-year. Big numbers there. Demand -- underlying demand. And the backdrop is one thing, execution on the sales is the other. Anything in the sales force you've done, investments you've made that are just making it, I don't want to say easier, but more successful, layering on new and expanding, existing?

Yes. Look, I think we've clearly made investments probably starting about 1.5 years ago on the sales force front, in terms of not only expanding the overall size of the team, both from a hunting and a farming perspective, but also expanding the scope of the skills that we have across the team. Adding experts in digital, adding experts in transformation and consulting, adding experts specifically tailored to the businesses that we've added or the new areas within our business, like procurement or like benefits management on the health care side. So supporting some of the new capabilities that we've added over the last several years have helped us with that. In terms of confidence, we felt comfortable enough with the productivity and the progress of those investments that we actually added another 10% to the sales force in the last quarter. We added, I believe, 10 or 11 salespeople, which took the overall size up 9% or 10% in terms of quota-carrying sales. And it's going to take 12 to 18 months for these new sales people to become fully productive. But again, this is the latest step function that we've made into our business. And those costs are embedded in the margin expectations, which are stable for fiscal '23.

Where are you finding sales talent?

Really broad-based. So we found a lot of them coming directly from industry, people that have worked in their respective verticals for many years and kind of understand what the processes in those businesses have historically looked like and what they need to. We've hired from within industry as well. So folks that have sold both in BPO and IT environments. And we've hired from the consulting agencies as well. So again, kind of similar to how we run our business, significant breadth across different verticals, different skill sets, different functions in terms of the expansion on the sales force.

Okay. Let's talk about the industry vertical. So travel, first off, you mentioned that, that you potentially have some upside there in this year depending on how that recovers. Maybe just some of the underlying factors in that travel industry exposure. Can you tease that out?

Yes. Obviously, travel created some pretty significant challenges for us during the pandemic. It was an area that was hit pretty hard from us, more from the standpoint of losing volumes on the processes and the clients that we were managing. Obviously, that was kind of across the board during the pandemic. But we have seen significant recovery in the parts of our business for travel that are related to either domestic or leisure travel to the point where that business now is running at or, in some cases, above pre-pandemic levels. The other thing that we've seen in travel through the pandemic was an increased demand for our services. So we've added several new logos in travel during that period. We've also been able to expand our existing relationships, which means managing more processes for the clients that we already had on board. If you look at our business today, there's really one piece that's running at levels that are below pre-pandemic levels. And that would be the international business travel exposure, and it's largely with the airlines. For that business, today, we're running about $20 million annualized below pre-pandemic levels. So that presents a recovery opportunity for us as and when that business rebounds. But as I mentioned earlier, that recovery is not included in our guidance for fiscal '23.

Okay. So overall, the industry vertical sounds healthier than it was the underlying relationships. It's really just this recovery of volume aspect...

Correct. Correct. And if you look at the growth in that industry -- in that vertical last fiscal year, it was the fastest-growing vertical for WNS in terms of year-over-year growth, obviously, coming off of a pretty easy comp. But driven by not only the recovery, but also, as I mentioned, the addition of new logos and the expansion of those relationships. And we believe that the travel vertical will continue to be an outsized contributor to the company's growth in fiscal '23.

Okay. Let's go to health care. So you've had standout performance in health care relative to other verticals for several years now. What areas within health care have driven that recent success? And then just maybe some broader trends in the space, where do you think the most opportunity will be for you?

Yes. Look, I think we've had really good success in the 2 key areas where we have depth and capability within the health care space, which would be the health care payer or the health care insurance segment and the pharmaceutical segment. If you look at what we do within those sub-verticals, it becomes kind of clear where our value proposition is resonated. Within the healthcare payer side, what we do is benefits management. So we're actually helping our clients do certification, precertification work for procedures as and when they're necessary. The stability from that business comes from the model, which is subscription based. We get paid per member per month. And obviously, over the last several years, we have not seen attrition in terms of the number of people, who require health care and don't see that changing in the near future. And again, what we've been able to do is add to the scope of what we manage in terms of benefit. So when we do specialty work, we're talking about things like radiology, oncology, sleep disorders. And what we're doing is helping these large health care insurance organizations manage these complicated technology-enabled types of services and solutions to make their businesses more efficient. And that -- I don't see that changing at all. The second piece of the business is the pharmaceutical side, where primarily our services and solutions are centered around analytics. The work that we do for pharma and biopharma companies tends to be in the areas of drug discovery, competitive intelligence, clinical trials, essentially helping pharmaceutical companies identify, understand and attack areas that their therapeutics and their preventatives can help in terms of the client mix. So obviously, during COVID, a very, very healthy area, not just in terms of specifically addressing the COVID issue, but medical issues in general.

Okay. A very sticky business, it sounds like...

Both very sticky businesses.

Okay. Let's talk talent and kind of shift over to the supply side here. Attrition has picked up across the industry, IT services and the BPM. For WNS, it popped last quarter. You talked about some of the drivers there in Philippines. Can you go into that a little bit? And how do you see it evolving in the coming quarters?

Yes, yes. So we've definitely seen last fiscal year a pickup in the attrition rate. Two distinct issues that we're dealing with. If you look at the attrition in the first half of fiscal '22, it was more a function of supply-related issues as it related to high-end digital and high-end analytics skills. The challenge there for us, similar to what we've seen in other industries, is the fact that both the BPO, the BPM, the IT services, the systems integrators are all looking for very similar digital skill sets that can help with the implementation, integration, management of tools like RPA, AI, machine learning, natural language processing. So there's some commonality to those skills, and obviously, to the extent that everyone was looking for experienced resource there and that supply had not been created over the last 5 to 10 years. Some significant pressure. The good news for WNS is we really saw that pressure on roughly 10% to 15% of the population. It did cause a little bit of attrition for us. In terms of the spike, it did create some additional wage pressure in the second and third quarters. But our attrition rates were running 2% to 3% as a company above our historical averages. The challenge that we had in the fiscal fourth quarter was a unique one relative to the Philippines, where there was a mandate from the Philippines government that we return to office. And we had significant pushback from our population in terms of their willingness to want to go into the office, because many of them have been hired into a work-from-home environment. So as we kind of cycle through that, we do expect some elevated attrition rates within the Philippines. The good news again there is that it's within the low elements of the organization in terms of experience and skill. Despite the accelerated attrition rate within the Philippines, we were able to add on a net basis over 800 people in the geography. So a lot of pressure on the recruitment and the onboarding and the HR teams. But certainly, the ability to do that, and it had no impact on our ability to deliver for our clients or to grow with our customers, which is the upside to that. But it's going to take a little bit of time for us to kind of process through what's going in that geography.

Okay. Okay. Now cost of labor, it is up across the industry. Obviously, driving some of the attrition here. What -- and when you think about that, how do you manage higher wages in a business model that's inherent on giving cost savings back to clients? How do you -- like the annual productivity commitments we've talked about in the past. How much is, I guess, passed through to clients [indiscernible] versus having to go and have these special conversations with them?

Yes. Well, I don't think special conversations with the client aren't going to work. We do have contractually the ability to pass on certain cost increases to the client. Is that compensating us fully for the incremental costs that we're incurring as an organization? No. If you look at really how costs are managed within any services businesses that leverages global delivery, it's through the increased deployment of technology and automation. So the real way to manage labor, if you will, and labor cost is to be less reliant on labor and labor costs. And we've got roughly 1/3 of our business where the pricing mechanism with the client has nothing to do with the number of people who are working on that process. And therefore, our ability to replace 10 people, 20 people with a piece of software allows us to reduce the cost of delivering that service, and therefore, either maintain or improve the margins on that specific process.

Okay. How do you see that mix of business, that 1/3 progressing? Can you get it up to [ 40% ]?

Yes. Absolutely. I'd be surprised, honestly, if 10 years from now, we're not talking about that, that mix being inverted. Because at the end of the day, our clients don't want to pay for inputs. They don't want to pay for bodies. They want to pay for results. And in a model, whether it's a transaction-based model or an outcome-based model or subscription-based model or a fixed fee model, in those models, the client isn't paying based on the amount of effort that's expended. They're paying based on the stated benefits that we're going to be delivering to them. And as clients increasingly understand what we do for them, as clients increasingly get comfortable with the ability from a -- for a third-party provider to manage things that are core and mission-critical to their business, they're going to want to shift that responsibility and that accountability to their providers. So the biggest challenge that we have today in terms of adoption of non-headcount based services is the clients believe that these -- that they're going to lose control. And the net loss of control is something that's really important to them given how important these services are to their day-to-day business.

Okay. Now as we tie attrition and wages and productivity commitments all together, how do you -- how do we think about the margin trajectory? Maybe talk about it this year. And then does the current dynamics, does that change anything in the medium term for you?

I don't think medium to long term, it changes anything in the dynamics. When you look at fiscal '23, we talked a little bit earlier about the 11% constant currency growth at the midpoint, the expectation for margins despite elevated wage levels, despite higher productivity commitments, despite the investments that we've made into our business, the expectation is that our margins are going to be flat year-over-year. So WNS, in addition to kind of having premium growth in the industry, has adjusted operating margins that run 300 to 400 basis points higher than our peers. We've guided to 21% adjusted operating margins for this coming year. And we did 21.3%, 21.4% last year. So very, very similar on the margin side. But certainly, as we look forward and look at the mix of our business shifting from FTE to non-FTE base, we look at the ability for these technology assets to be able to do more and to be able to do them smarter and more efficiently. We certainly believe that both of those drivers will enable margins to expand in this industry. And that's what we've seen historically in our business. We used to talk about WNS as a high teens margin business. And structurally, as we changed how we delivered and the mix of our business continued to shift, we started to talk about it as a low 20s margin business. And I'd be surprised if 5 years from now, we're not talking about this as a mid-20s business.

Okay. As you think about like becoming larger, just changes with scale on the delivery front, as you get larger, does your global operating footprint need to be more diverse? So do you need to widen the net further beyond the concentration you currently have with India and Philippines?

Yes. I think it always helps to have some further diversification of the geographic footprint. But again, if you look at what we do today, we deliver out of 12 different geographies. The bulk of where we deliver is a function of where the skill sets are, the populations within those respective areas, and the understanding that you need to have a certain scale to be able to drive productivity, right? So you look at our business today, and we've got 55% to 60% of our resources sitting in India. We've got 20% of our resources sitting in the Philippines. We've got another 6%, 7% sitting in South Africa. But once you get beyond those locations, we have pockets of talent in the U.S., in the U.K., in Poland, Romania, Costa Rica. So I think as we need to change certain skill sets, whether they're language based, whether they're technology based, there are certainly opportunities for us to be in multiple geographies. But in terms of overall size and scale, it's going to be hard to replicate what a country like India for data technology, analytics, core skills can bring to the table or what a country like the Philippines from a voice perspective bring to the table.

Okay. And does -- the nature of the activity of these end-to-end engagements, does that bring you -- does it force you to be closer to the client? Or does the hybrid -- does this COVID kind of forced us into the hybrid situation where you actually don't necessarily need to be as close?

Yes. I think you're right, Bryan. I think as you move up the value chain in terms of what you manage for clients, certain functions, certain skill sets are probably better suited to being done either onshore or nearshore to where clients are, right? That cultural line, that understanding of what clients do is going to become increasingly important, especially as it relates to things like consultative skills. But the core day-to-day processing, the day-to-day management of these processes, once you've taken them over, I think at that point, what we've historically seen is that cost becomes the driver, right? That delivery and productivity is a given, right, how and where you do that from becomes your challenge as a provider to manage.

Okay. And I guess with an increasing book of your own, that 1/3 you're talking about where you're taking the risk, you make that choice. So it's not dictated.

Yes. Absolutely. And certainly, obviously, what you want to try and do is move from high cost to low cost to no cost. And that's what we've seen. If you look at where technology and automation has been the most impactful within the process outsourcing space, to date, it's been the lower end functions, right? It's payables and receivables on the back office for finance accounting. It's the front-end voice and voice handling and call handling. But as the technology gets smarter, what you're going to see is that not only is the type of work that gets out sort is going to move up the value chain but where technology and automation play a role within these processes is going to move up the value chain.

Okay. Let's shift over to capital allocation priorities. I think you've recently paid off the last bit of debt or you're near the end of that?

Yes. 0 debt at this point.

So what are your priorities with cash?

Yes. Look, we certainly have a really healthy balance sheet. I mean, we're sitting on roughly $8 a share of cash today. We are actively looking at share repurchases, obviously, kind of given both where the company is, the opportunity is and where the market is today. But the #1 preferred use of cash for us is tuck-in M&A. Given the market opportunity, given the ability to find assets that will increase our capability and potentially accelerate our growth in this industry, we want to find things that are good cultural fit for us, and believe that those assets do exist. So we certainly want to make sure. And we're happy that we have dry powder to be able to do tuck-in M&A. And that is the preferred #1 use of cash. But at a minimum, we should be doing structural share repurchases to make sure that we're at least mitigating the impact of share creep from restricted stock.

Okay. What is -- as you think about the M&A pipeline, what does that look like? Whether it's by industry or by capability, where are you focused?

Yes. Really healthy at this point. We've made a conscious effort as an organization to expand the net and certainly have been able to expand the pipeline. 3 key areas from an M&A perspective that we're looking at, and again, all capability based. We're not looking to buy size, scale. We're not looking to buy revenue as an organization. We're looking for things that augment what we do to be able to allow us to take something different to market versus our peers. But the 3 key areas that we're looking at would be, one, looking at domain-specific or industry-specific assets that allow us to do something different in insurance or in travel or in health care, that we can bolt on to our existing capabilities and create a more robust profile of services. The second would be on the digital technology, hyper automation types of activities that allow us to accelerate the automation and digitization of our clients' processes. And then the third would be horizontal solutions, which would be specific to things like analytics or procurement, where we're able to really differentiate skill sets and accelerate value for clients.

Okay. How would you characterize valuations in that pipeline?

Still running a little expensive. Again, I would say, we have not done a deal now in 5 years. We've been extremely thoughtful in terms of our M&A approach and discerning in terms of what we will or won't do. That being said, I don't think it's really been valuation that's been the impediment to WNS doing M&A. The biggest issue has really been finding assets that are good fits for us in terms of capability and good fits for us culturally. Because in the services business, the cultural fit is extremely important. If it's not going to work and what you're acquiring is people, you better make sure that they're going to be around for a while. So we're pretty optimistic about our ability to get something done in this environment, but I don't think we're going to sacrifice on our criteria in terms of what we're looking for.

Okay. Just looking at the clock here, we've run out of time. We covered all the bases, but...

It was quick.

I want to thank you for the time.

Okay. No problem. Thank you, Bryan.

Thanks, everybody.