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

Good morning, and welcome to the WNS Holdings Fiscal 2024 First Quarter Earnings Conference Call. [Operator Instructions] 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.

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 impairment; 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?

Thank you, David, and good morning, everyone. In the first quarter, WNS continued to deliver healthy financial results and positioned 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 6 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 GenAI will create for our business moving forward. As we work to create new and innovative use cases for GenAI, it is important to remember that GenAI 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, helped drive increased opportunity 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 GenAI as a catalyst for driving higher value services -- solutions as well as engagement models. We believe that GenAI 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 GenAI 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, committed year-over-year productivity improvements are business as usual. At WNS, our experience demonstrates that increased productivity headwinds, driven by technology and automation, has 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 innovation, flexibility and client centricity to adapt and flourish. We've been able to successfully manage several key industry changes and challenges, including Brexit, SMACK, 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 GenAI, 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 GenAI. 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 GenAI 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 skins across data, AI, Cloud, enterprise and UI and UX. In terms of solution development, WNS has already embedded GenAI capabilities into 7 of our existing digital assets, which are now enabled and ready to go. In addition, we currently have more than 75 GenAI use cases in various stages of development across horizontals as well as verticals, of which 9 are currently built, demoed and ready for deployment. For example, in the health care space, we have combined our deep industry knowledge with GenAI to create a medical summarization solution, which can summarize, analyze and synthesize complex clinical as well as medical records by leveraging GenAI to process diverse data sets, including patient history, lab results, medical codes and treatment plans. WNS is able to help health care payers and providers access critical information rapidly, improved decision-making and drive better patient outcomes. Most importantly, we continue to believe that our decades long focused 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 GenAI to solve industry problems as well as drive great outcomes for them. So to summarize, we believe that AI and GenAI 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' 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 call -- turn the call over really to CFO, Sanjay Puria, to further discuss our results and outlook. Over to you, Sanjay.

Thank you, Keshav. In the fiscal first quarter, WNS' net revenue came in at $317.5 million or 15.5% from $274.8 million posted in the same quarter of last year, and up 17.5% on a constant currency basis. Sequentially, net revenue increased by 4.1% on a reported basis and 3.6% on 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. These benefits were partially offset by the impact of contractual productivity commitments to certain clients. In the first quarter, WNS recorded $2.6 million of high-margin short-term revenue. Adjusted operating margin in quarter 1 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 wage increases and return-to-office costs were largely offset by operating leverage on higher volumes and favorable currency movements. Sequentially, margin increased as a result of higher volumes, favorable currency impact, including the FX losses on our monetary assets and liabilities [indiscernible] and high-margin short-term revenues. 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 1 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 acquisition and share repurchase. This headwind was partially offset by higher interest rates and interest income on tax refunds. Sequentially, the unfavorable variance was a result of reduced benefits 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 1. WNS' effective tax rate for quarter 1 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 work delivered from tax incentive facilities. Sequentially, the tax rate also increased as a result of a onetime cash accounting benefit of $1.7 million in quarter 4 of last year. The company's adjusted net income for quarter 1 was $15.6 million compared with $45.9 million in the same quarter of fiscal 2023 and $52.4 million last quarter. Adjusted diluted earnings were $1.01 per share in quarter 1 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 1, 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 1 cash by $85.6 million. DSO in the first quarter came in at 34 days as compared to 29 days reported in quarter 1 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 1 of last year and 40% in the previous quarter. In the quarter, attrition for entry-level voice-based CX services reduced significantly. We expect attrition will normalize over time in the low to mid-30% range, but would continue to be volatile quarter-to-quarter in the current labor environment. Build seat capacity at the end of the quarter 1 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 an average exchange rate of 1.27 for the remainder of the fiscal year. Our revised relation guidance includes a headwind of approximately 1% for reduced volume projections from certain clients. As Keshav mentioned, we have not seen these reductions materialize to date, but in a week and uncertain macro, it is not surprising that clients are being conservative related to their future volume commitments. We have incorporated this lower estimate 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 a INR 82 to U.S. dollar exchange rate for the remainder of fiscal 2024. This implies adjusted EPS of $4.21 to $4.45, assuming a diluted share count of approximately 50.1 million shares. The midpoint of guidance represents more than 12% growth in EPS. With respect to capital expenditures, WNS currently expects a requirement for fiscal 2024 to be up to $60 million. I would also like to mention that beginning this quarter, WNS has changed our segment for financial reporting proposes to align with our new SBU structure. You will now see revenue and margin contribution by SBU in our company metrics wise and relevant SEC filings. We'll now open the call for questions. Operator?

[Operator Instructions] The first question comes from Bryan Bergin with TC Cowen.

I wanted to start on demand and the growth outlook here. So I 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?

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 slowdown, I think in terms of the commitments from clients, it's the places you would expect. So 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 and 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.

Yes. I'd just add that we are 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 1 or 2 delayed decision kind of cycle is taking place with one of our clients, and more importantly, we are seeing a lot of conservatism in terms of if people providing volume projections. But the core is people -- 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'm 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 a little much. 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.

Okay. Makes sense. Your conservatism it makes sense. Follow-up here on Generative AI. Just 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 types of investments do you need to scale? So 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?

Yes. So great question, Bryan. And first thing I'll tell you is, clients are extremely comfortable that they have a partner like WNS who have invested so solidly, first of all, in terms of domain, in terms of technology transformation as well as analytics over the years and have led the way in terms of their own transform models over a period of time. So I think the comfort that we are operating as an extension of their enterprise. So, therefore, we can lead them in unknown areas around Generative AI. Proactively this is a big, big comforting factor. That's the first thing I must tell you. In many of my conversations with clients, I'm also realizing that a number of them are wondering why there is so much hype on this particular area, right? And the reason for that is because they say, you guys have led us through all the other disruptions that we have seen across the years. We are super confident that you will lead us through this one as well. And it is not that any of them want to dramatically change their models overnight because there's a Generative AI kind of outlook out there in the marketplace. I think what they're looking for only is comfort that our partner understands the space, can integrate it quickly as the space evolves, and can help us in terms of faster go to market, higher productivity, all the other good takes. So from that point of view, we are very comfortable. We spoke about a lot of initiatives that we're driving in-house and some of the areas that we focused on that will start impacting our internal -- our existing clients at this point in time. But we're also excited about the fact that a lot of this is now going to help us penetrate a 75% different unpenetrated BPM space, right? And therefore, we'll have to watch this space because we are excited. We will keep making announcements around things that we're doing here but it's going to be in a very measured manner, and it will be all around, not only helping every one of our clients with the opportunity around Generative AI, but also getting after new areas that we think are now getting opened up as a result of our investments in this space.

And maybe I'll just add over there that specifically, there will be certain acceleration of the investments, specifically in GenAI as well as the AI area, what Keshav just spoke about. Because this is a time not to like shy way, but leading those investments from a need of an our perspective. And accordingly, maybe we start seeing quarter 2, a margin to be a little bit lighter than quarter 1 compared specifically, along with some of the return to office and some of the short-term revenue with a high margin in quarter 1.

And just to add to that, Bryan, just to give some focus and color about what we're seeing in terms of activity levels and inbound questions from our customers, we are currently in discussions with more than 20 of our clients about specific GenAI use cases. And at this point in time, we have secured commitments from 3 of those clients to implement those use cases. So we are seeing people come to us, as Keshav mentioned, to help them with this journey, to understand what it means for them. And I think we're in a great position to be able to lead them through this journey.

The next question comes from Ashwin Shirvaikar with Citi.

Congratulations on the quarter. I wanted to ask about the new organizational structure implemented at the beginning of April. Are you beginning to see the benefits that you expected? Or is it too early? I mean, in terms of just looking at growth profile, looking at demand looking at responsiveness, what metrics are you using? And any kind of early update that you can provide would be great.

Actually, it's early days at this point in time. And what I can say at this point in time is, I think the new org structure has actually been digested well, has been implemented well, has been accepted very well. And we can see that as far as the 4 SBUs are concerned, the impact with clients actually has already started being very positive because now there is much more focus on a global footprint. Every client's sales is now handled globally. And therefore, we're seeing some larger global deals enter as a result of this organizational structure. Similarly, we are also seeing leadership pipeline inside the company, obviously, increasing because you're having an end-to-end P&L responsibility with 4 senior leaders inside the company. And that obviously generates a different kind of behavior including a lot more aggression in terms of focusing on their specific areas. At the same time, the clamor for investment within each of those SBU structures in some of the areas that we have traditionally invested in, but also all these new areas, including the need for tuck-in kind of M&A and capital allocation is also emerging at a very logical pace, I would say, as a result of this restructuring. So while it's early days, I'm really satisfied with the outcomes that we're seeing already in terms of much higher client centricity, much more focused activity around the sales pipeline, much better understanding of clients' needs in a transformative market and finally, a much deeper understanding of how to invest and maintain and grow margins in a very transformative macro.

Got it. Got it. That's good. That's good to know. The second question is, as I sort of look at the updated outlook and the updated visibility number, I'm kind of trying to see what changed? On the positive side, there's FX, there's 1Q [ beat ], there is continued -- semi-continued strength in terms of flow-through from signed deals. On the negative side, you've already reflected the lower visibility. Are there other factors that perhaps I'm missing, maybe at a segment level? Like I see the BFSI strength, for example. Any overall color in terms of additional points we should be thinking of?

No. I think, Ashwin, we have covered all those specific points, whatever is there. Other than just want to highlight that this visibility, just want to remind that also factors based on certain of the short-term revenue based on certain acquisitions what we have done but with a very high growth opportunity over there, and that itself has a couple of percentage point impact on the visibility, right? But still, it has gone from 88% to 92%, and just wanted to remind that this does not still include the short-term revenue where we don't have a visibility as we move forward.

Yes. So I think, to Sanjay's point, Ashwin, this is pretty much business as usual for us. If you were to look at kind of what's really changed from a couple of months ago when we provided guidance, we obviously had revenue come in stronger for Q1, which is a positive. And the only other thing that's changed is we've baked in that 1% headwind from the lower volume forecast that we've received from clients. Again, I think those will hopefully prove to be conservative in nature. But other than that, this is business as usual for us.

The next question comes from Sam Salvas with Needham & Company.

I'm on for Mayank today. Just wanted to ask about those new logo wins, the 6 this quarter. Could you guys talk a little bit more about those in terms of the size, scale and what verticals those were in?

Sure. I can take that. We usually don't discuss the size, but I think when you look at the 6 new logos, one of them is what I would consider to be transformational in terms of the size and capability to become a top 10 customer. So very excited about that specific opportunity. With respect to the areas where they are, again, kind of reflective of our overall business. So the 6 logos, we've got 2 in banking and financial services, we've got 1 in travel, we've got 1 in insurance, we've got 1 in retail manufacturing, and we've got 1 in health care. So again, 6 logos spread across 5 different verticals. I would say 3 of them good in size, with 1 of them with the potential to be a very meaningful contributor to the company over the next 2 to 3 years.

Got it. That's helpful. And then just a quick follow-up. Are you guys seeing any difference in terms of demand between your larger versus smaller customers over the past few months?

So I'll take that. Frankly, like I mentioned earlier, we are seeing -- we continue to see excellent conversations with every one of the clients and prospects that we have. We're continuing to see a lot of travel up and down in terms of what is [indiscernible] possible in terms of client's transformation agenda, how the business can help them, and the pipeline continues to be healthy and continues to fill up extremely well. And as I mentioned, in addition to the transformation agenda, we're starting to see also people wanting to look at now the cost saving agenda as well. So overall, we actually think it should be positive thing for us. The only change that we're seeing is clients not wanting to commit volumes and get committed at this point in time. And I think that's much more to do with their trying to figure out how this whole macro is going to play out, what's going to happen with inflation and therefore, impacting their own businesses? But the green shoots there also is that in the last few weeks, we have seen that countries have started announcing better control over inflation. And I saw that U.K. also announced better numbers on inflation yesterday or day before. So we are expecting that over a propane this will all play out once again positively for the sector. But generally, I think the sector is very much insulated from all of these issues at this point in time. Right now, it's much more of a projection issue from a customer's point of view, less from our point of view.

Yes. And I just want to reiterate, to Keshav's point, when you look at the first quarter performance, on a constant currency basis, 6 of our 8 verticals grew at over 20%. And of the 2 that didn't, one is health care, where we had the significant ramp down of a large process. So to Keshav's point, what we're seeing is that the demand for our services is healthy and broad-based. You'll see a very similar profile if you look at this by geography and by service level as well.

The next question comes from Puneet Jain with JPMorgan.

A quick question on GenAI. So for the new clients or processes that you expect to come your way, driven by GenAI, who is servicing those processes right now? Like will those be competitive wins? Or do you think like it can result in increased outsourcing by clients?

I think the combination of both, but see for them to make changes on existing is going to take some time, right? So I think all they are doing there is getting comfort around the fact that how we can lead them in some of those areas and what benefits will be available to them and how -- what are the processes for getting that done. But I think some of these conversations also emerging and the POC is being discussed are also around new opportunity areas, which I think is very, very exciting from our point of view. See, Puneet, the thing I want to mention is that this obviously is something that everyone is looking at as one of the biggest democratization forces on planet earth for the future. So everyone wants to be on this journey, wants to have a solid partner whom they trust and who works, as I keep saying, is an extension of their enterprise to help them get there, and are also looking for new proactive ideas for people like us in terms of that 75% area, which is underpenetrated areas, we actually believe that they can start models using some of these technologies to go after areas that they kept insulated from the industry for some time. So that's how it is emerging. So let's wait on what this means. But from our point of view, it is helping our clients understand that in some of the current engagements, we will actually introduce some of it, and how we will share the benefits of it, and how we will take it into other new processes and how we will move the model to a completely outcome-based or a different model as a result of which they are only focused on the outcomes and less on how we do it.

Got it. And then for this quarter, in your revenue breakdown, it seems like North America was softer than other regions. Can you talk about what you expect there, specifically given that there was like a large insurance client that was ramping up in North America, or is expected to ramp up in North America?

Yes. Maybe, Puneet, I can take that. It was softer because if you recall that there was one large health care process ramped down and it was one of the leases because it was a North America client. But having said that, on the insurance side as well as, as Dave spoke about, the growth has been across if you see all the verticals which is more than 20% growth over there. So we believe as we move forward, the growth is going to be widespread across, including North America.

And is that health care client like that headwind from that, is that completely in numbers by now, or is it expected to be a headwind on a sequential basis going forward?

No. At this stage, it's already completely done as we speak for quarter 1.

Next question comes from Vincent Colicchio with Barrington Research.

Yes, Keshav, I can see the Generative AI being -- creating a bigger opportunity over the time. But in the near term, if I'm in the client shoes, I've got to have some confusion about how to invest my dollars if Generative AI is going to provide all these new opportunities. So I'm curious if -- is this impacting sales cycles or just client interest in moving forward with certain projects?

So Generative AI, at this point in time, is a hot topic of discussion. I think most clients are building comfort around how we are going to help them prepare for the journey. And in many cases, we are proactively discussing many pilots with all of them in some of our existing processes as well. Understanding fully well that, that is how you build trust with clients. You go proactively, you sometimes cannibalize a little bit of your revenue to do it, but also go after larger spaces inside the environment. So today, it's a lot more about discussion and proving the concept with them in many areas. Because just depending on the process and the sector, there is still a lot that they need to get comfortable with as clients as well when Generative AI is deployed. But helping them drive higher productivity gains, reducing their cost is frankly a no brainer and we can actually go and do that. And that's what Dave was talking about when he spoke about some of the pilots, the 20 clients or active discussions blah, blah, blah, all of that kind of stuff. But longer term, I think what is going to happen is these Generative AI solutions are going to get integrated into the core of WNS, right? And so as we have any interaction with a client, it is going to be all about a GenAI-driven kind of a solution, which allows us to take an end-to-end view of a process and take that out, as a result of which clients will obviously see a significant change in terms of, say, efficiency, productivity or whatever. But from our point of view also, because a lot of it could also be reusable, the ability for us to use it to go after larger pieces of business and at the same time, dramatically over a period of time increase our margin impact also is higher. So I think this is an emerging space. It is today in a situation where we are giving comfort to our clients, proving the concepts and then slowly making the announcements to the market also about how we will deal with some of these things.

And then quick follow-up on your acquisitions of Vuram, Smart Cube and OptiBuy, is there any meaningful variance in any of those this quarter versus expectations?

No. I think when you look, Vincent, kind of the business models that we had put into place and the expectations that we had for these assets, they're performing well. They're performing as expected. They're being successfully integrated into the company's operations. So I would just say, at this point in time, the acquisitions are doing exactly what they thought they'd do.

Got it.

I'd just add one point. At the time we did some of those acquisitions, Generative AI was not such a hot topic. And today, they are now -- these are -- some of these [ acquisitions ] are at the center of a lot of the dialogue and interaction and building a lot of comfort with clients.

The next question comes from Dave Koning with Baird.

Yes. I guess one observation, I mean, your sequential growth in Q1 was actually far better than normal Q1. So I mean, just great momentum there, I guess, relative to even normal. Does that mean Q2 might be a little slower than normal sequential progression? And you gave a little comment about some of the delayed cycles and employees were kind of flattish. So it looks like you're preparing for just a little slower growth than normal after a really good quarter. Is that all a fair way to think about it?

Yes. At this stage, as we provided the guidance based on the visibility and what Keshav and Dave was talking about some of the conservative forecast what the clients are providing, based on that, the quarter 2, we expect to be slightly up as compared to quarter 1. But having said that, I just want to remind that it still does not factor the softer revenue where we don't have visibility. It does not factor some of the forecasts, which clients have not committed yet and exactly what we saw in quarter 1. When we entered quarter 1, it was a similar situation, but as volumes keep on coming up, as we were nearing each of the month. So we have to just wait and watch. Also just wanted to add over there, which was factored in our guidance earlier, it is the transition of one high-tech client from an onshore offshore that is already part of the quarter.

Yes. I think, Dave, to Sanjay's point, when we look at the sequential numbers, we're obviously expecting a more modest growth rate as compared to what we saw sequentially from Q4 to Q1. That being said, we significantly outperformed what our expectations were for Q1. And I think some of this is the nature of the assets that we've acquired that have less visibility, but higher growth, right? So I think when you look at the numbers that we provide between that and the conservatism that we've baked in from our client forecast, what you're going to see is more upside to our numbers than you've historically seen but less visibility to those numbers. So our hope certainly is that as we move throughout Q2, as Sanjay mentioned, that we'll continue to build on that number. But in terms of visibility and in terms of what's baked into our guidance at this point, it does show a slowdown in the growth rate sequentially from Q4.

Yes, yes. That all makes sense. And then just a follow-up. In the new segment guidance, first of all, some cool new industry acronyms; so those are kind of interesting, I like it. But then also, there's a new line called less reconciling items that used to be kind of $2 million to $3 million a quarter kind of going back many -- like for a lot of quarters. And then the last few quarters, it's kind of ramped up to $7 million to $9 million of a headwind. What is that line? And why is it higher now?

Yes. So if you look at what's showing up in the reconciling items, and you'll see it in both the revenue and the cost line, right? On the revenue line, what is in there because if you look at kind of how the SBUs are laid out now, in addition to kind of the normal 8 verticals that we would talk about; travel, shipping and logistics, health care, we also have procurement that's broken out separately because it's run as a -- it's a separate business. So these reconciling items on the revenue line are really 2 things. One, it's the duplicate revenue credit that comes from procurement. And the second is the FX gain and loss line. So those, because we can't specifically allocate them to an SBU, sit as a reconciling item. On the cost side, you'll see that same procurement duplicate revenue credit go up with the cost. The second piece that shows up in the cost unallocated is unallocated facility costs. So seats that aren't being used, that have been returned back to the company by the SBUs. So you're going to see that number move around on a quarter-to-quarter basis. But overall, that hopefully should give you some color in terms of what that reconciling column is in terms of the revenue and margins.

The next question comes from Maggie Nolan with William Blair.

Congrats on the results. I wanted to ask you, what have passed technology waves meant for your value proposition as a company?

Okay. That's a great question, Maggie. So I think what it has done is it has kept enhancing the impact of our domain specialism and our core differentiator that we have always spoken about to clients. So every time there was a change in technology, the fact that clients who're working with people who understood the core of the business first and then integrated these technologies to deliver a higher value proposition in terms of impact, efficiency, cost and other things actually has been really the core. So I would say, for us, it's essentially the fact that it has enhanced the -- our capability around domain, and the fact that people now realize how important domain is in this business while you should expect that technology will keep changing and will only keep getting enhanced and better across time.

Yes. And I think from a business perspective, Maggie, and we've spoken about it to most of you folks and most of our investors at this point as well. But what we've seen historically is that while technology creates certain headwinds to our business, right? We used to talk about WNS having 2% to 3% year-over-year headwinds built into our contracts. And technology turns like RPA, like AI, like machine learning, have accelerated that productivity that we provide to clients into the 3% to 4% range. So we know that when we leverage technology, some of that benefit is going to go back to the client. But we've also seen, and Keshav spoke about it in his prepared remarks, is that what this does is it opens up new areas for us to get into, both within existing clients as well as the pressure to drive new clients to look at outsourcing. So while we know that these technologies will create some additional headwinds from a productivity perspective, we also know and have seen consistently that what it does is drive increased demand. And that's why when you look at our business, despite the fact that productivity improvements have been increasing, we've been delivering -- we've been delivering progressively higher growth rates in the face of those higher headwinds.

Yes. And I think that is more underlined that last statement, Dave, the fact that, if you look at our results over the past few years, when technology kept getting unleased and introduced and we kept absorbing it, our revenues actually grew from single-digit numbers to consistently double digit and increasing in terms of growth. And, at the same time, in spite of giving so much of gains back to clients, our margins actually have significantly grown over this entire period. So that is the opportunity. And the fact that 75% of this industry is still not penetrated is, I think, the biggest opportunity coming from this new paradigm.

That's great to hear. And then for my follow-up, you mentioned travel seeing some conservatism. Can you just kind of walk us through what you think travel can do this year? Can it return kind of closer to pre-pandemic levels? Or how is your outlook specifically for that vertical?

Yes. I will -- oh, do you want to go ahead, Sanjay. Go ahead.

So from a overall travel perspective, definitely, at this stage, if you see the travel industry, still they come back at 90% of the pre-pandemic level. But from WNS' perspective, you'll see that, significantly we have shown that growth which means that it's not only just about building up the new clients, but expanding the relationship with our existing clients over there. But at the same time, the corporate travel still has come back only by 50% of the pre-pandemic level. And that's why we believe that there is an opportunity of volume and from the [ unallocated ] facility, we still believe 1.5% to 2%. That upside potential is there as the volumes [indiscernible].

Yes. And that being said, the travel business, as Sanjay mentioned, is extremely healthy today. I mean if you look at our first quarter performance, we grew 8% sequentially, we've grown 18% on a year-over-year basis. Our travel revenues now are well above where they were pre-pandemic as a company. But to Sanjay's point, we still do have roughly a dozen clients, and they're mostly in the international and the business travel areas for the airlines. We have about a dozen clients that are still running below pre-pandemic levels, and the opportunity there is somewhere between 1% and 2% of total company revenue if and when they do get back to pre-pandemic levels.

I show no further questions in the queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.