WNS Q3 2025 Earnings Call Transcript

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Provided by Quartr
January 23, 2025
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Operator

Good morning, and welcome to the WNS Holdings Fiscal 2025 Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, we will conduct a question and answer session and instructions for how to ask a question will follow at that time. As a reminder, this call is being recorded for replay purposes. Now I would like to turn the call over to David Mackey, WNS' Executive Vice President of Finance and Head of Investor Relations.

Operator

David?

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Thank you, and welcome to our fiscal 2025 Q3 earnings Call. With me today on the call, I have WNS' CEO, Keshav Murugesh and WNS' CFO, Arijit Sen. A press release detailing our financial results was issued earlier today. The 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 Q3 ended December 31, 2024.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

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.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

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 impairment of goodwill and intangible assets. We are also excluding costs related to our ADS program termination and costs associated with the transition to voluntarily reporting on U. S.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Domestic issue reforms. Adjusted net income or ANI is defined as profit excluding amortization of intangible assets, share based compensation, acquisition related expenses or benefits, goodwill and intangible asset impairment, ADS program termination costs, the transition to voluntary reporting on U. S. Domestic issuer forms and all associated taxes. These terms will be used throughout today's call.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

I would now like to turn the call over to WNS' CEO, Keshav Marugesh. Keshav?

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Hey, thank you, David. Good morning, everyone. In fiscal Q3, WNS was able to reaccelerate sequential revenue growth, expand adjusted operating margin and generate strong cash flow. The company posted net revenue of $319,100,000 representing a year over year increase of 1% on a reported basis and flat on a constant currency basis after adjusting for foreign currency. Versus the prior quarter, net revenue increased by 2.7% on a reported basis and 3.2% on a constant currency basis.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Sequentially, broad based demand for digitally led business transformation as well as cost reduction initiatives in Q3 more than offset unfavorable currency movements and anticipated reductions in online travel volumes. In the Q3, WNS added 7 new logos and expanded 52 existing relationships. From a pipeline perspective, demand for traditional process management deals remains stable as well as healthy. This pipeline is broad based across verticals as well as service offerings, growing at a healthy rate and includes both new client additions and expansions of existing relationships. We are also encouraged that over the past few quarters, we've not only seen any material changes in client decision making or sales cycles for these traditional deals resulting from macro volatility, the U.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

S. Election, OR AI and Gen AI. Steady conversion of these opportunities combined with low unusual headwinds should enable WNS to return to high single to low double digit revenue growth in fiscal 2026. In addition to our large in addition, our large deal pipeline remains both robust and healthy, and we continue to be excited about the potential for these transformational opportunities to help accelerate company growth. The large deal pipeline includes several strategic initiatives with captive carve outs as part of the solution, which have the ability to expand WNS' vertical, horizontal and geographic capabilities and to ramp revenue much faster than traditional deals.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Currently, the large deal pipeline remains healthy with opportunities spread across all of our key verticals. We continue to work closely with client CEOs, CFOs and in many cases, Board members to ensure their transformational requirements are met. WNS is making good progress moving these deals through the pipeline and remain confident that we are well positioned for long term success. As mentioned last quarter, given the strategic complex and disruptive nature of some of these engagements, the timing of deal signings as well as associated revenue contribution remains uncertain. As a result, we continue to exclude any large deal revenue contribution from our guidance until signed.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Today, clients and prospects are increasingly looking for partners to deliver the right combination of specialized domain expertise, data management skills, advanced analytics and digital solutions to address their business requirements. This includes AI and Gen AI, where we continue to expand our capabilities and move our innovative solutions into production. To date, WNS has created more than 30 GenAI use cases, which are tested and customer ready. In addition, we have built 13 unique digital assets leveraging JENAI, which are reusable and configurable across clients. Examples include an automated freight management platform, which leverages Jenei to improve the accuracy of extracting, reading, as well as processing shipping documents and a Jenei powered knowledge processing engine, which enables WNS to access, query and analyze massive amounts of dispersed data to provide instant tailored customer responses across horizontals as well as verticals.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

We We currently have 13 clients with Gen AI Solutions and Production with another 20 either underway or committed. This includes a new U. S. Insurance client, which is projected to become a top 10 customer for WNS in fiscal 2026. For this client, we have integrated 3 of our JENAI digital assets into an end to end solution to help improve compliance, accuracy and productivity in their policy administration and broker agent support processes.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

WNS also continues to invest in the training and upskilling of our employees on AI as well as Gen AI. Our role specific programs combine internal training with external learning programs in partnership with organizations like Carnegie Mellon University, KPMG, LinkedIn Learning and Oxford University. So far, we have now trained over 22,000 individual employees with more than 51,000 total training courses completed. In summary, by combining the power of domain, data as well as digital, WNS is able to deliver impactful business outcomes for our clients by reducing cost, generating actionable insights to improve decision making, enhancing customer experience, reducing business risk and enabling innovation and competitive differentiation. With respect to fiscal 2025 guidance, we continue to expect healthy sequential revenue growth and operating margin expansion for the 2nd consecutive quarter in Q4.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Sustaining this revenue momentum into fiscal 2026 should enable WNS to reach high single to low double digit revenue growth with any large deal signings providing enhanced visibility and incremental opportunity. The company also remains committed to continuing our investments in domain expertise, data and analytics and technology enabled offerings, leveraging AI and GenAI to ensure our ability to deliver long term profitable growth as well as sustainable stakeholder value. I would now like to turn the call over to our CFO, Arjith Sen, to further discuss our results as well as outlook. Arjith? Thank you, Keshav.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

In the fiscal Q3, WNS' net revenue came in at $319,100,000 up 1% from $315,900,000 posted in the same quarter of last year and flat on a constant currency basis. Sequentially, net revenue increased by 2.7% on a reported basis and 3.2% constant currency. The quarter over quarter revenue growth was driven by broad based demand across verticals and services, which more than offset unfavorable currency movements and anticipated volume reductions in online travel. In Q3, WNS recorded $200,000 of short term high margin revenue. Adjusted operating margin in Q3 was 19.3% as compared to 19.7% last year and 18.6% last quarter.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Year over year, adjusted operating margins decreased as a result of lower employee utilization and increased investments in infrastructure and sales. These headwinds were partially offset by favorable currency movements. Sequentially, margin improvement was driven by operating leverage on higher volumes and favorable currency movements. The company's net other expense was $900,000 in the 3rd quarter as compared to $600,000 of net income in Q3 of fiscal 2024 and $1,400,000 of net expense last quarter. Year over year, the unfavorable variance is the result of higher debt levels and lower cash balances, driven primarily by our share repurchase.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Sequentially, the favorable variance is a result of reduced interest expense driven by debt payments, which more than offset lower interest income on decreased cash balances. WNS' effective tax rate for Q3 came in at 22.8% as compared to 6.7% last quarter and 8.5% in the prior quarter. Both year over year and sequentially, the higher tax rate is primarily the result of non recurring tax benefits of $9,500,000 in Q3 of last year and $8,600,000 last quarter, associated with the reversal of deferred tax liabilities on intangibles. Other changes in the effective tax rate were driven by a geographical profit mix and the percentage of work delivered from a tax incentive facility. The company's adjusted net income for Q3 was $47,000,000 compared with $58,500,000 in the same quarter of fiscal 2024 $51,500,000,000 last quarter.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Adjusted diluted earnings were $1.04 per share in Q3, down from $1.19 in the Q3 of last year and from $1.13 last quarter. As of December 31, 2024, Doublelift's balances in cash and investments totaled $231,500,000 and the company had $199,600,000 in debt. In the Q3, Dubliners generated $88,700,000 of cash from operating activities, incurred $12,100,000 in capital expenditures and made debt repayments of $58,400,000 DSO in the Q3 came at 34 days as compared to 35 days in Q3 of last year and 38 days last quarter. With respect to other key operating metrics, total headcount at the end of 3rd quarter was 63,319 and our attrition rate was 32% as compared to 29% reported in Q3 of last year and 34% in the previous quarter. We expect attrition to average in the low to mid-thirty percent range, but the rate could remain volatile quarter to quarter.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Build seat capacity at the end of Q3 increased to 43,550 and WNS averaged 71 percent work from office during the quarter. In our press release issued earlier today, WNS provided our revised full year guidance for fiscal 2025. Based on the company's current visibility levels, we expect net revenue to be in the range of $1,255,000,000,000 to $1,271,000,000 representing a year over year range of minus 2% to minus 1% on a reported basis. On a constant currency basis, the guidance ranges from minus 3% to minus 1%. Our fiscal 2025 guidance assumes no revenue contribution from the large deal pipeline, continued reductions in online travel volumes and no improvement in discretionary project spend.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Top line projections assume an average British pound to U. S. Dollar rate of 1.25 for Q4. Full year adjusted net income for fiscal 2025 is expected to be in the range of $205,000,000 to $209,000,000 based on an INR85.5 to U. S.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Dollar exchange rate for Q4. Our ANI guidance includes a one time benefit of $12,200,000 in the 4th quarter relating to our facility asset sale in India. Based on a diluted share count of approximately 45,900,000 shares, adjusted EPS is expected to be in the range of $4.46 to $4.55 With respect to capital expenditures, Dubliners currently expect our requirements for fiscal 2025 to be up to $16,000,000 We will now open the call for questions. Operator?

Operator

Our first question comes from the line of Nate Sison with DB. Your line is open.

Nate Sison
SPEAKER at UNKNOWN

Hi, guys. Thanks for the question. Good results and nice to hear about the expected revenue acceleration next year. So I know it's early, but I was hoping for a little more color on that fiscal 'twenty six outlook for high single to low double digit growth. I think on prior calls, you've talked about something like 10% to 11% in headwinds every time you enter a normal year and that's a combination of productivity commitments, projects, known ramp downs, etcetera.

Nate Sison
SPEAKER at UNKNOWN

So I guess given all the moving pieces that have impacted the business, I was hoping you could give an early read on how each of those headwinds are shaping up for next fiscal year versus maybe a normal year?

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Sure. Let me take that, Nate. I think as you rightly mentioned, the typical headwinds that we expect walking into a year are in the 10% to 11% range and comprised of not only the productivity commitments that we give back to clients, but also the fall off in project revenue, which is cyclical in nature as well as the fact that we typically expect some clients revenue loss on a year over year basis from things like bankruptcy or consolidation or M and A. If you look at currently where we sit relative to fiscal 2026, the only unusual headwinds at this point in time that we have walking into the year are 1% related to the healthcare client, which will anniversary in the fiscal Q1 of next year and about a 1% year over year impact from the annualized effects of the online travel reductions during fiscal 2025. So at this point in time, in terms of unusual headwinds walking into next year, we're probably looking at about 2%, which obviously is significantly below the headwinds that have seen in both fiscal 2024 and 2025.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

And Nate just to add, if you look at our Q3 growth, we were at 3.2% constant currency. If you look at even our Q2 numbers, if you pair out the impact of the head client and the OTA client, we again grew about 3% sequentially in Q2 as well. And if you look at our guidance, our guidance assumes a 2% sequential growth. So the good part is the run rate sequential growth also puts us in a very good place to be enter FY 2026. So that's another additional comfort that

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

we can provide. And I think that's consistent with the message that we've been carrying, right, that if you strip out the idiosyncratic challenges that the business has had over the last couple of years, what you'll see is that true underlying growth rate and this is coming obviously from just the traditional $1,000,000 $3,000,000 $5,000,000 types of deals, not the large deal pipeline, that run rate really is sitting at high single, low double digit rates.

Nate Sison
SPEAKER at UNKNOWN

That's super helpful color. I appreciate the answer. So for the follow-up, I wanted to ask about operating margins. So margins up sequentially, down a little bit year over year. I think on the call last quarter, you had pointed to sort of low 20s adjusted operating margins in 4Q.

Nate Sison
SPEAKER at UNKNOWN

So wanted to see, 1, if that still holds? And then 2, maybe more importantly, can you talk about how you see the cadence of margins evolving as we move into 2026, particularly in light of this expected revenue recovery? Again, really nice to hear the high single, low double digit, but just wondering about year over year margin expansion on a full year basis and how that cadence looks like moving into next year? Thanks.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Yes. Lae, if you remember last quarter we had mentioned that as we get our revenue growth back due to operating leverage, our margin should improve. So if you see in this quarter, we actually improved the margin almost sequentially. And the fact is, as I mentioned as we mentioned last quarter, we have not scaled back our investment, right? Despite our revenue headwinds, we continue to scale up our investments in sales, in capacity, and that continues as well.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

So if you ask me Q4, we are contrary to what our guidance, we should get closer we should be in the 20% range in Q4. And going forward, if you look at from a run rate perspective, we should average on the higher 2019 to 2020 ranges going forward.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Yes. And I

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

think just to add a little color to that, Nate, the Q4 numbers, what we're still holding relative to last year's guidance is, as Arjun mentioned last quarter's guidance, sorry, north of 19% for the full year, which implies that we will probably do closer to 21% in the fiscal Q4. With respect to the cadence next year, we do expect to see some operating margin leverage across the full year. But remember, similar to what we've talked about in prior years, there should be a quarterly cadence where we will see a sequential reduction from Q4 to Q1 that relates to our annual wage increases and relates to the productivity commitments that we give to clients and that that margin profile should build as we move across the last three quarters of the year.

Nate Sison
SPEAKER at UNKNOWN

Great. I appreciate that. Thanks guys.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Thanks Nate.

Operator

Thank you. Our next question comes from Bryan Bergin with TD Cowen. Your line is open.

Bryan Bergin
MD - Equity Research at TD Cowen

Hi, guys. Thank you. I'll ask on the large deal. Can you just talk about the progress there that you called out as far as pipeline or progression through the pipeline of the large deals? Do any visibility to near term closures and any learnings for you as they do progress through the pipeline?

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Sure, William. So thanks for that question. So first and foremost, headline news is we are super positive about the momentum that we're seeing on the large deal pipeline. And as I mentioned in my prepared remarks, they come across different areas. But I think what is critical and important for us to appreciate is the fact that as a company, we have got positioned in a different stratosphere, I believe, in terms of the interest that a number of companies are taking in us in terms of our core strategic message around helping them with their differentiation, their revenue accretion kind of issues, their cost leadership programs that they want to achieve, and more importantly, their long term differentiation that they want to bring to the marketplace.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

And the fact that WNS understands the business domains so well and has invested in so many programs across technology and horizontals is resonating very well. More importantly, sometimes these messages have to be delivered at the highest levels on the other side. And this is where the uncertainty of timing takes place. So I must mention that we are delighted with the progress that we have been making on many of these deals. In fact, at this point in time, we probably have more than 20 of these large deals that are qualified and then moving through the pipeline.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

The uncertainty is around the fact that because of these deals being of such scale, size and impact and so disruptive in nature for the client very often not only is the key stakeholder the CEO and the CFO, but also their risk committees, their board members and they have to go through some hoops in terms of getting comfort internally before they actually take a final decision. Sometimes they need to bring in an advisor from outside to help them navigate the entire potential of the deal and the contract and things like that. So that's where we are as far as this is concerned. In terms of potential filings, we are confident that over the next 1 or 2 quarters, we are in a pole position to probably close something, right. But again, I want to just lay that out there and also say that when we actually close, we will update you.

Bryan Bergin
MD - Equity Research at TD Cowen

Okay, good. Appreciate all that detail. My follow-up, maybe double click on the Can you comment on how travel performed relative to your forecast? Just anything beyond the normal weak seasonality and the ramp downs you had known about? And then insurance showed nice sequential acceleration.

Bryan Bergin
MD - Equity Research at TD Cowen

So can you comment on maybe what you're seeing there? Is any change in that large cap decline?

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Sure. Let me take that, Brian. With respect to travel, I would say that the overall volumes in Q3 and the guidance into Q4 remains consistent with what we talked about last quarter, but that does include reductions in those volumes sequentially, right? So we do have pressure in Q3 relative to Q2. We have big pressure relative to Q4 in.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

The good news is from a risk perspective, right, the OTAs in Q3, for example, the online travel represented only 3% of company revenue. So we're kind of getting down to that level where the exposure and the potential risk is low, but we think we're kind of bumping along the bottom here in terms of online travel volumes. And hopefully, as these clients make the shift advanced digitized solutions towards AI and Gen AI as opposed to traditional bots and traditional types of solutions, we should be in a very good position to help them with that journey. On the insurance side, good healthy acceleration in 2 of our insurance relationships, including one of the large U. S.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Clients that Teshu spoke about in his prepared remarks in terms of their policy administration journey and a digital policy administration journey leveraging GenAI. But nothing in either the Q3 actuals or the Q4 guidance related to the large insurance gap. So this is actually coming from a completely different client.

Bryan Bergin
MD - Equity Research at TD Cowen

Okay. Okay. Thank you.

Operator

Thank you. Our next question comes from Surinder Thind with Jefferies. Your line is open.

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies Financial Group

Thank you. I'd like to start with the commentary around just the sales cycle and the idea that there hasn't been any real material change. Can you perhaps characterize what your view of the sales cycle is on the normal deals at this point? It sounds like it's healthy, but just maybe historical context and how you think you see that evolving over the next quarter or 2?

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

So I'll take that and I'll have Dave and Ajit add more color. I think the first thing is that in terms of sales cycle itself for the normal deals, there are 2 things happening. I think the normal deals, you have to assume the sales cycle is normally 6 to 9 months, right? And particularly with first time outsources, it also means the prospect getting a lot of comfort around the fact that the partner that they're looking to work with actually understands the business domains very well and more importantly understands the sub domains, right. And one of the things that is starting to help accelerate some of the momentum on these deals is the fact that a lot of new clients in particular or people who have not dipped their toes in this model are also concerned that they may be left out in terms of some of the changes that are happening in terms of the macro changes around technology and disruption that the whole world is talking about, whether it's AI, Gen AI or whatever.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

And for people who have not yet dipped their toes in digital and transformation and cost leadership programs, for them to attempt the AI and Gen AI journey becomes difficult unless they do the first. So that actually is adding momentum to our sales funnel and is actually helping many more deals come through the pipeline. I just want to also underline that with all the changes taking place in the world outside around the macroeconomics as well as the desire to be seen as the smartest companies in the space from a digital as well as the Gen AI model point of view. Domain specialism continues to be the most important reason for customers wanting to align with a partner 1st and foremost. And in that area WNS scores probably the highest from an industry point of view.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

You know that for years together we've invested very strongly in end to end domain specialties. The second thing that we're seeing is that the use of technology and platforms as well as data analytics has now become par for the course. That is something that WNS has been investing very, very strongly, is a leader in the space, and that gives a lot of comfort to some of these people who are in the pipeline. And most importantly, in this era of uncertainty, all of them want to work with trusted partners who know their business and can guide them around new models that will help them with their revenue growth, with their cost leadership kind of programs, with their digital transformation initiatives and a partner that is actually investing in new disruption models. And I can tell you that this is where WNS scores all the time.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

And that's where the pipeline that's how the pipeline is being built in a very healthy manner and across all core horizontals, verticals and geographies. Geographies.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

And I think, Surinder, if you just kind of look at the history of this space and WNS' track record, when the macro was healthy and obviously companies were doing extremely well prior to the pandemic. What we saw was a good healthy acceleration in growth rate, right? So our ability to close the traditional $1,350,000,000 deals, our ability to expand existing relationships was healthy even in a positive macro environment, which means it wasn't all about cost reduction. It was about customers needing to change their models, needing to change their processes in order to remain competitive. If you fast forward now to some of the challenges that have happened over the last couple of years from a macro perspective, I think if you peel under the covers and get past the idiosyncratic issues that we've had, what you'd see is that our ability to close those deals and move them through the pipeline and those sales cycles haven't fundamentally changed.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

And in fact, if you look at through the 1st three quarters of this year, we've signed more new logos and we've expanded more relationships than we did last year. So there's actually been positive traction to Keshav's point in our ability to close deals despite some of the macro challenges in the political environment.

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies Financial Group

That's helpful. And then just following up in terms of just the build out of new solutions, new capabilities. So when we think about, I think you mentioned maybe 13 unique digital Gen AI assets. Any additional color you can provide there in the sense of are these primarily like proprietary models that you guys are building that you can leverage? Or is it some combination of solutions where you've integrated with maybe some of the large partners, whether it's an OpenAI or with Gemini or Llama for that matter or something like that?

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies Financial Group

How should we think about that part of the positioning and strategy?

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Yes. I think it's a combination, Surinder. At the end of the day, we have developed the digital assets are proprietary, but there can certainly be components of third party technology that are part of those integrated solutions, right? So the bottom line is what we're doing is we're using best in class and whether it's something that we've created or whether it's something that we partnered, what we've been able to do is take those capabilities, enhance them, put domain specialization in them and create an asset that is not only reusable across multiple clients, but customizable for those clients. So it's not like we're trying to create an asset that we can then go and sell as a standalone asset.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

We know that these things need to be modified to a specific customer's requirement. And we have that flexibility in these assets that we've created to be able to do that. So if you were to look at the 13 digital assets, you would see that they cut across both horizontals and verticals and combine both WNS proprietary technology as well as state of the art third party brand names like some of the ones that you've mentioned.

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies Financial Group

Thank you.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Thanks, Ramiris.

Operator

Thank you. Our next question comes from Maggie Nolan with William Blair. Your line is open.

Maggie Nolan
Research Analyst - Technology, Media & Communications at William Blair & Company, L.L.C

Hi, thank you. So I wanted to ask about your expansion of client relationships. I mean, obviously, there are some idiosyncratic things that you referenced, but overall, it seems like the majority of the client base is healthy and the number of expansions in the quarter was a bit of an uptick. Can you share any detail on the nature of these expansions or has anything changed in the business that you think is enabling a higher level of engagement with clients?

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Maggie, that's a great question, Adi. So first is, philosophically, we went through a perfect storm last year, right? And therefore, I think it's important for us to recognize that. And the fact that management of this company actually has spent a lot of time in terms of working on models and relationship kind of metrics that we want to track and we want to go after to make sure that every one of our clients, 1st and foremost, gets off the required attention that we don't see any surprises at any point in time. We've implemented a lot of that.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

And I think as a result of that very, very strong and enhanced engagement across every one of our client models, client relationships really is resulting in a detailed increase in pipeline, growth in the existing processes, but more importantly, allowing WNS people to actually interact across the length and breadth of each of our clients, which over a period of time will lead to new kind of interesting programs. So that is the benefit that we, I think, actually are starting to see, right? And I think as a result of that, our confidence is

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

strong about how it will result in great outcomes for us even next year. I think the other thing that's important, Maggie, is we've always kind of talked about our land and expand model that the goal is to get in there, demonstrate our capability and then move into other areas. And certainly, obviously, the narrative that we've been dealing with, we dealt with it with RPA, we've been dealing it here with AI and GenAI, it is that productivity commitment that we have to get back to clients because we're automating things that traditionally have been done with labor. But I think the other part that we've been very consistent talking about is how the automation actually expands the addressable market within the client environment. And I think that's part of what you're seeing here is that while we've got some of that downward pressure as we automate existing pieces of business, clients are willing to give us new pieces of business, additional pieces of business that allow us to automate and enable them to do things differently that they wouldn't have considered previously.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

And I think that's part of what you're seeing as you look at that expansion number is that clients are increasingly willing to let us manage things that previously they wouldn't because our technology capabilities and our approach is fundamentally different.

Maggie Nolan
Research Analyst - Technology, Media & Communications at William Blair & Company, L.L.C

Okay. Thank you. That's helpful. And then as you think about the year ahead, calendar or fiscal, how are you thinking about your M and A strategy and putting some of that cash to work? Thank you.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Thanks Maggie. I'll take that. So look, Maggie, we have from a M and A perspective, we've always been very clear that we will acquire for capability. So that philosophy continues. There are certain identified areas that we have internally sort of agreed on and we are evaluating multiple opportunities in those areas.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Of course, from a timing perspective, we will of course let you know once we have something conclusive. But in a sense that activity is continuing and that's in line with our overall capital philosophy where tuck in acquisitions is one of our strategic growth sort of imperatives that we've outlined in the company and that continues. So, yes, so that's where we are.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

But I think just to add to what Arjun said, the approach has also been that if it's not the right asset at the right price, it's the right fit, we're not going to do it. So I think we want to be impactful. We want to find assets that help improve our capabilities and plug holes in our offerings. But at the end of the day, if it's not the right fit, we're not going to force it. And that remains consistent in terms of philosophy with the company.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

And I'll just mention one thing here, which is that, I think all the acquisitions that we have done in the recent past have all been in the higher value add areas that have helped the company take the messaging to our clients to a different level. We have not wasted the crisis of last year inside the company and we have done a lot of work inside in order to make sure that 1st and foremost our core offerings are seen as strong and consistent. We have added new offerings that have been created organically. Our M and A targets that we acquired over the last few years have all delivered very strongly in this last few quarters. And like Arunjiv said, we will do whatever is light, essentially to add more capability, but really move up the value chain consistently around the whole data analytics, AI, Gen AI and potentially 1 or 2 very carefully chosen verticals.

Operator

Thank you.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Thanks Maggie.

Operator

Thank you. Our next question comes from Puneet Jain with JPMorgan. Your line is open.

Puneet Jain
Puneet Jain
Associate - Equity Research at JP Morgan

Thanks for taking my question. Keshav, like over the last 3 months, we've been hearing a lot about AgenTic AI as the next step in evolution of generative AI and AI overall. What does increasing adoption of AgenTek AI mean for companies like yourself and where clients are in the adoption cycle?

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Absolutely. So actually, again, like some of these other technologies and movements that this company has been used to navigating across many years, Longer term, all of this will be opportunity because these are areas that we are constantly investing in, in order to make sure that we become far more efficient as a company. Short term, there will also be a threat as a result of agentic AI. But the reality is we know all of that and we are investing behind it. And as we talk numbers to you on the street, we bake in some impacts from all of this in our productivity in terms of some of the opportunity losses and then grow beyond that.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Long term, I will say that at this point in time, it is still a term being spoken about a lot. I can tell you that inside the company, there's a lot of activity and lots of effort being made in order to test the model and try and bring this model into some of our core operations. It is not that clients have adopted in an aggressive manner at this point in time because there are still lots of hallucinations and other things that have to be navigated. I would expect that over the next 3 years, this is an area that will create tailwind for the industry and for WNS, and therefore, that's how we are working with it, creating offerings inside the company, building the right relationships with external partners to introduce agentic AI and constantly using all of this in order to drive our top line.

Puneet Jain
Puneet Jain
Associate - Equity Research at JP Morgan

And then second, given all the investments required to get there to be a meaningful participant in this new wave as well as like your transition to GAAP reporting. How should we think about like new normal for margins for WNS?

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

So, Priscilla, I think we covered that. I think we mentioned earlier as well. From a margin perspective, I think we are very comfortable in the high 19s 20% ranges on an 100 basis. If you see where we are in Q3, we are at 90.3%. As Dave mentioned, the Q4 guidance implies an acceleration of margins, driven primarily due to operating leverage as you get growth back.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

But if you ask us from a run rate perspective, we'll continue to be in the 19 half 20 percent range going forward. And that also makes in significant investments around capability, including our ability to lead the market from agent to care perspective.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Essentially, no change, Puneet. I think we can make those investments within the construct of how we run the business. To your point, which is correct, the big difference you see in the margin profile from what people have historically seen, which is kind of that low 20s, is the roughly 120 basis point impact of the transition from IFRS to U. S. GAAP.

Puneet Jain
Puneet Jain
Associate - Equity Research at JP Morgan

Got it. Got it. Appreciate it. Thank you and congrats for GAAP reporting.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

Thanks Puneet. Thanks Puneet.

Operator

Thank you. And our next question comes from David Koning with Baird. Your line is open.

David J. koning
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

Yes. Hey, guys. Thanks and nice job. I guess my first question, it looks like the way you're guiding the rest of the year, that fiscal Q4 sequential growth is actually pretty normal. I kind of look back, it looks like you usually average kind of 3%, 4% sequentially.

David J. koning
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

That's kind of what you're going to grow, maybe even a little better than that in Q4 sequentially. Is it are you just back to kind of normalize now that some of these headwinds are in the past and there's really not anything affecting sequential? Is that kind of the way to think about it?

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Yes. I think so, Dave. I mean, I think what you're seeing is on a sequential basis from Q2 to Q3 and from Q3 to Q4, you don't have any of these idiosyncratic issues. So whether it's the majority of the online travel issue, whether it's the healthcare client, whether it's the migration of the large Internet client from on-site to offshore, these challenges from a sequential basis are behind us. And for the most part, as I mentioned earlier, when we talked about kind of the unusual headwinds walking into next year, which are about 2%, they're behind us on a year over year basis.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

So I think as you move into fiscal Q1, for example, of 'twenty 6, what you should start to see is not only that good healthy sequential number showing up, but you're going to start to see that year over year number showing up as well.

David J. koning
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

Yes. No, that's great. And I guess two questions kind of around the U. S. GAAP accounting.

David J. koning
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

One is, was that any other reason? I mean, cash flow was super strong in Q3. Was maybe there's something different about conversion from U. S. GAAP?

David J. koning
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

And then the other one is, were there any kind of non recurring type expenses in fiscal 2025 that actually helped margin expansion in 2016 given the cost of all that switching you did in 2025?

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Yes. No, I don't think so, Dave. I think in fiscal Q3, we were under U. S. GAAP for the 1st 2 quarters of this year.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

So there's nothing in the numbers this quarter that are unique from a cash perspective. If you want to look at what really drove the healthy cash generation in the quarter, it was the reduction in the DSOs. So good growth on the top line, reduction in the DSOs really helped us drive healthy cash. I think that sequentially we've always had improving cash as we move throughout the year, similar to what we've talked about with the margin profile, right? As revenue accelerates, as margins expand, as DSOs come down, those all are helping us drive a healthy cash amount.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

With respect to kind of the non recurring issues on the margin side, I think the only non recurring issue that we had is if you look at what's really dragged margins this year, it will be the SG and A coverage in the first half of the year. We've run roughly 18% SG and A in the first half of the year. We typically run 16% to 17% on the SG and A level. And it's because when revenue took the hit, especially with this large healthcare client, we didn't adjust the SG and A level. And now as we move throughout the year, not only do you have that normal cadence coming back, but you also have expense coverage coming back, which is what Arjun spoke about.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Related to next year, we should not have those kinds of challenges. So we should be kind of more to a normal cadence and a normal margin profile across the year. But on a year over year basis, that should allow us to hopefully show some margin improvements in addition to accelerating top line growth.

Keshav Murugesh
Keshav Murugesh
Group CEO & Director at WNS

And I just want to add, while we're excited about all of this, we are more excited about the revenue momentum, the pipeline for growth, the needs of our customers. And as a result of that, our need to keep investing in areas around sales, branding and marketing, technology, the whole digital stack, analytics, and we're not going to hold back as far as these investments are concerned. So I just want to mention that we have brought in lots of very new interesting talent into each of these areas. While we expect it will not create a disturbance in terms of margin because we are saving in other areas to invest in these areas. These are the areas that we will invest in, in order to demonstrate a much higher quality of revenue and profit momentum for the company long term.

David J. koning
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

Great. Thanks, guys.

David Mackey
David Mackey
EVP of Finance & Head of IR at WNS

Thanks, Dave.

Executives
    • David Mackey
      David Mackey
      EVP of Finance & Head of IR
    • Keshav Murugesh
      Keshav Murugesh
      Group CEO & Director
Analysts
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Earnings Conference Call
WNS Q3 2025
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