WNS - WNS (Holdings) Limited (WNS) Q3 2024 Earnings Call Transcript
2024-01-18 11:34:11 ET
WNS (Holdings) Limited (WNS)
Q3 2024 Earnings Conference Call
January 18, 2024, 08:00 AM ET
Company Participants
David Mackey - Executive Vice President of Finance and Head of Investor Relations
Keshav Murugesh - Chief Executive Officer
Sanjay Puria - Chief Financial Officer
Conference Call Participants
Surinder Thind - Jefferies
Bryan Bergin - TD Cowen
Moshe Katri - Wedbush Securities
Maggie Nolan - William Blair
Nate Svensson - Deutsche Bank
Kyle Peterson - Needham
Mina Mafi - JPMorgan
Ashwin Shirvaikar - Citi
David Koning - Baird
Presentation
Operator
Good morning, and welcome to the WNS Holdings Fiscal 2024 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. Please go ahead.
David Mackey
Thank you, and welcome to our fiscal 2024 third 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 third quarter ended December 31, 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 today's 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 impairments; 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 the call.
I would now like to turn the call over to WNS' CEO, Keshav Murugesh. Keshav?
Keshav Murugesh
Thank you, David, and good morning, everyone.
In the third quarter, WNS' financial results were largely in-line with our expectations. The company posted third quarter net revenue of $315.9 million, representing a year-over-year increase of 7.8% on a reported basis and 5.9% constant currency. Sequentially, net revenue decreased by 2.8% on a reported basis and 2.3% on a constant currency basis after adjusting for foreign exchange. As discussed last quarter, the sequential reduction was largely the result of the delivery transition for a large Internet-based procurement client from on-site to offshore, lower travel volumes and softness in our project-based revenues. Overall, from a demand and booked revenue perspective, there were no major changes or surprises during the third quarter.
Travel volumes reduced during the quarter, particularly for domestic online travel. While some of this is a function of normal seasonality, we also saw volume reductions in our high-end business-to-business customer experience portfolio. This, we believe, is attributable to both corporate travel spending and client specific issues.
In addition, demand for WNS' project-based work, including hyper-automation, procurement and analytics projects saw a slight sequential decline in Q3, and remains below the levels expected in a healthy macro environment. While certain volumes and project work have reduced, demand for our core process management initiatives continues to be healthy, driven by client requirements for process automation, as well as cost reduction.
Our new business pipeline is robust and clients are moving forward with strategic initiatives. During the third quarter, WNS added eight new logos and expanded 32 existing relationships. I'm also excited to announce that we have now received a commitment from our large insurance captive relationship to proceed with a portion of the Phase 2 plan. This new process is expected to begin ramping later this quarter.
Today, I would like to provide you with a brief update on our AI as well as GenAI initiatives, as we continue to build, design, implement solutions for our clients leveraging these technologies. The pipeline of GenAI use cases continues to expand across our verticals, as well as service offerings, and we are making steady progress moving these initiatives forward with our clients.
Today, we have secured client commitments for GenAI implementations, which span verticals, including insurance, retail, CPG, travel, shipping and logistics, as well as banking and financial services, and represent horizontals such as procurement, operations and customer experience. In some of these examples, the GenAI solution has been a catalyst for new business, including customer additions and expansions of existing relationships. For others, GenAI is helping transform the existing book of business and drive improvements that previous solutions were unable to deliver.
At WNS, our approach continues to focus on combining our deep industry expertise with GenAI to deliver enhanced levels of performance, accuracy and business value, which is differentiated and superior to generic GenAI applications. For example, we currently have an existing client implementation, leveraging a powerful new WNS proprietary GenAI decision support engine, which enables our agents to quickly access relevant information from large numbers of complex lengthy documents and then synthesize and summarize the results to meet the customers' requirements.
The solution, which combines the power of human intelligence as well as artificial intelligence, is positively impacting most key business metrics, including reduced handling times, improved accuracy and higher first-call resolution rates. For our client, this is improving end user satisfaction and increasing revenue retention. For WNS, the solution is revenue neutral, margin accretive and resulting in additional process management opportunities. We are also excited to highlight that this GenAI decision engine is scalable both horizontally as well as vertically across WNS.
We're also pleased to announce that we are now upgrading Malkom, our intelligent automation platform for the shipping and logistics industry, with GenAI capabilities. The updated version now called Malkom AI is designed to revolutionize the way incoming data sources, including emails, chats, messaging, web portals and EDI, are processed. The enhanced platform enables cognitive extraction and routing of data to specific workflows within our clients' organization as well as IT systems, which in turn either fully automates these workflows or flags them for human validation and completion as is needed.
Malkom AI now demonstrates WNS' capability to leverage deep industry expertise and process knowledge in the application of GenAI and other cutting-edge technologies. Overall, we continue to see GenAI as a long-term catalyst for our business. Our investments in this as well as other new technologies and our ability to combine these powerful tools with domain, people and process is generating increased interest from both existing clients, as well as new prospects. These tools are enabling WNS to improve both the quantity and quality of client discussions with the focus increasingly shifting towards innovation, competitive positioning, as well as value creation.
In addition, we are seeing strong willingness from these clients to share in the financial and operational benefits of our GenAI solutions. So, for WNS, this includes the ability to capture new revenue streams, shift the commercials from FTE-based models to stickier higher-value managed services and outcome-based models, as well as improved margins.
I would also like to share with you some activities in progress designed to help improve our ability to compete for capital. In our press release issued earlier today, WNS announced that we have formally transitioned the company to three global headquartered locations in New York, London, as well as Mumbai. This change supports the company's decentralization of senior leadership, as well as decision making as highlighted by our organizational structure change announced in April 2023. These headquarter additions also reflect the company's financial and operational evolution over the past 25 years, including the geographic diversification of our revenue mix as well as delivery footprint.
In addition, earlier this week, WNS' Board of Directors granted approval for the company to move forward with plans to convert our ADSs to ordinary shares. The company intends to complete this exercise prior to the end of fiscal first quarter 2025.
The WNS Board has also granted approval and the company intends to voluntarily shift from foreign private issuer status reporting under IFRS to domestic filer status reporting under U.S. GAAP. This change is expected to be implemented prior to the end of fiscal second quarter 2025.
The company believes these actions are in the long-term best interest of all WNS stakeholders. Key objectives include, improved access to capital through the ability to participate in the U.S. indexes and additional active investment funds, reduced share price volatility, as well as enhanced governance.
In summary, despite the challenging macro environment and certain non-recurring headwinds in fiscal 2024, WNS now enters fourth quarter with more than 99% visibility to double-digit full-year revenue growth and continues to expect industry-leading stable margins for fiscal 2024. We also remain optimistic that our growing pipeline for core automation as well as cost reduction based services and reducing headwinds set the company up for accelerated growth in fiscal 2025. WNS continues to invest in technology, analytics and domain to ensure our competitive differentiation remains intact, enabling the company to deliver long-term sustainable value for every one of our key stakeholders.
I would now like to turn the call over to our CFO, Sanjay Puria, to further discuss our results as well as outlook. Sanjay?
Sanjay Puria
Thank you, Keshav.
In the fiscal third quarter, WNS net revenue came in at $315.9 million, up 7.8% from $292.9 million posted in the same quarter of last year and up 5.9% on a constant currency basis. Sequentially, net revenue decreased by 2.8% on a reported basis and 2.3% on a constant currency basis. The sequential revenue reduction was driven by the offshore delivery transition of a large Internet account, volume reductions with certain clients, primarily in OTA travel, and weakness in discretionary project-based revenues. These headwinds were partially offset by strong client demand for cost reduction focused initiatives. In the third quarter, WNS recorded $0.5 million of short-term revenue at company average margin.
Adjusted operating margin in quarter three was 20.6% as compared to 21.9% reported in the same quarter of fiscal 2023 and 22.4% last quarter. Year-over-year adjusted operating margins were pressured by annual rate increases and return-to-office costs. These headwinds were partially offset by improved productivity and favorable currency movements. Sequentially, margins decreased as a result of wage increases, higher SG&A expenses driven by quarter two provision reversals for performance incentives and bad debt and lower revenue.
The company's net other income expense was $2.8 million of net expense in the third quarter as compared to $1.2 million of net expense reported in quarter three of fiscal 2023 and $3.6 million of net expense last quarter. Year-over-year net interest expense increased due to higher debt levels and lower cash balances, driven by our acquisition and share repurchases. Sequentially, the favorable [variance] (ph) was a result of interest income on tax refunds, sale of assets and slightly lower interest expense.
WNS effective tax rate for quarter three came in at 6.6% as compared to 19.8% last year and 22% last quarter. In the fiscal third quarter, we realized a one-time tax benefit of $9.5 million, resulting from the reversal of a deferred tax liability on intangibles, both year-over-year and sequentially. Other changes in our effective tax rate was a result of shift in our geographical profit mix and changes to the mix of work delivered from tax incentive facilities.
The company's adjusted net income for quarter three was $58.2 million compared with $50.6 million in the same quarter of fiscal 2023 and $54.1 million last quarter. Adjusted diluted earnings were $1.18 per share in quarter three, up 18% versus $1.01 in the third quarter of last year and up 9% from $1.09 last quarter.
As of December 31, 2023, WNS' balances in cash and investments totaled $260.4 million and the company had $177.4 million in debt. In the third quarter, WNS generated $73.7 million of cash from operating activities, incurred $10.3 million in capital expenditures and made debt repayments of $20.2 million. The company also repurchased 1 million shares of stock at an average price of $58.13, which impacted quarter three cash by $58.1 million. Our revised full-year guidance assumes WNS will continue with our share repurchase program in the upcoming fiscal fourth quarter. DSO in the third quarter came in at 35 days as compared to 34 days reported in quarter three of last year and 35 days last quarter.
With respect to other key operating metrics, total headcount at the end of the quarter was 60,652 and our attrition rate in the third quarter was 29% as compared to 28% reported in quarter three of last year and 30% in the previous quarter. We expect attrition to average in the low- to mid-30% range, but the rate could remain volatile quarter to quarter in the current level -- environment. Build seat capacity at the end of the quarter three increased to 40,658 and WNS averaged 69% 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 level, we expect net revenue to be in the range of $1.270 billion to $1.292 billion, representing year-over-year growth of 9% to 11% on both reported and constant currency basis. Top-line projection assumes an average British pound to U.S. dollar exchange rate of 1.27 for the remainder of the fiscal year. And we currently have over 99% visibility to the midpoint of the range.
Full-year adjusted net income for fiscal 2024 is expected to be in the range of $212 million to $218 million based on an INR83.3 to U.S. dollar exchange rate for the remainder of fiscal 2024. This implies adjusted EPS of $4.27 to $4.39 assuming a diluted share count of approximately 49.6 million shares.
With respect to capital expenditure, WNS currently expects our requirement for fiscal 2024 to be up to $60 million.
We'll now open the call for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question comes from Surinder Thind with Jefferies. Your line is now open.
Surinder Thind
Thank you. Good morning. I'd like to start with a question on just kind of demand environment and more specifically just the volume aspect of the business. Can you maybe talk a little bit about how client volumes have evolved relative to expectations maybe six months ago when we first started seeing signals of clients wanting to slow down? And then, what are the client conversations as we look forward maybe six months at this point?
David Mackey
Sure, Surinder. So, I think if you look across the last couple of quarters, what we've seen and what we had included in our guidance was expectations from our clients, projections from our clients and for certain clients, especially in the travel space, commitments from these clients to reducing volumes. And historically, when we've seen that kind of a trend from customers, they've proven to be extremely conservative.
What we've seen over the last couple of quarters is that those numbers have come in much closer to their projections and commitments than what we've seen in the past. So, as a result, we have not been able to recognize upside relative to volume and relative to our forecast and guidance during that period. So essentially at the end of the day, the volume projections that they had provided us with proved to be accurate and good.
I think the good news and the upside is as we look forward into the fourth quarter, we are not seeing clients continuing to drop those forecasts and those projections. So, our hope at least at this point is that the volumes have stabilized at these levels, and then, as we move across into fiscal 2025, we have upside if we see some macro benefits out there.
Keshav Murugesh
Yeah. And I'd just add that while that was a great explanation on the volumes of the current business, the other fact to also mention here is that we continue to see a lot of interest in terms of existing clients as well as new prospects, continue to have very positive discussions in terms of longer-term strategic plans for both transformation, cost saving as well as implementation of some of the GenAI kind of tools that we've -- that I spoke about earlier. So, I think right now it's a mixed bag, but it is -- it looks exactly like what we said it was likely to be as of last quarter.
Surinder Thind
That's helpful. And then as a follow-up, when we think about your AI strategy, the platforms, the tools, the technologies that you want to build, the question here is how truly differentiated can you build some of those products? And how bespoke is that to kind of the client solutions that you build? And maybe how much is reusable? And then, I guess overall, do you have to accelerate spend to, I guess, win the arms race for AI here? How do we think about all of that dynamic?
Keshav Murugesh
Yeah. I think I'll take a stab at that answer first. So, first and foremost, I think we are very clear that this is a movement that will only keep gaining traction, and our job right now is to make sure that our clients see us as a responsible partner leading them in this charge, though many of them may not yet be completely ready to get on this bandwagon because some of the current stresses that they're seeing are more focused around profitability, volumes, things like that. So, from our point of view, giving them the comfort that we are training our people, they've got the right partnerships in place, we have invested very strongly in the tools, and the required technologies and that some of the solutions that they are used to seeing from WNS are all being enabled through AI and GenAI tools is something that is being seen as very positively.
The second thing that they're all seeing very positively is the intent from WNS to look at our core business, understand which are the areas that actually need faster implementation of some of these tools so that we are more partner-like to our clients. And even if it means cannibalization of short-term revenue for us, they have understood the intent from a WNS point of view is to do that in order to build very strong long-term sustainable relationships with them.
So, if you look at the current stage, it is all about building out completely new tools, creating these partnerships and enabling existing tools through GenAI. In many cases, we use the base tool that is available and then create something which is bespoke for a particular client. But most often, we also have the ability to reuse quite a few of these tools. So, when we are talking about some of these branded tools that I spoke about earlier, our ability to use them across multiple clients while incurring a one-time cost at the start is high, and therefore, our ability to have high-quality relationships or discussions with our clients in terms of how to share that cost or the opportunity in the first case is also built on trust as opposed to just plain opportunity.
David Mackey
And I think just...
Surinder Thind
Thank you.
David Mackey
Just to add to what Keshav said, Surinder, at the end of the day, clients are looking for digital transformation. And the reality is that GenAI as a tool is only one component of what they're looking for. So, we continue to believe that our key differentiator is domain expertise. The ability to understand the client's business, to understand the client's problem and leverage process, leverage people, leverage technology, whatever the technology might be to solve that problem.
And to Keshav's point, certainly certain components of that solution have to be customized and proprietary to that specific client. But at the same time, we're also creating reusable components that we can bring across the entire portfolio. So, I think the approach actually works well and plays into the strength of where this company has made our investments over the last 10, 15 years.
Surinder Thind
Thank you. That's very helpful.
Operator
Please stand by for our next question. The next question comes from Bryan Bergin with TD Cowen. Your line is now open.
Bryan Bergin
Hi, good morning. Thank you. First one I have, just as it relates to the share class conversion, the voluntary filer status shift, are there any notable financial implications from these items to be aware of as you transition next year? Just really anything to be aware of around maybe tax structure? And from an accounting change, anything dramatically different versus potentially just the hedges [of top] (ph) moving?
Sanjay Puria
No. So, there are no financial implications specifically for moving from ADS to the common stock over there. Even from a tax structuring or -- even the structure remains the same. It is just from the access of the capital and to reduce the volatility from a share volume perspective, those are the prime objectives. But primarily, no financials impact.
David Mackey
There will be changes to some of the financial metrics as we transition from IFRS to U.S. GAAP based on exactly what you were referring to, how these two different standards treat certain types of transactions and certain types of costs, but the reality is, to Sanjay's point, there should be no change from the conversion from ADSs to ordinary shares.
Bryan Bergin
Okay. Very good. And then, as it relates to the headquarter additions and the growing global diversification, can you just kind of discuss the margin implications from these changes? Do you have any difference in view on the medium-term potential in adjusted operating margin?
David Mackey
They're already embedded in our structure. There should be no change as a result of anything that we've discussed today relative to the approach to capital access.
Bryan Bergin
Great. Thank you.
David Mackey
Thanks, Bryan.
Operator
Please stand by for the next question. The next question comes from Spencer Lebov with Wedbush Securities. Your line is open.
Moshe Katri
Hey, guys, can you hear me?
David Mackey
Yes. We can hear you now.
Moshe Katri
Great. It's Moshe Katri with Wedbush. A question, can we get an update on the captive client, specifically the delays or the pause that we've heard about last week? And then, I have another follow-up. Thanks.
Sanjay Puria
Yeah. So, as in the remarks what we mentioned that last quarter, there was a delay over there. But the good news as we move forward, we already got a commitment of a portion of that Phase 2 from that client, and we will be starting the delivery from the later part of the quarter four. And as we move forward, the discussions are further on for the balance portion of the Phase 2, which may be there as a part for the next 12 months.
David Mackey
I think just to reiterate what Sanjay is saying, obviously, a lot of concern and consternation out there about the delay. As the company had said last quarter, we still believe that it was a question of when, not if, we were going to get this piece of business. All the indications from the client were that they were going to continue to move forward with this process addition and it was nice to see that they're taking steps in that direction, formal steps.
Sanjay Puria
And just to remind you again that this is a part of the overall commitment from the client. So, as Dave mentioned, it's all about when, but it need to happen during the tenure of the contract.
Moshe Katri
Yeah...
Keshav Murugesh
I just want to mention -- I'm sorry. I just want to mention one thing that some of these conversations are mostly about transformation as well as cost saving. Now, based on how well prepared a client may be on some of these larger initiatives, they can only delay that much. Thereafter, based on the macros, based on the business need, it's just smart for customers to actually move ahead with these journeys. So, I just want to mention again that while over the last one or two quarters, we saw these delays, we are also quite confident that not only will they come back in terms of Phase 2 and -- of this particular transformation, but the opportunity for WNS to go deeper into many more areas with this client is very high over the next few quarters.
Moshe Katri
Okay. So that's definitely positive development. So, there is a go ahead. Some of it -- some of the -- some of those -- some of that revenue generation will be recognized towards the end of Q4, and then there's Phase 2 that gets recognized in fiscal '25, is that the right way of looking at it?
Sanjay Puria
Yeah, you're absolutely right. It's going to be minimal revenue during this financial year. But as we transition, it's going to be the following year of FY '25 where the bulk of the revenue we'll start to recognize.
Moshe Katri
And can you...
David Mackey
I'm sorry, Moshe. And the hope also is that they continue to give us the additional components of Phase 2 as we move throughout fiscal '25 that also contributes above and beyond what we've been awarded at this point.
Moshe Katri
Okay. I'm sorry, just to go back to this, can you remind us what was the -- what is the potential run rate from this specific captive client?
David Mackey
Yeah, we talked about last quarter the delay in pushing that revenue out of our fiscal '24 financials costing the company almost 2% of revenue.
Moshe Katri
And that's been -- some of it is getting pushed out to fiscal '25?
David Mackey
Well, in our last guidance, all of it was pushed out. The majority of it is still going to be pushed out because we're not recognizing anything until later in this fiscal fourth quarter. But the good news is because we're starting in the fiscal fourth quarter, we should have a higher run rate of revenue in fiscal '25 from this award.
Sanjay Puria
So maybe, Moshe, I'll just help you with that. And as Dave mentioned, it was a 2% which got impacted for this fiscal year. Out of that what we have been awarded is 25% of that now, and which is completely awarded and which we'll be able to recognize in FY '25. But at the same time, the balance 75%, still there's an opportunity which we are working, which will help us during the next fiscal year.
Moshe Katri
Okay, great. Final question. Since May of last year, again, someone decided that WNS is exclusively going to get impacted by GenAI, right? Any indication that any of those -- any of that kind of prophecy has materialized in terms of your revenue base, cannibalization, et cetera, just to be clear? Thanks.
Keshav Murugesh
Not at all. Actually from our point of view, voluntarily, like I said earlier, wherever we think the client will benefit by embracing GenAI, even if they are not ready, we are going in, having those conversations, building deep connections with our clients and building our plans that will help us grow net of the cannibalization at a level that the industry expects.
David Mackey
To be very clear, Moshe, in terms of what we've seen to date and what we've embedded into this guidance, there has been zero negative impact to our revenue from GenAI.
Moshe Katri
Thank you.
Operator
Please standby for the next question. The next question comes from Maggie Nolan with William Blair. Your line is open.
Maggie Nolan
Hi. Thank you, and congratulations on all the developments. I wanted to ask about the project-based work and whether you have any changes in expectations over the next couple of quarters, just given that clients are starting to kind of finalize their budgets for calendar '24.
David Mackey
Sure. I'll take that, Maggie. I think as we talked about, we did see that some of the softness that was projected and committed from clients did materialize here in the third quarter. The good news again is that when you look at the fourth quarter numbers, we're not seeing a further decline in that expected project revenue, it doesn't mean that it couldn't happen. But at this point in time, it's our belief that the project run rate has somewhat stabilized here. And to the extent that we don't take another leg down in the macro or we don't see a meaningful hiccup in the macro, this is probably going to be the sustainable level for project-based work for us.
Sanjay Puria
And maybe we'll have more color because, January is a time where the clients' budgets will start getting further for the next fiscal year. And I know that some discussions have already started based on that. So, we'll be able to maybe have a better color when we provide updates for the next quarter.
Maggie Nolan
Thank you. And then, I mean, you have a great track record of posting strong margins and you continue to do so, but there are a lot of moving parts with volumes and project-based work, and you mentioned this new product that's margin accretive. So, I'm hoping you could maybe help us think through some of the puts and takes on margins even into fiscal 2025.
Sanjay Puria
You're right from those moving parts perspective, but there's a lot of variable costs associated from our business perspective. Though volume keeps on moving up or down quarter-over-quarter and accordingly we are able to manage those costs associated with that due to the variability. So, accordingly we believe that as we keep on investing into our business, as we keep on seeing some of the volatility in the volume, about 20% margin, operating margin, what we have been consistent with delivery and we expect to continue with that.
David Mackey
Yeah, I would just reiterate what Sanjay said that we do continue to believe that these margins are stable that there will continue to be puts and takes in terms of wage increases and the ability to improve margins as we continue to transition this business towards transaction outcomes subscription-based models and deliver higher value for our customers in those models. So, the expectation from the company continues to be that 20% to 22% range for adjusted operating margin moving forward.
Maggie Nolan
Perfect. Thank you.
David Mackey
Thank you.
Operator
Please standby for the next question. The next question comes from Nate Svensson with Deutsche Bank. Your line is open.
Nate Svensson
Hi, guys. Thanks for the question. I wanted to touch base on something that came up in the prepared remarks, and it's about the potential for reacceleration in revenue growth in fiscal '25. So, I think a few of the questions earlier have kind of gotten at this point, whether it's the insurance camp that's wrapping next year or expectations for project-based work. But I kind of just wanted to hear about your confidence or your visibility into that potential reacceleration next year, particularly given sort of volumes and short-term work is stable to slightly down in this environment. Thanks.
Keshav Murugesh
Yeah. So, I'll take that. So, I think the first thing is we continue to be positive about the potential for growth in our business, right? We think that the macros, while we are causing pressure at this point in time and have cost pressure probably this whole year, and we'll continue to be weak as we are hearing from the economists for the next few quarters, will also push customers who want to now start taking decisions that go beyond just the core business transformation agenda and go much more into cost savings in order to be smart about how they're running their businesses, one.
The second thing is our change that we made in terms of our org structure has now been digested well, has been understood well by the market, and that is actually now starting to evoke much higher quality and even better conversations with a lot of prospects as well as our existing customers. We actually think over a period of time, that will also start evoking higher benefits for the company.
The third thing I will say is that with other changes that we made around our sales focus, farming focus as well as creating specific track teams to go after some of these things, we are actually seeing higher-quality conversations on larger-sized deals, which, again, we believe, may take time to actually see decisions. Well, actually the number of deals entering the pipeline, the quality of the discussions we are having and the level of connects that we are now generating around these deals will actually deliver a very strong pipeline for growth longer term.
And therefore, from my point of view, I continue to see the business being very positive. I continue to see long-term tailwinds. I continue to see the BPM industry being underpenetrated and huge potential for us to go after the white spaces that need penetration. And with the change in our org structure, our clients and prospects are interacting with us in a far superior way than we saw even two years ago.
David Mackey
The other thing I would add to Keshav's comments is, remember that the biggest challenge that we have this year relative to growth are the unusual headwinds we have in our business. And to the extent that we've got 5%, 6%, 7% headwind to our business that has nothing to do with macro, that has nothing to do with projects, that has nothing to do with volume, right? To the extent that these are unusual types of things, as long as demand stays healthy for our core services, the ability to accelerate growth should clearly be there for us in fiscal '25.
Nate Svensson
Great. That's super helpful color. I really appreciate the detailed answer. I guess for my follow-up, can you share what the inorganic impact was in the quarter, particularly versus what your expectations have been? The reason I ask is I know Vuram had been sort of highly tied to short-term sort of discretionary project work and you had sort of the reversal of the contingent considerations last quarter. So, I was just wondering if we could get an update on how OptiBuy and Smart Cube have been performing. Thanks.
David Mackey
Yeah. I mean, overall, obviously, they're performing below expectations relative to when we purchase these assets, but they do continue to perform above company average in terms of their contribution. So, don't want to mislead from the standpoint of saying that these aren't healthy and well-performing assets. But in terms of the contribution on a year-over-year basis, from -- to revenue growth, you're looking at about 2 -- a little over 2% year-over-year.
Nate Svensson
Very helpful. Appreciate the answers.
Operator
Please stand by for the next question. The next question comes from Kyle Peterson with Needham. Your line is now open.
Kyle Peterson
Great. Thanks, guys. This is Kyle Peterson on for Mayank. I wanted to start off here just on some of the puts and takes of what you guys are seeing. I guess there's obviously been some macro challenges over the last couple of quarters, but you guys do help kind of streamline operations, reduced costs. So, I just wanted to see if you guys could kind of walk through how some of those client conversations are going. And what's the impact and focus on questions between some of the discretionary spend versus cost savings efficiency initiatives?
David Mackey
Sure, Kyle. I think overall, and Keshav alluded to it in his prepared remarks, right, I mean, there are kind of three components to the revenue portfolio in terms of what we're seeing. One is kind of those core cost reduction, automation, transformation requirements that clients have. The second are discretionary projects where -- by definition, it's got a fixed start and fixed end, and clients need to pay upfront for the benefit as opposed to paying as they go for the benefits that they receive. And then, the third is volume, which is essentially the number of transactions that are getting pushed through the processes that we already own and manage.
And obviously, as we've talked about, some of it specific to certain verticals and some of it specific to certain processes, we've seen pressure from both a discretionary spend perspective as well as from a volume perspective in certain verticals and sub-verticals. That being said, the core business, which for us represents almost 90% of our total where what we're driving for the client is tangible business benefit, whether that's cost reduction, whether that's revenue generation, whether that's loss leakage prevention, right, that piece of our business remains extremely healthy. That's really been the driver for the upside this year. And again, the reason that growth from this company is below normal. It's more about the headwinds to our business than the demand for our services.
Kyle Peterson
Great. That's very helpful. And then just a follow-up on the M&A pipeline. You guys made a couple of acquisitions here in the last few years. But how are you guys thinking about potential targets, how conversations are going, and where valuations stand in this environment?
Keshav Murugesh
Yeah. So, I'll just mention that we continue to be -- we continue to look at assets in chosen areas that we are interested in. Like we have said before, for us, it's all about capability creation. So, the core around M&A really is, if there is some new capability that we can bring in, that would be really our focus. Valuations, we believe, have come very much under control over the past two years or so. And therefore, our ability to be productive and constructive in this area is high.
We do constantly look at a number of -- some of these assets starting from small to mid-sized to sometimes even a much larger-sized assets also in order to make sure that our team is scanning the market very carefully and then giving us the insights to make a decision. Having said that, we will not do anything that doesn't make business sense for us. So, the timing of any future M&A activities and stuff like that can't comment on, but I can only tell you that we have been very constraint.
Sanjay Puria
Yeah. And I'll just add over there, there are multiple of those capability acquisitions what we focus and target upon are in various stages of discussion at this stage. And a specific point from a valuation perspective, in fact, the earlier valuation were actually over high. And now it has come to proper reasonable level, and that's what we are seeing in various of our discussions with various of the targets which are at a different maturity stage.
David Mackey
That being said, Kyle, the approach from the company remains the same. We're going to be opportunistic. We're going to find assets that have the right capability, that are the right cultural fit and then are at the right price. And if those opportunities aren't available in the market, we're not going to do acquisitions.
Kyle Peterson
Got it. That's great color. Thanks, guys.
Operator
Please standby for the next question. The next question comes from Mina Mafi with JPMorgan. Your line is open.
Mina Mafi
Hi. This is Mina on for Puneet Jain. I have two quick questions on GenAI. The first is that you mentioned that GenAI is kind of drawing in new clients as well as expanding your market share of existing. Are these new clients first-time outsourcers or competitive takeaways? And are these projects still more in the discovery stage or getting into implementation?
Keshav Murugesh
Yeah. I think that's a great question because one of the things that we are seeing is with the existing portfolio, our ability to have these conversations, obviously, is high. But because they are used to doing things in a particular way, they take a little longer to climb on the bandwagon of GenAI because there has to be a significant change management process that has to be implemented even with an existing process.
But with a lot of the first-time outsourcers with whom we're having lots of these conversations, their ability to get into this model upfront is much higher. And that's where we are having -- we are quite excited about the fact that while we are implementing and experimenting with a lot of these solutions with our existing clients, the ability to take them into some of these new conversations and lead with GenAI solutions is also very high. And I can tell you that at this point in time, the pipeline of sales is very strong with some of these first-time outsourcers. And in many of them, it is GenAI-led solutions and some of the platform-based solutions that I spoke about, where the core of the discussion is happening around.
Mina Mafi
Great. Thank you. My other question was just that you guys have stated you have -- you expect a structurally higher margin profile as you guys are shifting more towards outsourcing. And have also mentioned that these GenAI projects are coming in at higher margins. How much higher are the GenAI projects? And is it significant enough to also structurally, I guess, shift your margin profile and raise it?
David Mackey
At this point in time, Mina, when you look at the quantum of work that's been shifted to GenAI, it's extremely, extremely small, right? We've talked about a handful of very small projects that we've implemented in parts of processes that we've leveraged these tools on for existing clients at this point in time. So, this is going to be an evolution like everything else.
I think the opportunity that tools like GenAI present and the need for digital transformation presents is the ability to shift clients from FTE models to non-FTE models. And we know that when we're able to move to either a transaction or an outcome or a subscription-based model, the margin levers that we as a company have at our disposal are significantly higher.
So, what we want to do is we want to lock in that customer. We want to take ownership and accountability for results. We want to move to a model where we take ownership and accountability for those results, and therefore, make the relationship stickier. But at the same time, give us multiple margin levers to be able to drive improvement. And what we see in our current portfolio is that the margins on the non-FTE component of our business are meaningfully higher than the FTE component.
So that's really where the opportunity for margin expansion in the space comes from. It is the evolution to higher-value services and to higher-value models to deliver those services. And GenAI is just one component of that. But we do believe it has the potential to help service a catalyst for that move.
Mina Mafi
Got it. Thank you.
David Mackey
Thank you.
Operator
Please stand by for the next question. The next question comes from Ashwin Shirvaikar with Citi. Your line is now open.
Ashwin Shirvaikar
Thank you. Let me start with saying Happy New Year. It's the first time speaking with you guys this year.
Keshav Murugesh
Thank you, Ashwin.
Ashwin Shirvaikar
And congratulations on the good quarter and the rapid resolution that you have with the client. Let me just ask about the ADS to general shares transition. And apologies if I've misinterpreted this. But have you sized the impact of things like the ability to now be on an index once you complete the process, the number of incremental investors who can now look at WNS that didn't used to be able to before, that might have been what you meant by access to capital? But in terms of just investor flows, I kind of feel like that can be very significant levels of buying, but have you done that analysis?
David Mackey
Sure. Let me take that, Ashwin. Obviously, we've done several assessments of what the potential opportunities are across the entire -- both institutional and index capabilities for us. And you're right, the opportunity is meaningful. The reality is we know there are no hard and fast rules that we need to continue to demonstrate the right structure, the right metrics, the right approach to be able to access those funds.
So, at this point in time, to be able to say, we definitively know that these certain things are given, I don't think we can do that. I think what we can say with certainty is that what we're doing here certainly positions the company much, much better to have access to those funds. And obviously, if you look at our shareholder portfolio today, sitting here with 2% of our shares held in index funds, this has been a major deficiency for the company over the past several years.
Keshav Murugesh
So Ashwin, I think I would just like to take a higher level stab at this question -- to answer this question. If you look -- I mean notwithstanding where the macros are and how demand is playing out at this point in time, if you just step back maybe a year or two, you will see that we have taken a view that the tailwinds for this business continue to be very, very high, for the sector itself and for WNS in particular, there is the ability for us to continue to lead and grow and grow faster than the industry over a period of time, that's really where our focus is.
We believe that the market penetration levels for BPO continue to be low and therefore, with some of the changes taking place in the world around us, including AI, GenAI and some of the other conversations we've been having over the last few quarters, the ability for smart companies to lead is very high. WNS is one of the smart companies that will [indiscernible].
And while we're doing all of this, you will see that we -- in order to prepare for all of this, we have made some significant changes. We made an organization structure change in order to be even more nimble, flexible, rightsized and innovative and attentive of our customers. That organization change has now settled in well. We have absorbed a number of leaders across the company, added a number of new leaders that have come in, got very comfortable with this. Our customer base, prospect base is very aligned around this new org structure.
The implementations that we have done around technology as well as AI, GenAI and some of the things that I've spoken about over the last two or three quarters are starting to resonate well. Although, like Dave said, at this point in time, the revenue impact on all of this is minimal, but we believe it will keep [cash down] (ph), right?
As a result of all of this, the conversations that are now starting with prospects are emerging at much larger-size conversations, larger-size deals that we think over the next few quarters, will emerge as proper run rate events for this company. And when we do all of this, we therefore think the potential for this company to access capital, manage our capital allocation program appropriately, as well as allow the investor base to participate in this growth story in a constructive way has to be done. And that's one of the reasons why we've done all of this.
Now, in terms of sizing of the opportunity, I can tell you, like Dave said, 2% of our equity is owned by the indices. And you know that when you look at the peer set and you look at others, a significantly larger part of their holding actually are indices. So, we actually believe that some of these funds as well as other stakeholders deserve to own the WNS stock. And as management, we are doing whatever is required behind the scenes to make sure that everyone is part of our long-term growth of success story. So that's really where this conversation is right now.
Sanjay Puria
And maybe, Ashwin, I'll just add over there that if you see the evolution from the WNS specific perspective, right, because the other question is what the timing, right, why is the time, why it was not earlier and so on, and this whole diversification, whether it's from a revenue perspective, whether it was from the market, where specifically on the North America, the structure change what Keshav spoke about to support that entire growth, this is how it has been evolving over the years. And that is where we believe that this is the right time for the company to really move ahead with some of these additional steps.
Ashwin Shirvaikar
That's very complete. Thank you all, and I'll leave it there.
Keshav Murugesh
Thank you, Ashwin.
David Mackey
Thanks, Ashwin.
Operator
Please stand by for the next question. The last question comes from David Koning with Baird. Your line is now open.
David Koning
Yeah. Good morning, guys. Great job.
Keshav Murugesh
Thanks, Dave.
David Koning
Yeah. And just a couple of quick ones. So, first of all, the health business, obviously still declining with the transition, but we've had four quarters now of a pretty similar decline, which implies Q4 hits a dramatically easier comp. And I guess the real question here is how fast is that growing ex the transition really so we can kind of get an understanding of how fast Q4 could grow kind of -- and going forward?
David Mackey
Yeah, let me take that, Dave. Obviously, we know in fiscal Q4 of last year, we took a significant step down and we lost a large healthcare process with one of our clients. If you look at the challenge, for example, in the healthcare vertical this past quarter, it was actually on the analytics project work. So, part of what we've seen here in the last quarter or two is some softness relative to the project work and the analytics work in that vertical and sub-vertical, and for us, specifically in the pharmaceutical space. But you're right, I think we're getting to the point now where those headwinds anniversary and to the extent that we've got stability on the project side, we should see Q4 sequentially step up, and we should start to see a re-acceleration of that year-over-year growth.
David Koning
Okay. Great. That's exactly what I was looking for. Good. And then, the second thing, just employees grew over 1% sequentially. The last couple of quarters were flat. That seems like a pretty good sign, often stocks start going up when employees grow. Maybe what's behind that? I mean is there a lot of just confidence that you need to start building the employee base again, just to keep up with accelerating growth?
David Mackey
Sure, let me take that one, Dave. Obviously, we fully expected this question given the fact that our headcount went up in the quarter while revenue went down. And the reality is, when you look at what we see going forward, when you look at having over 99% visibility to healthy sequential growth from Q3 to Q4, what we didn't want to do is get caught in a situation where we were letting people go and then rehiring them in a quarter, quarter-and-a-half later.
So, part of the reason margins were a little soft this quarter is because we carried excess resource. When you look at revenue per employee in the quarter, it was weak. And the reality is we were willing to do that and willing to absorb that in terms of the overall margins for the full year, maintaining at this 21.5% kind of a range, absolutely willing to do that given the visibility that we have to growth going forward.
Sanjay Puria
And also just to add, when we spoke about the large insurance client from a quarter four perspective, we are in the Phase 2, so the transition work will start. So, it's preparedness for some of those also, as well as some of the other visibility and the growth that we are seeing. So, yes, absolutely what we have mentioned that it's just -- it was a matter of timing. And also the mix changes, right, because the skills are different from a different business perspective. And accordingly, we will just balance [a quarter] (ph) for that.
David Koning
Yeah. Well, good job. Thanks, guys.
David Mackey
Thanks, Dave.
Keshav Murugesh
Thanks, Dave.
Operator
At this time, we have no further questions in the queue. This will conclude today's conference call. Thank you for participating. You may now disconnect.
For further details see:
WNS (Holdings) Limited (WNS) Q3 2024 Earnings Call Transcript