For the three months ended June 30, 2016 and 2015, our revenue and revenue less repair payments (non-GAAP) were derived from the following geographies
(based on the location of our delivery centers) in the proportions set forth in the following table:
We
provide our services under contracts with our clients, which typically range from three to five years, with some being rolling contracts with no end dates. Typically, these contracts can be terminated by our clients with or without cause and with
short notice periods. However, we tend to have long-term relationships with our clients given the complex and comprehensive nature of the business processes executed by us, coupled with the switching costs and risks associated with relocating these
processes in-house or to other service providers.
Each client contract has different terms and conditions based on the scope of services to be delivered
and the requirements of that client. Occasionally, we may incur significant costs on certain contracts in the early stages of implementation, with the expectation that these costs will be recouped over the life of the contract to achieve our
targeted returns. Each client contract has corresponding service level agreements that define certain operational metrics based on which our performance is measured. Some of our contracts specify penalties or damages payable by us in the event of
failure to meet certain key service level standards within an agreed upon time frame.
When we are engaged by a client, we typically transfer that
clients processes to our delivery centers over a two to six month period. This transfer process is subject to a number of potential delays. Therefore, we may not recognize significant revenue until several months after commencing a client
engagement.
In the WNS Global BPM segment, we charge for our services based on the following pricing models:
Apart from the above-mentioned pricing methods, a small portion of our revenue comprises reimbursements of out-of-pocket expenses incurred
by us in providing services to our clients.
Outcome-based arrangements are examples of non-linear pricing models where revenues from platforms and
solutions and the services we provide are linked to usage or savings by clients rather than the efforts deployed to provide these services. We intend to focus on increasing our service offerings that are based on non-linear pricing models that allow
us to price our services based on the value we deliver to our clients rather than the headcount deployed to deliver the services to them. We believe that non-linear pricing models help us to grow our revenue without increasing our headcount.
Accordingly, we expect increased use of non-linear pricing models to result in higher revenue per employee and improved margins. Non-linear revenues may be subject to short-term pressure on margins, however, as initiatives in developing the products
and services take time to deliver. Moreover, in outcome-based arrangements, we bear the risk of failure to achieve clients business objectives in connection with these projects. For more information, see Part III Risk Factors
If our pricing structures do not accurately anticipate the cost and complexity of performing our work, our profitability may be negatively affected.
In our WNS Auto Claims BPM segment, we earn revenue from claims handling and repair management services. For claims handling, we charge on a per claim basis
or a fixed fee per vehicle over a contract period. For automobile repair management services, where we arrange for the repairs through a network of repair centers that we have established, we invoice the client for the amount of the repair. When we
direct a vehicle to a specific repair center, we receive a referral fee from that repair center. We also provide a consolidated suite of services towards accident management including credit hire and credit repair for non fault repairs
business.
Revenue by Contract Type
For the
three months ended June 30, 2016 and 2015, our revenue and revenue less repair payments (non-GAAP) were diversified by contract type in the proportions set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
As a percentage of revenue less
repair payments (non-GAAP)
|
|
|
|
Three months ended June 30,
|
|
|
Three months ended June 30,
|
|
Contract Type
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Full-time-equivalent
|
|
|
72.8
|
%
|
|
|
71.6
|
%
|
|
|
76.5
|
%
|
|
|
75.9
|
%
|
Transaction
|
|
|
18.7
|
%
|
|
|
20.8
|
%
|
|
|
14.6
|
%
|
|
|
16.1
|
%
|
Fixed price
|
|
|
3.3
|
%
|
|
|
2.9
|
%
|
|
|
3.4
|
%
|
|
|
3.0
|
%
|
Outcome-based
|
|
|
0.3
|
%
|
|
|
1.0
|
%
|
|
|
0.3
|
%
|
|
|
1.1
|
%
|
Others
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
|
|
5.2
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Under the terms of an agreement with a former client (who was one of our top five clients by revenue contribution
in fiscal 2014) negotiated in December 2009, we were the exclusive provider of certain key services from delivery locations outside of the US, including customer service and ticketing support for the client. This agreement became effective on April
1, 2010 and was due to expire in December 2015. Under our earlier agreement with this client, we were entitled to charge premium pricing because we had absorbed the initial transition cost in 2004. That premium pricing is no longer available in this
subsequent agreement with this client. The early termination of the prior agreement entitled us to a payment by the client of a termination fee of $5.4 million which was received on April 1, 2010. As the termination fee was related to a renewal of
our agreement with the client, we have determined that the recognition of the termination fee as revenue was to be deferred over the term of this subsequent agreement (i.e., over the period from April 1, 2010 to December 31, 2015). Since June 2015,
we ceased to provide services under this agreement to this client. Accordingly, in June 2015 we recognized in full the termination fee for the remaining six months of the term of this agreement.
Expenses
The majority of our expenses consist of cost of
revenue and operating expenses. The key components of our cost of revenue are employee costs, facilities costs, payments to repair centers, depreciation, travel expenses, and legal and professional costs. Our operating expenses include selling and
marketing expenses, general and administrative expenses, foreign exchange gains and losses and amortization of intangible assets. Our non-operating expenses include finance expenses as well as other expenses recorded under other income,
net.
Cost of Revenue
Employee costs represent
the largest component of cost of revenue. In addition to employee salaries, employee costs include costs related to recruitment, training and retention and share-based compensation expense. Historically, our employee costs have increased primarily
due to increases in number of employees to support our growth and, to a lesser extent, to recruit, train and retain employees. Salary levels in India and our ability to efficiently manage and retain our employees significantly influence our cost of
revenue. Regulatory developments may still result in wage increases in India and increase our cost of revenue. For example, in December 2015, the Government of India amended the India Payment of Bonus Act, which mandated increased employee bonus
amounts for certain wage categories, effective retroactively from April 1, 2014. See Part I Item 4. Information on the Company B. Business Overview Human Capital of our annual report on Form 20-F for
the fiscal year ended March 31, 2016.
Our WNS Auto Claims BPM segment includes repair management services, where we arrange for automobile repairs
through a network of third party repair centers. This cost is primarily driven by the volume of accidents and the amount of the repair costs related to such accidents.
Our facilities costs comprise lease rentals, utilities cost, facilities management and telecommunication network cost. Most of our leases for our facilities
are long-term agreements and have escalation clauses which provide for increases in rent at periodic intervals commencing between three and five years from the start of the lease. Most of these agreements have clauses that cap escalation of lease
rentals.
We create capacity in our operational infrastructure ahead of anticipated demand as it takes six to nine months to build up a new site. Hence,
our cost of revenue as a percentage of revenue may be higher during periods in which we carry such additional capacity.
Once we are engaged by a client
in a new contract, we normally have a transition period to transfer the clients processes to our delivery centers and accordingly incur costs related to such transfer. Therefore, our cost of revenue in relation to our revenue may be higher
until the transfer phase is completed, which may last for two to six months.
Selling and Marketing Expenses
Our selling and marketing expenses primarily comprise employee costs for sales and marketing personnel, travel expenses, legal and professional fees,
share-based compensation expense, brand building expenses and other general expenses relating to selling and marketing.
45
General and Administrative Expenses
Our general and administrative expenses primarily comprise employee costs for senior management and other support personnel, travel expenses, legal and
professional fees, share-based compensation expense and other general expenses not related to cost of revenue and selling and marketing.
Foreign
Exchange Loss / (Gain), Net
Foreign exchange gains or losses, net include:
|
|
marked to market gains or losses on derivative instruments that do not qualify for hedge accounting and are deemed ineffective;
|
|
|
realized foreign currency exchange gains or losses on settlement of transactions in foreign currency and derivative instruments; and
|
|
|
unrealized foreign currency exchange gains or losses on revaluation of other assets and liabilities.
|
Amortization of Intangible Assets
Amortization of
intangible assets is primarily associated with our acquisitions of Aviva Global Services Singapore Pte. Ltd., or Aviva Global, in July 2008, Fusion Outsourcing Services (Proprietary) Limited, or Fusion in June 2012, the acquisition of a customer
contract from Telkom, in May 2015.
Other Income, Net
Other income, net comprises interest income, income from investments and other miscellaneous expenses.
Finance Expense
Finance expense primarily relates to
interest charges payable on our term loans and short-term borrowings.
Operating Data
Our profit margin is largely a function of our asset utilization and the rates we are able to recover for our services. One of the most significant components
of our asset utilization is our seat utilization rate which is the average number of work shifts per day, out of a maximum of three, for which we are able to utilize our seats. Generally, an improvement in seat utilization rate will improve our
profitability unless there are other factors which increase our costs such as an increase in lease rentals, large ramp-ups to build new seats, and increases in costs related to repairs and renovations to our existing or used seats. In addition, an
increase in seat utilization rate as a result of an increase in the volume of work will generally result in a lower cost per seat and a higher profit margin as the total fixed costs of our built up seats remain the same while each seat is generating
more revenue.
The following table presents certain operating data as at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
September 30,
2015
|
|
|
June 30,
2015
|
|
|
March 31,
2015
|
|
Total head count
|
|
|
32,448
|
|
|
|
32,388
|
|
|
|
31,340
|
|
|
|
29,830
|
|
|
|
29,672
|
|
|
|
28,890
|
|
Built up seats
(1)
|
|
|
27,123
|
|
|
|
26,407
|
|
|
|
25,708
|
|
|
|
25,655
|
|
|
|
24,032
|
|
|
|
24,131
|
|
Used seats
(1)
|
|
|
20,433
|
|
|
|
20,063
|
|
|
|
18,812
|
|
|
|
18,749
|
|
|
|
17,744
|
|
|
|
17,451
|
|
Seat utilization rate
(2)
|
|
|
1.21
|
|
|
|
1.22
|
|
|
|
1.19
|
|
|
|
1.20
|
|
|
|
1.22
|
|
|
|
1.19
|
|
Notes:
1)
|
Built up seats refer to the total number of production seats (excluding support functions like Finance, Human Resource, Administration and seats dedicated for business continuity planning) that are set up in any
premises. Used seats refer to the number of built up seats that are being used by employees. The remainder would be termed vacant seats. The vacant seats would get converted into used seats when we increase headcount. Previously, our
reported built up seats included seats dedicated for business continuity planning. Commencing last fiscal year, we have decided to report our built up seats and compute our seat utilization rate excluding seats dedicated for business continuity
planning to better reflect our business operations. The built up seats and seat utilization rate presented for prior years in the table above have been re-computed to exclude seats dedicated for business continuity planning.
|
2)
|
The seat utilization rate is calculated by dividing the average total headcount by the average number of built up seats to show the rate at which we are able to utilize our built up seats. Average total headcount and
average number of built up seats are calculated by dividing the aggregate of the total headcount or number of built up seats, as the case may be, as at the beginning and end of the period by two.
|
46
Results of Operations
The following table sets forth certain financial information as a percentage of revenue and revenue less repair payments
(
non-GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
|
|
|
|
Revenue
|
|
|
Revenue less
repair payments
(non-GAAP)
|
|
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of revenue
|
|
|
66.7
|
%
|
|
|
66.2
|
%
|
|
|
65.0
|
%
|
|
|
64.2
|
%
|
Gross profit
|
|
|
33.3
|
%
|
|
|
33.8
|
%
|
|
|
35.0
|
%
|
|
|
35.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
5.2
|
%
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
|
|
5.9
|
%
|
General and administrative expenses
|
|
|
14.1
|
%
|
|
|
13.5
|
%
|
|
|
14.8
|
%
|
|
|
14.3
|
%
|
Foreign exchange loss / (gains), net
|
|
|
(0.1
|
)%
|
|
|
(1.3
|
)%
|
|
|
(0.1
|
)%
|
|
|
(1.4
|
)%
|
Amortization of intangible assets
|
|
|
4.3
|
%
|
|
|
4.6
|
%
|
|
|
4.5
|
%
|
|
|
4.9
|
%
|
Operating profit
|
|
|
9.8
|
%
|
|
|
11.5
|
%
|
|
|
10.3
|
%
|
|
|
12.2
|
%
|
Other (income) / expense, net
|
|
|
(1.6
|
)%
|
|
|
(1.6
|
)%
|
|
|
(1.7
|
)%
|
|
|
(1.7
|
)%
|
Finance expense
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
Provision for income taxes
|
|
|
3.1
|
%
|
|
|
3.5
|
%
|
|
|
3.3
|
%
|
|
|
3.7
|
%
|
Profit
|
|
|
8.2
|
%
|
|
|
9.5
|
%
|
|
|
8.6
|
%
|
|
|
10.1
|
%
|
The following table reconciles revenue (a GAAP financial measure) to revenue less repair payments (a non-GAAP financial
measure) and sets forth payments to repair centers and revenue less repair payments (non-GAAP) as a percentage of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
148.0
|
|
|
$
|
134.1
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Less: Payments to repair centers
|
|
|
7.2
|
|
|
|
7.6
|
|
|
|
4.9
|
%
|
|
|
5.7
|
%
|
Revenue less repair payments (non-GAAP)
|
|
$
|
140.8
|
|
|
$
|
126.5
|
|
|
|
95.1
|
%
|
|
|
94.3
|
%
|
47
The following table presents our results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(US dollars in millions)
|
|
Revenue
|
|
$
|
148.0
|
|
|
$
|
134.1
|
|
Cost of revenue
(1)
|
|
|
98.7
|
|
|
|
88.8
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49.3
|
|
|
|
45.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
(2)
|
|
|
7.7
|
|
|
|
7.4
|
|
General and administrative
expenses
(3)
|
|
|
20.9
|
|
|
|
18.0
|
|
Foreign exchange loss / (gains), net
|
|
|
(0.1
|
)
|
|
|
(1.8
|
)
|
Amortization of intangible assets
|
|
|
6.3
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
14.5
|
|
|
|
15.4
|
|
Other income, net
|
|
|
(2.3
|
)
|
|
|
(2.2
|
)
|
Finance expense
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Profit before income taxes
|
|
|
16.8
|
|
|
|
17.5
|
|
Provision for income taxes
|
|
|
4.6
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
Profit
|
|
$
|
12.2
|
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
|
Notes:
1)
|
Includes share-based compensation expense of $0.6 million and $0.6 million for the three months ended June 30, 2016 and 2015, respectively.
|
2)
|
Includes share-based compensation expense of $0.3 million and $0.5 million for the three months ended June 30, 2016 and 2015, respectively.
|
3)
|
Includes share-based compensation expense of $4.5 million and $2.6 million for the three months ended June 30, 2016 and 2015, respectively.
|
Results for the three months ended June 30, 2016 compared to the three months ended June 30, 2015
The following table sets forth our revenue and percentage change in revenue for the periods indicated:
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
148.0
|
|
|
$
|
134.1
|
|
|
$
|
13.9
|
|
|
|
10.3
|
%
|
The increase in revenue of $13.9 million was primarily attributable to revenue from new clients of $8.0 million, and an
increase in revenue from existing clients of $6.2 million, which was partially offset by a decrease in hedging gain on our revenue by $0.3 million to a gain of $1.2 million for the three months ended June 30, 2016 from a gain of $1.5
million for the three months ended June 30, 2015. The increase in revenue was primarily attributable to higher volumes in our healthcare, retail and CPG, shipping and logistics, travel, and consulting and professional services verticals. The
increase was partially offset by a depreciation of the pound sterling, South African rand and the Australian dollar by an average of 6.4%, 24.3% and 4.2%, respectively, against the US dollar for the three months ended June 30, 2016 as compared
to the average exchange rate for the three months ended June 30, 2015.
48
Revenue by Geography
The following table sets forth the composition of our revenue based on the location of our clients in our key geographies for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
As a percentage of
Revenue
|
|
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(US dollars in millions)
|
|
|
|
|
UK
|
|
$
|
65.8
|
|
|
$
|
64.3
|
|
|
|
44.5
|
%
|
|
|
47.9
|
%
|
North America (primarily the US)
|
|
|
45.1
|
|
|
|
36.0
|
|
|
|
30.5
|
%
|
|
|
26.8
|
%
|
Australia
|
|
|
10.6
|
|
|
|
9.2
|
|
|
|
7.2
|
%
|
|
|
6.9
|
%
|
South Africa
|
|
|
9.5
|
|
|
|
6.6
|
|
|
|
6.4
|
%
|
|
|
5.0
|
%
|
Europe (excluding the UK)
|
|
|
9.4
|
|
|
|
8.9
|
|
|
|
6.3
|
%
|
|
|
6.6
|
%
|
Rest of world
|
|
|
7.6
|
|
|
|
9.1
|
|
|
|
5.1
|
%
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148.0
|
|
|
$
|
134.1
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenue in North America (primarily the US) was primarily due to higher volumes in our consulting and
professional services, shipping and logistics, and travel verticals, partially offset by lower volume in our banking and financial services vertical. The increase in revenue from the South Africa region was primarily due to higher volume in our
retail and CPG vertical, partially offset by a depreciation of the South African rand by an average of 24.3% against the US dollar for the three months ended June 30, 2016 as compared to the average exchange rate for the three months ended
June 30, 2015. The increase in revenue from the UK region was primarily due to higher volumes in our healthcare, retail and CPG, and utilities verticals, partially offset by a depreciation of the pound sterling by an average of 6.4% against the
US dollar for the three months ended June 30, 2016 as compared to the average exchange rate for the three months ended June 30, 2015, and lower volume in our insurance vertical. The increase in revenue from the Australia region was
primarily due to higher volume in our insurance vertical, partially offset by a depreciation of the Australian dollar by an average of 4.2% against the US dollar for the three months ended June 30, 2016 as compared to the average exchange rate
for the three months ended June 30, 2015 and lower volume in our utilities vertical. The increase in revenue from the Europe (excluding the UK) region was primarily attributable to higher volumes in our retail and CPG, and travel verticals,
partially offset by lower volumes in our insurance vertical. The decrease in revenue from the Rest of world region was primarily due to lower volumes in our banking and financial services, and travel verticals.
Revenue Less Repair Payments (non-GAAP)
The following
table sets forth our revenue less repair payment (non-GAAP) and percentage change in revenue less repair payments (non-GAAP) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
Revenue less repair payments (non-GAAP)
|
|
$
|
140.8
|
|
|
$
|
126.5
|
|
|
$
|
14.3
|
|
|
|
11.3
|
%
|
The increase in revenue less repair payments (non-GAAP) of $14.3 million was primarily attributable to revenue less repair
payments (non-GAAP) from new clients of $7.9 million, and an increase in revenue less repair payments (non-GAAP) from existing clients of $6.7 million, which was partially offset by a decrease in hedging gain on our revenue less repair payments
(non-GAAP) by $0.3 million to a gain of $1.2 million for the three months ended June 30, 2016 from a gain of $1.5 million for the three months ended June 30, 2015. The increase in revenue less repair payments (non-GAAP) was primarily attributable to
higher volumes in our healthcare, retail and CPG, shipping and logistics, travel, and consulting and professional services verticals. The increase was partially offset by a depreciation of the pound sterling, South African rand and the Australian
dollar by an average of 6.4%, 24.3% and 4.2%, respectively, against the US dollar for the three months ended June 30, 2016 as compared to the average exchange rate for the three months ended June 30, 2015.
49
Revenue Less Repair Payments (non-GAAP) by Geography
The following table sets forth the composition of our revenue less repair payments (non-GAAP)
based on the location of our clients in our key
geographies for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue less repair payments
|
|
|
As a percentage of
revenue less repair
payments
|
|
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(US dollars in millions)
|
|
|
|
|
UK
|
|
$
|
58.6
|
|
|
$
|
56.7
|
|
|
|
41.6
|
%
|
|
|
44.8
|
%
|
North America (primarily the US)
|
|
|
45.1
|
|
|
|
36.0
|
|
|
|
32.1
|
%
|
|
|
28.4
|
%
|
Australia
|
|
|
10.6
|
|
|
|
9.2
|
|
|
|
7.5
|
%
|
|
|
7.3
|
%
|
South Africa
|
|
|
9.6
|
|
|
|
6.6
|
|
|
|
6.7
|
%
|
|
|
5.2
|
%
|
Europe (excluding the UK)
|
|
|
9.4
|
|
|
|
8.9
|
|
|
|
6.7
|
%
|
|
|
7.0
|
%
|
Rest of world
|
|
|
7.6
|
|
|
|
9.1
|
|
|
|
5.4
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140.8
|
|
|
$
|
126.5
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenue less repair payments (non-GAAP) in North America (primarily the US) was primarily due to higher
volumes in our consulting and professional services, shipping and logistics, and travel verticals, partially offset by lower volume in our banking and financial services vertical. The increase in revenue less repair payments (non-GAAP) from the
South Africa region was primarily due to higher volume in our retail and CPG vertical, partially offset by a depreciation of the South African rand by an average of 24.3% against the US dollar for the three months ended June 30, 2016 as compared to
the average exchange rate for the three months ended June 30, 2015. The increase in revenue less repair payments (non-GAAP) from the UK region was primarily due to higher volumes in our healthcare, retail and CPG, and utilities verticals, partially
offset by a depreciation of the pound sterling by an average of 6.4% against the US dollar for the three months ended June 30, 2016 as compared to the average exchange rate for the three months ended June 30, 2015, and lower volume in our insurance
vertical. The increase in revenue less repair payments (non-GAAP) from the Australia region was primarily due to higher volume in our insurance vertical, partially offset by a depreciation of the Australian dollar by an average of 4.2% against the
US dollar for the three months ended June 30, 2016 as compared to the average exchange rate for the three months ended June 30, 2015 and lower volume in our utilities vertical. The increase in revenue less repair payments (non-GAAP) from the Europe
(excluding the UK) region was primarily attributable to higher volumes in our retail and CPG, and travel verticals, partially offset by lower volume in our insurance vertical. The decrease in revenue less repair payments (non-GAAP) from the Rest of
world region was primarily due to lower volumes in our banking and financial services, and travel verticals.
Cost of Revenue
The following table sets forth the composition of our cost of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Employee costs
|
|
$
|
59.7
|
|
|
$
|
52.3
|
|
|
$
|
7.4
|
|
Facilities costs
|
|
|
17.2
|
|
|
|
16.3
|
|
|
|
0.9
|
|
Repair payments
|
|
|
7.2
|
|
|
|
7.6
|
|
|
|
(0.4
|
)
|
Depreciation
|
|
|
4.0
|
|
|
|
3.7
|
|
|
|
0.3
|
|
Travel costs
|
|
|
2.8
|
|
|
|
2.4
|
|
|
|
0.4
|
|
Legal and professional costs
|
|
|
1.6
|
|
|
|
1.9
|
|
|
|
(0.3
|
)
|
Other costs
|
|
|
6.3
|
|
|
|
4.6
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
98.7
|
|
|
$
|
88.8
|
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
66.7
|
%
|
|
|
66.2
|
%
|
|
|
|
|
50
The increase in cost of revenue was primarily due to higher employee cost on account of higher headcount, wage
inflation and impact of amendment to the India Payment of Bonus Act, 1965, adopted in December 2015, which increased employee bonus amounts for certain wage categories retroactively from April 1, 2014, and regulatory changes including impact of
changes in minimum wage; higher other costs primarily due to an increase in subcontracting costs; higher facilities costs on account of expansion of existing facilities and addition of new facilities; higher travel costs; and higher depreciation
costs. These increases were partially offset by lower repair payments, and legal and professional costs. Further, the depreciation of the Indian rupee and South African rand against the US dollar by an average of 5.6% and 24.3%, respectively,
against the US dollar for the three months ended June 30, 2016 as compared to the average exchange rate for the three months ended June 30, 2015, resulted in a decrease of approximately $4.3 million in the cost of revenue.
Gross Profit
The following table sets forth our gross
profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Gross profit
|
|
$
|
49.3
|
|
|
$
|
45.3
|
|
|
$
|
4.0
|
|
As a percentage of revenue
|
|
|
33.3
|
%
|
|
|
33.8
|
%
|
|
|
|
|
As a percentage of revenue less repair payments (non-GAAP)
|
|
|
35.0
|
%
|
|
|
35.8
|
%
|
|
|
|
|
Gross profit as a percentage of revenue and revenue less repair payments (non-GAAP) decreased primarily due to higher cost of
revenue as discussed above. Cost of revenue was higher notwithstanding the depreciation of the Indian rupee and South African rand against the US dollar by an average of 5.6% and 24.3%, respectively, for the three months ended June 30, 2016 as
compared to the average exchange rate for the three months ended June 30, 2015, and a decrease in hedging gain on our revenue by $0.3 million, to a gain of $1.2 million for the three months ended June 30, 2016 from a gain of $1.5 million for the
three months ended June 30, 2015. This increase in cost of revenue was partially offset by higher revenue.
Our built up seats increased by 12.9% from
24,032 as at June 30, 2015 to 27,123 as at June 30, 2016, during which we expanded seating capacities in our existing delivery centers in India and the addition of new facilities in India, South Africa and the Philippines. This was part of
our strategy to expand our delivery capabilities. Our total headcount increased by 9.4% from 29,672 to 32,448 during the same period, resulting in a decrease in our seat utilization rate from 1.22 for the three months ended June 30, 2015 to 1.21 for
the three months ended June 30, 2016. This 0.01 decrease in seat utilization resulted in a decrease in our gross profit by approximately 0.02% as a percentage of revenue and revenue less repair payments (non-GAAP) in the three months ended
June 30, 2016.
Selling and Marketing Expenses
The following table sets forth the composition of our selling and marketing expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Employee costs
|
|
$
|
5.7
|
|
|
$
|
5.2
|
|
|
$
|
0.5
|
|
Other costs
|
|
|
2.0
|
|
|
|
2.3
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling and marketing expenses
|
|
$
|
7.7
|
|
|
$
|
7.4
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
5.2
|
%
|
|
|
5.5
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
5.5
|
%
|
|
|
5.9
|
%
|
|
|
|
|
The increase in selling and marketing expenses was primarily due to an increase in sales headcount, and higher legal and
professional costs, partially offset by decrease in marketing related expenses, and travel costs.
51
General and Administrative Expenses
The following table sets forth the composition of our general and administrative expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Employee costs
|
|
$
|
16.0
|
|
|
$
|
13.8
|
|
|
$
|
2.2
|
|
Other costs
|
|
|
4.9
|
|
|
|
4.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
20.9
|
|
|
$
|
18.0
|
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
14.1
|
%
|
|
|
13.5
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
14.8
|
%
|
|
|
14.3
|
%
|
|
|
|
|
The increase in general and administrative expenses was primarily due to an increase in employee cost on account of wage
inflation, an increase in our share-based compensation, and impact of amendment to the India Payment of Bonus Act, 1965, adopted in December 2015, which increased employee bonus amounts for certain wage categories retroactively from April 1, 2014,
and regulatory changes including impact of changes in minimum wage, higher facilities cost, higher legal and professional costs, and higher other costs including miscellaneous costs. This increase were partially offset by $0.7 million due to the
depreciation of the Indian rupee and South African rand against the US dollar by an average of 5.6% and 24.3%, respectively, against the US dollar for the three months ended June 30, 2016 as compared to the average exchange rate for the three months
ended June 30, 2015.
Foreign Exchange Loss / (Gains), Net
The following table sets forth our foreign exchange loss / (gains), net for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Foreign exchange loss / (gains), net
|
|
$
|
(0.1
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
1.7
|
|
The lower foreign exchange gains were primarily due to higher losses from our rupee-denominated hedge contracts as a result of
a depreciation of the Indian rupee against the US dollar, partially offset by higher foreign currency revaluation gains of $2.1 million to a gain of $5.0 million for the three months ended June 30, 2016 from a gain of $2.9 million for the three
months ended June 30, 2015.
Amortization of Intangible Assets
The following table sets forth our amortization of intangible assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Amortization of intangible assets
|
|
$
|
6.3
|
|
|
$
|
6.2
|
|
|
$
|
0.1
|
|
The increase in amortization of intangible assets was primarily attributable to the acquisition of a customer contract from
Telkom, partially offset by the depreciation of the Indian rupee and South African rand against the US dollar by an average of 5.6% and 24.3%, respectively, against the US dollar for the three months ended June 30, 2016 as compared to the average
exchange rate for the three months ended June 30, 2015.
52
Operating Profit
The following table sets forth our operating profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Operating profit
|
|
$
|
14.5
|
|
|
$
|
15.4
|
|
|
$
|
(0.9
|
)
|
As a percentage of revenue
|
|
|
9.8
|
%
|
|
|
11.5
|
%
|
|
|
|
|
As a percentage of revenue less repair payments (non-GAAP)
|
|
|
10.3
|
%
|
|
|
12.2
|
%
|
|
|
|
|
Operating profit as a percentage of revenue and revenue less repair payments (non-GAAP) is lower due to higher cost of
revenue, higher general and administrative expenses, higher selling and marketing expenses, higher amortization expenses, and lower foreign exchanges gains, partially offset by higher revenue.
Other income, net
The following table sets forth our
other income, net for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Other income, net
|
|
$
|
2.3
|
|
|
$
|
2.2
|
|
|
$
|
0.1
|
|
Other income was higher primarily due to a higher yield on our cash and cash equivalents and investments.
Finance Expense
The following table sets forth our
finance expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Finance expense
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
(0.0
|
)
|
Provision for Income Taxes
The following table sets forth our provision for income taxes for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Provision for income taxes
|
|
$
|
4.6
|
|
|
$
|
4.7
|
|
|
$
|
(0.1
|
)
|
The decrease in provision for income taxes was primarily on account of lower taxable profits.
Profit
The following table sets forth our profit for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
Profit
|
|
$
|
12.2
|
|
|
$
|
12.8
|
|
|
$
|
(0.6
|
)
|
As a percentage of revenue
|
|
|
8.2
|
%
|
|
|
9.5
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
8.6
|
%
|
|
|
10.1
|
%
|
|
|
|
|
53
The decrease in profit was primarily on account of lower operating profit, partially offset by higher other
income, and lower provision for income taxes.
Liquidity and Capital Resources
Our capital requirements are principally for the establishment of operating facilities to support our growth and acquisitions and for fiscal 2017, to fund our
share repurchase program. Our sources of liquidity include cash and cash equivalents and cash flow from operations, supplemented by equity and debt financing and bank credit lines, as required.
As at June 30, 2016, we had cash and cash equivalents of $64.4 million which were primarily held in US dollars, Indian rupees, pound sterling, South
African rand and Philippines pesos. We typically seek to invest our available cash on hand in bank deposits and money market instruments. Our investments include marketable securities consisting of bank deposits and liquid mutual funds which totaled
$82.2 million as at June 30, 2016.
54
As at June 30, 2016, our Indian subsidiary, WNS Global Services Private Limited, or WNS Global, had a
secured line of credit of
₹
1,100.0 million ($16.3 million based on the exchange rate on June 30, 2016) from The Hongkong and
Shanghai Banking Corporation Limited, and unsecured lines of credit of $15.0 million from BNP Paribas,
₹
1,200.0 million ($17.8
million based on the exchange rate on June 30, 2016) from Citibank N.A. and
₹
810.0 million ($12.0 million based on the exchange
rate on June 30, 2016) from Standard Chartered Bank. Interest on these lines of credit would be determined on the date of the borrowing. These lines of credit generally can be withdrawn by the relevant lender at any time. As at June 30,
2016, there was no outstanding amount under the above facilities.
In February 2016, WNS UK renewed its working capital facility obtained from HSBC Bank
plc. of £9.9 million ($13.3 million based on the exchange rate on June 30, 2016) until February 28, 2017. The working capital facility bears interest at Bank of England base rate plus a margin of 2.45% per annum and has been renewed at the
existing rate. Interest is payable on a quarterly basis. The facility is subject to conditions to drawdown and can be withdrawn by the lender at any time by notice to the borrower. As at June 30, 2016, there was no outstanding amount under this
facility.
As at June 30, 2016, our South African subsidiary, WNS Global Services SA (Pty) Ltd., had an unsecured line of credit of ZAR 30.0 million ($2.0
million based on the exchange rate on June 30, 2016) from The HSBC Bank plc. This line of credit is for working capital purpose and can be withdrawn by the lender at any time. As at June 30, 2016, there was no outstanding amount under this facility.
Based on our current level of operations, we expect that our anticipated cash generated from operating activities, cash and cash equivalents on hand, and
use of existing credit facilities will be sufficient to meet our debt repayment obligations, estimated capital expenditures and working capital needs for the next 12 months. However, if our lines of credit were to become unavailable for any reason,
we would require additional financing to meet our capital expenditures and working capital needs. We currently expect our capital expenditures needs in fiscal 2017 to be in the range of $22.0 million to $25.0 million. Our capital expenditure in the
three months ended June 30, 2016 amounted to $5.2 million and our capital commitment as at June 30, 2016 was $2.9 million. Further, under the current challenging economic and business conditions as discussed under Global
Economic Conditions above, there can be no assurance that our business activity would be maintained at the expected level to generate the anticipated cash flows from operations. If the current market conditions deteriorate, we may experience a
decrease in demand for our services, resulting in our cash flows from operations being lower than anticipated. If our cash flows from operations are lower than anticipated, including as a result of the ongoing downturn in the market conditions or
otherwise, we may need to obtain additional financing to meet any debt repayment obligations and pursue certain of our expansion plans. Further, we may in the future consider making acquisitions. If we have significant growth through acquisitions or
require additional operating facilities beyond those currently planned to service new client contracts, we may also need to obtain additional financing. We believe in maintaining maximum flexibility when it comes to financing our business. We
regularly evaluate our current and future financing needs. Depending on market conditions, we may access the capital markets to strengthen our capital position, and provide us with additional liquidity for general corporate purposes, which may
include capital expenditures acquisitions, refinancing of indebtedness and working capital. If current market conditions deteriorate, we may not be able to obtain additional financing or any such additional financing may be available to us on
unfavorable terms. An inability to pursue additional opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods.
The following table shows our cash flows for the three months ended June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(US dollars in millions)
|
|
Net cash provided by operating activities
|
|
$
|
17.7
|
|
|
$
|
17.0
|
|
Net cash provided by investing activities
|
|
$
|
27.9
|
|
|
$
|
32.3
|
|
Net cash used in financing activities
|
|
$
|
(22.1
|
)
|
|
$
|
(38.1
|
)
|
Cash Flows from Operating Activities
Net cash provided by operating activities increased to $17.7 million for the three months ended June 30, 2016 from $17.0 million for the three months ended
June 30, 2015. The increase in net cash provided by operating activities was attributable to an increase in net profit as adjusted by non-cash related items by $0.1 million, a decrease in cash outflow on account of working capital changes by $0.9
million and a decrease in interest paid by $0.1 million, which was partially offset by a decrease in interest received by $0.3 million.
55
The net profit as adjusted by non-cash related items mainly comprised the following: (a) net income of $12.2
million for the three months ended June 30, 2016 as compared to $12.8 million for the three months ended June 30, 2015; (b) unrealized loss on derivative instruments of $8.4 million for the three months ended June 30, 2016 as compared to $4.5
million for the three months ended June 30, 2015; (c) share based compensation expense of $5.4 million for the three months ended June 30, 2016 as compared to $3.7 million for the three months ended June 30, 2015; (d) depreciation and
amortization expense of $10.4 million for the three months ended June 30, 2016 as compared to $10.0 million for the three months ended June 30, 2015; (e) unrealized exchange gain of $5.6 million for the three months ended June 30, 2016 as
compared to $1.5 million for the three months ended June 30, 2015;(f) interest income of $0.5 million for the three months ended June 30, 2016 as compared to $0.3 million for the three months ended June 30, 2015; and (g) reversal of allowance
for doubtful debts of $1.0 million for the three months ended June 30, 2016 as compared to $Nil for the three months ended June 30, 2015.
Cash outflow on
account of working capital changes decreased to $12.2 million for the three months ended June 30, 2016 from $13.1 million for the three months ended June 30, 2015. This was primarily on account of an increase in cash inflow from other
assets by $3.2 million and an increase in deferred revenue by $2.9 million, which was partially offset by an increase in cash outflow towards accounts receivables and unbilled revenue by $2.2 million, an increase in cash outflow towards other
liabilities by $1.8 million and an increase in cash outflow towards accounts payable by $1.1 million.
56
Cash Flows from Investing Activities
Net cash provided by investing activities decreased to $27.9 million for the three months ended June 30, 2016 from $32.4 million for the three months
ended June 30, 2015. This was primarily on account of a decrease in cash inflow from sale of FMPs by $ 30.7 million, an increase in cash outflow towards the business combination of Value Edge by $17.1 million (net of cash acquired $0.4
million), which was partially offset by an increase in cash inflow from sale of marketable securities by $39.9 million and a decrease in cash outflow towards purchase of property, plant and equipment by $3.4 million.
Cash Flows from Financing Activities
Net cash used in
financing activities decreased to $22.1 million for the three months ended June 30, 2016 from $38.1 million for the three months ended June 30, 2015. This was primarily on account of a decrease in cash outflow towards repayment of debt by
$18.1 million, which was partially offset by an increase in cash outflow towards share repurchase by $2.3 million.
Tax Assessment Orders
Transfer pricing regulations to which we are subject require that any international transaction among the WNS group enterprises be on armslength
terms. Transfer pricing regulations in India have been extended to cover specified Indian domestic transactions as well. We believe that the international and India domestic transactions among the WNS group enterprises are on arms-length
terms. If, however, the applicable tax authorities determine that the transactions among the WNS group enterprises do not meet arms length criteria, we may incur increased tax liability, including accrued interest and penalties. This would
cause our tax expense to increase, possibly materially, thereby reducing our profitability and cash flows. We have signed an advance pricing agreement with the Government of India providing for the agreement on transfer pricing matters over certain
transactions covered thereunder for a period of five years starting from April 2013. The applicable tax authorities may also disallow deductions or tax holiday benefits claimed by us and assess additional taxable income on us in connection with
their review of our tax returns.
From time to time, we receive orders of assessment from the Indian tax authorities assessing additional taxable income
on us and/or our subsidiaries in connection with their review of our tax returns. We currently have orders of assessment for fiscal 2004 through fiscal 2012 pending before various appellate authorities. These orders assess additional taxable income
that could in the aggregate give rise to an estimated
₹
2,798.2 million ($41.4 million based on the exchange rate on June 30,
2016) in additional taxes, including interest of
₹
1029.7 million ($15.2 million based on the exchange rate on June 30, 2016).
57
The following sets forth the details of these orders of assessment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entity
|
|
Tax year(s)
|
|
|
Amount
demanded
(including
interest)
|
|
|
Interest on amount
Demanded
|
|
|
|
|
|
|
(
₹
and US dollars in millions)
|
|
|
|
|
|
|
WNS Global
|
|
|
Fiscal 2004
|
|
|
₹
|
|
|
12.5
|
|
|
$
|
(0.2)
(1)
|
|
|
₹
|
|
|
3.1
|
|
|
$
|
(0.1)
(1)
|
|
WNS Global
|
|
|
Fiscal 2005
|
|
|
₹
|
|
|
27.4
|
|
|
$
|
(0.4)
(1)
|
|
|
₹
|
|
|
8.6
|
|
|
$
|
(0.1)
(1)
|
|
WNS Global
|
|
|
Fiscal 2006
|
|
|
₹
|
|
|
527.1
|
|
|
$
|
(7.8)
(1)
|
|
|
₹
|
|
|
195.0
|
|
|
$
|
(2.9)
(1)
|
|
WNS BCS and permanent establishment of WNS North America Inc. and WNS UK in India
|
|
|
Fiscal 2006
|
|
|
₹
|
|
|
67.9
|
|
|
$
|
(1.0)
(1)
|
|
|
₹
|
|
|
24.1
|
|
|
$
|
(0.3)
(1)
|
|
WNS Global
|
|
|
Fiscal 2007
|
|
|
₹
|
|
|
98.7
|
|
|
$
|
(1.5)
(1)
|
|
|
₹
|
|
|
31.9
|
|
|
$
|
(0.5)
(1)
|
|
WNS BCS and permanent establishment of WNS North America Inc. and WNS UK in India
|
|
|
Fiscal 2007
|
|
|
₹
|
|
|
34.3
|
|
|
$
|
(0.5)
(1)
|
|
|
₹
|
|
|
10.8
|
|
|
$
|
(0.2)
(1)
|
|
WNS Global
|
|
|
Fiscal 2008
|
|
|
₹
|
|
|
819.6
|
|
|
$
|
(12.1)
(1)
|
|
|
₹
|
|
|
344.2
|
|
|
$
|
(5.0)
(1)
|
|
WNS BCS and permanent establishment of WNS North America Inc. and WNS UK in India
|
|
|
Fiscal 2008
|
|
|
₹
|
|
|
28.0
|
|
|
$
|
(0.4)
(1)
|
|
|
₹
|
|
|
8.9
|
|
|
$
|
(0.1)
(1)
|
|
WNS Global
|
|
|
Fiscal 2009
|
|
|
₹
|
|
|
973.9
|
|
|
$
|
(14.4)
(1)
|
|
|
₹
|
|
|
336.7
|
|
|
$
|
(4.9)
(1)
|
|
WNS BCS and permanent establishment of WNS North America Inc. and WNS UK in India
|
|
|
Fiscal 2009
|
|
|
₹
|
|
|
21.1
|
|
|
$
|
(0.3)
(1)
|
|
|
₹
|
|
|
4.1
|
|
|
$
|
(0.1)
(1)
|
|
WNS Global
|
|
|
Fiscal 2010
|
|
|
₹
|
|
|
60.2
|
|
|
$
|
(0.9)
(1)
|
|
|
₹
|
|
|
23.5
|
|
|
$
|
(0.3)
(1)
|
|
WNS BCS and permanent establishment of WNS North America Inc. and WNS UK in India
|
|
|
Fiscal 2010
|
|
|
₹
|
|
|
1.8
|
|
|
$
|
(0.1)
(1)
|
|
|
₹
|
|
|
0.4
|
|
|
$
|
(0.1)
(1)
|
|
WNS BCS and permanent establishment of WNS North America Inc. and WNS UK in India
|
|
|
Fiscal 2011
|
|
|
₹
|
|
|
9.7
|
|
|
$
|
(0.1)
(1)
|
|
|
₹
|
|
|
3.2
|
|
|
$
|
(0.1)
(1)
|
|
WNS Global
|
|
|
Fiscal 2012
|
|
|
₹
|
|
|
116.0
|
|
|
$
|
(1.7)
(1)
|
|
|
₹
|
|
|
35.2
|
|
|
$
|
(0.5)
(1)
|
|
Total
|
|
|
|
|
|
₹
|
|
|
2,798.2
|
|
|
$
|
(41.4)
(1)
|
|
|
₹
|
|
|
1,029.7
|
|
|
$
|
(15.2)
(1)
|
|
Note:
(1)
|
Based on the exchange rate as at June 30, 2016.
|
The aforementioned orders of assessment allege that the
transfer prices we applied to certain of the international transactions between WNS Global or WNS BCS (each of which is our Indian subsidiary), as the case may be, and our other wholly-owned subsidiaries named above were not on arms length
terms, disallow a tax holiday benefit claimed by us, deny the set off of brought forward business losses and unabsorbed depreciation and disallow certain expenses claimed as tax deductible by WNS Global or WNS BCS, as the case may be. As at
June 30, 2016, we have provided a tax reserve of
₹
902.4 million ($13.4 million based on the exchange rate on June 30,
2016) primarily on account of the Indian tax authorities denying the set off of brought forward business losses and unabsorbed depreciation. We have appealed against these orders of assessment before higher appellate authorities.
58
In addition, we currently have orders of assessment pertaining to similar issues that have been decided in our
favor by first level appellate authorities, vacating tax demands of
₹
2,847.8 million ($42.2 million based on the exchange
rate on June 30, 2016) in additional taxes, including interest of
₹
879.9 million ($13.0 million based on the exchange rate on
June 30, 2016). The income tax authorities have filed appeals against these orders at higher appellate authorities.
In case of disputes, the Indian
tax authorities may require us to deposit with them all or a portion of the disputed amounts pending resolution of the matters on appeal. Any amount paid by us as deposits will be refunded to us with interest if we succeed in our appeals. We have
deposited a portion of the disputed amount with the tax authorities and may be required to deposit the remaining portion of the disputed amount with the tax authorities pending final resolution of the respective matters.
59
As at June 30, 2016, corporate tax returns for fiscal years 2013 (for certain legal entities) and thereafter
remain subject to examination by tax authorities in India.
After consultation with our Indian tax advisors and based on the facts of these cases, certain
legal opinions from counsel, the nature of the tax authorities disallowances and the orders from first level appellate authorities deciding similar issues in our favor in respect of assessment orders for earlier fiscal years, we believe these
orders are unlikely to be sustained at the higher appellate authorities and we intend to vigorously dispute the orders of assessment.
In March 2009,
we also received an assessment order from the Indian Service Tax Authority demanding payment of
₹
348.1 million ($5.2 million based on
the exchange rate on June 30, 2016) of service tax and related penalty for the period from March 1, 2003 to January 31, 2005. The assessment order alleges that service tax is payable in India on BPM services provided by WNS Global to
clients based abroad as the export proceeds are repatriated outside India by WNS Global. In response to an appeal filed by us with the appellate tribunal against the assessment order in April 2009, the appellate tribunal has remanded the matter
back to the lower tax authorities to be adjudicated afresh. Based on consultations with our Indian tax advisors, we believe this order of assessment is more likely than not to be upheld in our favor. We intend to continue to vigorously dispute the
assessment.
No assurance can be given, however, that we will prevail in our tax disputes. If we do not prevail, payment of additional taxes, interest and
penalties may adversely affect our results of operations, financial condition and cash flows. There can also be no assurance that we will not receive similar or additional orders of assessment in the future.
Quantitative and Qualitative Disclosures about Market Risk
General
Market risk is attributable to all market
sensitive financial instruments including foreign currency receivables and payables. The value of a financial instrument may change as a result of changes in the interest rates, foreign currency exchange rates, commodity prices, equity prices and
other market changes that affect market risk sensitive instruments.
Our exposure to market risk is primarily a function of our revenue generating
activities and any future borrowings in foreign currency. The objective of market risk management is to avoid excessive exposure of our earnings to losses. Most of our exposure to market risk arises from our revenue and expenses that are denominated
in different currencies.
The following risk management discussion and the estimated amounts generated from analytical techniques are forward-looking
statements of market risk assuming certain market conditions. Our actual results in the future may differ materially from these projected results due to actual developments in the global financial markets.
Risk Management Procedures
We manage market risk
through our treasury operations. Our senior management and our Board of Directors approve our treasury operations objectives and policies. The activities of our treasury operations include management of cash resources, implementation of
hedging strategies for foreign currency exposures, implementation of borrowing strategies and monitoring compliance with market risk limits and policies. Our Foreign Exchange Committee, comprising the Chairman of the Board, our Group Chief Executive
Officer and our Group Chief Financial Officer, is the approving authority for all our hedging transactions.
Components of Market Risk
Exchange Rate Risk
Our exposure to market risk arises
principally from exchange rate risk. Although substantially all of our revenue less repair payments (non-GAAP) is denominated in pound sterling and US dollars, approximately 42.5% of our expenses (net of payments to repair centers made as part of
our WNS Auto Claims BPM segment) for the three months ended June 30, 2016 were incurred and paid in Indian rupees. The exchange rates between each of the pound sterling, the Indian rupee, the Australian dollar, the South African rand and the
Philippines peso, on the one hand, and the US dollar, on the other hand, have changed substantially in recent years and may fluctuate substantially in the future.
60
Our exchange rate risk primarily arises from our foreign currency-denominated receivables. Based upon our level
of operations for the three months ended June 30, 2016, a sensitivity analysis shows that a 10% appreciation or depreciation in the pound sterling against the US dollar would have increased or decreased revenue by approximately $6.2 million and
increased or decreased revenue less repair payments (non-GAAP) by approximately $5.5 million for the three months ended June 30, 2016, and a 10% appreciation or depreciation in the Australian dollar against the US dollar would have increased or
decreased revenue by approximately $1.0 million and increased or decreased revenue less repair payments (non-GAAP) by approximately $1.0 million for the three months ended June 30, 2016. Similarly, a 10% appreciation or depreciation in the
Indian rupee against the US dollar would have increased or decreased our expenses incurred and paid in Indian rupee for the three months ended June 30, 2016 by approximately $5.5 million, and a 10% appreciation or depreciation in the South African
rand against the US dollar would have increased or decreased our expenses incurred and paid in South African rand for the three months ended June 30, 2016 by approximately $1.3 million and a 10% appreciation or depreciation in the Philippines peso
against the US dollar would have increased or decreased our expenses incurred and paid in Philippines peso for the three months ended June 30, 2016 by approximately $0.9 million. To protect against foreign exchange gains or losses on forecasted
revenue and inter-company revenue, we have instituted a foreign currency cash flow hedging program. We hedge a part of our forecasted revenue and inter-company revenue denominated in foreign currencies with forward contracts and options.
Interest Rate Risk
We intend to selectively use interest
rate swaps, options and other derivative instruments to manage our exposure to interest rate movements. These exposures are reviewed by appropriate levels of management on a periodic basis. We do not enter into hedging agreements for speculative
purposes. As at June 30, 2016, we had no borrowing outstanding.
61
Part III RISK FACTORS
This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including those described in the following risk factors and elsewhere in this report. If any of the following risks actually occur, our business, financial condition and results of
operations could suffer and the trading price of our ADSs could decline.
Risks Related to Our Business
The global economic and geo-political conditions have been challenging and have had, and may continue to have, an adverse effect on the financial markets
and the economy in general, which has had, and may continue to have, a material adverse effect on our business, our financial performance and the prices of our equity shares and ADSs.
Global economic conditions continue to show signs of turbulence. Some key indicators of sustainable economic growth remain under pressure. Ongoing concerns
over the low price of crude oil and other commodities across the globe and the related implications for potential global deflation, as well as concerns of slower economic growth in China, the European Union, or EU, Russia and India, and residual
concerns about the sustainability of economic recovery in the US and its substantial debt burden, have contributed to market volatility and diminished expectations for the US, European and global economies.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory,
and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. The referendum has created significant uncertainty about the
future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union-derived laws to replace or replicate in the event of a
withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a
material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets.
Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations.
42.7% of our revenues and 39.7% of our revenue less repair payments (Non-GAAP) for the three months ended June 30, 2016 and 46.9% of our revenues and
43.8% of our revenue less repair payments (Non-GAAP) for the fiscal 2016, respectively, are denominated in pound sterling. The extent and duration of any potential decline in the value of the pound sterling to the U.S. dollar and other
currencies is unknown at this time. A long-term reduction in the value of the pound sterling as a result of the U.K. referendum could adversely impact our earnings growth rate and profitability. We believe that our hedging program is effective and
it substantially protects us against fluctuations in foreign currency exchange rates through a mix of forwards and options for this current fiscal year.
The economic slowdown in China, coupled with turbulence in its financial markets, has global implications through the possibility of contagion into other
markets. In the US, there continue to be concerns over the failure to achieve a long term solution to the issues of government spending, the increasing US national debt, and their negative impact on the US economy as well as concerns over potential
increases in cost of borrowing and reduction in availability of credit as the US Federal Reserve begins raising interest rates. Globally, countries may require additional financial support, sovereign credit ratings may continue to decline, and there
may be default on sovereign debt obligations of certain countries. Any of these may increase the cost of borrowing and cause credit to become more limited. Further, there continue to be signs of economic weakness, such as relatively high levels of
unemployment, in major markets including Europe. Continuing conflicts and instability in various regions around the world may lead to additional acts of terrorism, such as the recent attacks in Western Europe, Turkey and the Middle East, and armed
conflict around the world. The ongoing refugee crisis in Europe, North Africa and the Middle East may contribute to political and economic instability in those regions. A resurgence of isolationist and/or protectionist policies may curtail global
economic growth.
These economic and geo-political conditions may affect our business in a number of ways. The general level of economic activity, such as
decreases in business and consumer spending, could result in a decrease in demand for our services, thus reducing our revenue. The cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and
wider credit spreads. Continued turbulence or uncertainty in the European, US, Asian and international financial markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our
customers. If these market conditions continue or worsen, they may limit our ability to access financing or increase our cost of financing to meet liquidity needs, and affect the ability of our customers to use credit to purchase our services or to
make timely payments to us, resulting in adverse effects on our financial condition and results of operations.
Changing economic conditions may have an
effect on foreign exchange rates, which in turn may affect our business. For further information, see Currency fluctuations among the Indian rupee, the pound sterling, the US dollar, the Australian dollar and the South African rand could
have a material adverse effect on our results of operations.
62
Uncertainty about current global economic conditions could also continue to increase the volatility of our share
price. We cannot predict the timing or duration of an economic slowdown or the timing or strength of a subsequent economic recovery generally or in our targeted industries, including the travel and leisure and insurance industries. If macroeconomic
conditions worsen or current global economic conditions continue for a prolonged period of time, we are not able to predict the impact that such worsening conditions will have on our targeted industries in general, and our results of operations
specifically.
A few major clients account for a significant portion of our revenue and any loss of business from these clients could reduce our
revenue and significantly harm our business.
We have derived and believe that we will continue to derive in the near term a significant portion
of our revenue from a limited number of large clients. In fiscal 2016 and 2015, our five largest clients accounted for 30.7% and 33.0% of our revenue and 32.5% and 35.0% of our revenue less repair payments (non-GAAP), respectively. In fiscal 2016
and 2015, our three largest clients accounted for 24.0% and 27.4% of our revenue and 25.4% and 29.0% of our revenue less repair payments (non-GAAP), respectively. In fiscal 2016, our largest client, Aviva Global Services (Management Services)
Private Limited, or Aviva MS, individually accounted for 10.9% and 11.6% of our revenue and revenue less repair payments (non-GAAP), respectively, as compared to 13.4% and 14.2% in fiscal 2015, respectively. Any loss of business from any major
client could reduce our revenue and significantly harm our business.
For example, in line with our expectations, one of our top five clients by revenue
contribution in fiscal 2014 and 2013, an online travel agency, or OTA, provided us with lower volume of business in fiscal 2015 as the OTA entered into a strategic marketing agreement with another OTA in August 2013, pursuant to which, it, over a
period of time, from the fourth quarter of fiscal 2014 to the fourth quarter of fiscal 2015, moved its customer care and sales processes that were previously managed by us to a technology platform managed by the other OTA. As a result, we lost most
of our business from that OTA and since June 2015, we ceased to provide services to that OTA. That OTA accounted for 2.5%, 6.1% and 7.3% of our revenue and 2.6%, 6.5% and 7.7% of our revenue less repair payments (non-GAAP) in fiscal 2015, 2014 and
2013, respectively. The other OTA uses several BPM vendors to manage such processes on their technology platform. We are approved as one of the other OTAs providers of BPM services. We have managed to compete with incumbent BPM vendors for the
other OTAs business and the other OTA has become one of our large clients.
Revenue from Aviva MS under our master services agreement with Aviva MS,
or the Aviva master services agreement, accounts for a significant portion of our revenue and we expect our dependence on Aviva MS to continue for the foreseeable future. The terms of the Aviva master services agreement include termination at will
provisions which permit Aviva MS to terminate the agreement without cause with 180 days notice upon payment of a termination fee.
In addition, the
volume of work performed for specific clients is likely to vary from year to year, particularly since we may not be the exclusive outside service provider for our clients. Thus, a major client in one year may not provide the same level of revenue in
any subsequent year. The loss of some or all of the business of any large client could have a material adverse effect on our business, results of operations, financial condition and cash flows. A number of factors other than our performance could
cause the loss of or reduction in business or revenue from a client, and these factors are not predictable. For example, a client may demand price reductions, change its outsourcing strategy or move work in-house. A client may also be acquired by a
company with a different outsourcing strategy that intends to switch to another business process management service provider or return work in-house.
Our revenue is highly dependent on clients concentrated in a few industries, as well as clients located primarily in Europe and the US. Economic
slowdowns or factors that affect these industries or the economic environment in Europe or the US could reduce our revenue and seriously harm our business.
A substantial portion of our clients are concentrated in the insurance industry and the travel and leisure industry. In fiscal 2016 and 2015, 32.4% and 35.8%
of our revenue, respectively, and 28.4% and 31.7% of our revenue less repair payments (non-GAAP), respectively, were derived from clients in the insurance industry. During the same periods, clients in the travel and leisure industry contributed
19.6% and 18.7% of our revenue, respectively, and 20.7% and 19.8% of our revenue less repair payments (non-GAAP), respectively. Our business and growth largely depend on continued demand for our services from clients in these industries and other
industries that we may target in the future, as well as on trends in these industries to outsource business processes.
63
Turbulence in the global economy affects both the industries in which our clients are concentrated and the
geographies in which we do business. For further details, see The global economic and geo-political conditions have been challenging and have had, and may continue to have, an adverse effect on the financial markets and the economy in
general, which has had, and may continue to have, a material adverse effect on our business, our financial performance and the prices of our equity shares and ADSs. Certain of our targeted industries are especially vulnerable to crises in the
financial and credit markets and potential economic downturns. A downturn in any of our targeted industries, particularly the insurance or travel and leisure industries, a slowdown or reversal of the trend to offshore business process outsourcing in
any of these industries or the introduction of regulation which restricts or discourages companies from outsourcing could result in a decrease in the demand for our services and adversely affect our results of operations. For example, as a result of
the mortgage market crisis, in August 2007, First Magnus Financial Corporation, or FMFC, a US mortgage services client, filed a voluntary petition for relief under Chapter 11 of the US Bankruptcy Code. FMFC was a major client of Trinity
Partners Inc. which we acquired in November 2005 from the First Magnus Group and became one of our major clients. In fiscal 2008 and 2007, FMFC accounted for 1.0% and 4.3% of our revenue, respectively, and 1.4% and 6.8% of our revenue less
repair payments (non-GAAP), respectively.
Further, the uncertainty in worldwide economic and business conditions has resulted in a few of our clients
reducing or postponing their outsourced business requirements, which in turn has decreased the demand for our services and adversely affected our results of operations. In particular, our revenue is highly dependent on the economic environments in
Europe and the US, which continue to show signs of economic weakness, particularly weaker economic growth and low inflation in the EU and continued uncertainty in the US. In fiscal 2016 and 2015, 53.3% and 58.2% of our revenue, respectively, and
50.6% and 55.6% of our revenue less repair payments (non-GAAP), respectively, were derived from clients located in Europe (including the UK). During the same periods, 27.6% and 25.9% of our revenue, respectively, and 29.3% and 27.5% of our revenue
less repair payments (non-GAAP), respectively, were derived from clients located in North America (primarily the US). Any further weakening of or uncertainty in the European or US economy will likely have a further adverse impact on our revenue.
Other developments may also lead to a decline in the demand for our services in these industries. Significant changes in the financial services industry
or any of the other industries on which we focus, or a consolidation in any of these industries or acquisitions, particularly involving our clients, may decrease the potential number of buyers of our services and have an adverse impact on our
profitability. Any significant reduction in or the elimination of the use of the services we provide within any of these industries would result in reduced revenue and harm our business. Our clients may experience rapid changes in their prospects,
substantial price competition and pressure on their profitability. Although such pressures can encourage outsourcing as a cost reduction measure, they may also result in increasing pressure on us from clients in these key industries to lower our
prices which could negatively affect our business, results of operations, financial condition and cash flows.
64
Currency fluctuations among the Indian rupee, the pound sterling, the US dollar, the Australian dollar, the
South African rand and the Philippines peso could have a material adverse effect on our results of operations.
Although substantially all of our
revenue is denominated in pound sterling, US dollars, and to a lesser extent, Australian dollars and South African rand, a significant portion of our expenses (other than payments to repair centers, which are primarily denominated in pound sterling)
are incurred and paid in Indian rupees and, to a lesser extent, in South African rand and Philippines pesos. Therefore, a weakening of the rate of exchange for the pound sterling, the US dollar or the Australian dollar against the Indian rupee or,
to a lesser extent, a weakening of the pound sterling against the South African rand would adversely affect our results. Furthermore, we report our financial results in US dollars and our results of operations would be adversely affected if the
pound sterling or Australian dollar depreciates against the US dollar, or if the Indian rupee or, to a lesser extent, the South African rand or the Philippines peso appreciates against the US dollar. Although the expected shift in US monetary policy
to increase short term interest rates is likely to strengthen the US dollar against a number of currencies, particularly against emerging market currencies, fluctuations between the pound sterling, the Indian rupee, the South African rand, the
Australian dollar or the Philippines peso, on the one hand, and the US dollar, on the other hand, also expose us to translation risk when transactions denominated in such currencies are translated to US dollars, our reporting currency. The exchange
rates between each of the pound sterling, Indian rupee, South African rand, Australian dollar and the Philippines peso, on the one hand, and the US dollar, on the other hand, have changed substantially in recent years and may fluctuate substantially
in the future.
The recent referendum in the United Kingdom regarding withdrawal from the EU has created uncertainty in the British and European
economies, and in the global economy as a whole. See Risk FactorsThe global economic and geo-political conditions have been challenging and have had, and may continue to have, an adverse effect on the financial markets and the economy in
general, which has had, and may continue to have, a material adverse effect on our business, our financial performance and the prices of our equity shares and ADSs. These developments have caused, and may continue to cause, volatility in the
exchange rates between the pound sterling and other currencies.
The average pound sterling to US dollar exchange rate was approximately £0.70 per
$1.00 in the three month ended June 30, 2016, which represented a depreciation of the pound sterling by an average of 5.0% as compared with the average exchange rate of £0.66 per $1.00 in fiscal 2016, which in turn represented a
depreciation of the pound sterling by an average of 6.4% as compared with the average exchange rate of approximately £0.62 per $1.00 in fiscal 2015.
The average Indian rupee to US dollar exchange rate was approximately
₹
66.94 per $1.00 in the three months ended June 30, 2016, which represented a depreciation of the Indian rupee by an average of 2.3%
as compared with the average exchange rate of approximately
₹
65.43 per $1.00 in fiscal 2016, which in turn represented a depreciation
of the Indian rupee by an average of 7.1% as compared with the average exchange rate of approximately
₹
61.12 per $1.00 in fiscal
2015.
In fiscal 2016, 2015 and 2014 the South African rand depreciated against the US dollar by an average of 24.3%, 9.4%, and 17.9% respectively, the
Australian dollar depreciated against the US dollar by an average of 15.8%, 6.1%, and 9.6% respectively, and the Philippines peso depreciated against the US dollar by an average of 4.3%, 1.9%, and 4.4% respectively.
Our results of operations would be adversely affected if the Indian rupee appreciates significantly against the pound sterling or the US dollar or if the
pound sterling or the Australian dollar depreciates against the US dollar or, to a lesser extent, the South African rand or the Philippines peso appreciates significantly against the US dollar. For example, the appreciation of the pound sterling in
fiscal 2015 and the depreciation of the South African rand in fiscal 2016 and 2015 against the US dollar positively impacted our results of operations, whereas the depreciation of pound sterling in fiscal 2016 and the depreciation of the Australian
dollar in fiscal 2016 and 2015 negatively impacted our results of operations in these years.
We hedge a portion of our foreign currency exposures using
options and forward contracts. We cannot assure you that our hedging strategy will be successful or will mitigate our exposure to currency risk.
65
The international nature of our business exposes us to several risks, such as significant currency
fluctuations and unexpected changes in the regulatory requirements of multiple jurisdictions.
We have operations in China, Costa
Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, the UK and the US, and we service clients across Asia, Europe, South Africa, Australia and North America. Our corporate structure also spans multiple jurisdictions, with
our parent holding company incorporated in Jersey, Channel Islands, and intermediate and operating subsidiaries (including branch offices) incorporated in Australia, China, Costa Rica, France, India, Mauritius, the Netherlands, the Philippines,
Romania, South Africa, Singapore, Sri Lanka, the United Arab Emirates, the UK and the US. As a result, we are exposed to risks typically associated with conducting business internationally, many of which are beyond our control. These risks include:
|
|
|
significant currency fluctuations between the US dollar and the pound sterling (in which our revenue is principally denominated) and the Indian rupee (in which a significant portion of our costs are denominated), for
more information, see Currency fluctuations among the Indian rupee, the pound sterling and the US dollar could have a material adverse effect on our results of operations;
|
|
|
|
legal uncertainty owing to the overlap of different legal regimes, and problems in asserting contractual or other rights across international borders;
|
66
|
|
|
potentially adverse tax consequences, such as scrutiny of transfer pricing arrangements by authorities in the countries in which we operate;
|
|
|
|
potential tariffs and other trade barriers;
|
|
|
|
unexpected changes in regulatory requirements;
|
|
|
|
the burden and expense of complying with the laws and regulations of various jurisdictions; and
|
|
|
|
terrorist attacks and other acts of violence or war.
|
The occurrence of any of these events could have a
material adverse effect on our results of operations and financial condition.
Our global operations expose us to numerous and sometimes conflicting
legal and regulatory requirements. Failure to adhere to the laws and regulations that govern our business or our clients businesses that we are required to comply with in performing our services could harm our business.
We have operations in ten countries and our corporate structure spans multiple jurisdictions. Further, we service clients across multiple geographic regions
and multiple industries. We are required to comply with numerous, and sometimes conflicting and uncertain, laws and regulations including on matters relating to import/export controls, trade restrictions, taxation, immigration, internal disclosure
and control obligations, securities regulation, anti-competition, data privacy and protection, anti-corruption, and employment and labor relations. In addition, we are required to obtain and maintain permits and licenses for the conduct of our
business in various jurisdictions. Our clients business operations are also subject to numerous regulations in the jurisdiction in which they operate or that are applicable to their industry, and our clients may contractually require that we
perform our services in compliance with regulations applicable to them or in a manner that will enable them to comply with such regulations. For example, regulations that our clients business operations are subject to include the
Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act and Health Information Technology for Economic and Clinical Health Act in the US and the Financial Services Act in the UK.
On account of the global nature of our and our clients operations, compliance with diverse legal and regulatory requirements is difficult,
time-consuming and requires significant resources. Further, the extent of development of legal systems varies across the countries in which we operate and local laws may not be adequately developed or be able to provide us clear guidance to
sufficiently protect our rights. Specifically, in many countries including those in which we operate and/or seek to expand to, the practices of local businesses may not be in accord with international business standards and could violate
anti-corruption laws and regulations, including the UK Bribery Act 2010 and US Foreign Corrupt Practices Act 1977. Our employees, subcontractors, agents, business partners, the companies we acquire and their employees, subcontractors and
agents, and other third parties with which we associate, could act in a manner which violates policies or procedures intended to ensure compliance with laws and regulations, including applicable anti-corruption laws or regulations.
Violations of such laws or regulations by us, our employees or any of these third parties could subject us to criminal or civil enforcement actions (whether
or not we participated or were aware of the actions leading to the violations), including fines or penalties, breach of contract damages, disgorgement of profits and suspension or disqualification from work, any of which could materially and
adversely affect our business, including our results of operations and our reputation. If we are unable to maintain our licenses, permits or other qualifications necessary to provide our services, we may not be able to provide services to
existing clients or be able to attract new clients and could lose revenue, which could have a material adverse effect on our business.
67
We face competition from onshore and offshore business process management companies and from information
technology companies that also offer business process management services. Our clients may also choose to run their business processes themselves, either in their home countries or through captive units located offshore.
The market for outsourcing services is very competitive and we expect competition to intensify and increase from a number of sources. We believe that the
principal competitive factors in our markets are price, service quality, sales and marketing skills, and industry expertise. We face significant competition from our clients own in-house groups including, in some cases, in-house departments
operating offshore or captive units. Clients who currently outsource a significant proportion of their business processes or information technology services to vendors in India may, for various reasons, including diversifying geographic risk, seek
to reduce their dependence on any one country. We also face competition from onshore and offshore business process management and information technology services companies. In addition, the trend toward offshore outsourcing, international expansion
by foreign and domestic competitors and continuing technological changes will result in new and different competitors entering our markets.
These
competitors may include entrants from the communications, software and data networking industries or entrants in geographic locations with lower costs than those in which we operate. Technological changes include the development of complex automated
systems for the processing of transactions that are formerly labor intensive, which may reduce or replace the need for outsourcing such transaction processing.
Some of these existing and future competitors have greater financial, human and other resources, longer operating histories, greater technological expertise,
more recognizable brand names and more established relationships in the industries that we currently serve or may serve in the future. In addition, some of our competitors may enter into strategic or commercial relationships among themselves or with
larger, more established companies in order to increase their ability to address client needs, or enter into similar arrangements with potential clients. Increased competition, our inability to compete successfully against competitors, pricing
pressures or loss of market share could result in reduced operating margins which could harm our business, results of operations, financial condition and cash flows.
Changes in technology could lead to changes in our clients businesses as well as their requirements for business process services, which may
adversely impact our business and results of operations.
Proliferation of accessible technology, such as smartphones and internet, has had an
impact on the manner in which customers and businesses interact with each other. Companies are increasingly adopting social media platforms, online self-help portals and mobile applications for communicating with and servicing their customers rather
than utilizing business process management companies such as ourselves to manage these interactions. Our clients also continue to invest in technology by upgrading their platforms and application capabilities towards increased automation of
transactions. Advances in software, such as robotic process automation and voice recognition, have the potential to reduce dependency on human processing transactions. Such developments and other innovations, such as autonomous vehicles, have the
potential to significantly change the way our clients businesses operate and may reduce their dependency on business process management companies, including our company, for managing their business processes. We are therefore subject to a risk
of disintermediation on account of such changes in technology, which could impact our future growth prospects and may require continued investments in our business.
If we cause disruptions to our clients businesses, provide inadequate service or are in breach of our representations or obligations, our clients
may have claims for substantial damages against us. Our insurance coverage may be inadequate to cover these claims and, as a result, our profits may be substantially reduced.
Most of our contracts with clients contain service level and performance requirements, including requirements relating to the quality of our services and the
timing and quality of responses to the clients customer inquiries. In some cases, the quality of services that we provide is measured by quality assurance ratings and surveys which are based in part on the results of direct monitoring by our
clients of interactions between our employees and our clients customers. Failure to consistently meet service requirements of a client or errors made by our associates in the course of delivering services to our clients could disrupt the
clients business and result in a reduction in revenue or a claim for substantial damages against us. For example, some of our agreements stipulate standards of service that, if not met by us, will result in lower payment to us. In addition, in
connection with acquiring new business from a client or entering into client contracts, our employees may make various representations, including representations relating to the quality of our services, abilities of our associates and our project
management techniques. A failure or inability to meet a contractual requirement or our representations could seriously damage our reputation and affect our ability to attract new business or result in a claim for substantial damages against us.
68
Our dependence on our offshore delivery centers requires us to maintain active data and voice communications
between our main delivery centers in China, Costa Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, the UK and the US, our international technology hubs in the UK and the US and our clients offices. Although we
maintain redundant facilities and communications links, disruptions could result from, among other things, technical and electricity breakdowns, computer glitches and viruses and adverse weather conditions. Any significant failure of our equipment
or systems, or any major disruption to basic infrastructure like power and telecommunications in the locations in which we operate, could impede our ability to provide services to our clients, have a negative impact on our reputation, cause us to
lose clients, reduce our revenue and harm our business.
Under our contracts with our clients, our liability for breach of our obligations is generally
limited to actual damages suffered by the client and capped at a portion of the fees paid or payable to us under the relevant contract. Although our contracts contain limitations on liability, such limitations may be unenforceable or otherwise may
not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our clients, are generally not limited under those agreements. Further, although we have
professional indemnity insurance coverage, the coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims and our insurers may disclaim coverage as to any future claims. The successful
assertion of one or more large claims against us that exceed available insurance coverage, or changes in our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have a material
adverse effect on our business, reputation, results of operations, financial condition and cash flows.
69
Our facilities are at risk of damage by natural disasters.
Our operational facilities and communication hubs may be damaged in natural disasters such as earthquakes, floods, heavy rains, tsunamis and cyclones. For
example, Chennai was affected by severe flooding in November 2015. Although our clients experienced minimal disruptions during the Chennai flood due to the business continuity planning and infrastructure resiliency measures that are designed to
minimize the impact of natural disasters on our business which we have implemented, such measures may be rendered less effective in other circumstances. During floods caused by typhoons in Manila, Philippines in September 2009, our delivery
center was rendered inaccessible and our associates were not able to commute to the delivery center for a few days, thereby adversely impacting our provision of services to our clients. During the floods in Mumbai in July 2005, our operations
were adversely affected as a result of the disruption of the citys public utility and transport services making it difficult for our associates to commute to our office. Such natural disasters may also lead to disruption to information systems
and telephone service for sustained periods. Damage or destruction that interrupts our provision of BPM services could damage our relationships with our clients and may cause us to incur substantial additional expenses to repair or replace damaged
equipment or facilities. We may also be liable to our clients for disruption in service resulting from such damage or destruction. While we currently have property damage insurance and business interruption insurance, our insurance coverage may not
be sufficient. Furthermore, we may be unable to secure such insurance coverage at premiums acceptable to us in the future or secure such insurance coverage at all. Prolonged disruption of our services as a result of natural disasters would also
entitle our clients to terminate their contracts with us.
We are liable to our clients for damages caused by unauthorized disclosure of sensitive
or confidential information, whether through a breach or circumvention of our or our clients computer systems and processes, through our employees or otherwise.
We are typically required to manage, utilize and store sensitive or confidential client data in connection with the services we provide. Under the terms of
our client contracts, we are required to keep such information strictly confidential. Our client contracts do not include any limitation on our liability to them with respect to breaches of our obligation to maintain confidentiality on the
information we receive from them. Although we seek to implement measures to protect sensitive and confidential client data, there can be no assurance that we would be able to prevent breaches of security. Further, some of our projects require us to
conduct business functions and computer operations using our clients systems over which we do not have control and which may not be compliant with industry security standards. In addition, some of the client designed processes that we are
contractually required to follow for delivering services to them and which we are unable to unilaterally change, could be designed in a manner that allows for control weaknesses to exist and be exploited. Any vulnerability in a clients system
or client designed process, if exploited, could result in breaches of security or unauthorized transactions and result in a claim for substantial damages against us. If any person, including any of our employees, penetrates our or our clients
network security or otherwise mismanages or misappropriates sensitive or confidential client data, we could be subject to significant liability and lawsuits from our clients or their customers for breaching contractual confidentiality provisions or
privacy laws. Although we have insurance coverage for mismanagement or misappropriation of such information by our employees, that coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large
claims against us, and our insurers may disclaim coverage as to any future claims. Penetration of the network security of our or our clients data centers or computer systems or unauthorized use or disclosure of sensitive or confidential client
data, whether through breach of our or our clients computer systems, systems failure, loss or theft of assets containing confidential information or otherwise, could also have a negative impact on our reputation which would harm our business.
Our business could be materially and adversely affected if we do not protect our intellectual property or if our services are found to infringe on
the intellectual property of others.
Our success depends in part on certain methodologies, practices, tools and technical expertise we utilize in
designing, developing, implementing and maintaining applications and other proprietary intellectual property rights. In order to protect our rights in such intellectual properties, we rely upon a combination of nondisclosure and other contractual
arrangements as well as trade secret, copyright and trademark laws. We also generally enter into confidentiality agreements with our employees, consultants, clients and potential clients, and limit access to and distribution of our proprietary
information to the extent required for our business purpose.
India is a member of the Berne Convention, an international intellectual property treaty,
and has agreed to recognize protections on intellectual property rights conferred under the laws of other foreign countries, including the laws of the United States. There can be no assurance that the laws, rules, regulations and treaties in effect
in the United States, India and the other jurisdictions in which we operate and the contractual and other protective measures we take, are adequate to protect us from misappropriation or unauthorized use of our intellectual property, or that
such laws will not change. We may not be able to detect unauthorized use and take appropriate steps to enforce our rights, and any such steps may not be successful. Infringement by others of our intellectual property, including the costs of
enforcing our intellectual property rights, may have a material adverse effect on our business, results of operations and financial condition.
70
Our clients may provide us with access to, and require us to use, third party software in connection with our
delivery of services to them. Our client contracts generally require our clients to indemnify us for any infringement of intellectual property rights or licenses to third party software when our clients provide such access to us. If the indemnities
under our client contracts are inadequate to cover the damages and losses we suffer due to infringement of third party intellectual property rights or licenses to third party software to which we were given access, our business and results of
operations could be adversely affected. We are also generally required, by our client contracts, to indemnify our clients for any breaches of intellectual property rights by our services. Although we believe that we are not infringing on the
intellectual property rights of others, claims may nonetheless be successfully asserted against us in the future. The costs of defending any such claims could be significant, and any successful claim may require us to modify, discontinue or rename
any of our services. Any such changes may have a material adverse effect on our business, results of operations and financial condition.
Our
clients may terminate contracts before completion or choose not to renew contracts which could adversely affect our business and reduce our revenue.
The terms of our client contracts typically range from three to five years. Many of our client contracts can be terminated by our clients with or without
cause, with three to six months notice and, in most cases, without penalty. The termination of a substantial percentage of these contracts could adversely affect our business and reduce our revenue. Contracts that will expire on or before
March 31, 2017 (including work orders/statement of works that will expire on or before March 31, 2017) represented approximately 20% of our revenue and 21% of our revenue less repair payments (non-GAAP) from our clients in fiscal 2016.
Failure to meet contractual requirements could result in cancellation or non-renewal of a contract. Some of our contracts may be terminated by the client if certain of our key personnel working on the client project leave our employment and we are
unable to find suitable replacements. In addition, a contract termination or significant reduction in work assigned to us by a major client could cause us to experience a higher than expected number of unassigned employees, which would increase our
cost of revenue as a percentage of revenue until we are able to reduce or reallocate our headcount. We may not be able to replace any client that elects to terminate or not renew its contract with us, which would adversely affect our business and
revenue.
For example, one of our largest auto claims clients by revenue contribution in fiscal 2012 terminated its contract with us with effect from
April 18, 2012. This client accounted for 10.4% and 7.5% of our revenue and 1.3% and 1.9% of our revenue less repair payments (non-GAAP) in fiscal 2012 and 2011, respectively.
In addition, one of our top five clients by revenue contribution in fiscal 2014 and 2013, an OTA, provided us with a lower volume of business in fiscal 2015
as the OTA entered into a strategic marketing agreement with another OTA in August 2013 pursuant to which it over a period of time, from the fourth quarter of fiscal 2014 to the fourth quarter of fiscal 2015, moved its customer care and sales
processes that were previously managed by us to a technology platform managed by the other OTA. As a result, we lost most of our business from that OTA and since June 2015, we ceased to provide services to that OTA. That OTA accounted for 2.5%, 6.1%
and 7.3% of our revenue and 2.6%, 6.5% and 7.7% of our revenue less repair payments (non-GAAP) in fiscal 2015, 2014 and 2013, respectively. The other OTA uses several BPM vendors to manage such processes on their technology platform. We are approved
as one of the other OTAs providers of BPM services. We have managed to compete with incumbent BPM vendors for the other OTAs business and the other OTA has become one of our large clients. For more information, see A few
major clients account for a significant portion of our revenue and any loss of business from these clients could reduce our revenue and significantly harm our business.
Some of our client contracts contain provisions which, if triggered, could result in lower future revenue and have an adverse effect on our business.
In many of our client contracts, we agree to include certain provisions which provide for downward revision of our prices under certain
circumstances. For example, certain contracts allow a client in certain limited circumstances to request a benchmark study comparing our pricing and performance with that of an agreed list of other service providers for comparable services. Based on
the results of the study and depending on the reasons for any unfavorable variance, we may be required to make improvements in the service we provide or to reduce the pricing for services to be performed under the remaining term of the contract.
Some of our contracts also provide that, during the term of the contract and for a certain period thereafter ranging from six to 12 months, we may not provide similar services to certain or any of their competitors using the same personnel. These
restrictions may hamper our ability to compete for and provide services to other clients in the same industry, which may result in lower future revenue and profitability.
Some of our contracts specify that if a change in control of our company occurs during the term of the contract, the client has the right to terminate the
contract. These provisions may result in our contracts being terminated if there is such a change in control, resulting in a potential loss of revenue. Some of our client contracts also contain provisions that would require us to pay penalties to
our clients if we do not meet pre-agreed service level requirements. Failure to meet these requirements could result in the payment of significant penalties by us to our clients which in turn could have an adverse effect on our business, results of
operations, financial condition and cash flows.
71
Fraud and significant security breaches in our or our clients computer systems and network
infrastructure could adversely impact our business
Our business is dependent on the secure and reliable operation of our information systems,
including those used to operate and manage our business and our clients information systems, whether operated by our clients themselves or by us in connection with our provision of services to them. Although we take adequate measures to
safeguard against system-related and other fraud, there can be no assurance that we would be able to prevent fraud or even detect them on a timely basis, particularly where it relates to our clients information systems which are not managed by
us. For example, we have identified incidences where our employees have allegedly exploited weaknesses in information systems as well as processes in order to misappropriate confidential client data and used such confidential data to record
fraudulent transactions. We are generally required to indemnify our clients from third party claims arising out of such fraudulent transactions and our client contracts generally do not include any limitation on our liability to our clients
losses arising from fraudulent activities by our employees. Accordingly, we may have significant liability arising from such fraudulent transactions which may materially affect our business and financial results. Although we have professional
indemnity insurance coverage for losses arising from fraudulent activities by our employees, that coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims against us, and our insurers
may also disclaim coverage as to any future claims. We may also suffer reputational harm as a result of fraud committed by our employees, or by our perceived inability to properly manage fraud related risks, which could in turn lead to enhanced
regulatory oversight and scrutiny.
Our expansion into new markets may create additional challenges with respect to managing the risk of fraud due to the
increased geographical dispersion and use of intermediaries. Our business also requires the appropriate and secure utilization of client and other sensitive information. We cannot be certain that advances in criminal capabilities (including
cyber-attacks or cyber intrusions over the internet, malware, computer viruses and the like), discovery of new vulnerabilities or attempts to exploit existing vulnerabilities in our or our clients systems, other data thefts, physical system or
network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting our or our clients computer systems and networks that access and store sensitive information. Cyber threats, such as
phishing and trojans, could intrude into our or our clients network to steal data or to seek sensitive information. Any intrusion into our network or our clients network (to the extent attributed to us or perceived to be attributed to
us) that results in any breach of security could cause damage to our reputation and adversely impact our business and financial results. Although we have implemented security technology and operational procedures to prevent such occurrences, there
can be no assurance that these security measures will be successful. A significant failure in security measures could have a material adverse effect on our business, reputation, results of operations and financial condition.
Our business may not develop in ways that we currently anticipate due to negative public reaction to offshore outsourcing, proposed legislation or
otherwise.
We have based our strategy of future growth on certain assumptions regarding our industry, services and future demand in the market
for such services. However, the trend to outsource business processes may not continue and could reverse. Offshore outsourcing is a politically sensitive topic in the UK, the US and elsewhere. For example, many organizations and public figures in
the UK and the US have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in their home countries.
Such concerns have led to proposed measures in the US that are aimed at limiting or restricting outsourcing. There is also legislation that has been enacted
or is pending at the state level in the US, with regard to limiting outsourcing. The measures that have been enacted to date are generally directed at restricting the ability of government agencies to outsource work to offshore business service
providers. These measures have not had a significant effect on our business because governmental agencies are not a focus of our operations. However, some legislative proposals would, for example, require contact centers to disclose their geographic
locations, require notice to individuals whose personal information is disclosed to non-US affiliates or subcontractors, require disclosures of companies foreign outsourcing practices, or restrict US private sector companies that have federal
government contracts, federal grants or guaranteed loan programs from outsourcing their services to offshore service providers. Such legislation could have an adverse impact on the economics of outsourcing for private companies in the US, which
could in turn have an adverse impact on our business with US clients.
Such concerns have also led the UK and other EU jurisdictions to enact regulations
which allow employees who are dismissed as a result of transfer of services, which may include outsourcing to non-UK or EU companies, to seek compensation either from the company from which they were dismissed or from the company to which the work
was transferred. This could discourage EU companies from outsourcing work offshore and/or could result in increased operating costs for us.
72
In addition, there has been publicity about the negative experiences, such as theft and misappropriation of
sensitive client data, of various companies that use offshore outsourcing, particularly in India.
Current or prospective clients may elect to perform
such services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshore provider. Any slowdown or reversal of existing industry
trends towards offshore outsourcing would seriously harm our ability to compete effectively with competitors that operate out of facilities located in the UK or the US.
Adverse changes to our relationships with the companies with whom we have an alliance or in the business of the companies with whom we have an alliance
could adversely affect our results of operations.
We have alliances with companies whose capabilities complement our own. For example, some of
our services and solutions are based on technology, software or platforms provided by these companies. The priorities and objectives of these companies with whom we have an alliance may differ from ours. As most of our alliance relationships are
non-exclusive, these companies with whom we have an alliance are not prohibited from competing with us or forming closer or preferred arrangements with our competitors. One or more of these companies with whom we have an alliance may be acquired by
a competitor, or may merge with each other, either of which could reduce our access over time to the technology, software or platforms provided by those companies. In addition, these companies with whom we have an alliance could experience reduced
demand for their technology, software or platforms, including, for example, in response to changes in technology, which could lessen related demand for our services and solutions. If we do not obtain the expected benefits from our alliance
relationships for any reason, we may be less competitive, our ability to offer attractive solutions to our clients may be negatively affected, which could have an adverse effect on our results of operations.
We may face difficulties as we expand our operations to establish delivery centers in onshore locations and offshore in countries in which we have
limited or no prior operating experience.
In April 2014 our delivery center in South Carolina in the US became fully operational. We also opened
an additional delivery center in Pennsylvania in the US in September 2014. We intend to continue to expand our global footprint in order to maintain an appropriate cost structure and meet our clients delivery needs. We plan to establish
additional offshore delivery centers in the Asia Pacific and Europe, which may involve expanding into countries other than those in which we currently operate. Our expansion plans may also involve expanding into less developed countries, which may
have less political, social or economic stability and less developed infrastructure and legal systems. As we expand our business into new countries we may encounter regulatory, personnel, technological and other difficulties that increase our
expenses or delay our ability to start up our operations or become profitable in such countries. This may affect our relationships with our clients and could have an adverse effect on our business, results of operations, financial condition and cash
flows.
We may be unable to effectively manage our growth and maintain effective internal controls, which could have a material adverse effect on
our operations, results of operations and financial condition.
We were founded in April 1996, and we have experienced growth and
significantly expanded our operations. For example, over the last six fiscal years, our employees have increased to 32,388 as at March 31, 2016 from 21,958 as at March 31, 2010. In fiscal 2011, we expanded our delivery center in Romania.
In fiscal 2013, we opened new facilities in Poland and Vishakhapatnam, or Vizag. In fiscal 2014, our facilities in China and Sri Lanka became operational. In fiscal 2015, our delivery centers in South Carolina and Pennsylvania, in the US, as well as
in South Africa, became fully operational, as did our newest facility in China. We now have delivery centers across 10 countries in China, Costa Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, the UK and the US. Further,
in February 2011, we received in-principle approval for the allotment of a piece of land on lease for a term of 99 years, measuring 5 acres in Tiruchirappalli Navalpattu, special economic zone, or SEZ, in the state of Tamil Nadu, India
from Electronics Corporation of Tamil Nadu Limited, or ELCOT for setting up delivery centers in the future. We intend to further expand our global delivery capability, and we are exploring plans to do so in Asia Pacific and Europe.
We have also completed numerous acquisitions. For example, in June 2012, we acquired Fusion Outsourcing Services (Proprietary) Limited, or Fusion, a
leading BPM provider based in South Africa. Fusion provides a range of outsourcing services, including contact center, customer care and business continuity services, to both South African and international clients. With operations in Cape Town and
Johannesburg, Fusion employed approximately 1,500 people as at June 30, 2012, which increased to 3,912 people as at June 30, 2016.
73
This growth places significant demands on our management and operational resources. In order to manage growth
effectively, we must implement and improve operational systems, procedures and internal controls on a timely basis. If we fail to implement these systems, procedures and controls on a timely basis, we may not be able to service our clients
needs, hire and retain new employees, pursue new business, complete future acquisitions or operate our business effectively. Failure to effectively transfer new client business to our delivery centers, properly budget transfer costs or accurately
estimate operational costs associated with new contracts could result in delays in executing client contracts, trigger service level penalties or cause our profit margins not to meet our expectations or our historical profit margins. As a result of
any of these problems associated with expansion, our business, results of operations, financial condition and cash flows could be materially and adversely affected.
Our executive and senior management team and other key team members in our business units are critical to our continued success and the loss of such
personnel could harm our business.
Our future success substantially depends on the performance of the members of our executive and senior
management team and other key team members in each of our business units. These personnel possess technical and business capabilities including domain expertise that are difficult to replace. There is intense competition for experienced senior
management and personnel with technical and industry expertise in the business process management industry, and we may not be able to retain our key personnel due to various reasons, including the compensation philosophy followed by our company as
described in Part I Item 6. Directors, Senior Management and Employees Compensation of our annual report on Form 20-F for our fiscal year ended March 31, 2016. Although we have entered into employment contracts
with our executive officers, certain terms of those agreements may not be enforceable and in any event these agreements do not ensure the continued service of these executive officers. In the event of a loss of any key personnel, there is no
assurance that we will be able to find suitable replacements for our key personnel within a reasonable time. The loss of key members of our senior management or other key team members, particularly to competitors, could have a material adverse
effect on our business, results of operations, financial condition and cash flows. A loss of several members of our senior management at the same time or within a short period may lead to a disruption in the business of our company, which could
materially adversely affect our performance.
We may fail to attract and retain enough sufficiently trained employees to support our operations, as
competition for highly skilled personnel is significant and we experience significant employee attrition. These factors could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The business process management industry relies on large numbers of skilled employees, and our success depends to a significant extent on our ability to
attract, hire, train and retain qualified employees. The business process management industry, including our company, experiences high employee attrition. During fiscal 2016, 2015 and 2014, the attrition rate for our employees who have completed six
months of employment with us was 34%, 34% and 33%, respectively. Our attrition rate for our employees who have completed six months of employment with us was 34% during the three months ended June 30, 2016. We cannot assure you that our attrition
rate will not continue to increase in the future. There is significant competition in the jurisdictions where our operation centers are located, including India, the Philippines, Romania, South Africa and Sri Lanka, for professionals with the skills
necessary to perform the services we offer to our clients. Increased competition for these professionals, in the business process management industry or otherwise, could have an adverse effect on us. A significant increase in the attrition rate
among employees with specialized skills could decrease our operating efficiency and productivity and could lead to a decline in demand for our services.
In addition, our ability to maintain and renew existing engagements and obtain new business will depend largely on our ability to attract, train and retain
personnel with skills that enable us to keep pace with growing demands for outsourcing, evolving industry standards and changing client preferences. Our failure either to attract, train and retain personnel with the qualifications necessary to
fulfill the needs of our existing and future clients or to assimilate new employees successfully could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Employee strikes and other labor-related disruptions may adversely affect our operations.
Our business depends on a large number of employees executing client operations. Strikes or labor disputes with our employees at our delivery centers may
adversely affect our ability to conduct business. Our employees are not unionized, although they may in the future form unions. We cannot assure you that there will not be any strike, lock out or material labor dispute in the future. Work
interruptions or stoppages could have a material adverse effect on our business, results of operations, financial condition and cash flows.
74
We, from time to time, enter into agreements for credit facilities, which may impose operating and
financial restrictions on us and our subsidiaries.
We, from time to time, enter into agreements for credit facilities, which may contain a number
of covenants and other provisions that, among other things, may impose operating and financial restrictions on us and our subsidiaries. These restrictions could put a strain on our financial position. For example:
|
|
|
they may increase our vulnerability to general adverse economic and industry conditions;
|
|
|
|
they may require us to dedicate a substantial portion of our cash flow from operations to payments on our loans, thereby reducing the availability of our cash flow to fund capital expenditure, working capital and other
general corporate purposes;
|
|
|
|
they may require us to seek lenders consent prior to paying dividends on our ordinary shares;
|
|
|
|
they may limit our ability to incur additional borrowings or raise additional financing through equity or debt instruments; and
|
|
|
|
they may impose certain financial covenants on us that we may not be able to meet, which may cause the lenders to accelerate the repayment of the balance loan outstanding.
|
Further, the restrictions that may be contained in our agreements for credit facilities that we enter into from time to time may limit our ability to plan for
or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans. Our ability to comply with the covenants of our agreements for credit facilities that we enter into from time to time may
be affected by events beyond our control, and any material deviations from our forecasts could require us to seek waivers or amendments of covenants or alternative sources of financing or to reduce expenditures. We cannot assure you that such
waivers, amendments or alternative financing could be obtained, or if obtained, would be on terms acceptable to us.
To fund our capital
expenditures and service any indebtedness and other potential liquidity requirements, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control and we may need to access the credit market
to meet our liquidity requirements.
Our ability to fund planned capital expenditures and to make payments on any outstanding loans will depend on
our ability to generate cash in the future. This, to a large extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Furthermore, given that the uncertainty over global
economic conditions remains, there can be no assurance that our business activity will be maintained at our expected level to generate the anticipated cash flows from operations or that our credit facilities would be available or sufficient. If
global economic uncertainties continue, we may experience a decrease in demand for our services, resulting in our cash flows from operations being lower than anticipated. This may in turn result in our need to obtain financing.
If we cannot fund our capital expenditure and service our credit facilities, we may have to take actions such as seeking additional equity or reducing or
delaying capital expenditures, strategic acquisitions and investments. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms or at all.
75
If we fail to maintain an effective system of internal control over financial reporting, we may not be able
to accurately report our financial results or prevent or detect fraud. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our ADS price.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports. The effective internal controls
together with adequate disclosure controls and procedures are designed to prevent or detect fraud. Deficiencies in our internal controls may adversely affect our managements ability to record, process, summarize, and report financial data on a
timely basis. As a public company, we are required by Section 404 of the Sarbanes-Oxley Act of 2002 to include a report of managements assessment on our internal control over financial reporting and an auditors attestation report on
our internal control over financial reporting in our annual reports on Form 20-F.
If material weaknesses are identified in our internal controls
over financial reporting, we could be required to implement remedial measures. If we fail to maintain effective disclosure controls and procedures or internal control over financial reporting, we could lose investor confidence in the accuracy and
completeness of our financial reports, which could have a material adverse effect on our ADS price.
Wage increases may prevent us from sustaining
our competitive advantage and may reduce our profit margin.
Salaries and related benefits of our operations staff and other employees in
countries where we have delivery centers, in particular India, are among our most significant costs. Wage costs in India have historically been significantly lower than wage costs in the US and Europe for comparably skilled professionals, which has
been one of our competitive advantages. However, rapid economic growth in India, increased demand for business process management outsourcing to India, increased competition for skilled employees in India, and regulatory developments resulting in
wage increases in India may reduce this competitive advantage. For example, in December 2015, the Government of India amended the Payment of Bonus Act, 1965, which mandated increased employee bonus amounts for certain wage categories, effective
retroactively from April 1, 2014. As a result, our wage costs in India have increased. In addition, if the US dollar or the pound sterling declines in value against the Indian rupee, wages in the US or the UK will further decrease relative to wages
in India, which may further reduce our competitive advantage. We may need to increase our levels of employee compensation more rapidly than in the past to remain competitive in attracting the quantity and quality of employees that our business
requires. Wage increases may reduce our profit margins and have a material adverse effect on our financial condition and cash flows.
Further, following
the establishment of our delivery centers in the US in 2014, our operations in the US have expanded and our wage costs for employees located in the UK and the US now represent a larger proportion of our total wage costs. Wage increases in the UK and
the US may therefore also reduce our profit margins and have a material adverse effect on our financial condition and cash flows.
Our operating
results may differ from period to period, which may make it difficult for us to prepare accurate internal financial forecasts and respond in a timely manner to offset such period to period fluctuations.
Our operating results may differ significantly from period to period due to factors such as client losses, variations in the volume of business from clients
resulting from changes in our clients operations, the business decisions of our clients regarding the use of our services, delays or difficulties in expanding our operational facilities and infrastructure, changes to our pricing structure or
that of our competitors, inaccurate estimates of resources and time required to complete ongoing projects, currency fluctuations and seasonal changes in the operations of our clients. For example, our clients in the travel and leisure industry
experience seasonal changes in their operations in connection with the US summer holiday season, as well as episodic factors such as adverse weather conditions. Transaction volumes can be impacted by market conditions affecting the travel and
insurance industries, including natural disasters, outbreak of infectious diseases or other serious public health concerns in Asia or elsewhere (such as the outbreak of the Influenza A (H7N9) virus in various parts of the world) and terrorist
attacks. In addition, our contracts do not generally commit our clients to provide us with a specific volume of business.
76
In addition, the long sales cycle for our services, which typically ranges from three to 12 months, and the
internal budget and approval processes of our prospective clients make it difficult to predict the timing of new client engagements. Commencement of work and ramping up of volume of work with certain new and existing clients have in the past been
slower than we had expected and may in the future be slower than we expect. Revenue is recognized upon actual provision of services and when the criteria for recognition are achieved. Accordingly, the financial benefit of gaining a new client may be
delayed due to delays in the implementation of our services. These factors may make it difficult for us to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of those delays. Due to the
above factors, it is possible that in some future quarters our operating results may be significantly below the expectations of the public market, analysts and investors.
If our pricing structures do not accurately anticipate the cost and complexity of performing our work, our profitability may be negatively affected.
The terms of our client contracts typically range from three to five years. In many of our contracts, we commit to long-term pricing with our
clients, and we negotiate pricing terms with our clients utilizing a range of pricing structures and conditions. Depending on the particular contract, these include input-based pricing (such as full-time equivalent-based pricing arrangements),
fixed-price arrangements, output-based pricing (such as transaction-based pricing), outcome-based pricing, and contracts with features of all these pricing models. Our pricing is highly dependent on our internal forecasts and predictions about our
projects and the marketplace, which are largely based on limited data and could turn out to be inaccurate. If we do not accurately estimate the costs and timing for completing projects, our contracts could prove unprofitable for us or yield lower
profit margins than anticipated. Some of our client contracts do not allow us to terminate the contracts except in the case of non-payment by our client. If any contract turns out to be economically non-viable for us, we may still be liable to
continue to provide services under the contract.
We intend to focus on increasing our service offerings that are based on non-linear pricing models (such
as fixed-price and outcome-based pricing models) that allow us to price our services based on the value we deliver to our clients rather than the headcount deployed to deliver the services to them. Non-linear revenues may be subject to short term
pressure on margins as initiatives in developing the products and services take time to deliver. The risk of entering into non-linear pricing arrangements is that if we fail to properly estimate the appropriate pricing for a project, we may incur
lower profits or losses as a result of being unable to execute projects with the amount of labor we expected or at a margin sufficient to recover our initial investments in our solutions. While non-linear pricing models are expected to result in
higher revenue productivity per employee and improved margins, they also mean that we continue to bear the risk of cost overruns, wage inflation, fluctuations in currency exchange rates and failure to achieve clients business objectives in
connection with these projects.
Our profit margin, and therefore our profitability, is largely a function of our asset utilization and the rates we are
able to recover for our services. An important component of our asset utilization is our seat utilization rate, which is the average number of work shifts per day, out of a maximum of three, for which we are able to utilize our work stations, or
seats. During fiscal 2016, 2015 and 2014, we incurred significant expenditures to increase our number of seats by establishing additional delivery centers or expanding production capacities in our existing delivery centers. During fiscal 2015, we
incurred costs to move our operations from one site in Gurgaon to another. If we are not able to maintain the pricing for our services or an appropriate seat utilization rate, without corresponding cost reductions, our profitability will suffer. The
rates we are able to recover for our services are affected by a number of factors, including our clients perceptions of our ability to add value through our services, competition, introduction of new services or products by us or our
competitors, our ability to accurately estimate, attain and sustain revenue from client contracts, margins and cash flows over increasingly longer contract periods and general economic and political conditions.
Our profitability is also a function of our ability to control our costs and improve our efficiency. As we increase the number of our employees and execute
our strategies for growth, we may not be able to manage the significantly larger and more geographically diverse workforce that may result, which could adversely affect our ability to control our costs or improve our efficiency. Further, because
there is no certainty that our business will ramp up at the rate that we anticipate, we may incur expenses for the increased capacity for a significant period of time without a corresponding growth in our revenue. Commencement of work and ramping up
of volume of work with certain new and existing clients have in the past been slower than we had expected and may in the future be slower than we expect. If our revenue does not grow at our expected rate, we may not be able to maintain or improve
our profitability.
77
We have in the past and may in the future enter into subcontracting arrangements for the delivery of
services. For example, in China, in addition to delivering services from our own delivery center, we used to deliver services through a subcontractors delivery center. We could face greater risk when pricing our outsourcing contracts, as
our outsourcing projects typically entail the coordination of operations and workforces with our subcontractor, and utilizing workforces with different skill sets and competencies. Furthermore, when outsourcing work we assume responsibility for our
subcontractors performance. Our pricing, cost and profit margin estimates on outsourced work may include anticipated long-term cost savings from transformational and other initiatives that we expect to achieve and sustain over the life of the
outsourcing contract. There is a risk that we will underprice our contracts, fail to accurately estimate the costs of performing the work or fail to accurately assess the risks associated with potential contracts. In particular, any increased or
unexpected costs, delays or failures to achieve anticipated cost savings, or unexpected risks we encounter in connection with the performance of this work, including those caused by factors outside our control, could make these contracts less
profitable or unprofitable, which could have an adverse effect on our profit margin
We have incurred losses in the past. We may not be profitable
in the future.
We incurred losses in each of the three fiscal years from fiscal 2003 through fiscal 2005. We expect our selling and marketing
expenses and general and administrative expenses to increase in future periods. If our revenue does not grow at a faster rate than these expected increases in our expenses, or if our operating expenses are higher than we anticipate, we may not be
profitable and we may incur losses.
We may not succeed in identifying suitable acquisition targets or integrating any acquired business into our
operations, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our growth
strategy involves gaining new clients and expanding our service offerings, both organically and through strategic acquisitions. It is possible that in the future we may not succeed in identifying suitable acquisition targets available for sale or
investments on reasonable terms, have access to the capital required to finance potential acquisitions or investments, or be able to consummate any acquisition or investments. Future acquisitions or joint ventures may also result in the incurrence
of indebtedness or the issuance of additional equity securities, which may present difficulties in financing the acquisition or joint venture on attractive terms. The inability to identify suitable acquisition targets or investments or the inability
to complete such transactions may affect our competitiveness and our growth prospects.
Historically, we have expanded some of our service offerings and
gained new clients through strategic acquisitions. For example, in November 2011, we acquired the shareholding of Advanced Contact Solutions, Inc., or ACS, our former joint venture partner in WNS Philippines Inc. and increased our share
ownership from 65% to 100%. The lack of profitability of any of our acquisitions or joint ventures could have a material adverse effect on our operating results.
In addition, our management may not be able to successfully integrate any acquired business into our operations or benefit from any joint ventures that we
enter into, and any acquisition we do complete or any joint venture we do enter into may not result in long-term benefits to us. For instance, if we acquire a company, we could experience difficulties in assimilating that companys personnel,
operations, technology and software, or the key personnel of the acquired company may decide not to work for us. In March 2016, we entered into a definitive agreement to acquire Value Edge Research Services Pvt. Ltd., or Value Edge, a provider of
commercial research and analytics services to clients in the pharma industry. The acquisition has been approved by the Reserve Bank of India in June 2016. On June 14, 2016 we acquired all outstanding equity shares of Value Edge. We, however, cannot
assure you that we will be able to successfully integrate Value Edges business operations with ours, or that we will be able to successfully leverage Value Edges assets to grow our revenue, expand our service offerings and market share
or achieve accretive benefits from our acquisition of Value Edge.
Further, we may receive claims or demands by the sellers of the entities acquired by us
on the indemnities that we have provided to them for losses or damages arising from any breach of contract by us. Conversely, while we may be able to claim against the sellers on their indemnities to us for breach of contract or breach of the
representations and warranties given by the sellers in respect of the entities acquired by us, there can be no assurance that our claims will succeed, or if they do, that we will be able to successfully enforce our claims against the sellers at a
reasonable cost. Acquisitions and joint ventures also typically involve a number of other risks, including diversion of managements attention, legal liabilities and the need to amortize acquired intangible assets, any of which could have a
material adverse effect on our business, results of operations, financial condition and cash flows.
78
We recorded a significant impairment charge to our earnings in fiscal 2008 and may be required to record
another significant charge to earnings in the future when we review our goodwill, intangible or other assets for potential impairment.
As at
June 30, 2016, we had goodwill and intangible assets of approximately $73.3 million and $22.0 million respectively, which primarily resulted from the purchases of Aviva Global Services Singapore Pte. Ltd., or Aviva Global (which we have renamed
as WNS Customer Solutions (Singapore) Private Limited, or WNS Global Singapore, following our acquisition), BizAps, Chang Limited, Flovate Technologies Limited, or Flovate, Fusion, Marketics Technologies (India) Private Limited, or Marketics,
Town & Country Assistance Limited (which we subsequently rebranded as WNS Assistance), and WNS Global Services Private Limited, or WNS Global. Of the $22.0 million of intangible assets as at June 30, 2016, $7.3 million pertain to our
purchase of Aviva Global. Under IFRS, we are required to review our goodwill, intangibles or other assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. In addition, goodwill, intangible or
other assets with indefinite lives are required to be tested for impairment at least annually. We performed an impairment review and recorded a significant impairment charge to our earnings in fiscal 2008 relating to Trinity Partners Inc. If, for
example, the insurance industry experiences a significant decline in business and we determine that we will not be able to achieve the cash flows that we had expected from our acquisition of Aviva Global, we may have to record an impairment of all
or a portion of the $7.3 million of intangible assets relating to our purchase of Aviva Global. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our
goodwill or other intangible assets is determined. Such charges may have a significant adverse impact on our results of operations.
We are
incorporated in Jersey, Channel Islands and are subject to Jersey rules and regulations. If the tax benefits enjoyed by our company are withdrawn or changed, we may be liable for higher tax, thereby reducing our profitability.
As a company incorporated in Jersey, Channel Islands, we are currently subject to no Jersey income tax rate. Although we continue to enjoy the benefits of the
Jersey business tax regime, if Jersey tax laws change or the tax benefits we enjoy are otherwise withdrawn or changed, we may become liable for higher tax, thereby reducing our profitability.
79
Risks Related to Key Delivery Locations
A substantial portion of our assets and operations are located in India and we are subject to regulatory, economic, social and political uncertainties in
India.
Our primary operating subsidiary, WNS Global, is incorporated in India, and a substantial portion of our assets and employees are located
in India. The Government of India, however, has exercised and continues to exercise significant influence over many aspects of the Indian economy. The Government of India has provided significant tax incentives and relaxed certain regulatory
restrictions in order to encourage foreign investment in specified sectors of the economy, including the business process management industry. Those programs that have benefited us include tax holidays, liberalized import and export duties and
preferential rules on foreign investment and repatriation. We cannot assure you that such liberalization policies will continue. The Government of India may also enact new tax legislation or amend the existing legislation that could impact the
way we are taxed in the future. For more information, see New tax legislation and the results of actions by taxing authorities may have an adverse effect on our operations and our overall tax rate. Other legislation passed by the
Government of India may also impact our business. For example, in December 2015, the Government of India amended the Payment of Bonus Act, 1965, which mandated increased employee bonus amounts for certain wage categories, effective retroactively
from April 1, 2014. As a result, our wage costs in India have increased. Our financial performance and the market price of our ADSs may be adversely affected by changes in inflation, exchange rates and controls, interest rates, Government of India
policies (including taxation regulations and policies), social stability or other political, economic or diplomatic developments affecting India in the future.
India has witnessed communal clashes in the past. Although such clashes in India have, in the recent past, been sporadic and have been contained within
reasonably short periods of time, any such civil disturbance in the future could result in disruptions in transportation or communication networks, as well as have adverse implications for general economic conditions in India. Such events could have
a material adverse effect on our business, the value of our ADSs and your investment in our ADSs.
The results of the United Kingdoms
referendum on withdrawal from the European Union may have a negative effect on our operations in the United Kingdom and European Union.
We have
operations delivery centers in the United Kingdom, Romania and Poland. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of
any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. The referendum has created significant uncertainty about the future
relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union-derived laws to replace or replicate in the event of a
withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. Any of these events may have an adverse effect on our operations in the United Kingdom and the European
Union, the value of our ADSs and your investment in our ADSs.
Our business in South Africa is evaluated for compliance with the South African
governments Broad-Based Black Economic Empowerment Act, or BBBEE, legislation. Failure to maintain a certain BBBEE rating may result in loss of certain government grants, and may also result in us losing certain business opportunities or
clients imposing contractual penalties on us.
Our business in South Africa is evaluated for compliance with the South African governments
BBBEE legislation against a BBBEE scorecard, based on various criteria. South African government grants are available to businesses that meet specified conditions, including achieving a specified BBBEE rating. Additionally, many South African
companies require their service providers to maintain certain BBBEE rating, and many of our South African client contracts contain clauses that allow our clients to terminate their contracts with us or impose specified penalties on us if we do not
maintain specified BBBEE rating.
Under the BBBEE criteria that were in effect prior to March 2016, we have achieved the required rating and are compliant
as per the BBBEE Act. This rating is valid till March 2017.
New BBBEE criteria will be coming into effect from March 2017, under the new regulations, the
seven elements of the existing regulations have been reduced to five elements comprising of shareholding, skill development, supplier development, management control and socio-economic development. We will be evaluated based on revised criteria in
March 2017. However, there is no assurance that we will successfully maintain our existing BBBEE rating under the new criteria. If we fail to achieve the required BBBEE rating, we may cease to be eligible for government grants, may be disqualified
from bidding for certain business, and our clients may terminate their contracts with us or may impose penalties on us. These outcomes can have an adverse effect on our business, results of operations, financial condition and cash flows. We are in
the process of implementing steps to meet each of the five criteria to ensure that we are compliant with the revised BBBEE rating within the provided timeline.
80
If the tax benefits and other incentives that we currently enjoy are reduced or withdrawn or not available
for any other reason, our financial condition would be negatively affected.
We have benefitted from, and continue to benefit from, certain tax
holidays and exemptions in various jurisdictions in which we have operations.
In the three months ended June 2016, fiscal 2016 and 2015, our tax rate in
India, the Philippines and Sri Lanka impacted our effective tax rate. We would have incurred approximately $1.0 million, $5.0 million and $3.0 million in additional income tax expense on our combined operations in our SEZ operations in India, the
Philippines and Sri Lanka for three months ended June 2016, fiscal 2016 and 2015 respectively, if the tax holidays and exemptions as described below had not been available for the respective periods.
We expect our tax rate in India, the Philippines and Sri Lanka to continue to impact our effective tax rate. Our effective tax rate in India may be impacted
by the reduction in the tax exemption enjoyed by units under the SEZ scheme.
For example, in the past, the majority of our Indian operations were
eligible to claim income tax exemption with respect to profits earned from export revenue from operating units registered under the Software Technology Parks of India, or STPI. The benefit was available for a period of 10 years from the date of
commencement of operations, but not beyond March 31, 2011. Effective April 1, 2011, upon the expiration of this tax exemption, income derived from our STPI operations in India became subject to the prevailing annual tax rate, which is
currently 34.61%, and was 34.61% in fiscal 2016 and 33.99% in fiscal 2015.
When any of our tax holidays or exemptions expire or terminate, or if the
applicable government withdraws or reduces the benefits of a tax holiday or exemption that we enjoy, our tax expense may materially increase and this increase may have a material impact on our results of operations. The applicable tax authorities
may also disallow deductions claimed by us and assess additional taxable income on us in connection with their review of our tax returns.
81
New tax legislation and the results of actions by taxing authorities may have an adverse effect on our
operations and our overall tax rate.
The Government of India may enact new tax legislation that could impact the way we are taxed in the future.
For example, the Government of India has clarified that, with retrospective effect from April 1, 1962, any income accruing or arising directly or indirectly through the transfer of capital assets situated in India will be taxable in India. If
any of our transactions are deemed to involve the direct or indirect transfer of a capital asset located in India, such transactions could be investigated by the Indian tax authorities, which could lead to the issuance of tax assessment orders and a
material increase in our tax liability. For example, we received requests for information from, and are in discussions with, the relevant income tax authority in India relating to our acquisition in July 2008 from Aviva of all the shares of
Aviva Global, which owned subsidiaries with assets in India and Sri Lanka. The Government of India has issued guidelines on General Anti Avoidance Rule, or the GAAR, which is currently expected to be effective April 1, 2017, and which is
intended to curb sophisticated tax avoidance. Under the GAAR, a business arrangement will be deemed an impermissible avoidance arrangement if the main purpose of the arrangement is to obtain tax benefits. Although the full implications
of the GAAR are presently still unclear, if we are deemed to have violated any of its provisions, we may face an increase to our tax liability.
The
Government of India, the US or other jurisdictions where we have a presence could enact new tax legislation which would have a material adverse effect on our business, results of operations and financial condition. In addition, our ability to
repatriate surplus earnings from our delivery centers in a tax-efficient manner is dependent upon interpretations of local laws, possible changes in such laws and the renegotiation of existing double tax avoidance treaties. Changes to any of these
may adversely affect our overall tax rate, or the cost of our services to our clients, which would have a material adverse effect on our business, results of operations and financial condition.
We are subject to transfer pricing and other tax related regulations and any determination that we have failed to comply with them could materially
adversely affect our profitability.
Transfer pricing regulations to which we are subject require that any international transaction among our
company and its subsidiaries, or the WNS group enterprises, be on arms-length terms. Transfer pricing regulations in India have been extended to cover specified Indian domestic transactions as well. We believe that the international and India
domestic transactions among the WNS group enterprises are on arms-length terms. If, however, the applicable tax authorities determine that the transactions among the WNS group enterprises do not meet arms-length criteria, we may incur
increased tax liability, including accrued interest and penalties. This would cause our tax expense to increase, possibly materially, thereby reducing our profitability and cash flows. We have signed an advance pricing agreement with the Government
of India providing for the agreement on transfer pricing matters over certain transactions covered thereunder for a period of five years starting from April 2013.
82
We may be required to pay additional taxes in connection with audits by the Indian tax authorities.
From time to time, we receive orders of assessment from Indian tax authorities assessing additional taxable income on us and/or our subsidiaries
in connection with their review of our tax returns. We currently have orders of assessment for fiscal 2004 through fiscal 2012 pending before various appellate authorities. These orders assess additional taxable income that could in the aggregate
give rise to an estimated
₹
2,798.2 million ($41.4 million based on the exchange rate on June 30, 2016) in additional taxes,
including interest of
₹
1,029.7 million ($15.2 million based on the exchange rate on June 30, 2016).
These orders of assessment allege that the transfer prices we applied to certain of the international transactions between WNS Global or WNS Business
Consulting Services Private Limited, or WNS BCS, each of which is one of our Indian subsidiaries, as the case may be, and our other wholly-owned subsidiaries were not on arms-length terms, disallow a tax holiday benefit claimed by us, deny the
set-off of brought forward business losses and unabsorbed depreciation and disallow certain expenses claimed as tax deductible by WNS Global or WNS BCS, as the case may be. As at June 30, 2016 we have provided a tax reserve of
₹
902.4 million ($13.4 million based on the exchange rate on June 30, 2016) primarily on account of the Indian tax authorities
denying the set off of brought forward business losses and unabsorbed depreciation. We have appealed against these orders of assessment before higher appellate authorities. For more details on these assessments, see Part I
Item 5 Operating and Financial Review and ProspectsTax Assessment Orders of our annual report on Form 20-F for our fiscal year ended March 31, 2016.
In addition, we currently have orders of assessment pertaining to similar issues that have been decided in our favor by first level appellate authorities,
vacating tax demands of
₹
2,847.8 million ($42.2 million based on the exchange rate on June 30, 2016) in additional taxes,
including interest of
₹
879.9 million ($13.0 million based on the exchange rate on June 30, 2016). The income tax authorities
have filed appeals against these orders at higher appellate authorities.
In case of disputes, the Indian tax authorities may require us to deposit with
them all or a portion of the disputed amounts pending resolution of the matters on appeal. Any amount paid by us as deposits will be refunded to us with interest if we succeed in our appeals. We have deposited a portion of the disputed amount with
the tax authorities and may be required to deposit the remaining portion of the disputed amount with the tax authorities pending final resolution of the respective matters.
As at March 31, 2016, corporate tax returns for fiscal years 2013 (for certain legal entities) and thereafter remain subject to examination by tax
authorities in India.
After consultation with our Indian tax advisors and based on the facts of these cases, certain legal opinions from counsel, the
nature of the tax authorities disallowances and the orders from first level appellate authorities deciding similar issues in our favor in respect of assessment orders for earlier fiscal years, we believe these orders are unlikely to be
sustained at the higher appellate authorities and we intend to vigorously dispute the orders of assessment.
In March 2009, we also received an
assessment order from the Indian Service Tax Authority demanding payment of
₹
348.1 million ($5.2 million based on the exchange rate
on June 30, 2016) of service tax and related penalty for the period from March 1, 2003 to January 31, 2005. The assessment order alleges that service tax is payable in India on BPM services provided by WNS Global to clients based
abroad as the export proceeds are repatriated outside India by WNS Global. In response to an appeal filed by us with the appellate tribunal against the assessment order in April 2009, the appellate tribunal has remanded the matter back to the
lower tax authorities to be adjudicated afresh. Based on consultations with our Indian tax advisors, we believe this order of assessment is more likely than not to be upheld in our favor. We intend to continue to vigorously dispute the assessment.
No assurance can be given, however, that we will prevail in our tax disputes. If we do not prevail, payment of additional taxes, interest and penalties
may adversely affect our results of operations, financial condition and cash flows. There can also be no assurance that we will not receive similar or additional orders of assessment in the future.
83
Terrorist attacks and other acts of violence involving India or its neighboring countries could adversely
affect our operations, resulting in a loss of client confidence and materially adversely affecting our business, results of operations, financial condition and cash flows.
Terrorist attacks and other acts of violence or war involving India or its neighboring countries may adversely affect worldwide financial markets and could
potentially lead to economic recession, which could adversely affect our business, results of operations, financial condition and cash flows. South Asia has, from time to time, experienced instances of civil unrest and hostilities among neighboring
countries, including India and Pakistan. In previous years, military confrontations between India and Pakistan have occurred in the region of Kashmir and along the India/Pakistan border. There have also been incidents in and near India such as the
bombings of the Taj Mahal Hotel and Oberoi Hotel in Mumbai in 2008, a terrorist attack on the Indian Parliament, troop mobilizations along the India/Pakistan border and an aggravated geopolitical situation in the region. Such military activity or
terrorist attacks in the future could influence the Indian economy by disrupting communications and making travel more difficult. Resulting political tensions could create a greater perception that investments in Indian companies involve a high
degree of risk. Such political tensions could similarly create a perception that there is a risk of disruption of services provided by India-based companies, which could have a material adverse effect on the market for our services. Furthermore, if
India were to become engaged in armed hostilities, particularly hostilities that were protracted or involved the threat or use of nuclear weapons, we might not be able to continue our operations.
Restrictions on entry visas may affect our ability to compete for and provide services to clients in the US and the UK, which could have a material
adverse effect on future revenue.
The vast majority of our employees are Indian nationals. The ability of some of our executives to work with and
meet our European and North American clients and our clients from other countries depends on the ability of our senior managers and employees to obtain the necessary visas and entry permits. In response to previous terrorist attacks and global
unrest, US and European immigration authorities have increased the level of scrutiny in granting visas. Immigration laws in those countries may also require us to meet certain other legal requirements as a condition to obtaining or maintaining entry
visas. These restrictions have significantly lengthened the time requirements to obtain visas for our personnel, which has in the past resulted, and may continue to result, in delays in the ability of our personnel to meet with our clients. In
addition, immigration laws are subject to legislative change and varying standards of application and enforcement due to political forces, economic conditions or other events, including terrorist attacks. We cannot predict the political or economic
events that could affect immigration laws or any restrictive impact those events could have on obtaining or monitoring entry visas for our personnel. If we are unable to obtain the necessary visas for personnel who need to visit our clients
sites or, if such visas are delayed, we may not be able to provide services to our clients or to continue to provide services on a timely basis, which could have a material adverse effect on our business, results of operations, financial condition
and cash flows.
If more stringent labor laws become applicable to us, our profitability may be adversely affected.
India has stringent labor legislation that protects the interests of workers, including legislation that sets forth detailed procedures for dispute resolution
and employee removal and legislation that imposes financial obligations on employers upon retrenchment. Though we are exempt from a number of these labor laws at present, there can be no assurance that such laws will not become applicable to the
business process management industry in India in the future. In addition, our employees may in the future form unions. If these labor laws become applicable to our workers or if our employees unionize, it may become difficult for us to maintain
flexible human resource policies, discharge employees or downsize, and our profitability may be adversely affected.
Most of our delivery centers
operate on leasehold property and our inability to renew our leases on commercially acceptable terms or at all may adversely affect our results of operations.
Most of our delivery centers operate on leasehold property. Our leases are subject to renewal and we may be unable to renew such leases on commercially
acceptable terms or at all. Our inability to renew our leases, or a renewal of our leases with a rental rate higher than the prevailing rate under the applicable lease prior to expiration, may have an adverse impact on our operations, including
disrupting our operations or increasing our cost of operations. In addition, in the event of non-renewal of our leases, we may be unable to locate suitable replacement properties for our delivery centers or we may experience delays in relocation
that could lead to a disruption in our operations. Any disruption in our operations could have an adverse effect on our results of operation.
84
Risks Related to our ADSs
Substantial future sales of our shares or ADSs in the public market could cause our ADS price to fall.
Sales by us or our shareholders of a substantial number of our ADSs in the public market, or the perception that these sales could occur, could cause the
market price of our ADSs to decline. These sales, or the perception that these sales could occur, also might make it more difficult for us to sell securities in the future at a time or at a price that we deem appropriate or to pay for acquisitions
using our equity securities. As at June 30, 2016, we had 50,817,089 ordinary shares (including 1,850,000 treasury shares), outstanding, including 50,604,112 shares represented by 50,604,112 ADSs. In addition, as at June 30, 2016, a total
of 4,098,830 ordinary shares or ADSs are issuable upon the exercise or vesting of options and restricted share units, or RSUs, outstanding under our 2002 Stock Incentive Plan and our Third Amended and Restated 2006 Incentive Award Plan. All ADSs are
freely transferable, except that ADSs owned by our affiliates may only be sold in the US if they are registered or qualify for an exemption from registration, including pursuant to Rule 144 under the Securities Act of 1933, as amended, or the
Securities Act. The remaining ordinary shares outstanding may also only be sold in the US if they are registered or qualify for an exemption from registration, including pursuant to Rule 144 under the Securities Act.
The market price for our ADSs may be volatile.
The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:
|
|
|
announcements of technological developments;
|
|
|
|
regulatory developments in our target markets affecting us, our clients or our competitors;
|
|
|
|
actual or anticipated fluctuations in our operating results;
|
|
|
|
changes in financial estimates by securities research analysts;
|
|
|
|
changes in the economic performance or market valuations of other companies engaged in business process management;
|
|
|
|
addition or loss of executive officers or key employees;
|
|
|
|
sales or expected sales of additional shares or ADSs;
|
|
|
|
loss of one or more significant clients; and
|
|
|
|
a change in control, or possible change of control, of our company.
|
In addition, securities markets generally
and from time to time experience significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.
85
We may not be able to pay any dividends on our shares and ADSs.
We have never declared or paid any dividends on our ordinary shares. We cannot give any assurance that we will declare dividends of any amount, at any rate or
at all. Because we are a holding company, we rely principally on dividends, if any, paid by our subsidiaries to us to fund our dividend payments, if any, to our shareholders. Any limitation on the ability of our subsidiaries to pay dividends to us
could have a material adverse effect on our ability to pay dividends to you.
Any future determination to pay cash dividends will be at the discretion of
our Board of Directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of
dividends and any other factors our Board of Directors deems relevant at the time.
Subject to the provisions of the Companies (Jersey) Law 1991, or the
1991 Law, and our Articles of Association, we may by ordinary resolution declare annual dividends to be paid to our shareholders according to their respective rights and interests in our distributable reserves. Any dividends we may declare must not
exceed the amount recommended by our Board of Directors. Our board may also declare and pay an interim dividend or dividends, including a dividend payable at a fixed rate, if paying an interim dividend or dividends appears to the Board to be
justified by our distributable reserves. We can only declare dividends if our directors who are to authorize the distribution make a prior statement that, having made full enquiry into our affairs and prospects, they have formed the opinion that:
|
|
immediately following the date on which the distribution is proposed to be made, we will be able to discharge our liabilities as they fall due; and
|
|
|
having regard to our prospects and to the intentions of our directors with respect to the management of our business and to the amount and character of the financial resources that will in their view be available to us,
we will be able to continue to carry on business and we will be able to discharge our liabilities as they fall due until the expiry of the period of 12 months immediately following the date on which the distribution is proposed to be made or until
we are dissolved under Article 150 of the 1991 Law, whichever first occurs.
|
Subject to the deposit agreement governing the issuance of
our ADSs, holders of ADSs will be entitled to receive dividends paid on the ordinary shares represented by such ADSs. See Risks Related to Our Business We, from time to time, enter into agreements for credit facilities, which
may impose operating and financial restrictions on us and our subsidiaries.
Holders of ADSs may be restricted in their ability to exercise
voting rights.
At our request, the depositary of the ADSs will mail to you any notice of shareholders meeting received from us together
with information explaining how to instruct the depositary to exercise the voting rights of the ordinary shares represented by ADSs. If the depositary timely receives voting instructions from you, it will endeavor to vote the ordinary shares
represented by your ADSs in accordance with such voting instructions. However, the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the ordinary shares on deposit. We
cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary in a timely manner. Ordinary shares for which no voting instructions have been received will not be voted.
As a foreign private issuer, we are not subject to the proxy rules of the Commission, which regulate the form and content of solicitations by US-based
issuers of proxies from their shareholders. The form of notice and proxy statement that we have been using does not include all of the information that would be provided under the Commissions proxy rules.
86
Holders of ADSs may be subject to limitations on transfers of their ADSs.
The ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems
necessary or advisable in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when the transfer books of the depositary are closed, or at any time or from
time to time if we or the depositary deem it necessary or advisable to do so because of any requirement of law or of any government or governmental body or commission or any securities exchange on which the American Depositary Receipts or our
ordinary shares are listed, or under any provision of the deposit agreement or provisions of or governing the deposited shares, or any meeting of our shareholders, or for any other reason.
Holders of ADSs may not be able to participate in rights offerings or elect to receive share dividends and may experience dilution of their holdings,
and the sale, deposit, cancellation and transfer of our ADSs issued after exercise of rights may be restricted.
If we offer our shareholders any
rights to subscribe for additional shares or any other rights, the depositary may make these rights available to them after consultation with us. We cannot make rights available to holders of our ADSs in the US unless we register the rights and the
securities to which the rights relate under the Securities Act, or an exemption from the registration requirements is available. In addition, under the deposit agreement, the depositary will not distribute rights to holders of our ADSs unless we
have requested that such rights be made available to them and the depositary has determined that such distribution of rights is lawful and reasonably practicable. We can give no assurance that we can establish an exemption from the registration
requirements under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of
our ADSs may be unable to participate in our rights offerings and may experience dilution of your holdings as a result. The depositary may allow rights that are not distributed or sold to lapse. In that case, holders of our ADSs will receive no
value for them. In addition, US securities laws may restrict the sale, deposit, cancellation and transfer of ADSs issued after exercise of rights.
We may be classified as a passive foreign investment company, which could result in adverse US federal income tax consequences to US Holders of our ADSs
or ordinary shares.
Based on our financial statements and relevant market and shareholder data, we believe that we should not be treated as a
passive foreign investment company for US federal income tax purposes, or PFIC, with respect to our most recently closed taxable year. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot
assure you that we will not be a PFIC for any taxable year. A non-US corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its
assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. A separate determination must be made after the close of each
taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs and ordinary shares, fluctuations in the market price of
the ADSs and ordinary shares may cause us to become a PFIC. In addition, changes in the composition of our income or assets may cause us to become a PFIC. If we are a PFIC for any taxable year during which a US Holder (as defined in
Part I Item 10. Additional Information E. Taxation US Federal Income Taxation) holds an ADS or ordinary share, certain adverse US federal income tax consequences could apply to such US Holder.
87
Our share repurchase program could affect the price of our ADSs.
Our Board of Directors and shareholders have authorized the repurchase of up to 3.3 million of our ADSs, each representing one ordinary share, at a price
range of $10 to $50 per ADS, in the open market from time to time over the next thirty-six (36) months from the date of our shareholders approval on March 16, 2016. Any repurchases pursuant to our repurchase program could affect the price
of our ADSs and increase its volatility. The existence of a repurchase program could also cause the price of our ADSs to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity of our ADSs. There
can be no assurance that any repurchases will enhance shareholder value because the market price of our ADSs may decline below the levels at which we repurchase any ADSs. In addition, although our repurchase program is intended to enhance long-term
shareholder value, short-term price fluctuations in our ADSs could reduce the programs effectiveness. Significant changes in the price of our ADSs and our ability to fund our proposed repurchase program with cash on hand could impact our
ability to repurchase ADSs. The timing and amount of future repurchases is dependent on our cash flows from operations, available cash on hand and the market price of our ADSs. Furthermore, the program does not obligate our Company to repurchase any
dollar amount or number of ADSs and may be suspended or discontinued at any time, and any suspension or discontinuation could cause the market price of our ADSs to decline.
We have certain anti-takeover provisions in our Articles of Association that may discourage a change in control.
Our Articles of Association contain anti-takeover provisions that could make it more difficult for a third party to acquire us without the consent of our
Board of Directors. These provisions include:
|
|
a classified Board of Directors with staggered three-year terms; and
|
|
|
the ability of our Board of Directors to determine the rights, preferences and privileges of our preferred shares and to issue the preferred shares without shareholder approval, which could be exercised by our Board of
Directors to increase the number of outstanding shares and prevent or delay a takeover attempt.
|
These provisions could make it more
difficult for a third party to acquire us, even if the third partys offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
It may be difficult for you to effect service of process and enforce legal judgments against us or our affiliates.
We are incorporated in Jersey, Channel Islands, and our primary operating subsidiary, WNS Global, is incorporated in India. A majority of our directors and
senior executives are not residents of the US and virtually all of our assets and the assets of those persons are located outside the US. As a result, it may not be possible for you to effect service of process within the US upon those persons or
us. In addition, you may be unable to enforce judgments obtained in courts of the US against those persons outside the jurisdiction of their residence, including judgments predicated solely upon the securities laws of the US.
88
Part IV OTHER INFORMATION
Share Repurchases
In March 2016, our shareholders
authorized a share repurchase program for the repurchase of up to 3.3 million of our ADSs, each representing one share, at a price range of $10 to $50 per ADS. Pursuant to the terms of the repurchase program, our ADSs may be purchased in the open
market from time to time for 36 months from March 16, 2016, the date the shareholders resolution approving the repurchase program was passed. We intend to fund the repurchase program with cash on hand. We are not obligated under the repurchase
program to repurchase a specific number of ADSs, and the repurchase program may be suspended at any time at our discretion. We intend to hold the shares underlying any such repurchased ADSs as treasury shares.
The table below sets forth the details of ADSs repurchased during the three months ended June 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
No. of ADSs
purchased
|
|
|
Average price paid
per ADS (in $) *
|
|
|
Total number of ADSs
purchased as part of
publicly announced
plans or programs
|
|
|
Approximate U.S
dollar value (in 000s) of
ADSs that may yet
be
repurchased
under the program
(assuming purchase
price of $50 per
ADS)
|
|
|
|
|
|
|
Month # 1 (1 April to 30 April 2016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
165,000
|
|
|
|
|
|
|
1 May to 31 May 2016
|
|
|
39,732
|
|
|
|
30.39
|
|
|
|
39,732
|
|
|
|
163,013
|
|
|
|
|
|
|
1 June to 30 June 2016
|
|
|
710,268
|
|
|
|
30.49
|
|
|
|
710,268
|
|
|
|
127,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
750,000
|
|
|
|
30.49
|
|
|
|
750,000
|
|
|
$
|
127,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
excludes transaction costs
|
Equity issuances
We disclosed in Item 16G of our
Form 20-F
filed on May 12, 2016: We are not aware of any significant
differences between our corporate governance practices and those required to be followed by US issuers under the NYSE listing standards. As a foreign private issuer, we are exempt from the rules under the Exchange Act governing the furnishing and
content of proxy statements, including disclosure relating to any conflicts of interests concerning the issuers compensation consultants, and our directors, senior management and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Historically, we have chosen to seek shareholder approval for our equity compensation plans, although neither local law nor SEC rules require
such approval.
Subsequent to the filing of our
Form 20-F,
on May 31, 2016, our Third Amended and Restated
2006 Incentive Award Plan expired pursuant to its terms. On June 1, 2016, June 14, 2016 and July 13, 2016, we issued 44,284 restricted share units to certain members of our management and certain of our board members under an exemption
from registration under the United States federal securities laws. We did not seek shareholder approval for these issuances as they are not required under the laws of Jersey.
89