Revenue by Location of Delivery Centers
For the three months ended December 31, 2012 and 2011, our revenue and revenue less repair payments were derived from the following geographies (based on the location of our delivery centers) in the
proportions set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
As a percentage
of
revenue less repair payments
|
|
|
|
Three months ended December 31,
|
|
|
Three months ended December 31,
|
|
Location of Delivery Center
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
India
|
|
|
66.7
|
%
|
|
|
64.0
|
%
|
|
|
70.6
|
%
|
|
|
77.2
|
%
|
UK
|
|
|
13.0
|
%
|
|
|
25.4
|
%
|
|
|
7.8
|
%
|
|
|
10.1
|
%
|
Philippines
|
|
|
5.8
|
%
|
|
|
4.6
|
%
|
|
|
6.1
|
%
|
|
|
5.5
|
%
|
Romania
|
|
|
2.2
|
%
|
|
|
2.2
|
%
|
|
|
2.4
|
%
|
|
|
2.6
|
%
|
Sri Lanka
|
|
|
2.4
|
%
|
|
|
1.5
|
%
|
|
|
2.5
|
%
|
|
|
1.8
|
%
|
United States
|
|
|
1.4
|
%
|
|
|
1.2
|
%
|
|
|
1.4
|
%
|
|
|
1.5
|
%
|
Costa Rica
|
|
|
1.6
|
%
|
|
|
1.0
|
%
|
|
|
1.8
|
%
|
|
|
1.2
|
%
|
South Africa
(1)
|
|
|
6.2
|
%
|
|
|
0.1
|
%
|
|
|
6.6
|
%
|
|
|
0.1
|
%
|
Poland
(2)
|
|
|
0.3
|
%
|
|
|
|
|
|
|
0.3
|
%
|
|
|
|
|
China
(3)
|
|
|
0.4
|
%
|
|
|
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
(1)
|
Revenue from Fusion, which we acquired in June 2012.
|
|
(2)
|
This facility became operational from October 2012.
|
|
(3)
|
Revenue from services provided through our subcontractors delivery center in China, which services commenced during the three months ended December 31, 2012.
|
For the nine months ended December 31, 2012 and 2011, our revenue and revenue less repair payments were derived from the
following geographies (based on the location of our delivery centers) in the proportions set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
As a percentage
of
revenue less repair payments
|
|
|
|
Nine months ended December 31,
|
|
|
Nine months ended December 31,
|
|
Location of Delivery Center
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
India
|
|
|
69.2
|
%
|
|
|
64.3
|
%
|
|
|
73.0
|
%
|
|
|
78.5
|
%
|
UK
|
|
|
13.0
|
%
|
|
|
26.1
|
%
|
|
|
8.2
|
%
|
|
|
9.7
|
%
|
Philippines
|
|
|
5.8
|
%
|
|
|
4.1
|
%
|
|
|
6.1
|
%
|
|
|
5.0
|
%
|
Romania
|
|
|
2.3
|
%
|
|
|
2.3
|
%
|
|
|
2.5
|
%
|
|
|
2.8
|
%
|
Sri Lanka
|
|
|
2.2
|
%
|
|
|
1.5
|
%
|
|
|
2.3
|
%
|
|
|
1.9
|
%
|
United States
|
|
|
1.6
|
%
|
|
|
0.7
|
%
|
|
|
1.7
|
%
|
|
|
0.9
|
%
|
Costa Rica
|
|
|
1.4
|
%
|
|
|
0.9
|
%
|
|
|
1.5
|
%
|
|
|
1.1
|
%
|
South Africa
(1)
|
|
|
4.4
|
%
|
|
|
0.1
|
%
|
|
|
4.6
|
%
|
|
|
0.1
|
%
|
Poland
(2)
|
|
|
0.1
|
%
|
|
|
|
|
|
|
0.1
|
%
|
|
|
|
|
China
(3)
|
|
|
0.2
|
%
|
|
|
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
(1)
|
Revenue from Fusion, which we acquired in June 2012.
|
|
(2)
|
This facility became operational from October 2012.
|
|
(3)
|
Revenue from services provided through our subcontractors delivery center in China, which services commenced during the three months ended December 31, 2012.
|
Page
37
Our Contracts
We provide our services under contracts with our clients, the majority of which have terms ranging between three and eight 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 notice periods ranging from three to six months. 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 BPO segment, we charge for our services based on the following pricing models:
1)
|
per full-time equivalent arrangements, which typically involve billings based on the number of full-time employees (or equivalent) deployed on the execution of the
business process outsourced;
|
2)
|
per transaction arrangements, which typically involve billings based on the number of transactions processed (such as the number of e-mail responses, or airline coupons
or insurance claims processed);
|
3)
|
fixed-price arrangements, which typically involve billings based on achievements of pre-defined deliverables or milestones;
|
4)
|
outcome-based arrangements, which typically involve billings based on the business result achieved by our clients through our service efforts (such as measured based on
a reduction in days sales outstanding, an improvement in working capital, an increase in collections or a reduction in operating expenses); or
|
5)
|
other pricing arrangements, including cost-plus arrangements, which typically involve billing the contractually agreed direct and indirect costs and a fee based on the
number of employees deployed under the arrangement.
|
Apart from the above-mentioned pricing methods, a small portion of our
revenue is comprised of 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 our WNS Auto Claims BPO 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.
Page
38
Revenue by Contract Type
For the three months ended December 31, 2012 and 2011, our revenue and revenue less repair payments 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
|
|
|
|
Three months ended December 31,
|
|
|
Three months ended December 31,
|
|
Contract Type
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Full-time-equivalent
|
|
|
59.6
|
%
|
|
|
50.6
|
%
|
|
|
63.1
|
%
|
|
|
61.1
|
%
|
Transaction
|
|
|
29.7
|
%
|
|
|
39.0
|
%
|
|
|
25.6
|
%
|
|
|
26.4
|
%
|
Fixed price
|
|
|
5.9
|
%
|
|
|
5.3
|
%
|
|
|
6.2
|
%
|
|
|
6.3
|
%
|
Outcome-based
|
|
|
1.1
|
%
|
|
|
1.6
|
%
|
|
|
1.2
|
%
|
|
|
2.0
|
%
|
Others
|
|
|
3.7
|
%
|
|
|
3.5
|
%
|
|
|
3.9
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended December 31, 2012 and 2011, our revenue and revenue less repair payments 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
|
|
|
|
Nine months ended December 31,
|
|
|
Nine months ended December 31,
|
|
Contract Type
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Full-time-equivalent
|
|
|
58.8
|
%
|
|
|
50.1
|
%
|
|
|
62.1
|
%
|
|
|
61.2
|
%
|
Transaction
|
|
|
30.1
|
%
|
|
|
39.4
|
%
|
|
|
26.3
|
%
|
|
|
26.0
|
%
|
Fixed price
|
|
|
6.3
|
%
|
|
|
5.4
|
%
|
|
|
6.7
|
%
|
|
|
6.5
|
%
|
Outcome-based
|
|
|
1.1
|
%
|
|
|
1.6
|
%
|
|
|
1.1
|
%
|
|
|
2.0
|
%
|
Others
|
|
|
3.7
|
%
|
|
|
3.5
|
%
|
|
|
3.8
|
%
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our prior contracts with a major client, Aviva International Holdings Limited, or AVIVA, granted Aviva Global the option
to require us to transfer our facilities at Pune and Sri Lanka to Aviva Global. The Sri Lanka facility was transferred at book value and did not result in a material gain or loss, although we lost the revenue generated by the facility upon our
transfer of the facility to Aviva Global. With the transaction that we entered into with AVIVA in July 2008 described below, we have, through the acquisition of Aviva Global, resumed control of the Sri Lanka facility and we have continued to retain
ownership of the Pune facility and we expect these facilities to continue to generate revenue for us under the AVIVA master services agreement described below. However we may in the future enter into contracts with other clients with similar call
options that may result in the loss of revenue and may have a material impact on our business, results of operations, financial condition and cash flows, particularly during the quarter in which the option takes effect.
Page
39
In July 2008, we entered into a transaction with AVIVA consisting of a share sale and purchase agreement
with AVIVA and a master services agreement with Aviva MS. Pursuant to the share sale and purchase agreement with AVIVA, we acquired all the shares of Aviva Global in July 2008.
Pursuant to the master services agreement with Aviva MS, or the AVIVA master services agreement, we provide BPO services to AVIVAs UK and Canadian businesses for a term of eight years and four
months. Under the terms of the agreement, we have agreed to provide a comprehensive spectrum of life and general insurance processing functions to AVIVA, including policy administration and settlement, along with finance and accounting, customer
care and other support services. In addition, we have the exclusive right to provide certain services such as finance and accounting, insurance back-office, customer interaction and analytics services to AVIVAs UK and Canadian businesses for
the first five years, subject to the rights and obligations of the AVIVA group under their existing contracts with other providers. In March 2009, we entered into a variation deed to the AVIVA master services agreement pursuant to which we commenced
provision of services to AVIVAs Irish subsidiary, Hibernian Aviva Direct Limited, and certain of its affiliates. AVIVAs Canadian business has ceased to require our BPO services and we are currently providing BPO services to AVIVAs
UK business and AVIVAs Irish subsidiary, Hibernian Aviva Direct Limited, and certain of its affiliates.
Our clients customarily provide
one to three month rolling forecasts of their service requirements. Our contracts with our clients do not generally provide for a committed minimum volume of business or committed amounts of revenue, except for the AVIVA master services agreement
that we entered into in July 2008 as described above. Aviva MS has agreed to provide a minimum volume of business, or minimum volume commitment, to us during the term of the contract. The minimum volume commitment is calculated as 3,000 billable
full-time employees, where one billable full time employee is the equivalent of a production employee engaged by us to perform our obligations under the contract for one working day of at least nine hours for 250 days a year. In August 2009, we
entered into a variation agreement to the AVIVA master services agreement pursuant to which Aviva MS agreed to increase the minimum volume commitment from the current 3,000 billable full time employees to 3,300 billable full time employees for a
period of 17 months from March 1, 2010 to July 31, 2011 and to 3,250 billable full time employees for a period of six months from August 1, 2011 to January 31, 2012. The minimum volume commitment has since reverted to 3,000
billable full time employees for the remaining term of the AVIVA master services agreement. In the event the mean average monthly volume of business in any rolling three-month period does not reach the minimum volume commitment, Aviva MS has agreed
to pay us a minimum commitment fee as liquidated damages. Notwithstanding the minimum volume commitment, there are termination at will provisions which permit Aviva MS to terminate the AVIVA master services agreement without cause, with six
months notice upon payment of a termination fee. The annual minimum volume commitment under this contract was met until fiscal 2012. Based on Aviva MSs latest forecast of its service requirements for fiscal 2013 provided to us, we expect
them to meet their annual minimum volume commitment under this contract in fiscal 2013.
Under the terms of our agreement with one of our top
five clients negotiated in December 2009, we are 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 expires 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 the
new contract with this client. The early termination of the old 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 will be deferred over the term of the new agreement (i.e., over the period from April 1, 2010 to December 31, 2015).
Page
40
Expenses
The majority of our expenses comprise cost of revenue and operating expenses. The key components of our cost of revenue are employee costs, facilities costs, payments to repair centers, depreciation 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) / expenses, 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. 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. We expect our employee costs to increase as we expect to increase our headcount to service additional business and as wages continue to increase in India. We
seek to mitigate these cost increases through improvements in employee productivity, employee retention and asset utilization.
Our WNS Auto
Claims BPO segment includes repair management services, where we arrange for automobile repairs through a network of third party repair centers. The value of these payments in any given period 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, 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.
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.
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 / (gains), net
Foreign exchange gains or losses, net include:
|
|
marked to market gains or losses on derivative instruments;
|
|
|
foreign currency exchange gains or losses on translation of other assets and liabilities; and
|
|
|
unrealized foreign currency exchange gains or losses on revaluation of other assets and liabilities.
|
Amortization of intangible assets
Amortization of intangible assets is associated with our acquisitions of Marketics Technologies (India) Private Limited, or Marketics, in May 2007,
Flovate Technologies Limited, or Flovate, in June 2007, Accidents Happen Assistance Limited (formerly known as Call 24-7), or AHA, in April 2008, Business Applications Associates Limited, or BizAps Limited, in June 2008, Aviva Global in July 2008
and Fusion in June 2012.
Other income net
Other income, net comprise interest income and income or loss from sale of property and equipment and other miscellaneous expenses.
Finance expense
Finance expense primarily relates to interest charges payable on our term
loan and short-term borrowings.
Page
41
Operating Data
The following table presents certain operating data as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
September 30,
2012
|
|
|
June 30,
2012
|
|
|
March 31,
2011
|
|
|
December 31,
2011
|
|
|
September 30,
2011
|
|
Total head count
|
|
|
25,931
|
|
|
|
25,714
|
|
|
|
25,939
|
|
|
|
23,874
|
|
|
|
22,697
|
|
|
|
21,565
|
|
Built up seats
(1)
|
|
|
21,547
|
|
|
|
21,437
|
|
|
|
20,314
|
|
|
|
18,928
|
|
|
|
17,991
|
|
|
|
17,915
|
|
Used seats
(1)
|
|
|
15,589
|
|
|
|
15,928
|
|
|
|
15,546
|
|
|
|
14,082
|
|
|
|
13,826
|
|
|
|
13,336
|
|
Note:
(1)
|
Built up seats refer to the total number of production seats (excluding support functions like Finance, Human Resource and Administration) 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 the headcount.
|
Results of Operations
The following table sets forth certain financial information as a percentage of revenue and revenue less repair payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
|
|
|
|
|
|
|
|
|
|
Revenue less
|
|
|
|
|
|
|
|
|
Revenue less
|
|
|
|
|
|
|
|
|
|
repair
|
|
|
|
|
|
|
|
|
Repair
|
|
|
|
Revenue
|
|
|
payments
|
|
|
Revenue
|
|
|
Payments
|
|
|
|
Three months ended December 31,
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Cost of revenue
|
|
|
67.3
|
%
|
|
|
70.0
|
%
|
|
|
65.3
|
%
|
|
|
63.9
|
%
|
|
|
67.3
|
%
|
|
|
72.8
|
%
|
|
|
65.5
|
%
|
|
|
66.8
|
%
|
Gross profit
|
|
|
32.7
|
%
|
|
|
30.0
|
%
|
|
|
34.7
|
%
|
|
|
36.1
|
%
|
|
|
32.7
|
%
|
|
|
27.2
|
%
|
|
|
34.5
|
%
|
|
|
33.2
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
6.5
|
%
|
|
|
5.5
|
%
|
|
|
6.8
|
%
|
|
|
6.6
|
%
|
|
|
6.6
|
%
|
|
|
5.6
|
%
|
|
|
6.9
|
%
|
|
|
6.8
|
%
|
General and administrative expenses
|
|
|
12.5
|
%
|
|
|
10.7
|
%
|
|
|
13.3
|
%
|
|
|
12.9
|
%
|
|
|
12.6
|
%
|
|
|
10.6
|
%
|
|
|
13.3
|
%
|
|
|
13.0
|
%
|
Foreign exchange loss /(gains), net
|
|
|
1.7
|
%
|
|
|
0.9
|
%
|
|
|
1.8
|
%
|
|
|
1.1
|
%
|
|
|
1.9
|
%
|
|
|
(0.6
|
)%
|
|
|
2.0
|
%
|
|
|
(0.7
|
)%
|
Amortization of intangible assets
|
|
|
5.5
|
%
|
|
|
6.0
|
%
|
|
|
5.8
|
%
|
|
|
7.2
|
%
|
|
|
5.8
|
%
|
|
|
6.2
|
%
|
|
|
6.1
|
%
|
|
|
7.6
|
%
|
Operating profit
|
|
|
6.5
|
%
|
|
|
6.9
|
%
|
|
|
6.9
|
%
|
|
|
8.3
|
%
|
|
|
5.8
|
%
|
|
|
5.4
|
%
|
|
|
6.2
|
%
|
|
|
6.5
|
%
|
Other income, net
|
|
|
(1.0
|
)%
|
|
|
(0.1
|
)%
|
|
|
(1.1
|
)%
|
|
|
(0.2
|
)%
|
|
|
(0.9
|
)%
|
|
|
(0.1
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.1
|
)%
|
Finance expense
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
|
|
1.0
|
%
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
Provision for income taxes
|
|
|
1.8
|
%
|
|
|
2.8
|
%
|
|
|
1.9
|
%
|
|
|
3.3
|
%
|
|
|
2.1
|
%
|
|
|
2.3
|
%
|
|
|
2.2
|
%
|
|
|
2.8
|
%
|
Profit
|
|
|
5.0
|
%
|
|
|
3.5
|
%
|
|
|
5.3
|
%
|
|
|
4.2
|
%
|
|
|
3.9
|
%
|
|
|
2.3
|
%
|
|
|
4.1
|
%
|
|
|
2.8
|
%
|
Page
42
The following table reconciles revenue less repair payments (a non-GAAP measure) to revenue (a GAAP measure)
and sets forth payments to repair centers and revenue less repair payments as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
120.2
|
|
|
$
|
117.2
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
$
|
341.1
|
|
|
$
|
360.8
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Less: Payments to repair centers
|
|
|
6.7
|
|
|
|
20.0
|
|
|
|
6
|
%
|
|
|
17
|
%
|
|
|
17.7
|
|
|
|
65.6
|
|
|
|
5
|
%
|
|
|
18
|
%
|
Revenue less repair payments
|
|
$
|
113.5
|
|
|
$
|
97.2
|
|
|
|
94
|
%
|
|
|
83
|
%
|
|
$
|
323.4
|
|
|
$
|
295.2
|
|
|
|
95
|
%
|
|
|
82
|
%
|
The following table presents our results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(US dollars in millions)
|
|
Revenue
|
|
$
|
120.2
|
|
|
$
|
117.2
|
|
|
$
|
341.1
|
|
|
$
|
360.8
|
|
Cost of revenue
(1)
|
|
|
80.8
|
|
|
|
82.1
|
|
|
|
229.6
|
|
|
|
262.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
39.3
|
|
|
|
35.1
|
|
|
|
111.5
|
|
|
|
98.1
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
(2)
|
|
|
7.8
|
|
|
|
6.4
|
|
|
|
22.4
|
|
|
|
20.1
|
|
General and administrative expenses
(3)
|
|
|
15.1
|
|
|
|
12.5
|
|
|
|
42.9
|
|
|
|
38.4
|
|
Foreign exchange loss / (gains), net
|
|
|
2.1
|
|
|
|
1.1
|
|
|
|
6.6
|
|
|
|
(2.1
|
)
|
Amortization of intangible assets
|
|
|
6.6
|
|
|
|
7.0
|
|
|
|
19.7
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
7.8
|
|
|
|
8.1
|
|
|
|
19.9
|
|
|
|
19.3
|
|
Other income, net
|
|
|
(1.3
|
)
|
|
|
(0.2
|
)
|
|
|
(3.2
|
)
|
|
|
(0.3
|
)
|
Finance expense
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
2.8
|
|
|
|
3.1
|
|
Provision for income taxes
|
|
|
2.2
|
|
|
|
3.2
|
|
|
|
7.1
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
|
|
$
|
6.1
|
|
|
$
|
4.0
|
|
|
$
|
13.2
|
|
|
$
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
(1)
|
Includes share-based compensation expense of $0.02 million and $0.7 million for the three and nine months ended December 31, 2012, respectively, and $0.2
million and $0.7 million for the three and nine months ended December 31, 2011, respectively.
|
|
(2)
|
Includes share-based compensation expense of $0.1 million and $0.4 million for the three and nine months ended December 31, 2012, respectively, and
$0.04 million and $0.3 million for the three and nine months ended December 31, 2011, respectively.
|
|
(3)
|
Includes share-based compensation expense of $1.2 million and $3.3 million for the three and nine months ended December 31, 2012, respectively, and
$0.9 million and $2.6 million for the three and nine months ended December 31, 2011, respectively.
|
Page
43
Results for three months ended December 31, 2012 compared to the three months ended
December 31, 2011
Revenue
The following table sets forth our revenue and percentage change in revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
% Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
120.2
|
|
|
$
|
117.2
|
|
|
$
|
3.0
|
|
|
|
2.5
|
%
|
The increase in revenue of $3.0 million was primarily attributable to revenue from new clients of $9.5 million partially
offset by decrease in revenue from existing clients of $6.5 million. The increase in revenue is primarily due to higher revenue from retail and consumer packaged goods, or CPG, insurance, utilities and travel and leisure verticals, including
revenue contribution of $4.5 million from Fusion, which we acquired in June 2012. The decrease in revenue from existing clients was primarily attributable to our auto claims business on account of the termination of a contract with a large client in
April 2012 to whom we had provided repair management services. As we acted as principal in our dealings with third party repair centers and this client, we accounted for the amounts received from this client for payments to repair centers as revenue
and the payments made to repair centers in connection with our services provided to this client as cost of revenue (see Overview). The termination of this contract resulted in a decrease in revenue, with a corresponding decrease
of the same amount in our cost of revenue.
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 December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
UK
|
|
$
|
64.5
|
|
|
$
|
72.1
|
|
|
|
53.6
|
%
|
|
|
61.5
|
%
|
North America (primarily the US)
|
|
$
|
34.7
|
|
|
$
|
34.9
|
|
|
|
28.9
|
%
|
|
|
29.8
|
%
|
Europe (excluding the UK)
|
|
$
|
7.3
|
|
|
$
|
6.8
|
|
|
|
6.1
|
%
|
|
|
5.8
|
%
|
Rest of World
|
|
$
|
13.7
|
|
|
$
|
3.4
|
|
|
|
11.4
|
%
|
|
|
2.9
|
%
|
The decrease in revenue from the UK region is primarily attributable to the termination of a contract with a large client
in our auto claims business in April 2012 to whom we had provided repair management services as discussed above. The increase in revenue in Rest of World region was primarily due to revenue from new clients in the region.
Page
44
Revenue less repair payments
The following table sets forth our revenue less repair payments and percentage change in revenue less repair payments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
% Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
Revenue less repair payments
|
|
$
|
113.5
|
|
|
$
|
97.2
|
|
|
$
|
16.3
|
|
|
|
16.8
|
%
|
The increase in revenue less repair payments of $16.3 million was primarily attributable to increases in revenue less
repair payments from new clients of $8.5 million and revenue less repair payments from existing clients of $7.8 million including revenue less repair payments contribution of $4.5 million from Fusion, which we acquired in June 2012. The increase in
revenue less repair payments was primarily due to higher volumes in our retail and CPG, insurance, utilities, and travel and leisure verticals.
Revenue less repair payments by geography
The following table sets forth the composition of our revenue less repair payments based on the location of our clients in our key geographies for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
|
|
|
|
Revenue less repair payments
|
|
|
revenue less repair
payments
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
UK
|
|
$
|
57.8
|
|
|
$
|
52.1
|
|
|
|
50.9
|
%
|
|
|
53.6
|
%
|
North America (primarily the US)
|
|
$
|
34.7
|
|
|
$
|
34.9
|
|
|
|
30.6
|
%
|
|
|
35.9
|
%
|
Europe (excluding the UK)
|
|
$
|
7.3
|
|
|
$
|
6.8
|
|
|
|
6.4
|
%
|
|
|
7.0
|
%
|
Rest of World
|
|
$
|
13.7
|
|
|
$
|
3.4
|
|
|
|
12.1
|
%
|
|
|
3.5
|
%
|
The increase in revenue less repair payments in the UK and Rest of World regions was primarily due to revenue from new
customers in the region.
Page
45
Cost of revenue
The following table sets forth the composition of our cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Cost of revenue
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Employee costs
|
|
$
|
44.7
|
|
|
$
|
38.2
|
|
|
$
|
6.5
|
|
Facilities costs
|
|
|
16.1
|
|
|
|
13.2
|
|
|
|
2.9
|
|
Repair payments
|
|
|
6.7
|
|
|
|
20.0
|
|
|
|
(13.4
|
)
|
Depreciation costs
|
|
|
3.7
|
|
|
|
3.9
|
|
|
|
(0.1
|
)
|
Travel costs
|
|
|
2.7
|
|
|
|
1.7
|
|
|
|
1.0
|
|
Legal and professional costs
|
|
|
2.0
|
|
|
|
0.8
|
|
|
|
1.3
|
|
Other costs
|
|
|
4.8
|
|
|
|
4.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
80.8
|
|
|
$
|
82.1
|
|
|
$
|
(1.3
|
)
|
As a percentage of revenue
|
|
|
67.3
|
%
|
|
|
70.0
|
%
|
|
|
|
|
The decrease in repair payments was primarily attributable to the termination of a contract with a large client in our
auto claims business in April 2012 to whom we had provided repair management services as discussed above. The decrease was partially offset by an increase in employee costs due to wage increments and increase in facilities costs due to the expansion
of facilities in Chennai, and the Philippines, and the addition of new facilities in Poland, US and South Africa. The increase in travel costs was primarily attributable to project transition related travel whereas increase in legal and professional
costs was primarily attributable to higher professional fees. The impact of depreciation of the Indian rupee against the US dollar by an average of 6.5% in the three months ended December 31, 2012 as compared to the three months ended
December 31, 2011 partially offset these increases and also accounted for the marginal decrease in other costs.
Gross profit
The following table sets forth our gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Gross profit
|
|
$
|
39.3
|
|
|
$
|
35.1
|
|
|
$
|
4.2
|
|
As a percentage of revenue
|
|
|
32.7
|
%
|
|
|
30.0
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
34.7
|
%
|
|
|
36.1
|
%
|
|
|
|
|
Gross profit was higher primarily due to higher revenue less repair payments and, to a lesser extent, lower cost of
revenue as explained above. Gross profit as a percentage of revenue increased primarily due to higher revenue and lower cost of revenue, as a result of the termination of a contract with a large client in our auto claims business in April 2012 as
discussed above. Gross profit as a percentage of revenue less repair payments decreased primarily due to higher cost of revenue, employee costs and facilities costs as explained above.
Selling and marketing expenses
The following table sets forth the composition of our
selling and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Employee costs
|
|
$
|
5.8
|
|
|
$
|
4.8
|
|
|
$
|
1.1
|
|
Other costs
|
|
|
1.9
|
|
|
|
1.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling and marketing expenses
|
|
$
|
7.8
|
|
|
$
|
6.4
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
6.5
|
%
|
|
|
5.5
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
6.8
|
%
|
|
|
6.6
|
%
|
|
|
|
|
The increase in employee costs due to wage increments was partially offset by a depreciation of the Indian rupee against
the US dollar. The marginal increase in other costs was primarily due to higher expenses incurred for travel and administrative costs.
Page
46
General and administrative expenses
The following table sets forth the composition of our general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Employee costs
|
|
$
|
11.3
|
|
|
$
|
8.2
|
|
|
$
|
3.0
|
|
Other costs
|
|
|
3.8
|
|
|
|
4.3
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
15.1
|
|
|
$
|
12.5
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
12.5
|
%
|
|
|
10.7
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
13.3
|
%
|
|
|
12.9
|
%
|
|
|
|
|
The increase in employee costs due to wage increments was partially offset by a depreciation of the Indian rupee against
the US dollar. The other costs were lower primarily due to lower travel costs.
Foreign exchange loss/(gains), net
The following table sets forth our foreign exchange loss/(gains), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Foreign exchange loss/(gains), net
|
|
$
|
2.1
|
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
The higher foreign exchange losses were primarily due to lower foreign currency revaluation gains partially offset by
lower hedging losses from our rupee-denominated contracts as a result of a depreciation of the Indian rupee against the US dollar.
Amortization of intangible asset
The
following table sets forth our amortization of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Amortization of intangible assets
|
|
$
|
6.6
|
|
|
$
|
7.0
|
|
|
$
|
(0.4
|
)
|
The decrease in amortization of intangible assets was primarily attributable to the complete amortization in the six
months ended September 30, 2012 of intangibles acquired in connection with the acquisition of Marketics and Flovate in May 2007 and June 2007, respectively, and a part of intangible assets related to leasehold benefits acquired in connection with
the acquisition of Aviva Global in July 2008, partially offset by additional cost of amortization of intangible assets acquired in connection with the acquisition of Fusion in June 2012.
Operating profit
The following table sets forth our operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Operating profit
|
|
$
|
7.8
|
|
|
$
|
8.1
|
|
|
$
|
(0.3
|
)
|
As a percentage of revenue
|
|
|
6.5
|
%
|
|
|
6.9
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
6.9
|
%
|
|
|
8.3
|
%
|
|
|
|
|
Operating profit was lower primarily due to higher selling and marketing expenses, higher general and administrative
expenses and higher foreign exchange losses as explained above, partially offset by lower amortization costs.
Page
47
Other income, net
The following table sets forth our other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Other income, net
|
|
$
|
1.3
|
|
|
$
|
0.2
|
|
|
$
|
1.1
|
|
Other income was higher primarily on account of higher interest income due to higher cash balance.
Finance expense
The following table
sets forth our finance expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Finance expense
|
|
$
|
0.9
|
|
|
$
|
1.0
|
|
|
$
|
(0.1
|
)
|
Finance expense marginally reduced primarily due to lower interest cost on account of complete repayment of our 2010 Term
Loan (as defined under Liquidity and Capital Resources), partially offset by higher interest expense on new short term loans.
Provision for income taxes
The
following table sets forth our provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Provision for income taxes
|
|
$
|
2.2
|
|
|
$
|
3.2
|
|
|
$
|
(1.1
|
)
|
The decrease in provision for income taxes was primarily on account of higher deferred tax credits.
Profit
The following table sets forth
our profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Profit
|
|
$
|
6.1
|
|
|
$
|
4.0
|
|
|
$
|
2.0
|
|
As a percentage of revenue
|
|
|
5.0
|
%
|
|
|
3.5
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
5.3
|
%
|
|
|
4.2
|
%
|
|
|
|
|
The increase in profit was primarily on account of higher gross profit, higher other income and lower amortization cost,
partially offset by higher general and administrative expenses, selling and marketing expenses and foreign exchange losses.
Page
48
Results for nine months ended December 31, 2012 compared to the nine months ended
December 31, 2011
Revenue
The following table sets forth our revenue and percentage change in revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
% Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Revenue
|
|
$
|
341.1
|
|
|
$
|
360.8
|
|
|
$
|
(19.7
|
)
|
|
|
(5.5
|
)%
|
The decrease in revenue of $19.7 million was primarily attributable to a decrease in revenue from existing clients
of $39.2 million, partially offset by revenue from new clients of $19.4 million, including revenue contribution of $9.1 million from Fusion, which we acquired in June 2012. The decrease in revenue from existing clients was primarily
attributable to the termination of a contract with a large client in our auto claims business in April 2012 to whom, we had provided repair management services. As we acted as principal in our dealings with third party repair centers and this
client, we accounted for the amounts received from this client for payments to repair centers as revenue and the payments made to repair centers in connection with our services provided to this client as cost of revenue (see
Overview). The termination of this contract resulted in a decrease in revenue, with a corresponding decrease of the same amount in our cost of revenue. In addition, the decrease in revenue from existing clients was primarily attributable to
our auto claims business on account of changes to certain client contracts and contracts with repair centers during the first quarter of fiscal 2012 whereby the significant risk of services and the credit risk are now borne by these clients instead
of us. As a result of these changes, we no longer account for the amounts received from these clients for payments to repair centers as revenue, resulting in lower revenue. This decrease was partially offset by higher volumes from our retail and
CPG, insurance, utilities, and travel and leisure verticals.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
|
|
|
|
Revenue
|
|
|
revenue
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
UK
|
|
$
|
181.4
|
|
|
$
|
224.3
|
|
|
|
53.2
|
%
|
|
|
62.52
|
%
|
North America (primarily the US)
|
|
$
|
106.2
|
|
|
$
|
108.9
|
|
|
|
31.1
|
%
|
|
|
30.42
|
%
|
Europe (excluding the UK)
|
|
$
|
21.2
|
|
|
$
|
20.0
|
|
|
|
6.2
|
%
|
|
|
5.5
|
%
|
Rest of World
|
|
$
|
32.3
|
|
|
$
|
7.6
|
|
|
|
9.5
|
%
|
|
|
2.1
|
%
|
The decrease in revenue from the UK region was primarily attributable to the termination of a contract with a large
client in our auto claims business in April 2012 to whom we had provided repair management services as discussed above. The increase in revenue in Europe (excluding the UK) was primarily due to higher volumes in the public sector, consulting and
professional services and travel and leisure verticals. The decrease in North America (primarily the US) region is primarily due to lower volumes in the retail and CPG and banking and financial services verticals partially offset by higher volumes
in the travel and leisure verticals, while the increase in revenue from Rest of World region was primarily due to revenue from new clients in that region.
Revenue less repair payments
The following table sets forth our revenue less repair
payments and percentage change in revenue less repair payments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
% Change
|
|
|
|
(US dollars in million)
|
|
|
|
|
Revenue less repair payments
|
|
$
|
323.4
|
|
|
$
|
295.2
|
|
|
$
|
28.1
|
|
|
|
9.5
|
%
|
The increase in revenue less repair payments of $28.1 million was primarily attributable to increases in revenue
less repair payments from new clients of $18.0 million and revenue less repair payments from existing clients of $10.2 million. The increase in revenue less repair payments was primarily due to higher volumes in the retail and CPG,
insurance, utilities, and travel and leisure verticals.
Page
49
Revenue less repair payments by geography
The following table sets forth the composition of our revenue less repair payments 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
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(US dollars in millions)
|
|
|
|
|
|
|
|
UK
|
|
$
|
163.7
|
|
|
$
|
158.8
|
|
|
|
50.6
|
%
|
|
|
53.8
|
%
|
North America (primarily the US)
|
|
$
|
106.2
|
|
|
$
|
108.8
|
|
|
|
32.8
|
%
|
|
|
36.9
|
%
|
Europe (excluding the UK)
|
|
$
|
21.2
|
|
|
$
|
20.0
|
|
|
|
6.6
|
%
|
|
|
6.8
|
%
|
Rest of World
|
|
$
|
32.3
|
|
|
$
|
7.6
|
|
|
|
10.0
|
%
|
|
|
2.5
|
%
|
The increase in revenue from the UK and Rest of World regions was primarily due to new clients from those regions. The
decrease in revenue in North America (primarily the US) was primarily due to lower volumes in the banking and financial services and retail and CPG verticals, partially offset by higher volumes in the travel and leisure verticals. The increase
in revenue in Europe (excluding the UK) was primarily due to higher volumes in the public sector, consulting and professional services and travel and leisure verticals.
Cost of revenue
The following table sets forth the composition of our cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
Cost of revenue
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Employee costs
|
|
$
|
131.6
|
|
|
$
|
120.8
|
|
|
$
|
10.8
|
|
Facilities costs
|
|
|
42.9
|
|
|
|
40.0
|
|
|
|
2.9
|
|
Repair payments
|
|
|
17.7
|
|
|
|
65.6
|
|
|
|
(47.9
|
)
|
Depreciation
|
|
|
10.7
|
|
|
|
11.7
|
|
|
|
(1.0
|
)
|
Travel costs
|
|
|
7.5
|
|
|
|
6.8
|
|
|
|
0.7
|
|
Legal and professional costs
|
|
|
5.9
|
|
|
|
5.8
|
|
|
|
0.1
|
|
Other costs
|
|
|
13.3
|
|
|
|
12.0
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
229.6
|
|
|
$
|
262.7
|
|
|
$
|
(33.1
|
)
|
As a percentage of revenue
|
|
|
67.3
|
%
|
|
|
72.8
|
%
|
|
|
|
|
The decrease in repair payments was primarily attributable to the termination of a contract with a large client in our
auto claims business in April 2012 as discussed above, and was also primarily attributable to our auto claims business on account of changes to certain client contracts and contracts with repair centers during the first quarter of fiscal 2012
whereby the significant risk of services and the credit risk are now borne by these clients instead of us. As a result of these changes, we no longer account for the payments made to repair centers for cases referred by these clients as cost of
revenue, which resulted in lower repair payments. The decrease was also on account of a depreciation of the Indian rupee against the US dollar by an average of 15.5% in the nine months ended December 31, 2012 as compared with the nine months
ended December 31, 2011. The decrease was partially offset by an increase in employee costs due to higher headcount and wage increments, increase in facilities costs due to expansion of facilities in Pune, Chennai and the Philippines and the
addition of new facilities in Vizag, Philippines, Poland, US and South Africa, increase in travel cost due to project transition related travel and increase in other costs due to increase in onshore and outsourcing costs.
Gross profit
The following table sets forth our gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Gross profit
|
|
$
|
111.5
|
|
|
$
|
98.1
|
|
|
$
|
13.4
|
|
As a percentage of revenue
|
|
|
32.7
|
%
|
|
|
27.2
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
34.5
|
%
|
|
|
33.2
|
%
|
|
|
|
|
Gross profit was higher due to higher revenue less repair payments and lower cost of revenue as explained above. Gross
profit as a percentage of revenue increased primarily due to lower cost of revenue partially offset by lower revenue, as a result of the termination of a contract with a large client in our auto claims business in April 2012 as discussed above, and
also due to changes to certain client contracts and contracts with repair centers as discussed above.
Page
50
Selling and marketing expenses
The following table sets forth the composition of our selling and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Employee costs
|
|
$
|
17.1
|
|
|
$
|
15.0
|
|
|
$
|
2.1
|
|
Other costs
|
|
|
5.4
|
|
|
|
5.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling and marketing expenses
|
|
$
|
22.4
|
|
|
$
|
20.1
|
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
6.6
|
%
|
|
|
5.6
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
6.9
|
%
|
|
|
6.8
|
%
|
|
|
|
|
The increase in selling and marketing expenses was primarily the result of an increase in expenses incurred in the
expansion of our sales team and our client partner program.
General and administrative expenses
The following table sets forth the composition of our general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Employee costs
|
|
$
|
27.8
|
|
|
$
|
27.0
|
|
|
$
|
0.8
|
|
Other costs
|
|
|
15.1
|
|
|
|
11.4
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
42.9
|
|
|
$
|
38.4
|
|
|
$
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenue
|
|
|
12.6
|
%
|
|
|
10.6
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
13.3
|
%
|
|
|
13.0
|
%
|
|
|
|
|
The increase in employee costs due to wage increments was partially offset by a depreciation of the Indian rupee against
the US dollar. The other costs were higher primarily due to higher legal and professional fees and higher administrative costs in connection with the expansion of existing facilities and the addition of new facilities.
Foreign exchange loss/(gains), net
The
following table sets forth our foreign exchange loss / (gains), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Foreign exchange loss /(gains), net
|
|
$
|
6.6
|
|
|
$
|
(2.1
|
)
|
|
$
|
8.7
|
|
The higher foreign exchange losses were primarily due to lower foreign currency revaluation gains partially offset by
lower hedging losses from our rupee-denominated contracts as a result of a depreciation of the Indian rupee against the US dollar.
Amortization of intangible assets
The
following table sets forth our amortization of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Amortization of intangible assets
|
|
$
|
19.7
|
|
|
$
|
22.4
|
|
|
$
|
(2.7
|
)
|
The decrease in amortization of intangible assets was primarily attributable to the complete amortization in the six
months ended September 30, 2012 of intangibles acquired in connection with the acquisition of Marketics and Flovate in May 2007 and June 2007 and a part of intangible assets related to leasehold benefits acquired in connection with acquisition of
Aviva Global in July 2008, partially offset by additional cost of amortization of intangible assets acquired in connection with the acquisition of Fusion in June 2012.
Page
51
Operating profit
The following table sets forth our operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Operating profit
|
|
$
|
19.9
|
|
|
$
|
19.3
|
|
|
$
|
0.6
|
|
As a percentage of revenue
|
|
|
5.8
|
%
|
|
|
5.4
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
6.2
|
%
|
|
|
6.5
|
%
|
|
|
|
|
Operating profit was higher due to higher gross profit and lower amortization cost, partially offset by higher foreign
exchange losses, general and administrative expenses, and selling and marketing expenses.
Other income, net
The following table sets forth our other income, net for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Other income, net
|
|
$
|
3.2
|
|
|
$
|
0.3
|
|
|
$
|
2.9
|
|
Other income was higher primarily due to higher interest income due to higher cash balance.
Finance expense
The following table
sets forth our finance expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Finance expense
|
|
$
|
2.8
|
|
|
$
|
3.1
|
|
|
$
|
(0.3
|
)
|
The decrease was primarily due to lower interest cost on account of the complete repayment of our 2010 Term Loan
partially offset by higher interest expense on new short term loans.
Provision for income taxes
The following table sets forth our provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Provision for income taxes
|
|
$
|
7.1
|
|
|
$
|
8.4
|
|
|
$
|
(1.3
|
)
|
The decrease in provision for income tax expense was primarily on account of an increase in profits in locations enjoying
tax holidays as we continued the expansion of our operations in the special economic zones in India as well as in other locations and higher deferred tax credits.
Profit
The following table sets forth our profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(US dollars in millions)
|
|
|
|
|
Profit
|
|
$
|
13.2
|
|
|
$
|
8.1
|
|
|
$
|
5.1
|
|
As a percentage of revenue
|
|
|
3.9
|
%
|
|
|
2.3
|
%
|
|
|
|
|
As a percentage of revenue less repair payments
|
|
|
4.1
|
%
|
|
|
2.8
|
%
|
|
|
|
|
The increase in profit was primarily on account of higher operating profit and other income and lower finance expense and
provision for income taxes.
Page
52
Liquidity and Capital Resources
Our capital requirements are principally for debt repayment and the establishment of operating facilities to support our growth and
acquisitions. 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 December 31, 2012, we had cash and cash equivalents of $86.3 million. We typically seek to invest our available cash on hand in
bank deposits and money market instruments. Our investment in marketable securities, consisting of liquid mutual funds, was $59.2 million as at December 31, 2012.
As at December 31, 2012, our Indian subsidiary, WNS Global Services Private Limited, or WNS Global, had obtained a secured line of credit of
960.0 million ($17.5 million based on the exchange rate on December 31, 2012) from The Hongkong and Shanghai Banking Corporation Limited, and an unsecured line of credit of $15.0 million from BNP Paribas and
720.0 million ($13.1 million based on the exchange rate on December 31, 2012) from Citibank N.A., interest on which 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 December 31, 2012, (1) (i)
11.6 million ($0.2 million based on the exchange rate on December 31, 2012) was utilized for obtaining bank guarantees, and (ii)
649.0 million ($11.8 million based on the exchange rate on December 31, 2012) was utilized for working capital requirements from the line of credit available with The Hongkong and Shanghai Banking Corporation
Limited, (2) $14.5 million was utilized for working capital requirements from the line of credit available with BNP Paribas and (3)
703.8 million ($12.8 million based on the exchange rate on December 31, 2012) was utilized for working capital requirements from the line of credit available with Citibank N.A.
In March 2012, WNS Global obtained two new three-year term loan facilities consisting of a
510.0 million ($9.3 million based on the exchange rate on December 31, 2012) rupee-denominated loan and a $7.0 million US dollar-denominated loan, and our UK subsidiary, WNS Global Services (UK) Limited, or WNS
UK, obtained a new three-year term loan for £6.1 million ($9.9 million based on the exchange rate on December 31, 2012), rolled over its £9.9 million ($16.0 million based on the exchange rate on December 31, 2012)
two-year term loan (which was originally scheduled to mature in July 2012) for another three-year term, and renewed its £9.9 million ($16.0 million based on the exchange rate on December 31, 2012) working capital facility (which was
originally scheduled to mature in July 2012) until March 2013.
Details of these loan facilities are described below.
|
|
|
WNS Global obtained from HDFC Bank Ltd., or HDFC, a three-year rupee-denominated term loan of
510.0 million ($9.3 million based on the exchange rate on December 31, 2012) which was fully drawn on March 12, 2012. The loan is for the purpose of financing certain capital expenditures incurred during
the period from April 2011 to December 2011. The loan bears interest at a rate of 11.25% per annum for the first year, which will be reset at the end of the first year. Interest is payable on a monthly basis. The principal amount is repayable
in two equal installments on January 30, 2015 and February 27, 2015. Repayment of the loan is guaranteed by WNS and secured by a charge over our Pune property. This charge ranks
pari passu
with other charges over the property in
favor of other lenders. We are subject to certain covenants in respect of this loan, including restrictive covenants relating to our total debt to EBITDA ratio, total debt to tangible net worth ratio and EBITDA to debt service coverage ratio, each
as defined in the term sheet relating to this loan. In connection with this rupee-denominated term loan, we have entered into a currency swap to convert the rupee-denominated loan to a US dollar-denominated loan which has resulted in the loan
bearing an effective interest rate to us of 6.73% per annum.
|
|
|
|
WNS Global obtained from HSBC Bank (Mauritius) Limited a three-year term loan facility for $7.0 million. On April 16, 2012, June 20, 2012,
and August 16, 2012, we drew down $2.0, $ 3.0 and $2.0 million, respectively, from this facility. The facility is for the purpose of funding WNS Globals capital expenditure plans for fiscal 2013 and/or for any other purpose in
compliance with the Reserve Bank of Indias guidelines on External Commercial Borrowings and Trade Credits. The facility will bear interest at a rate of US dollar LIBOR plus a margin of 3.5% per annum. Interest will be payable
on a quarterly basis. The principal amount of each tranche will be repayable at the end of three years from the date of drawdown of such tranche. Repayment of the loan under the facility is guaranteed by WNS and secured by a charge over our Pune
property. This charge ranks
pari passu
with other charges over the property in favor of other lenders. The facility agreement contains certain covenants, including restrictive covenants relating to our debt to EBITDA ratio, debt to adjusted
tangible net worth ratio, EBITDA to debt service coverage ratio and fixed asset coverage ratio, each as defined therein. A change in the largest shareholder of WNS together with a loss of 10% of our clients by revenue within two quarters of the
change may also constitute an event of default under this facility agreement.
|
Page
53
|
|
|
WNS UK obtained from HSBC Bank plc. an additional three-year term loan facility for £6.1 million ($9.9 million based on the exchange rate on
December 31, 2012), which was fully drawn on March 30, 2012. WNS UK also rolled over on March 30, 2012 its existing term loan of £9.9 million ($16.0 million based on the exchange rate on December 31, 2012) from HSBC
Bank plc. (which was originally scheduled to mature on July 7, 2012) for three years until July 7, 2015. The facilities are for the purpose of providing inter-company loans within the WNS group and funding capital expenditures. The
facilities will bear interest at Bank of England base rate plus a margin of 2.25% per annum. Interest is payable on a quarterly basis. 20% of the principal amount of each loan will be repayable at the end of each of 18, 24 and 30 months after
drawdown and a final installment of 40% of the principal amount of each loan will be repayable at the end of 36 months after drawdown. Repayment of each loan is guaranteed by WNS, WNS (Mauritius) Limited, WNS Capital Investments Limited, WNS UK and
AHA, and secured by pledges of shares of WNS (Mauritius) Limited and WNS Capital Investments Limited, a charge over the bank account of WNS Capital Investments Limited, and fixed and floating charges over the respective assets of WNS UK and AHA. The
charge over the assets of WNS UK ranks
pari passu
with other charges over those assets in favor of other lenders. The facility agreements contain certain covenants, including restrictive covenants relating to further borrowing by the
borrower, total debt to EBITDA ratio, our total debt to tangible net worth ratio and EBITDA to debt service coverage ratio, each as defined in the facility agreement.
|
|
|
|
WNS UK renewed its working capital facility of £9.9 million ($16.0 million based on the exchange rate on December 31, 2012) (which was
originally scheduled to mature on July 1, 2012) until March 31, 2013. 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. Repayment of this facility is guaranteed by WNS, WNS UK and AHA, and secured by fixed and floating charges over the respective assets of WNS UK and AHA. The charge over the assets of WNS UK ranks
pari passu
with
other charges over those assets in favor of other lenders. The facility agreements contain covenants similar to those contained in WNS UKs term loan facilities described above. The facility is subject to conditions to drawdown and can be
withdrawn by the lender at any time by notice to the borrower.
|
In September 2010, WNS Global Services
Philippines Inc. obtained a $3.2 million three-year term loan facility from The Hongkong and Shanghai Banking Corporation Limited. This facility is repayable in three equal installments on September 28, 2012, March 28, 2013 and
September 27, 2013. The loan bears interest at the three-month US dollar LIBOR plus a margin of 3% per annum. This facility is secured by, among other things, a guarantee provided by WNS and an assignment (with a right of recourse) of all
rights, titles and interests in and to receivables due to WNS Global Services Philippines Inc. from WNS North America Inc. and WNS UK. The facility agreement contains certain restrictive covenants on our indebtedness, total borrowings to tangible
net worth ratio and total borrowings to EBITDA ratio, as well as a minimum interest coverage ratio, each as defined in the facility agreement. As at December 31, 2012, the amount outstanding under the facility was $2.1 million.
In July 2010, WNS (Mauritius) Limited obtained a term loan facility for $94.0 million, or the 2010 Term Loan, from The Hongkong and
Shanghai Banking Corporation Limited, Hong Kong, DBS Bank Limited, Singapore and BNP Paribas, Singapore. The proceeds from this loan facility, together with cash on hand, was used to repay the $115.0 million outstanding balance of the $200.0 million
term loan facility we had obtained in July 2008 to fund, together with cash on hand, the Aviva transaction. This 2010 Term Loan has been financed equally by all the three lenders and bears interest at a rate equivalent to three-month US dollar LIBOR
plus a margin of 2% per annum. On January 10, 2011, July 11, 2011 and January 10, 2012, we made scheduled payments of principal of $20.0 million, $20.0 million and $30.0 million, respectively. Repayment under the facility
was guaranteed by WNS, WNS UK, WNS Capital Investment Limited, WNS Global Singapore, WNS North America Inc., AHA and WNS Global Services Netherlands Cooperative U.A., and secured by pledges of shares of WNS (Mauritius) Limited, WNS Capital
Investment Limited and WNS Global Singapore, charges over the bank accounts of WNS (Mauritius) Limited, WNS Capital Investment Limited and WNS Global Singapore, a charge over receivables of WNS Capital Investment Limited from AVIVA held in escrow,
an assignment by WNS (Mauritius) Limited to the lenders of the 2010 Term Loan of its put option to sell its shares of WNS Capital Investment Limited to WNS Global, pursuant to which the lenders may, in the event of a default under the loan, compel
WNS (Mauritius) Limited to exercise its put option and apply the proceeds from the sale of its shares of WNS Capital Investment Limited to WNS Global towards repayment of the loan, and a fixed and floating charge over the assets of WNS UK, which
ranks
pari passu
with other charges over the same assets in favor of other lenders. The facility agreement contains certain covenants, including restrictive covenants relating to our indebtedness, total borrowings to tangible net worth ratio,
total borrowings to EBITDA ratio and a minimum interest coverage ratio, each as defined in the facility agreement, and undertakings by each of WNS (Mauritius) Limited and WNS Global Singapore not to sell, transfer or otherwise dispose of their
respective shares of WNS Global. On July 10, 2012, the final scheduled installment of $24.0 million was repaid and following this repayment, the security provided for the 2010 Term Loan has been released.
Page
54
Based on our current level of operations, we expect 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. We currently
expect our capital expenditures in fiscal 2013 to be approximately $22.0 million. Our capital expenditure in the nine months ended December 31, 2012 amounted to $17.8 million and our capital commitment as of December 31, 2012 was $4.1
million. However, if our lines of credit were to become unavailable for any reason, we would require additional financing to meet our debt repayment obligations, capital expenditures and working capital needs. Further, under the current extremely
volatile conditions as discussed under Global and 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 persist or further 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 some of our existing debt repayment obligations and pursue certain of our expansion plans. In
addition, 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 continue to
persist or deteriorate further, 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.
In summary, our cash flows were:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(US dollars in millions)
|
|
Net cash provided by operating activities
|
|
$
|
46.9
|
|
|
$
|
40.9
|
|
Net cash used in investing activities
|
|
$
|
(57.9
|
)
|
|
$
|
(32.6
|
)
|
Net cash used in financing activities
|
|
$
|
(1.7
|
)
|
|
$
|
0.5
|
|
Cash Flows from Operating Activities
Net cash provided by operating activities increased to $46.9 million for the nine months ended December 31, 2012 from $40.9
million for the nine months ended December 31, 2011. The increase in net cash provided by operating activities for the nine months ended December 31, 2012 as compared to nine months ended December 31, 2011 was attributable to an
increase in cash flow from working capital changes by $3.6 million, a decrease in interest paid by $1.1 million, an increase in profit as adjusted by non-cash related items by $0.7 million, a decrease in income taxes paid by $0.6 million and an
increase in interest received by $0.1 million.
The increase in profit as adjusted for non-cash related items by $0.7 million
was primarily on account of (i) a decrease in deferred tax credit by $5.9 million, (ii) an increase in profit by $5.1 million (iii) a decrease in excess tax benefit credit on share based options exercised by $0.9 million, (iv) an
increase in share based compensation by $0.8 million, and (v) an increase in deferred rent expense by $0.7 million. The increase was partially offset by (i) a decrease in current tax expenses by $7.1 million, (ii) a decrease in
depreciaton and amortization expense by $3.8 million, (iii) a decrease in interest expense by $1.3 million, (iv) a decrease in amortization of debt issue cost by $0.4 million, and (v) an increase in interest income by $0.1 million.
Cash flow from working capital changes increased by $3.6 million for the nine months ended December 31, 2012 as compared
to nine months ended December 31, 2011 primarily due to (i) a decrease in cash outflow towards settlement of other liabilities by $9.0 million, primarily as a result of a decrease in cash outflow towards a derivatives contract liability
settlement and towards payment of value-added tax and (ii) an increase in cash inflow from accounts receivables by $3.4 million, primarily as a result of a decrease in accounts receivables of a large client in our WNS Auto Claims BPO. The
increase was partially offset by an increase of cash outflow of $12.2 million in accounts payable primarily as a result of an increase in outflow towards accounts payable in our WNS Auto Claims BPO segment.
Cash Flows from Investing Activities
Net cash used in investing activities increased to $57.9 million for the nine months ended December 31, 2012 from $32.6 million for the nine months ended December 31, 2011. Investing activities
comprised the following: (i) the amount invested in marketable securities for the nine months ended December 31, 2012 increased by $22.6 million as compared to December 31, 2011, (ii) a payment of $7.1 million made towards the
acquisition (net of cash acquired) of Fusion in the nine months ended December 31, 2012, as compared to the payment of $2.2 million made to Advanced Contact Solutions, or ACS, for the acquisition of the balance 35% stake in WNS Philippines Inc.
in the nine months ended December 31, 2011, (iii) the capital expenditures incurred for leasehold improvements, including the purchase of computers, furniture, fixtures and other office equipment and software (classified as intangibles)
associated with expanding the capacity of our delivery centers, for the nine months ended December 30, 2012 of $17.8 million, which represented a decrease by $0.1 million as compared to the nine months ended December 31, 2011,
(iv) dividends of $1.8 million received in the nine months ended December 31, 2012 on account of our investments in marketable securities, and (v) a government grant of $0.3 million received by WNS Global Services, Inc.
Page
55
Cash Flows from Financing Activities
Net cash used in financing activities increased to $1.7 million for the nine months ended December 31, 2012 from a cash provided
of $0.5 million for the nine months ended December 31, 2011. Financing activities consisted primarily of (i) repayments of a long term debt taken by WNS (Mauritius) Limited of $24.0 million and a long term debt taken by WNS Global Services
Philippines, Inc. of $1.1 million, partially offset by a long term debt taken by WNS Global of $7.0 million, for the nine months ended December 31, 2012, as compared to a repayment of long term debt taken by WNS (Mauritius) Limited of $20.0
million for the nine months ended December 31, 2011, (ii) short term debt taken by WNS Global of $15.1 million and by WNS UK of $1.4 million, for the nine months ended December 31, 2012, as compared to a short term loan taken by WNS
Global of $29.1 million, partially offset by a repayment of $8.9 million of a short term loan by WNS UK and a repayment of $0.7 million of a loan from ACS by WNS Philippines Inc. for the nine months ended December 31, 2011, (iii) a
decrease in excess tax benefit on share based options exercised by $0.9 million, and (iv) payment made towards debt issuance cost of $0.2 million by WNS Global for the nine months ended December 31, 2012.
Tax Assessment Orders
Transfer pricing regulations to which we are subject require that any international transaction among the WNS group enterprises be on arms length terms. Transfer pricing regulations in India have
been extended to cover specified domestic transactions as well. We believe that the international 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. 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 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 2003 through fiscal 2009 pending before various appellate authorities. These orders assess additional taxable income that could in the
aggregate give rise to an estimated
2,758.5 million ($50.4 million based on the exchange rate on December 31, 2012) in additional taxes, including interest of
669.3 million ($12.2 million based on the exchange rate on December 31, 2012).
The
following sets forth the details of these orders of assessment:
Note:
(1)
|
Based on the exchange rate on December 31, 2012.
|
Page
56
The aforementioned orders of assessment allege that the transfer prices we applied to certain of the
international transactions between WNS Global, one of our Indian subsidiaries, 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. As at December 31, 2012, we have provided a tax reserve of
954.8 million ($17.4 million based on the exchange rate on December 31, 2012) primarily on account of the Indian tax authorities denying the set off of brought forward business losses and unabsorbed
depreciation.
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
2,400.8 million ($43.8 million based on the exchange rate on December 31, 2012) in additional taxes, including interest of
736.8 million ($13.5 million based on the exchange rate on December 31, 2012). The income tax authorities have filed appeals against these orders.
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 small 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.
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
346.2 million ($6.3 million based on the exchange rate on December 31, 2012) 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 BPO 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 remanded the matter back to the lower tax authorities to be adjudicated afresh.
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 loss. 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 occur. 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 is denominated in pound sterling, US dollars and Euros, a significant portion of our expenses for the nine months ended
December 31, 2012 (net of payments to repair centers made as part of our WNS Auto Claims BPO segment) were incurred and paid in Indian rupees. The exchange rates among the Indian rupee, the pound sterling and the US dollar have changed
substantially in recent years and may fluctuate substantially in the future. We hedge a portion of our foreign currency exposures.
Our
exchange rate risk primarily arises from our foreign currency-denominated receivables. Based upon our level of operations for the nine months ended December 31, 2012, a sensitivity analysis shows that a 10.0% appreciation in the pound sterling
against the US dollar would have increased revenue for the nine months ended December 31, 2012 by approximately $19.9 million and would have increased revenue less repair payments for the nine months ended December 31, 2012 by
approximately $18.2 million. Similarly, a 10.0% appreciation or depreciation in the Indian rupee against the US dollar would have increased or decreased, respectively, expenses incurred and paid in Indian rupee for the nine months ended
December 31, 2012 by approximately $13.2 million.
Page
57
To protect against exchange gains (losses) on forecasted inter-company revenue, we have instituted a foreign
currency cash flow hedging program. We hedge a part of our forecasted external and inter-company revenue denominated in foreign currencies with forward and option contracts.
Interest Rate Risk
Our exposure to interest rate risk arises principally from our
borrowings which have a floating rate of interest, a portion of which is linked to the US dollar LIBOR and the remainder is linked to the Bank of England base rate. We manage this risk by maintaining an appropriate mix between fixed and floating
rate borrowings and through the use of interest rate swap contracts. The costs of floating rate borrowings may be affected by the fluctuations in the interest rates. In connection with the term loan facility entered into in 2008, which we refinanced
in 2010, we entered into interest rate swap agreements with banks in fiscal 2009. These swap agreements effectively converted the term loan from a variable US dollar LIBOR interest rate to a fixed rate, thereby managing our exposure to changes in
market interest rates under the term loan. Following our repayment of the 2010 Term Loan on July 10, 2012, there is no amount outstanding under the swap agreements.
Based upon our level of operations for the three months ended December 31, 2012 if interest rates were to increase by 1.0%, the impact on interest expense on our floating rate borrowing would be
approximately $0.1 million.
We monitor our positions and do not anticipate non-performance by the counterparties. 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.
Page
58
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 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 have been, and continue to be, challenging as certain adverse financial developments have caused a significant slowdown in the growth of the European, US and international
financial markets, accompanied by a significant reduction in consumer and business spending worldwide. These adverse financial developments have included increased market volatility, tightening of liquidity in credit markets and diminished
expectations for the global economy. Many key indicators of sustainable economic growth remain under pressure. Ongoing concerns including the pace of the recovery in the US and its substantial debt burden, the risk of global contagion from the
growing European sovereign debt crisis, the response by Eurozone policy makers to mitigate this sovereign debt crisis and the concerns regarding the stability of the Eurozone currency, as well as concerns of slower economic growth in China and
India, have created additional uncertainty in the European and global economies. Even though the immediate negative impact on the US economy that could have resulted from a combination of certain tax increases and government budget cuts that were
scheduled to become effective at the end of 2012 (commonly referred to as the fiscal cliff) were averted by the passing of the American Taxpayer Relief Act 2012 on January 1, 2013, there continue to be concerns over future budgetary
cuts that are scheduled to come into effect and that the US government may reach its debt ceiling sometime in the first quarter of calendar 2013, and their negative impact on the US economy. Further, there continue to be signs of economic weakness
such as relatively high levels of unemployment in major markets including Europe and the US.
These economic 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 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.
Furthermore, a weakening of the rate of exchange for the US dollar or the pound sterling (in which our revenue is principally denominated) against the Indian rupee (in which a significant portion of our
costs are denominated) also adversely affects our results. Fluctuations between the pound sterling or the Indian rupee and the US dollar also expose us to translation risk when transactions denominated in pound sterling or Indian rupees are
translated to US dollars, our reporting currency. For example, the pound sterling depreciated by 0.9% against the US dollar in the nine months ended December 31, 2012 as compared to the average exchange rate in the nine months ended
December 31, 2011, appreciated by 2.5% in fiscal 2012 as compared to the average exchange rate in fiscal 2011, and depreciated by 2.6% in fiscal 2011 as compared to the average exchange rate in fiscal 2010. While the Indian rupee depreciated by
15.5% against the US dollar in the nine months ended December 31, 2012 as compared with the average exchange rate in the nine months ended December 31, 2011 and by 5.2% in fiscal 2012 as compared with the average exchange rate in fiscal
2011, the Indian rupee appreciated by 4.0% against the US dollar in fiscal 2011 as compared with the average exchange rate in fiscal 2010.
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 insurance industry. If macroeconomic conditions worsen or the current global economic
condition continues for a prolonged period of time, we are not able to predict the impact 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 2012 and 2011, our five largest clients accounted for 41.4% and 54.3% of our revenue and 40.5% and 41.1% of our revenue less repair payments, respectively. In fiscal 2012 and 2011, our
three largest clients accounted for 34.1% and 41.8% of our revenue and 33.7% and 33.8% of our revenue less repair payments, respectively. In fiscal 2012, our largest client, AVIVA, individually accounted for 17.3% and 20.7% of our revenue and
revenue less repair payments, respectively, as compared to 16.4% and 20.4% in fiscal 2011, respectively. Any loss of business from any major client could reduce our revenue and significantly harm our business.
For example, in early 2012, as a result of concerns that the UK Competition Commission may ban the payment of referral fees by accident management
companies to claims management companies and insurance companies in the provision of credit hire replacement vehicles and third-party vehicle repairs to non-fault drivers, 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 in fiscal 2012 and 2011, respectively. For more
information, see Recent concerns over increases in car insurance premiums have led to investigations by the UK competition authority on whether any market practice, such as the payment of referral fees to accident management companies
and insurance companies of non-fault drivers, restricts or distorts competition in connection with the provision of motor insurance, and also to the recent introduction of new laws banning the payment of referral fees for claims
involving personal injury, which could have a material adverse effect on our non-fault repairs business in our auto claims business.
Page
59
First Magnus Financial Corporation, or FMFC, a US mortgage lender, was one of our major clients from
November 2005 to August 2007. FMFC was a major client of Trinity Partners Inc., which we acquired in November 2005 from the First Magnus Group. In August 2007, FMFC filed a voluntary petition for relief under Chapter 11 of the US Bankruptcy Code. In
fiscal 2007, FMFC accounted for 4.3% of our revenue and 6.8% of our revenue less repair payments. The loss of revenue from FMFC materially reduced our revenue in fiscal 2008.
Our prior contracts with another major client, AVIVA provided Aviva Global, which was AVIVAs business process offshoring subsidiary, options to require us to transfer the relevant projects and
operations of our facilities at Sri Lanka and Pune, India to Aviva Global. On January 1, 2007, Aviva Global exercised its call option requiring us to transfer the Sri Lanka facility to Aviva Global effective July 2, 2007. Effective
July 2, 2007, we transferred the Sri Lanka facility to Aviva Global and we lost the revenue generated by the Sri Lanka facility. For the period from April 1, 2007 through July 2, 2007, the Sri Lanka facility contributed $2.0 million
of revenue and in fiscal 2007, it accounted for 1.9% of our revenue and 3.0% of our revenue less repair payments. We may, in the future, enter into contracts with other clients with similar call options that may result in the loss of revenue that
may have a material impact on our business, results of operations, financial condition and cash flows, particularly during the quarter in which the option takes effect.
We have, through our acquisition of Aviva Global in July 2008, resumed control of the Sri Lanka facility and we have continued to retain ownership of the Pune facility. Revenue from AVIVA under the AVIVA
master services agreement accounts for a significant portion of our revenue and we expect our dependence on AVIVA to continue for the foreseeable future. The AVIVA master services agreement provides for a committed amount of volume. However,
notwithstanding the minimum volume commitment, there are also termination at will provisions which permit AVIVA to terminate the agreement without cause with 180 days notice upon payment of a termination fee. These termination provisions
dilute the impact of the minimum volume commitment.
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 outsourcing 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 2012 and 2011, 44.7% and 60.1% of our revenue, respectively, and 33.6% and 33.4% of our revenue less repair payments, respectively, were derived from clients in the insurance industry. During the same periods, clients in the travel and
leisure industry contributed 18.8% and 13.6% of our revenue, respectively, and 22.6% and 22.7% of our revenue less repair payments, 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. Global economic conditions have been, and continue to be, challenging as certain adverse financial
developments have caused a significant slowdown in the growth of the European, US and international financial markets, accompanied by a significant reduction in consumer and business spending worldwide. These adverse financial developments have
included increased market volatility, tightening of liquidity in credit markets and diminished expectations for the global economy. Many key indicators of sustainable economic growth remain under pressure. Ongoing concerns including the pace of the
recovery in the US and its substantial debt burden, the risk of global contagion from the growing European sovereign debt crisis, the response by Eurozone policy makers to mitigate this sovereign debt crisis and the concerns regarding the stability
of the Eurozone currency, as well as concerns of slower economic growth in China and India, have created additional uncertainty in the European and global economies. Even though the immediate negative impact on the US economy that could have
resulted from a combination of certain tax increases and government budget cuts that were scheduled to become effective at the end of 2012 (commonly referred to as the fiscal cliff) were averted by the passing of the American Taxpayer
Relief Act 2012 on January 1, 2013, there continue to be concerns over future budgetary cuts that are scheduled to come into effect and that the US government may reach its debt ceiling sometime in the first quarter of calendar 2013, and their
negative impact on the US economy. Further, there continue to be signs of economic weakness such as relatively high levels of unemployment in major markets including Europe and the United States. 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 outsource
business processes 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, 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, respectively.
Page
60
Further, the downturn 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, such as relatively high levels of unemployment. In fiscal 2012 and 2011, 61.2% and 60.9% of our revenue, respectively, and 53.4% and 54.0% of our revenue less repair payments,
respectively, were derived from clients located in the UK. During the same periods, 30.5% and 22.2% of our revenue, respectively, and 36.6% and 37.0% of our revenue less repair payments, respectively, were derived from clients located in North
America (primarily the US). Further, during the same periods, 5.6% and 15.9% of our revenue, respectively, and 6.7% and 7.2% of our revenue less repair payments, respectively, were derived from clients in the rest of Europe. Any further weakening of
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. 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.
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 outsourcing 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 outsourcing industry, including our company, experiences high employee attrition. During fiscal 2012, 2011 and 2010, the attrition rate for our employees who have completed six months of employment with us was 38%,
43% and 32%, respectively. While our attrition rate for our employees who have completed six months of employment with us improved to 33% in the nine months ended December 31, 2012, we cannot assure you that our attrition rate will not
increase. There is significant competition in the jurisdictions where our operation centers are located, including India, the Philippines 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 outsourcing 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.
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 report on Form 20-F.
Based
on its evaluation, management had concluded that as at March 31, 2010, our companys disclosure controls and procedures and internal control over financial reporting were not effective due to a material weakness identified in the design
and operating effectiveness of our controls over the recognition and accrual of repair payments to garages and the related fees in our WNS Auto Claims BPO segment. In fiscal 2011, we implemented remediation measures to address the material weakness.
Although management concluded that our companys disclosure controls and procedures and internal control over financial reporting were effective as at March 31, 2012 and 2011, it is possible that, in the future, material weaknesses could
be identified in our internal controls over financial reporting and we could be required to further 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.
Page
61
Any changes in accounting standards can be difficult to predict and can materially impact how we
report our financial results.
We have adopted IFRS, as issued by the IASB, with effect from April 1, 2011. From time to time, the
IASB changes its standards that govern the preparation of our financial statements. For example, the IASB has proposed amendments to its standards that govern hedge accounting, and these amendments, if adopted as proposed, would significantly change
the way option contracts are accounted for. There is no assurance that the amendments will be adopted as proposed or at all or on the timing of any such amendments. Changes in accounting standards are difficult to anticipate and can significantly
impact our reported financial condition and the results of our operations.
We may be unable to effectively manage our rapid growth and
maintain effective internal controls, which could have a material adverse effect on our operations, results of operations and financial condition.
Since we were founded in April 1996, and especially since Warburg Pincus & Co. acquired a controlling stake in our company in May 2002, we have experienced rapid growth and significantly expanded
our operations. Our employees have increased to 23,874 as at March 31, 2012 from 15,084 as at March 31, 2007. In January 2008, we established a new delivery center in Romania, which we expanded in fiscal 2011. Our subsidiary, WNS
Philippines Inc., established a delivery center in the Philippines in April 2008, which it expanded in fiscal 2010. Additionally, in fiscal 2010, we established a new delivery center in Costa Rica and streamlined our operations by consolidating our
production capacities in various delivery centers in Bangalore, Mumbai and Pune. We now have delivery centers in nine locations in Costa Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, the UK and the US. We are in the process
of establishing a delivery center in South Carolina, which we expect to be operational in the fourth quarter of fiscal 2013. 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 Tiruchirapalli Navalpattu, special economic zone, or SEZ, in the state of Tamil Nadu, India from Electronics Corporation of Tamil Nadu Limited (ELCOT) for setting up delivery centers in future. We intend to expand our
global delivery capability, and we are exploring plans to do so in areas such as Asia Pacific and Latin America.
We have also completed
numerous acquisitions. For example, in June 2012, we acquired Fusion, a leading BPO 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 2,106 people as at December 31, 2012. In July 2008, we entered into a
transaction with AVIVA consisting of (1) a share sale and purchase agreement pursuant to which we acquired from AVIVA all the shares of Aviva Global and (2) a master services agreement with Aviva MS pursuant to which we are providing BPO
services to AVIVAs UK business and AVIVAs Irish subsidiary, Hibernian Aviva Direct Limited, and certain of its affiliates. Aviva Global was the business process offshoring subsidiary of AVIVA. Through our acquisition of Aviva Global, we
also added three facilities in Bangalore, Chennai and Sri Lanka in July 2008, and one facility in Pune in August 2008.
This rapid 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.
We may face difficulties as we expand our operations to establish delivery centers in onshore locations in the US
and offshore in countries in which we have limited or no prior operating experience.
In June 2012, we acquired Fusion, a leading BPO
provider with two delivery centers in South Africa. In May 2012, we announced our plans to establish a new delivery center in South Carolina in the US, which will be our first delivery center in North America. We expect this new delivery center to
start operations in the fourth quarter of fiscal 2013. 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 onshore
delivery centers in the US and offshore delivery centers in the Asia Pacific and Latin America, which may involve expanding into countries other than those in which we currently operate. We have limited prior experience in operating onshore delivery
centers in the US. 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 not be
successful in achieving the expected benefits from our transaction with AVIVA in July 2008, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In July 2008, we entered into a transaction with AVIVA consisting of (1) a share sale and purchase agreement pursuant to which we acquired all the
shares of Aviva Global and (2) the AVIVA master services agreement pursuant to which we are providing BPO services to AVIVAs UK business and AVIVAs Irish subsidiary, Hibernian Aviva Direct Limited, and certain of its affiliates. We
completed our acquisition of Aviva Global in July 2008. Aviva Global was the business process offshoring subsidiary of AVIVA with facilities in Bangalore, India, and Colombo, Sri Lanka. In addition, through our acquisition of Aviva Global, we also
acquired three facilities in Chennai, Bangalore and Sri Lanka in July 2008, and one facility in Pune in August 2008. The total consideration (including legal and professional fees) for this transaction with AVIVA amounted to approximately $249.0
million. We cannot assure you that we will be able to grow our revenue, expand our service offerings and market share, or achieve the accretive benefits that we expected from our acquisition of Aviva Global and the AVIVA master services agreement.
Page
62
Our loan agreements impose operating and financial restrictions on us and our subsidiaries.
Our loan agreements contain a number of covenants and other provisions that, among other things, 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;
|
|
|
they 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; and
|
|
|
a reduction in revenue from our top 10 clients by revenue by a specified amount or a change of control and a loss of 10% of our clients by revenue may
also constitute an event of default under certain of our loan agreements.
|
Further, the restrictions contained in our loan
agreements could 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 loan agreements 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 service our 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 make payments on our loans and to fund planned capital expenditures 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 additional financing.
If we cannot service our loan agreements, 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.
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 Costa Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, the UK and the US, and we service
clients across Asia, Europe, 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 incorporated in
Australia, China, Costa Rica, India, Mauritius, the Netherlands, the Philippines, Romania, 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);
|
|
|
legal uncertainty owing to the overlap of different legal regimes, and problems in asserting contractual or other rights across international borders;
|
|
|
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;
|
Page
63
|
|
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.
Currency fluctuations among the Indian rupee, the pound sterling and the US dollar could have a material adverse effect on our results of operations.
Although substantially all of our revenue is denominated in pound sterling or US dollars, 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. We report our financial results in US dollars and our results of operations would be adversely affected if the Indian rupee appreciates
against the US dollar or the pound sterling depreciates against the US dollar. The exchange rates between the Indian rupee and the US dollar and between the pound sterling and the US dollar have changed substantially in recent years and may
fluctuate substantially in the future.
The average Indian rupee/US dollar exchange rate was approximately
54.46 per $1.00 in the nine months ended December 31, 2012, which represented a depreciation of the Indian rupee of 15.5% as compared with the average exchange rate of approximately
47.14 per $1.00 in the nine months ended December 31, 2011, and approximately
47.93 per $1.00 in fiscal 2012, which represented a depreciation of the Indian rupee of 5.2% as compared with the average exchange rate of approximately
45.57 per $1.00 in fiscal 2011, which in turn represented an appreciation of the Indian rupee of 4.0% as compared with the average exchange rate of approximately
47.46 per $1.00 in fiscal 2010. The average pound sterling/US dollar exchange rate was approximately £0.63 per $1.00 in the nine months ended December 31, 2012, which represented a depreciation of
the pound sterling of 0.9% as compared with the average exchange rate of approximately £0.62 per $1.00 in the nine months ended December 31, 2011, and approximately £0.63 per $1.00 in fiscal 2012, which represented an
appreciation of the pound sterling of 2.5% as compared with the average exchange rate of approximately £0.64 per $1.00 in fiscal 2011, which in turn represented a depreciation of the pound sterling of 2.6% as compared with the average
exchange rate of approximately £0.63 per $1.00 in fiscal 2010.
Our results of operations may be adversely affected if the Indian
rupee appreciates significantly against the pound sterling or the US dollar or if the pound sterling depreciates against the US dollar. 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.
Recent concerns over increases in car
insurance premiums have led to investigations by the UK competition authority on whether any market practice, such as the payment of referral fees to accident management companies and insurance companies of non-fault drivers, restricts
or distorts competition in connection with the provision of motor insurance, and also to the recent introduction of new laws banning the payment of referral fees for claims involving personal injury, which could have a material adverse effect on our
non-fault repairs business in our auto claims business.
A number of aspects of the motor insurance sector are currently
under review in the UK. The UK Office of Fair Trading, or the OFT, has conducted a market study of the UK private motor insurance market to investigate increases in car insurance premiums over the past two years. The study focused on the provision
of repairs and replacement vehicles to drivers involved in road traffic accidents which were not their fault (or non-fault drivers). The OFT has provisionally decided that there are reasonable grounds to suspect that credit hire
replacement vehicle arrangements and third-party vehicle repair arrangements for non-fault drivers are two factors that may be driving up insurance premiums. The OFTs market study has provisionally found that the practice of the
payment of referral fees by accident management companies to claims management companies and insurance companies in the arrangements for the provision of credit hire replacement vehicles and third-party vehicle repairs to non-fault
drivers appear to be inflating the cost of insurance claims. As a result, the OFT has provisionally decided to refer the matter to the UK Competition Commission for a more detailed investigation. The UK Competition Commission has the power to impose
remedies or recommend legislative changes that could include a ban on the payment of referral fees in such arrangements.
In May 2012, the UK
Legal Aid, Sentencing and Punishment of Offenders Act 2012, or the LASPO Act, was adopted. The Act prohibits the payment and receipt of referral fees by regulated professionals, such as solicitors, barristers, claims management companies and
insurers, for claims involving personal injury. The LASPO Act will become effective in April 2013. The implementation of the ban on referral fees for claims involving personal injury cases pursuant to the LASPO Act is expected to have, and any other
similar bans or restrictions imposed in future would likely have, a material adverse effect on the business of clients that are dependent on such referral fees. In turn, this would likely result in a loss of all or a material portion of the accident
management services that we provide these clients in our non-fault repairs business. One of our largest auto claims clients by revenue contribution in fiscal 2012 that generates significant revenues through referral fees has 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 in fiscal 2012 and 2011, respectively. We may lose some or all of the business
from other clients that may be adversely affected by a ban on such referral fees.
Page
64
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 call 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 European Union,
or 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.
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.
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 outsourcing
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, 2012. 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.
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 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 outsourcing to India, and increased competition for skilled
employees in India may reduce this competitive advantage. 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 our acquisitions
of Aviva Global, Business Applications Associates Limited, or BizAps, and Chang Limited, our operations in the UK have expanded and our wage costs for employees located in the UK now represent a larger proportion of our total wage costs. Wage
increases in the UK may therefore also reduce our profit margins and have a material adverse effect on our financial condition and cash flows.
Page
65
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 (H1N1) virus in various parts of the world) and terrorist attacks. In addition, our contracts do not generally commit our clients to providing us with a specific volume of
business.
For example, as a result of these and other factors, such as impairment of goodwill and intangible assets relating to certain
acquisitions, amortization of intangible assets resulting from our acquisitions, an increase in employee share based compensation arising from the abolition of the levy of fringe benefit tax on such share based compensation and mark to
market losses on derivative instruments that are re-designated as ineffective hedge resulting from the refinancing of a loan, our gross profit (under US generally accepted accounting principles, or US GAAP, our previous GAAP prior to
our adoption of IFRS as issued by the IASB with effect from April 1, 2011) increased by 10.9% from fiscal 2009 to fiscal 2010 and then decreased by 13.1% from fiscal 2010 to fiscal 2011; our operating income (under US GAAP) decreased by 14.3%
from fiscal 2009 to fiscal 2010 and by a further 50.9% from fiscal 2010 to fiscal 2011; and net income available to the Companys shareholders (under US GAAP) decreased by 54.7% from fiscal 2009 to fiscal 2010 and then increased by 164.6% from
fiscal 2010 to fiscal 2011.
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 has been slower than we
had expected. 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.
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.
Failure to adhere to the regulations that govern our business could result in us being unable to effectively perform our services. Failure to
adhere to regulations that govern our clients businesses could result in breaches of contract with our clients.
Our
clients business operations are subject to certain rules and regulations such as 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. Our clients may contractually require that we perform our services in a manner that would enable them to comply with such rules and regulations. Failure to perform our services in such a manner could
result in breaches of contract with our clients and, in some limited circumstances, civil fines and criminal penalties for us. In addition, we are required under various Indian laws to obtain and maintain permits and licenses for the conduct of our
business. If we fail to comply with any applicable rules or regulations, or if we do not maintain our licenses or other qualifications 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.
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 eight 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, 2013 (including work orders/statement of works that will expire on or before March 31, 2013
although the related master services agreement has been renewed) represented approximately 12.5% of our revenue and 15.1% of our revenue less repair payments from our clients in fiscal 2012. 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 has 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 in fiscal 2012 and
2011, respectively. For more information, see Recent concerns over increases in car insurance premiums have led to investigations by the UK competition authority on whether any market practice, such as the payment of referral fees to
accident management companies and insurance companies of non-fault drivers, restricts or distorts competition in connection with the provision of motor insurance, and also to the introduction of new laws banning the payment of referral
fees for claims involving personal injury, which could have a material adverse effect on our non-fault repairs business in our auto claims business.
Page
66
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 twelve 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.
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
eight 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 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. Although we use our internally developed methodologies and processes and past project experience to reduce the risks
associated with estimating, planning and performing transaction-based pricing, fixed-price and outcome-based pricing projects, if we fail to estimate accurately the resources required for a project, future wage inflation rates or currency exchange
rates, or if we fail to meet defined performance goals or objectives, our profitability may suffer.
We have in the past and may in the future
enter into subcontracting arrangements for the delivery of services in jurisdictions where we do not have delivery centers. 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 under price 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.
Our profitability will suffer if we are not able to maintain our pricing and asset utilization
levels and control our costs.
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 2012, we made significant investments to increase our number of seats by establishing additional delivery centers or expanding production capacities in our existing delivery centers. 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.
Page
67
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 revenues. Commencement of work and ramping up of volume of work with certain new and existing clients have been slower than we had expected. If our revenue does not grow at our expected rate, we may not be able to maintain or improve our
profitability.
We face competition from onshore and offshore business process outsourcing companies and from information technology
companies that also offer business process outsourcing 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 outsourcing 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.
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.
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, 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.
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.
Our dependence on our offshore delivery centers requires us to maintain active data and voice communications between our main delivery centers in 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.
Page
68
We are liable to our clients for damages caused by unauthorized disclosure of sensitive and
confidential information, whether through a breach of our computer systems, 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. We seek to implement measures to protect sensitive and confidential client data and
have not experienced any material breach of confidentiality to date. However, if any person, including any of our employees, penetrates our 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 data centers could have a negative impact on our reputation which would harm our business.
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. Historically,
we have expanded some of our service offerings and gained new clients through strategic acquisitions. For example, we acquired Fusion in June 2012, Aviva Global in July 2008, BizAps in June 2008, Chang Limited in April 2008, and Flovate Technologies
Limited, or Flovate (which we subsequently renamed as WNS Workflow Technologies Limited), in June 2007. In March 2008, we entered into a joint venture with Advanced Contact Solutions, Inc., or ACS, a provider in BPO services and customer care in the
Philippines, to form WNS Philippines Inc. In November 2011, we acquired ACSs shareholding in WNS Philippines Inc. and increased our share ownership from 65% to 100%. 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. The inability to identify
suitable acquisition targets or investments or the inability to complete such transactions may affect our competitiveness and our growth prospects.
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. For example, in June 2012, we acquired Fusion, a leading BPO 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 2,106 people as at
December 31, 2012. We cannot assure you that we will be able to successfully integrate Fusions business operations with ours, or that we will be able to successfully leverage Fusions assets to grow our revenue, expand our service
offerings and market share or achieve accretive benefits from our acquisition of Fusion.
The lack of profitability of any of our acquisitions
or joint ventures could have a material adverse effect on our operating results. 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. 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.
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 December 31, 2012,
we had goodwill and intangible assets of approximately $89.7 million and $97.5 million, respectively, which primarily resulted from the purchases of Fusion, Aviva Global, BizAps, Chang Limited, Flovate, Marketics Technologies (India) Private
Limited, or Marketics, Town & Country Assistance Limited (which we subsequently rebranded as WNS Assistance) and WNS Global. Of the $97.5 million of intangible assets as at December 31, 2012, $89.2 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 $89.2 million of intangible assets relating to our purchase of Aviva Global. Although our impairment review of goodwill and intangible assets in fiscal 2012 and fiscal 2011 did not indicate any impairment, 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.
Page
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, 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 outsourcing 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.
Our largest shareholder, Warburg Pincus, is able to influence our corporate actions, and may also enter into transactions that may result in a change in control of our company. A change in control
transaction may have a material adverse impact on our business.
As at December 31, 2012 Warburg Pincus beneficially owned
approximately 28.8% of our shares and is our largest shareholder with a nominee serving on our board of directors. As a result of its ownership position and board representation, Warburg Pincus has the ability to influence matters requiring
shareholder and board approval including, without limitation, the election of directors, significant corporate transactions such as amalgamations and consolidations, changes in control of our company and sales of all or substantially all of our
assets. The interests of Warburg Pincus may differ from the interests of other shareholders of our company.
Warburg Pincus may also seek to
sell all or a substantial portion of its shareholding in our company, which may result in a change in control in our company. A change in control in our company together with a loss of more than 10.0% of our clients by revenue or a credit rating
downgrade (or we do not approach a credit rating agency for a rating review within one month of the change in control) may also constitute an event of default under one or more of our loan agreements. Such an event could have a material adverse
effect on our business, results of operations, financial condition and cash flows, as well as cause our ADS price to fall.
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 operate under the zero-ten business tax regime and are not currently required to pay
taxes in Jersey. Although we continue to enjoy the benefits of the zero-ten 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.
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. We
intend to continue to develop and expand our facilities 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 outsourcing 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. Various other factors, including a collapse of the present coalition government due to the withdrawal of support of coalition members or the formation of a new unstable government with limited support, could trigger
significant changes in Indias economic liberalization and deregulation policies and disrupt business and economic conditions in India generally and our business in particular. 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.
Page
70
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.
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 operations in India became subject to the annual tax rate
of 32.45%.
Further, in 2005, the Government of India implemented the Special Economic Zones Act, 2005, or the SEZ legislation, with the
effect that taxable income of new operations established in designated SEZs may be eligible for a 15-year tax holiday scheme consisting of a complete tax holiday for the initial five years and a partial tax holiday for the subsequent ten years,
subject to the satisfaction of certain capital investment conditions. We have a delivery center located in Gurgaon, India registered under the SEZ scheme and eligible for a 50.0% income tax exemption from fiscal 2013 until fiscal 2022. During fiscal
2012, we also started operations in delivery centers in Pune, Navi Mumbai and Chennai, India registered under the SEZ scheme, through which we are eligible for a 100.0% income tax exemption until fiscal 2016 and a 50.0% income tax exemption from
fiscal 2017 until fiscal 2026.
The SEZ legislation has been criticized on economic grounds by the International Monetary Fund and the SEZ
legislation may be challenged by certain non-governmental organizations. It is possible that, as a result of such political pressures, the procedure for obtaining benefits under the SEZ legislation may become more onerous, the types of land eligible
for SEZ status may be further restricted or the SEZ legislation may be amended or repealed. Moreover, there is continuing uncertainty as to the governmental and regulatory approvals required to establish operations in the SEZs or to qualify for the
tax benefit. This uncertainty may delay our establishment of operations in the SEZs. The Government of India, pursuant to the Indian Finance Act, 2011, has also levied minimum alternate tax, or MAT, on the book profits earned by the SEZ units at the
rate of 20.01%.
We have operations in Costa Rica and the Philippines which are also eligible for tax exemptions which expire in fiscal 2017
and fiscal 2014, respectively. Our operations in Sri Lanka are also eligible for tax exemptions. One of our Sri Lankan subsidiaries was eligible to claim income tax exemption with respect to profits earned from export revenue by our delivery center
registered with the Board of Investment, Sri Lanka, or the BOI. This tax holiday expired in fiscal 2011, however, effective fiscal 2012, the Government of Sri Lanka has exempted the profits earned from export revenue from tax. This enables our Sri
Lankan subsidiary to continue to claim tax exemption under the Sri Lanka Inland Revenue Act following the expiry of the tax holiday.
We
incurred minimal income tax expense on our operations in the Philippines and Sri Lanka and in connection with our SEZ operations in India in fiscal 2012 and the first nine months of fiscal 2013 as a result of the tax holidays described above,
compared to approximately $1.7 million and $1.1 million that we would have incurred in fiscal 2012 and the first nine months of fiscal 2013, respectively, if the tax holidays had not been available for the respective periods.
When any of our tax holidays expire or terminate, or if the applicable government withdraws or reduces the benefits of a tax holiday that we enjoy, our
tax expense will materially increase and this increase will 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.
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 Direct Taxes Code Bill, which
was tabled in the Indian Parliament in August 2010, is intended to replace the Indian Income Tax Act, 1961 and is proposed to come into effect in April 2014, if enacted. Under the Direct Taxes Code Bill, a non-Indian company with a place of
effective management in India would be treated as a tax resident in India and would be consequently liable to tax in India on its global income. The Direct Taxes Code Bill, if enacted, also proposes to discontinue the existing profit based
incentives for SEZ units operational after March 31, 2014 and replace them with investment based incentive for SEZ units operational after that date. The implications of the Direct Taxes Code, if enacted, on our operations are presently still
unclear and may result in a material increase in our tax liability.
Further, the Government of India, pursuant to Indian Finance Act 2012,
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, they 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, in December 2012, we received a request from the relevant income tax authority in India for information 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. No allegation or demand for payment of additional tax relating to that transaction has been made yet. The Government of India has issued guidelines on General Anti Avoidance Rule, or the GAAR, which is expected to be effective
April 1, 2015, 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 a tax
benefits. Although the full implications of 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.
Page
71
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 domestic transactions as well. We believe that the international 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 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 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 2003 through fiscal 2009 pending before various appellate authorities. These orders assess
additional taxable income that could in the aggregate give rise to an estimated
2,758.5 million ($50.4 million based on the exchange rate on December 31, 2012) in additional taxes, including interest of
669.3 million ($12.2 million based on the exchange rate on December 31, 2012).
These orders of
assessment allege that the transfer prices we applied to certain of the international transactions between WNS Global, one of our Indian subsidiaries, 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. As at December 31, 2012, we have provided a tax reserve of
954.8 million ($17.4 million based on the exchange rate on December 31, 2012) primarily on account of the Indian tax authorities denying the set off of brought forward business losses and unabsorbed
depreciation. For more details on these assessments, see Part II Managements Discussion and Analysis of Financial Condition and Results of Operations Tax Assessment Orders.
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
2,400.8 million ($43.8 million based on the exchange rate on December 31, 2012) in additional taxes, including interest of
736.8 million ($13.5 million based on the exchange rate on December 31, 2012). The income tax authorities have filed appeals against these orders.
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 small 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.
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
346.2 million ($6.3 million based on the exchange rate on December 31, 2012) 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 BPO 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.
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.
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.
Page
72
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 outsourcing 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.
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 December 31, 2012, we had 50,452,199 ordinary shares outstanding, including 35,217,756 shares represented by 35,217,756 ADSs. In addition,
as at December 31, 2012, a total of 3,519,487 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 Second Amended and Restated
2006 Incentive Award Plan. All ADSs are freely transferable, except that ADSs owned by our affiliates, including Warburg Pincus, 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 outsourcing;
|
|
|
addition or loss of executive officers or key employees;
|
|
|
sales or expected sales of additional shares or ADSs;
|
Page
73
|
|
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.
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 Our loan agreements 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.
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 ADRs 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.
Page
74
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. In
addition, based on the current and anticipated valuation of our assets, including goodwill, and composition of our income and assets, we do not expect to be a PFIC for US federal income tax purposes for our current taxable year or in the foreseeable
future. 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 of our annual
report on Form 20-F for our fiscal year ended March 31, 2012) holds an ADS or ordinary share, certain adverse US federal income tax consequences could apply to such US Holder.
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.
Page
75
Part IV OTHER INFORMATION
Jeremy Young, who was appointed to our Board of Directors as a nominee of Warburg Pincus, the largest shareholder of our company, in May 2004, ceased to
be an employee of Warburg Pincus with effect from December 31, 2012. Accordingly, he ceased to serve as a nominee of Warburg Pincus with effect from December 31, 2012.
In January 2013, our Board of Directors, having considered all relevant facts and circumstances, determined that Mr. Young satisfies the independence requirements of Rule 10A-3 of the
Securities Exchange Act of 1934, as amended, and the NYSE listing standards. At the same time, our Board determined to make the following appointments and changes to our Audit Committee and Nominating and Corporate Governance Committee composition:
1.
|
Mr. Adrian Dillon, who was appointed to our Board in September 2012, is appointed as Vice Chairman of our Board with effect from January 1, 2013;
|
2.
|
Messrs. Dillon and Young are appointed as members of our Audit Committee with effect from January 15, 2013. At the same time, Mr. Eric B. Herr,
Mr. Richard O. Bernays and Sir Anthony A. Greener resigned as members of our Audit Committee. Their resignation is not the result of any disagreement with our Company on any matter relating to our Companys operations, policies or
practices. Following these changes, our Audit Committee now comprises three directors: Messrs. Albert Aboody (Chairman), Dillon and Young; and
|
3.
|
Mrs. Renu Karnad, who was appointed to our Board in September 2012, is appointed as a member of our Nominating and Corporate Governance Committee and
Mr. Bernays resigned as a member of our Nominating and Corporate Governance Committee with effect from January 15, 2013. Following these changes, our Nominating and Corporate Governance Committee now comprises three directors: Sir Anthony
A. Greener, Mr. Herr and Mrs. Karnad.
|
Page
76