Q2 2020 Earnings Call
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I would now what to turn the conference over to William Maina Investor Relations. Please go ahead.
Thank you and try and welcome to Virtusa second quarter fiscal year 2020 earnings Conference call.
Well, we will be discussing our financial results for Virtusa second quarter ended September 32019.
On the cost me, a Kris Canekeratne, <unk>, Chairman and Chief Executive Officer, John Calia, Executive Vice President and Chief Financial Officer.
Certain statements made on this call they're not based on historical information are forward looking statements. What's your pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act 1995.
During this call we may make expressed or implied forward looking statements relating to among other things for kids expectations and assumptions concerning management's forecast the financial performance.
The growth of accuse us business the ability of Virtusas clients to realize benefits from you separate uses I to service as a mattress plans objectives and strategies. These statements are neither promises or guarantees and are subject to a variety of us risks and uncertainties I think whats your beyond Virtusas control, which could cause actual results to differ materially from that's contemplated neutral.
The statements.
Existing and prospective investors are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date her out.
Virtusa undertakes no obligation to update or revise information disclosed during this call whether as a result at new information future events circumstances or otherwise.
Other statements on this call also.
non-GAAP financial information as defined by the FCC.
We presented constant currency revenue to provide a framework for assessing how already performed excluding the effects of foreign currency rate fluctuations.
<unk> non-GAAP adjusted operating income non-GAAP , adjusted net income and non-GAAP earnings per share, which we believe insight into the operational performance for our business reconciliations of non-GAAP to GAAP measures are included in todays earnings press release and data sheet, which can be found on the investor Relations page our website.
Also for that because that's a reconciliation of cash cash equivalents short term long term investments that we believe provides insights it's hard total cash position and overall liquidity.
Please nobody's supplemental data presentation to our second quarter results has also been posted to our Investor Relations website.
For additional disclosure regarding these and other risks faced by Virtusa. Please see the disclosures contained in Virtusas public filings with such as he say in an Orange press release that I'd like to turn the call Chris Chris.
Thank you well.
Good evening, everyone and thank you for joining us today.
We delivered solid fiscal second quarter financial results that exceeded the midpoint, although although the guidance range.
Well good revenue was 328.5 million got it.
Representing 3% sequential and 7.5% year over year growth.
We generated sequential revenue growth across all our major industry groups.
Our non-GAAP operating margin was 8.9% up 130 basis points sequentially and inline with our expectation.
Our non-GAAP EPS was 54 cents.
Our second quarter results reflect strong demand across our industry group.
And geography.
Digital transformation and cloud transformation I would be tea and the Ti practices ariad continuing to be the key driver or other business.
It's an ongoing beavering trajectory that reflects the realized mission.
What has been called the fourth industrial Revolution.
A profound technology driven shift from discrete layout and controlled business model that they used to all customer what's subject to.
The ones that all fully distributed flat and use the empowered.
The legacy approaches of the past are being disrupted.
And in some kids the destroyed by this new order.
Leasing unrelenting pressure on book shortly every company to rethink re imagine and ultimately transform their businesses in order to remain competitive.
Digital transformation and cloud transformation are the cornerstone initiative to make that happen.
They are the cornerstone of our business.
Digital transformation continues to garner most strategic attention at the highest level, although kinds organization and consequently, more budget as I look clients realize it's important to the off the Bible.
I would note a recent idcs study projects Golden de spending could talk two trillion dollar bite 2020 too.
This grant is evident in our metrics.
I would get you to walk is increasing.
I would get you to pipeline grew by more than 30% year over year for the second straight quarter.
And I wouldn't it stood revenue was 41%.
So what good revenue in fiscal Q2.
That's the big still transformation demand continues to grow.
We are seeing increased interest from bronchitis across all industries in cloud transformation.
And do not inextricably linked.
I will tell consummation engagement ranged from walking the Cline well beginning the journey of moving to the code.
The developing cloud native application and data migration for global organization.
When established Mitel cloud strategy.
We believe it is no longer a question Oh, yes.
Well the enterprise clients are considering coat adoption, but rather when they they're big getting like what stage.
No journey they are currently in.
In anticipation of this spring.
Have been making strategic investments across our business in building a workforce, but strong global expertise.
Augmenting our.
<unk> in house cloud capabilities.
Creating cloud native solution.
And strengthening other partnerships with industry, leading public cloud service provider.
As a result of these investments and proven leadership in deliberating on the problem is a coke transformation.
Okay, and increasingly doing too, but too soon for cloud solutions to resolve if we do challenger.
Sean form the organization and create a ready, but anything scalable digital infrastructure.
Let me know give you a few examples of what the aren't doing in the cloud spirit.
Okay.
What do so today is leading enterprise wide kelk transformation for a multinational telecommunications company.
This might tell you engagement extends beyond just application migration to the code.
I'll be engaged wouldn't begin with creating a new application development blueprint for public line utilizing a giant approaches and applying this blueprint to stepper lycos application transformation use cases.
I looked like the then leverage this new development playbook.
Quickly to it its migration over 400 application.
Disparate data center to the up pretty good public cloud provider.
What do so one this deal competing against multiple generation one consulting firms.
Not only because of other BP capability.
But just as importantly, our creativity and engineering expertise, which will enable increased efficiencies across our clients global application development ecosystem.
But this when we I know in India petition to flow did reviewed our person within this might tell you count migration program with the dog food value in the tens of millions of dollars.
But do supposed also recently selected by in leading U.S. before.
My time National Bank for the implementation will be might take out.
Progress transforming their legacy debit platform into what cutting edge go native platform that there will be built using our clients progress towards.
This transformation will enable our client to modernize that debit card platform and a cheap scalability at it reduced cost.
But to suppose chosen as the preferred transformation Pago after the kill food God due diligence to aspartame public cloud enablement expertise and experience in delivering large transmission programs for major banks.
In My last example, but tusa was recently selected by one of Europe's largest banks do my greatest adult all 140 applications onto a private cloud infrastructure.
This program will enable our climbed to meet it time bone requirement separating its share data center with these subsidiary company.
What do slug in one disengagement because of the extensive code expertise as well as I would deep domain knowledge and engineering cutting edge.
I looked like examples you know, but digital transformation practice area continue to demonstrate our leadership position.
The initiatives have been and not being undertaken to expand doubled cline addressable markets.
So did you do first and digital only strategies.
Increased speed to market.
Mitigate risk and reduce them be you'll call.
All of these outcomes remain key gone priorities across oil although industry groups.
Okay. Thank them to remains one of our fastest growing industries and he's an area that would be all else being substantially demand for I would DP solution.
I'll be hooked up time, I increasingly looking to implement analytic solution.
By AI and now in order to gain better business insight.
We did greater engagement between patients and providers.
And provide better more advanced care for patients.
For example, but to say, it's currently engaged by a leading healthcare technology company to modernize the current analytics system.
Over the course of disengagement veeva developing and advance set up dashboards that should be highly interactive and bill good health care providers access to robust analytics.
Capabilities of medical data.
Then just engagement is complete the new system to be able to run advanced AI analytics.
That provide predictive and prescriptive information do with users ultimately providing better care to patients.
We also recently announced a collaboration with Cardinal Hill.
Amazon Web services and the University of Texas Health Science Center at Houston to use AI and machine learning to advance medical research.
Using but to SaaS cloud based platform Prebuild Apiay and <unk> mm one has.
Many good researchers at Yoki Hill.
The seat to find Quinn that can lead to new treatment strategies and queues reinject businesses.
Very proud to be part of this collaboration.
Within banking and financial services regulatory compliance initiatives remain near the forefront above book on de spending priorities, especially in Europe .
We continue to see increased collaboration bit Bang.
Particularly around New York customer, Okay buys the requirement.
In addition, those banks that okay, but I see compliant are looking to monetize the only investment.
By developing Apiay.
Fee based usage patterns for customers and partners.
Today, we are engaged with multiple European banks.
Building block cave IC platform.
Benefiting from Abbott earlier investment in building solution accelerators in this area.
I look out and it's good consummation capabilities continue to be recognized market wide and this is leading to even greater opportunities for virtusa.
Our consistent track record is garnering us bought attention and reward with the most recent example involving but to still being selected as a major European banks number one strategic digital Engineering Park, though.
After a grueling competitive RFP process against 22 other service providers.
The selection gives us the ability to bid on 100% of declines digital projects beginning in album fiscal fourth quarter and positions us as their partner of choice.
We have already been awarded new work, including engagement to build it did ship to personal finance to coach for their retail banking customers.
It is sizable project, but as importantly, it's an opportunity to expand the dinner division of the bank the largest did stood bucket.
We're very pleased to be selected as this client number.
It's a good injuring partner and believe it reflects although growing position as a leader in this space is known for the integrity of our work and I would track record of delivery excellence.
Moving forward, we see demand remaining strong across oil, although the industry groups and geographies, but we are not standing still.
We couldn't do you do make revenue diversification, a priority and are making solid sprite.
We are targeting height grow what verticals, including health care and high Tech.
And increasing other focus on high growth geographies in EMEA.
Yes, well, it's still committed to growing high potential accounts faster than the company's growth rate to further diversify revenue.
We believe these initiatives will reduce revenue concentration risk overtime and lead to better than industry grew up.
In conclusion, we believe that I'll focus on digital and cloud transformation work across industries and geographies remain the REIT focused.
The task of transformation has become in necessary white virtually every business in today's world and ability to make it happen is our core strength.
Although progress and position gives us confidence in our ability to deliver solid sustainable growth.
No I'd like to turn the call over on John will provide more details on our results as well as our third quarter and fiscal year 2020 guidance.
Roger.
Thanks, Chris and good evening to everyone.
Let me start by summarizing the results of our fiscal second quarter 2020 .
I will then provide our current guidance for both fiscal third quarter and fiscal year, ending March 31st 2020 before opening the call for questions.
Revenue for fiscal second quarter was $328.5 million above the midpoint of guidance and representing 3% sequential growth in reported currency and 3.5% growth in constant currency.
I sequential revenue growth was driven by growth across all of our industry groups.
Year over year, our second quarter revenue increased 7.5% in reported currency and 8.4% in constant currency.
Gross margin of 27.4% was inline with our expectation and up 100 basis points sequentially, primarily reflecting higher utilization.
GAAP operating income for the second quarter was $19.2 million compared with $13.4 million in the prior quarter and $14 million into year ago Peter.
GAAP operating income was slightly above the midpoint apart expectations, reflecting our revenue beat.
Second quarter. Other expense was $7.2 billion. This includes $3.5 million of net foreign exchange loss and $3.7 million of net interest and other expense.
Net interest and other expense includes $4.8 million off interest expense and $1.1 billion of interest and other income.
GAAP earnings Bush. It was 20 cents into second quarter. This compares to 15 cents in the prior quarter and once ended the year ago Peter.
Turning to our non-GAAP results non-GAAP operating income was $29.4 million into second quarter compared to $24.2 million in the prior quarter and $29 billion a year ago Peter.
Second quarter non-GAAP operating margin was 8.9% inline with our prior expectation.
non-GAAP earnings per share was 54 cents in the second quarter two cents above the midpoint of our prior guidance, primarily due to higher operating income and our share repurchases in the quarter.
This is compared to 41 cents in the prior quarter and 54 cents in the Utica repeated.
Turning to the balance sheet and in cash at September Thirtyth, 2019 was $198.5 million inclusive of cash and cash equivalents short term and long term investments.
Oh gosh declined approximately $10 million sequentially as we funded our stock buyback program.
[noise] gosh provided by operating activities was $21.6 million into second quarter, representing 7% of revenue.
Our dsos for the second quarter was 74 days, an improvement of one day sequentially and two days from the Utica repeated.
In Q2, we repurchased approximately 505000 shares for $18.7 billion under our current share buyback program.
As of September Thirtyth 2019, $11.3 million was available under this program.
No I will go into some more detailed discussion of our second quarter revenue performance by industry group.
Revenue across all industry groups exceeded the midpoint of our prior expectation.
You have decided revenue increased 1.8% sequentially and 70 basis points year over year, representing 59% of revenue.
The sequential increase in be emphasize primarily reflects growth without financial services and banking clients, including growth at our largest line as previously expected.
Communication and technology revenue increased 3.7% sequentially and 27% year over year.
C and D represents 33% of revenue in Q2 up from 28% a year ago, highlighting our strong growth in this industry group and ongoing focus on revenue diversification.
Media information and other revenue increased 9% quarter over quarter and decreased 4.8% year over year, representing the remaining 8% of revenue.
With respect Joe with respect to our geographical performance North America revenue increased 11% year over year, followed by that's the awarded by 8.8%.
This was partially offset by Europe , which declined 5.6% in reported currency and 1.1% in constant currency.
I will now provide our current guidance for our fiscal third quarter and year ending March 31st.
2020 .
Revenue in the third quarter of 2020 is expected to be in the range of 332 million to 10 $40 million.
non-GAAP diluted earnings per share in the third quarter of 2020 is expected to be in the range of 73 to 79 cents.
Our Q3 fiscal 2020 non-GAAP EPS guidance anticipates, an average headcount of approximately 33.4 million.
Well the fiscal year, ending March 31st 2020 , we expect revenue to be in that Angel.
$1.3 billion to $1.35 billion.
non-GAAP diluted EPS for fiscal 2020 is expected to be in the range up $2.51 to $2.65.
Our guidance excludes $23.4 million or stock compensation expense and $16.8 million acquisition related charges.
For fiscal year, 2020 , non-GAAP EPS anticipates, an average headcount of approximately 33.7 million.
Our current GAAP and non-GAAP guidance is based on a set of assumptions that can be found on our datasheet located in the Investor Relations section of our website.
As Chris discussed earlier digital transformation and cloud transformation Clyde initiatives continue to be the key go try before too so.
Digital transformation, primarily involves three core business areas did I integration and CX or customer experience.
Do you don't do all the ability to capture aggregate.
And analyze massive amounts of data we are machine learning in real time to both measure performance and generate insights that can drive future growth.
D. integration opportunities include building scale middleware that can bridge applications with partner ecosystem to improve time to market.
Do you applied to customer experience is about creating seamless often mobile first interfaces that allow customers to engage when and how they want.
As digital transformation demand continues to grow we're also seeing greater interest from clients across all industries in cloud transformation.
As we D.. We believe there is significant runway for growth from cloud transformation services within our banking and financial services insurance and healthcare clients as they are earlier in that adoption of cloud was as high decline.
At the midpoint of our fiscal Q3 guidance revenues expected to increase 2.3% sequentially slightly below our pride expectation impacted primarily by higher than anticipated Klein mandated date holidays.
As contemplated in our prior guidance, we expect strong sequential non-GAAP operating margin accretion Q3.
Looking to fiscal Q4, our guidance contemplates that our strong sequential revenue growth will be supported by the following factors.
First a high number of billing days versus Q3.
Second the resumption of growth at one of our large European banking clients, which we discussed with you previously.
Kurt the usual Q4 revenue acceleration at a large European telecom Cline.
And last organic growth with other clients in line with past performance.
What I fytwenty at the midpoint of guidance range. We continue to expect revenue growth of 7.4% in reported currency and 8.1 in constant currency.
In addition, we expect 60 basis points of non-GAAP operating margin accretion in a fytwenty.
Our non-GAAP effective tax rate is expected to be 30.3% for fiscal year 2020 worst is 30% previously stated.
As a reminder, audio does not include any beat tax impact as we have been contemplating a reorganization of our Indian legal entities, which continues to be on track.
Our current non-GAAP guidance anticipates $18.7 million of interest expense.
We continue to expect strong non-GAAP EPS growth of 22% in a fytwenty at the midpoint.
The three cents increase in our non-GAAP EPS guidance is primarily due to our share repurchase activity in Q2.
In conclusion, our second quarter results exceeded the midpoint of our prior guidance.
Based on current demand trends backlog and pipeline, we expect our fiscal second half results to perform in line without expectations.
And beauty to reiterate the midpoint of our fiscal year 2020 revenue guidance and raised our non-GAAP EPS guidance.
While our business momentum remains positive, particularly within healthcare and high Tech, we will continue to monitor macroeconomic trends and the potential impact on demand at our banking client in the U.S. and in UK.
Our focus continues to be on creating long term shareholder value by delivering strong you'd be as growth in fiscal 2020 and beyond.
Operator, human now begin the acuity sessions.
We will now begin the question and answer session to ask your question you May Press Star then one on your telephone keypad. If you are using you speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily twoish.
Symbol our roster.
The first question comes from.
Mayank Tandon of Needham and company. Please go ahead.
Hey, good evening, it was actually called Peterson on for Mike Thanks for taking the questions.
Just wanted to start on margins I'm kind of walking through that kind of 60 bips year on year expansion.
Just between kind of gross margin SGN. A is is there any more room do you guys think on whether its utilization or bill rates. The that gross margin could kind of see itself or higher or is most that expansion couldn't be through SGN. A it just kind of want to see how we should be thinking of that I see your progress.
Well go a you know we believe it at the midpoint of our guidance the.
Opium makes it a accretion is expected to 60 basis points. If we tend to be at the high end there will be an accretion can be higher than that that being said you know, we believe that our business model and our financial model continues to have many levers that we will continue to extract the walk on out hundred 200 infill.
80 basis points road map that we've designed for ourselves, which we didnt meet the last two years I mean this year is an exception because of the big revenue change that we had after our may guidance, but we believe that we continue to be on the road map doing <unk> growing margins by 100 250 basis points and believe in which would mean that we either have plenty leverage in our gross margin.
As well as an artist either.
All right. That's a that's helpful color and then just a follow up we notice that the a number clients with 25 million plus revenue.
Took a little leg up I think there were three more in that bucket this quarter.
<unk> are these new clients that have been ramping of potential to scale and kind of help with the revenue diversification or is this new work out into the existing clients just.
And any color you might be able to add would be helpful. Access just nice to see the diversification playing out.
Hey accounts this Chris and yes, absolutely.
You have been focused on our diversification strategy.
Nobody, but fish diversification strategy spans multiple areas.
We are targeting high growth verticals, including healthcare and high Tech.
We're increasing our focus on high growth geographies, such as the UK and Australia.
And you also committed to growing high potential accounts faster than the company's growth for it.
Specifically doors, the calling for that the potential to be greater than 25 million dollar account.
Now some of those accounts have been accounts that we have actually been working with the sometime.
We have made the necessary investments, we have proven the differentiation Abbas service offerings, but they've been cloud and our digital transformation and via ex expanding the addressable market across those accounts in other instances, we have a crop of new accounts that Iran.
Deeply emerging to be able to do provide the potential to actually become 25 million dollar plus ago. So.
So we are seeing it both from the perspective of existing accounts that be booked with for quite some time and you're also seeing from the perspective of new accounts at the closing, but I think the large underlying reason for this level of growth, especially in those accounts that have the potential to be accounts that are meaningful and over 25.
Million has to do without expertise and capabilities in digital transformation and cloud transformation.
Yeah, I think Chris as much so pretty clear I just want to add one one thing that you know what you're really seeing is none of it's all by design I mean this was incorporated in our guidance earlier on India. We've been working a lot up initiatives that actually translated into showing that our 25 million dollar clients have really grown significantly so.
None of this was actually a surprise to us we've been working on this behind the scenes.
All right. Thanks to the color, it's great to see thanks, guys.
I felt.
Your next question comes from Puneet Jain of JP Morgan. Please go ahead.
Yeah, Hi, Thanks for taking my question or your organic growth.
Over the last few quarters is driven by the second Telecom protocol, which has offset weakness in all that is yes.
So what's driving high cool in back work because it does synergies from Itouch speed.
Oh, it any industry trends sleeping whos good at such an equal isn't dad telecom, that's driving through in that business.
So.
Tony the fundamental on areas, that's actually driving.
Really significant growth for us is above trend then expertise in digital transformation.
Believe he.
Robust layout of micro services to be able to enable our clients to provide seamless.
Sure needs to consumers and expand the addressable markets.
And and increasing volume of activity in cloud transformation.
So about a year ago, what we found was that they have a large number of experiments that are being done in around cloud initiative and now you're finding that these programs are becoming substantial program.
Typically in telco and health care.
And in high Tech nothing significant increase.
In need and adoption of digital transformation and cloud transformation Sobi says and as you probably noticed our digital revenue mix has increased.
And I would still pipeline now two quarters in a rule have grown by over 30%.
Got it got to.
And all the UK or Brexit uncertainty likely pushed out into your fourth quarter. How confident you are about seeing improvement then that you get based banking client.
And our.
Is that line like given where it is into Q.
They're going to be a need for does step down in revenue from Q2 into Q3 at that time.
So let me just stuck by sharing some color in terms of our large European banking client.
So we do expect that although large European banking client from an expectation standpoint.
<unk> was lower than our forecasts and viiv recalibrated that especially in going into Q3.
We are expecting fairly shop.
A sharp rise in revenue growth at other large European banking client going into Q4, and that's being driven by us being.
Elected.
In a very.
You know a very deep and.
Complex pursued amongst 22 Sobi so's provider.
And being selected as the number one digital engineering services provider.
As a result of that selection the momentum that we have and the pipeline activity that we have especially as we start.
Calendar year 20 has increased sharply and we are expecting that some of those programs. The drive significant growth in revenue from our large European banking plan as we go into although Q4 or the first calendar quarter of.
20.
So company just.
So one you know for the large European planned there was always expected that Q3 versus Q2 will still be a decline.
A bright guy Didnt expectation continues to be our same expectation. We the guidance calls for this is probably the last quarter off continued declines in this if we are expecting because you know the March quarter is that first budgeting quarter.
We will start to grow that but the growth is not at the client level. The gold should not be part of water is a and b exponential growth that we're getting some all going to reverse in one quarter. We are expecting you know in growth will happen, but it'll happen and a more measured manner, but the big piece that will happen for the company is at least that wouldn't be masking lot of.
The growth that happens at the other clients. So the good had happens at the other clients with also started to show very favorable.
Got it okay. Thank you.
The next question comes from Bryan Bergin of Cowen. Please go ahead.
Hi, Thank you wanted to ask you on a on the large health care deal how that might be progressing any early signs of success here that you think you know.
Actual expansion that you can call out.
Yeah. So Brian you did the how large HOKA that we talked about in Q1 continues to do well, it's probably I am contributing about $5 million to $6 million worth of revenue on a quarterly basis and as you know how we tried to do these things as we don't really going very hard and heavy on synergy play earlier on and we know the synergy play is something that.
We are working on you know start to really extract maybe later part in Q4, you know there initiatives that are there, but these numbers that I talked about five to 6 million do not in a contemplates synergy revenue in that and we expect the you know synergy revenue opportunity, So where do so continues to do that so the so the deal has done pretty much on track with what.
While we had designed the acquisition model.
Okay. That's helpful. And then what's your top client did that come in line with your expectations I think it that a little bit better than you expected last quarter.
How did that fair your relative to your your outlook in a in this quarter and going forward as it's still kind of that can.
Good sequential growth as we move through the back up.
Yes so.
So it's a sequentially group. It's the end of sequential growth was it slightly better than our expectation and we're expecting sequential growth again in our Q3, so full year our expectations for this line, it's pretty much where we had talked about an army guidance.
Alright, great. Thank you.
The next question comes from Moshe Katri of Wedbush Securities. Please go ahead.
Hey, Thanks, just going back to.
The topic of the European client.
It's just not talk a bit more maybe about how this actually gets reflected in the quarterly numbers for the next few quarters that's number one.
And then did you mention what was the digital next year in the quarter and also the growth rates. Thanks.
So the large European banking client as we expected we would see sequential decline going into Q3, and that's exactly what's driving starting as a matter of fact, the client has performed a little bit below expectation offset by other clients that have performed better than our expectations.
Hence the guidance being exactly what it was been be guided last quarter.
Now having said that.
We have been recently selected by disciplined as there are number one strategic digital engineering partner after going through a fairly extensive RFP process.
Now what that means is that as a result of being selected as the number one gets to engineering partner, we basically get to bid on the entire opportunity set of digital engineering programs, which is quite sizeable.
And they also very pleased that we actually competed against a pretty much everyone in the space, whether they have a generation one companies that are India headquartered consulting firms today, the Europe or U.S. headquarters.
Digital engineering funds from Eastern Europe and.
Other parts of the wood and vivo pick essentially as the number one strategic partner and that's really that really talks clearly endpoints to the highly differentiated service those that we have in films of digital and cloud.
Now whats happen more shares since this is that we have been selected for a variety of different engagement many of them commencing in January all the January quarter of 2020.
So we expect that as the going to other fourth quarter.
That people see fairly significant revenue ramp at this client.
And then beyond that the potential is pretty significant because they're now the number one strategic digital partner.
Now in terms of our overall pipeline.
Our overall pipeline was up 12% year over year.
But more importantly, the digital pipeline was up 39% year over year.
I bridge deal sizes for the total pipeline was up close up 20% year over year. So overall got making great progress across pipeline metrics and directly on core operating the fact that although overall volume of digital engineering work.
Is increasing.
We are becoming very well known as the transmission.
And so mish, new digital and cloud transformation partner and I think thats for the underscored by going up against perhaps that some of the.
Best known there'll be those companies and being selected as the number one partner in the in this RFP process that I just.
Described.
Understood. Thank you.
The next question comes from Maggie Nolan of William Blair. Please go ahead.
Hi, it's kind of alluded to that a couple of times I'm talking about the other large clients, but outside of your top 10 or outside of the top line to top 10 clients actually grew pretty well I'm. So I'm wondering kind of what you expect this group to do I wondered if gross level.
Now I can continue and kind of any strong double digit rates and then what's your visibility into the rest of this group.
Your confidence level there.
Magazine, if I just wanted to provide a few data points around this right. So even though the appeal is seeing that when you take a look at the industry is that health care and communications and technology is going pretty well for us.
If I wasn't just simply exclude.
Two of our large banking cotton the rest of our banking business year over year is growing 22% right. So matched by if you include all of the portfolio banking is growing about 1%, but if you will but what do exclude the two large banking clients are too about large banking clients. The rest of the book of business.
Is growing 22% and we fully expect given the pipeline activity that we have and the traction that you're seeing in terms of digital transformation and cloud transformation for that level of robust growth to continue.
You want to build on what they needed to get the other pieces that we're really excited about I'd be a moving into the back half as maybe the growth on our non top then glide portfolio and yes, Chris talked about but we.
Management recognize the importance of revenue diversification and we actually been doing lot of things on revenue diversification. The rest of some of it actually starting to show you sorry on the 25 million dollar client.
If the guidance plays out the way we've been contemplating the non top 10 clients are expected to grow a lot faster than the company outage that was really continue to contribute to the.
Revenue diversification story and they leave sets our Q4, and then Fytwenty one we believe very well for bagged growth that board producer aspires to it would do so they used to which is really go to have you know a few percentage points faster than industry outage.
Thank you and then a in regards to that strong caught expertise that you've been building how do you feel your position competitively with feminists cloud transformation market, you're doing and then where do you think that we are on the maturity curve.
At this cloud work.
So let me address the second part for US so yeah into very early stages of code. So it's one this is the first year that Bob you're really seeing significant budget dollars being allocated to code and cloud transformation.
As I had mentioned earlier in prior year dealt with a lot of experimentation that a lot of proof of concepts being done but relatively small engagement. This you'll get being very significant engagement and we're also seeing them what should reach maturity level, although client in terms of code adoption going up.
Fairly sharply so.
Today, it's not about it.
It's really a question of when people are really going to embrace the cloud in the enterprise Arena and a large part of that is driven by virtue of the fact that as they adopt cloud and as they can actually move workloads to the cloud. They don't have two sites that data centers anymore for Mexico volume on next node they can.
With me size, they are held requirements and scale it as and when they need. So clearly you can see that there's a significant benefit from an operating perspective once you move to code.
In that journey.
Many of the plan that's still in the very early stages of basically picking either a private cloud infrastructure.
And all maybe one health services partner to move some of the workloads to.
The more advanced client that they're working that have a multi cloud strategy and into multi cloud strategy. They could have a private code. They could have multiple csps cloud services provider.
And directionally built, albeit good for them the ability to move workloads from one code to another but minimal changes and then I'll just to get them significant flexibility and significant opportunities to continue to drive their price points down.
Now as far as but to says differentiation.
We've been working on cold fall before years.
We had strategic partnerships very significant strategic partnerships that OIBDA, leading csps and.
And we have executed some of the most transformational cloud program in industry.
So I believe that be up a standout and we have highly differentiated sobi says no matter, whether a client is looking at cloud in the early phases have been moving to a private cloud or maybe to one CSP all that they're looking at the possibility of going to a might I called environment and working with us.
To actually build the layers that are required to be up <unk> move workloads from one CSB to another so we believe that did extremely well positioned and inner leadership role in terms of working with our client and bringing industry, leading cloud thought leadership to the to the table.
Thank you.
Your next question comes from Daniel Reagan of Cantor Fitzgerald. Please go ahead.
Oh Hi. This is this is Joe.
Let me just ask.
Directly you've gone to the struggles with the large client I know you've talked about it quite extensively during the call.
Help me understand why you feel like maybe the numbers are de risked now appropriately.
After seeing.
Demand for quarter.
And how comfortable you are.
So there won't be another revision.
Yes, sure fake question Joe's Joe if you really looking at once you know our guidance forecasting methodology, we're not forecasting methodology continues to be consistent we obviously loan from our past learning that incorporate them, but primarily the methodology stays consistent.
It is a very data driven methodology, which really shows there's a backlog percentage within the in in this quarter's case continues to be in Akbar to what it was in prior times. During this period for full year visibility. It shows you know backlog rolling forward as well as pipeline visual 100% revenue visibility for the remaining of.
The year, which means we don't really need to go out and I expect any more new pipeline injection to really make our full year number. It should all you got to do is continue the backlog forward and continue to close the with the pipelines that are in there we don't need incremental pipeline, which is very consistent to what we've talked at the calls before is this is how our revenue methodology.
Yes, you mean, sometimes you know these black Swan event that come in and they come in in a very short period of time. It has taken us type two absorbed but we also believe that we've proven that more than once that this model is sold resilient that it does absorb it takes a couple of quarters and it does absorb those heads in in this case.
We believe that you know the large European line will be this will be the last quarter of their decline, which is no different than what we had talked about earlier. This is no change in our viewpoint about that and then they will start to really grow in the March quarter. The growth in the March quarter is being supported by the fact that.
A big RFP, well, but to say came it as number one which means we're too. So I was going to have access to 100% of digital bidding that we can choose that work or we may not use their own we've got a margin, but we get the first shot of of course as anybody else that gives you the comfort over and above that the pipeline that was dead has starting to one again resume and starting to grow that.
Gives us comfort and then the remaining business always was doing well we had been talking about the remaining business had been doing continues to do well and that provides us comfort in the overall revenue guidance.
Got it to more for me.
Our Resourcing perspective did you have to reassign head count.
Has that process already taken place from the large European client and are those people now productive again and should we see Utilizations go up or did you keep a couple of people on the bench because you're assuming that revenue growth rates are going to reaccelerate out the large European client.
A little bit of both right as you would expect I mean, we've basically figured out what we would need to keep back. So that we didn't have to go into sort of a yoyo between you know letting some people go that we would need just in a short period and then we looked at skill sets that somewhat down it's done and took the opportunity to let some of the.
People move on so be it a bit up boat.
From a resourcing and staffing perspective, there very well positioned to be able to capture this increased demand that building.
As.
As as we have indicated from a pipeline perspective, our digital pipeline continues to outstrip growth of any other type of work that we're doing and obviously that includes both digital transformation and cloud transformation and they're very well positioned to execute against it.
Got it but there are many jobs.
Sorry, I was just contract, especially on utilization, we're not expecting us in a very significant increase in utilization in the backup marginal increases, but no significant increases we've really realigned our utilization unlocked.
Got it Okay and then the last question for me is really sort of a more strategic one what's the next stage of evolution for the Virtusa model right I mean.
We've known each other a long time youre organic or during median offshore days.
Did Polaris is transformational.
Acquisition.
And now we've had a couple of.
The quarters, but really sort of steady growth overall in the digital practices. So I'm. Just wondering what are you next focused on would it be another transformational acquisition once we get the noise behind US is it just continuing to grow the business digital perspective, again, just looking for sort of the overall strategy. Thanks.
Well, it's quite simple joby have industry leader, we have an industry leadership position in both digital transformation in cloud transmission.
The highly differentiated.
We compete very effectively Andy can we've demonstrated that we have a unique and differentiated set of offerings.
In a double down on those.
As we do that they're going to continue to be mindful of the importance of diversification.
The go into focus a lot about attention in terms of growing enough codes that we might be scaled in some areas, but they are underpenetrated and other areas, they're going to grow those areas effectively specifically, but these new service offerings and new service line, and then that targeting bought industry.
Trees and certain geographies that we believe that we have a significant opportunity to grow although accounts and have them that that they have potential to be over $25 million in revenue to but do so that's our goal.
As we do this I'm sure, they're going to find more opportunities and.
And I'll get back to our growth rates that we have always enjoyed bitches basically growing the business on an organic basis, a couple of points ahead of industry.
Thank you.
Again, if you have your question. Please press Star then one on the Touchtone phone.
The next question comes from Vincent Colicchio of Barrington Research. Please go ahead.
Oh, yes, Chris.
In Europe should we be concerned more broadly beyond your large banking client in terms of weakness.
What do you sitting on the ground.
So we're going to let me just started because in my prepared remarks I talked about you know look we do continue to watch the macro economic uncertainties that play out right. We do believe that even with this large European Cline some off the spending impact that they face was as a result.
The big Brexit that blend continues to play out and Geo overdid above that we are watching you know macroeconomic uncertainties that play out whether that could be you know a trade discussions other whether that could be upcoming election any significant events. We continue to watch the impact of those on our financial services clients.
And then assuming that there isn't a significant impact on.
Well situations like that they actually seeing as an example that while.
Large enterprises that are very focused on just the UK market may have had some so certain slowdown we also seeing.
Enterprise clients that are servicing board European customers and UK customer.
Needing to double down and do things like data center separation.
And now as they do data center separation, it's a great opportunity for them to embrace the benefits of code and we actually seeing a surgeons of activity in the UK and in Europe . They are enterprises that are so the thing.
Consumers and customers beyond just the UK actually doubling down investing in terms of preparing themselves for whatever happens with Brexit and one thing is very clear that Yukon. So this european customers bit data in the UK.
Nor can you will service.
UK customers that data in Europe .
Post Brexit environment, and many plans have to prepare for that well ahead of.
The Brexit.
So.
We actually seeing some increased activity as result of Brexit in the same thing just says runs and mentioned.
Enterprises that are very UK specific may have seen some negative impacts of the Brexit as well.
[noise] and that you spent a lot of time talking about Cici versus G. T work I'm curious how does the margins compare between the two.
Yeah. We're you know we've agreed DTC DT and Cts start I say Worsley continues to be a strong growth driver. What we have seen that on our digital portfolio, which is a mix of 41% those margins have always been slightly higher than the company margins trend continues to play out.
Hi, Chris I heard two different numbers I was just for clarity digital pipeline was up was a 30% year over year were 39%.
So that in two consecutive quarters, our digital pipeline has grown over 30% in this last quarter digital pipeline grew 39%.
Thanks for the clarity that's that's it for me. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Chris kind of current now for any closing remarks.
Thank you drew thanks.
Thank you all for joining us today.
I'd like to take this opportunity with bank of a global team members for their dedication and commitment to our clients. Thank you.
And we look forward to speaking to you on out Q3 earnings call. It.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.