Q4 2020 Earnings Call
Good day, and welcome to the Virtusa fourth quarter and fiscal year end 2020 conference call all participants will be in English.
Should you need assistance, please signal a conference specialist.
Starchy followed by zero.
Please be reminded that this meeting is being recorded I would now let's turn the conference over 2 billion.
Certainly.
Please go ahead.
Thank you Shawn and welcome to reduce this fourth quarter and full fiscal year 2020 earnings conference call well be discussing our financial results for Q producers fourth quarter full fiscal year ended March 31st 2020.
On the call with me are Kris Canekeratne, <unk>, Chairman and Chief Executive Officer, and launch on Calia, except <unk> Executive Vice President and Chief Financial Officer certain statements made on this call. There are not based on historical information are forward looking statements, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act at 1995.
During this call we may make expressed or implied forward looking statements relating to among other things reduces expectations and assumptions concerning management's forecast the financial performance the growth of Virtusas business, the ability of or TUSAS clients to realize benefits from the use of Virtusas I T services the impact on our operations during the cold the 19th.
Endemic and Mashes plans objectives and strategies. These statements are neither promises or guarantees are subject to a variety of risks and uncertainties.
Many of which are beyond virtusas control, which could cause actual results to differ materially from those contemplated in these forward looking statements.
Existing and prospective investors are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof Virtusa undertakes no obligation to update or revise incurring those during this call.
Whether as a result of new information future events circumstances or otherwise other statements on this call also includes certain non-GAAP financial information as defined by the FCC.
We present constant currency revenue to provide a framework for assessing how our revenue performed excluding the effect of foreign currency rate fluctuations, we provide non-GAAP adjusted operating income non-GAAP adjusted net income and non-GAAP earnings per share, which we believe provide insight into the operational performance of our business reconciliations of non.
Got to GAAP measures are included in todays earnings press release, and Datasheet, which can be found on the Investor Relations page of our website. We also present a reconciliation cash cash equivalent short term in long term investments that we believe provides insight into the total cash position and overall liquidity.
Please note that he supplemental data presentation to our fourth quarter full year results has also been posted to our Investor Relations website for additional disclosure regarding these and other risks faced by Virtusa, She's disclosures contained ever TUSAS public filings with the FCC and in our earnings press release, but that I'll turn the call that a Kris Kris.
Thank you Bill.
Good good evening, everyone and thank you put joining us today.
Let me begin by saying that I wont automobile and your family's Duff <unk> and Colby.
Yes, that's still month of post unprecedented challenges around the world and on behalf, but you'll sell our hearts go out all those affected by the Corbett 19 pandemic.
But to sell stopped priorities remain protecting the health and safety, although dolbeau team members.
And our families and continuing to self fund fear and sustainable.
We move rapidly on both of these from.
During the crisis and today 98 cents above Goldberg be breakeven members have the ability to walk from won't.
I would kill Im going to cloud based digital infrastructure.
Cool, but to be a tremendous asset in our ability. So I look hot money corrupted during these challenging time.
I mean credits the probe on public builder in both quickly adapting to this evolving situation.
Moving swiftly to men in business continuity.
And going above and beyond to ensure we continue to so as an agile and trusted partner that over time can rely on to address that most critical technology me at any time and under any circumstance.
In terms of where we thought.
Well good revenue for the fourth quarter was $329.7 million.
Representing a decline of 1.6 puts them sequentially and 0.6% growth year over year.
Although Q4, non-GAAP eat yes, what's 41 cents.
What do you hope it's good Twentytwenty, we generated 1.31 billion of revenue.
<unk> <unk>, 0.2% and wants to non-GAAP EPS, Oh go daughters, and 14 cents.
As we previously announced in late March although fourth quarter results.
Reflect the impact.
The Corbett 19, pandemic, including business interruption and project delays as well, let you don't get kind does it shouldn't making cycle.
No I would like to provide you'll get some color context around what the are being in the market today.
You do you said, the Corbett 19 pandemic impacting can spend across industries and geographies at varying levels.
Sometimes not reducing budget.
We have taken a more aggressive look at offshoring what are those all sitting on the sidelines until they have more the ability.
It'll be expect short films secular had been received the current environment, creating opportunities for us.
As cooperation so moving to reduce short film costs and cut discretionary spending they couldn't currently seeking to increase investment in longer to revenue generating and efficiency improvement area, including digital transformation.
Transformation and remote thing or remote walk for support.
These trends play into but to sprint.
Digital he's the said code revenue driver you know business.
We are committed to delivering value to our cotton well, but did you get initiative in the short and long term.
The depth, finishing up digital and how a book.
And the industry deal the overall digital market. It has people in recent years.
The other two was previously you can describe largely consumer facing up the kitchen did you do know represents a broader set of technology and interfere.
Critical go deep learning and do and digital experiences.
Born most companies are realizing that achieving look truly embossed bids and shoved into wind experian requires integrating crunch and seamless consumer interface, though the Bakken system, the I'd be interested middleware and cloud technology.
Often referred to as deep digital.
That is you expand the test can do to dish digital and what is driving the demand.
But that they wouldn't mind, then be aligned but too so its definition of digital publication and industry.
And after specifically, excluding non digital technology.
Oh, what proportion of digital revenue increased.
[laughter], the 8% of total revenue in fiscal year Quentin.
Moving well, but we did you.
Yes, the definition of digital to report I wouldn't digital revenue percentage.
Additionally, although overall pipeline has expanded.
D.A., but then you're on your in the fourth quarter.
And the mix.
Did you feel pipeline <unk> overall pipeline is consistent with other goodbye digital revenue mix.
That's it still transmission demand continues to grow.
We're also seeing increased interest in Coke krotz submission and the two inextricably linked.
The cost reduction.
The ability and operating efficiencies coke reprise them.
A significant and essentially.
We believe that the current endemic and that recessionary environment. The operate it did accelerate demand for our cloud offering.
Two such trend and competitive advantage.
I'm encouraged by the early sign the has already seen and I'll bet petition to help our cat.
And finally, the cost will help.
Setting up remote workforce would have been steady and growing.
As Dr. did you did that's committed that tens of millions of goal do work Oh, no walking crumble.
Im coils, but not ready for this transition.
And many have reached out to but two so wearable unique technical ability around remote king and booked <unk> execution, including the hyper distributed at Johns solution and so he said.
Alongside these essentially they'll be area, we are seeing more discrete interest in cost optimization opportunities that fit well with sprint, including vendor consolidation.
Just one and British reduce assurance oil proven approach to driving overall cost down and perform and up.
In addition, we are seeing demand, but regulatory compliance project.
No EBITDA banking and quite nicely.
Focused on either complying, but new mandates created as a result, <unk> 19, Oh advancing completion.
I think required when the timeline, but not impacted by the current health crisis.
No I would like to focus a little closer.
Let's see what these discrete areas.
Split into but to the spread.
And provide some specific details on hold with too. So it's helping other can address these challenges today as well, but the long term.
We are seeing several up on larger client enterprises.
Looks the need for strategic vendor consolidation planning.
We believe but to say the exceptionally both petition to respond.
In addition to our extreme agility to quickly and they're both 98% about anybody team members to book trouble.
Providing books, what do you uninterrupted they'll get slow because.
The on it minority report into end vendor.
Has the ability to provide oh, God actionable thought leadership and well stack dumped view FH at Jive themes.
As a result, youre seeing some caution that wants to take on additional walk from other providers, who don't have the love love agility and flexibility that virtusa has been able to come on spreads.
In other cancers, the asking can that's already started dealt vendor consolidation process accelerate their plan choosing book too so as it lead partner.
Oh, the success and proven track record in this regard you've highlighted by increasing the abrupt guidance across the globe, who have avoided that's pretty good then to set up.
She said honor and represent it tremendous opportunity.
That's cost optimization initiative intensified youre also seeing more clients exhibit.
I couldn't be quiet.
Well you all show anybody to you.
As clients.
Hi, John resources across a wide variety of project and technology.
But that's just what model of operation has been experiencing an increase in demand.
Oh, the edges, what more do you feel like.
So despite a giant scrum team.
Books, where do you deployed to provide scale and capacity to set up it remote ready.
The L.C. platform.
I'm sure distributor deems appropriate its mission.
Separately.
Good that line not Mitt.
Lastly, I also mentioned the increase China demand for regulatory compliance program necessary to comply with new mandates, resulting from Corbett 19.
Deep domain expertise has been a cornerstone of other regulatory compliance capabilities the many yard.
What do supposed recent disconnected by leading U.S. thing to create the digital infrastructure necessary to support the loan booking and so the thing operation lit up to the it package recently passed by Congress.
This engagement, we are helping other can accelerate the loan disbursement process for the U.S. Smart business administration.
Sure Protection program known.
As part of the Colby 19.
Stimulus package.
You're going to critical role that banks up playing in executing the government loan program, what do so sees strong potential to support multiple cotton in these efforts going forward.
I think it's important to highlight again the demand for digital consummation and cloud transformation remains the only books and showing encouraging site.
No I just want to partner with Apollo that provides true end to win it's true solutions to help them Chris.
The coke and economic challenges of Corbett 19.
No digitally engaged customers that consumer goods and believe that the cost efficiency benefits in parent took true end to end digital and cloak transmission.
These directives, not only fit well with who but to say is.
What we do but most importantly, b well, what but two so does best.
As an example, without the U.S. healthcare and life Sciences God is bcl growing demand for our collaborative cope near you.
Hi, driven platform the life as clients rapidly, but to walk us Uncooled 90 increased one and Bexley National research. So be nice platform is designed to expedite research and development efforts in healthcare and life sciences by providing deep insight into detail.
And then conventional would be it I encourage and stuff on <unk>.
We liked it's comprised probably HIPAA compliant Italy.
A couple data sources.
Rebuild Keith <unk> and <unk> ml moderate.
The platform offers prebuilt.
Yeah mill modern data visualization and new lifted the U.S. population that though device stimulation I don't feel analysis and many of the feature.
This solution is helping when Pablo medical researchers walking D N night to resolve the prison global crisis.
Other leading telecom side, we recently won strategic cloud program to execute be that migration data analytics and security solutions.
And finally put a leading UK bank Levy some people won a major cloak transformation initiative within the outcome moisture origination Neil.
The book in blood upgrading legacy infrastructure and migrating to the public Cote.
He wants season gets month against strong competition, including a well known incumbent in the final Roe.
The significant then we have plenty created by new buying centers a bit Scott.
No as the preferred strategic thought no across this guy and the idea there we have access to a large addressable markets and significant upside potential.
Turning now to fiscal year, 2020 button and beyond.
Like up here the Corbett 19 pandemic, that's created so 10 near term challenges to up a bit stuff.
However, along with the challenger it has reviewed unique opportunities, especially as it relates to all but three pillow strategy, which has been pets with respect to growth.
Diversification and margin improvement.
Typically they believe that well drilling pad and incorporating Colby 19 later chinchillas that enable us to navigate the pandemics near term economic impacts and Scranton, although old broad buckets financial and operational positioning going well, but in fact.
The pandemic Ms. So as it positive accelerant to sum up the initiative they already had in place.
Building on our fiscal Eurtwenty plan the fiscal year 21 bad consists of three fundamental pillar.
First profitable revenue growth.
Second.
The new diversification, which can be categorized by geography industry and client.
Third increasing gross and net margin.
Yep concrete strategies tactics and timetables in place to deliver in each of these areas.
With respect to the first filler profitable revenue growth it's clear.
That the global 2000 buying behavior not changing in today's environment.
For the foreseeable future God forbid predominantly focused on cost reduction and all strategic projects that in blood critically important workload.
These doesn't show book, those discretionary projects and generally longer to and recurring in nature.
Provides us with the ability to better manage and improved margin.
The track record it looked like the.
Digital strategy.
Combined with our size scale and agility.
Well see some thoughts well to been significant show.
It's still believe borne out by the recent positive response to sub go to market campaign see launched targeting global 2000, and Dell strategic development needs.
Turning to up at that diversification that but.
Second pillar.
Other efforts to increase of a geographical diversification both strengthened in fiscal year twentytwenty during which time be separated out the emricasan and EMEA you know.
The other night, the new executive to oversee our efforts in each region.
Mid key local leadership hires including managing director.
So starting Europe and the middle East.
We expect these changes will expand a book on it and they book course of client relationships strengthen other petition regionally and drive revenue would be booked the kids then grow it particularly in EMEA.
In terms of group you books indication of the increased sales and marketing investment.
In attractive, but it goes over the past your there has been that strategic and many have resulted in 46, but then you're all be outgrowth in Albuquerque, Our current revenue and 25% growth you know the C. N P industry group in fiscal year 20.
Public communications and technology industry group represented 34% about revenue.
It's really up 2500 basis points from fiscal year 19.
Yes, I grew up like 400 basis points over the same period.
Additionally, although yep yep kinds represented approximately 15% about revenue in fiscal year 20.
Given the increasing importance of health care, coupled with business from a gross scale and margin perspective.
Evaluating better break bulk health care into a separate industry group on subsequent calls.
Lastly, we continue to accompany a.
Well, the geographic and industry diversification that but the greater diversification all grew up at the Cline.
We believe it is critically important over the long term to reduce concentration you know, but not just a college and capture increasing organic growth opportunities across the remainder of account bids.
The do so we plan to focus on hypotension, lakos by increasing sales and marketing spend in these areas.
Yes seem discard she was very successfully at almost strategic account.
And I look plan is to apply these same techniques to grow high potential accounts to extend <unk> account diversification.
It is important to note here as well that's all I wouldn't be books indication that but sure inherently drive revenue expansion and organic margin accretion overtime.
I mean, what could be though although fiscal year 21. Penn also include several strategies underway to reduce cost and improve both gross and net margins from Q1 Twentytwenty lovely.
We have initiated programs to improve labor pyramid attrition fees.
Okay like vision and the direct cost both the build spread.
The initiatives focused on the core profit drivers of our business.
People supply chain mobility <unk>.
Project profitability and GE any cost reduction.
And we have initiated programs to reduce other yosef subcontractor, but also optimizing above staffing pyramid.
We believe these actions and the fiscal year 21 plan and that's a whole oh.
Oh, good right cost based on what Youre seeing increasing pipeline momentum.
Other models beyond the immediate negative impacts of Colby 19, and preliminary results.
We believe this plan forms the basis for revenue growth and margin accretion through improved from Q1 of the [laughter] Goodyear 21, and fiscal year 22, and then returned to strong above industry revenue growth and earnings growth faster than top line as the most.
The men damage and that recessionary had been that's generated.
I did close by saying that all the tableau in the World right. Now we are confident in the plan b have laid out.
But to some remains well positioned to do the book value to other <unk>, especially in these uncertain times.
Although the short term environment. They had its challenges we have the right to one team and Threed below strategy in place to come out stronger and better position on the other side.
I'm incredibly proud of orders, although global team members and their unwavering commitment to but to setup and do the can be served.
Thank you for your time, no I'd like to turn the call run John will provide more details.
On our fourth quarter and will yield we thought.
And we'll provide some details with respect to of the outlook for the remainder of fiscally up 21.
John.
Thanks, guys and good evening to everyone.
Let me start by summarizing the results of our fiscal fourth quarter and full year Twentytwenty.
Revenue for the 54th quarter was $329.7 billion, representing 1.6% sequential decline in reported currency and 1.5% decline in constant currency.
Year over year, our fourth quarter revenue increased 8.6% in reported currency and 0.9% in constant currency.
Our fourth quarter revenue was consistent with our revised March 26 expectations.
Gross margins for the fiscal fourth quarter was 24.3% compared with 29.4% into Blackwater and 29.7 concerned in the years ago Peter.
Primarily reflecting the impact of losing revenue on our utilization.
Hi, just up some subcontractor costs.
He is still in piece of employee benefits and pre schedule compensation increases.
GAAP operating income for the fourth quarter was $17.1 billion compared with $30.4 billion into <unk> and $23 billion into your to go Peter.
Fourth quarter other expense was $14.5 million.
This includes $10.7 million of net foreign exchange loss and $3.8 million net interest and other expense.
Net interest and other expense includes $4.6 million off interest expense.
And $800000 off interest in other income.
GAAP diluted earnings per share what 66 cents in the fourth quarter.
This compares to 38 cents in the prior quarter and 24 cents into your to go Peter.
Our fiscal fourth quarter GAAP EPS includes a tax benefit off $11 billion or 33 cents. Fortunately the merger off on Indian entities.
Now turning to our non-GAAP results.
Non-GAAP operating income was $19.7 billion into fourth quarter.
Compared to $40.5 billion and the price Gordon.
And $34 million into you to go Peter.
Fourth quarter non-GAAP operating margin was 6%, reflecting more sequential gross margins.
Non-GAAP earnings per share was 41 cents in the fourth quarter.
As compared to 78 cents in the prior quarter and 46 cents into you know Peter.
Turning to the balance sheet, and then gosh at March 31st Twentytwenty.
What is $300.6 million inclusive of cash and cash equivalents short and long term investments.
Gosh increased by approximately $63 million sequencing.
We made payments of $32.2 billion in Q4 related to tuck in acquisitions.
These acquisitions include Wyndham consolidations and large clients and then India based digital transformation company.
Our cash flow from operations was $5.4 million, 54th quarter and $79.9 billion for fiscal year Twentytwenty.
Ideas. So for the fourth quarter was 78 days, a 90 E P sequentially.
Our Q4 cash flow from operations well below our expectations you hired via so but in line, but historically what order trends.
In March we drew down approximately $84 million from our credit facility as a proactive measure in light of uncertain covert 19 situation.
Additionally, in April we move $25 million up cash from our India entity to U.S. without tax implications to support our U.S. legal entity liquidity needs.
We believe are approximately 200 million dollar cash balance is adequate to cover our cash needs.
That being said, we have designed additional strategies to boost liquidity if needed.
No I was doing to a more detailed discussion of our fiscal fourth quarter revenue performance.
The $27.7 billion underperformance compared to the midpoint of our February guidance was primarily due to 60% from a reduction in backlog due to the did you scope and cancellation of certain projects.
35% from the impact of our pipeline from longer decline decision, making cycle.
And 5% from unfavorable foreign exchange fluctuations predominantly the British pound washes the U.S. dollar.
In terms of outperformance by industry can.
<unk> decreased 2.7% sequentially.
And declined 8.2% year over year, representing 55% of revenue, what's the 61% into University.
Our year over year performance in deemphasize reflects the impact.
The previously discussed deductions about large you get banking clients and impacts of <unk> 19 online spend.
Communications and technology revenue decreased 2% sequentially and increased 13.3% year over year.
Our year over year growth in C and D well supported by growth at all healthcare and telco clients.
Yeah. The represented 36% of revenue in Q4 up from 31% in the year ago PD.
As we continue to drive for the industry diversification.
Media information and other revenue increased 6.6% sequentially and 18.7% year over year, representing that a meeting 9% up.
We continue to see good momentum for our digital in cloud transformation services and on media clients.
Turning to our geographical performance North America revenue decreased 2.8% sequentially and grew 5.2% year over year.
Europe grew 1% sequentially and declined 20.2% year over year.
Finally, let's do a world revenue grew 3.9% sequentially and 15.6% year over year.
I would now like to briefly summarize our financial results for the full fiscal year twentytwenty as compared to fiscal year 2090.
Revenue was $1.2 billion, an increase of 5.2% year over year.
On a constant currency basis revenue increased 5.6% year it'll be good.
Our performance reflects growth within our C N D industry group or approximately 25% year over year.
C and D performance was driven by growth at on large still Coke line.
Large high decline.
And a cross out to help get wind portfolio.
GAAP diluted earnings per share was dollar 42 cents compared to 38 cents full fiscal year <unk>.
And non-GAAP diluted EPS was $2 in 14 cents compared to $2 in 12 cents in fiscal 2090.
Turning to our outlook.
Given the market volatility and economic uncertainties associated with good 19.
We have temporarily suspended our financial guidance for fiscal year 2021.
While our pipeline continues to grow we have limited visibility on when some of these deals we close.
And therefore do not believe it would be to going to provide formal guidance at this time.
We will continue to monitor the covert 19 situation and blanket resumed guidance once visibility improves.
Why do we will not give you our typical financial guidance ranges I will provide you with incremental color on demand trends financial impact as well as some opportunities.
Despite the Golden 19, overhang, we continued to see demand across our client base.
We do do life, they find budgets may be under pressure and that's certainly programs and projects may not be action.
Some work maybe put on hold.
And longer decision, making cycle may affect biplane closure.
In the current environment, we believe some new spending patterns are emerging while other areas are getting more focus.
First increased focus on cost saving and efficiency programs.
These include spending on cloud transformation intelligent automation.
Offshore development.
Vendor consolidation of smaller providers.
Second enhancing the remote workforce model.
This will include spending on collaboration and productivity monitoring tools.
Look for efficiency solutions, and accelerated data and application migration to the cloud.
Third we believe the current environment will provide more opportunities for outcome based pricing.
And lastly additionally.
Additional regulatory compliance work to address new requirements from overnight deal related legislation.
Global GDP remains under pressure impacting our clients budgets.
While we have seen an increase in our pipeline, we believe decision, making cycles will remain elongated impacting stopped age and initial deal sizes.
Therefore on a preliminary basis, we expect our fiscal fourth quarter revenue declined approximately 10% year over year.
While we remain optimistic about all growth in the second half of this fiscal year, our first quarter results and continued uncertainty in the market will most likely result, you not a fight when do you want revenue declining washes out Fytwenty just thoughts.
We caution that another significant go over 19 outbreak could further impact the market and outperformance.
We are using this current environment as the time for continued improvement in order to exit the speedier even stronger.
Some of the actions we have taken include.
Oh really a realignment of our revenue forecasting methodology, we used the percentage of backlog in our financial model.
And a comprehensive cost reduction and efficiency plan, which encompasses improving better murder efficiencies.
Do you seem to use of subcontractors.
Increasing utilization.
Enhancing project profitability.
And your they leverage.
In conclusion, the Coburn 19 pandemic impacted our fourth quarter <unk> fourth quarter results and we expect fiscal Twentytwenty, one will reflect continued demand side challenges.
We will continue to closely monitor the impacts of corporate 19 on the economy and outlined budgets.
We didn't mean prudent and outlining the Betty what a wide range of economic scenarios, what would what do so.
You didn't disputed we are prioritizing the health and wellbeing of our global team members and their families and serving our clients.
At the same time, we have increased our focus on did you see got costs and strengthening our financial flexibility without sacrificing investments in those areas that will enable virtusa grow over the long term.
Once the current economic uncertainties subside, we believe we can grow revenue faster than the market.
We live in annual margin expansion.
And generate EPS growth faster than revenue growth.
Operator, you may now begin the queuing recession.
Thank you we will now begin be question and answer session to ask your question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Anytime your question has been addressed and you would like to withdraw your question. Please press Star then to.
Our first question will come from Mayank Tandon with Needham. Please go ahead.
Thank you good evening christened Rajan Ah. Thank you for sharing some of that perspective, so just oh from a guidance standpoint, you're not giving formal guidance, but you talked about the one Q a downtick in revenue could you talk about trends so far that you've seen in April and through early may and what that might suggest to you in terms.
I'll start could once you be the bottom is that signaling a trough or do you think that's going to linger into twoq you as well before we see some kind of bottoming based on what you're seeing today.
Sure Mike Let me start then of course will add so my like like your dog right.
I believe the year over year decline on Q1, where we've done for ourselves, it's really guiding Q1 with a lot higher backlog than we've done in times.
And so that's one piece that we've done you ought to be forecasting model behind that if you look I'd like to start the pipeline continues to increase and even a wood north.
Close rates that they might be we believed that the Q1 is reflects at around 10% decline year over year.
From there we believe we will start doing.
Similar patterns like we've done in prior years and even if we go in similar patterns like prior years in probably the latter part of the Oh slightly game.
Slightly slower than prior years, we do believe there's some still be a year over year decline by the year over year decline should be less than the decline that we are facing in Q1 year over year.
Okay. That's helpful color and then I wanted to shift gears to the digital piece.
In terms of I'm, just looking at the digital numbers coming out of many of your peers. The going go a lot faster even in the midst of this up and I think at least a two there last quarter.
You noted a 2% growth rate could you just point to what might be weighing that growth rate down is it a function of the way you define it versus your peers or something systemic to that piece of business that is impacting it versus what we're seeing from a lot of your peers in terms of the growth profile there on the digital side.
So I don't bank I wanted just direct 52% growth rate that you mentioned so if you look at the new digital definition that could start the burden you live in embellish more on that but I just want to you know stuff, where the growth to the digital growth rate that'd be having the new definition is slightly higher than the company average now you know.
Last year, if you look at it it wasn't the best to go through your forward do side, you know you've known about the reason being we had a significant sharp fall in a very large you get baseline so that impacted the gold for the company, but the digital gold for the segment that Chris talked about is slightly higher than the comfort.
He outage.
So my just to build on what runs and so said.
Very clear to us that digital has evolved in recent years and not definition of just like behind what kind of thing called as digital today.
So whether to bid. So it was previously used to describe largely user experience consumer facing applications and technology digital now represents a much broader set of technologies going into phase, so that I really critical deep learning and into and an immersive digital experience.
So as an example, but not any of our guns think of digital today. In addition to the end user interface. They include the middleware layer Microservices data links.
Yeah now cloud infrastructures.
So that it can provide and into end experience.
Much of this he's also referred to as deep digital.
So then de aligned but to sell definition of digital.
Oh, the constitute digital transformation and after specifically excluding non digital technology is although proportion of digital revenue is 58%.
I'm not want be report because it really in line, but however gun and many in our industry calculated <unk> and you also very pleased with the pipeline momentum that we had been digital as you know a pipeline has consistently growing very rapidly the digital.
[noise], Okay. That's helpful and just finally, Ron John I didn't catch this if you Didnt noted these no mind or you can provide some more color on margins or do we see another step down in margins in one Q before we start to build back up maybe any kinda framework on that would be very helpful from modeling perspective. Thank you.
No no fair question, Mike as you know our Q4 exit was no less than our previous expectations in previous expectation for Q4, it used to be a low double digits envied outperformance for Q4 was shorter than that are coming into Q1, we are seeing another revenue stepped down sequentially I do.
And then or wouldn't which was which means that you know the billable utilization gets impacted over and above that you know you you have some new expenses that come in and also we have the whole productivity discount that we've talked about without large client that really starts to impact on Q1. So yes, Q1 margins will be more than.
In the Q4 margins because those two reasons we plan to really you know we go the margins Oh coming out of Q1 once again consistent with our prior performance and fully agree we're expecting margins to be flat.
Maybe.
Thank you.
The next question will come from countries and Jane with JP Morgan. Please go ahead.
Hey, Thanks for taking my question and the to know that Youre last season healthy.
So Chris you talked about how quick 19 can result in increased spending on cloud and that's still over the long term.
Should we also expect to see.
Inflection in offshore adoption as clients get more comfortable but let's try to market the Philippines.
Great question, putting it and the short the short and say yes.
It's very clear to us as they've looked at our pipeline.
And the significant increase that they've had enough pipeline that much up that increase is represented in what people call hi put distributor ejaz, which basically means that I try to teams can walk virtually.
Anywhere using up a game you fight tools and platform.
Any loss in productivity to execute the work.
As you know.
Well school bid and Im just recessionary environment.
What about can have constructed budget.
And but they still have to get critical strategic workloads done.
And we believe that the fact that Virtusa has already demonstrated the ability to execute from walk to work from home.
Using other tools and our platforms.
No interruption or disruptions in terms of so deliberate.
And the fact that client budgets are declining.
We believe that that bill.
And to increase all show so vis execution as the quarters progress and this is also reflected in other pipeline. So I can't spend a moment on the pipeline when it's just to build on your question.
So.
Like then as I mentioned earlier up 78% over the same period last year.
But it doesn't look color behind that so shortly before Corbett 19 was deemed a pandemic. We moved our team very quickly to work from home and initiated to set up targeted campaigns to kick specific offerings to both new and existing clients. These offerings included other hyper district.
<unk> offering and the billing, but to virtual scrum teams and squads to collaborate remotely.
They told you need also productivity digital offerings and solutions talk but that regulatory changes and on programs such as PPP and SMB loan.
Large scale workload consolidation to reporting offshoring and demonstrating compelling productivity metrics.
And overall and since early March although overall pipeline has expanded significantly to over $4 billion.
But much of the newly injected pipeline is in early stages. We are cautiously optimistic about its contribution in the second half and beyond.
Got it quick follow up on that Chris.
So I see you your pipeline as existing work and you for and if you ask that you talked about for example to working there now.
Is it going to it is another thing he privatization of Klein spending towards new is again, meaning that some of the order book not get executed.
What do you think that some the order book will also get executed and it's just being before right now.
We believe that order book that comprised of.
Digital transformation into in digital transformation.
To be a do reach abroad to consumer and customer market.
<unk> transformation I think data heightened awareness of the importance of code, especially in terms of enabling work from home also be seen consumer.
That would most likely look there looks so besides from anywhere we believe that those programs are continuing to be funded.
New programs with respect to.
Booked sure remotely.
In the past that was a strong desire, especially in China teams to have everyone book you name in the open space environment, all together collaborating on solutions and we have been able to demonstrate very effectively that we can execute that will remotely.
On the are seeing significant traction in that area.
So those are the types of programs that they believe the continue to get funded.
Critical strategic programs to expand other kinds addressable market.
Regulatory compliance issues.
And.
Reporting.
Obviously in a cost constrained environment, we believe that a larger percentage of it would get executed two offshore.
Okay. Thank you.
Just quickly on thanks for providing a breakdown of 27 million or some impact on Q food was pricing also and then a effect given that the magnitude of impact in such short duration.
Was there any pricing impact them.
And should be expected to continue into Q1 Q2.
Yes, It fair question, but if you look at it.
Was there any pricing concession discussions, but you would really having where there while there was a revenue shortfall probably not a significant alone I'm that as that but yes. When we look at what you know we we've all talked about the realized pricing as a metric that realized pricing as a metric was low.
Lower than Q, what expectation, but that's largely due to the revenue shortfall that you're facing.
Moving this discussion forward I think we do believe that I've realized play a.
Pricing rate.
<unk> or <unk> industry, sometimes don't SPDR will have an impact in 2021 on largely due to the productivity should deficiency discounts that'd be provider to a large client and some of the FX issues I mean are happening, but that a lot of does get offset by a mix changes.
Revenue because you know be having some higher growth accounts that are expected to really cool I should say high margin accounts that are expected to go. So overall, we would say see an impact at the company level, but underneath some of the high margin accounts are growing and what didn't back and offset some of the headwinds that'd be would be facing.
Okay. Thank you.
And the next question will come from Bryan Bergin with Cowen. Please go ahead.
Hi, guys, good evening help or rather an okay.
Just wanted to follow up on the outlook. So so based on what you're seeing here and Roger within that initial 10% contraction expectation for the June quarter can you just help us parse how much of that might be driven by the top client and some of the other top 10 clients versus whether you're seeing that more broad based across the portfolio.
Yeah. So you know when you reduce the UN impacted our top line in Q1.
You know most of the performance I would say that you know sequentially then it can impact sequentially and at our stopped and portfolio as well as it I'm on that portfolio from Q4 into Q1.
We do see that impact and that a few once you do declines that are keeping the large lines that are keeping their performance flat, but you know kind of in this current environment. That's a little bit expected you know it could be demand, but there's also logistic disruption that that is still happening.
We still know that as you know, even though there's work from home abilities that we have but the law towns and the length of the law does impact sometimes the revenue performance because it does impact the new supply chain, that's really needed for the revenue.
That's that's not a you know huge surprise to us in the current environment that.
That portfolio is showing a sequential decline both the top end demand type thing, but we do expect based on the pipeline and based on you know like we talked at the highest backlog percentage that we are getting into the a and even in Q1 that those portfolios will equal for that im interested.
Especially the topping one.
Because I don't up and in that got independent environment on top and it's been a hobby still have more challenges so you adopt and portfolio.
Have you know strong financial where the dog loss to this figure out and that's a more importantly portfolio and we do see that continues to go after Q1.
Okay.
And then just on the pipeline commentary can you help us translate some of the metrics, you're citing on pipeline with ultimately potentially revenue growth.
When we think about pipeline, which is qualified or mature how how might that have changed a anything around close rates are or just backlog as as that has trended anything you can help us out what there [noise].
Sure Brian So it's they're obviously very pleased with the grew up in the pipeline I think the campaigns that we took out for a very topical.
I'm dead resonator, particularly well [noise].
BB been seen some opportunities move very quickly through the pipeline.
Having said that.
It's important for me to stress and under school.
That much of that very significant pipeline.
We grew up.
He is in early stage.
And much of that the malls or the next up for months and quarter Woods and from an expectation standpoint, you expect that this pipeline growth will actually only translate into 10 ship the revenue into second half and beyond.
Now in terms of your question with respect to a deal sizes and.
And closed threats close rates have been consistent.
Hasn't changed.
Quarter over quarter, or you're a quarter over you.
And.
The.
From a.
<unk> perspective, the overall pipeline has actually expand that average deal size, the growing about 66% year over year.
Okay that was helpful. Thanks.
If I guess with a more knowledge and did you mention the I thought I heard inorganic contributions from a consolidation and another deal without material.
That was probably the inorganic will probably in the two and a half percentage for the quarter for Q4, Yes. I mean, we did have either so one of the things that would do says really benefited like a stark earlier on in these larger enterprises, but we continue to gain preferred vendor status. We have also been getting off would you.
These vendor consolidation, especially for the smaller vendors that seems like isn't INBONE flow that continues to come to virtusa because of this trend delivery excellence trends have you gotten good domain expertise WK. So in the inorganic tuck in acquisitions I talked about.
Well.
Benefited by that and then we also acquired in the small our banking company, India base, which was a digital transformation company and I would say pick up that the Dutch if India like we did a couple of years back you know the best course company, which was on <unk> digital transformation.
But itouch was all onshore oriented this is still digital transformation, but all offshoring and so we're very excited about some of these opportunities that meet them to close.
Thank you very much.
And our next question will come from Maggie Nolan with William Blair. Please go ahead.
Thank you.
Can you clarify for me so.
Kind of 27 million they previously.
That reference when you with great exciting.
And that's about kind of where you shut out how much of that are you kept rising has truly cope had driven and then I'll cover the impact do you have a sensor how much and effective portfolio at that time it.
You know kind of having a knee jerk reaction persist those that were already seeing that's.
Financial distress related because it at that point in time.
Sure Michael let me start in fiscal <unk>.
We believe you know.
Most of it that impact has its 27 was really go would impact right and then we believe we were going to.
Meet the midpoint of our guidance, we did see shrinkage, they're not backlog, which usually as you know in our business doesn't happen do a significant amount you make some times come across the slight shouldn't get in background, but it's not a significant change in the backlog in this case, we did see a significant change in the backlog or whatever.
Very short period of time, Oh, we saw a significant change in the deal flow years and.
Also we believe that was covered related some of it was disruption some of it bodes people really trying to manage that expensive and some of that.
Vision, making we believe also landed and I'd be a so in terms of getting the paperwork sign because those processes. We're really not articulated really both somebody is looking at home. The workflows systems are really not working so all those pieces.
That's happened because of coal would really impacted but every cycle.
Okay. Thank you and then well with respect to the goal of growing hypothetical accounts to diversify the revenue base how are your reconciling that with.
You know the likely widespread downturn in demand that we'll see in coming months in quarters, and if there are different and how you have to define.
Yeah, hi, potential or or growth accounts in the near term versus the medium or long term.
So megi obviously the have a.
Pretty pillow strategy that fit being that'd be deployed talking last year, and we are continuing to move fault, but three pillars strategy I'm, a key element up that did diversification and b b, a it'll be seen and deep.
At very strong.
Very strong track record of walking the talk trends and scaling them I'm pretty significantly whether they're probably own concept. The had organically brought in all but are there some with the concept the actually acquired through what Polaris and dog eat Dutch no clearly as the going to fiscal year 21, yeah.
We'll take some of those playbooks and they're going to replace those pay books in height potential accounts outside of some of the accounts that have already scaled significantly and not somewhat concentrated but the good news is that we have been increasing number of accounts they'll be has been selected as a.
Strategic preferred partner so it gives us a very large addressable markets and we believe that from a sales and marketing spend perspective et cetera that be dual focus.
Hi, <unk> percentage of investments in those accounts that present hypertension.
Not yet or not.
Concentration have not reached that level of concentration, but to prison very significant potential for growth.
It's not necessarily an expectation that you drive growth you know in fiscal 21 at these accounts, but you kind of built the foundation for it.
Correct I mean now obviously our plan is to continue just write about diversification strategy to obviously execute that by virtue of how the outlook kit.
Sales and marketing investments and as they do that we will continue to push school, but on a three pillow strategy and obviously built its strong platform as the continue bought into second half of this year and going into fiscal <unk> to to make sure that yeah.
We are moving in that direction that be has set up in terms of diversification and producing constant krish.
Yeah.
Maybe just because I mean, there will be gold. These I potential accounts this year and itself. It may be just not expecting Q1, and probably you know some part of Q2, it's gonna get impacted but if things stay in as it isn't yes. There are some unknowns that could be there'd be a second baybrook over 19 and <unk>.
But that's not necessarily won't be really plan for but without that we do believe some of this growth will show up in.
The current yet because we are expecting back afterwards.
In some of the go to keep okay. Thank you.
As a reminder, she would like to ask your question. Please press Star then one.
Our next question will come from Vincent Colicchio with Barrington. Please go ahead.
[laughter] Raj on because you break down the attribution of the declined.
Margins and the quarter gross margins between you know low revenues subcontractor costs et cetera.
Oh, what do you would not really providing.
You know that level to break, but let me give you. Another perspective, if you really look at age the change in utilization that we have from Q4 levels. If you look at Oh billable utilization is probably running at about 80, 480% in Q4 and in Q1 I'd like now expecting that.
Utilization would probably be the seventh before that 75%. So you look at a historical metrics and.
Sensitivity of utilization, which has been about 40 basis points. So you don't need talking when 4200 50 basis points, just coming from the utilization factor in himself you overlay on top of that the productivity discount that we talked about without large customer even though we believe some of that productivity just.
I want was really come still come from productivity efficiencies, but some of it will impact revenue. So therefore, those two pieces impact Q1 big in Q1 down from.
6% margin that'd be hard in Q4 for their down into Q1.
And then Chris you talked a number of times about the increase in preferred provider relationships to track that data do you have numbers behind that like you know the number that an increase from core a year over year or anything like that.
Yes, the I'll be do I can tell you begins to be if had a significant increase year over year in strategic preferred partnerships, we have not disclose that number but it represents a very significant crop public codes that have reached a certain level of minima minimum scale that probes.
<unk> us with the opportunity to be the replay at the same playbooks at the have used to grow accounts from five to 20 million 20 million to 50 million 50 million to 100, and even 100 200 million. So they're very excited about that and <unk> keep you posted on subsequent calls in terms of.
They're doing against of a diversification below or above three for those strategy.
And then last question or should we be concerned, but any of your top 10 clients or any of them financially leveraged to extend the of that nature.
I think really that's that's that's a tough one we believe all our you know something Cline.
He's a global 1000 global 2000 clients.
These are all in you know good financial position you know, it's gonna be a little bit effect or discussions like we do have a concentration in banking clients say that does that sector getting back to the positives out we don't have exposures to hospitality, but you do gotti. So a large portion of the banking.
We believe these on marquee banking clients, so it should not really be.
And risk, but you always need to watch for those things.
But we can do that leave him into the size and scale business have you do with these large declines trust me the market opportunity is huge inside them.
[laughter], thanks for answering my questions.
This will conclude our question answer session and I would like to turn the conference back over to Kris Canekeratne now for any closing remarks.
Thank you.
Thank you all for joining us on.
Q4, and full year fiscal 20 earnings call I would like to take this opportunity to tank car build the team members for their dedication to our clients in these challenging time.
Thank you once again for joining instead well everybody.
The conference has now concluded.
Thank you for attending today's presentation and you may now disconnect.
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