Q1 2021 Virtusa Corp Earnings Call
[music].
Good day and welcome to the Virtusa Corporation first quarter fiscal 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal copper, especially starkey followed by Europe.
After today's presentation, there will be an opportunity to ask question to ask a question you May Press Star then one and you touched on that.
Withdraw your question. Please press Star then two leased that that is being recorded a lot now like to turn the confident there, but you will make here.
The relation please go ahead.
Thank you welcome to Virtusas first quarter 2021 earnings conference call well be discussing our financial results for Virtusas first quarter ended June 30 2020.
On the call it being a Kris canekeratne that chairman and Chief Executive Officer, and Raj on Colleen Executive Vice President Chief Financial Officer certain statements made on this call that are not based on historical information are forward looking statements, which are made pursuant to the safe Harbor provisions other private Securities Litigation Reform Act of 1995.
During this call we may make expressed or implied forward looking statements relating to among other things reduced expectations and assumptions concerning management's forecast the financial performance the growth of reduces business the ability of virtusas clients realize benefits from the use of Virtusas Nike services the impact on operations do that kind of it 19 pandemic and.
Management's plans objectives and strategies. These statements are needed promise, there's no guarantees or starts I'd of risks and uncertainties many of which are beyond virtusas control, which could cause actual results to differ materially from those contemplating. These forward looking statements existing and prospective investors are cautioned not to place undue reliance on these forward looking statements, which.
Only as of today's date.
Virtusa undertakes no obligation to update or revise the information disclosed during this call whether as a result, a new information future events or circumstances or otherwise.
Other statements on this call also includes certain non-GAAP financial information as defined by the S.C.
We present constant currency revenue to provide a framework for assessing how our revenue performed excluding the effect of foreign currency.
Agents.
We provide non-GAAP operating income non-GAAP adjusted net income and non-GAAP earnings per share, which we believe provide insight into the operation performance of our business reconciliations of non-GAAP to GAAP measures are included in today's earnings press release and data sheet, which can be found on the investor Relations page of our web site.
We also present a reconciliation of cash cash equivalents short term long term investments that we believe provides insight into the cash position of our overall liquidity.
Please note that a supplemental data presentation to our first quarter results has also been posted to our Investor Relations website for additional disclosures regarding these and other risks faced by Virtusas either disclosures contained reduces public filings with the SEC and an earnings press release with that I'd like to turn the call over to Chris Chris.
Thank you Bill and good evening, everyone and thank you for joining us today on our first fit good quarter 2021 conference call.
First I would like to provide a brief update on the effects of cobot 19 on our operation and other risks but.
But do so continues to do everything and its Paul look to help ensure the health and safety of up a good team members and community.
But providing the themes superior service to all the time in its teeth and sustain a boom that up.
Although cross functional Corbett 19 task force continues to meet on a regular basis to coordinate the companys ongoing responds to depend dynamic and implementing initiatives focused on safety protocols for both to now and facilities.
Remember support technology enablement productivity and communications with clients to manage the crisis.
We are maintaining restrictions on crab boot business critical situations.
Enforcing strict visits a policies that are facilities and have stood up support groups to help our team members to these challenging times.
Yeah monitoring the bobbing near trip the pandemic very closely and will continue to adapt depending on the separate date of the virus going forward, but.
As I mentioned on our last call.
I'm extremely proud of all the blue team for stepping up during this unprecedented time and ensuring we continue to so as an adjunct and trusted partner that all kinds can rely on to address them most critical technology needs at anytime and under any circumstance.
Let me know move on to over Q1 2021 financial highlights [noise].
Although Q1 performance reflects it focused commitment to the execution above three pillow strategic plan, although at Giles and methodical response, the many challenges presented by the pandemic and ability to support global good guidance as Steve walk through these unique challenges.
The combination of these approaches coupled with public commitments to rigorous execution and talk to bottom accountability has enabled us to really book this quarter with does that flow materially better than what you need still expectation.
Specifically.
Total revenue for the first fiscal quarter was $301 million, representing a decline of 8.7% sequentially and 5.6% year over year.
I've been non-GAAP operating income for the quarter was 14 million carloads represent representing in non-GAAP operating margin of 4.7%.
And our Q1 non-GAAP EPS was 27.
We expect this positive trajectory to continue with our current fiscal Q2 revenue guidance at $315 million at the midpoint, reflecting 4.6% sequence to abroad, and yes up 53 cents.
We also expect although Q2 non-GAAP operating margin to expand approximately 460 basis point at the midpoint of guidance.
For the full fiscal year 2021, although current expectations show positive improvement versus our prior outlook run some good delve deeper into these numbers later on the court [noise].
[noise] income the numbers that telling the story, although ability, but not just to weather the storm, but to strengthen our client relationship and find new opportunities for growth.
Let me know Provital give more color on what we're doing to drive that momentum.
When the vote boy, we did not.
We made a decision to respond aggressively to drive for but by focusing on how cold. It 19, what's going to force. The global 2000 to rethink that 80 priorities reallocate, yeah investment and reassess step powerful inflow that every dollar spent.
Good yield both short and long tail.
Bottom line benefit.
We've seen across every industry, a heightened demand, but technology that will reduce cost of operations.
Increased business agility and improve their ability to meet the needs, albeit post Corbett wood.
Achieving these outcome what effectively doing more with less requires a boost though the engineering partner not unlike what to them.
That can deliver into end solutions that incorporate the fluid advantages of deep digital and cloud transformation technologies in a way that is best efficient and cost effective.
The pandemic is that every major cooperation to rethink kits walk policies and institute remote walk.
Because of our depth and breadth of experience managing and any uplink remote workforce.
Demand well, but to some technical capabilities around remote team.
Actual execution and other solutions and services has intensified as companies adapt to the new remote normally a trend that there will likely continue beyond the pandemic.
The emerging needs enterprises during and post Corbett 19, align very well with our with sprint and capabilities.
[noise] as clients look to relocate budget.
They are seeking to optimize and consolidate dealt vendor ecosystems and reduce costs through increased offshoring and higher efficacy.
Oh, the ability to deploy flexible agitated resources across a wide variety of projects and technologies is driving demand for public report at Joe's Quad model and hyper distributed enterprise solution.
This differentiates Medusa in a market that is seeking efficiency and results.
In the flip for in the fourth quarter, we saw an increasing number of clients initiate conversations about transitioning walk from other suppliers over to Virtusa.
And accelerating strategic supplier discussions with us.
This consolidation trend continue in the first quarter, and we know have 70% more strategic supplier partnerships that we did a year ago.
In addition, regulatory compliance continues to be a steady source of funded projects, especially in banking and financial services as compliance. The numerous regulations has not been scaled back during the pandemic.
Our deep industry expertise combined with our agile digital engineering capabilities position us very well to venue and expand existing engagement.
Let me now move on to describe in more detail public treat below plan.
As we have been responding aggressively to these pandemic induced market means the first quarter also saw and unbilled bring execution, although the three pillars strategic plan.
As they share on our last call. The plan is up a detailed road map to not just offset the challenges brought on by the economic slowdown, but to build a foundation for sustainable long term draw it and category leadership.
It's designed to achieve three critical outcomes.
First profitable revenue growth.
Second revenue diversification, which can be categorized by geography industry and client.
And third increasing gross and net margins.
Made solid progress in each area.
[noise] unprofitable revenue growth.
An important element of profitable revenue growth is gotten larger and higher quality pipeline.
We've achieved significant increases in other global pipeline, which more than doubled in the fiscal first quarter from a year ago.
This growth is a function of new policies programs and campaigns targeting new business driving account margin thresholds and accelerating core business development with other top digital and cloud partners.
Much of the pipeline growth represents digital and cloud transformation work, reflecting bought market demand and other unique expertise.
The work we are winning is essential to our clients revenue performance cost reduction and efficiency initiatives and has the potential to be long term and recurring in nature.
These are annuity engagements increase overall revenue predictability help pyramid management.
Improve margins and result in profitable revenue growth.
Moving onto our second pillar revenue diversification.
Why masked somewhat by the impact of Corbett 19 on certain clients, we continue to diversify our revenue in the first quarter.
The benefit of diversification is more then reducing the risk associated with industry or account concentration.
A more diversified portfolio of industries geographies entercom.
Tends to offer great organic expansion opportunities.
No true new capability development and generate margin accretion.
In fiscal Q1 public communications and technology industry group grew 3.3% year over year, and communications and technology as a percentage of total revenue increased 200 basis points from 22% to 24% over the same time period.
Other media information and other revenue was up 16.6% year over year.
Other healthcare industry segment, which we are breaking out for the first time was 14% about overall revenue in Q1, and you are expecting strong sequential growth in Q2.
[noise] BFS site revenue in the first quarter declined 9.6% year over year and represented 55%, although the total revenue down 200 basis points from 57% about revenue in Q1 Twentytwenty.
Lastly revenue from other.
Non-GAAP, Tim client was 44% of our total revenue in fiscal Q1 up from 41% a year ago inline with our diversification goals.
Moving on to the loss you know margin expansion.
A quick and decisive cost containment initiatives implemented at the onset of the pandemic in conjunction with profitable revenue growth and diversification is expected to result in margin expansion.
In the first quarter, we were pleased with our margin performance, which exceeded our in Connecticut.
Driven impart by higher utilization and efficient execution, although cost containment initiatives.
This significantly shifted our labor pyramid efficiencies.
Increased gross margin accountability and actively carload lower margin work.
Based in large part to the cost containment initiatives we took.
At the onset of the pandemic.
And ongoing programs we are running.
We expect margins will be over 9% in fiscal Q2 2021.
Additionally, we expect to achieve low double digit margins by the fiscal third quarter of 2021.
We are pleased with the progress on all three below plan and with the top and bottom line momentum.
We have a detailed road bans that the will continue to execute upon in Q2 and the second half of fiscal year 2021.
Its momentum that is best captured in the first quarter pipeline metrics that I mentioned.
But overall pipeline more than doubled year over year and our digital pipeline is now over 70%, although overall pipeline, which bodes well for expanding our digital revenue mix and capturing higher digital market share.
I guess I'd like no other drilldown, a little further and provide you with a few examples that show hold beyond leveraging our industry expertise.
Leading engineering capabilities, and our creativity to compete for and win new digital and cloud transformation engagement in today's market.
To illustrate this further I will highlight three examples that underscore our deep expertise in digital and cloud transformation services.
We recently won is significant engagement focused on modernizing and scaling and order entry platform for the largest cable.
TV and home Internet service provider in the World.
Well tusa provided crumb team capacity for Tim parallel functional areas of the clients or the increase platform.
We leveraged our digital transformation studio or bps environment to ensure peak productivity and quality of our scrum teams.
But tusa help define the architect strip this platform, including it proof of concept with a double U.S.
The bulk end to end journeys and production rollout.
This solution handed record setting volumes for new customer and existing customer orders for our clients during the height of Corbett 19.
But to service also recently awarded is significant coke transformation engagement by leading health care and integrated delivery network company.
Okay, let's seeking a partner with Google Health care, a pie and protected hilt Canine commission of ph high experience.
We began to leverage our Google partnership qualifications and the work we have done on outlook. The lights killed can life Sciences applications management around PXI and D identification update hub to vince's engagement.
We also closed a significant cloud transformation partnership with a large telecom cod.
As part of this multiyear engagement, we will begin by migrating 90 of other clients applications to eight up U.S.
Equally as important we are helping to create a horizontal cloud practice to define and initiate our clients companywide cloud adoption.
What's happening is extraordinarily well to continue to win Kelk transformation work with our clients.
In closing our innovative agitated responds to the current market conditions and changing times needs and the solid foundation. We are building by executing on our strategic Threed below plan are having it positive and material impact on our talk.
And bottom line performance.
This is creating sustainable momentum that will allow us to achieve our longer term financial objectives and drive shareholder value.
We are confident that Apple uniquely strong end to end digital and cloud capabilities that are delivered by our industry specialized and certified as John Engineering teams and our supported by our Gamified Remotelink platform will enable us to gain market share in.
This uncertain economic environment.
I'm incredibly proud of all other global team members for their unwavering commitment to Medusa and good declines we serve.
Thank you for your time now I'd like to turn the call opened on John who will provide more details on our first quarter results.
And we'll provide some details with respect to our outlook for the remainder of fiscal year 21.
Roger.
Thanks, Chris and good evening to everyone.
Let me start by summarizing the results of our fiscal first quarter 2021.
Revenue for the fiscal first quarter was $381.1 billion, representing an 8.7% sequential decline in reported currency and 8.2% decline in constant currency.
Year over year, our first quarter revenue.
Decreased 5.6% in reported currency and 5.2% in constant currency.
Our first quarter revenue was ahead of our pride expectations off approximately $290 million.
Spend at our DFS clients, driven by the cloud regulatory compliance and cost efficiency initiatives drove the higher than expected revenue in Q1.
Gross margin for fiscal first quarter was 22.8% compared with 24.3% in the prior quarter and 26.4% in a year ago period.
Our Q1 gross margin was ahead of our internal estimates driven by slightly higher than expected utilization and execution of our cost containment initiatives.
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GAAP operating income for the first quarter was $7.2 million compared with $17.1 billion in the prior quarter and $13.4 million in the year well period.
First quarter other expense was $6 million. This includes $1.3 million net foreign exchange loss and $4.7 million of net interest and other expense.
Net interest and other expense includes $5.3 million off interest expense and $600000 of interest and other income.
GAAP diluted loss per share was once again in the first quarter. This compares to EPS of 66 cents in the prior quarter and 15 cents in a year ago period.
Now turning to our non-GAAP results non-GAAP operating income was $14 million in the first quarter compared to $19.7 million in the prior quarter and $24.2 million in the year, we'll period.
First quarter non-GAAP operating margin was 4.7% ahead of our internal expectations driven by the revenue beat and execution of cost saving initiatives.
Non-GAAP earnings per share was 20 cents in the first quarter above our expectations.
This compares to 41 cents in both the prior quarter and a year ago period.
Turning to the balance sheet and the cash at June Thirtyth, Twentytwenty was $289.3 million inclusive of cash cash equivalents short term and long term investments.
Our cash decreased by approximately $11 million sequentially, after making a $59 million payments on our tech.
Our cash flow from operations was a strong $56 million for fiscal first quarter, representing 18.6% of revenue.
Ideas. So for the first quarter was 70 days and eight day improvement sequentially and five day improvement year over year, driven by record cash collections in the quarter.
Now moving to our Q1 performance by industry.
Please note that this quarter, we have broken out healthcare into a standalone industry group in order to provide you increased visibility into our performance.
Our prior year results have been recasted to incorporate the new industry group reporting.
The if unsided revenue decreased 5.5% sequentially and 9.6% year over year, representing 55% of revenue versus 57% in the year ago period.
The for sale outperformed our expectations driven by stronger performance at two large banking clients and at two large financial technology.
Communication and technology revenue decreased 12.8% sequentially, but increased 3.3% year over year.
Our year over year growth in CMP, well supported by growth at a large genco Cline.
C and D represented 24% of revenue Q1 up from 22% in the year ago period, as we continue to drive further industry diversification.
Healthcare revenue decreased 12.1% sequentially and 12.5% year over year, representing 14% off revenue.
Our first quarter healthcare revenue was impacted primarily by the timing of spend with two clients.
We currently expect revenue growth at these two clients to resume in Q2 driving strong sequential.
Okay revenue growth in the fiscal second quarter.
Additionally, we expect healthcare group to exceed company average in Fytwenty 21.
Media information and other revenue decreased 10.9% sequentially and grew 16.6% year over year, representing the remaining 7% of revenue.
We continue to see good momentum for our digital and cloud transformational services add on media clients.
Turning to our geographical performance North America revenue decreased 8.1% sequentially and 2.7% year over year.
Europe decreased 9.5% sequentially and 20.1% year over year.
Finally rest of world declined 11.8% sequentially and grew 3.4% year over year.
Given the uncertainties surrounding forward 19, we are maintaining the suspension of our annual fiscal Twentytwenty one guidance. However, due to improving revenue visibility. We are these two during our quarterly guidance.
Revenue for the second quarter of Twentytwenty, one is expected to be in the range of 311 million to $319 million.
Non-GAAP diluted earnings per share in the second quarter of 2021 is expected to be in the range of 50 cents to 56 cents.
Our Q2 fiscal 2021, non-GAAP EPS guidance anticipates, an average share count of approximately 33.6 million.
Turning to the current demand environment Vancouver, 19 continues to influence client spending demand for our digital transformation and cloud transmissions solutions remains robust and we are capturing new opportunities to help our clients achieved their strategic and operational goals.
We are cautiously optimistic that demand will continue to improve over the course of this year.
Also realize client spend me remain under pressure due to the pandemic, thus impacting decision, making cycles and pipeline closures.
In the current environment workforce productivity digital consumer experience and cost optimization initiatives are key areas of spend for our clients.
As clients have been focused to adapt to a largely work from home model. We have seen increased demand for remote workforce solutions, such as productivity monitoring tools and workforce efficiency solutions.
As more business is getting done virtually we're seeing our clients invest more in the digital infrastructure in order to modernize the consumer and employee experience and offer greater self service options.
To achieve cost optimization, our clients our focus heavily on cloud migration.
Increased automation and optimizing Dev ops.
Clients are also exploring increase offshoring and smaller scale vendor consolidation as ways to reduce costs benefited preferred vendors like us.
Finally in the current environment clients are partnering with us to reduce the overall IP spend through increase engineering productivity initiatives, such as technical debt reduction.
Effort reduction and end to end SDL automation.
At the midpoint of our fiscal Q2 guidance revenue is expected to increase 4.6%, which sequential growth across all industry groups.
Led by our health care and M&A industry group.
Consistent with prior years performance, our sequential growth rate in fiscal Q2 is expected to be the highest for the year.
For your modeling purposes, we expect Q3, and Q4 sequential revenue growth to be in the range of 1% to 2% as we incorporate fewer billing days from holidays in Q3.
And calendar year budgeting process during our Q4.
Our better than expected first quarter results second quarter outlook and momentum in our business give us increased confidence that our full year fytwenty when results will exceed our pride expectations.
Revenue outlook at our DFS, CMT and healthcare clients has increased versus our prior expectations.
We caution that another significant covered 90 outlook could further impact the market and our outlook.
As previously anticipated, we expect sequential non-GAAP operating margin accretion to resume in fiscal Q2.
Growing approximately 460 basis points sequentially at the midpoint.
[noise] acuity margin accretion benefits from a one quarter of cost saving initiatives action in Q1.
Such as improving billable utilization.
Ongoing pyramid optimization.
Reduce subcontractor expense.
And shared services leverage.
As Chris mentioned, we expect our non-GAAP operating margin to continue to improve over the course of Fytwenty, one reaching low double digits by the third quarter.
For the full year Fytwenty, one we now expect modest non-GAAP operating margin accretion above our prior expectations are flattish margins.
Our margin accretion will benefit from revenue growth and the cost saving initiatives I just discussed.
For the remainder of Fytwenty, one we expect a non-GAAP tax rate of approximately 26%.
Fiscal Q in fiscal Q1, we incurred $700000 often prefer professional fees associated with a potential proxy deliberation as we expect and we expect to book additional related expenses in the fiscal second quarter.
These expenses have been and we'll continue to be excluded from our non-GAAP results.
In conclusion, we delivered better than expected fiscal first quarter revenue.
Non-GAAP operating income and margin and non-GAAP EPS.
We expect our Q1 momentum to carry into fiscal Q2 and drive strong sequential revenue growth and margin accretion in the second quarter.
Our Q1 results business momentum and execution against our three pillar strategy position us well for stronger than previously expected Fytwenty one revenue margin NPS.
I will now unlike like to turn the call back over to Chris for a few additional comments before we open the call for questions.
Thank you Roger.
Before I turn to the Q any portion of today's call I've only briefly address the activist investor and their recent notice to nominate three individuals as 10 play election to the Virtusa Board of directors at our Twentytwenty annual meeting.
Our board is receptive to new ideas that are focused on creating value for oil shareholder and we have engaged in extensive dialogue with the activist to better understand their views and perspectives and we look forward to continuing this dialogue.
Other board also constantly evaluate its comp position to enjoy it has the right mix of skills to drive value creation.
Then we recently appointed added limit to allow the former CEO of Wipro limited a 28 year IP services industry veteran who oversaw that companies successful digital transformation to our board.
[noise], including Missoni Machala other boarded added five new independent directors since 2016, and we are currently conducting a process to Ed and additional highly qualified independent director.
We are pleased with the progress and the momentum we are seeing across the business and our focus today is to take you through the details of our results and key trends.
As such we would appreciate if you could keep your questions focused on the quarter and on but to SaaS broader strategic and operational outlook.
Thank you and with that operator, you may now begun the QNX session.
Thank you.
We will now begin the question and answer session throughout the question. Their press Star then one on your touch sensor.
If you're using a speakerphone please pick up your handset for pressing they can.
Withdraw your question. Please press Star then too.
And our first question today will come from Mayank Tandon with Needham. Please go ahead.
Oh. Thank you good evening, thanks for the details our Chris around John So I just wanted to start with maybe in the quarter. The bookings momentum that you saw it sounds like things improved through the quarter, but just maybe give us a sense of.
May and June 3rd versus April and them based on your comment it sounds like you are looking for the trends to continue the improvement through to Q and then maybe at a more moderate pace in the back half of the or just if you could provide some perspective around the bookings momentum to give us some level of confidence and how that will translate into revenue growth over the remainder of.
A year.
So Mike I'll start maybe ranch and can add some color.
So much of the momentum that we saw had to do that the pipeline activities that we had actually described during our Q4 fiscal year 20 earnings call.
Now clearly as the result of the onset of coal bed week, we saw some headwinds much of those headwinds dissipated towards the.
Second half of.
Q1.
And in the second half of our Q1, we straws strong momentum in terms of pipeline conversion in terms of renewals within our existing client et cetera, which really resulted in better than expected performance in Q1.
We're also seeing the same.
Pipeline momentum continuing into Q2.
And we fully expect that in Q2, we will see better than expected performance.
Certainly than what we saw than the first provider for Europe.
Sectarian during our last quarter.
Resident could like about anything please go ahead.
Thanks, Chris I think you covered mostly Mike a couple of other comments, yes. The latter part of Q1 was stronger than what we had expected to be when we did our remote Q4 earnings call. So latter part of May and June was much stronger, which kind of gives us comfort with regards to the sequential growth that we are expecting in Q2 as you know.
For Virtusa, the Q2 quarters always in the strongest quarter and you know we have strong guidance. We have a strong revenue for that are also doing that sets us well get really for the whole year and why Q2 really ends up being strong for us in a couple of factors behind that.
One is the yearend budgets are really more set up with other project level Q2 billing days are usually higher than Q1 billion barrels that helps us and in this quarter. We are really you know as we started that they're going to yours, you know you're starting in carrying the quarter with the higher backlog to leave ended last year those key pieces any give us comfort.
That the so 4.6% Q2 sequential guidance that we put together for ourselves. After that you know for Q3 in Q4, we taper down the growth a little bit more so incorporating the lesser billing days that will be there in Q3 and the budgeting cycle part you know strong Q1, and we feel good about our Q2 guidance.
Got it and I guess, the visibility should be a little bit better because you in summaries are giving guidance. If I heard your right you said, 1% to 2% sequential growth in the back half quarters. When you gave guidance on margins as well for Threeq you I would assume that some of that will flow through into Fourq. You. If you see the revenue uptick so.
I guess, what I'm getting out is it sounds like the visibility is markedly better than what you would have caught maybe a couple of months ago.
But we agree with you might get all of this revenue visibility is higher you know the backlog that we accounting for the full year.
As we sit today, when we compared to last year at the same time is higher I'm in our cost savings initiatives that we embarked upon most of them have already been marked at about amounts of course, not realizing all those so that the business platform. The revenue visibility is much better, but I I would just want to correct. Yeah. Yeah, we are not issue.
Guidance was only provided color in terms of doing modeling and outlook.
Sure.
Just one final question.
It's good to see the commitment to margin expansion I, just want to get a better sense of the long term model here, if we get back to some level of normalcy in terms of top line growth for two so do you think you can sustained margin expansion and if you could remind us what the levers are longer term to maybe get into more of an industry type margin level.
Longer term thank you.
Yeah, no, but first I can start I'm pleased that you're going on but you know.
Mike like you said, they really if you're able to deliver the margin accretion that we talked about you know, we're really going to be setting ourselves for them in a high single digits exiting in Q2, and then really setting ourselves for low double digits and you know growing margins in Q4 again, we are they like the had said it even in our last fall we outlined.
Our to really get into that lower double digits Q4, this year, which is exactly what we wanted last year in short recovered reasons, we could not do that.
We are able to achieve that exit that doesn't really set us up for once again, a strong margin growth back to our aspirations of 400 250 basis points on annual margin accretion. So we believe me. We can continue to do that are we just a little bit behind this year. All of it was really cobiz related and in terms of the drivers will continue to be.
I mean, you look at our utilization, which is really running exiting Q wondered about 77% we have not alumina utilization can do we had lauren and our betterment optimization do you have room and while they do continue to reduce our contracting expense and then over and above that we believe we'll continue to deliver a senior leverage.
Great. Thank you.
At our next question will come from any joining with JP Morgan. Please go ahead.
Hi, Thanks for taking my question and a nice quarter.
Oh.
So it does seem like a financial services non citizens financial services business was flat.
In the quarter on sequential basis, one hotel and Tech and communications.
Business, which have been up for two years, where it actually week purchaser. So.
So could you share like.
In the two yards you expect this growth acceleration in second half.
Visibility given what you experienced in Q1.
Sure so somebody to one I'd.
Sorry go.
Well go ahead.
So a pretty you're you're correct.
Looking at from their perspective of the healthcare, but like I mentioned in my prepared remarks I was just you know we believe in just a timing of the spend that happened for two of our clients.
If you give the guidance plays out in the Q2 healthcare sequential growth will be very very strong and that'll really set us up for the healthcare really being like I said and above company average a growth in fact, the you know healthcare could be a flight to marginally up in an environment, where the company.
It hasn't declined year over year, so from a healthcare perspective, you continue to feel good about it and the full year growth is also going to be driven by our banking and financial services clients. We're expecting continued growth at our banking you know we are expecting growth and in a larger.
And on single largest line and throughout the remaining quarters and also some of the other banking clients and like I had mentioned in the world.
A couple of the financial services clients. So the banking financial the banking and financial services segment will be strong healthcare will be strong in fact, a and C. N people continue to be strong team for their media.
Got it got to own a house.
The fundamentals.
In addition, a gains that simpler strategy.
You said pipeline has doubled over the last year and you're also seeing market share gains.
But I'd imagine letup could also result in lenders being less selective about cold to diversify what have local revenue being is to expand milestones.
But let me know they go ahead.
Record of scrolling talked at the first two and perhaps you can answer the last part of the question again.
So on the pipeline side, we have seen very strong momentum in the pipeline onto to provide a little detail around pipeline.
Our overall pipeline more than doubled year over year.
Average deal sizes up over 90% year over year.
When rates are about the same one deal tenure increased.
And perhaps most importantly.
Oh, the digital pipeline.
Grew by about 50% quarter over quarter.
And now represents 73%, although overall pipeline.
Our digital revenue in the quarter.
Lets 61 point.
I'm sorry did should have no in Q1 was just over 61% up about three percentage points from Q4, and we expect that trend will continue.
Oh I recognize that these are very strong metrics with respect to pipeline and I want to provide a little bit of color as to what's driving the pipeline.
The first is that our capabilities in and around digital and Coke transformation is one second to none in the industry any resonating, particularly well, especially in this corbett environment and we believe any cost Corbett ward.
Second.
Over the last 12 months, we have built a formidable set of relationships the cloud service providers and digital service providers the leader to feel well in seat LIBOR goes in terms of either Csps our DSP.
But it's created if sales force multiplier for Virtusa.
And no.
He has a far greater number of strategic supplier relationships as a matter of fact, the number of strategic relationships that we have with global 2000, and all large technology clients is up 7% from a year ago.
Which has greatly expanded our addressable market both in terms of receiving things like RSP and are generating proactive proposals.
So clearly that has been a significant sort of reasons are those three specific areas have created very significant pipeline momentum and finally of course.
Our decision to expand coverage like targeted sales and marketing campaign.
That went out to clients and prospects endemic induced technology needs also has resulted in very strong pipeline growth and pipeline momentum.
Well beyond that.
We also took.
The opportunity right at the onset truck Corbett.
To Institute survey cost containment initiatives as a matter of fact do as the pen that has the pandemic buzz unfolding. It gives us a chance to accelerate many online initiatives with respect to cost containment, which otherwise would have taken a lot longer to X.
Thank you.
So this is the reason why do you believe that then extraordinarily strong position to one increase market share.
In spend davio's across all industries that be working and to execute that with much stronger a much stronger much leaner platform because many of the cost containment initiatives that the initiated have already been put in place and no desktop new real.
It's the full quarter benefit in Q2, and then additional benefits in Q3 in Q4.
And put it I know you've got a third part the question. If you could ask that once more there'll be no I'm not the third part was about the cost you mentioned that it does seem like because of the abundantly because of the disruption.
You are forced to take some of the decisions to cut cost.
Which would have been difficult otherwise is direct sales.
Let's say that is very correct, we were able to accelerate the nearby initiatives as a result of this very significant.
Pandemic and as a result that we believe that although cost platform is much more conducive.
To yield stronger margin accretion I believe that in Q2 alone will see approximately 460 basis points of margin accretion.
Almost two thirds of that coming on the gross margin side.
Got it got it thank you.
And our next question will come from Magnolia with William Blair. Please go ahead.
Hey, this is Ted on for manufacturer take our question.
Regarding Chris could you talk a little bit about your outlook and expectations for the second quarter, how does that change between the high end in the low end of your guidance range for revenue.
Sure.
Well, it's primarily we believe like I said in our prepared remarks, we believe that all industry groups are really going to grow for us.
In the growth is really going to be led more so by healthcare M&A, but everything is expected I think for US you know if in terms of getting to the high end and probably be you know more growth opportunities that we do see in our pipeline being consummated and I would say probably maybe.
C and D in banking and financial services, but I will not be surprised that you know if all four of them continue to claw the way we plan for at the midpoint, they all Clark and nearly help us getting behind but more so it looks like banking and financial community.
Yes.
Okay. That's helpful 100 banking and financial services, you mentioned from projects and are in there from the outperformance.
This quarter or how much of our overhead 19 Pacific related.
Projects a record Doug.
So to.
Right, Yeah, so Ted I'd say that.
Some of the projects that we started well corbett induced but the type of engagements and the 10 year of these engagements I'm much more in line with what our clients need to do not just during Corbett and some of the shutdowns, but in a pause corbett.
Was it specifically, they're looking at expanding their reach in terms of into in digital we find that virtusa is extremely.
Well recognized in that space, that's driving a higher than normal set of initiatives and activities as clients.
Being more and more of the user customer and consumer journeys to digital.
So while some of these initiatives may have been precipitated as a result of Corbett much of the ongoing spend at our clients.
Moving into these programs that are creating more digital presence the secondary or that's driving this has to happen to be coke transformation.
Hello transmission has now become something that is very keenly.
Embraced by enterprises, and our clients as they realize that one of the few ways that they can service the employees or their customers from anywhere is to have a robust cloud infrastructure as opposed to data centers that were targeted primarily towards office space or Scott.
Take offices and that therein lies get another.
Sort of activities that for precipitated by Corbett, but have a much longer tail as clients embraced code. So all the work that they're doing may have started as a result of corbett related activities, but the actual work itself goes well beyond that of Corbett.
Specific Corbett work.
Okay. Thanks for being a last question here I'm always their organic growth for the first quarter and what was the expectations embedded in the guidance. Thank you.
It's all organic with women entirely within consummate any acquisitions in Q1.
And what about the growth.
No okay.
And that is also true up Q2.
Yeah Okay.
Yes, we did some tuck in acquisitions last year, which you know continue to do well this year for full year, but we haven't really consummated anything in Q on Q.
Your next question will come from Bryan Bergin with Cowen. Please go ahead.
Hey, good evening. Thank you I wanted to ask about the high potential accounts can you just talk about your efforts there to add more work streams in Eni potentials and your large clients to design any notable expansions here recently, just give us at our place.
Yeah. So.
Brian de have significantly expanded our strategic supplier relationships as I mentioned in my earlier remarks, we today have 70% higher strategic supplier partnerships.
With enterprise clients.
That's creating significant opportunities for us across the board in terms of high potential clients that we now have the opportunity not only to receive RFP is before it goes to a broader audience.
First line to receive those RFP is and also an opportunity to generate 40 core proactive proposal into those guidance Saba addressable market has significantly expanded and you can actually see that directly in the pipeline growth that I described.
Earlier.
Okay and as we think about just like the mix of your portfolio clients, just trying to get a sense of where they're at a as it relates to cope with those that have are still dealing with covert fall out versus those that have kind of move past that I've been able to assess the damage. So to speak and have made budget decisions can you give us a sense on on that where.
You see the portfolio as far as those that you think are still susceptible to cuts versus those that are that are.
<unk> solid from here.
So I think across the board the initial impacts of core bid.
I will be into their budget at this point for the remainder of the year.
The only unknown is if there is a reprice the.
Oil they this significant second.
Nick of Corbett.
How that could impact our time and their budgets, but notwithstanding the belief that they'll spend has been pretty much back for the remainder of the year.
They have re located some of their spend to target specific programs.
They require.
Specifically around digital and cloud and in some kids Reg and compliance work.
To make sure that they can service bought they are customers consumers and employees in a much better way in terms of being able to transact from anywhere at any time and if you will know most enterprise does have a long way to go especially to juxtapose enterprise.
Digital capabilities with high Tech digital capabilities, they have a long way to go.
In terms of creating it true end to end digital experience for their consumers and that's where you're seeing more and more of the budget dollars flowing.
Fortunately for Virtusa as I mentioned earlier once again, we are second to none they comes to digital engineering and cloud transformation and your and you're seeing that rapidly in other pipelines and our pipeline momentum.
Okay that makes sense any supply side constraints as far the clients not allowing any.
From our long range on clusters that all occur.
That's all behind US Brian we did see some of that very early I think I had mentioned on our last earnings call Wholl be moved to work from home well before the India lockdown be at over 95% above practitioner then team members working from home, we had no interruption whats.
But while the clients with respect to the India Lockdown.
During that initial phase.
And this is in the March timeframe.
Sometimes have to get certain approvals from there can send their consumers to be able to enable us to execute work remotely that happened to get that down in relatively short order and in the latter in certainly in the latter half of the second quarter.
And beyond we have not seen any supply supply side issues or headwinds with respect to execution.
Thank you.
And our next question will come from Moshe Katri with Wedbush.
Hello.
Hey, Thanks for taking my question good quarter excellent execution on a very a tough environment out a couple of Chris So.
You've been talking about profitable growth.
So maybe you can talk a bit about how you're approaching this versus the past.
Or what do you you know are you changing compensation.
K P I targets for sales to get there and then maybe you can talk a bit about.
I mean, you spoke a bit about the near term margin targets. What are the long term Margaret margin targets in the business versus where versus prior target.
Yes so.
Moshe Grad question.
Clearly when it comes due.
Good yeah, they're basically seeing very strong progress across the board as I mentioned earlier, I think they're extremely well positioned given the spend area.
That's driving.
Strong momentum with respect to topline growth.
On the taken we took several initiatives do.
Restructure much of our execution platform as a result, right at the onset of the pandemic.
That's enabling us to execute work, but they'd be through a remote infrastructures whether it be agitated teams that are working on to our gamified platforms et cetera, and all of that has positioned us extremely well.
For growth no beyond that.
One of two things that we have done that is that is contributing greatly two high quality revenue is the size.
And expanding the overall pipeline, it's giving us being more degrees of freedom, it's giving us more choice in terms of being able to be more selective in terms of the types of engagements that we are.
Pursuing aggressively and closing on as you know our pipeline has expanded significantly more than doubled in the last 12 months, so giving us greater optionality.
Beyond that they're also finding that our expertise and capabilities around showed and digital.
Is enabling us to capture a greater addressable market, especially now that we have a forced multiplier when it comes to working with the leading csps and the leading dsps.
So you combine all of this and we expect that on an ongoing basis, we do see strong revenue growth expectations are to grow revenue above other industry growth trends.
As we grow our revenue above industry.
We expect that VBU see strong margin accretion.
As a metro effect as we exit.
Look Q4 fiscal 21, we would expect to be in the low double digits approximately 12% margin.
We are actually considerably ahead on our margin goals for this year, you think you're seeing that already in Q2.
The already mentioned that in Q3, we expect to get to double digit margins and exit the year.
In the low double digit again beyond that we expect that we will accrete margins by about 100 250 basis points and our goal is to get to the mid teens margin in the mid to long term, which is the three to five year period, and we feel very confident given the change.
Does that they've made it given the rigor that they have with respect to pipeline activities.
The diversification strategy that deployed to the part about three pillar strategy, we feel that dang very good stead to be able to accrete margins. According to our plans and get to although mid to long term margin goals of mid teens.
Oh, Yeah, that's a really helpful uncertain details and then.
So you're focusing on other newer verticals quote unquote, maybe talk about some of your recent successes in terms of competitive wins why do you think you're winning versus I don't know are you willing versus accountants are you just taking over.
Internal I T. Maybe some color on that will be helpful.
Yeah, and I'd say that this is probably true across all verticals, new as well as existing or verticals that I've spending very rapidly like health care and tech and even verticals like banking and financial services, but they still significant potential and opportunity.
So.
They are very differentiated in all the verticals simply stated but to size burn known for what the core engineering arbitrage as opposed to cost arbitrage and today clients are looking for ways to be much more efficient and increase efficacy levels as opposed to the simple value of offshore.
During an offshore cost, but to say the leader in that space, then beyond that they come to digital and cloud, they're highly differentiated and other strategic partnership in all about strategic partnerships. We have both highly coveted status in terms of execution service excellence and.
The and the designation that the command with each of the CSP then DSP. So that's clearly driving differentiation.
Beyond that.
And especially during Corbett virtusa acquitted ourselves extremely well in terms of having no disruption whatsoever to other clients during the call it looked out.
Unfortunately, many of the other smaller providers and even some of the larger scale generation one providers did not to quit themselves. So about.
And we've seen a notch influx of interest from clients to actually look at Virtusa has the strategic supplier and to transition some of the walk away from either a bunch of a sub scale providers, all very large generation one providers.
Who may not be as nimble noise at <unk> as we are so all of this is contributing as I said two pipeline growth rates that they're out there that are more than doubled from a year ago and our win loss ratios hasn't changed our deal sizes have kept expanding and our digital foot.
Brent is expanding rapidly which is obviously an area of significant investment across all industries, the operating and.
And that's really what's can then rattling the momentum.
Great and then last question. This is kind of more big picture.
We recently hosted an investor call what are the former CFO of emphasis more hunt pie is actually talking about this sector, reaching an inflection point, especially as digital crosses 50% of next and he's kind of attributing that to cope with it so call it seems to be driving rather.
Then going the other way in terms of spending or funding for digital work and.
Overall, it seems that there is a consistent theme on your among your peers about extending and very large pipeline.
What's your view on that.
We are definitely seeing an expansion of fun digital and cloud transformation initiatives coming to our pipeline. We believe that that is precipitated by Corbett.
They are also seeing a larger percentage of activity with respect to rationalization and consolidation of suppliers.
Especially away from either a very small providers and or generation, one providers and transitioning work to providers that have very strong digital capabilities and agile and nimble.
So we do believe that Corbett is precipitating and or has precipitated a sea change in terms of client spending in areas such as digital and cloud.
Great. Thanks, Chris.
Your next question will come from Vincent Colicchio with Barrington. Please go ahead.
Chris or any clients are asking for better financial terms or is that type of behavior past us.
Clearly Vincent during the peak in the height of Corbett.
We had several conversations with our clients about spend reduction about concessions.
About how they could actually make sure that the work that they have to get done.
He is getting done in the most cost effective ways [noise].
Many of those conversations are behind us.
We have worked with clients.
To understand what some of the issues, though and I have worked on programs with them.
And have provided certain concessions throughout this calendar year.
Many of those concessions actually come off as the start calender 21.
But the number of conversations that the had during March April and May have tapered down critically in June and July and be believes that the majority of those conversations and discussions are behind us and obviously all of that is baked into our.
Skull 21 expectation that picture.
And then one strategic question a as you read every reengage with the M&A in the M&A market. Given your you know your strategy to diversify well you'd be biased towards non be if aside deals in the near future.
You know as they take a look at capital allocation.
They will be very mindful.
Of the areas that we think are complimentary to virtusa and those areas could be industry. This they'll be need to scranton certain segments of the tusa in industries that we are already operating or potentially new industry areas that they might want to get involved that.
We will look at and many it from the perspective of geographical reach and obviously technology expertise in a rapidly evolving technology landscape. We believe that they have very strong leadership on many of these areas, but it because its technology.
Industry expertise, but having said that as the CRO enskilda pull them. We have a list of areas. There. We think we can actually expand either organically or inorganically and then that creates the opportunity for us to allocate capital on me again, so the strategic.
Goals.
Uh huh.
Nice job in the quarter.
Thank you.
And this will conclude our question and answer session I'd like to turn the conference back over to Chris Tucker for any closing remarks.
Thank you.
Thank you everyone for joining us today I want to take this opportunity to paying our global team members for their dedication and devotion to our clients during a period unprecedented times.
And we look forward just speaking with you at our Q2 floating Scott. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines. This time.
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