Virtusa's CEO Discusses F3Q2014 (Qtr End 12/31/13) Results - Earnings Call Transcript

| About: Virtusa Corporation (VRTU)

Virtusa Corporation (NASDAQ:VRTU)

F3Q2014 Earnings Call

January 30, 2014 5:00 p.m. ET


Staci Mortenson - ICR, Inc.

Kris Canekeratne - Chairman & CEO

Ranjan Kalia - EVP & CFO

Raj Rajgopal - President


Rahul Bhangare - William Blair

Mayank Tandon - Needham & Company

Brian Kinstlinger - Sidoti

Joseph Foresi - Janney Montgomery Scott

Puneet Jain - JPMorgan


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Virtusa Corporation Fiscal Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up to ask questions. I would like to remind everyone that this conference is being recorded and would now like to turn the call over to Ms. Staci Mortenson of ICR. Please go ahead.

Staci Mortenson

Thank you. Good evening and welcome to Virtusa’s third quarter of fiscal year 2014 earnings conference call where we will be discussing our financial results for Virtusa’s third quarter ended December 31, 2013.

On the call with me are Kris Canekeratne, Chairman and Chief Executive Officer; Ranjan Kalia, Executive Vice President and Chief Financial Officer; and Raj Rajgopal, President of Virtusa.

Certain statements made in this call that 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 of 1995.

During this call, we may make expressed or implied forward-looking statements relating to, among other things, Virtusa’s expectations and assumptions concerning management’s forecast of financial performance, Virtusa’s forecast of the financial performance of OSB Consulting and TradeTech Consulting Scandinavia AB and its subsidiary, Virtusa’s ability to assimilate and integrate the operations of OSB and TradeTech, the growth of Virtusa’s business, the ability of Virtusa’s clients to realize benefits from the use of Virtusa’s, OSB’s or TradeTech's IT Services, and management’s plans, objective and strategy.

These statements are neither promises nor guarantees but are subject to a variety of risks and uncertainties, many of which are beyond Virtusa’s 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 obligations to update or revise the information disclosed during this call whether as a result of new information, future events or circumstances or otherwise.

Other statements in this call also include certain non-GAAP financial information as defined by the SEC. We present constant currency revenue to provide a framework for assessing how our revenue performed excluding the effect of foreign currency rate fluctuations. We also present a reconciliation of cash, cash equivalents, short-term and long-term investments that we believe provide insights into our total cash position and overall liquidity.

For additional disclosure regarding these and other risks faced by Virtusa, see the disclosures contained in Virtusa’s public filings with the SEC and our press release.

With that, I’d like to turn the call over to Kris.

Kris Canekeratne

Thank you, Staci, and thank you for joining us on our third quarter fiscal year 2014 conference call. We made good process against our stated goal and are pleased to announce another quarter of industry leading revenue growth and significant operating margin expansion. We're also very pleased that we crossed $100 million in quarterly revenue, another very important milestone for our team.

For the December quarter, revenue was $101 million, an increase of sequentially and 17% year-over-year in reported currency. EPS was $0.35 compared to $0.29 in the year ago period.

We continued to make excellent progress on our growth platform and our differentiated value proposition is resonating very well. We made strides winning new clients, growing existing client relationships and expanding our global presence. The overall demand environment is healthy and is driven by targeted enterprise initiatives to expand revenue and/or to improve the efficiencies of running their business as usual or BAU operation.

On the revenue side, we work with our clients to deliver a distinctive millennial experience to expand the addressable market and grow their businesses. On running the BAU operation more efficiently we provide industry-leading transformation solution that reduce operating costs while meeting increasing regulatory and compliance requirements.

We are in front of a very significant (inaudible) in enterprise solution. Business leaders are being forced to rethink their strategies due to the increasing number of digitally savvy users, the proliferation of powerful handheld devices and advances in technology. Progressive business leaders are looking beyond established web solutions. They're rapidly embarking on mobile first or tablet first strategies that rely heavily on social, location aware analytics and other enabling technologies such as in memory and cloud provided through millennial experience.

Enterprises and startups that embrace these strategies are disruptive, capture a larger customer base, expanding to adjacent markets and accelerate their revenue growth. As an example, the mobile payment space is rapidly evolving with multiple providers vying for a piece of the pie. Virtusa's mobile payments practice is working with several entrants across this emerging space to disrupt traditional payment methods with smartphone to intersect the rapidly expanding millennial consumer base. We are working with banking partners to provide us secure solution through the use of dynamic credentials which could protect customer account and payment data on the device.

For another client we are working to take advantage of how the portability aspect of mobile payment can transform customer buying experiences by leveraging the power of the device location awareness, design intelligence on personal buying preferences and the convenience of mobile payment they are able to drive a distinctive millennial experience and thereby grow and expand their businesses.

Simultaneously, we are also seeing business leaders initiate large transformational programs to run their BAU operation more efficiently. These programs are targeted to us meeting increasing compliance and regulatory requirements, automating consumer and employee facing processes, improving data integrity and finance operation, improving business efficacy through automation and reducing cost through IT rationalization and consolidation. To better align themselves on business outcome, enterprises are moving away from horizontal sourcing activity and opting instead for a strategic partner that can closely align with the business and provide end-to-end services. Business leaders are taking more control as they focus on lowering their risks and lowering their cost of operation.

The healthcare industry is a great example of where regulation and transformation are driving our business, enabling us to leverage both our industry knowledge and IT expertise. Healthcare companies are adopting new technology to increase operating efficiencies and become more competitive, customer centric and responsive to better navigate the rapidly changing healthcare landscape. Using our healthcare industry expertise, our deep knowledge of technology, agile development technique and our accelerated solution design process we are working with our client to develop and deploy a set of transformational products.

For example, the Virtusa's deploying a solution at a leading healthcare provider to help meet requirements of the Affordable Care Act and to accelerate the launch of new healthcare products. Virtusa has this time turned the October 1, 2013 federal deadline into an opportunity to improve business operation and provide better service. The solution built and deployed by Virtusa enables our client to comply with member level rating and execute health insurance exchange requirement as mandated by the Affordable Care Act. We see healthcare transformational program as a growing opportunity for Virtusa and one that meets the needs of both the payors and providers.

Investing in transformation programs is also apparent in the work we are doing for our global BFSI clients. As we have discussed with you on past calls, our expectation was that we would start to see an acceleration in regulatory and compliance initiatives and this would help lead to a reacceleration in our BFSI growth rate, and this is happening. As an example, we recently engaged with the global risk management team at one of our large banking clients to plan, design and execute a solution that impact their risk management structure. Our solution is evaluating key markets, credit, country and liquidity areas and helping drive transformational change across our client's risk organization.

We have established deep expertise helping our clients improve the operational efficiency and effectiveness, rationalize their IT infrastructure, and improve the organizational structure to support executive decision making and regulatory mandates. As this example illustrate, we are well-positioned to address the duality our clients are facing by helping them innovate new solutions and transform their operating cost.

Our targeted consulting like solutions combined with our IT rationalization and consolidating expertise are highly differentiated and provided clear set of benefits to both business leaders and IT leaders as they evaluate partners to help them achieve their strategic goals. This is enabling us to penetrate and grow our relationships pursuing increasingly larger engagement and greatly strengthen our clients' foundation.

Each of Virtusa's growth strategy is to continue to deepen our industry expertise, strengthen our service capability and expand our global presence. The recent acquisition of TradeTech and the November acquisition of OSB Consulting are clear examples of our strategic acquisition program at work.

TradeTech meets for the attention criteria on several fronts. First, it immediately expands our global presence to the Nordic region. These countries are a large and growing IT services market trying to increasing the use of outsourcing and offshoring. We now have a beachhead from which we deliver a broader set of global services. TradeTech also brings industry expertise, which we can leverage across our global client base to increase the value deliver, specifically we are increasing our asset management and treasury services domain and technology expertise.

TradeTech's core strength include technology consulting, regulatory and compliance and implementation of global asset management and treasury platforms. With approximately one third of the revenue coming from managed services of these platforms consisting of support and maintenance, the addition of TradeTech also adds to our revenue visibility.

We're already seeing the benefits of both acquisitions and we are having meaningful conversations cross-selling out combined services. To further highlight this point, the combination of the Virtusa's finance transformation capability with OSB's enabled us to pursue and win an engagement with a leading property and casualty insurance company.

Specifically, we have able to edge out formidable competition and (inaudible) engagement to overhaul and re-platform their finance applications on to a global SAP solution. We are enthusiastic about the opportunity we have to pool our collective capabilities, provide greater value to our clients and expand our addressable market.

Overall, we are pleased with our third quarter performance. We made excellent progress against our long term strategic goals, strengthen our global market, expanded our addressable market and deepened our client relationships.

We are enthusiastic about our position and our ability to provide thought leadership to both business and IT leaders further differentiating ourselves and continuing to grow faster than our industry.

Now, let me turn the call over to Ranjan, who will provide more details on our third quarter results and fourth quarter and fiscal year 2014 guidance. Ranjan?

Ranjan Kalia

Thanks, Kris, and good evening to everyone. Let me start by summarizing the results of our third quarter of fiscal year 2014, before providing a current guidance the fourth quarter and full fiscal year ending March 31, 2014. All of the number being discussed are US GAAP except with regards to use of constant currency revenue metrics.

Revenue for our third fiscal quarter was $101 million in line with our guidance. Revenue increased 17% year-over-year in both reported and constant currency. Sequentially, revenue increased 7% in reported currency and 6% in constant currency. Constant currency normalizes the movement of the British pound against the U.S. Dollar in each comparative period.

Gross margin during the third quarter was 36.8% as compared to 35.8% in the prior quarter and 35.6% in the year ago period. During the third quarter, the sequential improvement was primarily due to increased utilization and FX benefits partially offset by our customary annual onside wage increases.

Our operating income for the third quarter was $11.2 million, an increase compared to $9.8 million in the prior quarter and an increase from $9.1 million in the year ago period. The higher operating income resulted in an operating margin of 11.1% for the third quarter of fiscal 2014 compared to 10.4% in our prior quarter and 10.6% in the year ago period.

The sequential operating margin increased of 70 basis points was primarily driven by an FX benefit mainly from our INR hedging program, high utilization and lower travel expenses partially offset by annual onside wage increases and the impact of the OSB acquisition including the increased use of subcontractors and intangible amortization.

The year-over-year 50 basis points operating margin increase was primarily due to an FX benefit mostly from our INR hedging programs and increased utilization, partially offset by an increase in compensation expense due to annual onsite rate increases transaction expenses related to the acquisition of both TradeTech and OSB and intangible amortization due to OSB acquisition.

Third quarter other income was $1.2 million. We had an income tax expense of $3 million in our December quarter, which equates to an effective tax rate of 24.5%. This differs from our previous guidance of 25.5% due to certain onetime tax benefits primarily a tax refund in the UK.

Net income for our December quarter was $9.3 million, an increase compared to $7.5 million in the prior quarter and $7.4 million in the third quarter of fiscal 2013.

Diluted earnings per share was $0.35 in the third quarter of fiscal 2014. This compares to $0.28 in the prior quarter and $0.29 in the year ago period.

Turning to the balance sheet, ending cash at September 31, 2013 was $142.3 million inclusive of cash equivalents and short term and long term investments. This cash balance includes the drawdown of $30 million from our line of credit used for the TradeTech acquisition which closed on January 2, 2014.

The December 31 cash balance excludes net proceeds of $86.2 million from our follow on public offering which closed on January 14, 2014. We have since paid off the $20 million in borrowing outstanding from the net proceeds of the offering.

Cash flows from operating activities was $17.6 million in the third quarter. Our DSO including unbilled receivables improved by 8 days to 70. Capital expenditures were $2.3 million in the December quarter. Depreciation and amortization expense in the quarter was $2.7 million.

Now let me turn to some additional quarterly financial and operational metrics beginning with those related to our third quarter fiscal 2014 revenue. Revenue across our industry groups are as follows: BFSI increased 10% year-over-year and 57% of revenue. BFSI increased 4% sequentially inline with our expectations. We expect strong sequential growth in the fourth quarter of fiscal 2014.

Communication and technology grew 46% year-over-year representing 33% of revenue and increased 20% sequentially. Strength in the quarter was primarily driven by transformational project at some of our telecom clients. As expected, media information and other declined 13% year-over-year as certain projects came to their natural conclusion. We expect this industry group to return to growth in the fourth quarter.

For the December quarter, we had two clients contribute greater than 10% of revenue. During the December quarter, we commenced work with five new clients, three in BFSI, one in communication and technology, and one from media information and other.

We ended the December quarter with 6,817 IT professionals, an increase of 14% year-over-year. Global utilization including trainees was 85% in our third quarter, up sequentially and year-over-year. This meaningful increase in utilization was due to the completion of some pre-established calendar year milestones on certain fixed price project which were contemplated in our prior guidance. Our expectation is that our utilization rates will return to our targeted range around low 80% over the next few quarters.

Now I will provide our current for our fourth quarter fiscal quarter and full fiscal year ending March 31, 2014 which now includes our recently acquisition of TradeTech. In addition, our current guidance includes the issuance of 2.65 million shares from our follow on offering which we completed on January 14, 2014 and is expected to have a $0.03 EPS impact.

Revenue in the fourth quarter of fiscal 2014 is expected to be in the range of $110.3 million to $112.3 million. Diluted earnings per share in the fourth quarter of fiscal 2014 are expected to be in the range of $0.33 to $0.37. Earnings per share anticipate an average share count of approximately 28.9 million.

For the full fiscal year ending March 31, 2014, we expect revenue to be in the range of $396.2 million to $398.2 million. Diluted earnings per share for fiscal year 2014 are expected to be in the range of $1.26 to $1.30. Full fiscal year 2014 EPS anticipates an average share count of approximately 27 million.

Our turn guidance is based on a set of assumptions related to such items including tax rate, interest income, foreign exchange rate and capital expenditures that can be found second page of our data sheet located in the Investor Relations section of our website.

Now I would like to spend a moment providing you with our current thoughts on our fourth quarter and full fiscal year 2014 guidance. Overall, IT services budgets are expected to be up marginally with healthy offshore IT services secular growth trend rates to continue. In particular, we're seeing increased allocation around differentiated programs that drive revenue, reduce risk and improve operating efficiencies and we are well-positioned to capitalize on these opportunities.

Our ongoing global expansion efforts are driving increased opportunities. In particular, Europe is now open to outsourcing and offshoring. Our recent acquisition of TradeTech immediately expands our presence in the region allowing us to capture more of this global spend. We're seeing an increased need for healthcare transformational program this is driven by regulatory change and new technologies to help our clients on board their customers and become more customer-centric while continuing to realize operating efficiency.

We expect these trends and the capabilities we are building to be long term drivers for our business. For the fourth quarter of fiscal year 2014, we expect strong organic sequential revenue growth rates to continue driven by increases across all our industry groups. BFSI momentum is expected to continue in the fourth quarter inclusive of banking driven by expected increase in regulatory and compliance globally.

As we execute against our stated strategy of becoming a significantly larger company, we have been focusing on growing non-top 10 portfolio faster than top 10. These initiatives remain on track.

For the full fiscal year 2014, we continue to expect to achieve above industry organic revenue growth rate.

Turning to margins, our organic operating margin forecast for the full fiscal year 2014 is consistent with our prior guidance and it's expected to grow approximately 100 basis points. On a GAAP net income basis, we continue to expect the TradeTech acquisition impact to be neutral for the full fiscal year 2014 even after absorbing acquisition related costs.

In conclusion, we continue to see broad-based growth across our client portfolio allowing us to generate above industry growth rates, increased margins, and generate meaningful cash flow. We are now in a strong strategic and financial position from which to execute on our growth initiative in fiscal year 2015 and beyond.

I will now turn the call over to the operator to begin Q&A. Thank you.

Question-and-Answer Session


(Operator Instructions). And we do go first to Rahul Bhangare with William Blair.

Rahul Bhangare - William Blair

Just implied in your fourth quarter guidance, I think sequential growth is quite strong, and can you talk about what kind of contribution you are expecting from acquisitions in Q4, and are you expecting similar underlying business growth continuing into the next fiscal year?

Ranjan Kalia

Yes. So Rahul, I mean, we have talked about if you look at it from the TradeTech, we have previously guided about $4.2 million worth of contribution would be from TradeTech in the March quarter and if you take prior to that we have given guidance that OSB would contribute about $2.4 million worth of revenue contribution in the quarter for the March quarter. That being said, we still believe that even if you back out these, it's a very strong organic growth rate target about 5% that we're going at the mid point.

Rahul Bhangare - William Blair

And then it's nice to see North America accelerated a little bit quarter-over-quarter. Are we expecting North America to continue accelerating with Q2 kind of a trough in that region?

Ranjan Kalia

Yes, Rahul, we have talked about really the North America was primarily being impacted by the banking segment, banking segment is primarily North America base for us. And like Kris and myself talked earlier on we believe that banking is expected to grow in Q4. If that trend continues, yes, the North America growth rates will continue too.


And we next go to Mayank Tandon with Needham & Company.

Mayank Tandon - Needham & Company

Kris, you touched on this, but maybe a few more specifics around the demand environment entering 2014 versus what you saw back in 2013, and how are the plan priorities different this year versus last year, and also if you could speak to deal size than relative to a year ago?

Kris Canekeratne

On the demand environment what we are seeing, Mayank, is that many of our clients had finalized or in the process of finalizing the calendar year '14 budget. Most of the spending is being allocated to the program that either expand their business or run their business operations better. We feel that we are really well-aligned and extremely well-positioned to help our clients across both these areas, on the one hand to help and grow and scale their businesses or scale their revenue specifically by providing a distinctive millennial experience enabling them to go after a larger consumer base.

And then on the other hand, our transformational solution are highly targeted with either lowering the cost of the BAU operation or reducing the risks within the enterprises. So we are seeing that there is more certainty in budgets and in terms of formalizing budgets, as well as expecting them to allocate these budgets to these programs. Raj will comment on some of the other areas.

Raj Rajgopal

Yeah, thank you, Kris. So again as Kris said, the pipeline of things we consist of the millennial type of programs as well as a transformational types of programs, and essentially our average pipeline has expanded extremely well year-over-year; also the average deal size has increased handsomely year-over-year. We have more big deals in the funnel now compared to last year. As well as the average deal price is growing.

To think of the demand cycle, the decision making cycles are as they were before over the year which means they're very strong unlike probably last year when there was a little softening at this point and time. Now win rates have been consistent. So simply that is essentially contributing to the growth that we had in the past and we expect that to continue in the future.

Mayank Tandon - Needham & Company

That's very helpful color, but just as a follow up some of your larger peers have indicated that 2014 should be a better growth year than 2013 and 2013 was a pretty good year for the IT services sector. I know you haven't given guidance for the next fiscal. Well would you also believe that this could be a better growth area, you have just given some of the client priorities that you listed?

Raj Rajgopal

Mayank, even a couple of things from macro environment perspective, like we said, we do believe that budgets are in a better situation, but I think from a comparative perspective from Virtusa we said a lot of the other payers, you got to keep in mind that we have always consistently grown and I feel like some of the other people are going to be coming from slow growth to high growth. So that you got to keep that in mind. We believe that our growth trajectory has been consistent it's based on a strong portfolio of client and if the market stays the way it is, we would like to continue that growth trajectory.


And we next go to Brian Kinstlinger with Sidoti.

Brian Kinstlinger - Sidoti

Ranjan, in the past you said even if currency work against you, which it hasn't, for two Virtusa can expand its operating margin of 100 to 150 basis points. You do have the rupee at the tailwind, but now you got the amortization from the acquisitions, and so I'm wondering when you look to fiscal '15 with all that said, can you still grow your operating margin 100 to 150 basis points?

Ranjan Kalia

I think Brian, it's a fair question. I mean we do believe that we can continue to grow and we've always talked about growing the margins on an organic basis by 100 to 150 basis points, we still are committed to that. We believe we can grow because we continue to still have a lot of levers in there. I think even with the acquisitions that we've talked about this year the impact of those on a full year P&L will also continue to go down; it won't be the same impact like you see of 40, 50 basis points in for Q4. So we will provide you the guidance next time we talk. Well we still have competitive going on margins by 100 to 150 basis points on an organic basis.

Brian Kinstlinger - Sidoti

Did you say how much OSB contributed during the quarter, and is OSB and TradeTech are going to be considered in consulting?

Ranjan Kalia

It won't be, not necessarily with TradeTech, because you may remember we had talked about TradeTech has the business support system, so some of that business will go into the application outsourcing side. With regards to the OSB, the OSB revenue contribution in the quarter was about $1.5 million which is what the guidance that we have given and they came in line with the guidance.

Brian Kinstlinger - Sidoti

And then just finally when we look at the equity raise as well as the acquisition, what will the new amortization be when you have a full quarter of it or the incremental from this deal, and then what is your sort of assumption on interest income given you're on such a high cash balance?

Ranjan Kalia

Yeah, so I think if you look at it from a Q3 perspective, the total deprecation and amortization was about $2.8 million. Out of that $800,000 is related to the acquisitions, $2 million is the raw depreciation. And then we expect that $800,000 will grow to $1.7 million in Q4.

So on a full year basis, our amortizations forecast for our FY'14 is about $3.4 million and that will – $3.9 million and that is expected to increase for FY'15. And I will provide you more color on that when we meet next time, but the $3.9 million will definitely grow.

Brian Kinstlinger - Sidoti & Company

And the other part was the interest income, you are going to have a considerable amount more cash, just there is two or three line items in other income. So just on the interest income portion, what do you expect that to be?

Ranjan Kalia

Yes. So Brian, it takes time to really find the right home. At Virtusa we have I would say a relatively risk averse investment policy and we are in the process right now finding home for this cash. So I will be able to provide you more on that. But, I won’t say that we are not going to be looking for significant marginal interest rate expansion, it'll be dollar expansion but not margin rate expansion.

Brian Kinstlinger - Sidoti & Company

And finally, is there another use for the cash such as, I mean you just made an acquisition, it wasn’t that large and you raised a bit of amount of cash? Is there something else that is in the pipeline for deals?

Ranjan Kalia

No. I mean, I will say that we have something that's imminent in the pipeline right now. But it is a strategic initiative that the management at Virtusa undertakes in terms of continue to look for tuck-in acquisitions. And in this case not only we will continue to look for that once we are comfortable that we have been able to integrate the two that we just picked up. But we will also deploy some of this cash for operating efficiency type of investments. And those are the ones that we talked about maybe look at some of our at leased delivery centers and convert them into owned delivery centers.


And we next go to Joseph Foresi with Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

Hi. I was wondering if you guys could talk about the mobile and healthcare, maybe just give us some sense of how big those pieces are of the overall business, how the growth rate is there and any competitive advantages you can get on in those businesses.

Kris Canekeratne

Clearly on to more this side we are seeing good traction. It’s an area that’s transforming rapidly. It’s obviously very in much in line with the industries and the notion of the industries that we serve which are very large consumer facing industries. In all of these industries, Joe, what we are seeing is that there are initiatives to actually create solutions and services so that healthcare providers can provide access to their services through things like mobile devices, tablets, et cetera to be able to access, penetrate and retain consumers especially those that are much more digitally savvy than perhaps prior generation.

So on the one side, we are seeing the regulatory initiatives driving change within healthcare, on the other side, we are seeing large transformation programs to help these healthcare organizations basically turn their business as usual operation a lot better. And then beyond that we are seeing them starting to invest in millennial initiatives so they can expand their reach and the addressable market.

Across these spectrums, we are extremely well-positioned to provide industry leading solutions whether it would be on the millennial side of the equation to help them grow and expand or whether it be on helping them run their BAU operations a lot better. As a result of that, we have seen strong growth in healthcare and we expect that healthcare will be a growth enabler for Virtusa moving forward.

Joseph Foresi - Janney Montgomery Scott

Okay. And --

Kris Canekeratne

And Raj want to elaborate on that?

Raj Rajgopal

Yes. So basically about healthcare, our pipeline and healthcare is actually quite strong. And its primarily because they have invested in several solutions to help our clients sort of comply with the Affordable Care Act especially with respect to on boarding the large number of individuals that comes from the mandate.

The other aspect of it is around reporting and analytics to give our clients the information about the kinds of clients that are coming on board so they can make decisions. Those are the two reasons that our healthcare pipeline is expanding.

Joseph Foresi - Janney Montgomery Scott

I mean should we think this as – there is just that much demand out there or what you are doing differentiated product even the mobile and the healthcare business?

Kris Canekeratne

So clearly the overall demand environment is stronger and have improved. But I think beyond that they are extremely differentiated and well-positioned to help our clients in the two areas that they are investing. Once again in healthcare, this is to help them expand the addressable market by providing very distinctive millennial solutions that helped in extend their services to new consumers and to help retain the aggressive consumers. And then, on the other hand, to be able to help them transform their BAU operations and run the operation a lot better.

So we feel, Joe, that we are extremely well-positioned to take advantage of increasing spend in the healthcare industry with very targeted offering on both sides of the equations where they are investing and spending.

Joseph Foresi - Janney Montgomery Scott

Okay. How should we think about the spending from your larger clients heading into next year? Is that going to decrease a percentage of revenue because some of your other clients are growing faster or what kind of visibility do you have on those particular budgets?

Ranjan Kalia

Joe, we do believe that our top 10 client portfolio is strong, I mean our relationship has probably been the best that's ever been in Virtusa's history. Even where some of the banking segment clients, which were some pressure in there during the year I think we believe that's also turning a little bit around. But we also got to keep in mind that it's not like all the clients that the budget kimono is going to completely open, they are going to do very selected investments and we want to really pick up those selective investments over to Virtusa. I think as a portfolio that'll probably grow well, but it will grow probably less than the company average.

Joseph Foresi - Janney Montgomery Scott

Okay. But you are expecting from though from the large client, is that fair?

Ranjan Kalia


Joseph Foresi - Janney Montgomery Scott

Okay. And then just a last one from me, I know you gave the dilution impact but maybe you can, there is a bit of a spread on the EPS hearing talked about Kris on dilution, maybe you could run us through some of the components of that spread. Is that, I assume some of that concern is staying with the acquisition, but I am just trying to get a field for any other moving parts?

Ranjan Kalia

Yes, Joe, there is no impact of the acquisition of the EPS line item. Like I said, it is EPS neutral. Really the EPS impact is all due to the increased loss account, which is $0.03.


(Operator instructions). And we next go to Puneet Jain with JPMorgan.

Puneet Jain - JPMorgan

For the non-top 10 clients were up almost 10% on sequential basis, but it likely includes some contribution from the OSB acquisition also. So what was organic growth in those accounts in this quarter?

Kris Canekeratne

Actually Puneet, most of the non-top 10 is really all organic, because from the OSB acquisition we had two relationships with existing clients which are really our top 10.

Puneet Jain - JPMorgan

Raj, I think you mentioned that average deal size is growing. So is that an industry wide trend or something which you can say is specific to Virtusa given your improving service capabilities?

Raj Rajgopal

Yeah, I can only speak to our deals, so essentially if you look our deals, it was as we grow and scale clients see us as a very viable alternative to some of the large incumbents with which they have fatigue. So many of the large deals that might have in the past gone towards our larger competitors, our larger competitors, we are being considered for that and hence the deal sizes are bigger.

Puneet Jain - JPMorgan

And basically like related question to the previous. So if you compare your current pipeline with that of last year, last year obviously grew significantly faster, by last year I mean calendar 2013, and you grew significantly faster than the overall industry average rate last year. So if you compare last year's pipeline with this year's, do you think you can continue to grow premium rates this year given your pipeline.

Kris Canekeratne

Puneet, obviously we are not guiding for calendar '14 or fiscal '15 at this juncture, but just to reiterate something that Raj mentioned earlier, our pipeline in terms of overall growth has grown very well year-over-year. Our overall deal sizes have expanded and our win loss ratios are pretty much stayed in line.

So as we start this calendar year, we have a great platform. We are winning much larger engagements both in our existing client base as well as with new clients. I think our value proposition is extremely targeted especially to the two arenas that we are finding that client are investing into specifically around expanding the addressable market us being able to provide a set up services that create a distinctive millennial experience. And on the other hand, our transformational services and solutions are very targeted with helping our clients to run their BAU operation better.

So this is actually helping us bolster our pipeline and our ability to create very significant value for our clients and we are probably one of the few firms that have a proven track record of working with our clients to help them rationalize their IT application portfolios. And that's also creating differentiation for us in the market and helping us essentially go out there and consolidate and rationalize these application portfolios and move some of the work over to Virtusa. So these are some of the underlying enablers as to the results that we are seeing from an execution perspective and the growth that we have seen in our pipeline.


And it appears there are no other questions in queue. I would like to turn the conference over to Kris Canekeratne for any closing or additional remarks.

Kris Canekeratne

Thank you. Thanks for joining us today. I want to take this opportunity to thank our global team members for their hard work and dedication and helping accelerate our clients' business outcomes. Thank you.


And that does conclude today's conference. We do thank you for your participation. You may now disconnect, have a great rest of your day.

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