Virtusa Corporation (VRTU)F
F4Q10 (Qtr End 03/31/2010) Earnings Call
May 12, 2010 05:00 pm ET
Staci Strauss Mortenson - IR, ICR
Kris Canekeratne - Chairman & CEO
Tom Holler - EVP & COO
Ranjan Kalia - SVP & CFO
Jon Maietta - Needham & Company
Brian Kinstlinger - Sidoti & Company
Vincent Colicchio - Noble Financial
Avishai Kantor - Cowen & Company
Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Virtusa Corporation Fourth Quarter 2010 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 for your questions. I would like to remind everyone that this conference is being recorded.
And now I’ll turn the conference over to Ms. Staci Strauss Mortenson of ICR. Please go ahead.
Staci Strauss Mortenson
Thank you, good evening and welcome to Virtusa’s fourth quarter and fiscal year 2010 earnings conference call where we will be discussing our financial results for the quarter and year ended March 31, 2010. On the call with me are Kris Canekeratne, Chairman and Chief Executive Officer, Tom Holler, Executive Vice President and Chief Operating Officer, and Ranjan Kalia, Senior Vice President and Chief Financial Officer 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 provision of the Private Securities Litigation Reform Act of 1995. During this call we may make, express or imply forward looking statements relating to among other things, Virtusa’s expectations and assumptions concerning management forecast to financial performance.
Virtusa’s ability to assimilate and integrate the operations of in source and compares to consulting acquisition of new clients and growth of the business, the ability of Virtusa’s clients to realize benefits from the use of Virtusa’s IT services. The potential impact of currency exchange on our business and operations and management’s plans, objectives and strategies. 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 here of. Virtusa undertakes no obligation 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 currencies rate and fluctuation. We also present a reconciliation of cash, cash equivalents, short-term and long-term investment that we believe provides insight into our total cash position and overall liquidity. For additional disclosure regarding needs and risks stated by Virtusa see that disclosures contained and Virtusa’s public filing with the Securities and Exchange Commission, and on our earlier press release.
With that I would like to turn the call over to Kris. Kris please go ahead.
Thank you Staci, and thank you for joining us on our fourth quarter and fiscal 2010 year-end conference call. We are pleased to report a strong fourth quarter and good progress during a challenging economic period. During this call, I will summarize our fourth quarter and fiscal year results provide you with our thoughts on the market place, our key differentiators and focus areas and then discuss our outlook.
Ranjan will provide more details on our financials and provide you with our current fiscal year ‘11 guidance before we open up the call for Q&A.
While the economic environment was challenging during 2010, our business performed growth and we were pleased with our ability to show meaningful sequential growth in the second half of the fiscal year. This was a direct result of the investments we made in broadening and deepening our industry expertise, growing our business consulting practice, a better spend environment and the acquisition of InSource and ConVista Consulting.
We are particularly pleased with the strong foundation we have built for our business through the increased quality and significant expansion of our plant base. All this combined with our expertise in IT rationalization through our platforming approach positions us well for sustainable, long-term growth in fiscal year ‘11 and beyond.
Here are some of the highlights from the fourth quarter and fiscal year 2010. For the March quarter total revenue was $47.8 million, an increase of 15% year-over-year and 15% sequentially. Our operating income was $3.2 million or 6.7% and earnings per diluted share was $0.15. Fiscal year revenue was $164.4 million a decrease of 5% from the prior year. Operating profit was $12.9 million and EBITDA for the fiscal year was $0.50.
During the fourth quarter, we added 11 new clients, including six from ConVista. For the full year, the number of active clients increased from 56 to 68. We are pleased with the quality of the clients we added during the year and many have the potential to be strategic. Our overall client base is stronger than at any point in our history and provides us with a solid foundation for sustainable long-term growth. Unlike a year ago, the demand environment is improving, budgets are set and clients have increasing confidence in their ability to spend.
The funding of strategic initiatives is also picking up. Clients are investing in programs that accelerate business outcomes including growing revenue, reducing costs, increasing competitiveness, improving customer service and bringing products and services to markets faster. We are extremely well positioned to drive business transformation for our clients. Let me spend a moment on some of the growth drivers of our business and while we are uniquely positioned to capture the opportunities we see in front of us.
While overall IT spend increases are modest, a larger percentage of IT dollars are being spent offshore. We are in a strong position to capture the increasing offshore spent because of our industry-leading, global delivery model and our ability to perform over 80% of the work offshore. This efficient ratio combined with our track record of service excellence provides our clients with significant cost benefit.
In addition to reducing cost by moving work offshore, clients are looking for systemic ways to improve the efficiencies of their IT application [estate] through rationalization and re-platforming of applications. Our business consultant, technology architects and solution experts analyze core business processes, identify discrete applications and rationalize redundancies. These initiatives have significantly reduce total cost of ownership for our clients, and we have demonstrated towards leadership taken on downstream execution and captured a larger percentage of our clients mind and wallet share.
As an example, we recently worked with a leading supplier of financial marketing intelligence to improve the usability of the set up core business application. Our business consulting that engagement team possess usability across the portfolio of application evaluated multiple technologies to realization of improvement and demonstrated possible approaches toward set up facilitated workshops and prototypes. This allowed the client to see solution option and select the ideal approach and it led to us winning the implementation and maintenance of the solution.
Based on the success of this initiatives, Virtusa is now a key partner to this client within opportunity to provide a broader set of services. We are also clearly seeing increasing demand for programs that drives business value. First, the health of a client accelerate time to market for products and services. Improved functionality expand platform to supports geographic growth and ultimately strengthen their market position. Our consulting approach helps business and ideal leaders crystallized requirement and collaborate on solutions through visualization and rapid prototyping. Our global engagement teams applied cutting edge techniques to deliver these products and services to market faster and more efficiently.
Second, our solutions based approach is really resonating within the market place in areas such as Business Process Management, Enterprise Content Management and Data Warehousing and Business Intelligence Solutions. Our business consulting practice has developed a series of orchestrated workshops together with our solution accelerators and framework to rapidly solve business and technical problems.
Compressed timeline and employed best practices to overcome known challenges. This is driving demand for our industrial leading, Business Process Management Services which enable clients to order make manual processes and streamline inefficient business processes. One great example from our enterprise content management solutions area is our media convergence solution accelerator. This solution combines consulting with proven technology components to ensure a consistent branded user experience that optimizes revenue generating opportunities for our client. Our solution accelerated incorporates best practices in areas such as multi-channel publishing, social media integration, user experience enhancement and Ed-server integration.
The Travel Channel, as an example, engaged Virtusa to assist with the re-platforming and re-launch of their website. Over the years the accumulation of disparate website content and inconsistent branding across online and TV had eroded the customer experience. This had also led to escalating cost and lengthy release cycles.
Although business consulting led global engagement team used our Media Conversion Solutions accelerator to deliver a unified high quality web platform. Deploying features of our solution accelerator we’ll be able to further enhance the site with social media features and rich multimedia content and deliver this program on a compressed timeline greatly exceeding client expectation.
Finally, to the recent acquisition of InSource and ConVista Consulting, we have expanded our overall market opportunity. This includes adding domain knowledge in insurance and healthcare and expertise in implementing high volume business to consumer enterprise applications in finance transformation. We also enhanced our business consulting program management and account management skill sets.
We made great strides in fiscal 2010 in strengthening our company, improving our market position and expanding both the number and quality of our client relationships. Looking forward, we have identified several key areas of focus for 2011 including expanding revenue from Europe, investing in healthcare solution, expanding our footprint in finance transformation, broadening our consulting and solutions capabilities and strengthening our client engagement model.
I will now spend a few moments on each of these areas.
In fiscal 2011, we will invest in expanding our solutions expertise in Europe especially in the UK and will leverage many of the industry leading solutions. We have had great success with across our US based clients. We see strong demand for Business Process Management, Enterprise Content Management and Data Warehousing and Business Intelligence and in a short period of time we have gained good momentum.
During fiscal 2010, our organic business was able to develop a footprint in the healthcare market. With the domain knowledge we acquired from InSource, we have increased our focus on healthcare. We have already introduced solutions to market and we expect to roll out more offerings throughout the year.
With our finance transformation business unit created from the acquisition of ConVista, we have gained specialized skills in several areas of SAPs market leading enterprise application suite. We now have tremendous opportunity to leverage Virtusa’s core business consulting, program management, global delivery and outsourcing services to expand the side and scope of engagement and access new opportunities within these blue chip clients.
We continue to strengthen our business consulting practice and closely coupled this with our solutions offerings and rationalization expertise to better align business NIT to drive outcomes. This includes enhancing our alliances with best of breed software providers in business process management, enterprise content management, data warehousing and business intelligence to provide enterprise class solution.
In addition we are strengthening our integrated enterprise solutions offering in data management, client experience management, enterprise 2.0, mobility and cloud offering.
Finally, we enter fiscal 2011 with the strongest client base in our history and we will invest in our client services and business consulting function to expand our client partnerships. Specifically we will add female client partners, who have strong industry domain knowledge and pair them with our consultants an expert in IT rationalization to identify opportunities that will provide plans at enduring value.
Turning to our outlook, we expect strong topline and earnings per share growth in fiscal year 2011. Ranjan will provide the specifics on our financial guidance, but we are enthusiastic about the opportunities we see in front of us and the foundation we have built for sustainable long term growth and margin expansion. Our IT rationalization expertise, executed through an optimized globally delivering model is un-matched and in-demand because of the added value it brings to our client.
Our business consulting and solutions go to market strategy is providing us with competitive advantage and we have a larger high quality client base which affords us increased opportunities for growth. In addition we have a strong HR function and attractive value proposition for IT professionals and proven processes to scale our business to mid anticipated growth.
Now, let me turn the call over to Ranjan who will provide more detail on our results and provide you with first quarter and fiscal year 2011 guidance. Ranjan?
Thanks, Kris and good evening to everyone. Let me start by summarizing the results of our fourth quarter, followed by a brief review of the full fiscal year results for the period ended March 31, 2010. Before concluding with our first quarter and fiscal 2011 guidance.
Please note that all of the numbers being discussed include ConVista Consulting which we acquired on February 1, 2010 and InSource which was acquired on November 4, 2009. All results in accordance with US GAAP except for regards to the use of constant currency revenue metrics.
Turning to our results for the fourth quarter ended March 31, 2010. Revenue for the fourth quarter came in at $47.8 million, which was in line with our previous guidance range. This represents a sequential increase of $6.1 million and growth of 15% on both a sequential and year-over-year basis. In constant currency revenue increased 16% sequentially and 14% year-over-year after normalizing for the British Pound against the US dollar in each competitive period.
ConVista Consulting contributed $3.3 million in revenue during the quarter and was $0.02 dilutive to earnings. Our operating income for the quarter was $3.2 million as compared to $3.9 million in the year ago period.
Operating margin deceased from 9.4% in our fourth quarter last year to 6.7% in our fourth quarter ended March 31, 2010.
The primary drivers of this 270 basis points decrease were 250 basis point negative impact from a higher onsite effort percentage, 250 basis points negative impact from both an increased use of contractors and other discretionary costs offset by a positive impact from an increasing utilization and lower head count related compensation, 230 basis point of negative impact as a result of transaction, integration, and acquisition amortization costs, 150 basis point of positive impact from SG&A; finally, 310 basis point of positive impact due to changes in British pound and Indian rupee against the US dollar.
Fourth quarter operating income decreased by $200,000 quarter-over-quarter. Operating margin decreased from 8.2% in the prior quarter to 6.7% in our quarter ended March 31 2010. The primary drivers of this 150 basis point decrease was 240 basis point negative impact from an increased use of contractors, 70 basis point negative impact from a higher on sight effort percentage, 150 basis point of negative impact as a result of transaction, integration and acquisition amortization costs, 230 basis point of positive impact related to compensation expense, our overall compensation dollars increased, but this was spread over a larger revenue base due to the inclusion of acquisition revenue, finally 80 basis point positive impact due to lower bad debt expense and lower US facility charges.
Fourth quarter other income was in loss of $100,000 inclusive of an FX loss of $600,000 which was not included in our guidance. This was due to FX losses primarily on inter-company balances and payments, driven by the continued strengthening of the Indian rupee against both the US dollar and the British pound. We had an income tax benefit of approximately $500,000 in our quarter ended March 31, 2010 better than our guidance of an effective tax rate of 12%. This was due to various non-recurring items in the quarter including a one time multi year benefit from certain UK tax credits and year-end through up of our US and India differed tax assets due to changes in all applicable tax rates, whereby we have now recognized certain deferred tax assets that previously we could not.
These one time benefits were partly offset by changes in the geographical mix of taxable profits. This resulted in net income for our fourth quarter of $3.6 million. Diluted earnings per share were $0.15 in our fourth quarter of fiscal 2010.
Turning to the balance sheet, ending cash was $96 million inclusive of cash equivalents, short-term and long-term investments which is a decrease of $26.7 million from December 31, 2009. This includes $24.8 million used for the acquisition of ConVista Consulting and $500,000 related to the contingent earn out consideration for the InSource acquisition.
Cash flows provided by operating activities were 177,000 in the fourth quarter. The change from prior quarter is primarily associated with working capital funding for the newly acquired business. ConVista was an asset purchased and did not include the purchase of any receivables. Our DSO, including unbilled receivables was 68 days. Consistent with the prior quarter, capital expenditures were $1.7 million in the fourth quarter inclusive of $1.4 million for the build out of our Hyderabad campus. Depreciation and amortization expense in the fourth quarter was $1.2 million.
Now let me turn to some additional quarterly financial and operating metrics beginning with those related to our fiscal fourth quarter revenue. The following metrics all include ConVista consulting and InSource. Revenue by geography was as follows: North America was 74% of revenue, increasing 16% year-over-year and sequentially. Europe was 24% of revenue, increasing 19% year-over-year and growing 9% sequentially. Other geographies contributed 2% of revenue. Revenue growth across our industry groups was as follows: BFSI was up 25% year-over-year, representing 50% of total revenue in the fourth quarter. Sequentially, this group grew 23%. Communication and technology grew 25% year-over-year, representing 32% of revenue. Sequentially, this industry group increased 12%. Media information and other contribute to the remaining 18% of revenue, declining 15% year-over-year and remained flat sequentially.
Revenue across our service offerings was as follows: IT consulting and implementation services were 52% of revenue and grew 58% year-over-year. This was due to new project starts with our recently added client’s volume growth at BT and other acquired entities. Application outsourcing represented 48% of revenue and decline 11% year-over-year which reflects the impact of a large technology client who has progressing its work to their captive center as expected as well as the shift in BT revenue towards IT consulting and implementation. We believe over time the revenues led by service offering will migrate more toward historical levels as we leveraged our offshore capabilities across the client’s base including those recently acquired companies.
BT contributed 16% of revenue in the quarter, BT revenue increased 21% year-over-year and 12% in constant currency. Sequentially, BT increased 18% in reported currency and 25% in constant currency. Time-and-material contracts were 80% of revenue and fixed price represented 20% of revenue. Our top 10 clients for the quarter represented 65% of revenue. In the fourth quarter, we had two clients contribute greater than 10% of revenue. 78% of our revenue came from clients we have partnered with for more than one year compared to 81% in our prior quarter.
Recent client additions and expansions including acquired businesses grew from 19% to 22%. We commence towards 11 new clients in the quarter including six added through ConVista Consulting. The composition of client additions was seven in BFSI, three in communication and technology, one in media and information. Geographically, all 11 were in North America. We ended the quarter with 68 active clients.
Turning to our operating metrics, we ended the quarter with 4038 global team members of which 3702 were IT professionals. The total number of global team numbers increased by 292 or 8% compared to the prior quarter. Attrition calculated on a trailing 12 month basis was 18.6% versus16.3% in the prior quarter. Global utilization excluding trainees was 78% in our fourth quarter consistent with the prior quarter.
We continue to deliver our services using an industry leading highly efficient global delivery model. Our built effort mix chains slightly quarter over quarter and 82% off-shore and 18% onsite versus 8317 last quarter. This slight shift to more onsite work is consistent with our prior discussions and reflects the ramp ups associated with newer projects that have a higher initial percentage of work conducted on sites and our acquisitions. Realized pricing increased marginally on a sequential basis, I would now like to briefly summarize our financial results for the fiscal year ended March 31, 2010.
Revenue for the fiscal year ended March 31, 2010 was $164.4 million a decrease of 5% over fiscal 2009. On a constant currency basis revenue for the full year decreased 4%, operating profit was $12.9 million or 7.8% of total revenue, representing an increase from $10 million or 5.8% in fiscal 2009. We are pleased with the operational improvements we have made during the year and their positive impact on our operating profit particularly in a declining revenue environment.
Net income in fiscal 2010 was $12.1 million which was roughly flat with the prior fiscal year due to lower revenue and increased FX losses offset by the profitability. This resulted in eluded EPS for the fiscal year 2010 of $0.50, consistent with the prior year. Cash flow from operations for the fiscal year was $18.6 million. Capital expenditures for the fiscal year were $4 million including $2.4 million on our Hyderabad Campus.
Our operating metrics for the full fiscal year were as follows, North America was 74% of revenue, declining 2% year-over-year. Europe was 24% of revenue declining 11% year-over-year. For the fiscal year, we had four clients contribute greater than 10% of revenue including BT, Metavante, JPMorgan, and Thomson Reuters.
BT was our largest client contributing 16% of total revenue. By industry group, banking, financial services and insurance grew 3% and represented 47% of total revenue. Communications and technology declined 5% in fiscal 2010 and represented 33% of revenue, excluding BT, communication and technology grew 23%.
Lastly, media information and other accounted for the remaining 20% of revenue declining 20% year-over-year, excluding one large client who transitioned to their captive center, media and information grew 3%.
Revenue from fixed price engagements represented 18%, time and material contracts represented the remaining 82% of revenue. Top 10 client concentration improved by 3 percentage points year-over-year from 73% of revenue in our prior fiscal year to 70% in our fiscal 2010.
Finally, application outsourcing revenue represented 56% of total revenue and was down 20% versus the prior year primarily due to the shift of BT [towards] to consulting and implementation services as well as the impact of a large technology client; who has transitioned this work to their captive center as expected.
IT consulting and implementation services accounted for the remaining 44% of revenue growing 26% year-over-year due to the program starts with our newer clients, volume increases at BT in the second-half of the year and contribution from recent acquisitions.
Now I will provide our current guidance for our quarter ending June 30, 2010 and the fiscal year ending March 31, 2011. As a reminder all of our numbers are on a US GAAP basis. Revenue in the first quarter of fiscal 2011 is expected to be $49.8 million to $52.3 million, diluted earnings per share in the first quarter of 2011 is expected to be $0.10 to $0.14. This includes approximately $1.7 million of acquisition related amortization expense.
Earnings per share anticipates an average share count of approximately $24.2 million. For the full fiscal year ending March 31, 2011 our revenue earnings is currently expected to be $201 million to $215 million.
Fully diluted earnings per share for the full fiscal year 2011, is expected to be in the range of $0.57 to $0.73. This includes approximately $6.2 million of acquisition related amortization expense.
Full year EPS anticipates an average share count of approximately 24.2 million. Our current guidance is based on the following set of assumption in other income we model interest income using an annual effective interest rate of approximately 1.9% on an average projected cash balance including long and short term investment. We have not considered any potential impact to other income associated with foreign exchange gains or losses.
Indian rupee foreign currency hedge contracts are in place for the fiscal year ending March 31, 2011 come in the majority of our forecasted expenses denominated in Indian rupees.
Based on existing hedge contracts, the weighted average Indian rupee to US dollar conversion rate improves as compared to fiscal 2010. The weighted Indian rupee conversion rate for the year ending March 31, 2011 is approximately 47.5 which is better than the effective rate we realized in our March quarter.
In addition, guidance does not consider the possible impact of having ineffective hedging contracts throughout the fiscal year. Our current guidance anticipates a British pound to US dollar conversion rate of 1.5 which does consider the benefit of revenue and cost hedging contracts already in place for our first quarter.
We currently expect to have an effective tax rate for the full fiscal year of approximately 17%. This increase is primarily due to the exploration of the STPI holiday on our Hyderabad location. Our effective tax rate is sensitive to the geographical mix of profit for the fiscal year and in particular to the mix of profit between our Indian subsidiaries and the subject to change. We anticipate the spending on our Hyderabad campus in our full fiscal year will be $7.2 million. During fiscal year 2011, we anticipate exiting a portion of our lease facilities and further utilizing our campus.
Now I will like to spend a moment providing you with our current thoughts on our first quarter and fiscal year 2011 guidance. The overall economy has improved and we are seeing an increase in the demand for our services. We believe we are well positioned to capture the growth. We continue to closely monitor the economy as some signs of cautions remain, but overall are encouraged with the improving outlook.
When we look at our business, we see an improving top line specifically as budgets for the year have been set and there is increasing confidence around the allocation of dollars.
Coming out of the down turn clients have established a governance framework to closely monitor program ROIS and with our track record of service excellence, we expect to continue to meet client requirements.
Clients realize that the underinvested the last few years and this has resulted in pent up demand. Therefore they are starting to fund strategic initiatives. Additionally, we have expanded our market opportunity to do re-investments in our go to market solutions combined with the recent acquisitions.
Our operating profit dollars and earnings per share are expected to grow for the full year, however we will experience some first half margin pressure to support our revenue growth.
Factors impacting gross margin include, annual salary increases in addition to absorbing the select performance based raises given in October 2009. On site effort mix for the full year has been increased due to the ramp up of our newer clients, the increased demand for our consulting and solution based offering, and the recent acquisitions.
Utilization for the full year is expected to return to the high end of our target range of 70% to 75% from 76.5 in fiscal 2010, in support of our growth opportunities. Partially offsetting these increases are expected delivery efficiencies such as resource optimization due to increased campus hiring, reduced use of sub contractors as we source skills from our global delivery centers, and a more favorable rupee to US dollar conversion rate. Based on this we believe our gross margins for the full fiscal year will be approximately 40%.
First half margins are expected to be slightly below this level. The second half gross margins should move to what our target range of low 40% as we realize delivery efficiencies. The impact of our gross margins will be offset by a leverage in our SG&A. This is primarily due to G&A expenses being spread over a larger revenue base even after the inclusion of $6.2 million, or approximately 300 basis point from acquisition, amortization.
We will also continue to invest in sales and marketing, but as a percentage of revenue it is expected to be at levels commensurate with fiscal 2010. Overall, at the mid point of our guidance full year operating margins are expected to expand. To note our first quarter SG&A will increase sequentially due to a full quarter of ConVista SG&A. Increased marketing expenses including attendance at customer and partner events in support of the growing demand for our services, and $1.7 million of acquisition amortization. Also we expect the fourth quarter of fiscal 2011 SG&A expenses to be the lowest of the year as acquisition amortization declines to $1.1 million.
In summary, we remain on track to expand our operating margins to the mid-teen levels over the next 3 to 5 years. To reach these goals we are assuming a normalized economic environment and our points of operating leverage include ongoing research optimization, spreading our SG&A over a larger revenue base including realizing improvements in areas such as shared services.
Additionally, in fiscal year 2012 and ’13, the acquisition amortization will be significantly less than in 2011 which will also help us move towards our target operating model. Overall our expanded services, strong client portfolio and growing employee base positions us well to capture that growth we see in front of us.
I will now turn the call over to the operator to begin the Q&A. Thank you.
(Operator Instructions). And we will go first to Jon Maietta with Needham & Company.
Jon Maietta - Needham & Company
Kris, you talked about pursuing opportunities in Europe, and I'm less familiar as to what's going on the ground today in Europe. Maybe if you could share with us in which industry verticals do you see the most activity today in Europe?
So generally speaking John I think that Europe has been lagging behind the U.S. in terms of overall spend, resuming spend. However, for very specific solutions that improve business outcome, we are starting to see tremendous momentum, specifically in the UK and even outside of UK in Europe. These are across a variety of our industries which include financial services, telecommunications and media and I’d say that the larger sort of demand is really out of financial services or banking and financial services.
Jon Maietta - Needham & Company
Okay. And then within banking and financial services, Kris, are there particular practice areas where you're seeing the most activity? I imagine kind of data warehousing and BI would be one area. Are there other sort of areas where you are seeing sustained activity?
Yeah, so clearly business intelligence in there, warehousing is one and the other one is business process management which is also much coveted and in demand, and the third area is enterprise content management.
And next we’ll go to Brian Kinstlinger, Sidoti & Company.
Brian Kinstlinger - Sidoti & Company
The first question I have relates to the revenue guidance. There were a lot of positive commentary on demand increasing for platforming, I think, and many other pieces of your business in spending. And when I look at the annual guidance, it's less than the midpoint of your first quarter. So maybe take us through if you think the growth will slow in the second half of the year or maybe the differences between the high end and the low end of the assumptions in your full year guidance.
So, Brian just looking to grow on the revenue perspective line. So if you look at it on the revenue side, revenue is growing anywhere in the 22% and 30% on the top line at the range and then you look at the EPS I mean the EPS is also showing strong growth from $0.57 to $0.73. Yes, we did discussed that we will be facing some margin pressures in the first half of the year primarily due to as we absorb the product related increases as utilization, we are targeting to bring it back to our -- targeted range of 70 to 75%, we believe that running utilization hard that we are actually missing opportunities and then as we've -- and then we’ve got the first half -- the first quarter is usually a high marketing quarter for us, we’ve really attend a lot of partner and customer events.
Brian Kinstlinger - Sidoti & Company
(Inaudible) put on pretty good pressure?
Brian Kinstlinger - Sidoti & Company
Sorry. The question I was really asking was just on the revenue side. If you look at the midpoint of your guidance just on the revenue in the first quarter and you annualize that number, that's a low end of your full year number. So I guess I'm wondering what does that suggest about the second half of the year. So at the high end of the low end of the revenue guidance for the annual numbers, I'm wondering what those assumptions are in that. Sorry.
Yes, Brian we’re looking at sequential growth across all the quarters and we do order the main caution with the economy with that of our customers spending that we’re seeing. The guidance and it reflects the bottoms up data that we’re seeing as of today our customer demand then we are already seeing as of today which then reflects sequential increase but that’s what we see today and that’s what really is going to reflecting in our guidance. The process is very similar to what use in last year.
Brian Kinstlinger - Sidoti & Company
Okay. And in terms of platforming, it seems like an area where; is cost-cutting around what corporations are trying to do right now. Do you think leading off with platforming has been a competitive advantage and continues to be in and what has been the acceptance of that today versus maybe six months ago? So brand rationalization to a platforming approach is very much in demand it is very topical as you would expect. It is one of the ways that our clients especially large complex IT, departments IT groups and in large enterprises can have a much more systemic impact on their total cost of ownership as well as being able to accelerate time to market and improve the end consumer experience. So that clearly is something that is very topical and one that is driving, it has very significant traction. Now over and above our rationalization expertise through platforming which as I mentioned earlier was enhanced particularly well in this environment.
We also have some very specific best in class industry solutions that are also much in demand. And those solutions include our leading position in business process management. As you well know we have a very strong business process management integration and systems implementation group. Similarly with enterprise content management, data warehousing and business intelligence I think all of that together provides us with of competitive advantage.
Now a last thing I would like to say is that we integrate all of this with a very strong consulting our business consulting group that can very quickly identify business outcomes for our plans that is also resonating particularly well with our clients and with the market.
Brian Kinstlinger - Sidoti & Company
The last question I had was the salary increases, could you talk about the magnitude to maybe how it compares to the industry averages.
In our Asia locations we averaged about 12% of pay increases.
Moving on to Noble Financial, Vincent Colicchio.
Vincent Colicchio - Noble Financial
The InSource acquisition was, how did you get a bigger exposure to insurance and healthcare. So I'm just curious how that vertical is progressing, if there were any additions in healthcare insurance clients in the quarter?
We are progressing very well. Even before the acquisition of InSource last year we had started to work in the healthcare industry and the addition of InSource has certainly bolstered our ability for both providing services in insurance and in healthcare and specifically in healthcare with some of the government amended regulatory changes it gives us a very strong position to provide services. Several of our new wins going to insurance and healthcare industry, three of our new wins were in the industry in Q4
Vincent Colicchio - Noble Financial
Okay. There is some speculation about Metavante regarding private equity interest. Any thoughts there, how that may change the relationship or anything else you may want to add on the nature of that relationship?
Yes, we have certainly seen the rumors as you have. We don't think that's going to materially change any of the activities that we are involved with. We are a strategic partner to FIS. We have a very strong track record of service excellence at FIS and as you well know during the integration phase we have already taken into consideration that their spend levels with us will be very similar as to what they have been in Q3 and Q4 for the next few quarters. So we expect that the relationship will continue well. We expect that during the integration phase our revenues with them will remain at about the same level as what it’ll be in Q3 and Q4, but we have a very strong partnership with FIS and we look forward to continuing that partnership.
Vincent Colicchio - Noble Financial
And last question on British Telecom, do you expect to surpass the minimums on BT going forward and do you think BT will grow in fiscal 2011?
So as you can tell from our earnings call itself, growing at BT over the last few quarters; the visibility at BT remains strong. Although we must all be mindful about the fact that overall IT spends at BT is reducing and we expect that BT for the full year will be at or slightly above our minimum spend for the full year.
And next one is on to [David Kone] with JP Morgan.
This is Puneet sitting in for David. I’ll start with the question on wage inflation. Can you tell us what is your normal cycle of salary increases in India and Sri Lanka? I guess on the call you said last increase was in October. So when is the next increase due?
You are correct. In last October we did selective promotional based increases. Our normal cycle is the April cycle and that’s the 12% that I just mentioned was effective as of April.
And can you also remind us what percentage of your total cost is offshore salaries?
It’s about 40% from the cost side.
Ok. I am sorry 40% of cost of services or total operating cost.
Just the cost of services.
Okay, and then another question on revenue guidance. So revenue guidance range for the first quarter and fiscal year was higher than what it has been normally. Is there any specific reason for the above normal range?
Can you just repeat that revenue guidance question?
Revenue guidance range for the first quarter was higher than what it has been normally, it is wider so is there any specific reason why the revenue guidance range was wider than normal?
Fair observation for this, if you look at it the business has become larger with the acquisition of the ConVista and InSource opportunities are larger and therefore we thought that its fair to really reflect it in our widened revenue guidance range.
And how does your current visibility on annual revenue compare with what you had in the past at this time
Very similar like I said we followed the same process that we have followed in prior years the bottoms up process. The bottoms up process that we see as of today really reflects in the guidance.
Very specifically to it if the question was what’s our visibility at this time of this year as opposed to last year, our visibility for the full year is better than it was for last year same time.
And next we move onto Avishai Kantor from Cowen & Company.
Avishai Kantor - Cowen & Company
Hi it is Avishai Kantor for Moshe Katri, couple of quick questions. Can you talk a little bit about hiring plans for the next 12 months are you hiring both onsite and offshore, the mix between campus and lateral hiring.
Sure we are hiring, we don’t give specific numbers in terms of our hiring targets. But our hiring is in line with our revenue guidance and our utilization target is what dictates the value of hiring that we do. We will be hiring both offshore and on site and approximately half of our offshore hiring is from campus.
Avishai Kantor - Cowen & Company
So it remains 50/50. And can you talk a little bit about wage inflation onsite?
Sure, we are selling the process of communicating onsite pay increases to our employees, so it’s a bit premature to stay a specific percentage, but it will be in line with industry.
Avishai Kantor - Cowen & Company
Okay, sure. And the last question, has ConVista's run rate changed between last conference call and now?
No, its very similar to what we talk everyday. As we reported its $2.3 million for the two months that they were with us.
And gentlemen, there are no further questions at this time.
Let me take a moment and close this conference call. Thank you all for joining us today. Clearly the fourth quarter was very strong and we expect this momentum to continue into our first quarter and fiscal year 2011. We have the highest quality client base in the history of our company, and we are enthusiastic about the opportunity to both deepen and broaden these relationships.
Our business consulting like solutions and rationalization expertise provide our clients with significant comparative advantage and clear differentiation for Virtusa, specifically in comparison to our competitors. We expect strong revenue and EPS growth in fiscal year 2011, our balance sheet remains strong and we expect to continue to generate significant cash flow from operations.
Finally, I would like to once again thank our global team members for their tireless efforts. Thank you all for joining us today.
Ladies and gentlemen that does concludes today’s conference. We thank you for your participation.