Virtusa's (VRTU) CEO Kris Canekeratne On Q4 2014 Results - Earnings Call Transcript

| About: Virtusa Corporation (VRTU)

Virtusa Corp (NASDAQ:VRTU)

Q4 2014 Earnings Conference Call

May 12, 2014 5:00 PM ET


Staci Mortenson – ICR, Inc.

Kris Canekeratne – Chairman and Chief Executive Officer

Ranjan Kalia – Executive Vice President and Chief Financial Officer

Raj Rajgopal – President- Business Development and Client Services


Puneet Jain – JPMorgan Securities LLC

Mayank Tandon – Needham & Co. LLC

Joseph D. Foresi – Janney Montgomery Scott LLC

Brian D. Kinstlinger – Sidoti & Co. LLC

Moshe Katri – Cowen & Co. LLC


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Virtusa Corporation Fiscal Fourth Quarter and Full Year 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 for 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 fourth quarter and full fiscal year 2014 earnings conference call where we will be discussing our financial results for Virtusa’s fourth quarter and full year ended March 31, 2014.

On the call with me are Kris Canekeratne, our 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 LLC 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 often 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 earnings 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 fourth quarter and full fiscal year 2014 conference call. This was an outstanding year for Virtusa and we’re very pleased with our fourth quarter and fiscal year 2014 results, which demonstrate our ability to grow faster in the industry and significantly expand profitability.

For the March quarter, revenue was $111.1 million, an increase of 10% sequentially and 24% year-over-year in reported currency. For the full-year, revenue increased 19% to $396.9 million and operating profit increased 49% to $42.4 million. Our growth was broad based across all industries and geographies and for the first time in our history did a client contribute more than $50 million to our annual revenue.

While we are pleased with the progress made in fiscal year 2014, we are very enthusiastic about the opportunity in front of us. The overall demand environment is solid, our value proposition resonates particularly well. Our service offerings are highly differentiated and our cash basis stronger than at any point in our history. This combination is presenting us with an unparallel opportunity to expand within our existing account base and in the geographies and industries we serve.

Our growth strategy and targeted areas of investment are focused on helping enterprises grow revenue by expanding the addressable market, improving operational efficiencies, reducing costs and lowering risk. In doing this, we address two key imperatives enterprises are faced with.

First, enterprises are focused on leveraging new technology to grow the addressable market. The C-Suite is quickly realizing that they must step up innovation to capture digitally savvy consumers or give up market share to upstarts or innovative competitors.

Second, clients are embarking on large transformational program that increase the efficiencies of their business as usual operation of BAU operation while reducing risk. Many of these transformational program are targeted towards application modernization and automation, big data and analytics, compliance and regulatory initiatives and application rationalization and consolidation.

Let me start by sharing our perspective on the increasing demand for new technology services, a key pillar of our grown platform and our leadership position in this area.

Today, we’re operating at the leading edge of a very significant paradigm shift in the way enterprises interact with consumers and employees. Over the past decades, we have seen the computing power of handheld devices increase exponentially, a cellular infrastructure capable of delivering data at unprecedented speed, massive increase in the capture and availability of structured and unstructured consumer data and a powerful new user interface. These innovation combined with the rapidly expanding demographic of digitally savvy all these connected users prevent challenges and big opportunity by established enterprises that are being disrupted by upstarts not encumbered by outdated processes or legacy technology.

Enterprise has realized that they must accelerate investment in digital initiative, which are driving what is widely believed to become the largest investment in application modernization in history.

We are very well positioned to lead this paradigm shift. Much of this is do to our heritage and deep experience on enterprise IT systems at the nexus of our clients and their consumers or employee in large B2C industries and our focus on creating a distinctive millennial experience.

Large enterprises and disrupters have the opportunity to take advantage of infrastructure and powerful handheld devices to create an experience that is useful, usable and desirable both functionally and emotionally in other words, a distinctive millennial experience to override consumer market and there by expand market share.

For example, we are working with a global banking client with one of the largest web and mobile banking user bases in the U.S. This consumer base expected to grow rapidly between now and 2020 as the number of digital users almost doubled.

Although, their platforms has been enhanced over the years to features like mobile banking and new web channels, our plan is investing and building a state-of-the-art platform that provides high availability, faster response time, gives location and socially aware leverages both structured and unstructured data for real time personalization and provides an experience that it is useful, usable and desirable.

Virtusa has been engaged on this multi-year project to create a powerful horizontally scalable architecture with industry-leading up times to deliver our rich set of millennial capability. This is just one example of any merging set of opportunities globally for Virtusa.

Now, let me turn to how we are helping our large enterprise clients improve the efficiencies of their BAU operation, transform and modernize their IT application infrastructure and reduce enterprise risks. Our ability to look at transformational program to the length of IT nationalization as meaningful benefits to our client and improve the efficacy of their BAU operation.

In support of this we have been investing in our work integrated development and application support and maintenance or IV ASM capabilities. These capabilities are key components to large transformation engagement and provide a meaningful opportunity for growth as we can expand the life cycle and value of the overall services we deliver to our clients and reduce application development and maintenance cost thereby increasing our recurring revenue stream. One great example of this is the large telecom services provider that we won a significant IT ASM transformation contract transformation within their global services organization. The program encompasses transformation and support of several solutions including portals, sales tools, master data management and data warehousing.

We were awarded this program among formidable competition from leading IT services providers due to our long-standing track record of service excellence, our expertise and depth in key parts of the platform, our already proven transition model and successes in providing IV ASM services. As a part of this program, we will deliver significant enterprise efficiencies, reduce total cost of ownership, and greatly improve system stability by intelligently identifying and improving areas that are at the root of causing support and maintenance problems.

Additionally, we are rationalizing redundancies and applying simplification to improve the alacrity of introducing new products and services by breaking down the traditional barrier between IT and operations. As is becoming the trend in several large enterprises, our client has brought IT and business operations under one umbrella, greatly improving the synergies between cross-functionality to increase IT velocity without compromising system stability.

Overall, this program is very much in line with our strategy to move towards multi-year transformational IT ASM contracts that have a positive impact on increasing annuity revenue. In the area of helping our clients reduce risk, our regulatory and compliance initiative for our global DSS clients have been an area of key differentiation for us and are helping to drive re-acceleration in revenue growth, particularly in banking.

Over the last year or so the nature of these programs has been to assess risk and plan and design solutions. Now, we are starting to move into the multi-year execution and implementation of these programs that are generally longer in duration and are driven by larger budgets. Based on our industry-leading expertise in this area, our consultative approach and our focus on improving the underlying business process, we are able to take on the full life cycle of these programs.

For example, as a result of a client on-boarding solution, we recently won with an engagement with a new banking client. As a part of this win, we are implementing our on-boarding solution with FATCA readiness across all U.S. capital markets lines of business. The solution enables the bank to improve Ky3 compliance and documentation management by addressing the background components and workflows up the customer on-boarding solution. The solution also offers a FATCA to involve our customer identification and documentation requirements.

This client work further illustrates the investments we are making to expand our portfolio of industry-leading solutions. They combine our deep industry domain expertise, consulting and service capabilities to bring best-in-class, targeted solutions to market. These solutions allow us to compete and win in our chosen industry segments. Expanding to adjacent area and broaden our reach within our client base. The example just referenced is one of many domain lens best in class, transformational solutions we can repeatedly take to market that allow us to differentiate and intersect common business challenges in the market.

And finally, we have a meaningful opportunity to expand within our existing client base and support capital deployment. We end the fiscal year 2015 with the highest quality client base in our history across our geographies, and they represent a very large untapped opportunity by expansion as the year unfolds. While we expect solid growth from our top 10 clients overall. We also see a significant pipeline of opportunity across our non top 10 clients and expect them to be a growth driver.

As we commence fiscal year 2015, the overall demand environment is strong. Our value proposition resonates particularly well, our service offerings are highly differentiated and our client base is stronger than at any point in our history. In order to maximize the opportunity we have and grow faster than the market, we will continue to invest in key areas including strengthening our leadership role in SoLoMo and gamification while investing in creative design to provide our plans to get a distinctive millennial experience.

Expanding our industrial leading, transformational solution and expanding our presence into broader industry segments deepening our consulting strength and extending our outsourcing capabilities. Broadening our leadership position in horizontal technology skills including social, moible, big data and analytics. Deepening our repertoire of ID ASM skills to increase our percentage of recurring revenue and growing our nearshore centers to continue to strengthen and expand our ability to provide a unique and differentiated high-touch client experience.

We are confident that these investments will continue to differentiate us in the market, expand our industry presence, broaden our service capabilities and provide a solid foundation to grow ahead of our industry with meaningful operating margin expansion.

Before I turn the call over to Ranjan, we will provide more details on our fourth quarter results and first quarter and fiscal year 2015 guidance. I would like to underscore, how pleased we are with the progress we made in fiscal year 2014 and how enthusiastic we are about fiscal year 2015, Ranjan?

Ranjan Kalia

Thanks Kris. And good evening to everyone. Let me start by summarizing the results of our fourth quarter and full year fiscal 2014, before providing our current guidance for the first quarter and full fiscal year ending March 31, 2015.

All of the numbers being discussed are U.S. GAAP except with regards to use of constant currency revenue metrics. Revenue for our fourth fiscal quarter was $111.1 million a 10% sequential increase in reported currency and 9% in constant currency. This was inclusive of our OSB and TradeTech acquisitions, which contributed approximately 500 basis points of our sequential revenue growth. Our sequential growth was broad-based across all geos and industry groups and across our client portfolio.

Additionally, in line with our strategy our non-top 10 clients grew faster than our top 10. On a year-over-year basis revenue increase 24% in reported currency and 22% in constant currency, consistent with prior years organic revenue for the full fiscal year remained above industry trends.

Gross margin during the fourth quarter was 38.4% compared to 36.8% in the prior quarter and 35.9% in the year ago period. The sequential improvement was due to the reduced use of subcontractors, our shift towards more offshore effort and a greater revenue contribution from accounts with higher realized pricing, partially offset by utilization decline and that impact of expected movement in our INR hedge rates.

Our operating income for the fourth quarter was $12.5 million, an increase from $11.2 million in the prior quarter and from $9.4 million in the year ago period. This resulted in an operating margin of 11.3% for the fourth quarter of fiscal 2014 compared to 11.1% in our prior quarter and 10.5% in the year ago period.

The sequential operating margin change was primarily driven by increases in gross margin partially offset by accelerated sales and marketing investments and increased business development spending to drive our long-term initiatives.

The year-over-year 80 basis points increase was primarily due to FX impact mainly from our INR hedging programs, increased utilization, and subcontractor efficiencies partially offset by increased headcount related expenses and increased spending to drive our long-term growth initiatives.

Fourth quarter other income was $1.1 million inclusive of nominal FX transaction gain. We had an income tax expense of $3.6 million in our fourth quarter ended March 31, 2014 which equates to an effective tax rate of 26.3% slightly higher than our prior guidance of 26%. Net income for our March quarter was $10 million and increased compared to both $9.3 million in the prior quarter and $9.1 million in the fourth quarter of fiscal 2013.

Diluted earnings per share was $0.35 in our fourth quarter of fiscal 2014 in line with both the prior quarter and the year ago period.

Turning to the balance sheet, ending cash at March 31, 2014 was $201 million inclusive of cash equivalents and short-term and long-term investments compared to $142.3 million as of December 31, 2013. The cash increase is inclusive of purchase price payout of $17.3 million for the TradeTech acquisition, a paid down of $20 million of line of credit drawn down in our fiscal third quarter and $86.2 million in net proceeds from our underwritten follow on offering close on January 14, 2014.

Cash flow from operating activities were $9.4 million in the fourth quarter. Our DSO including unbilled receivables was 74 days compared to 70 days in the prior quarter. Capital expenditures were $1.7 million in the March quarter. Depreciation and amortization expense related to intangibles in the quarter was $3.6 million.

Now, let me turn to some additional quarterly financial and operational metrics beginning with those related to our fourth quarter 2014 revenue. Revenue across our industry groups are as follows: BFSI increased 15% year-over-year and represented 56% of revenue. Sequentially BFSI increased 7% inclusive of OSB and the majority of revenue from the TradeTech acquisition. As expected our banking segment saw strong organic sequential growth and we expect this to continue into fiscal year 2015.

Communication and technology grew 59% year-over-year and 16% sequentially representing 35% of revenue. Strength in the quarter came from our European telecom clients and several new logos added in the last 18 months.

Media information and other increased 5% sequentially, but declined 12% year-over-year contributing the remaining 9% of revenue.

For the full fiscal year 2014, BT and AIG each contributed 13%. During the March quarter, we commenced work with 14 new clients including nine from the TradeTech acquisition. We ended the fourth quarter with 7,192 IT professionals, an increase of 6% sequentially. Global utilization, excluding trainees was 84% in our fourth quarter, compared with 85% in the prior quarter.

I will now like to briefly summarize our financial results for the fiscal year 2014 as compared to fiscal year 2013. Revenue was $396.9 million, an increase of 19% on both reported and a constant currency basis. Operating profit was $42.4 million, an increase of 29% as we continue to regularize operating leverage while drive significant top line growth.

Income tax expense was $11.5 million, which equates to an effective tax rate of 25.1%. Net income was $34.4 million, an increase of 21%. The increase in net income resulted in diluted EPS of $1.27, compared to $1.11 for fiscal year 2013. Cash flow from operations was $48.9 million and capital expenditures were $7.5 million.

Now, I will provide our current guidance for our first fiscal quarter and fiscal year ending March 31, 2015. Revenue in the first quarter of fiscal 2015 is expected to be in the range of $111 million to $113 million.

Diluted earnings per share in the first quarter of fiscal 2015 is expected to be in the range of $0.29 to $0.33. Earnings per share anticipates an average share count of approximately 29.4 million. For the fiscal year ending March 31, 2015 we expect revenue to be in the range of $468 million to $486 million or approximately 20% growth. Diluted earnings per share for fiscal year 2015 is expected to be in the range of $1.44 to $1.60. For fiscal year 2015 EPS anticipates an average share count of approximately $29.4 million.

Our current guidance is based on a set of assumptions including tax rate, interest income, foreign exchange rates and capital expenditures that can be found on the second page of our data sheet located in the Investor Relations section of our Web site.

Now, I would like to spend a moment providing you with our current thoughts on our first quarter and fiscal year 2015 guidance. Overall, quite IT budgets remained steady, with programs focused on clients dual mandate of revenue growth through millennial initiatives, including operating efficiencies and reducing risks. Virtusa is well positioned on both sides of these strategies.

As we know, international IT spend is larger than the U.S. and represents a growing opportunity for Virtusa. Over the last few years, we have been making strategic investments in extending our presence internationally, both organically and inorganically. The result is that we have seen a meaningful mix shift towards international revenue and we continue to believe this diversification will be a growth driver going forward.

In both Europe and Asia, there has been a noticeable increase in demand from millennial enablement, legacy transformation and regulation and supplies initiatives. These trends and our investments are resulting in our ability to win more programs with larger deal sizes and longer durations. Our expectation for fiscal year 2015 is that we will continue to see strength in our communication and technology industry group, broadly driven by clients we have added over the last 18 months in our telecom and technology segments, who are focused on transformational programs.

We also expect our BSFI vertical to grow with a continuation of the strength we have seen in Q4 in the banking segment. We are optimistic about the opportunities in both these verticals, which make up the vast majority of our revenue. Offsetting some of this growth will be continued performance in M&I, as some larger programs come to their conclusion while we ramp up new client signed over the last two years. Our current fiscal quarter sequential revenue growth is consistent with last year.

As with prior fiscal years, we are impacted by seasonal revenue declines in our communication and technology vertical driven by the budgeting cycle and one of our larger clients as well as in our M&I business, which we just discussed. Inline with prior fiscal years, we expect stronger sequential growth after Q1.

Turning to our gross margins. For the first quarter of fiscal 2015, we expect a seasonal sequential decline as we experience an ongoing shift towards more work done onsite. We also expect to incur incremental visa costs for proactive H1B filings, which are impacting margins by 90 basis points. This investment will have margin benefits in the second half of the fiscal year.

Additionally, we had a rate card adjustment along with our newly established preferred vendor status at a large client. This status creates expanding revenue opportunities similar to our experiences at other large clients. For the full fiscal year 2015, we expect overall margin expansion of 110 basis point at the mid point of our guidance range, which is inclusive of incremental investments to drive our growth. In our effort to capture larger outsourcing deals that includes more recurring revenue streams, we are making increase investments in millennial and domain led transformational solutions.

We also plan to expand our nearshore centers globally to further the level of engagement with our clients. Sales and marketing investments will continue at a linear base would most of the leverage coming from shared services.

In conclusion, we close out a strong fiscal year with 19% revenue growth and organic margin expansion above 100 basis points. As we look forward, we are encouraged by our ongoing diversification strategy both geographically and across the client portfolio. We believe this positions us well for above market growth and meaningful operating margin expansion for 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 our first question comes today from Puneet Jain with JPMorgan.

Puneet Jain – JPMorgan Securities LLC

Hey, thanks for taking my question. Kris, many of your peers, they experienced slowdown in their maintenance or outsourcing growth rate, as they say clients are trying to get more efficient, a trend you also talk about in your prepared remarks. So talk to us about the impact of clients' dual agenda on your outsourcing business, if their cuts there have negative impact or you think helping clients cut costs will offset the overall decline in outsourcing budgets?

Kris Canekeratne

Hey Puneet, thanks for the question. So first and foremost, just to provide some context. We have really not seen any significant change in the macro-environment budgets or the budgeting cycle. As you know generally, Q1 is a slow growth quarter for us, because of the budgeting cycle at one of our large client. But we continuously very strong subset based on our differentiated value of proposition both in terms of helping our client expand their addressable market specifically through our millennial experience creating a distinctive millennial experience for our clients.

And then, on the side of improving the efficiency of the BAU operation our value proposition is incredibly well targeted. So, as you probably know Puneet, based on the conversations we’ve had in the past much of our capability comes from our ability to provide the efficiencies of software platforming, or rationalization and consolidation. And this value of proposition today even in an environment where our clients are looking for the next wave or the next way to lower their cost, they are finding that our rationalization and consolidation value proposition is very well targeted. Our transformational solution which are really structured specifically to work within the segment and the industries that they operate in, it actually helps them create efficiencies, introduce new capabilities to market faster and then rationalize these processes into core unified platform is resonating extremely well within the industry that we are serving. And I think that’s what giving us the opportunity to continue to grow and scale within our client base and in the industries that we serve in a very meaningful way.

Ranjan Kalia

Yes, Kris if I can just build on that, you just actually look at the pipeline for multi-year deals of the recurring nature and pipeline is actually going quite strongly.

Puneet Jain – JPMorgan Securities LLC

Understood, understood. Thanks. And SG&A, it increased sequentially a lot. I am sorry if you already talked about this, but is it because of recurring expense did you take that? Or are there any one-timers in there?

Kris Canekeratne

So I mean, I did touch base on that in my prepared remarks, let me expand. So, yes you right. The piece of it is trade back, but we also accelerated some sales and marketing investments and also in other initiatives that we are working on really drive a long-term growth strategies for the company and that also got accelerated in Q4.

Puneet Jain – JPMorgan Securities LLC

Thank you.


And our next question comes from Mayank Tandon with Needham & Company.

Mayank Tandon – Needham & Co. LLC

Thank you, good evening. I think, Kris, you talked about the pricing adjustment within one of your large clients. How would you categorize pricing overall within your client base? I know some of your larger peers have talked about some pricing degradation within certain contracts.

Ranjan Kalia

So Mike, I’ll give you the tactical piece, then Kris will add the strategic element to it. So as we look at the pricing Q4 as well as into FY 2105 ex this one price adjustment that has happened for us to really getting preferred vendor status that we’re really excited about. If you look at expand the prices actually stable to marginally improving, so we don’t really see a significant price degradation. I think this is one is just a strategic decision that the company made, I’ll allow Kris expand on it.

Kris Canekeratne

So Mayank, as you know we’ve been working on very significant transformational program at this time and we have really done some outstanding work with excellent service over the 2.5 years or so that we have been engaged and the client has been very meaningful outcome as the result of the work that we are doing on claims transformation. And they are very much inline with their return on investment on the ROI model that drove this program.

And as a result of the great work that our global team has done, we have the opportunity to sit down with this client and figure out how we could potentially work across areas that were not – that we were not able to in the past. As a result of that discussion and that conversation we agree to certain price concessions specifically to the extend that we can get access to a much larger set of RFPs that we actually pursue, and ideally win more programs inside the client, the client discussion extensively in many areas.

A part of it is transformational, work that they are currently doing, a part of it is just in terms of BAU operation, that we feel that our value proposition can actually make a meaningful contribution to both their efficiencies as well as their cost structures. And we felt that this was a very, very good move for us.

We’ve done this at some of our the larger clients in the past as you well know our telecommunications clients negotiated certain prices points with us a few years ago. As you’ve seen and perhaps noticed we’ve had steady expansion in terms of that client and we feel that the same opportunity exists within the large insurance clients that you’re talking about.

Mayank Tandon – Needham & Co. LLC

: Thank you for that color. Just a few margin-related questions. Ranjan, you talked about the 90 basis point headwind from visa costs. First, is that a sequential impact? And then secondly, could you talk about what level of wage increases you’re building into the model and would that be primarily a first quarter impact? And then finally, the margin expansion you talked about at the midpoint, 110 basis points, will that be fairly linear or will that be more back-end loaded?

Ranjan Kalia

So the first one is that the 90 basis points visa is a sequential increase from Q4 into Q1. Like I talked about, we believe that, as you know, you apply for the visas. If you get the visas, that will really help your cost sequential structure in the back end, if you don’t them, a lot of the refunds you get, so it seemed like a very good investment on our part to take it in Q1 and post a sequential increase. Then the second piece is in terms of the margin accretion, as you will see, the margin trajectory for Virtusa this year is very similar to the margin trajectory for last year, where margins will improve every quarter. But they have more of an acceleration in the back half and in terms of the comp increases, most consistent with prior years, our comp is going to affect in our second quarter. And right now, we’re targeting in the high single digits, one or two points consistent with last year.

Mayank Tandon – Needham & Co. LLC

Great thank you.


And next will move to Joseph D. Foresi with Janney Montgomery Scott.

Joseph D. Foresi – Janney Montgomery Scott LLC

Hi. Will the account where the price concession was given grow this year, and what’s the drag from price discount post this year?

Ranjan Kalia

Joe, based on the recognized revenue, because we are really giving a significant amount of price discount, the reported revenue for that client will not grow this year. Even though on a delivered – it will still be a very good revenue that we will be projecting in that account, but on a reported revenue it will not grow, primarily because we are really giving a pretty good chunk of discount in that.

Joseph D. Foresi – Janney Montgomery Scott LLC

Okay, I guess what I’m wondering is, was it your suggestion for the price discount to get on the preferred vendor list or was it their suggestion and…?

Ranjan Kalia

No, no. We were invited – we were invited to be a preferred vendor primarily, because we had such tight delivery excellence and performance. So, it was an invite and that invite needed to match the rate cut.

Joseph D. Foresi – Janney Montgomery Scott LLC

Got it, okay. And then in Europe, can you give us a better breakdown of what the revenue growth is there, I mean versus the large client versus other clients? I’m just trying to get a feel for how many counts you are adding. And I assume you expect that to grow faster there and North America this year?

Ranjan Kalia

Yes, you’re right. so if you look at it for FY 2014, our combined growth in Europe was 48%. Now even if we give you the organic growth in Europe was 42%. Now we are projecting that on a combined basis, Europe will grow significantly above the company average in FY 2015. So that growth trajectory continues.

Joseph D. Foresi – Janney Montgomery Scott LLC

Got it, okay. and then the last one for me, a number of your competitors gave sort of positive commentary regarding 2014, but they did have some pockets of weakness to start the year and it was off to a slow start. Ultimately, do you feel like 2014 is shaping up better than 2013? And then if you could just point to strengths or weaknesses that you see as you get out the gate here.

Kris Canekeratne

So Joe, clearly, a large part of what we are seeing is based on the industries that we work in and just to – just from a context perspective, we’re working very large business to consumer industries who are facing some very interesting paradigm shift in the way enterprises interact with consumers and in terms of the employees. And that’s primarily driven by a demographic change with more and more millennials, or those born after 1980, becoming a larger part of the workforce and a larger part of their consumers

So keep in mind that my response to you is based on what we are seeing in these very large enterprises that have a huge end consumer market that they service. Now in these large B2C enterprises that basically – they are forced to figure out how to invest into expanding their addressable market. And at the same time, how are they going to keep their BAU operation running better, more efficiently while adhering with increasing compliance and regulatory initiatives and mandates.

So with that as a backdrop, what we are seeing across the board, and Raj will comment in a moment on some of the pipeline activities that that we have seen across our client base. What we are seeing is that indeed large B2C industries, our clients are investing. They are staying both from a budgeting cycle and buying patterns that are earlier than perhaps the same time last year.

And I think with that, I will ask Raj to spend a moment on what specific pipeline areas that we’re seeing.

Raj Rajgopal

Thanks, Kris. I think I would like to comment on two parts to this – one is the pipeline component to it and the other one is kind of the meantime to close, because it gives you a good idea about our client’s confidence in the environment given that these are shrinking. So, first, on the pipeline, our pipelines are growing significantly and much larger at this time of the year than last year at this point. And this is especially because of the large number of bigger deals in the pipeline.

The pipeline for smaller deals is also growing significantly compared to this time last year. To give you some color, a large deal pipeline, this is with a TCV of $10 million and higher, has actually increased over 100% in the last six months. And these pipeline increases are across industry groups and all geos. If I come to the meantime to close, especially meantime to close for late stage, both these metrics have actually improved – have actually decreased. Our time to close has actually come down. This gives me confidence that our clients are feeling good about the demand environment, and therefore continuing to invest in what is required in terms of improving the quality of the business.

Ranjan Kalia

Joe, let me just give you some numbers to put it in perspective between the two years for you. So if you look at the midpoint growth, we obtain even if you talk about organic, it is very consistent with last year. Our revenue trajectories are very consistent with last year. You look at the verticals that I talked about in the prepared remarks, BFSI and communication and technology are expected – similar to last year are expected to grow far higher than the Company growth average. And M&I would be the one where we talked about we are seeing some declines. That will be growing – it’s actually in a declining stage.

So when I look at it at a higher level from a number’s perspective, growth rates consistent, growth trajectory consistent, growth rates coming from consistent and ti it all is going to lead to the portfolio becoming more and more diversified. Top 10 concentration continues to come down; non-top continues to go up.

Joseph D. Foresi – Janney Montgomery Scott LLC

Thank you.


And next we’ll move to Brian Kinstlinger with Sidoti & Company.

Brian D. Kinstlinger – Sidoti & Co. LLC

Hi, great. My first question is related to the pricing on that large client that was changed. Can they reevaluate every year the entire preferred partnerships that they have? How often do they generally do that? And then you talked about large deals in the pipeline up 100%. It sounds like those are the deals where there is some pricing pressure. Do you think you get the same pricing on those deals versus some of the smaller deals?

Ranjan Kalia

Brain, this is the large enterprise client of ours, they do not go out there and review their preferred partners on an annual basis. They actually select their preferred partners across two categories, one is the strategic category, and the other one is generally an outsourcing category. And we are basically a formidable partner for them in their strategic categories and as a result of the recent discussions that we have entered with the debt we have had and from the price concession that we provided them.

We now have an opportunity to go after a much larger addressable space within this client, which, obviously, bodes very well for us. Hence the short-term impact of the immediacy, if you also impact of the price negotiation. but from a strategic stand point, we believe that the opportunity at this large client is very reminiscent of the opportunity we had sometime ago at VT.

So we actually feel that this is from a strategic standpoint, extremely good process, not just by the way within this one large enterprise client of us. But we also feel that it’s signaling to a whole industry that we have a set of solutions and capabilities that are second to none. And now, with this really forming this partnership at a much deeper level, we believe that that’s going to bode very well for us both at the client, but perhaps, even more importantly in the insurance industry.

Brian D. Kinstlinger – Sidoti & Co. LLC

Thanks. And then my follow-up, during fiscal 2012, if we look hindsight, your EPS came with the absolute high-end of your range. In fiscal 2013 adjusted for the 4Q results, I get that you came at the middle of the range. And so if you look backwards, can you compare the different factors that drove where you landed your guidance? And then does this feel more like fiscal 2012 as you head into the year or more like fiscal 2013? Thank you.

Ranjan Kalia

So, Brian, like I talked about, our whole EPS guidance really starts from our revenue guidance. The revenue guidance is relay built on the business revenue that we have on hand, ramp up, ramp down, new logo closures that we would have, we take that all into account and put together a revenue, and then really look at it from an onshore, offshore ratio.

So it really gives us, we believe a very healthy operating margin expansion where at the midpoint it really translates to 110 basis points on margin expansion and the midpoint brings EPS at about $1.52.

Brian D. Kinstlinger – Sidoti & Co. LLC

And that midpoint, is that EBIT or EBITDA 110 basis points?

Ranjan Kalia

That’s EBITDA, that’s operating margin EPS. So if you wanted to do EBITDA, you will have to add back amortization and depreciation to that, which is – which will probably be in the range of, I would say $16 million for next year.

Brian D. Kinstlinger – Sidoti & Co. LLC

Thank you very much.


And next we’ll move to Moshe Katri with Cowen.

Moshe Katri – Cowen & Co. LLC

Yes. Thanks, finally. I think you mentioned nine new client additions, maybe a bit more for the quarter. Can you give us some color in terms of which verticals they came from and give us a split between North America and Europe?

Ranjan Kalia

So Moshe what I talked about was actually 14 new clients, nine came from our TradeTech acquisition, and five came from the organic business. So if you look at it, the nine are really European based and the other – actually 13 are European based and one is in North America.

Moshe Katri – Cowen & Co. LLC

And by vertical.

Ranjan Kalia

By vertical there were two in C&T and 12 in BFSI all of the TradeTech business is really in BFSI.

Moshe Katri – Cowen & Co. LLC

Understood. So should we assume that looking into fiscal year 2015 – looking at some of the growth drivers, which verticals? Should we assume BFSI is going to be the fastest-growing vertical of the Company, or what are you looking at this internally? How do you see that?

Ranjan Kalia

I’ve talked about in my remarks that in C&T and BFSI are expected to grow significantly above company average and I would say C&T would even grow higher than BFSI.

Moshe Katri – Cowen & Co. LLC

Great. And then did you start accruing bonuses for fiscal year 2015? And is there – can you in any way share with us some of those targets for reaching those bonuses?

Kris Canekeratne

We haven’t started 2015, we’re really talking about Q4 reporting right now.

Moshe Katri – Cowen & Co. LLC


Kris Canekeratne

So fiscal 2015 we will start to accrue next quarter.

Moshe Katri – Cowen & Co. LLC

Okay, and can you share with us some of those targets for bonuses?

Kris Canekeratne

So, anyway if the targets for bonuses for leadership are really around a revenue and operating margin, that’s decided by the comp committee in a very aggressive targets that really significantly above industry average that’s what the expectation is for bonus sales at 100%.

Moshe Katri – Cowen & Co. LLC

Okay, so north of 20%.

Kris Canekeratne

I think that’s what the comp committee to decide, like I said, they are significantly high above the industry averages.

Moshe Katri – Cowen & Co. LLC

All right, great. Thank you.


(Operator Instructions) And it appears we have no further questions at this time. I will turn it back over for any additional or closing remarks.

Kris Canekeratne

Thank you. I want to take this opportunity to thank our global team members for their dedication and commitment to our clients. Thank you.


And once again that does conclude today's conference. We appreciate your participation.

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