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Executives

Staci Strauss Mortenson – IR, ICR

Kris Canekeratne – Chairman and CEO

Ranjan Kalia – SVP and CFO

Analysts

Bhavan Suri – William Blair

Jon Maietta – Needham & Company

Puneet Jain – JPMorgan

Vincent Colicchio – Noble Financial

Virtusa Corporation (VRTU) F2Q2011 (Qtr End 09/30/10) Earnings Conference Call October 27, 2010 5:00 PM ET

Operator

Welcome to the Virtusa Corporation Second Quarter 2011 Earnings Conference Call. (Operator Instructions) I would like to remind everyone that this conference is being recorded.

And now I’d like turn the conference over to Ms. Staci Strauss Mortenson, ICR. Please go ahead.

Staci Strauss Mortenson

Thank you. Good evening and welcome to Virtusa’s second quarter fiscal year 2011 earnings conference call, where we will be discussing our financial results for Virtusa’s second quarter ended September 30, 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 provisions of the Private Securities Litigation Reform Act of 1995.

During this call, we may make express or implied forward-looking statements relating to among other things Virtusa’s expectations and assumptions concerning management’s forecast of financial performance. Virtusa’s ability to assimilate and integrate the operations of InSource and ConVista Consulting, the growth of Virtusa’s business, the ability Virtusa’s clients to realize benefits from the use of Virtusa’s IT services, the potential impact of currency exchange on our business and operation and management’s plan 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 would cause actual result to differ materially from those contemplated in these forward-looking statements. Existing and perspective 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 and 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 insight 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 Securities and Exchange Commission and on our earning press release.

With that, I would like turn the call over to Kris. Kris, please go ahead.

Kris Canekeratne

Thank you Staci and thank you for joining us on our second quarter fiscal year 2011 conference call. We are pleased with our second quarter results. The business environment remains stable and clients continue to expand their programs with us. Our value proposition resonates particularly well due to our unique ability to improve IT efficiencies and drive business outcome.

In addition, we are pleased with the solid progress we have made over the last 18 months to improve the quality and diversity of our client base and build a sustainable growth platform. We are now seeing the results of these efforts and consequently, we are increasing our full fiscal year 2011 revenue guidance.

Here are some of the highlights from the Q2 fiscal year 2011. For the September quarter, total revenue was $52.7 million, an increase of 40% year-over-year. Our operating income was $4 million or 7.7% and earnings per diluted share was $0.15.

Financial services revenue was quite strong growing 70% year-over-year. Growth in financial services was primarily driven by our existing plan expanding program with us and the significant number of new high quality clients added during the last 18 months.

Now, let’s turn to some of the key factors that are contributing to our everyday, to capture market share and our increase confidence in the business.

First, there is increasing demand for our service and solution offering around improving IT efficiencies and driving business outcome. Virtusa’s go-to-market strategy includes a unique combination of IT consulting, best in class solution and outsourcing services that provide end to end value to our clients.

It begins with deep domain expertise and consulting to help clients identify opportunities to improve business efficiencies, which typically leads to the re-definition, multiplication and modernization of key business processes in IT systems.

Our engagement team focused on leveraging our planned interesting technology assets and implementing solutions that accelerate their business goals. We are experiencing demand for our offering across all our industry growth in areas such as reducing operating cost, on boarding of new customers, improving the end consumer experience and accelerating the launch of new products and services.

This value proposition including industry specific solution has resonated particularly well with many of the world’s leading financial services institutions enabling us to either expand our existing partnerships or win new clients. We are pleased with the strong progress we have made as evidence by our significant growth in this industry group.

In one client example, we are working to develop an approach to increase process automation in mortgage origination. We were chosen for two primary reasons, our consulting skills and our deep business process management expertise. Our consulting skills are helping the client define the solution approach and roadmap, and our deep business process management expertise enables us to accelerate solution development and deployment. In addition, our IT rationalization and simplification approach is enabling our client to reach their desired outcome faster and more cost effectively.

Second, we are beginning to see industries that have lag the economic recovery increase spending as they initiate programs to accelerate time to market and still head up the competition. These enterprises need to rationalize cost in order to reinvest savings into growth initiatives.

Our IT rationalization and simplification expertise combined with our solutions offering helps them do this. For example, the communications and technology industry group was particularly hard hit by the recession and their recovery has railed financial services. But we are now starting to see improvements.

Up to seven new clients are added during our second quarter, five going communications and technology. In fact, communications and technology revenue grew 7% sequentially during the second quarter. We expect communications and technology will be a contributable growth in the second half of this fiscal year.

Third and finally, our efforts to improve the quality of our client base diversify our top client’s contributions and target plans with greater revenue potential are paying off. We have made investment in our sales and business development team, enabling us to identify and win high quality clients that we can add significant value and scale our partnerships.

We are pleased to the progress our teams have made. The result is that a greater percentage of the clients added during the last 18 months are contributing more annual revenue and that revenue is accelerating faster than we have seen with prior new clients.

Traditionally, year two revenue growth rates for this constituency are higher. This is a key factor in raising our second half revenue growth and is one of the reasons why we are raising our first fiscal year revenue guidance.

Now, let me share an example with you. We began working with a financial services client in the second quarter of fiscal year 2010 on a customer’s service program allowing call center agents to handle inquiries and distributes more quickly and efficiently. We were chosen for this development project because of our extensive domain knowledge and our experience in building customer service platforms.

Although, the initial revenue for the project was a few hundred thousand dollars, our engagement team identified related opportunities that would significantly improve our clients end consumer experience. During the success of the initial project and our track record of service excellence, we were able to build a stronger partnership, present ideas for additional improvement and expand our engagement. The result is that we have greatly expanded our wallet share and within three quarters, this client is contributing more than $1 million quarterly.

We are only at the surface of what we can do for these newer clients and they have significant opportunity for ongoing growth in future years. The same is true for the remainder of our existing client portfolio as we expand our address of the market through the addition of domain knowledge and solutions offering. Building on our strong track record of service excellence, our clients, services professionals are focused on understanding key business drivers within this client and bringing targeted solutions and services that accelerate their transformational initiatives.

Our client foundation and growth platform has never been strong during the history of our company and positions as well for capturing an increasing percentage of the market.

Turning to our people, I am pleased to announce that Virtusa has been rank amongst the top 20, best IT employers in India for the second consecutive year by Dataquest-IDC and we have moved up five spots in their 2010 ranking. This was based on third-party employee satisfaction surveys.

Virtusa was recognized by its culture of providing opportunities for career advancement and training programs for engineering excellence. We are gratified to be amongst the best IT employees in India and we are committed to providing our team members with an environment where they can realize their full potential.

During the second quarter, we did experience an increase in our attrition. However, in September and October, we have seen attrition levels drop. Our increase in attrition was due to two factors.

First, as the demand environment has improved our industrial experience has spiked in attrition. Second, in September, our state of the art advance technology center in Hyderabad became fully operational and we moved some engagements and programs from various locations around the city into our campus.

With change there comes some attrition and we experienced this in the months leading up to the move. Ultimately, in addition to creating operating efficiencies, the new campus in Hyderabad will enable team building, a greater sense of camaraderie and knowledge sharing that will benefit Virtusa and our clients.

As our business continues to grow, we are committed to hiring a greater percentage of our team members from campus that traditionally attrition levels are lower. As well as provide our team members more opportunities for career advancement. We believe these factors will help us further control voluntary attrition.

Turning to our current outlook, while some progress have been made on improving our margin, more work needs to be done here. Ranjan will provide detail on this in a moment.

Looking at revenue, we expect strong sequential and year-over-year growth in the second half of fiscal year 2011 and our raising our revenue guidance. We expect our growth to be broad based across clients, industry groups and geographies with increasing contribution from the new clients we have added during the last 18 months. We are optimistic that the investments we have made in our business that will continue to yield positive results.

Now let me turn the call over to Ranjan, who will provide more detail on our results and provide you with third quarter and fiscal 2011 guidance. Ranjan?

Ranjan Kalia

Thanks, Kris and good evening to everyone. Before I begin, I want to remind you that we have updated the analyst data sheet and posted it in the Investor Relations section of our website.

Now, let me start by summarizing the results of our second quarter fiscal 2011 before providing our guidance for the third quarter and full fiscal year 2011. All of the numbers being discussed our U.S. GAAP expect with regards to use of constant currency revenue metrics.

Turning to our results for the quarter ended September 30th, 2010, revenue for the second quarter came in at $52.7 million. This represents a year-over-year increase of 40% and quarter-over-quarter increase of 2%.

In constant currency, our revenue increased 42% year-over-year and 1% sequentially, after normalizing for the British pound against the U.S. dollar in each comparative period.

Gross margin during the quarter was 38.6% compared to 38% in the prior quarter and 43.7% in the year ago period. While gross margins increased sequentially, it was below our expectations.

Resource optimization initiatives did have a positive impact in the quarter. However, they are taking effect at a slower pace as we balance these programs with increasing revenue opportunities.

Our operating income for the second quarter was $4 million, an increase from $3.2 million in the year ago period. Operating margin decreased from 8.5% in our second quarter fiscal 2010 to 7.7% in our second quarter fiscal 2011. This was due to the gross margin decline just discussed as well as a 270-basis point year-over-year impact as a result of acquisition amortization and acquisition related retention bonuses.

Offsetting this is the underlying SG&A leverage in the business as we continue to spread our cost over a larger revenue base and benefit from other cost efficiency programs.

Second quarter other expense was $23,000, inclusive of an FX loss of $470,000 which was not included in our guidance. This was primarily due to both FX losses on intra-company payments made to our Indian subsidiary due to the strengthening of the Indian Rupee and FX losses on non-GBP shared accounts receivable held by our U.K. subsidiary driven by the strengthening of the British pound.

The primary drivers of this 230 basis point decrease are 70 basis points negative impact from an increased use of contractors. This was due to the increased demand for new program starts, which initially have more work conducted on site, offset by a positive impact from an increasing utilization and SG&A leverage.

We had an income tax expense of approximately $310,000 in our second quarter ended September 30th, 2010, which equates to an effective tax rate for the quarter of 7.7%. This includes a tax benefit of approximately $270,000 related to U.K. research and development deductions pertaining to prior tax years.

Net income for our September quarter increased to $3.7 million, compared to $3 million in the second quarter of fiscal 2010. Diluted earnings per share increased to $0.15 in our second quarter of fiscal 2011, compared to $0.12 in the second quarter of fiscal 2010.

Turning to the balance sheet. Ending cash was $95 million, inclusive of cash equivalents, short-term and long-term investments, an increase of $5.1 million from June 30th, 2010.

Cash flows provided by operating activities was $7 million in the second quarter. DSO, including unbilled receivables was 77 days compared to 78 days in the prior quarter.

Capital expenditures were $2.7 million in the September quarter, inclusive of $1.4 million for the build out of our Hyderabad campus.

Depreciation expense in the quarter was $1.3 million.

Acquisition amortization and acquisition related retention bonus expense in the quarter was $1.4 million.

Now, let me turn to some additional quarterly financial and operational metrics beginning with those related to our fiscal second quarter revenue. Revenue by geography was as follows: North America was 74% of revenue, increasing 43% year-over-year. Europe was 21% of revenue, increasing 14% year-over-year, excluding BT, Europe decrease 1% year-over-year. Other geographies contributed 5% of revenue.

Revenue growth across our industry group was as follows: BFSI increased 70% year-over-year, representing 54% of total revenue. Communications and technology grew 27% year-over-year representing 31% of revenue and media information and other contributed the remaining 15% of revenue and was flat year-over-year.

BT contributed 15% of revenue in the September quarter. We are pleased with our performance at BT which grew 22% year-over-year in reported currency and 29% in constant currency. Sequentially, BT increased 3% in reported currency and declined 1% in constant currency.

For the September quarter, we had two clients contribute greater than 10% of revenue. 77% of our revenue came from clients we have partnered with for more than one year inclusive of those we added through acquisitions during the second half of last fiscal year.

On an organic basis, this metric was 91%.

Looking at new client wins. During the quarter, we commenced work with seven new clients; five were in communication and technology and two were in BFSI. We ended the quarter with 76 active clients.

Turning to our operating metrics. We ended the quarter with 4,180 IT professionals, an increase of 5% compared to the prior quarter. Attrition calculated on a trailing twelve month basis, was 27.7% versus 21.4% in the prior quarter. As Kris discussed, attrition began to decline in September and October and we expect in quarter attrition to be lower in the third quarter.

Global utilization excluding trainees was 76% in our second quarter compared to 78% in the prior quarter. Q2 ending utilization levels would enable us to meet the increased second half demand.

Now, I will provide our current guidance for our third fiscal quarter ending December 31st, 2010, and for full fiscal year 2011. As a reminder, all of our numbers are on a U.S. GAAP basis.

Revenue in the third quarter of fiscal 2011 is expected to be $54 to $56 million. Diluted earnings per share in the third quarter of fiscal 2011 is expected to be $0.16 to $0.20. Earnings per share anticipates an average share count of approximately $24.8 million.

For the full fiscal year ending March 31st, 2011, our revenue range is currently expected to be $214 to 220 million. Fully diluted earnings per share for the full fiscal year 2011 is expected to be in the range of $0.60 to $0.72. Full year EPS anticipates an average share count of approximately $24.7 million.

Our current guidance is based on the following set of assumptions: annual effective interest rate yield of approximately 1.8% on average projected cash balance including long and short-term investments. This is slightly higher than our previous assumption of 1.5%. We have not considered any potential impact to other income associated with foreign exchange gains and losses.

Indian rupee foreign currency hedge contracts are in place for the majority of Indian rupee expenses for the fiscal year ending March 31st, 2011. Based on the current spar trade and our contracts, we expect the weighted average Indian rupee conversion rate for the remainder of the fiscal year ending March 31st, 2011 to be approximately 46.6 versus our prior guidance of 48 due to the impact of the strengthening of the rupee on our unhedge rupee expenses and increase INR forecasted spending to meet our expected top line growth for the second half of fiscal year 2011 compared to our prior guidance and forecast.

Our current guidance anticipates a British pound to U.S. dollar conversation rate of 1.57, which does consider the benefit of revenue and cost hedging contracts already in place for our third quarter. We expect an effective tax rate for the remaining quarter of the fiscal year 2011 to be approximately 16%. We continue to anticipate the spending on Hyderabad campus in our full fiscal year 2011 will be $7.2 million.

Now, I will like to spend a moment providing you with our current thoughts on our third quarter and fiscal year 2011 guidance.

Since our last earnings call, our business continues to strengthen and we expect broad-based growth across all industry groups and geographies in the second half of fiscal 2011. Therefore, we are raising our current revenue guidance for the full fiscal year 2011.

I will now share a few observations that are positively impacting our business. The clients we have added during the last 18 months are contributing annual revenue and are ramping faster than new clients in prior years. We are experiencing continued strength in our BSFI industry group where clients are increasing their spend with partners that accelerate their business outcomes.

Our multipart service offering enables us to capture the entire lifecycle of this work from business consulting to the implementation of solutions. Additionally, industry groups such as communication and technology which have taken longer to recover from economic downturn are beginning to spend on IT rationalization simplification and industry specific solutions. These companies are reinvesting cost savings into initiatives that improve competitiveness and drive differentiation in their end markets.

For the third quarter, we expect gross margins to be relatively flat sequentially. We remain focused on resource optimization program, but expect them to take a little more time than we initially projected as we continue to manage these programs in support of our revenue growth. Specifically, we are increasing our campus, hiring and broadening our pyramid as well as continuing to manage our onsite contractor cost.

The strengthening of the Indian rupee will also negatively impact our blended hedge rate and impact operating margins by approximately 80 basis points. 60 basis points will impact gross margins and the remainder will impact operating expenses.

And following industry practice, we are implementing focus performance base midyear wage increases, both onsite and offshore that are greater than we previously contemplated in our fiscal year guidance.

Our current assumptions are that the fourth quarter gross margins will improve to approximately 39%. Additionally, we remain focus on optimizing our operating expenses and continuing to find areas of leverage.

As a reminder, included in our operating margin is acquisition amortization and acquisition-related retention bonuses of $1.6 million in the third quarter, which decline to $1.2 million in our fourth quarter.

For the full fiscal year 2011, acquisition amortization and acquisition related retention bonuses will have a 270 basis points impact on our operating margin. However, we are expecting double digit year-over-year growth in both operating income and EPS for Q3, Q4 and the full fiscal year 2011.

Our value proposition and our proven ability to improve business outcomes for our clients are positively impacting our market position. We are intermittently [ph] more optimistic on our outlook and look forward to ongoing success during the second half of this fiscal year and beyond.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Bhavan Suri with William Blair.

Bhavan Suri – William Blair

Afternoon, guys.

Kris Canekeratne

Hey, Bhavan.

Bhavan Suri – William Blair

Hey, guys. Hey, Kris. Just looking at the gross rates, even at the midpoint four Q3 with adjusts kind of a 4% sequential growth and then Q4, a 5% sequential growth. I guess the question I have is, are clients starting to talk about sort of budget flush? What’s kind of giving you the confidence of that acceleration from 2% sequential growth or 1% in constant currency up for the rest of the year?

Kris Canekeratne

So, about that, several factors are actually contributing to our increasing confidence as well as are we able to increase our guidance for the second half of this year and for the full fiscal year.

The first is that we are seeing increasing demand broadly across our business. The gender business environment is better. So, clients are now investing in support of initiatives that drive business outcomes whether that be revenue growth, improving operating efficiencies or improving customer service, all very much in line with our core value proposition.

The whole idea about combining consulting in our areas of the solutions that we provide has enabled us to capture a part of this demand and I think most importantly, the clients that we have added over the past 18 months are getting to that point – first and foremost, it is our interest the stuff the ramp within those clients. We are seeing that the quality of these clients are very strong and that naturally provides us with broader opportunity stuff that we can go after and then not withstanding many of our existing clients are also expanding their programs with us.

Bhavan Suri – William Blair

Okay.

Ranjan Kalia

Bhavan, if I can just add or maybe a little bit of additional color to …

Bhavan Suri – William Blair

Sure.

Ranjan Kalia

A couple of other things that are happening with regards to not only the 18 months piece that Kris talked about, whether the ramp rate is much faster than what we experienced in prior years. Also, if you look at the new logos that’d be close, which we talked about, we believe, are much more strategic.

Bhavan Suri – William Blair

Right.

Ranjan Kalia

There ramp up is almost double from first half to the second half. That’s another data piece. Then CMT, which we always talk about that, they will be – there recovery will be a little bit lag, but will happen. We started really seeing that in Q2 and that is expected to also accelerate in Q3 and Q4. Although, the added together really give us the comfort for the second half guidance range.

Bhavan Suri – William Blair

Got it. Got it. And then when you look at the demand, if you could just split that out sort of between the package implementation piece – so whether it’s BPM work or data warehousing work or ECM work, versus kind of just pure straight ADM type work. How is that demand trending?

Kris Canekeratne

Yes. So, I think quarter over quarter, our consulting revenue was as outsourcing revenue has been pretty similar about 53% in consulting and implementation work and about 47% in application outsourcing work. We don’t break up our consulting and systems implementation work, primarily because they easily went up consulting in systems integration and vice versa.

But just seeing good strong demand for all of the solutions that we provide from business process management, EWB data warehousing and business intelligence, enterprise content management and then naturally some of the high volume enterprise applications peace offering from SAP. So, these plans, we have some very targeted solutions and in these areas, we stand apart from the crowd. We have best in class solutions and that’s driving strong benefit for us.

Bhavan Suri – William Blair

Great. Thanks, guys.

Kris Canekeratne

Thanks.

Operator

And from Needham & Company, we’ll go on to Jon Maietta.

Jon Maietta – Needham & Company

Hey, thanks very much. Hey, good work. It sounds like all the hard work on the customer front is starting to pay dividends here as you guys leverage some of the more recent wins over the past several quarters. I just wanted to get some clarification on the opportunity for market improvement. It sounds like some of its currencies, some of its wages and all stuff we’ve heard about in the industry. But, as you think about the business operationally, where are some of the opportunities where you can kind of work smarter and drive margins here over the next number of quarters?

Kris Canekeratne

Sure, Jon. So, just like we’ve talked about – a lot of our focus is on resource optimization and what we really mean by that is broadening our pyramid, really trying to bring a lot of the campus pressure highs in which we actually ended up doing. We brought in two batches of college hires in the first half and that’s once again expected to double in the second half. So, that will have a positive gross margin impact.

We had always talked about that we had a higher contractor cost because if the revenue came a lot faster than we were able to resource it with our own employee base, that is starting to come down. But it’s taking a little bit longer because we’re trying to balance the contractor cost, reduction with not losing really the revenue opportunities. So, very focus other than the external factors of the EFX.

We are very focus on the internal factors of research optimization, which is pyramid, which is campus hiding, which is onsite contractors.

Jon Maietta – Needham & Company

Okay. No, that’s helpful. I just wanted to clarify that. And then other question I had – less of a Q2 question, but your Company, your size, it’s going to be important overtime to continue to invest in domain expertise and packet solutions and things like this. And I was wondering if you just talk about how we should think about that investment over time. Is that a sort of evolutionary type of investment, or you could potentially see a step function over the next year, year and a half in that type of an investment?

Kris Canekeratne

So, Jon, obviously, we manage our SG&A very closely. Even when we are having gross margins, we try to bring that back through the SG&A. But inside the SG&A, what we’re really trying to do is not really sacrifice on the S. On the S side, we really completely look at sales toward activity, where we’re making sure we are targeting the focus accounts.

But we are not really holding back from the investments that need to be made on that. We’re really funding that through all of the G&A to capitalizing and maximizing on the shared services center. So, yes, we will continue the investment on the S side, to make sure we are very competitive on the domain.

Jon Maietta – Needham & Company

Okay. And then, just the last question, do you happen to have the CapEx figure for the quarter handy?

Kris Canekeratne

For Q2?

Jon Maietta – Needham & Company

Yes.

Kris Canekeratne

2.7 million.

Jon Maietta – Needham & Company

Great. That’s it for me. Thanks very much.

Kris Canekeratne

Thanks, Jon.

Operator

And from JPMorgan, we’ll hear from Puneet Jain.

Puneet Jain – JPMorgan

Yes, hey, guys. My question is obviously revenue was right in line with your guidance range, but on an absolute basis it represents only 1% sequential growth in constant currency, which compares with maybe double-digit growth at some of your peers including some of the largest ones. So, I’m just trying to understand or disconnect as to what constrained your growth this quarter related to peers.

Kris Canekeratne

What’s up, Puneet. This is Kris. So, all in all we had a good quarter with revenue and EPS in line with our guidance.

Puneet Jain – JPMorgan

Right.

Kris Canekeratne

As we’ve been focus on broadening our client base, expanding some of our programs in the existing base and been also very focus over the last 18 months to improve the overall quality of the base that we have and we actually very positive about our business as we exit the second quarter. This is one of the reasons we are raising our full year guidance as well.

So, this foundation is giving us more visibility and a stronger base to grow from. So, much of this is being driven by the client to be battled over the 18 months, over the last 18 months, but also from several clients that are existing clients over Virtusa and we feel that our based today, our client based today is better than at any point in the history of our company and this is what’s going to enable us to continue to grow in scale at the clip that we would like to grow in scale in the coming quarters and hopefully in the years to come.

Puneet Jain – JPMorgan

Okay. Good to know that. And switching gears a bit, attrition rate increased a lot and I know you mentioned that it was lower in September and October. So, can you share what drove this spike in attrition rate and the steps you are taking to stun this turnover?

Kris Canekeratne

Yes. To point on the attrition trend, a large part of – as we well know the entire industry going through an increase in attrition.

Puneet Jain – JPMorgan

Right.

Kris Canekeratne

So, we were not immune from that. We’ve also saw increase attrition based on the industry trends. But very specifically as a result of us moving some of our program engagements to our new campus in Hyderabad and moving some of the programs away from the city centers, we saw a larger percentage of attrition rate there. And as an example, involuntary attrition went up quite a bit in Q2.

As a matter of fact, our involuntary attrition went up by approximately two points in the quarter. Now, this we believe is something that’s specific due to the movement of resources and movement of programs and engagements from multiple locations in the city, in Hyderabad to the campus. We also …

Puneet Jain – JPMorgan

Right. Could some of that run off, like, I mean it will not –

Kris Canekeratne

Yes. It will not reoccur.

Puneet Jain – JPMorgan

Exactly.

Kris Canekeratne

We don’t expect that those – we expect that those are one time impact that we had. We also saw soon after we move in September and in October thus far, we have seen attrition levels drop quite a bit. So, overall, attrition did go up, both on the voluntary side and on the involuntary side, probably more so on the involuntary side than in prior quarters and we believe that as we move forward with some of the programs that we have enacted and the fact that we have a very conducive work environment now at our campus in Hyderabad, we believe that attrition levels will continue to come down and that we will get our attrition down as the quarters progress.

Ranjan Kalia

Puneet, I just want to add that inside the company, the employee engagement continues to be strong like Kris talked about as evidence by the Dataquest IDC, top 20 accolade that we received. Not only its top 20, but we are moving up in and that’s really all based on responses from employee engagement.

Puneet Jain – JPMorgan

Right. And last question if I could. Kris in your prepared remarks you mentioned new clients are contributing more to revenue growth. And so, can you talk about what a typical revenue contribution is from new clients in any given year? And what do you expect the clients you added over last 18 months to contribute to second half growth?

Kris Canekeratne

Yes, I think generally what we are seeing is that the new plans that we’ve added in the last 18 months are contributing more and our ramping up faster, and I think this really talks to the underlying quality of our customer base being very different Puneet from what it was two years ago, right. So, we are very, very pleased with that.

We’ve also been very focused on making sure that we diversify our revenue concentration especially amongst the top 10 clients. Now, we clearly have many of those clients continue to grow with us.

Puneet Jain – JPMorgan

Yes.

Kris Canekeratne

And we will continue to expand programs of those clients. But beyond that, we believe that the clients that we’ve added over the 18 months are going to ramp up faster, that’s what we are seeing and contribute more towards the growth in the second half of this year and into next year.

Ranjan Kalia

Puneet, a couple of other trending data points. If you look at it, our new logo revenue this quarter is expected to be higher than last quarter, last year. We’re also expecting that our new logo revenue on a per client basis is going to be higher than last year. So, since the 18 months, it’s the in quarter, they are all wrapping together to really give us more comfort on the second half.

Puneet Jain – JPMorgan

And what percentage of revenue comes from new logo in any given year?

Kris Canekeratne

That’s approximated on about …

Ranjan Kalia

That’s approximated on about; it’s in ranges in the 10 to 11% range.

Puneet Jain – JPMorgan

10% to 11%. And you expect in fiscal ‘11 it would be higher than that.

Kris Canekeratne

Yes, fiscal ‘11 will be higher than what we’ve closed at new logo revenue in fiscal ‘10.

Puneet Jain – JPMorgan

And can you also quickly talk about like timing, when you expect most of these clients – new recently added clients to fully ramp up. Will that be fiscal ‘12?

Kris Canekeratne

So, generally, it takes – when we add new clients, Puneet – I’ll answer this question in a very different way. When we add new clients, we don’t expect significant revenue contribution in the current quarter …

Puneet Jain – JPMorgan

Right.

Kris Canekeratne

Quarter plus one or quarter plus two, right. So, when we get new clients then we are really looking at them for their contribution towards the end of the year that we bring them in, the end of the 12-month period and then into a year plus, year plus one, year plus three …

Puneet Jain – JPMorgan

Yes.

Kris Canekeratne

And in that, in year plus one through year plus three, there is a fairly large variants in terms of how quickly these clients expand with us. But we have seen in the last 18 months that that crop of clients we brought in based on the quality and the revenue potential of these clients that their rate of expansion has been a little faster.

Puneet Jain – JPMorgan

Okay, got you. Okay. Thanks, guys.

Kris Canekeratne

Thanks, Puneet.

Operator

(Operator Instructions) Next we’ll here from Vincent Colicchio with Noble Financial.

Vincent Colicchio – Noble Financial

Good afternoon, guys.

Kris Canekeratne

Hi, Vince.

Vincent Colicchio – Noble Financial

You had a 10% contributor drop out of that category. What does the tone of the business look like going forward with that customer? Should they – do you think they bump back up 10% contributor in the near future, or does it continue to drop?

Kris Canekeratne

Yes. So, the reason it drop was that some programs and engagements came to an absolute conclusion and we run the process of – we have strong visibility in this account and we believe that they will continue to grow and extend with Virtusa. So, it was more a timing really issue around certain programs coming to an end and other starting a little bit later.

But overall, the relationship with the client is very strong and we expect the clients to continue to be a strong contributor to Virtusa’s revenue quarter in the out quarter than out year.

Vincent Colicchio – Noble Financial

On BT, it looks like BT had nice growth relatively speaking, what is the outlook? Any comments on that for the rest of the year?

Kris Canekeratne

BT continues to be a strong client for us. We have good visibility at BT. I will temper this by sharing with you that the overall spend levels at BT are reducing and we are very pleased that in the reducing spend environment that we are continuing expand our footprint at BT.

This is predominantly based on the quality of the service we provide. The strategic alignment between their strategic goals around platforms and the consumer experience and our way of to deliver against that, and that’s the primary reason as to why we continue to keep expanding our footprint in a decreasing pie.

Vincent Colicchio – Noble Financial

I’m curious on terms of platforming. How is that resonating in terms of attracting new clients? Is that a key differentiator for you today?

Kris Canekeratne

Yes. The whole – what platforming really does for our plans is ability to go in and first and foremost rationalize IT cost and IT expense because we can take out a lot of the disparity and move them into more holistic, more broader platforms and that clearly resonating very well in the marketplace because it’s one of the ways that clients can actually reduce some of their expense levels, but still invest in bringing new products and services to market as well as improving the end consumer experience, so that they can be more competitive in their industry segment.

So, the platforming and the rationalization strength that Virtusa has is a very key differentiator in the marketplace. That combined with the targeted solutions offerings that we’ve built over the years that we are second to none in terms of our expertise and strength in those solutions is a very potent combination.

Vincent Colicchio – Noble Financial

Okay. Okay, guys. Thanks.

Kris Canekeratne

Thanks, Vince.

Operator

And there are no further questions at this time. I’ll turn the conference back over to management for closing comments.

Kris Canekeratne

Thank you. Thank you for joining us today. In closing, we are pleased with our results of the second quarter and the improved outlook for the year. Our focus on high quality scalable relationships is clearly paying off. Our business consulting lead solutions based approach is enabling us to capture a greater portion of our clients’ minds and wallet share.

Finally, I would like to once again thank our global team members for their tireless efforts. Thank you all for joining our call today.

Operator

Ladies and gentlemen that does conclude today’s conference. We thank you for your participation.

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