Virtusa's (VRTU) CEO Kris Canekeratne on Q1 2017 Results - Earnings Call Transcript

| About: Virtusa Corporation (VRTU)

Virtusa Corporation (NASDAQ:VRTU)

Q1 2017 Earnings Conference Call

August 09, 2016 08:00 AM ET

Executive

William Maina - IR, ICR

Kris Canekeratne - Chairman and CEO

Ranjan Kalia - EVP and CFO

Jitin Goyal - President, Virtusa BFS

Raj Rajgopal - President, Virtusa ETS

Analyst

Joseph Foresi - Cantor Fitzgerald

Mayank Tandon - Needham and Company

Puneet Jain - JP Morgan

Brian Kinstlinger - Maxim Group

Frank Atkins - SunTrust Robinson Humphrey

Anil Doradla - William Blair

Bryan Bergin - Cowen and Company

Vincent Colicchio - Barrington Research

Operator

Good day and welcome to the Virtusa Corporation First Quarter 2017 Earnings Conference Call. Today's event is being recorded. I’ll turn the conference over to William Maina of ICR.

William Maina

Thank you, and welcome to Virtusa's first quarter fiscal year 2017 earnings conference call, where we will be discussing our financial results for Virtusa's first quarter ended June 30, 2016. On the call with me are Kris Canekeratne, Chairman and Chief Executive Officer; Ranjan Kalia, Executive Vice President and Chief Financial Officer; Jitin Goyal, President, Virtusa BFS; and Raj Rajgopal, President, Virtusa ETS

Certain statements made on this call that are not based on historical information are forward-looking statements, which are made pursuant to the Safe Harbor provisions 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, the growth of Virtusa's business, Virtusa's ability to realize the intended benefits, revenues and other synergies of the Polaris acquisition, including the ability to integrate Virtusa's employer to the business and operations, the ability of Virtusa's clients to realized benefits from the use of Virtusa's IT services, and management's plans, objectives and strategies.

These statements are neither promises nor guarantees and 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 obligation to update or revise the information disclosed during this call, whether as a result of new information, future events, circumstances or otherwise.

Other statements on 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 provide non-GAAP adjusted operating income, non-GAAP adjusted net income, and non-GAAP earnings per share, which we believe provide insight into the operational performance of our business.

Reconciliations of non-GAAP to GAAP measures are included in today's earnings press release and data sheet, which can be found on the Investor Relations page of our website. We also present a reconciliation of cash, cash equivalents, short term and long term investments that we believe provides insight into our total cash position and overall liquidity.

For additional disclosures regarding these and other risks faced by Virtusa, please see the disclosures contained in Virtusa's public filings with the Securities and Exchange Commission and our earnings press release.

With that, I'll turn the call over to Kris.

Kris Canekeratne

Thanks, Will, and thank you for joining us on our first quarter fiscal 2017 conference call. I will begin by providing some highlights from our first quarter results. Revenues were $205.5 million, an increase of approximately 52% year-over-year and 20% sequentially. Our first quarter non-GAAP operating income was $7.7 million, and non-GAAP EPS was $0.18, which was at the high-end at our guidance range.

Our fiscal Q1 results include a full quarter of contribution from our recent acquisition, our majority interest in Polaris Consulting and Services. Overall, our first quarter results were in line with our expectations, reflecting solid execution and strong forward progress on the integration of Polaris and our combined go-to-market initiatives.

We made strong progress in Q1 and our new business pipeline continued to expand. However, due to macroeconomic uncertainties we started to experience elongated decision making cycles, pressure on discretionary spend and delays in pipeline conversion, particularly with our BFSI and telecom clients.

In addition, we expect Britain’s decision to leave the European Union to have a negative impact on our reported results this year, due to the approximately 9% drop in the value of the British pound versus the US dollar, which impacts approximately 12% of our total reported revenue. We have taken these factors into consideration and reduced our fiscal year 2017 guidance. Ranjan will discuss this in greater details later in the call.

Despite the more challenging macroeconomic environment we are operating in, the fundamental drivers of our growth remain intact and our current outlook is for sequential quarterly growth for the remainder of fiscal year 2017. Clients across our target industries continue to invest in new business models and digital transformation to expand their addressable market, while intensifying their focus on reducing the business as usual cost of their legacy IT environment.

Our core capabilities and ongoing areas of investment remain extremely well aligned with this demand and our deep domain knowledge and industry leading solutions continue to resonate well with existing and prospective clients. Virtusa is increasingly being billed as a transformational partner of choice in the market due to our unique approach and ability to drive accelerated outcomes for our clients.

Here are a few examples of recent engagements that illustrates our ability to uniquely address our clients need in these critical areas and win share. In the BFSI segment, our positioning with our clients as a strategic partner for business innovation and digital transformation has been bolstered by the integration of Polaris.

As an example, one of our banking clients in the US, recently selected Virtusa Polaris as its sole partner for developing its next generation digital banking platform. We are helping this client to transform its digital banking capabilities from siloed line of business centric solution to an enterprise digital platform that will service all its business lines, retail banking and business banking to begin with, extending to commercial banking and wealth management businesses in subsequent phases.

Virtusa Polaris consultant has designed and architected the entire solution and will be responsible for the end-to-end development and deployment of the solution. Scalability, extensibility, reusability and flexibility in meeting the needs of multiple business stakeholders were key design elements of the architecture. Our proven industry leading digital banking experience was the key reason as to why Virtusa Polaris is selected for that transformational engagement.

Turning to healthcare, this sector continues to be an area of strength for Virtusa, as management teams look to address both sides of their dual mandate of growing the business and running the business more efficiently. Digital transformation remains a key trend in the healthcare industry as companies are looking to find ways to improve their top line performance.

For example, we recently began work with a major medical device company to help build innovative mobile and digital capabilities in to their portable ultrasound device, enabling them to both broaden the use and increase the competitiveness of their device, leading to increased market penetration and revenue generation for our clients.

Core platforms, modernization, consolidation and replacement also remain a priority area for healthcare insurers, and our leading transformation solutions continue to enable us to gain share in the market. We were recently selected by a leading multinational Fortune 500 healthcare provider which serves over 10 million members for a multi-year engagement to design and develop their next generation provider lifecycle management platform.

Virtusa was chosen for this engagement over generation one providers, because of our deep domain knowledge and leadership in this space, as well as our proven ability through our work on other similar projects to deliver the desired outcomes of driving improved operational efficiency and better customer relationships for our clients. This is a great example of how we are leveraging our focused investment in developing domain solutions that drive competitive wins in the market place.

Another area where we are leveraging our domain expertise and innovative solutions to win share from our competitors is in the telecom space. For example, Virtusa was recently chosen by a leading software and solutions provider to deliver tech-ops solutions in support of its product offerings to global telecom companies. Through our tech-ops work, we will drive increased efficiencies and cost savings to our client, while also dramatically improving that telco customer’s end customer experience by pre-empting and eliminating operational support incidence.

As part of this engagement, Virtusa will apply RPA solution to improve the efficiencies of our tech-ops work and reduce the need for additional BPO effort. Virtusa was one of 10 firms who competed for this deal, which is one of the largest tech-ops engagements to come to market in the last 12 months. We won not only for our deep telecom domain knowledge and best-in-class tech-ops capabilities, but for our ability to deliver accelerated outcome to this client through providing automation solutions.

Now, I would like to briefly address the recent decision by the United Kingdom to withdraw from the European Union. The immediate impact of Brexit on Virtusa will result from the recent significant decline in the British pound versus the US dollar, which creates an increased headwind to revenue growth and margins at current exchange rates.

While it is still too early to determine the longer term impacts of Brexit, this development has clearly introduced greater uncertainty in the market. We are carefully monitoring this situation and remain in constant contact with our clients and will inform the market as the year progresses and we know more about the potential impacts of this development.

Turning to our integration of Polaris, I’m very pleased with the tremendous progress that has been made since closing the acquisition. As I mentioned in our last earnings call, we have completed our organizational changes and launched comprehensive go-to-market strategies across all of our industry groups, creating nimble and focused engines of growth inside Virtusa Polaris.

In addition, we have made strong progress on our plan to fully integrate our two company’s shelf services functions including accounting and finance, HR and IT by calendar year-end 2016. We continue to expect our integration of Polaris to be complete by the end of calendar year 2016.

In conclusion, macroeconomic uncertainty leading to elongated decision making cycles, pressure on discretionary spend delays in pipeline conversion and Britain’s decision to move away from the European Union is causing near-term headwinds to our business. While these developments will have an impact on our fiscal 2017 results, the fundamental long term drivers of our growth remained strong.

Our value proposition continues to resonate with existing and prospective clients, and our track record of service excellence continues to bode well for us to grow and expand. Our ability to help clients grow revenue by expanding the addressable market and deployed transformational solutions that improve operational efficiencies, reduce cost and lower risk is enabling us to build a strong and diversified client base.

We currently have higher visibility in to our revised outlook for fiscal year 2017 versus prior periods, which continues to call for broad based quarterly sequential growth over the balance of this fiscal year. Finally, we are on track with our integration of Polaris and our strategic rationale for the acquisition continues to play out.

Now let me turn the call over to Ranjan, who will provide more details on our results and our second quarter and fiscal year 2017 guidance.

Ranjan Kalia

Thanks Kris, and good morning to everyone. Let me start by summarizing the results of our first quarter fiscal year 2017. I’ll then provide our current non-GAAP guidance for both the second quarter and fiscal years ending March 31, 2017 before opening the call for questions.

Revenue for our fiscal first quarter was $205.5 million; this represents 19.6% sequential growth in reported currency and 19.5% in constant currency. Year-over-year, first quarter revenue increased 52.4% in reported currency and 53.5% in constant currency. Gross margin in the first quarter was 25.3% compared to 35.1% in the prior quarter, and 35.2% in the year-ago period.

Gross margin in the quarter was slightly below our expectations, due to lower utilization and a sequential increase in contractor cost. GAAP operating loss for the first quarter was $1.8 million, compared to operating income of $5.5 million in the prior quarter and $12.4 million in the year ago period.

First quarter other income was negative $4.1 million including $3.6 million of unrealized foreign currency transaction losses, and $500,000 of net interest expense. GAAP loss diluted share inclusive of minority interest expense was $0.21 in the first quarter, versus earnings per share of $0.41 in the prior quarter and earnings per share of $0.34 in the year-ago period.

Our GAAP income tax rate was 7.8%, which was lower than our prior expectation [Technical Difficulty] non-GAAP operating margins were in line with our prior expectations. Non-GAAP diluted earnings per share were $0.18 in our first quarter at the high-end of our $0.14 to $0.18 guidance range. This compared to $0.55 in the prior quarter and $0.48 in the year ago period. Our non-GAAP tax rate was 13% in the first quarter versus our guidance of 26%, primarily due to the same factors that impacted our GAAP tax rate.

Turning to the balance sheet ending cash at June 30, 2016 was $207.9 million inclusive of cash equivalence and short term and long term investments. Cash used for operating activities was $17.1 million in the first quarter, primarily impacted by a GAAP net loss, annual incentive awards paid in the quarter, and an increase in DSO.

Our DSO including unbilled receivables was 82 days. Virtusa’s standalone DSO was 78 days compared to 77 days in the prior quarter. Capital expenditures were $3.3 million in the June quarter.

Now I will turn to some additional quarterly financial and operational metrics, beginning with those related to our first fiscal quarter 2017 revenue. Revenue across our industry groups and geographies was as follows, and this includes the sequential and year-over-year impact of the Polaris acquisition.

BFSI revenue increased 77.2% year-over-year and 33.8% sequentially, representing 63% of total revenue. Our BFSI results in the first quarter was slightly below our expectations, reflecting softer than expected growth at our financial services clients, partially offset by better than anticipated results in insurance. Communication and technology grew 14.6% year-over-year and decreased 5.3% sequentially, representing 26% of revenue. C&T revenue was in line with our expectations.

Media, information and other grew 50.7% year-over-year and 22.4% sequentially, representing the remaining 11% of revenue. Our M&I organic growth revenue growth in the quarter was better than expected. North America revenue grew 38% year-over-year and 13.8% sequentially making up 65% of total revenue.

Results was slightly below our expectations due to softer than anticipated revenue from some of our banking clients inclusive of a geographical shift in revenue from a North America banking client to Europe. Europe revenue increased 52.9% year-over-year and 22.3% sequentially on a reported basis, and was 57.7% year-over-year and 21.9% sequentially on a constant currency basis.

Europe results were better than our expectations primarily due to the revenue shift from North America to Europe which I just referenced. Europe represents 23% of total revenue in the quarter. The rest of the world more than doubled year-over-year grew 54% on a sequential basis and accounted for the remaining 12% of revenue.

Our Q1 mix of revenues reflects greater geographical diversification which is in line with one of our strategic objective of the Polaris acquisition. During the June quarter, we commenced work with seven new clients including three in BFSI, two in C&T, two in median information and other. We ended the first quarter with 60,075 IT professionals, a decrease of 1.5% sequentially due to an increase in our performance based turnover. Global utilization excluding trainee’s was71% in our first quarter.

Now, I will provide our current guidance for our second quarter and fiscal year ending March 31, 2017. Revenue in the second quarter of fiscal 2017 is expected to be in the range of $206.5 million to $211.5 million. Non-GAAP diluted earnings per share in the second quarter of fiscal quarter 2017 is expected to be in the range of $0.26 to $0.30. Our Q2 fiscal 2017 earnings per share guidance anticipates an average share count of approximately 30.1 million.

For the fiscal year ending March 31, 2017, we expect revenue to be in the range of $850 million to $870 million. Non-GAAP diluted earnings per share for fiscal year 2017 is expected to be in the range of $1.58 to $1.72. Our guidance excludes of $25 million of stock compensation expense and $13.5 million of acquisition related charges, 4 million of which is related to the Polaris integration.

Full fiscal year 2017 EPS anticipates an average share count of approximately 30.2 million and a lower than previously anticipated tax rate. Our current GAAP and non-GAAP guidance is also based on a set of assumptions including tax rate, interest income, foreign exchange rates, capital expenditures and certain non-GAAP metrics that can be found on our datasheet located in the investor relations section of our website.

Now, I would like to spend a moment providing you with some additional detail on our second quarter and revised fiscal year 2017 guidance. Overall, we believe increased uncertainty has led to delays in decision making which could result in lower than anticipated IT spending in the current fiscal year. In addition, the decline in the British pound versus the US dollar has impacted our fiscal 2017 guidance.

More specifically we attribute the revision of our prior fiscal 2017 guidance to the following three factors: first, we have recently a lengthening of decision making cycles in Europe that is impacting the timing of project expansion at some of our European telecom clients. In addition, an expansion opportunity at a US telco client has been delayed.

Second, we have recently seen evidence, that increased uncertainty and external pressure are impacting some of our insurance and banking clients, resulting in delays in decision making and greater scrutiny of discretionary spend. These factors appear to be leading to the isolated reductions and delay in follow-on renewals in our banking and insurance pipeline.

Third, we anticipate approximately 100 basis points of revenue growth headwind in the second quarter and the full fiscal year, due primarily to 9% drop in the value of British pound versus the US dollar. As a reminder, approximately 12% of our revenue is found denominated.

These three factors which I just referenced are impacting both our Q2 and full year revenue expectations. In addition, in light of these developments we recently conducted another review of our pipeline and revenue forecast across all our industry verticals and determined our new revenue guidance range.

Our revenue visibility metrics are now higher than prior periods. We are expecting broad based sequential quarterly growth for the remainder of the year driven by the BFSI and C&T industry groups. BFSI growth is expected to be driven by our banking and financial services clients, while C&T will be driven by our healthcare clients. Our current guidance implies lower than previously expected non-GAAP operating margins of fiscal 2017 in the high single digits. Our revised guidance includes an increase in onsite effort, low utilization and the net impact from a weaker British pound offset by a weaker INR.

The current guidance implies reduced SG&A spending versus prior guidance, but due to the fixed nature of infrastructure spending, we will experience slightly negative SG&A leverage. We continue to expect our non-GAAP operating margins will improve in fiscal second quarter compared to first quarter and to exit the year with lower double digit margins.

In conclusion, we have adjusted our revenue and EPS guidance in light of elongated decision making cycles, lower than previously anticipated discretionary spend, some isolated delays in pipeline conversions and increased FX headwinds. Even with this more challenging backdrop, we continue to expect broad based sequential growth rates across our industry segment for the remainder of the year. Our financial metrics will continue to improve in fiscal ’17, which sets the stage for improved fiscal 2018 financial performance.

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

Question-and-Answer Session

Operator

[Operator Instructions] We’ll go to Joseph Foresi of Cantor Fitzgerald.

Joseph Foresi

My first question here is in the lowering of guidance, how can we get confidence that we took the largest cut at the guidance, and then, it seems like you haven’t necessarily fully adjusted the cost basis. So what confidence do you have that these are delayed and not just cancelled?

Ranjan Kalia

Joe, let me start and then Kris can [inaudible] a few data points to provide on that piece. So when we look at our revenue visibility of coming into the quarter, we now see our revenue visibility coming into the quarter higher than we’ve seen in any prior periods based on the revisions that we did to our guidance.

When we do that for the full year, we look at that same trend continue to rollout for the full year high revenue visibility. Also for the full year 98% of our revenue is really coming from existing or recently closed clients, which means that we’ve really de-risked a lot of the new client logo revenue that’s always resides in a growing company like Virtusa.

Joseph Foresi

And then you talked about the delay in decision making. I’m wondering have you made any adjustments to the cost basis here or the headcount to coincide with that delay and how do we know that they are delays and just not outright cancels at this point?

Ranjan Kalia

If you look at it from an SG&A spending, what you will see is that the SG&A spending in raw dollars has come down guidance over guidance. Like I said, there is still a little bit of a negative leverage from the prior guidance, but it has come down, which means that we have taken steps in terms of reducing our SG&A. Also we have taken actions in terms of looking at our billable headcount as well as our bench. As you can see that there was a headcount reduction that was there in Q1 that we talked about. So we’ve tried to adjust both the billing pool as well as our SG&A in terms of our cost.

With regards to whether what’s in the pipeline in terms of these delays or these non-delays, we believe most of the impact that we’re seeing the biggest piece was really from delays. There was a very small piece that I had talked about was really in terms of backlog reduction. Most of these pieces were backlog delays that we saw there really starting later on in Q2 or starting in Q3.

Operator

We’ll go next to Mayank Tandon of Needham and Company.

Mayank Tandon

First and foremost, Ranjan could you comment on the contribution of Polaris in the quarter and also what your expectations are for the remainder of the year in terms of Polaris and the core Virtusa business?

Ranjan Kalia

Mayank let me put some qualitative color on that. So when we look at Polaris, Polaris continue to be performing at or better than the financial model that we have put together for ourselves. Their revenue guidance continues to be some of the banking revenues that has impacted, has been on the Polaris side, but the utilization and the cost in fact has neutralized a lot of that.

So their margin as well as their EPS performance is actually better than what we have put together for ourselves in the earlier guidance as well as when we announced the deal, and that continues to rule out for the full year for us.

Mayank Tandon

So the incremental weakness that you’re calling out both in terms of revenue and of course the follow-through on earnings is really the core Virtusa business that is coming in below planned. Is that fair?

Ranjan Kalia

Yes, and if you look at the mid-point we are coming down 45 million and out of that 9 million would be Brexit. So really the remaining piece, the big chunk of the remaining piece is really coming out from telco and insurance and a small piece about like 15% is really coming out of the banking business.

Mayank Tandon

Got it and then just a quick follow-up for Kris. In terms of the delay and we’ve heard this from a lot of your peers as well. So I realize this is an industry wide issue on top of may be some specific factors weighing on Virtusa. But could you comment on just the slowdown we’re seeing, how much of that do you believe is structural versus cyclical, as we start to think about the model in ’18 and beyond.

Kris Canekeratne

So Mayank we feel that that’s probably both of these forces at work. So just to reiterate, when we take a look at the revised guidance, about 9 million or so as Ranjan mentioned comes from Brexit, that’s purely due to FX based impact of the British pound devalue against the dollar. Just remember that about 12% of our revenue comes out of the UK and that clearly has an impact.

On our pipeline [indiscernible] we’ve seen certain delays specifically with renewals and extensions and much of this we believe is a bit of macroeconomic uncertainty basically causing delays in decision making, in slow-down of extensions and expansions. In addition to this we also decided not to pursue a few deals that were later in the pipeline because of pricing pressure.

And we elected to not pursue these deals because we just felt that they were not in line with our overall aspirations as a company, and given that we have a fairly strong pipeline as it is, we believe that while these might be short term headwinds, we have a strong pipeline that over time will compensate and hopefully provide us the better quality revenue as we move forward.

So net-net, we feel that some of this is caused by a cyclical sort of issues and some of it is caused by a structural sort of issues that we believe is just something that our industry is going to go through for the next few years.

Operator

We’ll go next to Puneet Jain of JP Morgan.

Puneet Jain

So obviously year-end industry growth is facing cyclical challenges and Kris like you just said could be some pricing pressure. How should we think about normalized level of growth in the industry over the near term, and Virtusa’s ability to grow at in line with peers at least in line with peers next year or over next few years?

Kris Canekeratne

So Puneet, I’m sure you can tell for us to hit the midpoint of our guidance this year we will see strong sequential quarter-over-quarter growth. And assuming we execute against our plan that will lead us to above industry growth all things being equal going into our future years. Our goal remains to grow Virtusa Polaris at above industry level growth.

I think generally speaking industry growth has come down for our industry from the mid-teens to perhaps the low teens or lower double digits, and assuming that we continue to execute our plan, assuming we continue to differentiate in the market, specifically by offering some of the leading digital solutions and services in our space, combined with our very strong value proposition with respect to transformational services, with respect to lowering the cost basis of our clients who run the business, we believe and our aspiration is to grow Virtusa Polaris above industry in the outer years.

Puneet Jain

Got it. And it appears that our core Virtusa growth significantly deteriorated over last six to nine months. It was growing mid-teens and now expected to be flattish maybe declining. How should we feel comfortable that the growth slowdown has not stemmed from Polaris distraction or anything related to that?

Kris Canekeratne

So I will start, I’m going to ask Raj to make some comments because he obviously runs the Heritage Virtusa segment and industries. So first and foremost the impact to us has been primarily because of three things; the Brexit, which we’ve already talked about; certain delays in renewals and extensions due to macroeconomic uncertainty; and our decision not to pursue a few deals because we felt that they’ve earned the right type of deals for Virtusa from a pricing standpoint. This is clearly something that was in our control and it was our choice.

Prior to this we have seen some headwinds with some of our largest clients who have been going through a restructuring and that certainly caused some of the slowdown that we saw prior too. But as we take a look at the remainder of fiscal year ’17, we believe that we have accounted for the headwinds that you’re seeing. And as Ranjan mentioned earlier, we have a higher percentage of backlog whether it be for our current quarter or for the full fiscal year compare to any prior period.

So we have a high degree of confidence that our plans can be executed and we will do everything in our power to execute these plans and resume strong, sequential, quarter-over-quarter growth. With that I’ll turn it over to Raj.

Raj Rajgopal

Thanks Kris. So I think if I look at this sector by sector, healthcare and media and information are doing well and they’re growing. Healthcare we had the same challenges as some of the other providers in the area around mergers, slowing down, spending at large providers.

But several quarters back we developed our strategy to go around and attack the large regionals and that has essentially resulted in very good success, especially round the areas around consumerizatoin of healthcare in onboarding and customers wellness programs and platforms and analytics that reward doctors on care of patients. So that’s an area that is doing well for us.

Same in media and information, digital transformation is really driving the growth of that business and we’re doing very well on that. The two areas that we are seeing challenges from last year to this year were at telcos and insurance.

So on the telco side we had two of our large clients are actually facing merger challenges and that’s the one that’s really resulting in decision making and late spend by a couple of quarters. But I can say that talking to our clients, we are obviously increased the outreach to our clients because of this decision making delays, and what we’re seeing is they’re optimistic about growth picking up in the two subsequent quarters, Q3 and Q4.

If I look at insurance, this is area where we had two of our large clients’ essentially delaying decision making and reducing expense. These are two, one is an incoming client has been with us for a very long time and one is a new client, where the large program that we were looking to do is taking longer to execute as well as the pricing pressure that Kris talked about where we chose not to bid.

But again, if I look at the insurance team, the team remains optimistic; our clients are telling us that the spending is going to continue as the outer quarters unfold. So we remain cautiously optimistic about growth in all of our segments inside the old Virtusa business.

Ranjan Kalia

Thanks Raj, and just to reiterate, we expect to see strong sequential growth across the remainder of this year, growing in Q2, Q3 and Q4 and fairly meaningfully obviously in the second half.

Operator

We’ll go next to Brian Kinstlinger of Maxim Group.

Brian Kinstlinger

With your customers willing decisions, can you talk about how you plan to manage the headcount of 400 person reduction, doesn’t seem like a lot. So are you on a hiring spree and do you plan more significant performance based turnover.

Kris Canekeratne

Brian simply state, we will drive our utilization up that would be a combination of not hiring as many people as we normally would. It would also have - we will raise the bar in terms of performance objectives that we will set and overall we run our utilization commensurate with the revenue with ability that we have.

Brian Kinstlinger

And then about 23% of your revenue came from Europe and other in the June quarter you mentioned. Should we expect in absolute dollars this geography is going to decline over the course of the year?

Ranjan Kalia

I’ll tell you Brian for the back half this geography will continue to grow, because BT starts to pick up in the back half, but the percentage mix should really change significantly. I think Europe would be low 20%; the GBP would be around the 12% mark. Those metrics would continue to stay and in raw dollars it should grow.

Operator

We’ll go next to Frank Atkins of SunTrust.

Frank Atkins

Wanted to ask a little bit about trends of large banking clients. Can you give us any color, either on overtures of Virtusa or Polaris side?

Raj Rajgopal

Frank, don’t mind just repeat that question.

Frank Atkins

Color on large global banking clients.

Kris Canekeratne

So clearly while we have seen some headwinds and I think most of the headwinds is based on macroeconomic uncertainties across the board, the underlying relationship, the quality and the opportunities that we are seeing in banking and across the other industries is truly outstanding. I can share with you that as we have brought these two companies together, the strength of our value proposition whether it being digital transformation, helping our clients expand their addressable market by helping them reimagine their digital store front or helping our clients lower their cost of running the business, we have basically been able to bring together some very compelling, some very competitive solutions both from existing clients as well as the new prospects.

Overall, in our banking and financial services sector, we have seen strong progress with our existing large clients, and now a quarter or more in to the initiatives that we’ve started at our largest client. That initiative has gone very well, we have met or exceeded our client’s expectations. We have built a very strong relationship and commensurate with that, we are starting to see strong momentum in terms of pipeline activities building.

I want to turn this over to Jitin, who can provide a little bit more color around banking and financial services here at Virtusa Polaris.

Jitin Goyal

Thank you Kris. To add to what Kris said, there’s absolutely no doubt that the momentum in the BSF statement both on across both sides apart for the combination remains quite healthy. And our positioning in this particular sector as a company that can help our clients with their business innovation, digital transformation, and process automation kind of initiatives remains pretty strong and we continue to have significant amount of traction both very distinct clients on both sides, Heritage Polaris as well as Heritage Virtusa clients, where they’ve also been able to cross-pollinate with a great deal of solution coming from one company to the other, as well as acquiring new logos, both in Europe as well as in the US.

A lot of the work that we are coming across, for example, if I were to give you a little bit of a color on digital transformation that we’re working on digital transformation with large banks, with tier two banks, with credit unions, with payment processing companies and a whole host of other entities. And this covers businesses reigning from well-funded bank to private banking to corporate banking and retail banking, and the building enterprise digital platforms to mobile wallets, digitizing the client experience for a variety of clients.

So there’s a lot of very healthy demand for digital transformation kind of programs. We also set up a think-tank lab in the company, where we are actually working very closely with several of our clients on their co-innovation programs and we have talked about some of the work that we’re doing in the last quarter around PSD-2 and API Banking. We also are working on things like advanced customer analytics and micro segmentation, where there’s a lot of opportunity for clients to optimize their revenue productivity from their client base, but which an area of considerable focus for our traditional banking clients.

They are also working with us on how to deal with potential disruption for many of the new age [inaudible] companies that are coming about. And so a lot of the innovation that we are doing for our clients is in areas like blockchain, in artificial intelligence and deep learning, like so on and so forth.

Apart from that process automation is something that we talked about earlier and that remains very, very healthy. We are working across a broad range of processes including KYC and AML kind of processes, trade processing, customer onboarding and there’s a broad range of clients that are engaging us on those kind of programs.

So overall to summarize, I think the amount of opportunities that we have in the BFS sector are very encouraging. It’s just that there is a slowdown in decision making because of some of the factors that Kris and Ranjan talked about. And that has had some impact on de-closure. So if you look at the overall trend in the pipeline, we continue to remain as Raj said very cautiously optimistic about where the business is going for the combination. Back to you Kris.

Frank Atkins

And then my second question, one of the strategic reasons for the deal was to position yourself for larger deals in the pipeline. Are you seeing any evidence of bigger size pipeline deals?

Kris Canekeratne

Thanks Jitin. So yes overall we are seeing larger deals and our larger deals have grown. So overall despite the fact that there’s been a slowdown in decision making, we have seen that our overall pipeline has grown considerably year-over-year. And inside this pipeline, we have seen that the big deals pipeline has grown in excess of 0.5%.

So clearly a part of that is attributable to our ability as a result of combining with Polaris to be able to pursue larger deals with our clients. A qualified pipeline which happens to be at stages three and above have also grown north of 30%. So overall we’re seeing good pipeline momentum, obviously offset by delayed decision making primarily due to the macroeconomic uncertainties.

But we feel that our positioning, our solution and our ability fairly works in the areas that are most important to our clients i.e. either helping them digitized and reimagine their digital store front, specifically around expanding their wallet share and their disciplined market. And on the other side, helping our clients lower their BAU costs are resonating particularly well.

Operator

We’ll go next to Anil Doradla of William Blair.

Anil Doradla

A couple of questions, so Kris and Ranjan you talk about not pursuing deals because of the pricing environment. Now a couple of questions around this, given the weak macro, why would this not continue on, people are getting a little bit more desperate, this is a macro impacting the overall industry. Why wouldn’t your competitors become desperate and the current pricing environment that you have, why would that not continue on.

And the second question was, can you talk a little bit about what are those pricing pressures? Is it people are willing to do more work for the same money or relative to what you’ve seen historically, how would you characterize this pricing environment? Thanks a lot.

Kris Canekeratne

Our focus at Virtusa traditionally and now together with Polaris has been really focused the value side of the equation as oppose to the commodity side of the equation. So most often when we excel is because we go in to trial and we can demonstrate to them very quickly and early that we can rationalize and consolidate and therefore take cost out, however, what we don’t compromise on is our rate card.

What happened with a few of deals is that there was fairly intense rate card pressure, and while we had a much stronger and much more articulate strategy and story for our clients, in this few instances the clients wanted purely a commodity based solution. And Virtusa has always been on the side of providing value as oppose to commodity.

Now your second part of the question was around would we continue to see this given that we’re seeing macroeconomic headwinds? And the answer is we expect to see it and that’s one of the reasons we actually brought guidance down and we have a much higher percentage of our outward looking revenue in that plug.

Having said that we also have stronger pipeline coverage for opportunities that we are pursuing than we had in any prior periods, so we believe that the combination of the two specifically staying allegiant to providing value through the salient benefits of our value proposition will endure and will provide a better opportunity for our clients, just as we have seen time and time again in every one of the clients that we have expanded and grown fairly significant relationships with.

Operator

We’ll go next to Bryan Bergin of Cowen and Company.

Bryan Bergin

Just on the pipeline conversion of the deals that you’re so in pursuit. Did you see clients go back to the drawing board on those because they changed their objective or is it really just that they are in the pipeline and just the slowness to engage?

Kris Canekeratne

I think there is a wide spectrum of reasons and issues. In some instances it’s simply a [inaudible] on them sort of trying to digest some of the economic headwind that they’re seeing and figuring out which programs they are going to invest behind in to which programs they might actually throttle back, which ones they are going to change in some ways.

There’ve been very few that have gone back to the drawing boards per se, but in some instances some of our clients have elected to take a look at the overall opportunity sets and re-scope some of the initiatives and maybe look at chunking things up into smaller bite sized people as oppose to taking on the totality of the programs.

Bryan Bergin

And one follow-up just on cash flow, expectations for the full year or on DSO and how we should be thinking about operating cash flow or free cash flow for the year?

Raj Rajgopal

Like you’ve observes the DSO was higher this quarter, primarily bringing Polaris over to our set of books. Polaris DSO was always a little higher, even though I had provided color that the Virtusa DSO is a relatively flat. So we believe their DSO will come down for the remaining of the year. This first quarter is usually a seasonal cash use quarter, because we have incentive pay-out, awards that get paid out in the Q1 quarter. So therefore we should be accreting cash for the remainder of the year.

Operator

[Operator Instructions] We’ll go next to Vincent Colicchio of Barrington Research.

Vincent Colicchio

Kris I’m curious has there been any negative impact on your business from [inaudible] consolidation?

Kris Canekeratne

Across the board we have been, whether it be our largest account Citi, we have had surely been selected by them as their strategic preferred partner across the entire [remiss] of Citi or otherwise. We have generally benefited from some of the vendor consolidation activities that have been going on, and we have expanded our ability to provide a much larger portfolio of services which I think bodes well from a consolidation perspective.

So Vince to specifically answer your question, we don’t believe that the headwinds we are seeing are the results of vendor consolidation as much as just delayed decision making just across our client base tied to macroeconomic headwinds.

Vincent Colicchio

And has there been any change to your expectation for Citi and do you expect to close the year at a higher level than where you were in the last quarter with Citi?

Kris Canekeratne

So I’ll start and may be Jitin can add. Our expectations at Citi remains the same. We’d actually executed extraordinarily well, we have strengthened our relationships there and thus seeing very good pipeline momentum at Citi. Jitin anything you’d like to add?

Jitin Goyal

Yeah, I think the full year guidance for Citi is in the $120 million range, which is in line with our expectations. Keep in mind that this takes in to account a significant amount of reduction in revenue because of the commitments to the cost reduction through efficiency improvement that we signed up to, and a lot of that gap is getting filled up by new opportunities and new deeds that we signing up with Citi.

And the good thing is that we’re finding that there is traction across all parts of Citi, not just the corporate bank or the transaction bank, but also in the consumer bank, in their ATM business and cards business and also in the private bank and a lot of traction that they’ve also seen in the corporate technology office which is there to manage their risk and compliance kind of program and also a data analytic kind of initiatives.

Just to add a little bit more color to this, and in earlier question around the kind of things that are getting delayed. In the BFS sector, the strength around digital transformation kind of programs and [distant] compliance kind of programs remain strong. That’s not something that is getting significantly impacted by all these headwinds.

They’re still around the bank and the BAU kind of activities, so the banks are obviously under lot of pressure to reduce the cost income ratio, and that’s how they’re trying to figure out whether or not they want to continue with some programs, whether or not it makes sense of them to consolidate some of their suppliers and try to drive their spend down by getting rate to [count] and so on and so forth.

But to the extent that our primary strategy is to essentially be a transformation and innovation partner for Citi and other banking clients, I think we’re in a very good place to be able to weather that and to essentially merge the positive revenue growth in the coming quarters.

Operator

I will turn the conference to Mr. Kris Canekeratne for additional remarks.

Kris Canekeratne

Thank you all for joining. I want to take this opportunity to thank our global team members for their hard work and dedication towards the success of our clients programs. Thank you.

Operator

That concludes today’s event. Thank you for your participation. You may now disconnect.

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