Virtusa Corporation (NASDAQ:VRTU) Q4 2019 Results Conference Call May 15, 2019 5:00 PM ET
William Maina - Investor Relations
Kris Canekeratne - Chairman and Chief Executive Officer
Ranjan Kalia - Executive Vice President and Chief Financial Officer
Conference Call Participants
Mayank Tandon - Needham & Company
Puneet Jain - JPMorgan
Joseph Foresi - Cantor Fitzgerald
Vincent Colicchio - Barrington Research
Bryan Bergin - Cowen
Good day, everyone, and welcome to the Virtusa Corporation Fourth Quarter Fiscal 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. And please note that today's event is being recorded.
And I would now like to turn the conference over to William Maina, Investor Relations. Please go ahead.
Thank you, and welcome to Virtusa's Fourth Quarter and Full Fiscal Year 2019 Earnings Conference Call, where we will be discussing our financial results for Virtusa's fourth quarter and full fiscal year ended March 31, 2019. On the call with me are Kris Canekeratne, Chairman and Chief Executive Officer and Ranjan Kalia, Executive Vice President and Chief Financial Officer.
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 express or imply 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; the ability of Virtusa's clients to realize 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 or 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 provide insight into our total cash position and overall liquidity. Please note that a supplemental data presentation to our fiscal fourth quarter results has also been posted to our IR website. For additional disclosures regarding these and other risk factors faced by Virtusa, please see disclosures contained in Virtusa's public filings with the SEC and in our earnings press release.
With that, I'd like to turn the call over to Kris. Kris?
Thank you, Will. Good evening, everyone, and thank you for joining us today. I'll begin by running through some fourth quarter and full year fiscal 2019 financial highlights.
Total revenue for the fourth quarter was $327.6 million, representing 4.1% sequential and 16.5% year-over-year growth. Our Q4 non-GAAP operating margin was 10.4%, up 50 basis points year-over-year. And we delivered non-GAAP EPS of $0.46. For the full year fiscal 2019, we generated approximately $1.25 billion of revenue, up 22%, delivered 140 basis points of non-GAAP operating margin expansion in line with our guidance and posted non-GAAP EPS of $2.12, up 30% from fiscal 2018. Overall, we are pleased with our fiscal 2019 results, which reflect strong execution across our business and validate our leading position in the digital engineering market.
Looking ahead, our fiscal year 2020 revenue guidance reflects double-digit growth at the midpoint, driven by continued momentum across the majority of our clients and all of our industry verticals, partially offset by a "slower than previously expected" start to the fiscal year at one of our banking clients, where we are seeing interim budget constraints as well as typical Q1 seasonality at one of our telecom clients. While we expect revenue from these two accounts to decline sequentially in the first fiscal quarter, we are expecting to resume sequential growth in the second quarter based on our backlog, pipeline and revenue visibility into Q2 and beyond.
From a profitability standpoint, we expect to deliver strong non-GAAP operating margin accretion and EPS growth in fiscal year '20, reflecting our top line performance and our ongoing productivity improvements. Notwithstanding a softer fiscal Q1, we are seeing strong business momentum across the majority of our client portfolio, supporting our expectation for continued double-digit organic growth in fiscal 2020. Underlying this growth is strong demand across all of the sectors we serve for deep digital transformation and cloud transformation, which are the two pillars essential to competing in today's digital first world and all areas, where Virtusa has proven leadership and distinct competencies.
Given the growing demand, the market condition and our unique position, we will continue to focus our go-to-market on these 2 demand drivers. Our distinct delivery approach is focused on both business outcome and productivity and centered on creating client-specific, high-performance, integrated Agile scrum teams. Our design build teams are comprised of domain experts, solution architects and full stack engineers. Their unique composition and depth of competency allows us to efficiently deliver on the promise of digital and cloud transformation. I'd like to explain a little more about each area and how we are delivering measurable impact for our clients.
The digital transformation pillar is getting more strategic attention and more budget as clients across industries realize the importance of creating frictionless digital experiences for their end customers and consumers in order to both protect and grow market share. Our digital transformation capabilities are delivered via our Agile scrum team and enhanced by their domain expertise, gamified continuous integration, continuos deployment tool sets, accelerators and adapters. This delivery approach is setting a high bar in the industry for both productivity and outcomes.
Our ability to combine cutting-edge middleware technology with pre-built adapters for technologies like artificial intelligence and machine learning enable us to create hyper-personalized digital channels that can deliver a custom-tailored digital experience based on a user's preferences and interests. Through our digital transformation team-based solutions and services, we are allowing clients to better engage with their end customers, drive higher customer retention, improve margins and establish significant competitive advantages.
Let me now walk you through an example that illustrates how our digital transformation team-based capabilities are enabling us to dramatically expand our client book of business. Our digital transformation journey with a top 10 U.S. bank is a testament to the quality of our Agile scrum team, our domain expertise, our leading gamified CICD platform and our banking and financial services accelerators and adapters.
We improved functionality coverage by 30%, increased user visits by over 20% online and over 40% on mobile and enacted a state-of-the-art CICD pipeline for continuous innovation. What started as a proof-of-concept relationship has ended with us being selected as their digital partner, expanding our work across multiple lines of business.
Notable engagements with this bank include delivering deep digital transformation across mobile applications, digital wallet integration and open banking platform with secure data exchange and an API platform using pre-built accelerators with the largest BIAN compliant API gateway. Overall, we greatly increased the velocity of the ideate, experiment, built and deploy cycle, streamlined operations, set and exceeded aggressive KPIs and established a formidable multi-year partnership with this client.
Moving to the second driver of demand, we are seeing increased levels of investment in legacy technology modernization through our cloud transformation solutions and services. Today, many of our clients are beginning to realize the significant cost reduction and efficiency improvement benefits of moving to cloud native architectures, which enable substantial speed-to-market, data management and storage efficiency gains. Once again, our Agile scrum team approach enabled by our engineering arbitrage-led platforming methodology provides us with significant competitive advantages as we help our clients rationalize, consolidate and sunset their redundant systems. The bottom line results to them are greatly reduced operating costs and improved IT efficacy.
To capitalize on this demand trend, we have continued to implement initiatives that further strengthen our leadership in cloud offerings and services. Last quarter, we announced a strategic collaboration agreement with Amazon Web Services to build solutions that help clients accelerate their digital transformation and cloud adoption initiatives, and we are very pleased with the result of this partnership.
One recent example of the work we are winning in cloud transformation is with a large bank in the United Kingdom that we were selected to manage their data and application cloud migration, driven in part by data ring-fencing laws, requiring physical separation of data. First phase our multi-year engagement includes reengineering and the migration of over 350 applications from a variety of distinct and disparate systems, some of which are currently shared by various business units with partial sharing of underlying data.
To address these requirements, the Agile scrum team designed a scalable native cloud platform with the focus on workload prioritization, building the foundation for further development of the platform, separation of system, ring-fencing and preventing future data sharing and addressing bandwidth demand of the separated business entities.
We were chosen for this engagement because of the team's strength in deep digital engineering, industry domain expertise in banking and financial services and second-to-none cloud platform expertise. This deal also opened the door for further collaboration with the client as we will be able to leverage our institutional knowledge of the client's technical environment to rapidly ideate, build and deploy highly customized solutions.
A final example represents client work that bridges the digital and cloud transformation areas, ranging from creating digital-only businesses to business-enabling platforms. The assigned Virtusa team bring together comprehensive domain knowledge, deep digital engineering capabilities, real-time gamified CICD product development, cloud native architectures, microservices assets and starter packs. The ability to deliver solutions and support tools, both built by us and through fintech and other [x-tech] communities, enables us to quickly design, test and deploy digital-only businesses and platforms.
In one such instance, the private banking division of a multinational diversified financial services client with operations in the U.K. and EU engaged Virtusa to develop a seamless open banking architecture and deploy an API developer sandbox environment in order to rapidly roll out cutting-edge services to their consumers without the traditional time, cost and risk of in-house development.
As a result of our strong reputation for unparalleled digital engineering capabilities and deep industry specialization, we have been engaged to create an alternative digital-only bank, including account information services, payment initiation services, confirmation of fund and event notification services via authorized registered third-party providers. With our proprietary accelerators and in-house developer tool sets, we have, in the short period of a few weeks, already completed deployment of the developer API sandbox portal and the sample microservices that can easily interface with thousands of fintechs for rapid design experimentation and deployment.
We are currently in the process of completing the API-fication into downstream core system for account information and payment services. Leveraging our digital scrum team, gamified CICD processes, tools and assets, we are disrupting the typical software development life cycle and deployment life cycle from months and years to days and weeks.
The ongoing momentum in our digital lines of business continues to give us confidence that Virtusa is in a position of strength to capitalize on the burgeoning digital transformation and cloud transformation space. Our focus investments over the past several years in deepening our industry knowledge and expanding our digital engineering competency have equipped us with the requisite skills and competitive advantage to deliver deep digital to our clients, gain market share and place us at the forefront of digital cloud and even business transformation.
Our unique Agile scrum team and platform approach provides the underpinnings that enable us to realize our clients' end-to-end digital transformation journey. Our proprietary processes, tooling, adapters and accelerators enable us to provide considerable advantages to our clients in terms of both quality and efficiency. We are seeing consistent evidence that our Agile scrum team that adopt and utilize Virtusa's gamified tool, processes, adapters and accelerators are over 30% more productive. And perhaps most fundamentally, our ability to modernize and rationalize our clients' entire IT estate from platforms and infrastructures to application and interfaces allows us to create digital experiences that are at the forefront of today's digital economy.
In conclusion, we are pleased with our fiscal year 2019 performance, and we are excited about the growth opportunity ahead of us. While softer spend at one of our banking clients will have an impact in Q1, we are seeing sustained growth in our pipeline as our clients continue to invest in IT as a strategy to improve or maintain their competitive edge. Deep digital is becoming a significant part of our clients' transformation agenda in all industries, and we are very well positioned to provide a leadership role in digital and cloud transformation.
Now I'd like to turn the call over to Ranjan, who will provide more details on our results as well as our first quarter and fiscal year 2020 guidance. Ranjan?
Thanks, Kris, and good evening to everyone. Let me start by summarizing the results of our fourth quarter and full year fiscal 2019. I will then provide our current guidance for both the first quarter and fiscal year ending March 31, 2020, before opening the call for questions.
Revenue for the fiscal fourth quarter was $327.6 million, an increase of 4.1% sequentially in reported currency and 3.8% in constant currency. Our fourth quarter revenue was below the midpoint of our prior guidance, mainly due to performance at one of our banking clients. Year-over-year, fourth quarter revenue increased 16.5% in reported currency and 17.9% in constant currency. Our gross margin in the fourth quarter was 29.7%, up sequentially and in line with our expectation.
GAAP operating income for the fourth quarter was $23 million, up from $19.3 million in the prior quarter and $16.4 million in the year ago period. Fourth quarter other expense was $9.9 million. This includes $1.3 million of net foreign exchange loss and $8.6 million of net interest and other expense. Net interest and other expense includes $4.1 million of net interest expense, $4 million of impairment charge on land reclassified as held-for-sale and $500,000 of write-down of an available-for-sale security both acquired through the Polaris acquisition.
GAAP earnings per diluted share was $0.24 in the fourth quarter. This compares to GAAP EPS of $0.37 in the prior quarter and $0.06 in the year ago period. Our Q4 2019 GAAP EPS includes $1.3 million or $0.04 per share of BEAT tax, which was not contemplated or expected in our prior guidance.
Turning to our non-GAAP results. Non-GAAP operating income was $34 million compared to $32.7 million in the prior quarter and $27.9 million in the year ago period. Fourth quarter non-GAAP operating margin was 10.4% consistent with the prior quarter and up 50 basis points from the year ago period. Non-GAAP diluted EPS was $0.46 in the fourth quarter of fiscal 2019. This compares to $0.61 in the prior quarter and $0.55 in the year ago period. Our fourth quarter non-GAAP EPS was below our prior expectations partly due to $4.3 million or $0.13 per share of BEAT tax recognized in the fourth quarter, which was not expected or contemplated in our prior guidance.
Turning to the balance sheet. Ending cash at March 31, 2019, was $223.1 million, inclusive of cash and cash equivalents, short-term and long-term investments. Our cash declined by approximately $30 million sequentially primarily due to $11 million of CapEx investment and cash paid for second tranche of the eTouch acquisition consideration, which totaled $50 million and was paid using $8 million of cash on hand and $42 million raised through debt. Cash used for operating activities was $1.2 million in the fourth quarter. Our DSO for the fourth quarter was 76 days versus 71 days in the prior quarter and 78 days in the year ago period.
Now I will turn to a more detailed discussion of our fourth quarter revenue performance by industry group. Revenue across our industry groups was as follows. BFSI revenue increased 80 basis points sequentially and 6.7% year-over-year, representing 61% of revenue. Our BFSI results in the fourth quarter were below our expectations, primarily driven by performance at one of our banking clients. Results from our largest client were essentially in line with our forecast.
Communications and technology revenue increased 16% sequentially and 48% year-over-year representing 31% of revenue. C&T performance was above our expectations and driven primarily by growth at our technology and telecom clients. Media Information and other revenue was down 10% sequentially and up 80 basis points year-over-year representing the remaining 8% of revenue and largely in line with our expectations. With respect to our geographical performance of our sequential revenue growth was led by Europe, which grew 7.3% and North America, which was up 3.5%.
I would now like to briefly summarize our consolidated financial results for the full fiscal year 2019 as compared to fiscal year 2018. Revenue was approximately $1.25 billion, an increase of 22.3% year-over-year. On a constant currency basis, revenue increased 22.7% year-over-year. GAAP diluted EPS was $0.38 compared to a loss of $0.09 for fiscal year 2018.
On a non-GAAP basis, non-GAAP operating profit was $123.2 million, up 41.5% and $87.1 million in the prior year. An operating margin was 9.9%, up 140 basis points from 8.5% for fiscal year 2018. Non-GAAP net income was $71.3 million or $2.12 per diluted share compared to $52.8 million or $1.63 per diluted share for fiscal year 2018. Excluding the BEAT tax impact of $0.13 per share in the fourth quarter, our full year 2019 non-GAAP EPS is $2.25, up 38% year-over-year.
Now I will provide our current guidance for our first quarter and fiscal year ending March 31, 2020. Revenue in the first quarter of fiscal 2020 is expected to be in the range of $313 million to $321 million. Non-GAAP diluted EPS in the first quarter of fiscal 2020 is expected to be in the range of $0.37 to $0.43. Our Q1 fiscal 2020 non-GAAP EPS guidance anticipates an average share count of approximately 34 million. For the fiscal year ending March 31, 2020, we expect revenue to be in the range of $1.35 billion to $1.399 billion. Non-GAAP diluted EPS for fiscal year 2020 is expected to be in the range of $2.58 to $2.82.
Our guidance excludes $29.7 million of stock compensation expense and $14.6 million of acquisition-related charges. Full fiscal year 2020 non-GAAP EPS anticipates an average share count of approximately 34.2 million. Our domain expertise in BFSI, health care, media, telecom and high tech, combined with our deep digital engineering capabilities and delivery excellence is helping our clients to undergo significant digital transformation.
Our enterprise clients IT initiatives include cloud migration, payment modernization, open APIs and legacy modernization through platforming. Our banking portfolio is forecasted to show sequential revenue decline in fiscal Q1 due to a decline at our large banking client. This is masking growth at many of our other banking clients. Revenue from our largest client is expected to decline sequentially in fiscal Q1 due to budget constraints, but we are expecting to resume sequential growth in Q2.
For the full fiscal year, we expect revenue from our largest client to decline in the high single digits. At the midpoint of our fiscal Q1 guidance, revenue was expected to decline approximately 3% sequentially due to the decline at our large banking client, which I just discussed and seasonality at our large telecom client.
Non-GAAP operating margin will decline by approximately 290 basis points versus Q4 '19, reflecting the impact of lower revenue on utilization and contractor expense, annual compensation increases and visa expenses. We expect sequential revenue growth and margin acceleration to resume in fiscal Q2, driven by broad-based growth across all 3 industry verticals with sequential growth at our largest client.
For full fiscal year 2020 at the midpoint of our guidance range, we expect revenue growth of 10.5%, driven by broad-based growth across our key industry verticals and across our portfolio of top 10 and non-top 10 clients. In addition, we expect non-GAAP operating margin accretion of 100 basis points in line with our long-term forecasts.
Lastly, we are expecting strong non-GAAP EPS growth of 27% in FY '20. Our FY 2020 revenue visibility is consistent with FY '19 and is comprised of slightly better than historical backlog in qualified pipeline. Consistent with prior year, our guidance anticipates that 99% of our revenue will come from existing client portfolio. Our non-GAAP effective tax rate is expected to be 31.3% for fiscal year 2020. This does not anticipate any BEAT tax impact, as we have embarked on a plan to reorganize our India legal entities. Our current non-GAAP guidance anticipates $18.5 million of interest expense.
In conclusion, while we will experience a slower start to FY '20, we anticipate accelerated revenue growth beginning in second quarter and double-digit top line growth for full year at the midpoint of our guidance. Continued execution of our profitability initiatives are expected to allow us to deliver 100 basis points of non-GAAP operating margin accretion and strong EPS growth in excess of revenue growth in FY '20.
I will now turn the call over to the operator to begin Q&A. Thank you.
[Operator Instructions] And the first questioner today will be Mayank Tandon with Needham & Company.
Kris and Ranjan, could you give us a little bit more insight into what transpired in the quarter around the large banking client? Maybe share some more detail around that and then the impact obviously on guidance for the first quarter and for the full year? And then related to that would be just the visibility that you have given the slow start of the year to the targets that you set for fiscal '20?
Sure, Mayank. This is Kris. So Mayank, our large client trimmed some of their budgets in some of the areas that we are engaged in towards the second half of the March quarter. This is what's reflected in our Q1 guidance. From these levels, we expect sequential growth through the remainder of the year. We're also very enthusiastic about some of the newer starts, newer areas that we have recently opened at our large client, and we expect that those newer areas will also continue to expand with us during the remainder of the year. So at this point in time, while Q1 is off to a slower start with our large client, we fully expect that we will see sequential growth in Q2 and beyond, partly driven by the areas that we have significant strength and presence in continuing to expand with us, albeit from a slower start and newer areas contributing in a more meaningful way. I'll let Ranjan provide more insights into guidance.
So Mayank with regards to the large client, there have been a few public statements you can go and look at it, which really talks about that they're expecting to have budget reductions at the enterprise. Those budget reductions, we believe, lot of are being impacted in Q1 just setting up a new run rate and starting to accelerate from them. When we look at our backlog, when we look at our pipeline like I said earlier, the backlog percentage and the pipeline is actually slightly better than last year this time, so actually gives us comfort. And in Q4, this large client actually performed as per our expectations. So the whole piece was really impacting Q1, where we believe they're really just trying to realign their Q1 run rate and expecting to really grow from there.
And then if I can just squeeze one more in on margins. Ranjan, I think you've in the past always talked about 100 to 150 basis points of margin expansion at the operating level. This year, you're saying 100 basis points. Maybe just give us some context in terms of why the lower target for this year? And also related to that will be the trajectory of margins as you go through fiscal '20?
So Mayank, as you will see that stronger dip that we are taking in Q1 largely because of the impact of revenue that happened utilization will go down. And we believe that there is really no point in taking any drastic impacts on utilization -- improving utilization and let the utilization really grow through increases in revenue that will come through. So that's playing a little bit out there. We feel really good about the 100 basis points. If you look at it, two years ago, we had 200 basis points. Last year, we had 140 basis points. This year, we're really going to 100 basis points. Very, very strong margin accretion. Inside the 100 basis points, there's actually also a large deal that we have, which is very strategic in nature. We actually gave a little bit lower margin, which as that deal evolves throughout the year, that's going to continue to have margin accretion and that deal is going to place Virtusa to be a very significant digital player at a very large health care enterprise. So that's also being absorbed in the 100 basis points impact.
And our next questioner today will be Puneet Jain with JPMorgan.
So your Q4 revenue came in below consensus expectations by about $3 million. Is all of that you would attribute to the slower growth in large Banking and Financial Services client?
It's all like I said, Puneet, it's really all banking and one of our large banking clients. And it's not really the largest banking client, it's another large banking client. It was primarily on-boarding oriented. In fact, that large banking client is growing very strongly in FY '20.
And I know you mentioned like, you have higher guidance in your backlog for fiscal '20. Can you give us numbers like how much visibility you have, like or how much of your guidance is in the backlog beyond Q1?
Yes. So historically, Puneet, we've always gone out with a backlog in the mid-70s. This time, the backlog is slightly higher than that. We've gone out with a revenue visibility that will be in the high 80s. This time, the revenue visibility, which means your qualified pipeline and your backlog is slightly higher again.
And if I can quickly ask like this new deal that you talked about just now. Is this deal at one of your existing clients? Is it already baked in the guidance? Can you share some more details on that?
It is a client that we worked last year with. It is incorporated in the guidance, and we believe there is potential for it to really go higher than the midpoint of the guidance. But since we are really starting to try to really look at all different ways and allocate a revenue visibility in the midpoint of the guidance, but we do believe that this deal could do better than the midpoint of the guidance. But as we travel, we'll let you know more about, and we are very excited about the deal. Like I said, it clearly will place us to be a very significant digital partner with this very large health care enterprise.
And our next questioner today will be Maggie Nolan with William Blair.
This is Ted on for Maggie. So we wanted to ask about your long-term view of growth. So now that eTouch will have annualized after the first quarter, how should we think about the long-term profile of the company? Is the implied guidance and growth rate from Q2 through Q4 what you would consider to be normalized and sustainable on a go-forward basis?
So when you look at the number, right, so we've always now call eTouch and organic, everything is really organic for us, right? The way we look at it. Yes, there is a Q1, there is a dip like I talked to you about a 3% sequential growth. But from there, we're really talking about sequential growths that are in the mid-single digits and in some of the quarters that's actually slightly even north of that, so very excited about that. And it's largely the comfort that comes to if a large client, which really impacted a big piece of the Q1 decline that we have, we believe that, that large client is really going to turnaround in Q2, that in itself is going to fuel lot of growth and then rest of the business continues to deliver very strongly too.
And then last question for me, so wanted to ask about client budget and your expectations. And I know we've had a lot of conversations so far on the call today about the one large banking client and some of the pullbacks there. We've heard some commentary from some of your other peers regarding slowdown in financial services. So if you could add some color into the various subsectors within financial services and what you're seeing there and where your expectations are from within those different subsectors that would be helpful?
Sure. So this is Kris. For the most part, we are seeing that client budgets are very similar to what it was last year, maybe flat to maybe slightly up. But I think what's much more exciting for us is that the spend in the areas that we are strong in is actually increasing. So specifically, the areas that clients are investing in, has to do with digital transformation and deep digital to be able to provide end-to-end seamless digital access to consumers and to customers. That's an area where they are locating budget, increasing budget, increasing investment. And we are extremely well positioned to reap the expanding budgets in digital transformation.
On the BAU side of the house, while to a large extent, they're reducing their application development and maintenance spend, their support spend, et cetera, they're specifically investing in cloud transformation and essentially simplifying and reducing the complexity and the redundancy of the IT systems and the IT estate, also an area where Virtusa has significant strength in.
So notwithstanding the short-term slowdown at our large client, the momentum in our business is very strong and that's further reflected in our pipeline. And we fully expect that we will have sequential growth in Q2 and beyond for this fiscal year and fairly strong sequential growth, driven by us being very well positioned to intersect the investments that are being made in digital transformation and in cloud transformation at our clients and quite candidly a lot of the enterprises in the industries that we serve.
I just wanted to add we believe that the banking growth and the budgets is not a macro broad-based trend. We believe there is a certain clients who are just going through their budget adjustments, which are really those accounts those client related. Because rest of our banking portfolio is expected to grow this year for the full year, many clients are expected to grow very significantly. I mean out of our top five clients, we will have four clients, which will cross $100 million of revenue. And this is not run rate revenue that I'm talking. They will across $100 million of revenue this year. And that's how significant the trajectory is. Yes, we are facing issue in Q1.
And our next questioner today will be Joseph Foresi with Cantor Fitzgerald.
My first question is around the large banking client. I guess, my question there is, you've seen the slowdown in one area and it sounds like you're seeing a pickup in some other areas that, I believe, you're employing or going to compensate for the slowdown. It sounds like the slowdown was a surprise. So I guess specifically within that client, help me reconcile those two comments, right? You were surprised by slowdown in one area, yet you feel confident that it's not going to happen again and you're going to pick up in another?
So clearly, we started seeing some of the slowdown in the second half of our fourth quarter. And as we got deeper into it, our understanding, and some of this is actually in the public domain, is that our large banking client is recalibrating and readjusting their spend across different parts of their business. So clearly, the biggest single area of contribution to Virtusa from our large client has been in their institutional client group, which is the corporate banking side. And that's the side that is going through, what I would call that, a budget recalibration or readjustment.
We believe that, that readjustment and that recalibration is done. There is a new baseline for them in terms of what they will spend in ICG. We have absorbed that in our Q1, and we believe that, that area, the ICG area of our large client will continue to sequentially grow with us from a slower start in Q1. So we expect that even the area that has have to slowdown for the remainder of the year, our visibility of pipeline and our expectations are that, that side of the house will grow.
Notwithstanding, and I have shared this in prior remarks, we have been slowly expanding at our large banking client into the other areas of spend in the banking client that are unrelated and separate from the institutional client group side. Those areas continue to expand with us. Those are areas that are on the consumer banking side, those are areas on the infrastructure side. Their cloudification becomes very meaningful and important. And we expect that the ongoing expansion or sequential growth from ICG, albeit from a slower start and the contribution of the other areas that we are seeing expansion and growth and have strong visibility will contribute towards our large banking client continuing to grow with us in Q2, Q3 and Q4.
So essentially, because you've faced tougher comps, right? Because it was a shortfall in 4Q, but 1Q is a tough comp, you think that these new areas will compensate for the delta between the lower run rate and what you were doing last year, is that fair?
We expect that in the aggregate that we have good visibility to continue to grow and scale Citi in Q2 and beyond. And our expectations are that we will have a similar revenue year to fiscal year '19. I think marginally down, is it?
Yes, so, Joe, like I spoke in my prepared remarks, we believe our largest client will be down year-over-year. So a lot of this, I want to make sure that it's not like it's a completely surprise to us. Yes, the gravity of the budget reduction was a surprise to us. But if you really look at it, even in our last call, we had talked about that we were expecting our large client to be down versus Q3 level. So we were starting to see and that's because we are so strategically placed with the clients and their budgets, we were really starting to get that visibility, it's just that the significant -- how deep it was, that's not what was expected by us and that's what really impacted Q1. But the rest of the business is growing so well on Virtusa. So like I said, four of the five clients could be more than $100 million clients, and that's a significant achievement if we can really make it happen.
And then just on the mechanics around this. Would that slowdown -- do you plan on slowing down hiring? Do you have to take people who are one part of the Citi project and repurpose them and retrain them for the other part? I know margins are going to be tough in 1Q. I'm trying to get a sense of how that margin trajectory shakes out and how utilization shakes out throughout the year?
So we don't believe we need to do any very significant transformational changes in the operations of the company because of this Q1 event. We are willing to run the business in Q1 with a little bit low utilization. We've been through these scenarios before. We believe the revenue growth will come up and therefore, the utilization will go up. Even for the full year, we are not really expecting our utilization significant increases over year-over-year. We were planning to pretty much run utilization in about the 83% range, because we have plenty of other levers that are going to continue to help us increase gross margin. So in summary, we are not planning to take any significant impacts around utilization or headcount, because we believe that the revenue growth is going to be turning around in Q2.
And last question for me just on telecom. I know that this is part of their typical seasonality. Is there anything to call out on it being worse than in prior years or better than in prior years? I just wanted to understand how it works.
Yes, so we've always had seasonality with our large telecoms account whose fiscal year is the same as ours and their budgeting cycle is very similar. So that's very similar in nature to prior years. We are seeing strong activity and momentum in our large telecom client, and we expect that our large telecom client will be a growth account for us in fiscal year '20.
Joe, as a percentage, change from Q4 to Q1 is very similar with prior quarters and prior years is because that large client is also running north of $50 million now. So therefore, the dollar impact is a little bit more.
And the next questioner today will be Bryan Bergin with Cowen.
I wanted to ask on margins. Can you impact that 100 basis points of projected expansion? Where you're expecting to generate that from? And is that a midpoint of a range or are you fairly comfortable in that level as a base case?
Yes, Bryan, that is at the midpoint of our range. We believe just like we've talked about it before in the margin accretions for us, the way we plan our business, half of it comes from gross margin, half of it comes from SG&A. That is no different the way we look at it this year. In the gross margin, we have slight increases in realized pricing that we are really expecting to get. Some of that will offset increase -- on-site effort increases that we are expecting to have because of the whole digital business increase that we are talking. And then we continue to have SG&A leverage, which we have been doing it for several years. So we continue to feel comfortable on how we operate our business by controlling expenses and delivering a higher revenue base.
On the health care, you mentioned just curious on that client. There are some peers that have cited issues with health care client spending. Is this net new spending, is it you're taking share because of where you are positioned in a particular account? Can you just give us a little bit more flavor on that?
Once we go through the initial deal that you're talking about and then set ourselves up for this significant digital event, I mean I think in that case, it will probably be both, right? Some of it will be share and some of it will be in the incremental spending. But I believe that's something that if the year plays out, you have to really do the first deal that we have talked about. We want to do a good job on that. Once we do that, it's really setting us also for second half and the year after to really be that very strategic vendor with this client.
On the BEAT tax, just can you give us a little bit of color what changed so dramatically that wasn't contemplated in the guidance previously as for us, I guess interpretation around it? And then what can you do in your structure to drive that right back down?
So what changed was on the GAAP and the non-GAAP side? It's just how the allocations of the foreign tax credits, how they netted off the taxes that you have to pay, that was a little bit of a surprise for us. And the cross charges that happened between Polaris and the non-Polaris business that was the other surprise to us. And that's where it really presents us the opportunity. The reason why even this year the BEAT tax is there for us is because Polaris is still not being completely being folded up into the India -- into the Virtusa tax structure as you know we only own 93% of it.
We have now filed with the local tax authorities as well as Supreme Court in India allowing us to do a full merger of Polaris with Virtusa and what that would mean that is like a mandatory redemption of the other 3%. We feel very good there is very strong precedence that the court has cited on those precedences. If that happens, we will be able to own Polaris 100%. When you will be able to own Polaris 100% that will take off a lot of the BEAT tax exposure, and we are expecting all that to culminate sometime in our Q3 September-October time frame.
[Operator Instructions] And our next questioner will be Vincent Colicchio with Barrington Research.
I was wondering if you can comment on maybe what [inning] is in the digital services market overall in terms of opportunity and then could it be a fisheye vertical?
I'm sorry, Vince, just repeat the question, again? I didn't get the...
So I wonder how far along you think we are in terms of penetrating the digital services market opportunity overall and maybe for the BFSI market, in particular?
So first and foremost, the amount of work and investments going into digital transformation is rapidly increasing. We see the digital transformation market or the digital engineering market having two pillars. The first pillar, of course, is the digital transformation side, which is comprised of creating great digital experience for consumers in terms of all of the services that are provided by enterprises. The simple analogy here is how does an enterprise look and feel like a digital platform company like Amazon, Google, Uber, Lyft, Facebook, et cetera, and I think we would all agree that there's significant work that has to be done in the enterprise to create that commensurate level of digital service.
So in that context, I tell the enterprises are in a very early innings in terms of understanding the extent, the scope and the transformation that's required to be able to provide an experience that's commensurate with the experiences provided by the digital platform companies and the reality is that those digital platform companies are consistently expanding the gap and much of that gap is because of the users of things like artificial intelligence and machine learning to even further create a more galvanizing experience to consumers. So even though the enterprises are increasing their investments, we believe that there is a significant delta between the experiences of a digital platform company and an enterprise and the enterprises are playing catchup. So clearly, they're in the early innings there.
Now the second part or the second pillar is around the BAU, the business as usual or keep the lights on investment and spend of an enterprise. Much of this is prune with very complex, very redundant arcane legacy systems. And there is clear evidence now that if an enterprise can move their systems and their platforms and their technology assets to the cloud, that there are significant cost savings, efficiency improvements and perhaps most importantly, to provide a true digital experience to customers and consumers you have to link the legacy environment with the digital front ends.
And we are starting to see increasing spend in cloudification program, in deep digital program, so the enterprises can play catchup and try to provide commensurate levels of service to what consumers are becoming increasingly used to through digital platform companies, the likes of an Amazon, Uber, Lyft, et cetera. So overall, Vince, I believe that we're in the early innings here, enterprises are increasing their investments both in terms of digital transformation as well as cloud transformation and Virtusa is incredibly well positioned to intersect this increasing spend.
As a matter of fact, one of the reasons we have such strong momentum notwithstanding our 1 large account who reset and recalibrated their budgets is because they're seeing at large across all industries, across all segments, across all of our clients, very significant appetite for investments. As Ranjan said, we have over four accounts this year that will be spending more than $100 million with Virtusa. So a lot of that is the direct result of the investments that they're making in this area.
And this will conclude our question-and-answer session. And I would like to turn the conference back over to Kris Canekeratne for any closing remarks.
Thank you, operator, and I'd like to take this opportunity to thank our global team members for their hard work and commitment towards all of our clients. Thank you. We look forward to speaking with you at the end of our first quarter.
And the conference has now concluded. Thank you all for attending today's presentation. And you may now disconnect your lines.