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Virtusa Corp (NASDAQ:VRTU)
Q2 2020 Earnings Call
Nov 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Virtusa Corporation Second Quarter Fiscal Year 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to William Maina, Investor Relations. Please go ahead.

William Maina -- Senior Vice President

Thank you, Andrew, and welcome to Virtusa's second quarter fiscal year 2020 earnings conference call, where we will be discussing our financial results for Virtusa's second quarter ended September 30, 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 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, 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 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 provide insights into our total cash position and overall liquidity. Please note that a supplemental data presentation to our second quarter results has also been posted to our Investor Relations website. For additional disclosure regarding these and other risks faced by Virtusa, please see the 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?

Kris Canekeratne -- Chairman and Chief Executive Officer

Thank you, Will. Good evening everyone and thank you for joining us today. We delivered solid fiscal second quarter financial results that exceeded the midpoint of our guidance range. Total revenue was $328.5 million, representing 3% sequentially and 7.5% year-over-year growth. We generated sequential revenue growth across all our major industry groups. Our non-GAAP operating margin was 8.9%, up 130 basis points sequentially, and in line with our expectations. Our non-GAAP EPS was $0.54.

Our second quarter results reflect strong demand across our industry groups and geographies with digital transformation and cloud transformation. Our DT and CT practices areas continuing to be the key drivers of our business. It's an unwavering trajectory that reflects the realization of what has been called the fourth industrial revolution. A profound technology driven shift from discrete, layered and controlled business models that the user or customer was subject to; to ones that are fully distributed flat and user empowered. The legacy approaches of the past are being disrupted, and in some cases, destroyed by this new order, placing unrelenting pressure on virtually every company to rethink, reimagine, and ultimately transform their businesses in order to remain competitive.

Digital transformation and cloud transformation are the cornerstone initiatives to make that happen, and they are the cornerstones of our business.

Digital transformation continues to garner more strategic attention at the highest levels of our clients' organizations, and consequently, more budget, as our clients realize its importance to their survival. Of note, a recent IDC study projects global DT spending to top $2 trillion by 2022. This trend is evident in our metrics. Our digital work is increasing, our digital pipeline grew by more than 30% year-over-year for the second straight quarter, and our digital revenue was 41% of total revenue in fiscal Q2.

As the digital transformation demand continues to grow, we are seeing increased interest from clients across all industries in cloud transformation, and the two are inextricably linked. Our cloud transformation engagement range from working with clients, while beginning the journey of moving to the cloud, to developing cloud native application and data migration for global organization, with well established multi-cloud strategy. We believe it is no longer a question of if our enterprise clients are considering cloud adoption, but rather, when they will begin or at what stage of their cloud journey they are currently in.

In anticipation of this trend, we have been making strategic investments across our business in building a workforce with strong cloud expertise, augmenting our in-house cloud capabilities, creating cloud native solutions and strengthening our partnerships with industry leading public cloud service providers.

As a result of these investments, and our proven leadership in delivering on the promise of cloud transformation, our clients are increasingly turning to Virtusa, for cloud solutions to resolve everyday challenges, transform their organizations, and create a ready-for-anything, scalable, digital infrastructure.

Let me now give you a few examples of what we are doing in the cloud space. Virtusa today is leading an enterprisewide cloud transformation for a multinational telecommunications company. This multi-year engagement extends beyond just application migration to the cloud. Our engagement begins with creating a new application development blueprint for our client, utilizing agile approaches, and applying this blueprint to several lighthouse application transformation use cases. Our client will then leverage this new development playbook to facilitate its migration of over 400 applications from disparate data centers to their preferred public cloud provider. Virtusa won this deal, competing against multiple Generation One consulting firms, not only because of our CT capabilities, but just as importantly, our creativity and engineering expertise, which will enable increased efficiencies across our client's global application development ecosystem. With this win, we are now in a leading position to further radiate our presence within this multi-year cloud migration program, with a total value in the 10s of millions of dollars.

Virtusa was also recently selected by a leading U.S. based multinational Bank for the implementation of their multi-cloud program, transforming their legacy debit platform into a cutting-edge, cloud native platform that will be built using our client's proprietary tools. This transformation will enable our client to modernize that debit card platform and achieve scalability at a reduced cost. Virtusa was chosen as the preferred transformation partner, after careful client due diligence, to ascertain our cloud enablement expertise and experience in delivering large transformation programs for major banks.

In my last example, Virtusa was recently selected by one of Europe's largest banks to migrate a set of over 140 applications on to a private cloud infrastructure. This program will enable our client to meet a time bound requirement for separating its shared data centers, with a subsidiary company. Virtusa again won this engagement because of our extensive cloud expertise, as well as our deep domain knowledge and engineering heritage.

Our client examples in our digital transformation practice area, continue to demonstrate our leadership position. DT initiatives have been and are being undertaken to expand our client's addressable markets through digital first and digital only strategies, increase their speed to market, mitigate risk and reduce their BAU cost. All of these outcomes remain key client priorities across all of our industry groups.

Healthcare, for example, remains one of our fastest growing industries and is an area where they are seeing substantial demand for our DT solutions. Our healthcare clients are increasingly looking to implement analytic solutions driven by AIML, in order to gain better business insights, facilitate greater engagement between patients and providers and provide better, more advanced care for patients. For example, Virtusa is currently engaged by a leading healthcare technology company, to modernize their current analytics system. Over the course of this engagement, we will be developing an advanced sort of dashboards, which will be highly interactive and will give healthcare providers access to robust analytics, capabilities of medical data. When this engagement is complete, the new system will be able to run advanced AI analytics, that provide predictive and prescriptive information to its users, ultimately providing better care to patients.

We also recently announced a collaboration with Cardinal Health, Amazon Web Services, and the University of Texas Health Science Center at Houston, to use AI and machine learning to advance medical research. Using Virtusa's cloud-based platform, pre-built APIs and AIML models, medical researchers at UT Health will seek to find trends that can lead to new treatment strategies and cures for a range of businesses. We are very proud to be part of this collaboration.

Within Banking and Financial Services, regulatory compliance initiatives remain near the forefront of our client's BT spending priorities, especially in Europe. We continue to see increased collaboration with banks, specifically around know your customer or KYC requirement. In addition, those banks that are KYC compliant are looking to monetize their early investments by developing APIs with fee based usage models for customers and partners. Today, we are engaged with multiple European banks in building their KYC platform, benefiting from our earlier investments in building solutions accelerators in this area.

Our cloud and digital transformation capabilities continue to be recognized marketwide and this is leading to even greater opportunities for Virtusa. Our consistent track record is garnering us both attention and reward, with the most recent example involving Virtusa being selected as a major European bank's number one strategic digital engineering partner, after a grueling competitive RFP process against 22 other service providers. The selection gives us the ability to bid on 100% of the client's digital projects beginning in our fiscal fourth quarter, and positions us as their partner of choice.

We have already been awarded new work, including engagement to build a digital, personal, financial coach for their retail banking customers. Its a sizable project, but as importantly, it is an opportunity to expand within a division of the bank with the largest digital budget. We are very pleased to be selected as this client's number one digital engineering partner, and believe it reflects our growing position, as a leader in the space known for the integrity of our work, and our track record of delivery excellence.

Moving forward, we see demand remaining strong across all of our industry groups and geographies. But we are not standing still. We continue to make revenue diversification a priority and are making solid strides. We are targeting high-growth verticals, including healthcare and high-tech, and increasing our focus on high-growth geographies in EMEA. We are also committed to growing high potential accounts faster than the company's growth rate to further diversify revenue. We believe these initiatives will reduce revenue concentration risk over time, and lead to better than industry growth.

In conclusion, we believe that our focus on digital and cloud transformation work across industries and geographies remains the right focus. The task of transformation has become a necessary one for virtually every business in today's world, and the ability to make it happen is our core strength. Our progress and position gives us confidence in our ability to deliver solid sustainable growth.

Now I'd like to turn the call over to Ranjan, who will provide more details on our results, as well as our third quarter and fiscal year 2020 guidance. Ranjan?

Ranjan Kalia -- Chief Financial Officer

Thanks Kris and good evening to everyone. Let me start by summarizing the results of our fiscal second quarter 2020. I will then provide our current guidance for both fiscal third quarter and fiscal year ending March 31, 2020 before opening the call for questions.

Revenue for fiscal second quarter was $328.5 million, above the midpoint of our guidance and representing 3% sequential growth in reported currency and 3.5% growth in constant currency. Our sequential revenue growth was driven by growth across all of our industry groups. Year over year, our second quarter revenue increased 7.5% and reported currency and 8.4% in constant currency. Gross margin up 27.4%, was in line with our expectation and up 100 basis points sequentially, primarily reflecting higher utilization.

GAAP operating income for the second quarter was $19.2 million, compared with $13.4 million in the prior quarter and $14 million in the year ago period. GAAP operating income was slightly above the midpoint of our expectations, reflecting our revenue beat. Second quarter other expense was $7.2 million, this includes $3.5 million of net foreign exchange loss and $3.7 million of net interest and other expense. Net interest and other expense includes $4.8 million of interest expense and $1.1 million of interest and other income. GAAP earnings per share was $0.20 in the second quarter, this compares to $0.15 in the prior quarter and $0.01 in the year ago period.

Turning to our non-GAAP results; non-GAAP operating income was $29.4 million in the second quarter compared to $24.2 million in the prior quarter and $29 million in the year ago period. Second quarter non-GAAP operating margin was 8.9% in line with our prior expectation. Non-GAAP earnings per share was $0.54 in the second quarter, $0.02 above the midpoint of our prior guidance, primarily due to higher operating income and our share repurchases in the quarter. This is compared to $0.41 in the prior quarter and $0.54 in the year ago period.

Turning to the balance sheet; ending cash at September 30th, 2019 was $198.5 million inclusive of cash and cash equivalents, short term and long term investments. Cash declined approximately $10 million sequentially, as we funded our stock buyback program. Cash provided by operating activities was $21.6 million in the second quarter, representing 7% of revenue. Our DSO for the second quarter was 74 days, an improvement of one day sequentially, and two days from the year ago period. In Q2, we repurchased approximately 505,000 shares for $18.7 million under our current share buyback program. As of September 30, 2019, $11.3 million was available under this program.

Now, I will turn to some more detailed discussion of our second quarter revenue performance by industry group. Revenue across all industry groups exceeded the midpoint of our prior expectation. BFSI revenue increased 1.8% sequentially and 70 basis points year-over-year representing 59% of revenue. The sequential increase in BFSI primarily reflects growth with our financial services and banking clients, including growth at our largest client as previously expected.

Communication and technology revenue increased 3.7% sequentially, and 27% year over year. C&T represents 33% of revenue in Q2, up from 28% a year ago, highlighting a strong growth in this industry group, and ongoing focus on revenue diversification.

Media information and other revenue increased 9% quarter over quarter and decreased 4.8% year-over-year representing the remaining 8% of revenue. With respect to our geographical performance, North America revenue increased 11% year over year, followed by rest of the world by 8.8%. This was partially offset by Europe, which declined 5.6% in reported currency and 1.1% in constant currency.

I will now provide our current guidance for our fiscal third quarter and year ending March 31, 2020. Revenue in the third quarter 2020 is expected to be in the range of $332 million to $340 million. Non-GAAP diluted earnings per share in the third quarter of 2020 is expected to be in the range of $0.73 to $0.79. Our Q3 fiscal 2020 non-GAAP EPS guidance anticipates an average account of approximately 33.4 million.

For the fiscal year ending March 31, 2020, we expect revenue to be in the range of $1.3 billion to $1.35 billion. Non-GAAP diluted EPS for fiscal 2020 is expected to be in the range of $2.51 to $2.65. Our guidance excludes $23.4 million of stock compensation expense and $16.8 million of acquisition related charges. Full fiscal year 2020 non-GAAP EPS anticipates an average share count of approximately 33.7 million. Our current GAAP and non-GAAP guidance is based on a set of assumptions that can be found on our data sheet located in the Investor Relations section of our website.

As Chris discussed earlier, digital transformation and cloud transformation client initiatives continue to be the key growth driver for Virtusa. Digital transformation primarily involves three core business areas, data integration, and CX or customer experience. Data involves the ability to capture aggregate and analyze massive amounts of data via machine learnings in real-time, to both measure performance and generate insights that can drive future growth.

DT integration opportunities include building scale, middleware that can bridge applications with partner ecosystem, to improve time-to-market. DT applied to customer experience is about creating seamless, often mobile first interfaces, that allow customers to engage when and how they want.

As digital transformation demand continues to grow, we are also seeing greater interest from clients across all industries in cloud transformation. As with DT, we believe there is significant runway for growth from cloud transformation services within our banking and financial services, insurance and healthcare clients as they are earlier in their adoption of cloud versus high tech clients.

At the midpoint of our fiscal Q3 guidance, revenue is expected to increase 2.3% sequentially, slightly below our prior expectations impacted primarily by higher-than-anticipated client mandated holidays. As contemplated in our prior guidance, we expect strong sequential non-GAAP operating margin accretion in Q3.

Looking to fiscal Q4, our guidance contemplates that our strong sequential revenue growth will be supported by the following factors. First, a higher number of billing days versus Q3. Second, the resumption of growth at one of our large European banking clients, which we discussed with you previously. Third, the usual Q4 revenue acceleration at a large European telecom client. And last, organic growth with other clients in line with past performance.

For FY '20, at the midpoint of our guidance range, we continue to expect revenue growth of 7.4% in reported currency and 8.1% in constant currency. In addition, we expect 60 basis points of non-GAAP operating margin accretion in FY '20. Our non-GAAP effective tax rate is expected to be 30.3% for fiscal year 2020 versus 30% previously stated. As a reminder, our ETR does not include any BEAT tax impact, as we have been contemplating a reorganization of our Indian legal entities, which continues to be on track.

Our current non-GAAP guidance anticipates $18.7 million of interest expense. We continue to expect strong non-GAAP EPS growth of 22% in FY '20 at the midpoint. The $0.03 increase in our non-GAAP EPS guidance is primarily due to our share repurchase activity in Q2.

In conclusion, our second quarter results exceeded the midpoint of our prior guidance. Based on current demand trends, backlog and pipeline, we expect our fiscal second half results to perform in line with our expectations and we reiterate the midpoint of our fiscal year 2020 revenue guidance and raise our non-GAAP EPS guidance. While our business momentum remains positive, particularly within healthcare and high-tech, we will continue to monitor macroeconomic trends and their potential impact on demand at our banking clients in the U.S. and in the U.K. Our focus continues to be on creating long-term shareholder value by delivering strong EPS growth in fiscal 2020 and beyond.

Operator, you may now begin the Q&A session.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Mayank Tandon of Needham & Company. Please go ahead.

Kyle Peterson -- Needham -- Analyst

Hey, good evening. This is actually Kyle Peterson for Mayank. Thanks for taking the questions. Just wanted to start on margins, kind of walking through that kind of 60 bps year-on-year expansion. Just between kind of gross margin and SG&A, is there any more room do you guys think on, whether it's utilization or bill rates that gross margin could kind of see itself walk higher, or is most of that expansion going to be through SG&A? Just kind of want to see how we should be thinking of that, as the year progresses?

Ranjan Kalia -- Chief Financial Officer

Well Kyle, we believe at the midpoint of our guidance, the OPM accretion is expected to be 60 basis points. If we tend to be at the high end, OPM accretion can be higher than that. That being said, we believe that our business model and our financial model continues to have many levers, that we will continue to extract to walk on our 100 to 150 basis points roadmap that we've designed for ourselves, which we did meet the last two years. I mean this year is an exception because of the big revenue change that we had after our May guidance. But we believe that -- we continue to be on the roadmap to growing margins by 100 to 150 basis points annually, which would mean that we will have plenty levers in our gross margin as well as in our SG&A.

Kyle Peterson -- Needham -- Analyst

All right. That's helpful color. And then just a follow-up, we noticed that the number of clients with $25 million plus in revenue took a little leg up. I think there were three more in that bucket this quarter. Are these new clients that have been ramping, that have kind of potential to scale and kind of help with the revenue diversification? Or is this new work at existing clients. Just any color you might be able to add would be helpful. So it's just nice to see the diversification playing out.

Kris Canekeratne -- Chairman and Chief Executive Officer

Hey, Kyle. This is Kris. And yes, absolutely, we have been focused on our diversification strategy. Our diversification strategy expands multiple areas. We are targeting high growth verticals, including healthcare and high-tech. We are increasing our focus on high-growth geographies, such as the U.K. and Australia. And we also committed to growing high potential accounts faster than the company's growth rate, specifically those accounts that have the potential to be greater than $25 million accounts. Now some of those accounts have been accounts that we have actually been working with for some time. We have made the necessary investments. We have proven the differentiation of our service offerings, whether it be in cloud and/or digital transformation, and we are expanding our addressable market across those accounts.

In other instances, we have a crop of new accounts that are rapidly emerging to be able to provide the potential to actually become $25 million plus accounts. So we are seeing it both from the perspective of existing accounts that we've worked with for quite some time, and we are also seeing it from the prospective of new accounts that we are closing, but I think the large underlying reason for this level of growth, especially in those accounts that have the potential to be accounts that are meaningful and over $25 million, has to do with our expertise and capabilities in digital transformation and cloud transformation.

Ranjan Kalia -- Chief Financial Officer

Yes, and I think Kris remarks were pretty clear. I just want to add one more thing, that what you're really seeing is none of -- it's all by design. I mean this was incorporated in our guidance earlier on in the year. We've been working lot of initiatives that actually translated into showing that our $25 million clients have really grown significantly. So none of this was actually a surprise to us. We've been working on this behind the scenes.

Kyle Peterson -- Needham -- Analyst

All right, thanks for the color. It's great to see. Thanks guys.

Kris Canekeratne -- Chairman and Chief Executive Officer

Thanks Kyle.

Operator

The next question comes from Puneet Jain of JPMorgan. Please go ahead.

Puneet Jain -- JPMorgan -- Analyst

Yes, hi, thanks for taking my question. So your organic growth over the last few quarters is driven by the second telecom vertical, which has offset weakness in other areas. So what's driving high growth in that vertical? Is it the synergies from the eTouch deal or any industry trends maybe in healthcare, if that revenue goes in there or telecom that's driving growth in that business?

Kris Canekeratne -- Chairman and Chief Executive Officer

So Puneet, the fundamental areas that's actually driving fairly significant growth for us, is our strengths and expertise in digital transformation, due to the robust layer of micro services to be able to enable our clients to provide seamless journeys to consumers and expand the addressable markets, and increasing volume of activity in cloud transformation. So about a year ago, what we found was that, they have a large number of experiments that were being done in around cloud initiatives, and now we are finding that these programs are becoming substantial programs. Specifically in telco and healthcare and in high-tech, we are seeing significant increases in needs and adoption of digital transformation and cloud transformation services. And as you probably noticed, our digital revenue mix has increased, and our digital pipeline now two quarters in a row, have grown by over 30%.

Puneet Jain -- JPMorgan -- Analyst

Got it. And with U.K. or Brexit uncertainty likely pushed out into your fourth quarter, how confident you are about seeing improvement in that U.K. based banking client? And is that client like, given where it is in 2Q, is there going to be any further stepdown in revenue from Q2 into Q3 at that client?

Kris Canekeratne -- Chairman and Chief Executive Officer

So let me just start by sharing some color in terms of our large European banking client. So we do expect that our large European banking client, from an expectation standpoint was lower than our forecast, and we've recalibrated that especially going into Q3. We are expecting fairly sharp -- a sharp rise in revenue growth at our large European banking client going into Q4, and that's been driven by us being selected in a very deep and complex pursuit among 22 service providers, and being selected as the number one digital engineering services provider. As a result of that selection, the momentum that we have and the pipeline activity that we have, especially as we start calendar year '20, has increased sharply, and we are expecting that some of those programs will drive significant growth in revenue from our large European banking client, as we go into our Q4 or the first calendar quarter of '20.

Ranjan Kalia -- Chief Financial Officer

So Punit, just to add. So one -- from the large European client, that was always expected that Q3 versus Q2 will still be a decline, it was our prior guide and expectation, continues to be our same expectation, where we -- the guidance calls for this as probably the last quarter of continued declines in this. We are expecting, because the March quarter is their first budgeting quarter, and we will start to grow that. But the growth is not at the client level, the growth should not be thought about as a very exponential growth that is somehow going to reverse in one quarter. We are expecting a growth will happen, but it will happen in a more measured manner. But the big piece that will happen for the company is, at least that won't be masking lot of the growth that happens at the other clients. So the growth that happens at the other clients would also start to show very favorable.

Puneet Jain -- JPMorgan -- Analyst

Got it. Got it. Thank you.

Operator

The next question comes from Bryan Bergin of Cowen. Please go ahead.

Bryan Bergin -- Cowen -- Analyst

Hi, thank you. Wanted to ask you on the large healthcare deal, how that might be progressing? Any early signs of success here that you think potential expansions that you can call out?

Ranjan Kalia -- Chief Financial Officer

Yes. So Brian, the large healthcare that we talked about in Q1, continues to do well. It's probably contributing about $5 million to $6 million worth of revenue on a quarterly basis. And as you know, how we try to do these things is, we don't really go very hard and heavy on synergy play early on, and the synergy play is something that we are working on -- start to really extract maybe later part in Q4. There are initiatives that are there, but these numbers that I talked about, $5 million to $6 million do not contemplate synergy revenue in that, and we expect that synergy revenue opportunities for Virtusa continues to do that. So the deal has done pretty much on track with what -- how we had designed the acquisition model.

Bryan Bergin -- Cowen -- Analyst

Okay, that's helpful. And then with your top client, did that come in line with your expectations? I think it did a little bit better than you expected last quarter. How did that fare here relative to your outlook in this quarter and going forward? Is it still kind of that kind of sequential growth, as we move through the back half?

Ranjan Kalia -- Chief Financial Officer

Yeah. So it sequentially grew, and the sequential growth was slightly better than our expectations and we are expecting sequential growth again in Q3. So full year, our expectations for this client is pretty much what we had talked about in our May guidance.

Bryan Bergin -- Cowen -- Analyst

All right, great. Thank you.

Moshe Khatri -- Wedbush Securities -- Analyst

Our next question comes from Moshe Khatri of Wedbush Securities. Please go ahead.

Hey, thanks. Just going back to the topic of the European client; can you just talk a bit more maybe about how this actually gets reflected in the quarterly numbers for the next few quarters, that's number one. And then did you mention what was the digital mix during the quarter and also the growth rates? Thanks.

Kris Canekeratne -- Chairman and Chief Executive Officer

So with the large European banking client, as we expected, we would see sequential decline going into Q3 and that's exactly what's transpiring. As a matter of fact, the client has performed a little bit below our expectations, offset by other clients that have performed better than our expectations, hence the guidance being exactly what it was, when we guided last quarter.

Now having said, that we have been recently selected by this client as their number one strategic digital engineering partner, after going through a fairly extensive RFP process. Now what that means, is that as a result of being selected as their number one digital engineering partner, we basically get to bid on the entire opportunity set of digital engineering programs, which is quite sizable and we're also very pleased that we actually competed against pretty much everyone in the space, whether they were Generation One companies that are India headquartered, consulting firms that either Europe or U.S. headquartered, digital engineering firms from Eastern Europe and other parts of the world, and we were picked essentially as the number one strategic partner. And that really talks clearly and points to the highly differentiated services that we have, in terms of digital and cloud.

Now what's happened, Moshe, since this, is that we have been selected for a variety of different engagements, many of them commencing in January or the January quarter of 2020. So we expect that as we go into our fourth quarter, that we will see fairly significant revenue ramp at this client, and then beyond that, the potential is pretty significant, because they are now the number one strategic digital partner.

Now in terms of our overall pipeline; our overall pipeline was up 12% year-over-year. But more importantly, the digital pipeline was up 39% year-over-year. Average deal sizes for the total pipeline was up close to 20% year-over-year. So overall, we are making great progress across pipeline metrics and it's directly corroborating the fact that our overall volume of digital engineering work is increasing. We are becoming very well known as a transformational -- digital and cloud transformation partner. And I think that's further underscored by going up against perhaps some of the best known services companies and being selected as the number one partner in this RFP process that I just described.

Moshe Khatri -- Wedbush Securities -- Analyst

Understood. Thank you.

Operator

The next question comes from Maggie Nolan of William Blair. Please go ahead.

Maggie Nolan -- William Blair -- Analyst

Hi. You've kind of alluded to this a couple of times when talking about the other large clients, but outside of your top 10 or outside of the top client, the top 10 clients actually grew pretty well. So I'm wondering kind of what you expect this group to do, whether this growth levels can continue in kind of these strong double digit rates? And then what's your visibility into the rest of this group and your confidence level there?

Kris Canekeratne -- Chairman and Chief Executive Officer

Maggie, if I just were to provide a few data points around this, right. So even though we are clearly seeing that when you take a look at the industries that healthcare and communications and technology is growing pretty well for us. If I were to just simply exclude two of our large banking clients, the rest of our banking business year-over-year is growing 22%, right. So matched by -- if you include all of the portfolio, banking is growing about 1%. But if you were do exclude the two large banking clients or two of our large banking clients, the rest of the book of business is growing 22%, and we fully expect, given the pipeline activity that we have and the traction that they are seeing in terms of digital transformation and cloud transformation for that level of robust growth to continue. Ranjan, you want to build on that?

Ranjan Kalia -- Chief Financial Officer

Maggie, the other piece is that, we're really excited about, as we are moving into the back half, is really the growth on our non-top 10 client portfolio. As Kris talked about, we as management, recognize the importance of revenue diversification and we actually have been doing a lot of things on revenue diversification that -- some of it are actually starting to show. You saw that $25 million client, and if the guidance plays out the way we've been contemplating, the non-top 10 clients are expected to grow a lot faster than the company average, that will really continue to contribute to the revenue diversification story. And really sets our Q4 and then FY '21, we believe really well for that growth, that what Virtusa aspires to and Virtusa is very used to, which is really growth of a few percentage points faster than industry average.

Maggie Nolan -- William Blair -- Analyst

Thank you. And then in regards to the strong cloud expertise that you've been building, how do you feel you're positioned competitively with some of this cloud transformation work that you're doing. And then where do you think that we are on the maturity curve of this type of cloud work?

Kris Canekeratne -- Chairman and Chief Executive Officer

So let me address the second part first. So we are in the very early stages of cloud. So it's -- this is the first year that we are really seeing significant budget dollars being allocated to cloud and cloud transformation. As I had mentioned earlier, in prior years, there was a lot of experimentation, a lot of proof of concepts being done, but relatively small engagements. This year we are seeing very significant engagements, and we are also seeing the maturity level of our clients in terms of cloud adoption going up fairly sharply. So today, its not about if, it's really a question of when, people are really going to embrace cloud in the enterprise arena. And a large part of that is driven by virtue of the fact that as they adopt cloud and has they can actually move workloads to the cloud, they don't have to size their datacenters anymore for max volume or max load. They can basically size their cloud requirements, and scale it, as and when they need. So clearly you can see that there is a significant benefit from an operating perspective, once you move to cloud.

Now in that journey, many of the clients are still in the very early stages, of basically picking either a private cloud infrastructure, and/or maybe one cloud services partner to move some of the workloads to. The more advanced clients that they are working with have a multi-cloud strategy and in the multi-cloud strategy, they could have a private cloud, they could have multiple CSPs or cloud services providers, and they have actually built or we built for them, the ability to move workloads from one cloud to another with minimal changes, and that obviously gives them significant flexibility and significant opportunities to continue to drive their price points down.

Now as far as Virtusa's differentiation, we've been working on cloud for over four years. We have strategic partnerships, very significant strategic partnerships with all the leading CSPs, and we have executed some of the most transformational cloud programs in industry. So I believe that we are a stand out, and we have highly differentiated services, no matter whether the client is looking at cloud in the early phases, as in moving to a private cloud or maybe to one CSP, or that they're looking at the possibility of going to a multi-cloud environment, and working with us to actually build the layers that are required to be able to move workloads from one CSP to another. So we believe that we are extremely well positioned and in a leadership role in terms of working with our clients and bringing industry leading cloud thought leadership to the table.

Maggie Nolan -- William Blair -- Analyst

Thank you.

Operator

The next question comes from Daniel Reagan of Cantor Fitzgerald. Please go ahead.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi, this is Joe. Let me just ask kind of directly, you've gone through the struggles with a large client. I know you've talked about it quite extensively during the call. Help me understand why you feel like maybe the numbers are derisked now appropriately, after seeing demand for a quarter and how comfortable you are that there won't be another revision?

Ranjan Kalia -- Chief Financial Officer

Sure. Fair question, Joe. Joe if you really look at it once, our guidance forecasting methodology, one, our forecasting methodology continues to be consistent. We obviously learned from our past learnings and incorporate them. But primarily, the methodology stays consistent. It is a very data driven methodology, which really shows there is a backlog percentage, which in this quarter's case, continues to be at par to what it was in prior times during this period.

For full year visibility, it shows backlog rolling forward, as well as pipeline to show 100% revenue visibility for the remaining of the year, which means we don't really need to go out and extract anymore, new pipeline injection to really make our full year number. All we got to do is continue the backlog forward and continue to close the way the pipelines that are in there. We don't need incremental pipeline, which is very consistent to what we talked at the calls before, is this is how our revenue methodology works.

Yes. Sometimes these black swan events that come in and they come in, in a very short period of time. It has taken us time to absorb it, but we also believe that we've proven that more than once that this model is so resilient, that it does absorb, it takes a couple of quarters and it does absorb those heads -- in this case, we believe that our large European client will be -- this will be the last quarter of their decline, which is no different than what we had talked about earlier. So this is no change in our viewpoint about that, and then they will start to really grow in the March quarter. The growth in the March quarter is being supported by the fact that a big RFP, where Virtusa came it as number one, which means Virtusa is going to have access to 100% of digital bidding.

So we can choose that work or we may not choose that work because of margin, but we get the first shot of it versus anybody else. That gives you the comfort. Over and above that, the pipeline that was there is starting to -- want to again resume and starting to grow, that gives us comfort. And then the remaining business always was doing well. We had been talking about the remaining business -- had been doing, continues to do well, and that provides us comfort in the overall revenue guidance.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. Two more for me. From a resourcing perspective, did you have to reassign headcount? Has that process already taken place from the large European client? And are those people now productive again, should we see utilizations go up, or did you keep a couple of people on the bench, because you're assuming that revenue growth rates are going to reaccelerate at the large European client?

Kris Canekeratne -- Chairman and Chief Executive Officer

A little bit of both, right. As you would expect. I mean we basically figured out what we would need to keep back, so that we didn't have to go into sort of yo-yo between letting some people that we would need, just in a short period. And then we looked at skill sets that were somewhat aged and took the opportunity to let some of the people move on. So we did a little bit of both. But from a resourcing and staffing perspective, we are very well positioned to be able to capture this increased demand that we are seeing. As we had indicated from a pipeline perspective, our digital pipeline continues to outstrip growth of any other type of work that we're doing, and obviously, that includes both digital transformation and cloud transformation, and we are very well positioned to execute against it.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. And then the last -- sorry Ranjan, go ahead.

Ranjan Kalia -- Chief Financial Officer

Specifically on utilization, we are not expecting a very significant increase in utilization in the back half. Marginal increases, but no significant increases. We've really realigned our utilization a lot.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it, OK. And then the last question for me is really sort of a more strategic one, what's the next stage of evolution for the Virtusa model, right? I mean, we've known each other a long time, you were a core organic [Indecipherable] during the Indian offshore days. You did Polaris, it was this transformational acquisition and now, we've had a couple of lumpy quarters, but really sort of steady growth overall in the digital practices. So I'm just wondering what are you next focused on? Would it be another transformational acquisition once we get the noise behind us? Is it just continuing to grow the business from a digital perspective? Again, just looking for sort of the overall strategy. Thanks.

Kris Canekeratne -- Chairman and Chief Executive Officer

I mean it's quite simple, Joe. We have, industrial -- we have an industry leadership position in both digital transformation and cloud transformation. We are highly differentiated. We compete very effectively and we can -- we've demonstrated that we have a unique and differentiated set of offerings. They're going to double down on those. As we do that, we're going to continue to be mindful of the importance of diversification. We're going to focus a lot of our attention in terms of growing in accounts that we might be scaled in some areas, but we are under-penetrated in other areas. They're going to grow those areas effectively. Specifically, with these new service offerings and new service lines. And then they are targeting both industries and certain geographies, where we believe that we have a significant opportunity to grow our accounts and have them -- that they have potential to be over $25 million in revenue to Virtusa. That's our goal.

As we do with this, I'm sure we are going to find more opportunities and get back to our growth rates that we have always enjoyed, which is basically growing the business, on an organic basis, a couple of points ahead of industry.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

[Operator Instructions]. The next question comes from Vincent Colicchio of Barrington Research. Please go ahead.

Vincent Colicchio -- Barrington Research -- Analyst

Yes, Kris, in Europe should we be concerned more broadly beyond your large banking client in terms of weakness? What are you seeing on the ground?

Ranjan Kalia -- Chief Financial Officer

Let me just start with -- in my prepared remarks I talked about, look, we do continue to watch the macroeconomic uncertainties that play out. We do believe that even with this large European client, some of the spending impact that they faced, was as a result of the Brexit that will continue to play out in [Indecipherable]. Over and above that, we are watching macroeconomic uncertainties that play out, whether that could be trade discussions, or whether that could be upcoming election, any significant events, we continue to watch the impact of those on our Financial Services clients.

Kris Canekeratne -- Chairman and Chief Executive Officer

And assuming that there isn't a significant impact to situations like that. We are actually seeing as an example, that while large enterprises that were very focused on just the U.K. market, may have had some certain slowdown. We are also seeing enterprise clients that are servicing both European customers and U.K. customers needing to double down and do things like datacenter separation. And as they do datacenter separation, it's a great opportunity for them to embrace the benefits of cloud, and they are actually seeing a surgence of activity. In the U.K. and in Europe, there are enterprises that are servicing consumers and customers beyond just the U.K., actually doubling down investing in terms of preparing themselves for whatever happens with Brexit. And one thing is very clear, that you can't service European customers with data in the U.K. nor can you service U.K customers with data in Europe, in a post Brexit environment, and many clients have to prepare for that well ahead of the Brexit. So we are actually seeing some increased activity as a result of Brexit and at the same time just as Ranjan mentioned, enterprises that are very U.K. specific may have seen some negative impacts of the Brexit as well.

Vincent Colicchio -- Barrington Research -- Analyst

And you spent a lot of time talking about CT versus DT work. I'm curious, how do the margins compare between the two?

Kris Canekeratne -- Chairman and Chief Executive Officer

DT and CT [Indecipherable] continues to be a strong growth driver. What we have seen that on our digital portfolio, which is a mix of 41%. Those margins have always been slightly higher than the company margins, and that trend continues to play out.

Vincent Colicchio -- Barrington Research -- Analyst

And Kris, I heard two different numbers, just for clarity, digital pipeline was up 30% year-over-year or 39%?

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes, so, in two consecutive quarters, our digital pipeline has grown over 30%. In this last quarter, digital pipeline grew 39%.

Vincent Colicchio -- Barrington Research -- Analyst

Thanks for the clarity. That's it for me. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Kris Canekeratne for any closing remarks.

Kris Canekeratne -- Chairman and Chief Executive Officer

Thank you, Drew. Thank you all for joining us today. I'd like to take this opportunity to thank our global team members for their dedication and commitment to our clients. Thank you and we look forward to speaking to you on our Q3 earnings call. Thank you.

Operator

[Operator Closing Remarks].

Duration: 60 minutes

Call participants:

William Maina -- Senior Vice President

Kris Canekeratne -- Chairman and Chief Executive Officer

Ranjan Kalia -- Chief Financial Officer

Kyle Peterson -- Needham -- Analyst

Puneet Jain -- JPMorgan -- Analyst

Bryan Bergin -- Cowen -- Analyst

Moshe Khatri -- Wedbush Securities -- Analyst

Maggie Nolan -- William Blair -- Analyst

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Vincent Colicchio -- Barrington Research -- Analyst

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