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Virtusa Corp (NASDAQ:VRTU)
Q3 2020 Earnings Call
Feb 6, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Virtusa Corporation Third Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to William Maina, Investor Relations. Please go ahead.

William Maina -- Investor Relations

Thank you, Gary, and welcome to Virtusa's Third Quarter Fiscal Year 2020 Earnings Conference Call, where we'll be discussing our financial results for Virtusa's third quarter ended December 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 provision of the Private Securities Litigation Reform Act of 1995. During this call, we will make express 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 today's date. 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. Reconciliation of non-GAAP to GAAP measures are included in today's earnings press release and data sheet, which can be found on the Investor Relations page of our website. We also present a reconciliation of cash, cash equivalents, short-term and long-term investments that we believe provides insight into our total cash position and overall liquidity. Please note that a supplemental data presentation to our third quarter results has also been posted to our Investor Relations website. For additional disclosure regarding these and other risks faced by Virtusa, see the disclosures contained in Virtusa's public filings with the Securities and Exchange Commission and 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. I'll begin the call with some financial highlights. Total revenue for the fiscal third quarter was $335.1 million, representing 2% sequential and 6.5% year-over-year growth. Our top line performance was driven primarily by our healthcare, communications and technology industry practice areas, a consequence of our continued efforts to broaden our industry's mix. Third quarter non-GAAP operating margin was 12.1%, up 170 basis points year-over-year, and our non-GAAP EPS was $0.78. Our performance and position remains strong as we are benefiting from our clients' unwavering IT spend priorities and the ever-expanding demand for digital and cloud transformation engineering services. DT and CT are increasingly being seen as substantial undertakings for all major corporations today as they seek to keep pace with changing consumer expectations, new competitors and the unrelenting pressure on both their top and bottom line.

Accordingly, our DT and CT practice areas are and will be the key growth drivers of our business and will continue to receive much of our strategic investment focus. It is a positive reality captured in our digital pipeline, showing above 30% year-over-year growth in fiscal Q3, our third consecutive quarter of 30%-plus digital pipeline growth and resulting in DT and CT revenue comprising 41% of total revenue in fiscal Q3. Looking at the balance of fiscal 2020 and into fiscal year '21, early indications from our clients and the industry analysts point to steady IT services budgets for calendar year 2020, with spending on DT and CT initiatives continuing to grow at a strong pace. With the growth, we are also seeing different industries at different stages of DT and CT sophistication and maturity. Banking, Financial Services and Insurance, our largest segment, has been a forerunner in digital transformation investing. The big financial players' spending strategies are expanding to achieve truly end-to-end digital systems that deliver both greater customer value and significant infrastructure cost savings. We are working with our BFSI clients across every stage, from designing the front end, high-delight customer experiences and storefronts, to the essential middleware bridges to the back end modernization task of moving workloads and data to the private and public cloud.

Second only to big tech, our BFSI clients are broadening and deepening their DT and CT investments, while some other industries are really just beginning to increase their commitments as they realize the necessity of transformation. They are increasingly seeing DT and CT as the essential work of changing how their businesses work and seeing Virtusa as the partner to make it happen. That's why we are seeing double-digit growth momentum in our Healthcare, communication and technology segments, a clear indication of both demand and greater top line diversification. The robust growth in DT and CT demand across industries has created both incredible opportunity and increased competition. Virtusa's ability to stand above the rest is a function of our deep digital engineering and domain expertise, our grasp of emerging technologies and our formidable partnerships with the leading digital and cloud service providers. These powerful factors have enabled us to compete for and win some of the largest and most strategic DT and CT contracts in the industries we operate in. We are building on an already impressive track record while deepening and broadening our relationships with the market share leaders in many of the sectors we serve. I will now share some recent wins that exemplify the importance of the work we are doing and how we are applying our digital engineering ingenuity to uniquely solve what are often seemingly intractable challenges.

As I mentioned earlier, we are seeing strong momentum with our media and communications clients seeking to undertake digital transformation in order to compete more effectively amid evolving consumer demands and to take advantage of the new opportunities presented by emerging technologies such as 5G. A great example involves a Fortune 100 cable company that selected Virtusa to modernize their digital marketing platforms across all digital sales channels, representing 45% of the client's customer acquisitions. Virtusa is building a new advanced digital technology center, housing dedicated, agile scrum teams that are supporting our clients' launch of new products and services as well as consolidating their multiple legacy sales platforms and tools into a highly efficient, agile, digital platform. Virtusa was able to secure this strategic relationship through our innovation and technology thought leadership in digital engineering and reputation for delivery excellence. Virtusa has also been engaged by a major U.S. wireless telecommunications company to enhance their customer service experience by applying artificial intelligence technology to provide personalized service and relevant offers to its end customers. Our solution leverages predictive and adaptive analytics and prebuilt processes to identify a customer's intent for calling and proactively provide service responses and personalized offers.

Healthcare, as I mentioned earlier, also remains one of our fastest-growing industries and is an area where we are seeing substantial demand for our DT solutions. For example, Virtusa was recently selected by a leading disability insurer to implement a natural language processing solution that automate service request routing for a range of services, including billing contracts and ongoing employee maintenance. The solution resulted in 90% of requests being routed without human interaction, driving meaningful cost efficiencies for our clients, while improving overall turnaround times and consumer experience. Within our BFSI client portfolio, cloud transformation projects are joining digital as a top priority. The cost and performance benefits of moving workloads to the cloud has become overwhelmingly compelling and the competitive advantages are unassailable, driving a large number of U.S. and global banks to significantly accelerate their cloud investments. The financial services industry is experiencing unrelenting pressure to catch up to consumer expectations and take advantage of cost efficiencies and elastic compute and data capability for running data-intensive AI/ML workloads.

Recently and after an in-depth evaluation, Virtusa was selected by one of the largest U.S. banks as their strategic cloud center of excellence partner to accelerate the transition of on-premise workloads to their public cloud infrastructure, while increasing engineering productivity and improving large AI/ML workload implementation by leveraging the elasticity that the public cloud provides. This client is considered one of the industry leaders in private and public cloud deployment, further underscoring the importance of Virtusa's selection as their partner in this critical initiative. It clearly reflects the strength of our digital engineering, our extensive cloud transformation experience and our proven expertise in deploying CICD and end-to-end DevSecOps to automate and accelerate cloud adoption. In another instance, we partnered with a well-known global cloud provider to deliver cloud services to a large bank in the Middle East. We will be moving the bank's testing and development environments to a public cloud infrastructure. This multimillion dollar engagement is important to our clients as well as our cloud partner as it is the first bank in the region to move on to our partner's public cloud.

Virtusa was chosen due to our extensive cloud and engineering expertise especially in building cloud foundations, along with our deep industry knowledge. This is an important win for Virtusa as many companies in Europe and the Middle East are increasingly moving toward public cloud adoption. In conclusion, the pace of change and the need for business transformation to keep up with that change are unlikely to abate. Every major corporation in every major industry in every geography realizes that cloud digital and cloud transformation, becoming nimbler, smarter and more efficient are now essential capacities, not just to thrive, but to survive. And they realize that in order to undertake successful transformations, they need a partner that can bridge their business needs with the technological capacities in ways that work for all their stakeholders. In this regard, Virtusa digital engineering prowess, software platforming heritage and digital and cloud transformation capabilities are second to none. Accordingly, we will continue to invest in our DT and CT practice areas as the key drivers of our business and the core context of our market positioning. We will parlay that focus to drive both top and bottom line performance, while doubling down on high-growth verticals, including Healthcare and high-tech and on high-potential accounts to further diversify our revenue, industry and client mix. We are confident that this is the right strategy, one that will enable us to deliver greater-than-industry top line growth and strong EPS accretion over the long term.

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

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Thanks, Kris, and good evening to everyone. Let me start by summarizing the results of our fiscal third quarter 2020. I will then provide our current guidance for both fiscal fourth quarter and fiscal year ending March 31, 2020 before opening the call for questions. Revenue for the fiscal third quarter was $335.1 million, representing 2% sequential growth in reported currency and 1.4% growth in constant currency. Year-over-year, our third quarter revenue increased 6.5% in reported currency and 6.4% in constant currency. Our sequential and year-over-year revenue growth was driven primarily by our C&T industry group. Gross margin for fiscal third quarter was 29.4%, up 200 basis points sequentially. GAAP operating income for the third quarter was $30.4 million compared with $19.2 million in the prior quarter and $19.3 million in the year-ago period. Third quarter other expense was $7.2 million. This includes $3.1 million of net foreign exchange loss and $4.1 million of net interest and other expense. Net interest and other expense includes approximately $4.9 million of interest expense and $800,000 of interest and other income. GAAP diluted earnings per share was $0.38 in the third quarter, this compares to $0.20 in the prior quarter and $0.37 in the year-ago period.

Now turning to our non-GAAP results. Non-GAAP operating income was $40.5 million in the third quarter compared to $29.4 million in the prior quarter and $32.7 million in the year-ago period. Third quarter non-GAAP operating margin was 12.1%, in line with our prior expectations and up 320 basis points sequentially and 170 basis points year-over-year. Non-GAAP earnings per share was $0.78 in the third quarter, $0.02 above the midpoint of our prior guidance, mainly driven by lower than previously expected tax expense, primarily from onetime discrete tax items. This is compared to $0.54 in the prior quarter and $0.61 in the year-ago period. Turning to the balance sheet. Ending cash at December 31, 2019 was $237.5 million, inclusive of cash and cash equivalents, short-term and long-term investments. Cash increased approximately $39 million sequentially. Cash provided by operating activities was $50.7 million in the fiscal third quarter, representing 15.1% of revenue. Our DSO for the third quarter was 69 days, an improvement of five days sequentially. Now I will turn to a more detailed discussion of our fiscal third quarter revenue performance by industry group. BFSI revenue decreased 3.1% sequentially and 5.1% year-over-year, representing 56% of revenue versus 63% a year ago. Our BFSI results in the third quarter primarily reflect the previously discussed spend reduction at one of our large European banking clients.

Communication and technology revenue increased 10.3% sequentially and 34.1% year-over-year. Our strong sequential growth in C&T was fueled by growth at our large high-tech Internet and U.K. telecom client. C&T represented 36% of revenue in Q3, up from 26 -- 28% a year ago as we continue to diversify further industries. Media Information and Other revenue increased 5.5% sequentially and was essentially flat year-over-year, representing the remaining 8% of revenue. We are seeing good momentum for our transformational services at our media clients. Turning to our geographical performance, North America revenue grew 3.7% sequentially and 12.1% year-over-year, driven by our BFS and Healthcare clients. Europe declined 3.3% sequentially and 15.2% year-over-year. Finally, rest of the world declined 1.6% sequentially and grew 12.7% year-over-year. I will now provide our current guidance for our fiscal fourth quarter and year ending March 31, 2020. Revenue in the fourth quarter of FY '20 is expected to be in the range of $353.4 million to $361.4 million. Non-GAAP diluted earnings per share in the fourth quarter of FY '20 is expected to be in the range of $0.90 to $0.96. Our Q4 fiscal FY '20 non-GAAP EPS guidance anticipates an average share count of approximately 33.6 million.

For fiscal ending March 31, 2020, we expect revenue to be in the range of $1.336 billion to $1.344 billion. Non-GAAP diluted earnings per share for fiscal year 2020 is expected to be in the range of $2.63 to $2.69. Our guidance excludes $23.7 million of stock compensation expense and $17.4 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 sections of our website. At the midpoint of our fiscal Q4 guidance, revenue is expected to increase 6.7% sequentially, slightly above our prior expectations. Our strong sequential growth in Q4 reflects the following factors: first, a higher number of billing days versus Q3; second, the resumption of growth at our large European banking client, consistent with our prior expectations, as well as the usual Q4 revenue acceleration at our large European telecom client; third, continued organic growth with other clients in line with our expectations; and finally, with respect to our largest client, we expect Q4 growth above our prior expectations. As disclosed in our January 8-K filing regarding Citi, Virtusa was one of a handful of firms selected to continue as a preferred vendor at our largest client.

In return for becoming a preferred vendor, the firms selected, including Virtusa, agreed to provide our clients with contractual productivity saving commitments from April 1 to December 31, 2020, which if not achieved, would require us to provide certain discounts. This spend reduction is very similar to what we experienced at the time we acquired Polaris. We believe this development is beneficial to us as Virtusa is now one of only a handful of preferred vendors and we are able to compete for work previously done by those firms impacted by vendor consolidation. This means we now have a much larger addressable market with our client and, as you know, our preferred vendor status has historically enabled us to drive strong growth with them. As we discussed above, our fiscal Q4 revenue expectation from our largest client is above our prior expectations. Our business momentum remains positive, and we expect budgets to remain broadly steady. However, we continue to monitor the impacts of macroeconomic trends and recent global health events on our clients' decision-making patterns, especially in Asia Pacific and Europe.

Lastly, we are also closely watching the potential impacts of Brexit on our clients' demand, particularly in the U.K. Turning to Q4 margins. We expect our non-GAAP operating margins to be lower than our previous expectations, driven primarily by lower utilization and higher mix of contractors. In fiscal Q4, we expect an approximately $3.2 million or $0.10 per share tax benefit from the approval of our previously discussed merger of our Indian legal entities and election of lower tax rates in India. This tax benefit reflects a full year catch-up and will lower our Q4 GAAP ETR to approximately 21.2% for the fourth quarter. Our non-GAAP effective tax rate is expected to be 26.6% for full fiscal year 2020 versus 30.3% previously stated, reflecting the tax benefit catch-up in Q4. Please note that we will continue to recognize this tax benefit as a result of merger of our Indian legal entities ratably each quarter going forward. Normalizing for nonrecurring benefits in second half, we expect our FY 2021 and beyond non-GAAP tax rate to be approximately 28%. For FY '20, at the midpoint of our guidance range, we continue to expect revenue growth of approximately 7.4% in reported currency. In constant currency, we expect revenue growth of 7.8% at the midpoint. In addition, we expect 40 basis points of non-GAAP operating margin accretion in FY '20 versus 60 basis points previously.

Our current FY '20 non-GAAP guidance anticipates $19 million of interest expense. We now expect strong non-GAAP EPS growth of 25% in FY '20 at the midpoint. In conclusion, we delivered strong non-GAAP operating margin accretion and cash flow in fiscal Q3. For fiscal '20, we are set up well for strong EPS growth of 25% at the midpoint of our guidance, reflecting top line growth consistent with our prior expectations at the midpoint, continued margin accretion and significant tax benefits from the combination of our Indian legal entities. Our expected strong Q4 performance sets up well for continued revenue growth, margin expansion and robust EPS growth in FY '21. Demand for digital transformation services remains robust across industry groups and geographies. As a result, we remain confident in our ability to grow revenue faster than overall market. While our business momentum remains positive, we will continue to monitor macroeconomic trends and their potential impact on demand and our banking clients in the U.S. and U.K.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Mayank Tandon with Needham & Company. Please go ahead.

Kyle Peterson -- Needham & Company -- Analyst

Hey, good evening, guys. This is actually Kyle Peterson on for Mayank. So first question, I just wanted to see just the head count dipped just a touch. Is there anything going on there? Was that seasonal or kind of cost saving? Or just wanted to get a little color.

Kris Canekeratne -- Chairman and Chief Executive Officer

I'm sorry. Ranjan, can you just update a little bit more on the head count?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

I can. So Kyle, yes, you're right. There was a reduction in the head count from Q2 to Q3 levels. But it's largely due to the head count realignment that we've been doing with the revenue forecasting that has been going at our large U.K. client. So it's largely due to that.

Kyle Peterson -- Needham & Company -- Analyst

Great. That's helpful. And then just as a follow-up, I just wanted to get a little color. I know you guys have given a lot of background on the digital, the 41% of revenue, I believe, this quarter, and that's growing nicely. Just wanted to see in the other part of the business, are there any kind of bright spots or growth areas that you guys wanted to call out? Or kind of how should we think about the other, call it, 59%, 60% of the business moving forward?

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes. Great question, Kyle. So as you can tell, we're seeing very strong momentum across all of our digital programs. And beyond the digital programs, while in general, most clients are compressing, they are business as usual or they've run the business budgets. What they're spending on, even in that part of the business, is on ways to increase and wring out efficiencies in terms of systems and platforms that can be potentially rationalized or consolidated. So Virtusa is actually capturing an increasing percentage of the transformation that's taking place even on the BAU side to help set up our plans, obviously, for cost reduction initiatives as well as in some cases, creating the foundation for them to be able to move workloads to the cloud. So as a matter of fact, we are seeing growth not just only on the digital transformation side of the business or the digital business, which is about 41% of our revenue. We're also seeing growth across the remaining 59% of our revenue, maybe at a slightly slower pace than the digital side. So we expect that digital engineering work will continue to grow faster than the company average. But nevertheless, we are seeing growth across the board.

Kyle Peterson -- Needham & Company -- Analyst

Alright, that's helpful color. Thanks, guys.

Operator

The next question is from Moshe Katri with Wedbush Securities. Please go ahead.

Moshe Katri -- Wedbush Securities -- Analyst

Hi, thanks for taking my question. I just want to start just very quickly, I'm not sure if I got that. Was there any FX impact during Q3? And then is there going to be any FX impact looking at Q4?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Q3 and if you take on the revenue item, there was like $600,000 to $700,000 of...

Kris Canekeratne -- Chairman and Chief Executive Officer

FX impact.

Moshe Katri -- Wedbush Securities -- Analyst

And yes, Q4?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Q4, it will be probably be bigger and more be in the about $2 million to $2.5 million range in the revenue line item.

Moshe Katri -- Wedbush Securities -- Analyst

Okay, OK. And then just going back...

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

But it balances itself out, as you know, on the margin line item. Then the margin line item, the impacts will probably be about like seven basis points over the [Indecipherable].

Moshe Katri -- Wedbush Securities -- Analyst

And then the Citi renewal, and we -- as I'm sure you know, we get a lot of questions on this. Any changes in terms of -- or thoughts in terms of how this actually gets embedded in the model starting, obviously, in the June quarter? We know it's going to be down year-over-year but maybe kind of reiterate what you're telling The Street about that?

Kris Canekeratne -- Chairman and Chief Executive Officer

Sure, Moshe, this is Kris. Let me take that. So as you know, we entered into an 8-K and that 8-K, as Ranjan mentioned in his prepared remarks, is based on productivity-based spend reduction, underwritten by a discount in the event we are unable to drive efficiencies to meet the spend reduction. This is very, very similar to the structure of the spend reduction that we entered into with Citi, when we acquired Polaris. Now in return for this, and as a part of being a strategic preferred partner across Citi, we now have an additional addressable market opportunity of approximately $450 million as stated in their RFP, which we responded to in terms of providing them with the spend reduction and in return for the spend reduction, being able to have a much larger addressable market. But in addition to this, and this is something that we've learned about just about a week ago or less. And after a very comprehensive analysis, Virtusa has recently been impaneled into Citi's Global Consumer Bank as their preferred partner. So this further expands our addressable market at Citi. And as you know, the Global Consumer Bank at Citi is a very significant investment spender, specifically in digital transformation and digital engineering. With this, we expect that Citi will continue to be a $200-million-plus client based on the strategic nature of the work we do, the much larger addressable market available to us and the fact that the Global Consumer Bank impaneled Virtusa as their strategic preferred partner.

Moshe Katri -- Wedbush Securities -- Analyst

Okay. So just to confirm, the Citi is going to be flat year-over-year and it's not going to be down? I think we're looking for that to be down at least 10% in fiscal '21.

Kris Canekeratne -- Chairman and Chief Executive Officer

So what -- obviously, in this current fiscal year, I think Citi did approximately $219 million with us in fiscal year '19?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

That's right.

Kris Canekeratne -- Chairman and Chief Executive Officer

They'll probably do somewhere north of $208 million in...

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

That's fiscal -- actually, it's likely to be [Technical Issues]

Kris Canekeratne -- Chairman and Chief Executive Officer

Higher than [Technical Issues]. Probably do over $210 million in fiscal '20. And we expect that, going into fiscal '21, that Citi will operate as a $200-million-plus client.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So Moshe, if you remember, in our Q1 call, we said that Citi will decline in high single digits. And when we exited our Q2, we talked about that Citi will really decline in mid-single digits. And like we talked in the prepared remarks that Q4 it's now expected, Citi will be doing slightly better than expectations. So with all this put together, now we're really looking at Citi really declining as low single digits versus where we started. So Citi has done better than where we started the year.

Moshe Katri -- Wedbush Securities -- Analyst

Okay. That's helpful. So low single-digit declines versus where we were before, which I think was low double digits, right?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yes, we were -- I mean, we had called it out in our Q4 -- Q1 call to be at high single digits.

Moshe Katri -- Wedbush Securities -- Analyst

High single digits, OK. And then just one more question. I'm assuming at this point, you're sticking -- you will be sticking with your long term guide, which is high single-digit growth, maybe 9% to 10% growth down the road with margin expansion opportunities. That hasn't changed?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

No, I think you're right. I mean we continue to feel good, this was an important year. We did have specific client issues in Q1 and Q2, the guidance that we had put together for ourselves, Q2 growth, Q3 growth, Q4 growth, I mean Q2 has shown the actual performance as shown in line with guidance. So if we continue to perform based on our Q4 guidance, we will be exiting strongly FY '21 and -- FY '20 and entering very strongly into FY '21.

Moshe Katri -- Wedbush Securities -- Analyst

Understood, thanks a lot.

Operator

The next question is from Hitesh Malla with JPMorgan. Please go ahead.

Hitesh Malla -- JPMorgan -- Analyst

Hi, guys, thanks for taking my question. So I just wanted to ask, directionally, how should we be thinking about overall BFSI growth rates beyond this year? You've said Citi is expected to be flat or flat, but like other accounts, such as the large U.K. bank should grow. So just wondering like how we should be thinking about the vertical's near term outlook?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yes. So if we actually take the banking segment, which is where Citi and Lloyd's, say, land, the company overall growth was about 7%. But we had specific issues in the large -- Citi is our large client and the large European client. You back that and you really look at the growth of the banking segment, the banking segment growth was in mid-teens. So very strong growth that we saw in our banking clients. Now that being said, in our prepared remarks, I mean, look, we are watchful of certain macroeconomic events that are taking place. So Brexit as an event that is taking place in U.K. is unfolding. Some of the healthcare events that have just started to unfold in the last few days. They may or they may not have an impact on our clients, and we should all be watchful of them. But this year, ex those two specific client spending issues, we still had a very strong banking growth year.

Hitesh Malla -- JPMorgan -- Analyst

All right. And then as a quick follow-up, how much of EPS guidance would -- like the EPS guidance increase stems from below-the-line items? And if you could share like some views on long-term FCF margin target, so that would be great, yes. Thanks.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So if you look at the guidance-over-guidance, our last guidance was $2.58. We've really gone to $2.66 now. So that means we've had an $0.08 guidance increment in there. And that's made up of $0.14 of lower ETR. The why behind the lower ETR is the merger of our legal entities as well as some of the benefits that we will get because of lower tax rate, which is being offset by lower OPM guidance, which like we said in our prepared remarks, that is 20 basis points lower than what we had previously expected. So that lower EPS will -- lower OPM will come out about $0.07 and then $0.01 is rounding. So if you take $0.14, $0.07 and $0.01, you should really come back to the $0.08.

Hitesh Malla -- JPMorgan -- Analyst

Thanks guys.

Operator

The next question is from Maggie Nolan with William Blair. Please go ahead.

Ted -- William Blair -- Analyst

Hi. This is Ted [Phonetic] on for Maggie. So I wanted to ask about your diversification efforts. So as you continue to diversify the business, are there organizational changes that need to be made in terms of how the engineers or the sales force are structured?

Kris Canekeratne -- Chairman and Chief Executive Officer

As a matter of fact, Ted, we had -- diversification is not a new topic for us. It's actually something that we've been working on for quite some time. And going into this fiscal year and before the start of fiscal year '20, so this was basically about a year ago, we had structured our organization to basically better execute against our diversification strategy, which is essentially threefold. The first is geographical concentration that we had or geographical diversification. And we're basically going into the year, structuring Virtusa to be able to have very strong leadership across geos that had autonomy to be able to drive those geos. And we felt that, that would then provide us with the foundation required to expand geos and especially expand international faster. That was the first. The second, we had already made specific commitments in terms of our allocation of capital around sales and marketing, to basically expand and increase the investments into specific industries where we thought there was significant potential.

And those industries specifically were healthcare, technology and telecom. You can see that many of those investments are panning out very well today, especially given the growth rates that we are seeing across those areas that we invested slightly ahead of the curve going into fiscal year '20. And the last part of our diversification strategy has to do with identifying high potential accounts, especially accounts that may be $1 million to $25 million in size, making certain that they have the potential to be $50 million to $100 million accounts. And then investing in those accounts and allocating additional capital sales and marketing investments into those accounts so that we could grow them faster. And I think that as we continue, you will see this three-pronged strategy play out. And we will see that our diversification plans will continue to yield strong diversification and reduction in concentration.

Ted -- William Blair -- Analyst

Great. That's very helpful. I wanted to -- as a follow-up, wanted to ask about the pipeline for acquisitions. What verticals are of particular interest for you guys from an M&A perspective? Are you looking for one large flagship customer in target companies or broad vertical exposure? Just maybe a little commentary on your overall M&A strategy, that would be great.

Kris Canekeratne -- Chairman and Chief Executive Officer

First and foremost, let me start by saying that we've been very pleased, obviously, with the results of the last two acquisitions that we've made upscale, namely Polaris and eTouch. And I think you've seen the results that have greatly benefited Virtusa's platform. Having said that, we are very, very focused on continuing to extract the synergies of those acquisitions. And we take a look at moving forward, we're obviously not looking for any significant or sizable acquisitions. We think they have a great platform. But where it makes sense for us, which has to do with either new technology reach or driving new technology expansion, we might consider certain types of acquisitions. If geographical opportunities present themselves, we might. And the third obviously is industry-based. But once again, just to temper any of the discussion here, we are much more focused on integrating and leveraging the acquisitions we've already made and then very selectively looking at ways that we might be able to strengthen certain areas.

Ted -- William Blair -- Analyst

Thank you.

Operator

The next question is from Joseph Foresi with Cantor Fitzgerald. Please go ahead.

Daniel Reagan -- Cantor Fitzgerald -- Analyst

Hi. This is Daniel Reagan on for Joe. I wanted to dig a little deeper and ask what you are seeing in terms of spending patterns from your largest clients? And hopefully, a little bit more color on how you're shaping your strategy around it?

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes. So clearly, it's very clear to us, digital transformation and cloud transformation are becoming very, very significant investment areas across our large clients, across the next set of clients and, quite candidly, all enterprises in all industries that we operate in, so it's pretty much across the board. And in that area, what are they spending on? They're basically spending on developing digital journeys that provide delightful experiences to their end consumers. They are spending on creating digital storefronts so that consumers can do all of their transactions through their digital devices, as opposed to forcing consumers to go to a specific place to transact. To support these digital storefronts, they are investing in building very robust middleware layers that can essentially bridge the systems of record or the legacy systems with this new requirement with digital. And then finally, across the board, our clients are spending -- at varying degrees of maturity, though, they are spending on identifying workloads and moving these workloads to both private and public cloud.

By industry, the adoption rate is slightly different. And we are seeing that second to big tech, high-tech banking and financial services are greatly expanding their investments in digital and cloud. A few banks are looking at how they could potentially become technology companies providing banking services as opposed to banks leveraging technology to execute their services. Completely different paradigm, and once again this is driven by consumer demand of wanting to be able to transact with service providers, whether they be banks, insurance companies, healthcare companies, telecoms companies, media companies, to be able to transact through digital devices as and when they require or as and when they want to transact and be able to have the flexibility of doing the entire transaction end-to-end on their digital device. So this is where we're seeing the most of the investments going. Beyond that, on the run the business side or the BAU side, we are seeing many of our clients now looking at ways of rationalizing and consolidating many of their applications, and there are hundreds and hundreds and thousands of applications, so they can become a lot more efficient.

Daniel Reagan -- Cantor Fitzgerald -- Analyst

Got it. And just building off of that, so you had noted you're seeing strong momentum with media and communications clients. I'm wondering what opportunities you're seeing here? And how we should think about growth for these segments? Thank you.

Kris Canekeratne -- Chairman and Chief Executive Officer

So in media and communications, we are clearly seeing the introduction of 5G being a catalyst of media and communications companies to introduce a whole series of services that essentially eliminates the latency that used to exist. And now with that reduced latency, there are a whole number of new business models that they can actually provide their end consumers, including providing a much stronger and more effective AI-based engagement model that predicts what the next best action might be and do that real time. So we're seeing an increasing number of new business models that are coming up within telcos and media companies, notwithstanding some of the legacy within these firms, prevent them from being able to provide these seamless end-to-end journeys and being able to run things like AI workloads by leveraging the elasticity of a public cloud implementation. So we are seeing greater adoption of public cloud within telco and media companies, we are seeing far greater investment into building those middleware bridges that I described earlier and naturally then building new products, new services and creating a digital-first and digital-only experience for their end consumers. So we expect, because of this, that communications and media will continue to be a growth engine for us moving forward.

Daniel Reagan -- Cantor Fitzgerald -- Analyst

Great, thank you.

Operator

The next question is from Vincent Colicchio with Barrington. Please go ahead.

Vincent Colicchio -- Barrington -- Analyst

Yes. Ranjan, how much higher can you increase utilization rates from current levels? Could you remind us of how much higher you could target rates?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yes. So the realignment of our delivery platforms between Virtusa and Polaris and -- we believe that we could really go out and up to mid-80% percent in terms of delivering utilization. Inside of it, if we look at it, we continue to see more opportunity actually on our on-site utilization, which is very margin sensitive. That being the case, we wouldn't really expect all that utilization gap to really close out in one year. We would really try to continue to have utilization increments probably about like 50 to 75 basis points on an annual basis.

Vincent Colicchio -- Barrington -- Analyst

But it's reasonable again to see some of that, a meaningful amount to close in '21, correct?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yes. Vincent, if you look at it, our deal size continued to increase. Our deal size increased on revenue as well as our deal size continues to increase on our pipeline. Our deal tenure has continued to increase slightly. So all those things make it easier for you to continue to increase utilization.

Kris Canekeratne -- Chairman and Chief Executive Officer

So I can just build on what Ranjan just said when so overall, our pipeline has expanded 22% year-over-year. Our digital pipeline is up 34% year-over-year. That is now for the third consecutive quarter, where our digital pipeline has grown over 30% year-over-year. And as Ranjan just said, our average deal sizes for the total pipeline is up over 14% year-over-year.

Vincent Colicchio -- Barrington -- Analyst

And then one more. After the Brits decided to go ahead with Brexit finally, at that moment in time, did you see any change in client sentiment? Or is it just too early to identify that? I might have to get back to you.

Kris Canekeratne -- Chairman and Chief Executive Officer

It's a great question. So we are watching this very carefully. I do believe it's a little too early to predict exactly what is going to transpire as a result of -- in a post-Brexit environment. In prior conversations, we've talked about the importance of separation because now many of the U.K. banks cannot hold data -- not just banks, U.K. enterprises cannot hold data in the U.K. to service European customers and vice versa. So you can tell that from a long-term perspective, that's going to create more opportunity. In the near term, it's entirely possible that based on Brexit uncertainty and some of the ramifications of the Brexit uncertainty, that certain budgets might be under pressure. So it's something that we are watching carefully. I will share with you however, that our large U.K.-based client, while once again it's a little too early to provide guidance for fiscal '21, they are low point with us, as expected, was in Q3. Despite that, they actually grew slightly better than our expectations. We expect fairly strong growth in Q4. As I previously had mentioned and after a very comprehensive review of over 20 IT services and digital engineering traders, Virtusa selected us as their #1 digital engineering partner. Now that our client is beyond -- now that our large client is beyond their second half calendar year '19 budget issues, that naturally had a fairly significant impact on their spend with us and others during that second half. And by virtue of Virtusa being selected as their #1 digital engineering partner, we expect that our large U.K.-based banking client will be a growth account moving forward.

Vincent Colicchio -- Barrington -- Analyst

Thanks for the color. That's it for me.

Operator

The next question is from Bryan Bergin with Cowen. Please go ahead.

Bryan Bergin -- Cowen -- Analyst

Hi, good afternoon. Thank you. Just wanted a clarification on your large banking client. Understanding it sounds like fiscal '21 is going to be flattish over the $200 million run rate, is there anything notable in the margin structure or margin impact based on the disclosure that you had a couple of weeks ago?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So Bryan, I think it's going to be a little bit early to comment on that. Let me explain why. If you look at it, the productivity savings that we have contractually committed, some of them are going to come through savings, some may come out through discounts, very similar to what happened back in '17. And that really gets shape as the bottoms-up revenue visibility is put together, and you can really have a much better idea of where the productivity savings and how much can be derived and how much you really will have to pocket out as discount. That whole piece is putting -- getting computed as we -- we'll probably spend Q4 working on all that stuff, and we could probably walk you through better in May. So I don't think we have full visibility in terms of the margin impact at the account level, but from a company level, we continue to feel we are going to be a margin-accretive company. We continue to believe we are going to be a revenue growth company, and we continue to believe that we will be a double-digit EPS growth company.

Bryan Bergin -- Cowen -- Analyst

Okay. And just on the margin, so I did -- what -- your outlook for 4Q with some of the increased subcontractor usage and utilization down, is that kind of just a 4Q incident? Or is there something lasting that kind of carries through early next year? Can you reverse that quickly? This is the question.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yes. And we've done that before either -- it's a strong quarter in terms of us, in terms of revenue growth. And yes, we -- our mix of contractors is higher than what we had previously expected, but we've seen that happen before to us in quarters, and we've been able to churn it down in the following quarters. So this will probably be one of the gross margin drivers that we will continue to work on ourselves in FY '21.

Bryan Bergin -- Cowen -- Analyst

Okay. And then just on the comm and technology segment, understanding you have very good strong growth at your large tech client, how are you seeing new opportunities progress in high-tech? Anything notable in that, this 15 to 25 high-potential account range that your team might come across in the near term?

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes, I think we mentioned that we've had a fairly large number of new clients that we have engaged with that have recently crossed the $1 million mark. Some of them are from high-tech. And they're actually very enthusiastic about both our presence and the increasing S&M investments that they are making in the high tech, big tech community and that's really, we believe that there's a significant opportunity ahead of us in the high-tech corridor.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

And right, in our high-tech, 30% of our Healthcare clients fall into high-tech. And as you have seen, the Healthcare portfolio for us is expected to grow, year-over-year, 50%. So you could tell the contribution that, that is also having to our C&T clients. So Healthcare, we talked about that large deal in Q1 that we had embarked upon, that continued to flow well through the year. So there's a lot of Healthcare that's also sitting in C&T.

Bryan Bergin -- Cowen -- Analyst

Okay, thank you.

Operator

[Operator Instructions] The next question is a follow-up from the location of Maggie Nolan at William Blair. Please go ahead.

Ted -- William Blair -- Analyst

Hi. One follow-up question for me. So I know you talked about the 40 basis of margin accretion in fiscal '20. So over the long term, how should we think about the long-term expansion of the margins? Is the 100 to 150 basis points of expansion still on the table?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So fair question, we continue to be focused on the mid-teens margin growth initiative for ourselves. That continues to be a strategic goal for us. Yes, there could be years just like we had, where we learned from our experience this year. We could have short spending, client spending impacts that may result in margin -- or we could have years, where we may expect to do a lot of growth initiatives. We see a lot of digital and C&T growth in front of us. So those could be years that maybe are lighter than that 100 and 150 basis points annually. But overall, we continue to be committed for the margin growth of mid- teens. We continue to be committed for revenue growth, and if that could continue, should result in EPS growth of double digits.

Ted -- William Blair -- Analyst

All right. 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. I'd like to take this opportunity to thank all of our global team members for their dedication and commitment. Thank you all for joining us, and we look forward to updating you at the end of our fourth quarter and full fiscal year.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

William Maina -- Investor Relations

Kris Canekeratne -- Chairman and Chief Executive Officer

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Kyle Peterson -- Needham & Company -- Analyst

Moshe Katri -- Wedbush Securities -- Analyst

Hitesh Malla -- JPMorgan -- Analyst

Ted -- William Blair -- Analyst

Daniel Reagan -- Cantor Fitzgerald -- Analyst

Vincent Colicchio -- Barrington -- Analyst

Bryan Bergin -- Cowen -- Analyst

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