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Virtusa Corp (NASDAQ:VRTU)
Q1 2021 Earnings Call
Jul 30, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Virtusa Corporation First Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] [Operator Instructions]

I'd now like to turn the conference over to Will Maina, Investor Relations. Please go ahead.

William Maina -- Senior Vice President

Thank you, and welcome to Virtusa's First Quarter 2021 Earnings Conference Call. Where we'll be discussing our financial results for Virtusa's first quarter ended June 30, 2020. On the call with me are Kris Canekeratne, our Chairman and Chief Executive Officer; Anuranjan Kalia, Executive Vice President and Chief Financial Officer. Certain statements made on this call that are not based on historical information are forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

During this call, we may make express or 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; the impact on our operations due to the COVID-19 pandemic; 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 fluctuations. We provide non-GAAP operating income, non-GAAP adjusted net income and non-GAAP earnings per share, which we believe provide insight into the operational performance of our business.

Reconciliations of non-GAAP to GAAP measures are included in today's earnings press release and data sheet, which can be found on the Investor Relations page of our website. We also present a reconciliation of cash, cash equivalents, short-term and long-term investments that we believe provides sight into the cash position of our overall liquidity. Please note that a supplemental data presentation to our first quarter results has also been posted to our Investor Relations website. For additional disclosures regarding these and other risks faced by Virtusa, 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, and good evening, everyone, and thank you for joining us today on our first fiscal quarter 2021 conference call. First, I would like to provide a brief update on the effects of COVID-19 on our operations and our response. Virtusa continues to do everything in its power to help ensure the health and safety of our global team members and community, while providing the same superior service to our clients in a safe and sustainable manner.

Our cross-functional COVID-19 task force continues to meet on a regular basis to coordinate the company's ongoing response to the pandemic and implement initiatives focused on safety protocols for personnel and facilities, team member support, technology enablement, productivity and communications with clients to manage the crisis. We are maintaining restrictions on travel to business-critical situations, enforcing strict visitor policies at our facilities and have stood up support groups to help our team members through these challenging times.

We are monitoring the evolving nature of the pandemic very closely and will continue to adapt depending on the severity of the virus going forward. As I mentioned on our last call, I am extremely proud of our global team for stepping up during this unprecedented time and ensuring we continue to serve as an agile and trusted partner that our clients can rely on to address their most critical technology needs at any time and under any circumstance. Let me now move on to our Q1 2021 financial highlights. Our Q1 performance reflects a focused commitment to the execution of our Three-Pillar strategic plan, our agile and methodical response to the many challenges presented by the pandemic and our ability to support global clients as they work through these unique challenges.

The combination of these approaches, coupled with our commitment to rigorous execution and top to bottom accountability, has enabled us to deliver first quarter results that were materially better than our initial expectation. Specifically, total revenue for the first fiscal quarter was $301 million, representing a decline of 8.7% sequentially and 5.6% year-over-year. Our non-GAAP operating income for the quarter was $14 million, representing a non-GAAP operating margin of 4.7%, and our Q1 non-GAAP EPS was $0.20.

We expect this positive trajectory to continue with our current fiscal Q2 revenue guidance at $315 million at the midpoint, reflecting 4.6% sequential growth and EPS of $0.53. We also expect our Q2 non-GAAP operating margin to expand approximately 460 basis points at the midpoint of our guidance. For the full fiscal year 2021, our current expectations show positive improvement versus our prior outlook. Ranjan will delve deeper into these numbers later on the call. In sum, the numbers are telling a story of our ability to not just weather this storm but to strengthen our client relationships and find new opportunities for growth.

Let me now provide a little more color on what we are doing to drive that momentum. When the world paused, we did not. We made a decision to respond aggressively to drive forward by focusing on how COVID-19 was going to force the Global 2000 to rethink their IT priorities, reallocate their investment and reassess their partner to ensure that every dollar spent would yield both short and long-term top and bottom line benefits. We've seen across every industry a heightened demand for technology that will reduce cost of operations, increased business agility and improve their ability to meet the needs of a post-COVID world.

Achieving these outcomes while effectively doing more with less requires a full-service engineering partner like Virtusa that can deliver end-to-end solutions that incorporate the full advantages of deep digital and cloud transformation technologies in a way that is fast, efficient and cost-effective. The pandemic has led every major corporation to rethink its work policies and institute remote work. Because of our depth and breadth of experience with managing and enabling remote workforces, demand for Virtusa's technical abilities around remoting, virtual execution and our solutions and services has intensified as companies adapt to the new remote normal, a trend that will likely continue beyond the pandemic.

The emerging needs of enterprises during and post COVID-19 align very well with our strength and capabilities. As clients look to relocate budgets, they are seeking to optimize and consolidate their vendor ecosystems and reduce costs through increased offshoring and higher efficacy. Our ability to deploy flexible, agile resources across a wide variety of projects and technologies is driving demand for our remote Agile Squad model and Hyper Distributed Agile solutions. This differentiates Virtusa in a market that is seeking efficiency and results.

In the fourth quarter, we saw an increasing number of clients initiate conversations about transitioning work from other suppliers over to Virtusa and accelerating strategic supplier discussions with us. This consolidation trend continued in the first quarter, and we now have 70% more strategic supplier partnerships than we did a year ago. In addition, regulatory compliance continues to be a steady source of funded projects, especially in banking and financial services, as compliance with the numerous regulations has not been scaled back during the pandemic. Our deep industry expertise, combined with our agile digital engineering capabilities, positioned us very well to win new and expand existing engagement.

Let me now move on to describe in more detail our Three-Pillar plan. As we have been responding aggressively to these pandemic induced market needs, the first quarter also saw an unwavering execution of our Three-Pillar strategic plan. As I shared on our last call, the plan is our detailed road map to not just offset the challenges brought on by the economic slowdown but to build a foundation for sustainable long-term growth and category leadership. It's designed to achieve three critical outcomes: First, profitable revenue growth; second, revenue diversification, which can be categorized by geography, industry and client; and third, increasing gross and net margins. We've made solid progress in each area.

On profitable revenue growth, an important element of profitable revenue growth is a larger and higher quality pipeline. We've achieved significant increases in our global pipeline, which more than doubled in the fiscal first quarter from a year ago. This growth is a function of new policies, programs and campaigns, targeting new business, driving account margin thresholds and accelerating core business development with our top digital and cloud partners. Much of the pipeline growth represents digital and cloud transformation work, reflecting both market demand and our unique expertise.

The work we are winning is essential to our clients' revenue performance, cost reduction and efficiency initiatives and has the potential to be long-term and recurring in nature. These annuity engagements increase overall revenue predictability, help with pyramid management, improve margins and result in profitable revenue growth. Moving on to our second pillar, revenue diversification. While masked somewhat by the impact of COVID-19 on certain clients, we continue to diversify our revenue in the first quarter. The benefit of diversification is more than reducing the risk associated with industry or account concentration.

A more diversified portfolio of industries, geographies and accounts tends to offer greater organic expansion opportunities, nurture new capability development and generate margin accretion. In fiscal Q1, our communications and technology industrial group grew 3.3% year-over-year, and communications and technology as a percentage of total revenue increased 200 basis points from 22% to 24% over the same time period. Our media, information and other revenue was up 16.6% year-over-year. Our Healthcare industry segment, which we are breaking out for the first time, was 14% of our overall revenue in Q1, and we are expecting strong sequential growth in Q2.

BFSI revenue in the first quarter declined 9.6% year-over-year and represented 55% of our total revenue, down 200 basis points from 57% of our revenue in Q1 2020. Lastly, revenue from our top non top 10 clients was 44% of our total revenue in fiscal Q1, up from 41% a year ago, in line with our diversification goals. Moving on to the last pillar, margin expansion. Our quick and decisive cost containment initiatives implemented at the onset of the pandemic in conjunction with profitable revenue growth and diversification is expected to result in margin expansion.

In the first quarter, we were pleased with our margin performance, which exceeded our internal targets, driven in part by higher utilization and efficient execution of our cost containment initiatives. We've significantly shifted our labor pyramid efficiencies, increased gross margin accountability and actively culled lower margin work. Based in large part to the cost containment initiatives we took at the onset of the pandemic and ongoing programs we are running, we expect margins will be over 9% in fiscal Q2 2021. Additionally, we expect to achieve low double-digit margin by the fiscal third quarter of 2021. We are pleased with the progress on our Three-Pillar plan and with the top and bottom line momentum.

We have a detailed road map that we will continue to execute upon in Q2 and the second half of fiscal year 2021. It's momentum that is best captured in the first quarter pipeline metrics that I mentioned. Our overall pipeline more than doubled year-over-year, and our digital pipeline is now over 70% of our overall pipeline, which bodes well for expanding our digital revenue mix and capturing higher digital market share. I'd like now to drill down a little further and provide you with a few examples that show how we are leveraging our industry expertise, leading engineering capabilities and our creativity to compete for and win new digital and cloud transformation engagements in today's market.

To illustrate this further, I will highlight three examples that underscore our deep expertise in digital and cloud transformation services. We recently won a significant engagement focused on modernizing and scaling an order entry platform for the largest cable TV and home Internet service provider in the world. Virtusa provided Scrum team capacity for 10 parallel functional areas of the client's order entry platform. We leveraged our Digital Transformation Studio, or DTS, environment to ensure peak productivity and quality of our Scrum teams.

Virtusa helped define the architecture of this platform, including a proof-of-concept with AWS, developed end-to-end journeys and production rollout. Our solution handled record-setting volumes for new customer and existing customer orders for our client during the height of COVID-19. Virtusa was also recently awarded a significant cloud transformation engagement by leading healthcare and integrated delivery network company. Our clients were seeking a partner with Google Healthcare API and protected healthcare information, or PHI, experience.

We were able to leverage our Google partnership qualifications and the work we have done on our vLife healthcare and life sciences applications management around PHI and the identification of data to win this engagement. We also closed a significant cloud transformation partnership with a large telecom client. As part of this multiyear engagement, we will begin by migrating 90 of our client applications to AWS. Equally as important, we are helping to create a horizontal cloud practice to define and initiate our clients' companywide cloud adoption, positioning us extraordinarily well to continue to win cloud transformation work with our clients.

In closing, our innovative agile response to the current market conditions and changing client needs and the solid foundation we are building by executing on our strategic Three-Pillar plan are having a positive and material impact on our top and bottom line performance. This is creating sustainable momentum that will allow us to achieve our longer-term financial objectives and drive shareholder value.

We are confident that our uniquely strong end-to-end digital and cloud capabilities that are delivered by our industry specialized and certified agile engineering teams and are supported by our gamified remoting platform will enable us to gain market share in this uncertain economic environment. I'm incredibly proud of all our global team members for their unwavering commitment to Virtusa and to the clients we serve. Thank you for your time.

Now I'd like to turn the call over to Ranjan, who will provide more details on our first quarter results and will provide some details with respect to our outlook for the remainder of fiscal year 2021. 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 first quarter 2021. Revenue for the fiscal first quarter was $301.1 million representing an 8.7% sequential decline in reported currency and 8.2% decline in constant currency. Year-over-year, our first quarter revenue decreased 5.6% in reported currency and 5.2% in constant currency. Our first quarter revenue was ahead of our prior expectations of approximately $290 million. Spend at our BFS clients, driven by their cloud, regulatory compliance and cost efficiency initiatives drove the higher-than-expected revenue in Q1.

Gross margin for fiscal first quarter was 22.8% compared with 24.3% in the prior quarter and 26.4% in the year ago period. Our Q1 gross margin was ahead of our internal estimates, driven by slightly higher-than-expected utilization and execution of our cost containment initiatives. GAAP operating income for the first quarter was $7.2 million compared with $17.1 million in the prior quarter and $13.4 million in the year ago period. First quarter other expense was $6 million. This includes $1.3 million of net foreign exchange loss and $4.7 million of net interest and other expense.

Net interest and other expense includes $5.3 million of interest expense and $600,000 of interest and other income. GAAP diluted loss per share was $0.01 in the first quarter. This compares to EPS of $0.66 in the prior quarter and $0.15 in the year ago period. Now turning to our non-GAAP results. Non-GAAP operating income was $14 million in the first quarter compared to $19.7 million in the prior quarter and $24.2 million in the year ago period.

First quarter non-GAAP operating margin was 4.7%, ahead of our internal expectations, driven by the revenue beat and execution of cost-saving initiatives. Non-GAAP earnings per share was $0.20 in the first quarter, above our expectations. This compares to $0.41 in both the prior quarter and the year ago period. Turning to the balance sheet. Ending cash at June 30, 2020, was $289.3 million, inclusive of cash and cash equivalents, short-term and long-term investments. Our cash decreased by approximately $11 million sequentially after making a $59 million payment on our debt. Our cash flow from operations was a strong $56 million for fiscal first quarter, representing 18.6% of revenue.

Our DSO for the first quarter was 70 days, an 8-day improvement sequentially and 5-day improvement year-over-year, driven by record cash collections in the quarter. Now moving to our Q1 performance by industry group. Please note that this quarter, we have broken out Healthcare into a stand-alone industry group in order to provide you increased visibility into our performance. Our prior year results have been recasted to incorporate the new industry group reporting. BFSI revenue decreased 5.5% sequentially and 9.6% year-over-year, representing 55% of revenue versus 57% in the year ago period.

BFSI outperformed our expectations, driven by stronger performance at two large banking clients and at two large financial technology clients. Communication and technology revenue decreased 12.8% sequentially but increased 3.3% year-over-year. Our year-over-year growth in C&T was supported by growth at our large telco client. C&T represented 24% of revenue in Q1, up from 22% in the year ago period as we continue to drive further industry diversification.

Healthcare revenue decreased 12.1% sequentially and 12.5% year-over-year, representing 14% of revenue. Our first quarter healthcare revenue was impacted primarily by the timing of spend with two clients. We currently expect revenue growth at these two clients to resume in Q2, driving strong sequential healthcare revenue growth in the fiscal second quarter. Additionally, we expect healthcare growth to exceed company average in FY 2021. Media information and other revenue decreased 10.9% sequentially and grew 16.6% year-over-year, representing the remaining 7% of revenue.

We continue to see good momentum for our digital and cloud transformational services at our media clients. Turning to our geographical performance. North America revenue decreased 8.1% sequentially and 2.7% year-over-year. Europe decreased 9.5% sequentially and 20.1% year-over-year. Finally, rest of world declined 11.8% sequentially and grew 3.4% year-over-year. Given the uncertainties surrounding COVID-19, we are maintaining the suspension of our annual fiscal 2021 guidance. However, due to improving revenue visibility, we are reinstituting our quarterly guidance.

Revenue for the second quarter of 2021 is expected to be in the range of $311 million to $319 million. Non-GAAP diluted earnings per share in the second quarter of 2021 is expected to be in the range of $0.50 to $0.56. Our Q2 fiscal 2021 non-GAAP EPS guidance anticipates an average share count of approximately 33.6 million. Turning to the current demand environment. While COVID-19 continues to influence client spending, demand for our digital transformation and cloud transformation solutions remains robust, and we are capturing new opportunities to help our clients achieve their strategic and operational goals.

We are cautiously optimistic that demand will continue to improve over the course of this year but also realized client spend may remain under pressure due to the pandemic, thus impacting decision-making cycles and pipeline closures. In the current environment, workforce productivity, digital consumer experience and cost optimization initiatives are key areas of spend for our clients. As clients have been focused to adapt to a largely work from home model, we have seen increased demand for remote workforce solutions, such as productivity monitoring tools and workforce efficiency solutions.

As more business is getting done virtually, we are seeing our clients invest more in the digital infrastructure in order to modernize the consumer and employee experience and offer greater self-service options. To achieve cost optimization, our clients are focused heavily on cloud migration, increased automation and optimizing DevOps. Clients are also exploring increased offshoring and smaller scale vendor consolidation as ways to reduce costs, benefiting preferred vendors like us.

Finally, in the current environment, clients are partnering with us to reduce their overall IT spend through increased engineering productivity initiatives, such as technical debt reduction, effort reduction and end-to-end STL automation. At the midpoint of our fiscal Q2 guidance, the revenue is expected to increase 4.6% with sequential growth across all industry groups, led by our Healthcare and M&I industry group. Consistent with prior year's performance, our sequential growth rate in fiscal Q2 is expected to be the highest for the year.

For your modeling purposes, we expect Q3 and Q4 sequential revenue growth to be in the range of 1% to 2% as we incorporate fewer billing days from holidays in Q3 and calendar year budgeting process during our Q4. Our better-than-expected first quarter results, second quarter outlook and momentum in our business give us increased confidence that our full year FY 2021 results will exceed our prior expectations. Revenue outlook at our BFS, C&T and Healthcare clients has increased versus our prior expectations. We caution that another significant COVID-19 outbreak could further impact the market and our outlook.

As previously anticipated, we expect sequential non-GAAP operating margin accretion to resume in fiscal Q2, growing approximately 460 basis points sequentially at the midpoint. Our Q2 margin accretion benefits from a full quarter of cost-saving initiatives actioned in Q1, such as improving billable utilization, ongoing pyramid optimization, reduced subcontractor expense and shared services leverage. As Kris mentioned, we expect our non-GAAP operating margin to continue to improve over the course of FY 2021, reaching low double digits by the third quarter.

For the full year FY 2021, we now expect modest non-GAAP operating margin accretion above our prior expectations of flattish margins. Our margin accretion will benefit from revenue growth and the cost-saving initiatives I just discussed. For the remainder of FY 2021, we expect a non-GAAP tax rate of approximately 26%. In fiscal Q1, we incurred $700,000 of professional fees associated with a potential proxy deliberation as we expect, and we expect to book additional related expenses in the fiscal second quarter.

These expenses have been and will continue to be excluded from our non-GAAP results. In conclusion, we delivered better-than-expected fiscal first quarter revenue, non-GAAP operating income and margin and non-GAAP EPS. We expect our Q1 momentum to carry into fiscal Q2 and drive strong sequential revenue growth and margin accretion in the second quarter. Our Q1 results, business momentum and execution against our Three-Pillar strategy position us well for stronger than previously expected FY 2021 revenue, margin and EPS.

I would now like to turn the call back over to Kris for a few additional comments before we open the call for questions.

Kris Canekeratne -- Chairman and Chief Executive Officer

Thank you, Ranjan. Before I turn to the Q&A portion of today's call, I want to briefly address the activist investor and their recent notice to nominate three individuals to stand for election to the Virtusa Board of Directors at our 2020 annual meeting. Our Board is receptive to new ideas that are focused on creating value for all shareholders, and we have engaged in extensive dialogue with the activist to better understand their views and perspectives, and we look forward to continuing this dialogue.

Our Board also constantly evaluates its composition to ensure it has the right mix of skills to drive value creation. To this end, we recently appointed Abid Neemuchwala, the former CEO of Wipro Limited, a 28-year IT services industry veteran who oversaw that company's successful digital transformation to our Board. Including Mr. Neemuchwala, our Board has added five new independent directors since 2016, and we are currently conducting a process to add an additional highly qualified independent director.

We are pleased with the progress and the momentum we are seeing across the business, and our purpose today is to take you through the details of our results and key trends. As such, we would appreciate if you could keep your questions focused on the quarter and on Virtusa's broader strategic and operational outlook.

Thank you. And with that, operator, you may now begin the Q&A session.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Mayank Tandon with Needham. Please go ahead.

Mayank Tandon -- Needham -- Analyst

Thank you. Good evening. So I just wanted to start with maybe in the quarter, the bookings momentum that you saw. It sounds like things improved through the quarter. But just maybe give us a sense of how May and June fit versus April. And then based on your comments, it sounds like you are looking for the trends to continue the improvement through 2Q and then maybe at a more moderate pace in the back half of the year. Just if you could provide some perspective around the bookings momentum to give us some level of confidence in how that will translate into revenue growth for the remainder of the year.

Kris Canekeratne -- Chairman and Chief Executive Officer

Mayank, I'll start, maybe Ranjan can add some color. So much of the momentum that we saw had to do with the pipeline activities that we had actually described during our Q4 fiscal year 2020 earnings call. Now clearly, as a result of the onset of COVID, we saw some headwinds. Much of those headwinds dissipated toward the second half of Q1.

And in the second half of our Q1, we draw strong momentum in terms of pipeline conversion, in terms of renewals within our existing clients, etc, which really resulted in better-than-expected performance in Q1. We're also seeing the same pipeline momentum continuing into Q2. And we fully expect that in Q2, we will see better-than-expected performance, certainly than what we saw when we first provided full year expectations during our last call. Ranjan, if you'd like to add anything, please go ahead.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Kris, I think you covered mostly. Mayank, a couple of other comments. Yes, the latter part of Q1 was stronger than what we had expected it would be when we did our Q4 earnings call. So latter part of May and June was much stronger, which kind of gives us comfort with regards to the sequential growth that we are expecting in Q2. As you know, for Virtusa, the Q2 quarter is always the strongest quarter and we have strong guidance, we have a strong revenue for that. That also sets us well to, really, for the whole year.

And why Q2 really ends up being strong for us, there are a couple of factors behind that. One is the year-end budgets are really more set up at the project level. Q2 billing days are usually higher than Q1 billing days, that helps us. And in this quarter, we are really as we started at the beginning of year, we have started really carrying the quarter with a higher backlog than we even did it last year.

Those three pieces really give us comfort that the a 4.6% Q2 sequential guidance that we put together for ourselves. After that, for Q3 and Q4, we tapered down the growth a little bit, more so incorporating the lesser billing days that will be there in Q3 and the budgeting cycle. But strong Q1, and we feel good about our Q2 guidance.

Mayank Tandon -- Needham -- Analyst

Got it. And I guess the visibility should be a little bit better because you, in some ways, are giving guidance. If I heard you right, you said 1% to 2% sequential growth in the back half quarters. And then you gave guidance on margins as well. But 3Q, I would assume that some of that will flow through in 4Q, if you see the revenue uptick. So I guess, what I'm getting at is it sounds like the visibility is markedly better than what you would have thought maybe a couple of months ago.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

We agree with you, Mayank. Our revenue visibility is higher. The backlog that we are carrying for the full year, as we said today, when we compare it to last year at the same time, is higher. I mean our cost savings initiatives that we embarked upon, most of them have already been enacted upon. Now it's a question of realizing all of those. So the business platform, the revenue visibility is much better. But I would just want to correct, we have not issued guidance. We really provided color in terms of doing modeling and outlook.

Mayank Tandon -- Needham -- Analyst

Sure. And just one final question. It's good to see the commitment to margin expansion. I just want to get a better sense of the long-term model here. If we get back to some level of normalcy in terms of top line growth for Virtusa, do you think you can sustain margin expansion? And if you could remind us what the levers are longer term to maybe get to more of an industry type margin level longer term.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yes. Kris, I can start and, please, you can add. So Mayank, like you said, if you are able to deliver the margin accretion that we talked about, we're really going to be setting ourselves for high single-digit exiting in Q2 and then really setting ourselves for low double digits and growing margins in Q4 again. We are, like we had said it even in our last call, we our plans are to really get into that lower double digits Q4 this year, which is exactly what we wanted last year and for covert reasons, we could not do that.

If we are able to achieve that exit, that does really set us up for once again a strong margin growth back to our aspirations about 100 to 150 basis points on annual margin accretion. So we believe we can continue to do that. We're just a little bit behind this year. A lot of it was really COVID-related. And in terms of the drivers will continue to be, I mean, you look at our utilization, which is really running exiting Q1 at about 77%. We have a lot of room in our utilization to do, we have a lot of room in our pyramid optimization to do, we have room in our we do continue to reduce our contractor expense. And then over and above that, we believe we'll continue to deliver SG&A leverage.

Operator

And our next question will come from Puneet Jain with JPmorgan.

Puneet Jain -- JPmorgan -- Analyst

A nice quarter. So it does seem like financial services, non-Citi financial services business was flat in the quarter on a sequential basis, while healthcare and tech and communications business, which have been up for peers, were actually weak for Virtusa. So could you share, like, in which areas you expect this growth acceleration in second half and visibility given what you experienced in Q1?

Kris Canekeratne -- Chairman and Chief Executive Officer

Sure. Sure.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So Puneet, one sorry, go ahead, Kris.

Kris Canekeratne -- Chairman and Chief Executive Officer

No. Go ahead, Ranjan.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So Puneet, you're correct about sort of looking at from the perspective of the healthcare. But like I mentioned in my prepared remarks, is just we believe it's just a timing of the spend that happened for two of our clients. If the guidance plays out, the Q2 healthcare sequential growth will be very, very strong. And that will really set us up for the healthcare really being, like I said, an above company average growth. In fact, healthcare could be flat to marginally up in an environment where the company has a decline year-over-year. So from a healthcare perspective, we continue to feel good about it.

And the full year growth is also going to be driven by our banking and financial services clients. We are expecting continued growth at our banking. We are expecting growth in a larger our single largest line throughout the remaining quarters and also for some of the other banking clients and like I had mentioned, in the couple of the financial services clients. So the banking financial Banking & Financial Services segment would be strong. Health care would be strong. In fact, C&T will continue to be strong for the remaining of the year.

Puneet Jain -- JPmorgan -- Analyst

Got it. Got it. And how is the pandemic impacting execution against the Three-Pillar strategy? You said pipeline has doubled over last year, and you are also seeing market share gains. But I'd imagine like it could also result in vendors being less selective about growth to diversify or have like a revenue base to expand margins.

Kris Canekeratne -- Chairman and Chief Executive Officer

So let me start with the first two, and perhaps you can ask the last part of the question again. So on the pipeline side, we have seen very strong momentum in the pipeline. Just to provide a little bit more detail around pipeline. Our overall pipeline more than doubled year-over-year. Average deal size is up over 90% year-over-year. Win rates are about the same, while deal tenure increased. And perhaps most importantly, our digital pipeline grew by about 50% quarter-over-quarter and now represents 73% of our overall pipeline. Our digital revenue in the quarter was 61 point I'm sorry.

Digital revenue in Q1 was just over 61%, up about three percentage points from Q4, and we expect that, that trend will continue. Now I recognize that these are very strong metrics with respect to pipeline. And I want to provide a little bit of color as to what's driving the pipeline. So first is that our capabilities in and around digital and cloud transformation is, one, second to none in the industry and is resonating particularly well, especially in this COVID environment, and we believe in a post COVID world.

Second, over the last 12 months, we have built a formidable set of relationships with cloud service providers and digital service providers, the leaders, if you will, leaders in terms of either CSPs or DSPs, that has created a sales force multiplier for Virtusa. And now we have a far greater number of strategic supplier relationships. As a matter of fact, the number of strategic relationships that we have with Global 2000 and/or large technology clients is up 70% from a year ago, which has greatly expanded our addressable market, both in terms of receiving things like RFPs and/or generating proactive proposals.

So clearly, that has been a significant set of reasons or those three specific areas have created very significant pipeline momentum. And finally, of course, our decision to expand coverage by targeted sales and marketing campaigns that went after clients and prospects. Pandemic-induced technology needs also has resulted in very strong pipeline growth and pipeline momentum. Now beyond that, we also took the opportunity right at the onset of COVID to institute several cost containment initiatives. As a matter of fact, due as the pandemic was unfolding, it gave us a chance to accelerate many of our initiatives with respect to cost containment, which otherwise would have taken a lot longer to execute.

So this is the reason why we believe that we are in an extraordinary strong position to: One, increase market share in spend areas across all the industries that we work in; and two, execute that with a much stronger, much leaner platform because many of the cost containment initiatives that we initiated have already been put in place. And now we are starting to realize the full quarter benefit in Q2 and then additional benefits in Q3 and Q4. And Puneet, I know you had a third part of the question. If you could ask that once more, that will be helpful.

Puneet Jain -- JPmorgan -- Analyst

No, the third part was about the cost. You mentioned that it does seem like because of the pandemic, because of the disruption, you are forced to take some of the decisions to cut cost, which would have been difficult otherwise. Is that...

Kris Canekeratne -- Chairman and Chief Executive Officer

Correct.

Puneet Jain -- JPmorgan -- Analyst

Fair to say?

Kris Canekeratne -- Chairman and Chief Executive Officer

That is very correct. We were able to accelerate many of our initiatives as a result of this very significant pandemic. And as a result of that, we believe that our cost platform is much more conducive to yield stronger margin accretion. I believe that in Q2 alone, we'll see approximately 460 basis points of margin accretion, almost 2/3 of that coming on the gross margin side.

Operator

And our next question will come from Maggie Nolan with William Blair.

Ted -- William Blair -- Analyst

This is Ted [Phonetic] on for Maggie. Rajan and Kris, could you talk a little bit about your outlook and expectations for the second quarter? How does that change between the high end and the low end of your guidance range for revenue?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Sure. It's primarily, we like I said in our prepared remarks, we believe that all industry groups are really going to grow for us. The growth is really going to be led more so by healthcare, M&I, but everything is expected. I think for us, in terms of getting to the high end, it will probably be in a more growth opportunities that we do see in our pipeline being consummated, I would say, probably maybe C&T and Banking and Financial Services. But I will not be surprised that if all four of them continue to clock the way we planned at the midpoint. They all clock and really help us get to the high end, too. But more so it looks like Banking and Financials and C&T.

Ted -- William Blair -- Analyst

Okay. That's helpful. On the Banking and Financial Services, you mentioned some projects that you're doing there for the outperformance this quarter. How much of that was COVID-19 specific related projects that you guys are doing?

Kris Canekeratne -- Chairman and Chief Executive Officer

So Ted...

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Go ahead, Kris.

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes. So Ted, I'd say that some of the projects that we started were COVID-induced, but the type of engagements and the tenure of these engagements are much more in line with what our clients need to do, not just during COVID and some of the shutdowns, but in a post-COVID world. Specifically, they're looking at expanding their reach in terms of end-to-end digital. We find that Virtusa is extremely well recognized in that space that's driving a higher than normal set of initiatives and activities as clients bring more and more of their user customer and consumer journeys to digital.

So while some of these initiatives may have been precipitated as a result of COVID, much of the ongoing spend at our clients are moving into these programs that are creating more digital presence. The second area that's driving this happens to be cloud transformation. Cloud transformation has now become something that is very keenly embraced by enterprises and our clients as they realize that one of the few ways that they can service their employees or their customers from anywhere is to have a robust cloud infrastructure as opposed to data centers that were targeted primarily toward office space or specific offices.

And that therein lies yet another set of activities that were precipitated by COVID, but have a much longer tail as clients embrace cloud. So all of the work that we are doing may have started as a result of COVID-related activities, but the actual work itself was well beyond that of COVID specific COVID work.

Ted -- William Blair -- Analyst

Okay. And if I can slip in a last question here. What was the organic growth for the first quarter? And what was the expectations embedded in the guidance?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

It's all organic. We didn't consummate any acquisitions in Q1. And the growth no.

Kris Canekeratne -- Chairman and Chief Executive Officer

And that is also true of Q2.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yes, we did some tuck-in acquisitions last year, which continue to do well this year for full year, but we haven't really consummated anything in Q1.

Operator

And our next question will come from Bryan Bergin with Cowen.

Bryan Bergin -- Cowen -- Analyst

I wanted to ask about the high potential accounts. Can you just talk about your efforts there to add more work streams in the high potentials and your large clients? Did you sign any notable expansions here recently? Just give us that outlook, please.

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes. So Bryan, we have significantly expanded our strategic supplier relationships. As I mentioned in my earlier remarks, we today have a 70% higher strategic supplier partnerships with enterprise clients. That's creating significant opportunities for us across the board in terms of high potential clients that we now have the opportunity not only to receive RFPs before it goes to a broader audience behind the first line to receive those RFPs and also an opportunity to generate what we call proactive proposals into those clients. So our addressable market has significantly expanded, and you can actually see that directly in the pipeline growth that I described earlier.

Bryan Bergin -- Cowen -- Analyst

Okay. And as we think about just like the mix of your portfolio of clients, just trying to get a sense of where they're at as it relates to COVID, those that have or are still dealing with COVID fallout versus those that have kind of moved past that, have been able to assess the damage, so to speak, and have made budget decisions. Can you give us a sense on where you see the portfolio as far as those that you think are still susceptible to cuts versus those that are pretty solid from here?

Kris Canekeratne -- Chairman and Chief Executive Officer

So I think across the board, the initial impacts of COVID are well baked into their budget at this point for the remainder of the year. The only unknown is if there is a reprisal or if there is significant second leg of COVID, how that could impact our clients and their budgets. But notwithstanding, we believe that their spend has been pretty much baked for the remainder of the year. They have reallocated some of their spend to target specific programs that they require, specifically around digital and cloud, and in some case, reg and compliance work, to make sure that they can service both their customers, consumers and employees in a much better way in terms of being able to transact from anywhere at any time.

And as you well know, most enterprises have a long way to go, especially if you juxtapose enterprise digital capabilities with high-tech digital capabilities. They have a long way to go in terms of creating a true end-to-end digital experience for their consumers, and that's where we are seeing more and more of the budget dollars flowing. Fortunately for Virtusa, as I mentioned earlier, once again, we are second to none when it comes to digital engineering and cloud transformation, and we are seeing that rapidly in our pipelines and our pipeline momentum.

Bryan Bergin -- Cowen -- Analyst

Okay. That makes sense. Any supply side constraints as far as the clients not allowing any remote work from home arrangements left? Or is that all work through?

Kris Canekeratne -- Chairman and Chief Executive Officer

That's all behind us, Bryan. We did see some of that very early, I think I had mentioned, on our last earnings call, how we moved to work from home. Well before the India lockdown, we had over 95% of our practitioners and team members working from home. We had no interruption whatsoever to our clients with respect to the India lockdown.

During that initial phase, and this is in the March time frame, some clients had to get certain approvals from their clients and their customers to be able to enable us to execute work remotely. They happen to get that down in relatively short order. And in the latter certainly in the latter half of the second quarter and beyond, we have not seen any supply side issues or headwinds with respect to execution.

Operator

And our next question will come from Moshe Katri with Wedbush.

Moshe Katri -- Wedbush -- Analyst

Good quarter. Excellent execution in a very tough environment. I had a couple, Kris. So you've been talking about profitable growth. So maybe you can talk a bit about how you're approaching this versus the past. Or what are you are you changing compensation KPI targets for sales to get there? And then maybe you can talk a bit about I mean you spoke a bit about the near-term margin targets. What are the long-term margin targets in the business versus where versus prior targets?

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes. So Moshe, great question. Clearly, when it comes to growth, we are basically seeing very strong progress across the board. As I mentioned earlier, I think we are extremely well positioned given the spend area that's driving some strong momentum with respect to top line growth. We've taken we took several initiatives to restructure much of our execution platform As a result, right at the onset of the pandemic, that's enabling us to execute work, whether it be through remote infrastructures, whether it be agile teams that are working through our gamified platforms,etc. And all of that has positioned us extremely well for growth.

Now beyond that, one of the things that we have done that has that is contributing greatly to high quality revenue is the size and expanding the overall pipeline. It's giving us way more degrees of freedom. It's giving us more choice in terms of being able to be more selective, in terms of the types of engagements that we are pursuing aggressively and closing. As you know, our pipeline has expanded significantly. It's more than doubled in the last 12 months. So it's giving us greater optionality. Beyond that, we are also finding that our expertise and capabilities around cloud and digital is enabling us to capture a greater addressable market, especially now that we have a force multiplier when it comes to working with the leading CSPs and the leading DSPs.

So you combine all of this, and we expect that on an ongoing basis, we will see strong revenue growth. Our expectations are to grow revenue above our industry growth rate. As we grow our revenue above industry rates, we expect that we will see strong margin accretion. As a matter of fact, as we exit our Q4 fiscal 2021, we would expect to be in the low double digits or approximately 12% margin. We are actually considerably ahead on our margin goals for this year. I think you're seeing that already in Q2. We already mentioned that in Q3, we expect to get to double-digit margins and exit the year in the low double digits again.

Beyond that, we expect that we will accrete margins by about 100 to 150 basis points. And our goal is to get to the mid-teens margin in the mid to long term, which is the three to five year period. And we feel very confident, given the changes that we've made, given the rigor that we have with respect to pipeline activities, the diversification strategy that we deployed as a part of our Three-Pillar strategy, we feel that we are in very good stead to be able to accrete margins according to our plans and get to our mid- to long-term margin goals of mid-teens.

Moshe Katri -- Wedbush -- Analyst

Yes. That's really helpful in terms of details. And then so you're focusing on other "newer verticals." Maybe talk about some of your recent successes in terms of competitive wins. Why do you think you're winning versus, I don't know, are you winning versus incumbents? Are you just taking over internal IT? Maybe some color on that will be helpful.

Kris Canekeratne -- Chairman and Chief Executive Officer

Yes. And I'd say that this is probably true across all verticals, new as well as existing, or verticals that are expanding very rapidly like healthcare and tech. And even verticals like banking and financial services, where there is still significant potential and opportunity. So we are very differentiated in all the verticals. Simply stated, Virtusa is well known for what we call engineering arbitrage as opposed to cost arbitrage. And today, clients are looking for ways to be much more efficient and increase efficacy levels as opposed to the simple value of offshoring and offshore costs.

Virtusa is a leader in that space. And beyond that, when it comes to digital and cloud, they are highly differentiated. And our strategic partnerships, in all of our strategic partnerships, we have a highly coveted status in terms of execution, service excellence and the designation that we command with each of the CSPs and DSPs. So that's clearly driving differentiation. And beyond that, and especially during COVID, Virtusa quitted ourselves extremely well in terms of having no disruption whatsoever to our clients during the COVID lockdown.

Unfortunately, many of the other smaller providers and even some of the larger scaled generation one providers did not equip themselves so well. And we've seen a large influx of interest from clients to actually look at Virtusa as a strategic supplier and to transition some of the work away from either a bunch of subscale providers or very large generation one providers who may not be as nimble nor as agile as we are. So all of this is contributing, as I said, to pipeline growth rates that are more than double from a year ago.

And our win loss ratios haven't changed. Our deal sizes have kept expanding. And our digital footprint is expanding rapidly, which is obviously an area of significant investment across all the industries that we're operating in. And that's really what's generating the momentum.

Moshe Katri -- Wedbush -- Analyst

Great. And then last question, this is kind of more big picture. We recently hosted an investor call with the former CFO of Infosys, Mohan Pai. He was actually talking about this sector reaching an inflection point, especially as digital crosses 50% of mix. And he's kind of attributing that to COVID. So COVID seems to be driving rather than going the other way in terms of spending or funding for digital work. And in general, it seems that there is a consistent theme among your peers about expanding in very large pipelines. What's your view on that?

Kris Canekeratne -- Chairman and Chief Executive Officer

We are definitely seeing an expansion of digital and cloud transformation initiatives coming through our pipeline. We believe that, that is precipitated by COVID. We are also seeing a larger percentage of activity with respect to rationalization and consolidation of suppliers. Especially away from either very small providers and/or generation one providers and transitioning work to providers that have very strong digital capabilities and are agile and nimble. So we do believe that COVID is precipitating and/or has precipitated a fee change in terms of client spending in areas such as digital and cloud.

Operator

Our next question will come from Vincent Colicchio with Barrington.

Vincent Colicchio -- Barrington -- Analyst

Yes. Kris, are any clients asking for better financial terms? Or is that type of behavior past us?

Kris Canekeratne -- Chairman and Chief Executive Officer

Clearly, Vincent, during the peak and the height of COVID, we had several conversations with our clients about spend reduction, about concessions, about how they could actually make sure that the work that they have to get done is getting done in the most cost-effective way. Many of those conversations are behind us. We have worked with clients to understand what some of their issues are, and I've worked on programs with them and have provided certain concessions throughout this calendar year.

Many of those concessions actually come off as we start calendar 2021. But the number of conversations that we had during March, April and May have tapered down greatly in June and July, and we believe that the majority of those conversations and discussions are behind us. And obviously, all of that is baked into our fiscal 2021 expectations that we've shared.

Vincent Colicchio -- Barrington -- Analyst

And then one strategic question. As you reengage with the in the M&A market, given your strategy to diversify, will you be biased toward non-BFSI deals in the near future?

Kris Canekeratne -- Chairman and Chief Executive Officer

As we take a look at capital allocation, we'll be very mindful of the areas that we think are complementary to Virtusa and those areas could be industry based, where we need to strengthen certain segments of Virtusa in industries that we already operate in or potentially new industry areas that we might want to get involved with. We will look at M&A from the perspective of geographical reach and, obviously, technology expertise in a rapidly evolving technology landscape.

We believe that we have very strong leadership on many of these areas, whether it's technology or industry expertise. But having said that, as we grow and scale the firm, we have a list of areas where we think we can actually expand either organically or inorganically. And then that creates the opportunity for us to allocate capital against our strategic goals.

Operator

And this will conclude our question-and-answer session. I'd like to turn the conference back over to you Kris Canekeratne for any closing remarks.

Kris Canekeratne -- Chairman and Chief Executive Officer

Thank you. Thank you, everyone, for joining us today. I want to take this opportunity to thank our global team members for their dedication and devotion to our clients during a very unprecedented time, and we look forward to speaking with you at our Q2 earnings call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 71 minutes

Call participants:

William Maina -- Senior Vice President

Kris Canekeratne -- Chairman and Chief Executive Officer

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Mayank Tandon -- Needham -- Analyst

Puneet Jain -- JPmorgan -- Analyst

Ted -- William Blair -- Analyst

Bryan Bergin -- Cowen -- Analyst

Moshe Katri -- Wedbush -- Analyst

Vincent Colicchio -- Barrington -- Analyst

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