Virtusa Announces Second Quarter 2017 Consolidated Financial Results

Virtusa Corporation (NASDAQ GS: VRTU), a global business consulting and IT outsourcing company that combines innovation, technology leadership and industry solutions to transform the customer experience, today reported consolidated financial results for the second quarter fiscal 2017, ended September 30, 2016.

Second Quarter Fiscal 2017 Consolidated Financial Results

Revenue for the second quarter of fiscal 2017 was $210.1 million, an increase of 2.2% sequentially and 46.9% year-over-year. On a constant currency basis, (1) second quarter revenue increased 3.2% sequentially and 49.4% year-over-year.

Virtusa reported GAAP income from operations of $3.5 million for the second quarter of fiscal 2017, compared to loss from operations of $1.8 million for the first quarter of fiscal 2017 and income from operations of $13.3 million for the second quarter of fiscal 2016.

On a GAAP basis, net income for the second quarter of fiscal 2017 was $3.2 million, or $0.11 per diluted share, compared to net loss of $6.3 million, or $(0.21) per diluted share, for the first quarter of fiscal 2017, and net income of $11.1 million, or $0.37 per diluted share, for the second quarter of fiscal 2016.

Non GAAP Results:

Non-GAAP income from operations, which excludes stock-based compensation expense and acquisition related charges, was $12.9 million for the second quarter of fiscal 2017, compared to $7.7 million for the first quarter of fiscal 2017, and compared to $18.7 million for the second quarter of fiscal 2016.

Non-GAAP net income, which excludes stock-based compensation expense, acquisition related charges, and foreign currency transaction gains and losses, each net of tax, for the second quarter of fiscal 2017 was $8.4 million, or $0.27 per diluted share, compared to $5.3 million, or $0.18 per diluted share, for the first quarter of fiscal 2017, and compared to $15.0 million, or $0.50 per diluted share, for the second quarter of fiscal 2016.

Balance Sheet and Cash Flow

The Company ended the second quarter of fiscal 2017 with $227.3 million of cash, cash equivalents, and short-term and long-term investments (2).Cash flow from operations was $25.2 million for the second quarter of fiscal 2017.

Management Commentary

Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “We are pleased with our second quarter results, which include strong growth in our BFSI and M&I industry groups. While market conditions remain challenging, we continue to see healthy demand for our solutions. This is reflected in our pipeline, which is expanding across all verticals and solution areas.”

Ranjan Kalia, Chief Financial Officer, said, “During the second quarter, we delivered revenue above the mid-point of our guidance range and reported solid sequential improvement in our DSO which helped drive strong cash flow in the quarter. The midpoint of our fiscal year 2017 revenue guidance remains unchanged despite higher than expected foreign currency headwinds and third quarter furloughs. Our revised EPS guidance reflects the impact of higher onsite effort and contractor resourcing related to digital transformation programs, as well as currency headwinds.”

Organizational Changes

Virtusa announced today that Samir Dhir, Chief Delivery Officer and Head of India Operations, has been appointed President of Banking and Financial Services (BFS), effective immediately. Mr. Dhir replaces Jitin Goyal who resigned to pursue other interests.

Commenting on the appointment, Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “I would like to congratulate Samir on his appointment to President of Banking and Financial Services. Since the announcement of our acquisition, Samir has played a key role in the successful integration of Polaris and took overall responsibility for our largest banking client. I am confident that Samir and the BFS leadership team will continue to build on our strong platform and enable us to further capitalize on the significant digital transformation opportunity. I would also like to thank Jitin for his many contributions including the successful integration of Polaris into Virtusa. We wish Jitin the very best.”

Mr. Dhir is a 23 year veteran of the IT Services industry. Since joining Virtusa in 2010 he has served as Chief Delivery Officer and Head of India Operations, responsible for global delivery across all operating geographies. During his tenure, Dhir has built strong executive relationships with the firm’s largest clients, including Citigroup and British Telecommunications plc. He is also a key member of NASSCOM's IT Services Council which has been initiated to sustain and grow global leadership in IT. Prior to Virtusa, Dhir worked for Wipro Technologies where he managed a large delivery organization for technology, media, transportation and services business, handled the company’s SAP Practice and ran the managed services business. Prior to Wipro he held leadership positions with Avaya and Lucent Technologies in the UK.

Financial Outlook

Virtusa management provided the following current financial guidance:

• Third quarter fiscal 2017 revenue is expected to be in the range of $214.5 to $219.5 million. Non-GAAP diluted EPS is expected to be in the range of $0.34 to $0.38. GAAP diluted EPS is expected to be in the range of $0.17 to $0.21.
• Fiscal year 2017 revenue is expected to be in the range of $854 to $866 million. Non-GAAP diluted EPS is expected to be in the range of $1.26 to $1.34. GAAP diluted EPS is expected to be in the range of $0.40 to $0.48.
• Virtusa anticipates a restructuring charge in the in the second half of fiscal 2017 of approximately $1.5 to $2.0 million related to certain expense savings initiatives. This charge is not reflected in the current GAAP EPS guidance as the timing of this restructuring will impact the amount incurred in the third and fourth quarters. Additionally, this charge will not impact reported non-GAAP EPS.

The Company’s third quarter and fiscal year 2017 diluted EPS estimates an average share count of approximately 30.1 million and 30.2 million, respectively, (assuming no further exercises of stock-based awards) and assumes a stock price of $18.98, which was derived from the average closing price of the Company’s stock over the five trading days ended on November 4, 2016. Deviations from this stock price may cause actual diluted EPS to vary based on share dilution from Virtusa’s stock options and stock appreciation rights.

Conference Call and Webcast

Virtusa will host a conference call today, November 9, 2016 at 5:00 p.m. Eastern Time to discuss the Company’s second quarter fiscal 2017 financial results, current financial guidance, and other corporate developments. To access this call, please dial 877-440-5788 (domestic) or 719-325-4842 (international). The passcode is 6070061. A replay of this conference call will be available through November 16, 2016 at 877-870-5176 (domestic) or 858-384-5517 (international). The replay passcode is 6070061. A live webcast of this conference call will be available on the “Investors” page of the Company’s website (www.virtusa.com), and a replay will be archived on the website as well.

About Virtusa

Virtusa provides end-to-end information technology (IT) services to Global 2000 companies. These services, which include IT consulting, application maintenance, development, systems integration and managed services, leverage a unique Platforming methodology that transforms clients’ businesses through IT rationalization. Virtusa helps customers accelerate business outcomes by consolidating, rationalizing, and modernizing their core customer-facing processes into one or more core systems.

Virtusa delivers cost-effective solutions through a global delivery model, applying advanced methods such as Agile and Accelerated Solution Design to ensure that its solutions meet the clients’ requirements. As a result, its clients simultaneously reduce their IT operations cost while increasing their ability to meet changing business needs.

On March 3, 2016, Virtusa, through its India subsidiary, acquired an aggregate of approximately 51.7% of the fully diluted outstanding shares of Polaris Consulting & Services, Ltd., from founding shareholders, promoters, and certain other minority stockholders. In April 2016, Virtusa purchased an additional 26% of the fully diluted outstanding shares of Polaris from the company’s public shareholders in a mandatory open offer. Polaris is a majority owned subsidiary of Virtusa.

Founded in 1996 and headquartered in Massachusetts, Virtusa has operations in North America, Europe, and Asia.

© 2011 - 2016 Virtusa Corporation. All rights reserved.

Virtusa, Accelerating Business Outcomes, BPM Test Drive and Productization are registered trademarks of Virtusa Corporation. All other company and brand names may be trademarks or service marks of their respective holders.

Non-GAAP Financial Information

This press release includes certain Non-GAAP financial metrics as defined by Regulation G by the Securities and Exchange Commission. These Non-GAAP financial metrics are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial metrics calculated in accordance with GAAP, and may be different from Non-GAAP metrics used by other companies. In addition, these Non-GAAP metrics should be read in conjunction with Virtusa’s financial statements prepared in accordance with GAAP.

Virtusa believes the following financial metrics will provide additional insights to measure the operational performance of the business.

• Virtusa presents constant currency revenue growth rates to provide insights into, and a framework for assessing, how Virtusa's revenue performed excluding the effect of foreign currency rate fluctuations (see footnote 1).
• Virtusa presents a reconciliation of its cash, cash equivalents, short term and long term investments which Virtusa believes provides insight into its cash position and overall liquidity (see footnote 2).
• Virtusa also presents the following consolidated statement of income metrics that exclude acquisition-related charges, stock-based compensation expense and foreign currency transaction gains and losses to provide further insights into the comparison of Virtusa’s operating results among the periods:
  • Non-GAAP income from operations: income (loss) from operations, as reported on Virtusa’s consolidated statements of income (loss), excluding stock-based compensation expense and acquisition-related charges.
  • Non-GAAP operating margin: Non-GAAP income from operations as a percentage of reported revenues.
  • Non-GAAP net income: net income (loss), as reported on Virtusa’s consolidated statements of income (loss), excluding the tax adjusted impact of the following, stock-based compensation, acquisition-related charges and foreign currency transaction gains and losses.
  • Non-GAAP diluted earnings per share: diluted earnings (loss) per share, as reported on Virtusa’s consolidated statements of income (loss), excluding tax adjusted per share impact of the following, stock-based compensation, acquisition-related charges and foreign currency transaction gains and losses.

The following table presents a reconciliation of each Non-GAAP financial metric to the most comparable GAAP metric:

(a) Acquisition-related charges include, when applicable, amortization of purchased intangibles, external deal costs, acquisition-related retention bonuses, changes in the fair value of contingent consideration liabilities, charges for impairment of acquired intangible assets and other acquisition-related costs including integration expenses consisting of outside professional and consulting services and direct and incremental travel costs

(b) Foreign currency transaction gains and losses are inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes.

(c) Tax adjustments reflect the tax effect of the non-GAAP adjustments using the non-GAAP effective statutory tax rate for the respective periods.

(d) Noncontrolling interest represents the minority shareholders interest of Polaris

(e) Non-GAAP diluted earnings per share for the six months ended September 30, 2016 includes 567,037 shares of common stock equivalents that were excluded from GAAP diluted loss per share as their effect would have been anti-dilutive.

Footnotes

(1) To determine sequential revenue change in constant currency for the Company's second quarter of fiscal 2017, revenue from entities reporting in U.K. Pounds (GBP), Euros, and Swedish Krona (SEK) were converted into U.S. dollars at the average exchange rates in effect for the three months ended June 30, 2016, rather than the actual exchange rate in effect for the three months ended September 30, 2016. To determine year-over-year revenue change in constant currency for the Company's second quarter of fiscal 2017, revenue from entities reporting in U.K. Pounds (GBP), Euros, and Swedish Krona (SEK) were converted into U.S. dollars at the average exchange rates in effect for the three months ended September 30, 2015, rather than the actual exchange rate in effect for the three months ended September 30, 2016. The average exchange rates for the three months ended September 30, 2015, June 30, 2016, and September 30, 2016 are presented in the following table:

(2) The Company considers the measure of cash, cash equivalents, short-term and long-term investments to be a more meaningful indicator of the Company's overall liquidity. All of the Company's investments are classified as available-for-sale, including the Company's long-term investments which consist of fixed income securities, including government agency bonds and municipal and corporate bonds, which meet the credit rating and diversification requirements of the Company's investment policy as approved by the Company's audit committee and board of directors.

(3) On March 3, 2016 Virtusa acquired a majority interest in Polaris. In accordance with US GAAP, Polaris financial results for the quarter ending September 30, 2016 and assets and liabilities as of that date have been consolidated in full into Virtusa’s financial statements. Profit attributable to minority shareholders (Non-controlling Interest) in the Consolidated Statements of Income was $1.2 million, while net assets attributable to ownership in Polaris by minority shareholders (Non-controlling Interest) in our Consolidated Balance Sheets was $66.6 million at September 30, 2016.

(4) The impact of the Polaris transaction on GAAP EPS includes Virtusa’s controlling interest in earnings per share for Polaris, interest on debt, Polaris acquisition related charges, lost interest income on cash used to fund the acquisition, the foreign exchange translation gain or loss relating to the funding of the Polaris acquisition and related tax effects. The impact of the Polaris transaction on Non-GAAP EPS includes Virtusa’s controlling interest in earnings per share for Polaris, interest on debt, lost interest income on cash used to fund the acquisition and related tax effects, but excludes the effect of acquisition related charges, amortization of Polaris intangibles, the foreign exchange translation gain or loss relating to the funding of the Polaris acquisition and Polaris stock-compensation cost.

Forward-Looking Statements

This press release contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding, Virtusa's expectations concerning management's forecast of financial performance, the growth of our business and management's plans, objectives, and strategies. These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained in this press release that are not historical facts, and statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “see,” “seeks,” “estimates,” “will,” “should,” “may,” “confident,” “positions,” “look forward to,” and variations of such words or words of similar meaning and the use of future dates. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that these plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation: Virtusa’s failure to realize the intended benefits of the Polaris acquisition, including the inability to integrate Virtusa’s and Polaris’ business and operations or the inability to realize the anticipated synergies and revenues or growth rates in the expected amounts or within the anticipated time frames or cost expectations or at all; the possibility that Virtusa’s current or future estimated combined or standalone guidance may differ materially from expectations; the ability of Virtusa to manage an Indian public company; Virtusa incurring unexpected costs or liabilities in connection with the Polaris acquisition; unanticipated acquisition related costs and negative effects on Virtusa’s reported results of operations from acquisition related charges; increase in client or employee attrition due to the Polaris acquisition; inability of Virtusa to service the $200 million term loan incurred by Virtusa to acquire Polaris or to maintain compliance with certain financial covenants under the loan facility; Virtusa’s ability to integrate the operations of, and achieve expected synergies and operating efficiencies in connection with, other previously acquired businesses; unanticipated acquisition related costs and negative effects on Virtusa’s reported results of operations from previous acquisitions; Virtusa’s dependence on a limited number of clients as well as clients located principally in the United States and United Kingdom and in concentrated industries; currency exchange rate fluctuations of the Indian and Sri Lankan rupee, the U.S. dollar, the U.K pound sterling, the Swedish krona, and the euro; the international nature of our business; restrictions on immigration or changes in immigration laws; Virtusa's ability to hire and retain enough sufficiently trained IT professionals to support its operations; Virtusa's ability to expand its business or effectively manage growth; Virtusa's ability to sustain profitability or maintain profitable engagements; increasing competition in the IT services outsourcing industry; Virtusa's ability to attract and retain clients and meet their expectations; quarterly fluctuations in Virtusa's earnings; client terminations or contracting delays, or delays in revenue recognition in any reporting period; Virtusa's ability to successfully manage its billing and utilization rates and its targeted on-site to offshore delivery mix; technological innovation; Virtusa's ability to effectively manage its facility, infrastructure and capacity needs; regulatory, legislative and judicial developments in Virtusa's operations areas and Virtusa’s ability to comply with changing or complex laws and maintain effective internal controls to ensure ongoing compliance; the loss of any key member of Virtusa's senior management team, political or economic instability in India or Sri Lanka; any reduction or withdrawal of tax benefits provided to Virtusa by the governments of India and Sri Lanka, or new legislation by such governments which could be harmful to Virtusa; wage inflation and increases in government mandated benefits in India and Sri Lanka; telecommunications or technology disruptions; worldwide economic and business conditions; and the volatility of the market price of Virtusa's common stock. For additional disclosure regarding these and other risks faced by Virtusa, see the disclosure contained in Virtusa's public filings with the Securities and Exchange Commission, including Virtusa’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 and subsequent Quarterly Reports on Form 10-Q, as filed with the Securities and Exchange Commission.

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