Westborough, MA – (February 8, 2016) 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 third quarter fiscal year 2016, ended December 31, 2015.
Third Quarter Fiscal 2016 Consolidated Financial Results
Revenue for the third quarter of fiscal 2016 was $150.6 million, an increase of 5% sequentially and 22% year-over-year. On a constant currency basis,(1) third quarter revenue increased 6% sequentially and 23% year-over-year.
Virtusa reported GAAP income from operations of $14.1 million for the third quarter of fiscal 2016, compared to $13.3 million for the second quarter of fiscal 2016 and $14.6 million for the third quarter of fiscal 2015.
GAAP net income for the third quarter of fiscal 2016 was $11.3 million, or $0.38 per diluted share, compared to $11.1 million, or $0.37 per diluted share, for the second quarter of fiscal 2016, and compared to $11.8 million, or $0.40 per diluted share, for the third quarter of fiscal 2015.
In the third quarter of fiscal 2016, Virtusa incurred approximately $1.2 million, or $(0.02) per diluted share, of transaction expenses related to the proposed acquisition of a majority interest in Polaris Consulting & Services, Ltd., compared to the prior guidance of $0.6 million, or $(0.01) per diluted share.
Non-GAAP income from operations, which excludes stock-based compensation expense and acquisition related expenses, was $20.7 million for the third quarter of fiscal 2016, compared to $18.7 million for the second quarter of fiscal 2016, and an increase compared to $19.1 million for the third quarter of fiscal 2015.
Non-GAAP net income, which excludes stock-based compensation expense, acquisition related expenses, and foreign currency transaction gains and losses, each net of tax, for the third quarter of fiscal 2016 was $15.9 million, or $0.54 per diluted share, compared to $15.0 million, or $0.50 per diluted share, for the second quarter of fiscal 2016, and compared to $15.2 million, or $0.51 per diluted share, for the third quarter of fiscal 2015.
Chennai Flood Impact
Heavy rainfall and the resultant flooding in Chennai, India in December 2015 temporarily affected Virtusa’s regular business operations at its Chennai facility. Operations in Virtusa’s Chennai facility have been fully restored; however, the incident resulted in an unfavorable revenue impact of approximately $(0.8) million in the third fiscal quarter of 2016. In addition, Virtusa incurred approximately $0.4 million of incremental expenses associated with the deployment of its business continuity program. In total, Virtusa’s earnings per share were impacted by approximately $(0.02) in the third quarter of fiscal 2016 due to the effects of the flood.
Balance Sheet and Cash Flow
The Company ended the third quarter of fiscal 2016 with $201.2 million of cash, cash equivalents, and short-term and long-term investments (2). Virtusa’s fiscal third quarter ending cash balance excludes $20.3 million of restricted cash held in escrow for the mandatory unconditional offer related to the proposed acquisition of a majority interest in Polaris Consulting & Services, Ltd. Cash flow from operations for the third quarter of fiscal 2016 was $22.4 million.
Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “I am pleased with our fiscal third quarter performance. While we faced some unexpected challenges brought on by the Chennai floods, outstanding execution by our local team enabled us to navigate this event with minimal interruption to our critical business operations. From a demand perspective, corporations are increasingly investing in IT solutions which enable them to run their business more efficiently, secure the business, and grow the business. Virtusa’s value proposition of delivering industry-leading, transformational services and solutions that squarely address these critical business objectives continues to resonate in the market and is enabling us to win market share.”
Ranjan Kalia, Chief Financial Officer, said, “We delivered solid sequential and year-over-year revenue growth in the fiscal third quarter. Our strong quarterly cash flow provides us with increased flexibility to invest in our growth initiatives including in the upcoming Polaris acquisition. Our fiscal fourth quarter guidance reflects sequential revenue growth across all three of our industry verticals, partially offset by greater foreign exchange headwinds, continued pressure on our insurance segment, and a later than previously expected close of the Polaris acquisition.”
Virtusa management provided the following current financial guidance:
Fourth quarter fiscal 2016 revenue is expected to be in the range of $172.0 to $175.0 million, and assumes a later than previously anticipated closing of the Polaris acquisition expected now in late February 2016. GAAP diluted EPS is expected to be in the range of $(0.01) to $0.01. Virtusa management currently expects Polaris to contribute revenue of approximately $20 million and to be approximately ($0.36) dilutive to Virtusa’s GAAP earnings per share, including approximately ($0.20) of dilution from acquisition-related charges. Fourth quarter fiscal 2016 non-GAAP diluted EPS is expected to be in the range of $0.44 to $0.46, including $(0.10) dilution from the Polaris transaction.
Fiscal year 2016 revenue is expected to be in the range of $600.4 to $603.4 million. GAAP diluted EPS is expected to be in the range of $1.07 to $1.09. Virtusa management currently expects Polaris to contribute revenue of approximately $20 million and to be approximately ($0.39) dilutive to Virtusa’s GAAP earnings per share, including approximately ($0.23) of dilution from acquisition-related charges. Non-GAAP diluted EPS is expected to be in the range of $1.96 to $1.98, including $(0.10) dilution from the Polaris transaction.
Virtusa’s current GAAP diluted EPS guidance for the fourth fiscal quarter and the full fiscal year ending March 31, 2016 estimates Polaris transaction and integration expenses of $8.8 million and $10.0 million, respectively.
The Company’s fourth quarter diluted EPS estimates an average share count of approximately 30.2 million and fiscal year 2016 diluted EPS estimates an average share count of approximately 30.0 million, (assuming no further exercises of stock-based awards) and assume a stock price of $44.95, which was derived from the average closing price of the Company’s stock over the five trading days ended on February 4, 2016. Deviations from this stock price may cause actual 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, February 8, 2016 at 9:00 am Eastern Time to discuss the Company’s third quarter fiscal 2016 financial results, current financial guidance, and other corporate developments. To access this call, please dial 877-545-1402 (domestic) or 719-325-4760 (international). The passcode is 5423833. A replay of this conference call will be available through February 15, 2016 at 877-870-5176 (domestic) or 858-384-5517 (international). The replay passcode is 5423833. 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.
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.
The following table presents a reconciliation of each non-GAAP financial metric to the most comparable GAAP metric:
(1) To determine year-over-year constant currency revenue for the Company's third quarter of fiscal 2016, revenue from entities reporting in U.K. pound sterling was converted into U.S. dollars at the average exchange rate in effect for the three months ended December 31, 2014 of 1.58 U.S. dollars to U.K. pounds sterling, rather than the actual exchange rate in effect for the three months ended December 31, 2015 of 1.51 U.S. dollars to U.K. pounds sterling. To determine sequential revenue change in constant currency for the Company's third quarter of fiscal 2016, revenue from entities reporting in U.K. pounds sterling was converted into U.S. dollars at the average exchange rate in effect for the three months ended September 30, 2015 of 1.55 U.S. dollars to U.K. pounds sterling, rather than the actual exchange rate in effect for the three months ended December 31, 2015 of 1.51 U.S. dollars to U.K. pounds sterling.
(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.
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: the timing and impact of the closing of the Polaris acquisition on Virtusa’s results of operations and forecasts; Virtusa’s ability to integrate the operations of, and achieve expected synergies and operating efficiencies in connection with, acquired businesses; unanticipated acquisition related costs and negative effects on Virtusa’s reported results of operations from acquisition-related charges; 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, 2015 and subsequent Quarterly Reports on Form 10-Q, as filed with the Securities and Exchange Commission.