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Virtusa Announces Second Quarter Fiscal 2015 Consolidated Financial Results

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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 year 2015, ended September 30, 2014.

Second Quarter Fiscal 2015 Consolidated Financial Results

Revenue for the second quarter of fiscal 2015 was $117.7 million, an increase of 5% sequentially and 25% year-over-year in reported currency. On a constant currency basis,(1) second quarter revenue increased 5% sequentially and 23% year-over-year.

Income from operations increased to $12.2 million for the second quarter of fiscal 2015, compared to $11.2 million for the first quarter of fiscal 2015, and $9.8 million for the second quarter of fiscal 2014.

Net income for the second quarter of fiscal 2015 increased to $10.1 million, or $0.34 per diluted share, compared to $9.0 million, or $0.31 per diluted share, for the first quarter of fiscal 2015, and compared to $7.5 million, or $0.28 per diluted share, for the second quarter of fiscal 2014.

The Company ended the second quarter of fiscal 2015 with $215.2 million of cash, cash equivalents, and short-term and long-term investments.(2) Cash flow from operations for the second quarter of fiscal 2015 was $21.7 million.

Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “This was another strong quarter for Virtusa. We are realizing the benefits of the investments we have been making in business development, our service offerings and delivery excellence. Our Millennial and transformational solutions are driving our growth and increasingly being embraced by our clients as they look to Virtusa as a partner that can meet the needs of their larger and lengthier programs.”

Ranjan Kalia, Chief Financial Officer, said, “During our second quarter, broad-based demand across our verticals, geographies and client portfolio enabled us to record revenue at the high end of our guidance. We are also pleased with our ability to achieve double digit sequential and year-over-year EPS growth.”

Financial Outlook

Virtusa management provided the following current financial guidance:

  • Third quarter fiscal year 2015 revenue is expected to be in the range of $121.8 to $123.8 million, with diluted EPS of $0.39 to $0.41.
  • Fiscal year 2015 revenue is expected to be in the range of $477.0 to $483.0 million, with diluted EPS of $1.47 to $1.53.

The Company’s third quarter and full fiscal year 2015 diluted EPS estimates assume an average share count of approximately 29.6 million and 29.5 million respectively, (assuming no further exercises of stock-based awards) and assume a stock price of $36.62, which was derived from the average closing price of the Company’s stock over the five trading days ended on October 29, 2014. 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, October 30, 2014 at 5:00 pm Eastern time to discuss the Company’s second fiscal quarter 2015 financial results, current financial guidance, and other corporate developments. To access this call, please dial 866-675-4790 (domestic) or 913-312-0726 (international). The passcode is 2317896. A replay of this conference call will be available through November 6, 2014 at 877-870-5176 (domestic) or 858-384-5517 (international). The replay passcode is 231789. 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.

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

(c) 2011 – 2014 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

Footnotes

(1) To determine year-over-year constant currency revenue for the Company’s second quarter of fiscal 2015, 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 September 30, 2013 of 1.56 U.S. dollars to U.K. pounds sterling, rather than the actual exchange rate in effect for the three months ended September 30, 2014 of 1.66 U.S. dollars to U.K. pounds sterling. To determine sequential revenue change in constant currency for the Company’s second quarter of fiscal 2015, 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 June 30, 2014 of 1.69 U.S. dollars to U.K. pounds sterling, rather than the actual exchange rate in effect for the three months ended September 30, 2014 of 1.66 U.S. dollars to U.K. pounds sterling.

(2) The Company considers the measure of cash, cash equivalents and short-term investments together with 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.

Non-GAAP Financial Information

This press release includes certain non-GAAP financial information as defined by Regulation G by the Securities and Exchange Commission. Virtusa presents constant currency revenue 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) above for further detail). Virtusa also presents its cash, cash equivalents and short term investments together with its long term investments to provide additional insight into its overall liquidity and cash position (see footnote (2) above for further detail). These non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. Virtusa’s management believes that these non-GAAP revenue measures and liquidity presentations, when viewed with our results under U.S. GAAP and the accompanying reconciliations, are useful in providing additional information and evaluating Virtusa’s revenue and overall liquidity position. This information should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with GAAP.

Reconciliations of these non-GAAP revenue measures and liquidity presentations to GAAP financial measures are included in this press release.

Forward-Looking Statements

Certain statements made in this press release 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. This press release contains express or implied forward-looking statements relating to, among other things, Virtusa’s expectations concerning management’s forecast of financial performance, the growth of our business and management’s plans, objectives, and strategies. These statements are neither promises nor guarantees, but 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. In particular, the risks and uncertainties include, among other things: 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; 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; 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; 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; currency exchange rate fluctuations of the Indian and Sri Lankan rupee, the U.S. dollar and the U.K. pound sterling; and the volatility of the market price of Virtusa’s common stock. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Virtusa undertakes no obligation to update or revise the information contained in this press release, whether as a result of new information, future events or circumstances or otherwise. 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, 2014 and subsequent Quarterly Reports on Form 10-Q, as filed with the Securities and Exchange Commission.

Virtusa Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, unaudited)
September 30, 2014 March 31, 2014
Assets:
Cash and cash equivalents $93,967 $82,761
Short-term investments 67,581 55,888
Accounts receivable, net 69,645 64,662
Unbilled accounts receivable 23,759 26,548
Prepaid expenses 12,667 9,036
Deferred income taxes 5,938 6,610
Restricted cash 2,553 2,662
Other current assets 12,326 11,922
Total current assets 288,436 260,089
Property and equipment, net 35,320 35,346
Long-term investments 53,607 62,015
Deferred income taxes 4,090 4,651
Goodwill 52,130 53,448
Intangible assets, net 25,218 28,661
Other long-term assets 5,602 5,215
Total assets $464,403 $449,425
Liabilities:
Accounts payable $9,080 $11,002
Accrued employee compensation and benefits 23,727 27,175
Accrued expenses and other current liabilities 25,834 27,299
Income taxes payable 1,957 1,294
Total current liabilities 60,598 66,770
Deferred income taxes 2,460 2,744
Long-term liabilities 5,362 5,841
Total liabilities 68,420 75,355
Stockholders’ equity 395,983 374,070
Total liabilities and stockholders’ equity $464,403 $449,425
Virtusa Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands except share and per share amounts, unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2014 2013 2014 2013
Revenue $117,700 $94,301 $229,974 $184,790
Costs of revenue 74,968 60,503 147,557 118,305
Gross profit 42,732 33,798 82,417 66,485
Total operating expenses 30,491 24,022 58,946 47,780
Income from operations 12,241 9,776 23,471 18,705
Other income (expense):
Interest income 1,230 846 2,389 1,602
Foreign currency transaction gains (losses) 85 (959 ) (69 ) (573 )
Other, net (58 ) 218 (68 ) 212
Total other income 1,257 105 2,252 1,241
Income before income tax expense 13,498 9,881 25,723 19,946
Income tax expense 3,384 2,403 6,606 4,946
Net income $10,114 $7,478 $19,117 $15,000
Net income per share of common stock:
Basic $0.35 $0.29 $0.67 $0.59
Diluted $0.34 $0.28 $0.65 $0.57
Weighted average number of
common shares outstanding
Basic 28,695,642 25,553,237 28,586,223 25,423,169
Diluted 29,424,367 26,309,398 29,392,824 26,230,239
Virtusa Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(In thousands, unaudited)
Six Months Ended
September 30,
2014 2013
Cash flows provided by operating activities:
Net income $19,117 $15,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 7,151 5,153
Share-based compensation expense 4,931 3,530
Reversal of contingent consideration (1,833)
Provision for doubtful accounts,net (175) 639
Loss on disposal of property and equipment 42 19
Deferred income taxes 122
Foreign currency losses, net 69 573
Amortization of discounts and premiums on investments, net 636
Excess tax benefits from stock option exercises (2,837) (1,783)
Net changes in operating assets and liabilities:
Accounts receivable and unbilled receivable (3,422) 2,920
Prepaid expenses and other current assets (927) (1,563)
Other long-term assets (386) (317)
Accounts payable (887) (2,332)
Accrued employee compensation and benefits (6,577) (663)
Accrued expenses and other current liabilities 2,834 (2,826)
Income taxes payable 824 3,680
Other long-term liabilities 539 (125)
Net cash provided by operating activities 19,221 21,905
Cash flows used for investing activities:
Proceeds from sale of property and equipment 26 56
Purchase of short-term investments (2,515) (9,104)
Proceeds from sale or maturity of short-term investments 10,797 2,893
Purchase of long-term investments (15,005) (4,886)
Proceeds from sale or maturity of long-term investments 2,000 600
(Increase) decrease in restricted cash (15) 322
Purchase of property and equipment (6,393) (3,487)
Net cash used for investing activities (11,105) (13,606)
Cash flows provided by financing activities:
Proceeds from exercise of common stock options 1,650 1,675
Payment of contingent consideration related to acquisition (441)
Principal payments on capital lease obligation (22) (9)
Excess tax benefits from stock option exercises 2,837 1,783
Net cash provided by financing activities 4,024 3,449
Effect of exchange rate changes on cash and cash equivalents (934) (4,008)
Net increase in cash and cash equivalents 11,206 7,740
Cash and cash equivalents, beginning of period 82,761 57,199
Cash and cash equivalents, end of period $93,967 $64,939

Supplemental Non-GAAP Financial Information as of September 30, 2014 and 2013

Reconciliation to total cash and cash equivalents, short-term investments and long-term investments:
Cash and cash equivalents, end of period $93,967 $64,939
Short-term investments 67,581 37,262
Long-term investments 53,607 8,155
Total short-term and long-term investments, end of period 121,188 45,417
Total cash and cash equivalents, short-term investments and long-term investments $215,155 $110,356

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