Virtusa Announces Third Quarter Fiscal 2019 Consolidated Financial Results

  • Third quarter fiscal 2019 revenue of $314.7 million increased 3.0%
    sequentially and 19.3% year-over-year.
  • Third quarter fiscal 2019 GAAP diluted EPS of $0.37. Non-GAAP
    diluted EPS of $0.61.
  • Third quarter fiscal 2019 GAAP operating income of $19.3 million
    increased 41% year-over-year. Non-GAAP operating income of $32.7
    million increased 26% year-over-year.
  • Third quarter fiscal 2019 operating cash flow of $36.5 million,
    representing 11.6% of revenue.

SOUTHBOROUGH, Mass.–(BUSINESS WIRE)–Virtusa
Corporation
(NASDAQ GS: VRTU), a global provider of digital
engineering and IT outsourcing services that accelerate business
outcomes for its clients, today reported consolidated financial results
for the third quarter fiscal 2019, ended December 31, 2018.

Third Quarter Fiscal 2019 Consolidated Financial Results

Revenue for the third quarter of fiscal 2019 was $314.7 million, an
increase of 3.0% sequentially and 19.3% year-over-year. On a constant
currency basis, (1) third quarter revenue increased 3.3%
sequentially and 20.1% year-over-year.

Virtusa reported GAAP income from operations of $19.3 million for the
third quarter of fiscal 2019, compared to $14.0 million for the second
quarter of fiscal 2019 and $13.7 million for the third quarter of fiscal
2018.

GAAP net income available to common shareholders for the third quarter
of fiscal 2019 was $11.5 million, or $0.37 per diluted share, compared
to GAAP net income of $0.4 million, or $0.01 per diluted share, for the
second quarter of fiscal 2019, and GAAP net loss of ($11.1) million, or
($0.38) per diluted share, for the third quarter of fiscal 2018.

Non-GAAP Results*:

Non-GAAP income from operations was $32.7 million for the third quarter
of fiscal 2019, compared with $29.0 million for the second quarter of
fiscal 2019 and $26.0 million for the third quarter of fiscal 2018.

Non-GAAP net income was $20.7 million, or $0.61 per diluted share, for
the third quarter of fiscal 2019, compared to $18.2 million, or $0.54
per diluted share, for the second quarter of fiscal 2019, and $15.7
million, or $0.47 per diluted share, for the third quarter of fiscal
2018.

*Please refer to the Non-GAAP Financial Information section of this
press release for definitions of our Non-GAAP financial measures and
reconciliations to the most comparable GAAP financial measures.

Balance Sheet and Cash Flow

The Company ended the third quarter of fiscal 2019 with $253.1 million
of cash, cash equivalents and investments (2).Cash
provided by operating activities was $36.5 million for the third quarter
of fiscal 2019.

Management Commentary

Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “Our unique
ability to enable deep digital transformation at some of the world’s
largest enterprises continues to elevate our position as the digital
engineering partner of choice. In addition, our investments in
developing the best talent and expanding our digital solutions and
capabilities are enabling us to remain a step ahead of emerging
technologies and increase the value we deliver to our clients. Our
consistently solid financial results through the first three quarters of
fiscal 2019 are a testament to our strategy and competitive advantage.”

Ranjan Kalia, Chief Financial Officer, said, “We delivered another
quarter of strong financial results. Fiscal third quarter revenue and
non-GAAP EPS were toward the high-end of our guidance and increased 19%
and 30% year-over-year, respectively. Our strong earnings growth
reflects continued progress against our margin expansion targets, with
our non-GAAP operating margin reaching the double-digits in the fiscal
third quarter. Our continued business momentum has allowed us to offset
significant FX headwinds throughout the year and has enabled us to again
reaffirm the midpoint of our fiscal 2019 revenue guidance while raising
the midpoint of our EPS guidance.”

Financial Outlook

Virtusa management provided the following current financial guidance:

  • Fourth quarter fiscal 2019 revenue is expected to be in the range of
    $326 to $334 million. GAAP diluted EPS is expected to be in the range
    of $0.24 to $0.28. Non-GAAP diluted EPS is expected to be in the range
    of $0.59 to $0.65.
  • Fiscal year 2019 revenue is expected to be in the range of $1,246 to
    $1,254 million. GAAP diluted EPS is expected to be in the range of
    $0.39 to $0.43. Non-GAAP diluted EPS is expected to be in the range of
    $2.25 to $2.31.

In accordance with US GAAP, Virtusa applies the if-converted method to
its convertible preferred shares when reporting its fiscal year 2019
results. The if-converted method is used to calculate the share impact
of convertible securities. Under this method, only when the convertible
securities are considered dilutive are they then included in the
computation of weighted average shares outstanding in reported results
and full year guidance.

  • Third quarter GAAP and non-GAAP EPS were calculated by excluding
    the impact of dividends and accretion on the convertible preferred
    shares from net income available to common stockholders and including
    the impact of the convertible preferred shares in the weighted average
    shares outstanding as these shares were dilutive on both a GAAP and
    non-GAAP basis.
  • GAAP EPS guidance was calculated under the assumption that these
    convertible preferred shares will be anti-dilutive in fourth quarter
    and full fiscal year 2019. Thus in determining fourth quarter and full
    fiscal year 2019 GAAP EPS guidance, dividends and accretion on the
    convertible preferred shares are deducted from net income available to
    common stockholders and the convertible preferred shares have been
    excluded from weighted average shares outstanding.
  • Non-GAAP EPS guidance was calculated under the assumption that
    these convertible preferred shares will be dilutive in the fourth
    quarter and full fiscal year 2019. Thus, in determining fourth quarter
    and full fiscal year 2019 non-GAAP EPS guidance, dividends and
    accretion on the convertible preferred shares are excluded from net
    income available to common stockholders and the impact of the
    convertible preferred shares are included in the weighted average
    shares outstanding.

The Company’s fourth quarter and fiscal year 2019 diluted GAAP EPS
estimates are based on average share counts of approximately 30.9
million and 30.7 million, respectively (assuming no further exercises of
stock-based awards). The Company’s fourth quarter and fiscal year 2019
diluted Non-GAAP EPS estimates are based on average share counts of
approximately 33.9 million and 33.7 million, respectively (assuming no
further exercises of stock-based awards). GAAP and Non-GAAP average
share counts assume a stock price of $48.62, which was derived from the
average closing price of the Company’s stock over the five trading days
ended on February 4, 2019. Deviations from this stock price may cause
actual diluted EPS to vary based on share dilution from Virtusa’s stock
options.

Conference Call and Webcast

Virtusa will host a conference call today, February 7, 2019 at 5:00 p.m.
Eastern Time to discuss the Company’s third quarter fiscal 2019
financial results, current financial guidance, and other corporate
developments. To access this call, please dial 877-317-6789 (domestic)
or 412-317-6789 (international). A replay of this conference call will
be available through February 14, 2019 at 877-344-7529 (domestic) or
412-317-0088 (international). The replay passcode is 10128278. 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 Corporation (NASDAQ GS: VRTU) is a global provider of Digital
Business Transformation, Digital Engineering, and Information Technology
(IT) outsourcing services that accelerate our clients’ journey to their
Digital Future. Virtusa serves Global 2000 companies in Banking,
Financial Services, Insurance, Healthcare, Telecommunications, Media,
Entertainment, Travel, Manufacturing, and Technology industries.

Using a combination of digital strategy, digital engineering, business
implementation, and IT platform modernization services, Virtusa helps
clients execute successful end-to-end digital business transformation
initiatives.

Virtusa engages its clients to re-imagine their business models and
develop strategies to defend and grow their business by introducing
innovative products and services, developing distinctive digital
consumer experiences, creating operational efficiency using digital
labor, developing operational and IT platforms for the future, and
rationalizing and modernizing their existing IT applications
infrastructure. As a result, its clients are simultaneously able to
drive business growth through digital-first customer experiences, while
also consolidating and modernizing their IT application infrastructure
to support digital business transformation.

Holding a proven record of success across industries, Virtusa readily
understands its clients’ business challenges and uses its domain
expertise to deliver innovative applications of technology to address
its clients’ critical business challenges. Examples include building the
world’s largest property & casualty claims modernization program; one of
the largest corporate customer portals for a premier global bank; an
order to cash implementation for a multinational telecommunications
provider; and digital transformation initiatives for media and banking
companies.

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

© 2019 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 measures as
defined by Regulation G by the Securities and Exchange Commission. These
non-GAAP financial measures are not based on any comprehensive set of
accounting rules or principles and should not be considered a substitute
for, or superior to, financial measures calculated in accordance with
GAAP, and may be different from non-GAAP measures used by other
companies. In addition, these non-GAAP measures should be read in
conjunction with Virtusa’s financial statements prepared in accordance
with GAAP.

Virtusa believes the following financial measures 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 and cash equivalents to
    total 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 statements of income
    (loss) measures that exclude, when applicable, stock-based
    compensation expense, acquisition related charges, restructuring
    charges, foreign currency transaction gains and losses, impairment of
    investments, non-recurring third party financing costs, the tax impact
    of dividends received from foreign subsidiaries, the initial impact of
    our election to treat certain subsidiaries as disregarded entities for
    US tax purposes, and the impact from the U.S. government enacted
    comprehensive tax legislation (“Tax Act”) to provide further insights
    into the comparison of Virtusa’s operating results among the periods:

    • Non-GAAP income from operations: income from operations, as
      reported on Virtusa’s consolidated statements of income (loss),
      excluding stock-based compensation expense, acquisition related
      charges and restructuring charges.
    • Non-GAAP operating margin: non-GAAP income from operations as a
      percentage of reported revenues.
    • Non-GAAP net income available to Virtusa common stockholders: net
      income (loss) available to Virtusa common stockholders, as
      reported on our consolidated statements of income (loss),
      excluding stock-based compensation, acquisition related charges,
      restructuring charges, foreign currency transaction gains and
      losses, impairment of investments, non-recurring third party
      financing costs, the tax impact of the above items, the initial
      impact of our election to treat certain subsidiaries as
      disregarded entities for US tax purposes, the tax impact of
      dividends received from foreign subsidiaries, and the impact from
      the Tax Act.
    • Non-GAAP diluted earnings per share: diluted earnings (loss) per
      share, as reported on Virtusa’s consolidated statements of income
      (loss) available to Virtusa common stockholders, excluding
      stock-based compensation, acquisition related charges,
      restructuring charges, foreign currency transaction gains and
      losses, impairment of investments, non-recurring third party
      financing costs, the tax impact of the above items, the initial
      impact of our election to treat certain subsidiaries as
      disregarded entities for US tax purposes, the tax impact of
      dividends received from foreign subsidiaries, and the impact from
      the Tax Act. Non-GAAP diluted earnings per share is also subject
      to dilutive and anti-dilutive requirements of the if-converted
      method related to our Series A Convertible Preferred Stock that
      could result in a difference between GAAP to non-GAAP diluted
      weighted average shares outstanding.

The following table presents a reconciliation of each non-GAAP financial
measure to the most comparable GAAP measure for the three and nine
months ended December 31:

  (in thousands, except per share amounts)
Three Months Ended December 31,   Nine Months Ended December 31,
  2018     2017     2018     2017  
GAAP income from operations $ 19,285 $ 13,663 $ 47,228 $ 30,012
Add: Stock-based compensation expense 7,042 9,118 24,104 20,048
Add: Acquisition-related charges and restructuring charges(a)   6,378     3,227     17,872     9,087  
Non-GAAP income from operations $ 32,705   $ 26,008   $ 89,204   $ 59,147  
 
GAAP operating margin 6.1 % 5.2 % 5.1 % 4.1 %
Effect of above adjustments to income from operations   4.3 %   4.7 %   4.6 %   3.9 %
Non-GAAP operating margin   10.4 %   9.9 %   9.7 %   8.0 %
 
GAAP net income (loss) available to Virtusa common stockholders $ 11,489 $ (11,142 ) $ 4,523 $ (4,504 )
Add: Stock-based compensation expense 7,042 9,118 24,104 20,048
Add: Acquisition-related charges and restructuring charges(a) 6,852 3,227 19,279 9,087
Add: Impairment of investment (i) 885 885
Add: Foreign currency transaction (gains) losses, net(b) (8,319 ) (2,576 ) 11,794 (1,019 )
Add: Impact from Tax Act(h) (1,628 ) 19,815 (1,628 ) 19,815
Tax adjustments (c) 3,370 (3,210 ) (6,573 ) (9,798 )
Noncontrolling interest, net of taxes (d)   (103 )   (647 )   76     (1,326 )
Non-GAAP net income available to Virtusa common stockholders $ 19,588   $ 14,585   $ 52,460   $ 32,303  
 
GAAP diluted earnings (loss) per share (f) $ 0.37 $ (0.38 ) $ 0.15 $ (0.15 )
Effect of stock-based compensation expense (g) 0.21 0.28 0.72 0.63
Effect of acquisition-related charges and restructuring charges(a)
(g)
0.20 0.10 0.57 0.28
Effect of impairment of investment (i) 0.03 0.03
Effect of foreign currency transaction (gains) losses(b) (g) (0.25 ) (0.08 ) 0.35 (0.03 )
Effect of tax impact from Tax Act (g) (h) (0.05 ) 0.60 (0.05 ) 0.62
Effect of tax adjustments (c) (g) 0.10 (0.10 ) (0.20 ) (0.31 )
Effect of noncontrolling interest (d) (g) (0.02 ) (0.04 )
Effect on dividend on Series A Convertible Preferred Stock (f)
(g)
0.03 0.10 0.07
Effect of change in dilutive shares for non-GAAP (f)       0.04     (0.01 )   0.01  
Non-GAAP diluted earnings per share (e) (g) $ 0.61   $ 0.47   $ 1.66   $ 1.08  
                           
 
(a) Acquisition-related charges include, when applicable,
amortization of purchased intangibles, external deal costs,
transaction-related professional fees, acquisition-related retention
bonuses, changes in the fair value of contingent consideration
liabilities, accreted interest related to deferred acquisition
payments, 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. Restructuring charges, when
applicable, include termination benefits, as well as certain
professional fees related to the restructuring. The following table
provides the details of the acquisition-related charges and
restructuring charges:
           
Three Months Ended December 31,   Nine Months Ended December 31,
2018   2017 2018   2017
Amortization of intangible assets $ 2,860   $ 2,568 $ 8,629   $ 7,671
Acquisition & integration costs $ 3,518 $ 431 $ 9,243 $ 431
Restructuring charges $   $ 228 $   $ 985
Acquisition-related charges included in costs of revenue and
operating expense
$ 6,378 $ 3,227 $ 17,872 $ 9,087
Accreted interest related to deferred acquisition payments $ 474   $ $ 1,407   $
Total acquisition-related charges and restructuring charges $ 6,852   $ 3,227   $ 19,279   $ 9,087
 
(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 tax rates at which these adjustments are
expected to be realized for the respective periods, excluding the
initial impact of our election to treat certain subsidiaries as
disregarded entities for U.S. tax purposes. Tax adjustments also
assumes application of foreign tax credit benefits in the United
States.
 
(d) Noncontrolling interest represents the minority shareholders
interest of Polaris.
 
(e) Non-GAAP diluted earnings per share is subject to rounding.
 

(f) During the three months ended December 31, 2018, the weighted
average shares outstanding of Series A Convertible Preferred Stock
of 3,000,000 were included in the calculations of GAAP diluted
earnings per share as their effect would have been dilutive using
the if-converted method. During the nine months ended December 31,
2018, the weighted average shares outstanding of Series A
Convertible Preferred Stock of 3,000,000 were excluded from the
calculations of GAAP diluted earnings per share as their effect
would have been anti-dilutive using the if-converted method.

    During the three and nine months ended December 31, 2017, the
weighted average shares outstanding of Series A Convertible
Preferred Stock of 3,000,000 and 2,637,363, respectively, were
excluded from the calculations of GAAP diluted earnings per share
as their effect would have been anti-dilutive using the
if-converted method.

    The following table provides the non-GAAP net income available
to Virtusa common stockholders and non-GAAP dilutive weighted
average shares outstanding using if-converted method to calculate
the non-GAAP diluted earnings per share for the three and nine
months ended December 31, 2018 and 2017:

         
Three Months Ended December 31,   Nine Months Ended December 31,
2018   2017   2018   2017
Non-GAAP net income available to Virtusa common stockholders $ 19,588   $ 14,585 $ 52,460   $ 32,303
Add: Dividends and accretion on Series A Convertible Preferred Stock $ 1,087   $ 1,087 $ 3,262   $ 2,175
Non-GAAP net income available to Virtusa common stockholders and
assumed conversion
$ 20,675   $ 15,672 $ 55,722   $ 34,478
 
 
GAAP dilutive weighted average shares outstanding 33,661,728 29,295,730 30,598,114 29,387,977
Add: Dilutive effect of employee stock options and unvested restricted
stock awards and restricted stock units
709,961 637,830
Add: Series A Convertible Preferred Stock as converted       3,000,000   3,000,000     2,000,000
Non-GAAP dilutive weighted average shares outstanding   33,661,728     33,005,691   33,598,114     32,025,807
                       
(g) To the extent the Series A Convertible Preferred Stock is
dilutive using the if-converted method, the Series A Convertible
Preferred Stock is included in the weighted average shares
outstanding to determine non-GAAP diluted earnings per share.
 
(h) Impact from the U.S. government enacted comprehensive tax
legislation (“Tax Act”)
 
(i) Other-than-temporary impairment of a available-for-sale
securities recognized in earnings
 

Footnotes

(1) To determine sequential revenue change in constant currency for the
Company’s third quarter of fiscal 2019, 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, 2018, rather than the actual exchange rate in
effect for the three months ended December 31, 2018. To determine
year-over-year revenue change in constant currency for the Company’s
third quarter of fiscal 2019, 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 December 31, 2017, rather than the actual exchange rate in effect
for the three months ended December 31, 2018. The average exchange rates
for the three months ended December 31, 2017, September 30, 2018, and
December 31, 2018 are presented in the following table:

     
 
Average U.S. Dollar Exchange Rate
For the Three Months Ended
December 31, 2017   September 30, 2018   December 31, 2018
GBP 1.33 1.30 1.28
Euro 1.18 1.16 1.14
SEK 0.12 0.11 0.11
             
 

(2) The Company considers the total measure of cash, cash equivalents,
short-term and long-term investments to be an important indicator of the
Company’s overall liquidity. All of the Company’s investments are
classified as either equity or available-for-sale securities, 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) Earnings per share amounts for each quarter may not necessarily
total to the yearly earnings per share due to the weighting of shares
outstanding on a quarterly and year to date basis.

(4) On March 3, 2016 Virtusa acquired a majority interest in Polaris. In
accordance with US GAAP, Polaris financial results for the quarter
ending December 31, 2018 and assets and liabilities as of that date have
been consolidated in full into Virtusa’s financial statements. Net
assets attributable to ownership in Polaris by minority shareholders
(Non-controlling Interest) in our Consolidated Balance Sheets was $24.9
million at December 31, 2018. Profit attributable to minority
shareholders (Non-controlling Interest) in the Consolidated Statements
of Income was $0.2 million on a GAAP basis and $0.3 million on a
non-GAAP basis for the quarter ending December 31, 2018.

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, management’s forecast of financial performance, the growth of
our business and management’s plans, objectives, and strategies.

Contacts

Media Contact:
Greenough
Amy Legere, (617) 275-6517
[email protected]

Investor
Contact:

ICR
William Maina, 646-277-1236
[email protected]

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