Virtusa Announces Third Quarter Fiscal 2020 Consolidated Financial Results

  • Third quarter fiscal 2020 revenue of $335.1 million increased 2.0% sequentially and 6.5% year-over-year.
  • Third quarter fiscal 2020 GAAP diluted EPS of $0.38. Non-GAAP diluted EPS of $0.78.
  • Third quarter fiscal 2020 GAAP operating income of $30.4 million. Non-GAAP operating income of $40.5 million.
  • Cash provided by operating activities of $50.7 million, representing 15.1% of revenue.

SOUTHBOROUGH, Mass.--(BUSINESS WIRE)--Virtusa Corporation (NASDAQ GS: VRTU), a global provider of digital strategy, digital engineering and IT services and solutions that help clients change and disrupt markets through innovation engineering, today reported consolidated financial results for the third quarter fiscal 2020, ended December 31, 2019.


Third Quarter Fiscal 2020 Consolidated Financial Results

Revenue for the third quarter of fiscal 2020 was $335.1 million, an increase of 2.0% sequentially and 6.5% year-over-year. On a constant currency basis, (1) third quarter revenue increased 1.4% sequentially and 6.4% year-over-year.

Virtusa reported GAAP income from operations of $30.4 million for the third quarter of fiscal 2020, compared to $19.2 million for the second quarter of fiscal 2020 and $19.3 million for the third quarter of fiscal 2019.

GAAP net income available to common shareholders for the third quarter of fiscal 2020 was $11.6 million, or $0.38 per diluted share, compared to $6.0 million, or $0.20 per diluted share, for the second quarter of fiscal 2020, and $11.5 million, or $0.37 per diluted share, for the third quarter of fiscal 2019.

Non-GAAP Results*

Non-GAAP income from operations was $40.5 million for the third quarter of fiscal 2020, compared with $29.4 million for the second quarter of fiscal 2020 and $32.7 million for the third quarter of fiscal 2019.

Non-GAAP net income was $26.2 million, or $0.78 per diluted share, for the third quarter of fiscal 2020, compared to $18.1 million, or $0.54 per diluted share, for the second quarter of fiscal 2020, and $20.7 million, or $0.61 per diluted share, for the third quarter of fiscal 2019.

*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 2020 with $237.5 million of cash, cash equivalents and investments (2). Cash provided by operating activities was $50.7 million for the third quarter of fiscal 2020.

Management Commentary

Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “Virtusa’s competitive advantages, market position and performance remain strong. Demand for Digital and Cloud Transformation is expanding rapidly across the globe. We will continue to capitalize on this trend and expect to deliver greater than industry growth over the long term. We are winning some of the largest and most strategic Transformation engagements because of our end-to-end digital engineering and deep domain expertise, understanding of emerging technologies, and our commitment to delivery excellence. Together, these form the foundation of our competitive advantage and are largely responsible for our recognition as the Transformation market leader.”

Ranjan Kalia, Chief Financial Officer, said, “In the fiscal third quarter we generated 170 basis points of year-over-year non-GAAP operating margin accretion, non-GAAP EPS above the midpoint of our guidance, and strong operating cash flow. We expect strong 25% non-GAAP EPS growth for the full fiscal year 2020 supported by top-line growth in line with our prior expectations at the midpoint, margin expansion, significant tax benefits, and our share buyback program.”

Financial Outlook

Virtusa management provided the following current financial guidance:

  • Fourth quarter fiscal 2020 revenue is expected to be in the range of $353.4 to $361.4 million. GAAP diluted EPS is expected to be in the range of $0.66 to $0.72. Non-GAAP diluted EPS is expected to be in the range of $0.90 to $0.96.
  • Fiscal year 2020 revenue is expected to be in the range of $1,336 to $1,344 million. GAAP diluted EPS is expected to be in the range of $1.42 to $1.48. Non-GAAP diluted EPS is expected to be in the range of $2.63 to $2.69.

In accordance with US GAAP, Virtusa applies the if-converted method to its convertible preferred shares when reporting its fiscal year 2020 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 was 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 a GAAP and non-GAAP basis.
  • Fourth quarter fiscal 2020 GAAP and non-GAAP EPS guidance was calculated under the assumption that these convertible preferred shares will be dilutive. Thus, in determining fourth quarter fiscal 2020 GAAP and non-GAAP EPS guidance, dividends and accretion on the convertible preferred shares are not deducted from net income available to common stockholders and the impact of the convertible preferred shares are included in the weighted average shares outstanding.
  • Fiscal 2020 GAAP EPS guidance was calculated under the assumption that these convertible preferred shares will be anti-dilutive. Thus, in determining full fiscal year 2020 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.
  • Fiscal 2020 non-GAAP EPS guidance was calculated under the assumption that these convertible preferred shares will be dilutive. Thus, in determining full fiscal year 2020 non-GAAP EPS guidance, dividends and accretion on the convertible preferred shares are not deducted 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 2020 diluted GAAP EPS estimates are based on average share counts of approximately 33.6 million and 30.7 million, respectively. The Company’s fourth quarter and fiscal year 2020 diluted Non-GAAP EPS estimates are based on average share counts of approximately 33.6 million and 33.7 million, respectively. GAAP and Non-GAAP average share counts assume a stock price of $42.20, which was derived from the average closing price of the Company’s stock over the five trading days ended on January 31, 2020.

Conference Call and Webcast

Virtusa will host a conference call today, February 6, 2020 at 5:00 p.m. Eastern Time to discuss the Company’s third quarter fiscal 2020 financial results, current financial guidance, and other corporate developments. To access this call, please dial 844-695-5524 (domestic) or 412-317-5461 (international). A replay of this conference call will be available through February 13, 2020 at 877-344-7529 (domestic) or 412-317-0088 (international). The replay passcode is 10138820. 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 strategy, digital engineering, and information technology (IT) services and solutions that help clients change, disrupt, and unlock new value through innovation engineering. Virtusa serves Global 2000 companies in Banking, Financial Services, Insurance, Healthcare, Communications, Media, Entertainment, Travel, Manufacturing, and Technology industries.

Virtusa helps clients grow their business with innovative products and services that create operational efficiency using digital labor, future-proof operational and IT platforms, and rationalization and modernization of IT applications infrastructure. This is achieved through a unique approach blending deep contextual expertise, empowered agile teams, and measurably better engineering to create holistic solutions that drive business forward at unparalleled velocity enabled by a culture of cooperative disruption.

© 2020 Virtusa Corporation. All rights reserved.

Virtusa is a registered trademark 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 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, impairment of long-lived assets, 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 periods.

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,

 

2019

 

 

2018

 

 

 

2019

 

 

2018

 

GAAP income from operations

$

30,410

 

$

19,285

 

$

63,073

 

$

47,228

 

Add: Stock-based compensation expense

 

5,775

 

 

7,042

 

 

18,285

 

 

24,104

 

Add: Acquisition-related charges and restructuring charges(a)

 

4,345

 

 

6,378

 

 

12,741

 

 

17,872

 

Non-GAAP income from operations

$

40,530

 

$

32,705

 

$

94,099

 

$

89,204

 

 
GAAP operating margin

 

9.1

%

 

6.1

%

 

6.4

%

 

5.1

%

Effect of above adjustments to income from operations

 

3.0

%

 

4.3

%

 

3.2

%

 

4.6

%

Non-GAAP operating margin

 

12.1

%

 

10.4

%

 

9.6

%

 

9.7

%

 
GAAP net income available to Virtusa common stockholders

$

11,633

 

$

11,489

 

$

22,394

 

$

4,523

 

Add: Stock-based compensation expense

 

5,775

 

 

7,042

 

 

18,285

 

 

24,104

 

Add: Acquisition-related charges and restructuring charges(a)

 

4,345

 

 

6,852

 

 

13,008

 

 

19,279

 

Add: Impairment of investment(i)

 

184

 

 

885

 

 

184

 

 

885

 

Add: Foreign currency transaction losses(b)

 

3,065

 

 

(8,319

)

 

5,300

 

 

11,794

 

Add: Impact from the Tax Act(h)

 

-

 

 

(1,628

)

 

-

 

 

(1,628

)

Tax adjustments (c)

 

161

 

 

3,370

 

 

(4,153

)

 

(6,573

)

Noncontrolling interest, net of taxes (d)

 

(16

)

 

(103

)

 

(44

)

 

76

 

Non-GAAP net income available to Virtusa common stockholders

$

25,147

 

$

19,588

 

$

54,974

 

$

52,460

 

 
GAAP diluted earnings per share (f)

$

0.38

 

$

0.37

 

$

0.73

 

$

0.15

 

Effect of stock-based compensation expense (g)

 

0.17

 

 

0.21

 

 

0.54

 

 

0.72

 

Effect of acquisition-related charges and restructuring charges(a) (g)

 

0.13

 

 

0.20

 

 

0.38

 

 

0.57

 

Effect of impairment of investment(i) (g)

 

0.01

 

 

0.03

 

 

-

 

 

0.03

 

Effect of foreign currency transaction losses(b) (g)

 

0.09

 

 

(0.25

)

 

0.16

 

 

0.35

 

Effect of impact from the Tax Act(h) (g)

 

-

 

 

(0.05

)

 

-

 

 

(0.05

)

Effect of tax adjustments (c) (g)

 

-

 

 

0.10

 

 

(0.12

)

 

(0.20

)

Effect of noncontrolling interest (d) (g)

 

-

 

 

-

 

 

-

 

 

-

 

Effect on dividend on Series A Convertible Preferred Stock (f) (g)

 

-

 

 

-

 

 

0.10

 

 

0.10

 

Effect of change in dilutive shares for non-GAAP (f)

 

-

 

 

-

 

 

(0.06

)

 

(0.01

)

Non-GAAP diluted earnings per share (e) (g)

$

0.78

 

$

0.61

 

$

1.73

 

$

1.66

 

 
 

(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, facility exit costs as well as certain professional fees related to 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,

2019

2018

 

2019

2018

Amortization of intangible assets

$

3,496

$

2,860

$

10,157

$

8,629

Acquisition and integration costs

$

849

$

3,518

$

2,584

$

9,243

Acquisition-related charges included in costs of revenue and operating expense

$

4,345

$

6,378

$

12,741

$

17,872

Accreted interest related to deferred acquisition payments

$

-

$

474

$

267

$

1,407

Total acquisition-related charges and restructuring charges

$

4,345

$

6,852

$

13,008

$

19,279

(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 and for fiscal year 2020, excluding BEAT tax impact in contemplation of a reorganization of our Indian legal entities. 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, 2019 and 2018, all of the 3,000,000 shares of Series A Convertible Preferred Stock were included in the calculations of GAAP diluted earnings per share as their effect was dilutive using the if-converted method. During the nine months ended December 31, 2019 and 2018, all of the 3,000,000 shares of Series A Convertible Preferred Stock 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 the if-converted method to calculate the non-GAAP diluted earnings per share for the three and nine months ended December 31, 2019 and 2018:

Three Months Ended December 31,

 

Nine Months Ended December 31,

2019

2018

 

2019

2018

Non-GAAP net income available to Virtusa common stockholders

$

25,147

$

19,588

$

54,974

$

52,460

Add: Dividends and accretion on Series A Convertible Preferred Stock

$

1,087

$

1,087

$

3,262

$

3,262

Non-GAAP net income available to Virtusa common stockholders and assumed conversion

$

26,234

$

20,675

$

58,236

$

55,722

 
 
GAAP dilutive weighted average shares outstanding

 

33,458,231

 

33,661,728

 

30,700,269

 

30,598,114

Add: Incremental dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units

 

-

 

-

 

-

 

-

Add: Incremental effect of Series A Convertible Preferred Stock as converted

 

-

 

-

 

3,000,000

 

3,000,000

Non-GAAP dilutive weighted average shares outstanding

 

33,458,231

 

33,661,728

 

33,700,269

 

33,598,114

 

(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 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 2020, 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, 2019, rather than the actual exchange rate in effect for the three months ended December 31, 2019. To determine year-over-year revenue change in constant currency for the Company's third quarter of fiscal 2020, 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, 2018, rather than the actual exchange rate in effect for the three months ended December 31, 2019. The average exchange rates for the three months ended December 31, 2018, September 30, 2019, and December 31, 2019 are included in the table below:

 
  Average U.S. Dollar Exchange Rate  
  For the Three Months Ended  
    December 31, 2018 September 30, 2019 December 31, 2019  
  GBP

1.28

1.23

1.30

 
  Euro

1.14

1.11

1.11

 
  SEK

0.11

0.10

0.10

 

(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 available-for-sale debt securities and equity securities, including the Company's long-term investments, 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.

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 share repurchase program, 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, and our growth rate, 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 potential material assessment by the Indian government of certain statutory defined contribution obligations of employees and employers, the potential material assessment by the IRS in connection with a notice of proposed adjustment related to the employment tax treatment of certain payments made to certain Company employees, 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; inability of Virtusa to service the debt incurred by Virtusa to acquire Polaris and the delisting process 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, acquired businesses; unanticipated acquisition related costs and negative effects on Virtusa’s reported results of operations from previous acquisitions; the inability to pay cash dividends on the convertible preferred stock in connection with the Orogen convertible preferred stock financing, thus increasing the dilutive impact of the financing; the inability of Virtusa to redeem the convertible preferred stock at maturity, if there has been no conversion event prior to maturity; 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; 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; demand for digital and cloud transformation services; 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.


Contacts

Media:
Conversion Marketing
Ron Favali, 727-512-4490
ron@conversionam.com

Investor:
ICR
William Maina, 646-277-1236
william.maina@icrinc.com


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