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Virtusa Announces First Quarter Fiscal 2019 Consolidated Financial Results

August 8, 2018

SOUTHBOROUGH, Mass.--(BUSINESS WIRE)--Aug 8, 2018--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 first quarter fiscal 2019, ended June 30, 2018.

First Quarter Fiscal 2019 Consolidated Financial Results

Revenue for the first quarter of fiscal 2019 was $300.0 million, an increase of 6.6% sequentially and 32.0% year-over-year. On a constant currency basis, (1) first quarter revenue increased 7.4% sequentially and 30.7% year-over-year.

Virtusa reported GAAP income from operations of $13.9 million for the first quarter of fiscal 2019, compared to $16.4 million for the fourth quarter of fiscal 2018 and $6.1 million for the first quarter of fiscal 2018.

GAAP net loss available to common shareholders for the first quarter of fiscal 2019 was $7.4 million, or a ($0.25) loss per diluted share, compared to GAAP net income of $1.8 million, or $0.06 per diluted share, for the fourth quarter of fiscal 2018, and GAAP net income of $3.0 million, or $0.10 per diluted share, for the first quarter of fiscal 2018. First quarter fiscal 2019 GAAP net loss includes $4.5 million of net unrealized foreign exchange losses on an after-tax basis and $6.3 million of deferred tax charge related to Virtusa’s election to treat certain subsidiaries as disregarded entities for US tax purposes, both of which were not included in prior guidance.

Non-GAAP Results:

Non-GAAP income from operations, which excludes stock-based compensation expense, restructuring charges and acquisition related charges, was $27.5 million for the first quarter of fiscal 2019, compared with $27.9 million for the fourth quarter of fiscal 2018 and $13.4 million for the first quarter of fiscal 2018.

Non-GAAP net income was $16.8 million, or $0.50 per diluted share, for the first quarter of fiscal 2019, compared to $18.3 million, or $0.55 per diluted share, for the fourth quarter of fiscal 2018, and $7.4 million, or $0.25 per diluted share, for the first quarter of fiscal 2018.

Balance Sheet and Cash Flow

The Company ended the first quarter of fiscal 2019 with $213.0 million of cash, cash equivalents and investments (2). Cash used in operating activities was $6.7 million for the first quarter of fiscal 2019.

Management Commentary

Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “We are off to a solid start in fiscal 2019 as the momentum we established in FY 2018 continues. Across every one of our industry groups, the need for digital transformation has moved from being a strategic option to being a business imperative. Virtusa’s strong execution and the depth and breadth of our digital engineering capabilities allow us to help our clients realize the full potential of digital transformation and are powering our performance.”

Ranjan Kalia, Chief Financial Officer, said, “We are pleased with our fiscal 2019 first quarter results. We reported revenue toward the high-end of our guidance range and generated strong year-over-year organic revenue growth, margin expansion and EPS accretion. Our fiscal 2019 first quarter momentum has allowed us to maintain the midpoint of our FY 2019 revenue guidance even after absorbing one percent of currency headwinds compared to our prior guidance. We expect strong fiscal year 2019 non-GAAP diluted EPS growth of 38% at the midpoint based on our increased earnings guidance.”

Financial Outlook

Virtusa management provided the following current financial guidance:

Second quarter fiscal 2019 revenue is expected to be in the range of $301.0 to $309.0 million. GAAP diluted EPS is expected to be in the range of $0.09 to $0.13. Non-GAAP diluted EPS is expected to be in the range of $0.50 to $0.56. Fiscal year 2019 revenue is expected to be in the range of $1,235.0 to $1,265.0 million. GAAP diluted EPS is expected to be in the range of $0.09 to $0.19. Non-GAAP diluted EPS is expected to be in the range of $2.16 to $2.34.

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.

First quarter GAAP Income per share was calculated by including the impact of dividends and accretion on the convertible preferred shares in net income available to common stockholders and excluding the impact of the convertible preferred shares from the weighted average shares. First quarter 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 non-GAAP basis. GAAP EPS guidance was calculated under the assumption that these convertible preferred shares will be anti-dilutive in fiscal 2019. Thus, in determining 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 fiscal year 2019. Thus, in determining 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 second quarter and fiscal year 2019 diluted GAAP EPS estimates are based on average share counts of approximately 30.7 million and 30.8 million, respectively (assuming no further exercises of stock-based awards). The Company’s second quarter and fiscal year 2019 diluted Non-GAAP EPS estimates are based on average share counts of approximately 33.7 million and 33.8 million, respectively (assuming no further exercises of stock-based awards). GAAP and Non-GAAP average share counts assume a stock price of $52.88, which was derived from the average closing price of the Company’s stock over the five trading days ended on August 2, 2018. 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, August 8, 2018 at 5:00 p.m. Eastern Time to discuss the Company’s first quarter fiscal 2019 financial results, current financial guidance, and other corporate developments. To access this call, please dial 888-394-8218 (domestic) or 323-701-0225 (international). The passcode is 9387160. A replay of this conference call will be available through August 15, 2018 at 844-512-2921 (domestic) or 412-317-6671 (international). The replay passcode is 9387160. 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.

© 2018 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, acquisition-related charges, restructuring charges, stock-based compensation expense, foreign currency transaction gains and losses, 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, 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, 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, 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:

(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, 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:

Footnotes

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

(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.

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