Virtusa Announces Second Quarter Fiscal 2010 Financial Results and Acquisition of InSource, LLC

November 5, 2009 4:05 PM EST

- Second quarter fiscal 2010 revenue of $37.5 million and EPS of $0.12

- Cash, cash equivalents, short-term investments and long-term investments of $123.8 million, an increase of 6% over the first quarter of fiscal 2010

- Acquires InSource, a privately-held technology consulting firm with domain expertise in the insurance and healthcare industries

WESTBOROUGH, Mass.--(BUSINESS WIRE)-- Virtusa Corporation (NASDAQ: VRTU), a global information technology (IT) services company that provides IT consulting, technology implementation and application outsourcing services through an enhanced global delivery model, today reported financial results for the second quarter of fiscal year 2010, ended September 30, 2009.

Second Quarter Fiscal 2010 Financial Results

Revenue for the second quarter of fiscal 2010 was $37.5 million, a decrease of 15% year-over-year and an increase of $0.1 million sequentially. On a constant currency basis (1) second quarter revenue decreased 11% year-over-year and 1% sequentially.

Virtusa reported income from operations of $3.2 million for the second quarter of fiscal 2010, an increase compared to $0.7 million for the second quarter of fiscal 2009 and an increase compared to $3.1 million for the first quarter of fiscal 2010.

Net income for the second quarter of fiscal 2010 was $3.0 million, or $0.12 per diluted share, an increase compared to $1.3 million or $0.05 per diluted share for the second quarter of fiscal 2009 and an increase compared to $2.6 million, or $0.11 per diluted share, for the first quarter of fiscal 2010.

The Company ended the second quarter of fiscal 2010 with $123.8 million of cash, cash equivalents, short-term investments and long-term investments (2). The Company generated cash from operations of $8.3 million during the second quarter of fiscal 2010.

Kris Canekeratne, Virtusa's Chairman and CEO, stated, "During the second quarter, the underlying business environment showed signs of improvement while the pace of the recovery remains measured. We started work with seven new clients as a result of our focus on accelerating business outcomes and reducing overall IT costs."

Ranjan Kalia, Chief Financial Officer, said, "Our continued focus on profitability and working capital management resulted in earnings per share above the high end of our previous guidance and cash flow from operations of $8.3 million." Mr. Kalia added, "We continue to expect organic revenue growth in the second half of the year, driven by expansion from both existing clients and the newer clients we have added over the last 18 months."

Acquisition of InSource, LLC

Virtusa today announced the acquisition of InSource, LLC, a privately-held technology consulting firm with domain expertise in the insurance and healthcare industries. Under the terms of the agreement, InSource will become a wholly owned subsidiary of Virtusa. InSource employs approximately 50 experienced practitioners specializing in program management and IT strategy. The acquisition is expected to immediately expand Virtusa's service offerings in the insurance and healthcare industries.

Under the terms of the agreement, Virtusa acquired InSource for $7.3 million in cash, subject to post closing adjustments, including up to an additional $0.5 million in earn-out consideration upon InSource's achievement of certain revenue and profit milestones for the three and twelve month periods ending December 31, 2009. Virtusa expects the impact of the acquisition to be one to two cents dilutive to earnings per share on a GAAP basis for its fiscal year ending March 31, 2010, inclusive of expected transaction and integration costs.

"We are pleased to welcome the InSource team to Virtusa. Since the beginning of 2009, we have partnered with InSource to deliver comprehensive business solutions that combined their IT strategy and program management expertise with our technology capabilities and global delivery model. We have seen firsthand the benefits of the combination and are confident in our ability to take our expanded value proposition to existing and future clients in the insurance and healthcare industries," said Kris Canekeratne, Virtusa's Chairman and CEO.

Financial Outlook

Virtusa's current guidance for the third fiscal quarter ending December 31, 2009 and the full fiscal year ending March 31, 2010 reflects the inclusion of InSource. Virtusa expects InSource to contribute revenue of $1.2 to $1.4 million for the third fiscal quarter and $3.0 to $4.0 million for full fiscal year 2010. In addition, Virtusa expects InSource to be dilutive by $0.01 to $0.02 per share on a GAAP basis in the third fiscal quarter and for the full fiscal year 2010.

    --  Third quarter 2010 revenue is expected to be in the range of $39.7 to
        $41.4 million, with diluted EPS of $0.09 to $0.12.
    --  Fiscal year 2010 revenue is expected to be in the range of $157.0 to
        $162.0 million, with diluted EPS of $0.46 to $0.53.

The Company's third quarter and fiscal year 2010 diluted EPS estimates assume an average share count of approximately 24.1 million (assuming no further exercises of stock-based awards) and assume a stock price of $9.09, which was derived from the average closing price of the Company's stock over the five trading days ended on October 30, 2009. 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, November 5, 2009 at 5:00 pm Eastern time to discuss the Company's second quarter 2010 financial results, current financial guidance, the acquisition of InSource, and other corporate developments. To access this call, dial 888-205-6786 (domestic) or 913-312-1419 (international). A replay of this conference call will be available through November 12, 2009 at 888-203-1112 (domestic) or 719-457-0820 (international). The replay passcode is 9746905. 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 Corporation

Virtusa is a global information technology (IT) services company providing IT consulting, technology implementation and application outsourcing services. Using its enhanced global delivery model, innovative platforming approach and industry expertise, Virtusa provides high-value services that enhance clients' business performance, accelerate time-to-market, increase productivity and improve customer service.

Founded in 1996 and headquartered in Massachusetts, Virtusa has offices in the United States and the United Kingdom, and global delivery centers in India and Sri Lanka.

"Virtusa" is a registered trademark of Virtusa Corporation.

About InSource, LLC.

Founded in 1997, InSource, LLC (www.insourceconsulting.com) is a proven business and technology management consulting firm dedicated to the financial services and healthcare industries with a broad range of capabilities and in-depth expertise in the areas of business, operations and systems. Over the years, InSource has developed processes, practices and methodologies that are battle tested and proven to accelerate client projects, effectively manage risk, and add significant value to realizing project goals. InSource captures leading practices and methodologies, leverages learnings, and provides the latest and best approaches to its client delivery teams.

(1) To determine year-over-year constant currency revenue for the Company's second quarter of fiscal 2010, 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, 2008 of 1.90 U.S. dollars to U.K. pounds sterling, rather than the actual exchange rate in effect for the three months ended September 30, 2009 of 1.63 U.S. dollars to U.K. pounds sterling. To determine sequential revenue change in constant currency for the Company's second quarter of fiscal 2010, 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, 2009 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, 2009 of 1.63 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 the most meaningful indicator of the Company's liquidity. All of the Company's investments, other than certain auction-rate securities, 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 a reconciliation of its cash, cash equivalents, short term and long term investments which it believes provides insight into its cash position and overall liquidity (see footnote (2) above for further detail). While Virtusa's management believes that these non-GAAP revenue measures and cash reconciliation presentations are useful in evaluating Virtusa's revenue and cash position and overall liquidity, this information should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with GAAP.

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 forecast of financial performance for InSource, expected benefits of the InSource acquisition, the acquisition of new clients and growth of 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 ability to assimilate and integrate the operations of InSource; unanticipated acquisition related costs and negative effects on Virtusa's reported results of operations from acquisition-related charges; Virtusa's ability to achieve expected synergies and operating efficiencies in the acquisition within expected time-frames or at all; 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 expand its business or effectively manage growth; restrictions on immigration or changes in immigration laws; the loss of any key member of Virtusa's senior management team, increasing competition in the IT services outsourcing industry; Virtusa's ability to hire and retain enough sufficiently trained IT professionals to support its operations; quarterly fluctuations in Virtusa's earnings; client terminations or contracting delays, or delays in revenue recognition in any reporting period; Virtusa's ability to attract and retain clients and meet their expectations; Virtusa's ability to sustain profitability or maintain profitable engagements; 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; 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, 2009, 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, 2009  March 31, 2009

Assets:

 Cash and cash equivalents                   $ 69,806            $ 55,698

 Short-term investments                        26,136              23,333

 Accounts receivable, net                      26,384              28,244

 Unbilled accounts receivable                  2,550               4,005

 Prepaid expenses                              3,211               5,050

 Deferred income taxes                         2,015               4,139

 Other current assets                          5,318               5,668

 Total current assets                          135,420             126,137

 Property and equipment, net                   19,997              19,680

 Long-term investments                         27,901              28,054

 Restricted cash                               860                 3,489

 Deferred income taxes                         4,868               5,040

 Other long-term assets                        4,754               4,623

 Total assets                                $ 193,800           $ 187,023

Liabilities:

 Accounts payable                            $ 4,110             $ 5,499

 Accrued employee compensation and benefits    8,744               9,520

 Accrued expenses - other                      9,416               15,128

 Deferred revenue                              453                 1,016

 Income taxes payable                          493                 151

 Total current liabilities                     23,216              31,314

 Long-term liabilities                         1,746               3,123

 Total liabilities                             24,962              34,437

Stockholders' equity                           168,838             152,586

 Total liabilities and stockholders' equity  $ 193,800           $ 187,023

Virtusa Corporation and Subsidiaries

Consolidated Statements of Income

(In thousands except per share amounts, unaudited)

                  Three Months Ended              Six Months Ended

                  September 30,                   September 30,

                  2009            2008            2009            2008

Revenue           $ 37,497        $ 44,022        $ 74,865        $ 86,565

Costs of revenue    21,114          28,344          41,985          56,412

 Gross profit       16,383          15,678          32,880          30,153

Total operating     13,206          14,989          26,608          29,453
expenses

 Income from        3,177           689             6,272           700
 operations

Other income
(expense):

Interest income,    453             670             872             1,430
net

Foreign currency
transaction         (273       )    (896       )    (925       )    (880       )
gains (losses)

Other, net          (9         )    27              97              31

 Total other
 income             171             (199       )    44              581
 (expense)

 Income before
 income tax         3,348           490             6,316           1,281
 expense
 (benefit)

Income tax
expense             362             (806       )    701             (860       )
(benefit)

Net income        $ 2,986         $ 1,296         $ 5,615         $ 2,141

Net income per
share of common
stock:

Basic             $ 0.13          $ 0.06          $ 0.24          $ 0.09

Diluted           $ 0.12          $ 0.05          $ 0.24          $ 0.09

Weighted average
number of common
shares
outstanding

Basic               23,227,296      22,959,999      22,949,763      23,005,655

Diluted             24,151,930      24,358,242      23,857,345      24,533,214

Virtusa Corporation and Subsidiaries

Consolidated Statement of Cash Flows

(In thousands, unaudited)

                                                      Six Months Ended

                                                      September 30,

(In thousands)                                        2009          2008

Cash flows provided by operating activities:

Net income                                            $ 5,615       $ 2,141

Adjustments to reconcile net income to net cash
provided by operating activities:

Depreciation and amortization                           2,366         2,090

Share-based compensation expense                        1,712         2,202

Deferred income taxes, net                              (266    )     (1,011  )

Foreign currency losses, net                            925           880

Net changes in operating assets and liabilities:

Accounts receivable, net                                4,856         (1,821  )

Prepaid expenses and other current assets               2,613         (2,601  )

Other long-term assets                                  (930    )     (53     )

Accounts payable                                        (2,549  )     1,267

Accrued employee compensation and benefits              (520    )     (474    )

Accrued expenses--other                                 (644    )     818

Deferred revenue                                        (592    )     473

Excess tax benefits from stock option exercises         (45     )     --

Income taxes payable                                    94            795

Other long-term liabilities                             (202    )     88

Net cash provided by operating activities               12,433        4,794

Cash flows used for investing activities:

Purchase of short-term investments                      (2,049  )     (12,223 )

Proceeds from sale or maturity of short-term            15,600        28,588
investments

Purchase of long-term investments                       (22,551 )     (15,245 )

Proceeds from sale or maturity of long-term             7,100         2,737
investments

Purchase of property and equipment                      (1,756  )     (7,770  )

Proceeds from sale of property and equipment            --            12

Decrease in restricted cash                             2,691         579

Net cash used for investing activities                  (965    )     (3,322  )

Cash flows provided by (used for) financing
activities:

Purchase of treasury stock                              --            (3,400  )

Proceeds from exercise of common stock options          1,624         325

Excess tax benefits from stock option exercises         45            --

Principal payments on capital lease obligation          (4      )     --

Net cash provided by (used for) financing activities    1,665         (3,075  )

Effect of exchange rate changes on cash and cash        975           (827    )
equivalents

Net increase (decrease) in cash and cash equivalents    14,108        (2,430  )

Cash and cash equivalents, beginning of period          55,698        41,047

Cash and cash equivalents, end of period              $ 69,806      $ 38,617

Supplemental Non-GAAP Financial Information as of
September 30, 2009 and 2008

Reconciliation to total cash and cash equivalents,
short-term investments and long term investments:

Cash and cash equivalents, end of period              $ 69,806      $ 38,617

Short-term investments                                  26,136        32,015

Long-term investments                                   27,901        21,304

Total short-term and long-term investments, end of      54,037        53,319
period

Total cash and cash equivalents, short-term           $ 123,843     $ 91,936
investments and long-term investments

    Source: Virtusa Corporation

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