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Third quarter fiscal 2016 revenue of $150.6 million increased 5% sequentially and 22% year-over-year.
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Third quarter fiscal 2016 diluted EPS on a GAAP basis was $0.38, compared to $0.40 in the year ago period.
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Third quarter fiscal 2016 revenue and GAAP EPS were impacted by approximately $(0.8) million and $(0.02), respectively, as a result of recent floods affecting Virtusa’s Chennai, India facility.
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Incurred $1.2 million of Polaris transaction-related expenses including an incremental $0.6 million, or $(0.01) per share, not previously contemplated in guidance.
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Generated $22.4 million of cash from operating activities during the third quarter of fiscal 2016.
Virtusa Corporation, 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 third quarter fiscal year 2016, ended December 31, 2015.
Third Quarter Fiscal 2016 Consolidated Financial Results
Revenue for the third quarter of fiscal 2016 was $150.6 million, an increase of 5% sequentially and 22% year-over-year. On a constant currency basis,(1) third quarter revenue increased 6% sequentially and 23% year-over-year.
Virtusa reported GAAP income from operations of $14.1 million for the third quarter of fiscal 2016, compared to $13.3 million for the second quarter of fiscal 2016 and $14.6 million for the third quarter of fiscal 2015.
GAAP net income for the third quarter of fiscal 2016 was $11.3 million, or $0.38 per diluted share, compared to $11.1 million, or $0.37 per diluted share, for the second quarter of fiscal 2016, and compared to $11.8 million, or $0.40 per diluted share, for the third quarter of fiscal 2015.
In the third quarter of fiscal 2016, Virtusa incurred approximately $1.2 million, or $(0.02) per diluted share, of transaction expenses related to the proposed acquisition of a majority interest in Polaris Consulting & Services, Ltd., compared to the prior guidance of $0.6 million, or $(0.01) per diluted share.
Non-GAAP Results
Non-GAAP income from operations, which excludes stock-based compensation expense and acquisition related expenses, was $20.7 million for the third quarter of fiscal 2016, compared to $18.7 million for the second quarter of fiscal 2016, and an increase compared to $19.1 million for the third quarter of fiscal 2015.
Non-GAAP net income, which excludes stock-based compensation expense, acquisition related expenses, and foreign currency transaction gains and losses, each net of tax, for the third quarter of fiscal 2016 was $15.9 million, or $0.54 per diluted share, compared to $15.0 million, or $0.50 per diluted share, for the second quarter of fiscal 2016, and compared to $15.2 million, or $0.51 per diluted share, for the third quarter of fiscal 2015.
Chennai Flood Impact
Heavy rainfall and the resultant flooding in Chennai, India in December 2015 temporarily affected Virtusa’s regular business operations at its Chennai facility. Operations in Virtusa’s Chennai facility have been fully restored; however, the incident resulted in an unfavorable revenue impact of approximately $(0.8) million in the third fiscal quarter of 2016. In addition, Virtusa incurred approximately $0.4 million of incremental expenses associated with the deployment of its business continuity program. In total, Virtusa’s earnings per share were impacted by approximately $(0.02) in the third quarter of fiscal 2016 due to the effects of the flood.
Balance Sheet and Cash Flow
The Company ended the third quarter of fiscal 2016 with $201.2 million of cash, cash equivalents, and short-term and long-term investments (2). Virtusa’s fiscal third quarter ending cash balance excludes $20.3 million of restricted cash held in escrow for the mandatory unconditional offer related to the proposed acquisition of a majority interest in Polaris Consulting & Services, Ltd. Cash flow from operations for the third quarter of fiscal 2016 was $22.4 million.
Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “I am pleased with our fiscal third quarter performance. While we faced some unexpected challenges brought on by the Chennai floods, outstanding execution by our local team enabled us to navigate this event with minimal interruption to our critical business operations. From a demand perspective, corporations are increasingly investing in IT solutions which enable them to run their business more efficiently, secure the business, and grow the business. Virtusa’s value proposition of delivering industry-leading, transformational services and solutions that squarely address these critical business objectives continues to resonate in the market and is enabling us to win market share.”
Ranjan Kalia, Chief Financial Officer, said, “We delivered solid sequential and year-over-year revenue growth in the fiscal third quarter. Our strong quarterly cash flow provides us with increased flexibility to invest in our growth initiatives including in the upcoming Polaris acquisition. Our fiscal fourth quarter guidance reflects sequential revenue growth across all three of our industry verticals, partially offset by greater foreign exchange headwinds, continued pressure on our insurance segment, and a later than previously expected close of the Polaris acquisition.”
Financial Outlook
Virtusa management provided the following current financial guidance:
Fourth quarter fiscal 2016 revenue is expected to be in the range of $172.0 to $175.0 million, and assumes a later than previously anticipated closing of the Polaris acquisition expected now in late February 2016. GAAP diluted EPS is expected to be in the range of $(0.01) to $0.01. Virtusa management currently expects Polaris to contribute revenue of approximately $20 million and to be approximately ($0.36) dilutive to Virtusa’s GAAP earnings per share, including approximately ($0.20) of dilution from acquisition-related charges. Fourth quarter fiscal 2016 non-GAAP diluted EPS is expected to be in the range of $0.44 to $0.46, including $(0.10) dilution from the Polaris transaction.
Fiscal year 2016 revenue is expected to be in the range of $600.4 to $603.4 million. GAAP diluted EPS is expected to be in the range of $1.07 to $1.09. Virtusa management currently expects Polaris to contribute revenue of approximately $20 million and to be approximately ($0.39) dilutive to Virtusa’s GAAP earnings per share, including approximately ($0.23) of dilution from acquisition-related charges. Non-GAAP diluted EPS is expected to be in the range of $1.96 to $1.98, including $(0.10) dilution from the Polaris transaction.
Virtusa’s current GAAP diluted EPS guidance for the fourth fiscal quarter and the full fiscal year ending March 31, 2016 estimates Polaris transaction and integration expenses of $8.8 million and $10.0 million, respectively.
The Company’s fourth quarter diluted EPS estimates an average share count of approximately 30.2 million and fiscal year 2016 diluted EPS estimates an average share count of approximately 30.0 million, (assuming no further exercises of stock-based awards) and assume a stock price of $44.95, which was derived from the average closing price of the Company’s stock over the five trading days ended on February 4, 2016. 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, February 8, 2016 at 9:00 am Eastern Time to discuss the Company’s third quarter fiscal 2016 financial results, current financial guidance, and other corporate developments. To access this call, please dial 877-545-1402 (domestic) or 719-325-4760 (international). The passcode is 5423833. A replay of this conference call will be available through February 15, 2016 at 877-870-5176 (domestic) or 858-384-5517 (international). The replay passcode is 5423833. 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.
