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| VRTU > SEC Filings for VRTU > Form 10-K on 25-May-2012 | All Recent SEC Filings |
25-May-2012
Annual Report
The following discussion and analysis of our financial condition and results of our operations should be read together with our consolidated financial statements and related notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Annual Report.
Business overview
We are a global information technology services company. We use an offshore delivery model to provide a broad range of IT services, including IT consulting, technology implementation and application outsourcing. Using our enhanced global delivery model, innovative platforming approach and industry expertise, we provide cost-effective services that enable our clients to use IT to enhance business performance, accelerate time-to-market, increase productivity and improve customer service. Headquartered in Massachusetts, we have offices in the United States, the United Kingdom, the Netherlands, Germany and Singapore and global delivery centers in Hyderabad and Chennai, India, Colombo, Sri Lanka and Budapest, Hungary. At March 31, 2012, we had 5,672 employees, or team members, an increase from 5,056 at March 31, 2011. For the fiscal year ended March 31, 2012, we had revenue of $277.8 million and income from operations of $23.9 million. In our fiscal year ended March 31, 2012, our revenue increased by $59.8 million, or 27.4%, to $277.8 million, as compared to $218.0 million in our fiscal year ended March 31, 2011. Our net income increased from $16.2 million in our fiscal year ended March 31, 2011 to $20.0 million in our fiscal year ended March 31, 2012.
The key drivers of the increase in revenue in our fiscal year ended March 31, 2012, as compared to our fiscal year ended March 31, 2011, were as follows:
º •
º Broad based growth of our clients existing at March 31, 2011,
including our top ten clients collectively
º •
º Broad based revenue growth from clients in our banking, financial
services and insurance ("BFSI") and communications and technology
("C&T") industries
º •
º Revenue from clients obtained in connection with the acquisition of
ALaS in July 2011
The key drivers of our increase in net income in our fiscal year ended March 31, 2012, as compared to our fiscal year ended March 31, 2011, were as follows:
º •
º Higher revenue, partially offset by higher onsite effort, increased
use of subcontractors, increased compensation costs related to our IT
professionals and an increase in visa costs
º •
º Increased efficiencies in selling, general and administrative expenses
over a larger revenue base, partially offset by higher tax expense due
to expiration of certain of our tax holidays in India
High repeat business and client concentration are common in our industry. During our quarter ended March 31, 2012, 90% of our revenue was derived from clients who had been using our services for more than one year. Accordingly, our global account management and service delivery teams focus on expanding client relationships and converting new engagements to long-term relationships to generate repeat revenue and expand revenue streams from existing clients. We also have a dedicated business development team focused on generating engagements with new clients to continue to expand our client base and, over time, reduce client concentration. As a result of our business development efforts, our average revenue per new client closed in the fiscal year ended March 31, 2012 increased as compared to the fiscal year ended March 31, 2011.
For the fiscal years ended March 31, 2012, 2011 and 2010, we generated 54%, 49%, and 56%, respectively, of revenue from application outsourcing and 46%, 51% and 44%, respectively, of revenue from consulting services.
We perform our services under both time-and-materials and fixed-price contracts. Revenue from fixed-price contracts was 18%, 19%, and 18% of total revenue for the fiscal years ended March 31, 2012, 2011 and 2010, respectively. The revenue earned from fixed-price contracts reflects our clients' preferences during the fiscal years ended March 31, 2012, 2011 and 2010.
At March 31, 2012, we had cash and cash equivalents, short-term and long-term investments of $85.4 million as compared to $112.0 million at March 31, 2011. The decrease related primarily to the cash consideration of approximately $27.8 million we paid on July 1, 2011 to ALaS in connection with the acquisition of the ALaS business. For the fiscal year ending March 31, 2013, we expect the following factors, among others, to affect our business and our operating results:
º •
º Global economic conditions
º •
º Uncertainty in overall demand for global IT services
º •
º Foreign currency volatility
º •
º Continued impact of an increased effective income tax rate as a result
of the geographical mix of our profits.
For the fiscal year ending March 31, 2013, we plan to:
º •
º Continue to invest in our talent base, including new onsite campus
recruitment programs
º •
º Continue our focus on client generation and expansion of revenue
gained from existing clients
º •
º Invest in healthcare solutions as well as leverage our expertise in
customer relations management and business process management
º •
º Deepen our domain expertise in our service offerings related to mobile
applications, social media and cloud computing
º •
º Broaden our consulting and solutions capabilities related to our
service offerings
º •
º Pursue opportunistically acquisitions that would improve or broaden
our overall service delivery capabilities, domain expertise and / or
service offerings
º •
º Implement resource and operating optimization initiatives to improve
operating efficiencies
As an IT services company, our revenue growth has been, and will continue to be, highly dependent on our ability to attract, develop, motivate and retain skilled IT professionals. For the fiscal year ended March 31, 2012, we finished the fiscal year with a total headcount of 5,672, as compared with a total headcount of 5,056 for the fiscal year ended March 31, 2011. There is intense competition for IT professionals with the skills necessary to provide the type of services we offer. We closely monitor our overall attrition rates and patterns to ensure our people management strategy aligns with our growth objectives. For the last twelve months ended March 31, 2012, our voluntary attrition rate was 15.5%, while our involuntary attrition rate was 5.0%. The majority of our attrition occurs in India and Sri Lanka, and is weighted towards the more junior members of our staff. In response to higher attrition and as part of our retention strategies, we have experienced increases in compensation and benefit costs, which may continue in the future. However, we try to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, the mix of professional staff and utilization levels and achieving other operating efficiencies. If our attrition rate increases or is sustained at higher levels, our growth may slow and our cost of attracting and retaining IT professionals could increase.
We have continued to maintain an eight quarter hedging program, which we believe has been effective since inception at reducing the impact of fluctuations in local currencies on our operating results, although there is no assurance that this hedging program will continue to be effective. These hedges may also cause us to forego benefits of a positive currency fluctuation, especially given the volatility of these currencies. In addition, to the extent that these hedges cease to qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges placed earlier than expected.
We monitor a number of operating metrics to manage and assess our earnings, including:
º •
º Days sales outstanding ("DSO") is a measure of the number of days our
accounts receivable are outstanding based upon the last 90 days of
revenue activity, which indicates the timeliness of our cash
collection from clients and our overall credit terms to our clients.
DSO was 81 days and 76 days as of March 31, 2012 and March 31, 2011,
respectively. Higher DSO reduces our cash balance because the
revenue-to-cash conversion process takes longer.
º •
º Realized billing rates are the rates we charge our clients for our
services, which reflect the value our clients place on our services,
market competition and the geographic location in which we perform our
services. Our realized billing rates have marginally increased for our
fiscal year ended March 31, 2012 as compared to our fiscal year ended
March 31, 2011. Any increase in realized billing rates is a result of
our ability to successfully preserve or increase our billing rates
with existing and/or new clients.
º •
º Average cost per IT professional is the sum of team member salaries,
including variable compensation, and fringe benefits, divided by the
average number of IT professionals during the period. We experienced
an increase in our average cost per IT professional in Asia from our
fiscal year ended March 31, 2011 to our fiscal year ended March 31,
2012, primarily driven by competition and industry wide wage
increases.
º •
º Utilization rate is the percentage of time billable IT professionals
are deployed on client engagements, which indicates the efficiency of
our billable IT resources. Our utilization rate is defined as the
number of billable hours in a given period of time divided by the
total number of available hours of our IT professionals in a given
period of time, excluding trainees. We track our utilization rates to
measure revenue potential and gross profit margins. Management's
targeted range for the utilization rate is between 70% and 80%. The
utilization rate is affected by the rate of quarterly sequential
revenue growth, as well as ability to staff existing IT professionals
on billable engagements. In growth periods, utilization tends to rise
as more resources are deployed to meet rising demand. Utilization
rates above the target 80% may also indicate that there are
insufficient IT professionals to staff existing or future engagements
which may result in loss of revenue or inability to service client
engagements.
º •
º Attrition rate is the ratio of terminated team members during the
latest twelve months to the total number of team members at the end of
such period, which measures team member turnover. Increased voluntary
attrition rates result in increased hiring, training and on-boarding
costs and productivity losses, which may adversely affect our revenue,
gross margin and operating profit margin. Our voluntary attrition rate
was 15.5%, while our involuntary attrition rate was 5.0%, for the
fiscal year ended March 31, 2012. Our voluntary attrition rate was
22.6% for the fiscal year ended March 31, 2011, while our involuntary
attrition rate was 5.1% for the same fiscal year.
º •
º Operating expense efficiency is a measure of operating expenses as a
percentage of revenue. If we continue to successfully grow our
revenue, we anticipate that operating expenses will decrease as a
percentage of revenue as such expenses are absorbed across a larger
revenue base. In the near term, however, any operating expense
efficiency may decline if our revenue declines.
º •
º Effective tax rate is our worldwide tax expense as a percentage of our
consolidated net income before tax, which measures the impact of
income taxes worldwide on our operations and net
income. We monitor and assess our effective tax rate to evaluate whether our tax structure is competitive as compared to our industry. Our effective tax rate was 24.2% and 11.1% for the fiscal years ended March 31, 2012 and 2011 respectively. The expiration of our STP tax holidays in Hyderabad and Chennai, which expired on March 31, 2010 and 2011, respectively, resulted in an increase in our effective tax rate as compared to prior periods. Increases in our effective tax rate or a high effective tax rate will also have a negative effect on our earnings in future periods.
º •
º Onsite-to-offshore mix is the measurement of hours billed by resources
located offshore to hours billed by our team members onsite over a
defined period. We strive to manage both fixed-price contracts and
time-and-materials engagements to a 20/80 onsite-to-offshore service
delivery team mix, although such delivery mix may be impacted by
several factors including our new and existing client delivery
requirements as well as the impact of any U.S. based acquisitions. For
the fiscal year ending March 31, 2013, we anticipate the onsite ratio
to slightly increase due to new client engagements, existing work on
larger, more complex programs, as well as the full fiscal year impact
of the ALaS acquisition.
Sources of revenue
We generate revenue by providing IT services to our clients located primarily in North America and Europe. We have historically earned, and believe that over the next few fiscal years we will continue to earn a significant portion of our revenue from a limited number of clients. For the fiscal year ended March 31, 2012, collectively, our five largest and ten largest clients accounted for 45% and 59% of our revenue, respectively. Our two largest clients accounted for 16% and 12%, respectively, of our revenue for the fiscal year ended March 31, 2012. The loss of any one of our major clients could reduce our revenue and operating profit and harm our reputation in the industry. During the fiscal year ended March 31, 2012, 78% of our revenue was generated in North America, 18% in Europe and 4% in rest of the world. We provide IT services on either a time-and-materials or a fixed-price basis. For the fiscal year ended March 31, 2012, the percentage of revenue from time-and-materials and fixed-price contracts was 82% and 18%, respectively.
Revenue from services provided on a time-and-materials basis is derived from the number of billable hours in a period multiplied by the contractual rates at which we bill our clients. Revenue from services provided on a fixed-price basis is recognized as efforts are expended pursuant to the percentage-of-completion method. Revenue also includes reimbursements of travel and out-of-pocket expenses with equivalent amounts of expense recorded in costs of revenue. Most of our client contracts, including those that are on a fixed-price basis, can be terminated by our clients with or without cause on 30 to 90 days prior written notice. All fees for services provided by us through the date of cancellation are generally due and payable under the contract terms.
Our unit pricing is driven by business need, delivery timeframes, complexity of the engagement, operating differences (such as onsite/offshore ratio), competitive environment and engagement size or volume. As a pricing strategy to encourage clients to increase the volume of services that we provide to them, we may, on occasion, offer volume discounts. We manage our business carefully to protect our account margins and our overall profit margins. We find that our clients generally purchase on the basis of total value, rather than on minimum cost, considering all of the factors listed above.
While we are subject to the effects of overall market pricing pressure, we believe that there is a fairly broad range of pricing offered by different competitors for each service we provide. We believe that no one competitor, or set of competitors, sets pricing in our industry. We find that our unit pricing, as a result of our global delivery model, is generally competitive with other firms who operate with a predominately offshore operating model.
The proportion of work performed at our offshore facilities and at onsite client locations varies from period-to-period. Effort, in terms of the percentage of hours billed to clients by onsite resources, was 20%
and 18% of total hours billed in each of the fiscal years ended March 31, 2012 and 2011, respectively, while the revenue from resources located onsite and offshore accounted for 49% and 51% respectively in the fiscal year ended March 31, 2012, and 49% and 51% respectively during the fiscal year ended March 31, 2011. We charge higher rates and incur higher compensation costs and other expenses for work performed at client locations in the United States and the United Kingdom as compared to work performed at our global delivery centers in India, Sri Lanka and Hungary. Services performed at client locations or at our offices in the United States or the United Kingdom generate higher revenue per-capita at lower gross margins than similar services performed at our global delivery centers in India and Sri Lanka. We manage to a 20/80 onsite-to-offshore service delivery mix, although such delivery mix may be impacted by several factors including our new and existing client delivery requirements as well as the impact of any U.S. based acquisitions. For the fiscal year ending March 31, 2013, we anticipate the onsite ratio to slightly increase due to new client engagements, existing work on larger, more complex programs, as well as the full year impact of the ALaS acquisition.
Costs of revenue and gross profit
Costs of revenue consist principally of payroll and related fringe benefits, reimbursable and non-reimbursable costs, immigration-related expenses, fees for subcontractors working on client engagements and share-based compensation expense for IT professionals including account management personnel.
Wage costs in India and Sri Lanka have historically been significantly lower than wage costs in the United States and Europe for comparably-skilled IT professionals. However, wages in India and Sri Lanka are increasing in local currency, which will result in increased costs for IT professionals, particularly project managers and other mid-level professionals. We may need to increase the levels of our team member compensation more rapidly than in the past to remain competitive without the ability to make corresponding increases to our billing rates. Compensation increases may reduce our profit margins, make us less competitive in pricing potential projects against those companies with lower cost resources and otherwise harm our business, operating results and financial condition. We deploy a campus hiring philosophy and encourage internal promotions to minimize the effects of wage inflation pressure and recruiting costs. Additionally, any material appreciation in the Indian rupee or Sri Lankan rupee against the U.S. dollar or U.K. pound sterling could have a material adverse impact on our cost of services.
Our revenue and gross profit are also affected by our ability to efficiently manage and utilize our IT professionals and fluctuations in foreign currency exchange rates. We define utilization rate as the total number of days billed in a given period divided by the total available days of our IT professionals during that same period, excluding trainees. We manage employee utilization by continually monitoring project requirements and timetables to efficiently staff our projects and meet our clients' needs. The number of IT professionals assigned to a project will vary according to the size, complexity, duration and demands of the project. An unanticipated termination or reduction of a significant project could cause us to experience a higher than expected number of unassigned IT professionals, thereby lowering our utilization rate.
Although, we have adopted an eight quarter cash flow hedging program to minimize the effect of the Indian rupee movement on our financial condition, particularly our costs of revenue, these hedges may not be effective or may cause us to forego benefits, especially given the volatility of these currencies. In addition, to the extent that these hedges do not qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges remaining outstanding as of the balance sheet date.
Operating expenses
Operating expenses consist primarily of payroll and related fringe benefits, commissions, selling, share-based compensation and non-reimbursable costs, as well as promotion, communications, management, finance, administrative, occupancy, marketing and depreciation and amortization expenses. In the fiscal
years ended March 31, 2012, 2011, and 2010, we invested in all aspects of our business, including sales, marketing, IT infrastructure, facilities, human resources programs and financial operations. Additionally, any material appreciation in the Indian rupee or Sri Lankan rupee against the U.S. dollar or U.K. pound sterling could have a material adverse impact on our cost of operating expenses.
Other income (expense)
Other income (expense) includes interest income, interest expense, investment gains and losses, foreign currency transaction gains and losses and disposal of fixed assets. We generate interest income by investing in time deposits, money market instruments, short-term investments and long-term investments. The functional currencies of our subsidiaries are their local currencies, except for Hungary which operates in the euro zone. Foreign currency gains and losses are generated primarily by fluctuations of the Indian rupee, Sri Lankan rupee and U.K. pound sterling against the U.S. dollar on intercompany transactions. We place our cash in liquid investments at highly-rated financial institutions based on our investment policy approved by our audit committee and board of directors. We believe that our credit policies reflect normal industry terms and business risk.
Income tax expense
Our net income is subject to income tax in those countries in which we perform services and have operations, including the United States, the United Kingdom, India, Sri Lanka, the Netherlands, Germany, Singapore and Hungary. In the fiscal year ended March 31, 2012, our effective tax rate was impacted by the mix of income by jurisdiction, availability and term of certain tax holidays and certain tax positions identified during the fiscal year ended March 31, 2012. Historically, we have benefited from long-term income tax holiday arrangements in both India and Sri Lanka that are offered to certain export-oriented IT services firms. As a result of these tax holiday arrangements, our worldwide profit has been subject to a relatively low effective tax rate as compared to the statutory rates in the countries in which we operate. The effect of the income tax holidays in India and Sri Lanka decreased our income tax expense in the fiscal years ended March 31, 2012 and 2011 by $5.1 million and $4.6 million, respectively. However, our tax expense increased by $1.2 million in the fiscal year ended March 31, 2012 compared to our tax expense for our fiscal year ended March 31, 2011 due to the expiration of our STP tax holiday in Chennai, India on March 31, 2011. Our effective tax rate in our fiscal year ended March 31, 2011 and March 31, 2012 also reflected the impact of the expiration of our STP tax holiday in Hyderabad on March 31, 2010. Increases in our effective tax rate, or a high effective tax rate, has a negative effect on our earnings in future periods.
Our effective tax rate was 24.2% and 11.1% for each of the fiscal years ended March 31, 2012 and 2011 respectively. Our effective tax rate in future periods will be affected by the geographic distribution of our earnings, as well as the availability of tax holidays in India and Sri Lanka.
Application of critical accounting estimates and risks
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical to the preparation of our consolidated financial statements when both of the following are present:
º •
º the estimate is complex in nature or requires a high degree of
judgment; and
º •
º the use of different estimates and assumptions could have a material
impact on the consolidated financial statements.
We have discussed the development and selection of our critical accounting estimates and related disclosures with the audit committee of our board of directors. Those estimates critical to the preparation of our consolidated financial statements are listed below.
Revenue recognition
Our revenue is derived from a variety of IT consulting, technology implementation and application outsourcing services. Our services are performed under both time-and-material and fixed-price arrangements. All revenue is recognized pursuant to U.S. GAAP. Revenue is recognized as work is performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. For contracts with fees billed on a time-and-materials basis, we generally recognize revenue as the service is performed.
Fixed-price engagements are accounted for under the percentage-of-completion method. Under the percentage-of-completion method, we estimate the percentage-of-completion by comparing the actual number of work days performed to date to the estimated total number of days required to complete each engagement. The use of the percentage-of-completion method requires significant judgment relative to estimating total contract revenue and costs to completion, including assumptions and estimates relative to the length of time to complete the project, the nature and complexity of the work to be performed and anticipated changes in other engagement-related costs. Our analysis of these contracts also contemplates whether contracts should be combined or segmented. We combine closely related contracts when all the applicable criteria under GAAP are met. Similarly, we may segment a project, which may consist of a single contract or a group of contracts, with varying rates of profitability, only if all the applicable criteria under GAAP are met. Estimates of total contract revenue and costs to completion are continually monitored during the term of the contract and are subject to revision as the contract progresses. Unforeseen circumstances may arise during an engagement requiring us to revise our original estimates and may cause the estimated profitability to decrease. When revisions in estimated contract revenue and efforts are determined, such adjustments are recorded in the period in which they are first identified.
Valuation and impairment of investments and/or marketable securities
We classify our marketable securities as available-for-sale or trading securities, and carry them at fair market value. Changes in fair value subsequent to the balance sheet date are recorded in the period in which they occur. The difference between amortized cost and fair market value, net of tax effect, for available-for-sale securities is recorded as a separate component of . . .
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