Item 1.
Business.
Overview
Virtusa Corporation (the "Company", "Virtusa", "we", "us" or "our") is a global provider of information technology (\"IT") consulting and
outsourcing services that accelerate business outcomes for our clients. We support Forbes Global 2000 clients across large, consumer facing industries like Banking & Financial Services,
Insurance, Healthcare, Communications, and Media & Entertainment, as they look to improve their business performance through accelerating revenue growth, delivering compelling consumer
experiences, improving operational efficiencies, and lowering overall IT costs. We provide services across the entire spectrum of the IT services lifecycle, from strategy & consulting, to
technology & user experience ("UX") design, development of IT applications, systems integration, testing & business assurance, and maintenance and support services, including
infrastructure and managed services. Our services leverage our distinctive consulting approach and unique platforming methodology to transform our clients' businesses through the innovative use of
technology and domain knowledge to solve critical business problems. Our services enable our clients to accelerate business outcomes by consolidating, rationalizing and modernizing their core
customer-facing processes into one or more core systems. We deliver cost-effective solutions through a global delivery model, applying advanced methods such as Agile, an industry standard technique
designed to accelerate application development. We also use our consulting methodology, which we refer to as Accelerated Solution Design ("ASD"), which is a collaborative decision-making and design
process performed with the client, to ensure our solutions meet the client's specifications and requirements. Our industry leading business transformational solutions combine deep domain expertise
with our strengths in
software engineering and business consulting to support our clients' business imperative initiatives across business growth and IT operations.
Headquartered
in Massachusetts, we have offices in the United States, Canada, the United Kingdom, the Netherlands, Germany, Switzerland, Sweden, Austria, the United Arab Emirates, Hong
Kong, Japan,
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Australia
and New Zealand, with global delivery centers in India, Sri Lanka, Hungary, Singapore and Malaysia, as well as multiple near shore delivery centers in the United States.
We
support the chief executive officers ("CXOs") at our client organizations, including the chief information officers ("CIOs"), chief technology officers ("CTOs"), chief operating
officers ("COOs"), and chief digital/ marketing officers ("CDOs/ CMOs") in solving their most critical issues, including reducing total cost of ownership, accelerating time-to-market, increasing
productivity, improving innovation velocity, expanding into adjacent markets and/or new revenue segments, and enhancing the customer experience delivered by their organizations. Our digital
transformation and innovation ("DTi") solutions support the business growth imperative by delivering targeted and differentiated solutions that help our clients expand their addressable markets as
well as develop go-to-market strategies supporting new revenue streams. To improve IT efficiencies and reduce the cost of IT operations, we use our operational excellence ("OE") basket of solutions to
help our clients consolidate applications into platforms, rationalize IT infrastructure, and deliver transformational, industry-focused solutions, thereby enabling our clients to deliver modern,
efficient and agile enterprise application platforms. Our deep expertise in core technology services allows us to help our clients to lower total cost of ownership of their overall IT investments. We
also combine industry specialization with our core services to deliver high-impact solutions in critical business functions that help our clients transform their business performance and gain
competitive advantage in the markets in which they operate.
We
are at the cusp of the fourth industrial revolution ("4IR"), driven by the convergence of technology innovation, changing consumer expectations, supply chain expansion, and emergence
of disruptive start-ups, that is fundamentally changing the way businesses operate. We operate in markets and industries where the combination of a growing millennial population and rapid advances in
key technologies like mobility, big data analytics, social media and cloud computing are providing disruptive opportunities for progressive business leaders to break down barriers and expand
market-share. We enable our clients to leverage technology innovations to provide the distinctive millennial customer experiences demanded by digital consumers who are increasingly looking for
services that are available 24×7 without interruption, location aware and highly customized to their social likes and dislikes. As part of our DTi solutions, we provide end-to-end
consulting, user experience design, technology selection, and implementation and support services, which allow our clients to understand emerging consumer demand in their markets of operation and
develop, and execute to, a roadmap to transform their business and enhance their competitive differentiators. Commoditization of IT services
and the emergence of as-a-service models are putting tremendous pressure on our clients' IT organizations to improve the way they manage IT operations and lower the overall cost of IT. Our OE
solutions enable our clients to improve operational and IT efficiencies through the innovative use of automation, effort compression and IT simplification.
New
advances in areas like internet of things ("IoT"), artificial intelligence ("AI"), machine learning ("ML"), and robotics process automation ("RPA") are now pushing the
boundaries of how technology can disrupt traditional business models and deliver significant value in several areas, including delivering new products and services, enhancing consumer experience and
improving operational efficiencies of the business. We have invested in developing deep capabilities in these new areas, fostering a strong partner ecosystem and building a rich platform for nurturing
innovation and rapidly constructing prototypes that use IoT, AI and/or RPA to solve specific business problems for our clients. We have created innovation centers focused on certain technologies.
Virtusa's Skylab innovation center focuses on technologies like IoT, AI, and ML, and has created a robust ecosystem for clients to participate and innovate in creating new solutions to their business
challenges. Skylab has delivered award winning solutions to some of our marquee clients in healthcare, communications and insurance sectors. Virtusa's FinTech Lab focuses on innovation for our
financial services clients. Over the past year, we have augmented investments into our FinTech Lab and are currently helping some of the most innovative banking and financial services clients develop
and implement solutions around blockchain and open banking API platforms. We have also
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replicated
the success of our FinTech Lab to across other industries by creating innovation labs supporting the insurance and healthcare industries.
We
deliver our services using our enhanced global delivery model which leverages a highly efficient onsite-to-offshore service delivery mix and proprietary tools and processes to manage
and accelerate delivery, foster innovation, and promote continual improvement of outcomes delivered to our clients. Our global service delivery teams work seamlessly at our client locations and at our
global delivery centers to provide value-added services rapidly and cost-effectively. Our teams do this by using our enhanced global delivery model, which we manage to a targeted 25% to 75%
onsite-to-offshore service delivery mix, although such delivery mix may be impacted by several factors, including our new and existing client delivery requirements.
We
apply our innovative platforming approach across all of our services. Through our platforming approach, we help our clients combine common business processes and rules, technology
frameworks and data into reusable application platforms that can be leveraged across the enterprise to build, maintain and enhance existing and future applications. Our platforming approach enables
our clients to continually improve their software platforms and applications in response to changing business needs and evolving technologies, while also allowing them to improve business agility,
realize long-term and ongoing cost savings and improve their ROI. Our platforming methodology also reduces the effort and
cost required to develop and maintain IT applications by streamlining and consolidating our clients' applications on an ongoing basis. We believe that our solutions provide our clients with the
consultative and high-value services associated with large consulting and systems integration firms, the cost-effectiveness associated with offshore IT outsourcing firms, and the ongoing benefits of
our innovative platforming approach.
On
May 3, 2017, we entered into an investment agreement with The Orogen Group ("Orogen") pursuant to which Orogen purchased 108,000 shares of the Company's newly issued
convertible preferred stock, initially convertible into 3,000,000 shares of common stock, for an aggregate purchase price of $108 million with an initial conversion price of $36.00. In
connection with the investment, Vikram S. Pandit, the former CEO of Citigroup, was appointed to Virtusa's Board of Directors. Orogen is a new operating company that was created by Vikram Pandit and
Atairos Group, Inc., an independent private company focused on supporting growth-oriented businesses, to leverage the opportunities created by the evolution of the financial services landscape
and to identify and invest in financial services companies and related businesses with proven business models.
Under
the terms of the investment, the convertible preferred shares have a 3.875% dividend per annum, payable quarterly in additional shares of common stock and/or cash at Virtusa's
option. The convertible preferred stock matures on May 3, 2024. The shares purchased consist of voting convertible preferred stock and a separate class of non-voting convertible preferred
stock, the latter of which automatically converted into shares of voting convertible preferred stock on a one-to-one basis upon the expiration or termination of the applicable waiting period (which
occurred in May 2017) under the Hart-Scott-Rodino Antitrust Improvements Act. In connection with the investment, we repaid $81 million of our outstanding senior term loan, and our board
of directors approved the repurchase of approximately $30 million of Virtusa's common stock.
On
March 3, 2016, pursuant to a share purchase agreement dated as of November 5, 2015, by and among Virtusa Consulting Services Private Limited ("Virtusa India"), a
subsidiary of the Company, Polaris Consulting & Services Limited, a global IT services company focused on banking and financial services ("Polaris"), and the promoter sellers named therein, as
amended on February 25, 2016 (the "SPA"), the Company completed the purchase of 53,133,127 shares, or approximately 51.7% of the fully-diluted capitalization of Polaris from certain Polaris
shareholders for approximately $168.3 million in cash (the
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"Polaris
SPA Transaction"). The primary strategic purpose and goals of Virtusa's acquisition of Polaris were, and are, as follows:
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The combination of Virtusa and Polaris creates a unique, fully integrated provider of comprehensive solutions and services across the banking
and financial services industry,
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The combination meaningfully expands our addressable market, and
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The transaction enhances our ability to pursue larger consulting and outsourcing contracts.
In
addition, on April 6, 2016, as part of the Polaris SPA Transaction, Virtusa India completed an unconditional mandatory open offer (the "Mandatory Tender Offer") with successful
tender to purchase an additional 26% of the fully diluted outstanding shares of Polaris from Polaris' public shareholders. The Mandatory Tender Offer was conducted in accordance with requirements of
the Securities and Exchange Board of India ("SEBI") and the applicable Indian rules on takeovers. Virtusa India purchased 26,719,942 shares of Polaris common stock for approximately $3.32 per share
for an aggregate purchase price of approximately $89.1 million (Indian rupees 5,935 million). Upon the closing of the Mandatory Tender Offer, Virtusa India's ownership interest in
Polaris increased from approximately 51.7% to 77.7% of Polaris' fully diluted shares outstanding, and from approximately 52.9% to 78.8% of Polaris' basic shares outstanding. To comply with the
applicable Indian rules on takeovers and the requirement to reduce, within one year of the settlement of the Mandatory Tender Offer, its shareholdings in Polaris in excess of 75% of the basic
outstanding share capital of Polaris, on December 14, 2016, the Company sold 3.71% of its Polaris ownership through a public sale offer of Polaris common stock held by the Company, reducing the
Company's ownership interest from 78.6% to 74.9% of Polaris' basic shares of common stock outstanding. The Company received approximately $7.6 million in net proceeds from the sale of the
Polaris shares.
In
connection with, and as part of the Polaris SPA Transaction, on November 5, 2015, the Company entered into an amendment with Citigroup Technology, Inc. ("Citi") and
Polaris, which became effective upon the closing of the Polaris SPA Transaction, pursuant to which, (i) Citi agreed to appoint the Company and Polaris as a preferred vendor for Global
Technology Resource Strategy ("GTRS") for the provision of IT services to Citi on an enterprise wide basis ("GTRS Preferred Vendor"), (ii) the Company agreed to certain productivity savings and
associated reduced spend commitments for a period of two years, which, if not achieved, would require the Company to provide certain minimum discounts to Citi, (iii) the parties amended
Polaris' master services agreement with Citi such that the Company would also be deemed a contracting party and the Company would assume, and agree to perform, or cause Polaris to perform, all
applicable obligations under the master services agreement, as amended by the amendment (the "Citi/Virtusa MSA"), and (iv) Virtusa agreed to terminate Virtusa's existing master services
agreement with Citi, and have the Citi/Virtusa MSA be the sole surviving agreement. Under the terms of the Citi/Virtusa MSA, the Citi/Virtusa MSA has a perpetual term, but may be terminated sooner by
either party in the event of, among other things, an uncured, material
breach of the other party on 30 days prior written notice or by Citi for convenience generally upon 30 days prior written notice except for certain time and material engagements, which
may be terminated for convenience by Citi on 10 business days or shorter notice. The Citi/Virtusa MSA contains provisions regarding insurance, indemnities, limitations of liability, warranty, service
levels, liquidated damages and other customary terms and conditions.
We
provide our IT services primarily to enterprises engaged in the following industries: communications and technology ("C&T"); banking, financial services and insurance ("BFSI"); and
media and information ("M&I"). Our current clients include leading global enterprises such as Citi, AIG Global Services, Inc. (primarily through its affiliates, Chartis Global Claims
Services, Inc. and Chartis Global Services, Inc.) ("AIG"), JPMorgan Chase Bank, N.A. ("JPMC"), British Telecommunications plc ("BT"), Aetna Life Insurance Company, Thomson Reuters
(Healthcare) Inc., and leading enterprise software developers. We have a high level of repeat business among our clients. For instance, during the fiscal year ended March 31, 2017, 86%
of our revenue came from clients to whom we had been providing services for
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at
least one year. Our top ten clients accounted for approximately 45%, 47% and 52% of our total revenue in the fiscal years ended March 31, 2017, 2016 and 2015, respectively. Our largest
client for the fiscal year ended March 31, 2017, Citi, accounted for 17% of our total revenue and for the fiscal years ended March 31, 2016 and 2015, accounted for 3% and 2%,
respectively. During the fiscal years ended March 31, 2017, 2016 and 2015, AIG accounted for 3%, 10% and 11% of our total revenue, respectively. During the fiscal years ended March 31,
2017, 2016 and 2015, BT accounted for 6%, 9% and 12%, of our total revenue, respectively. We have a Global Frame Contract with BT and a master services agreement with AIG, as described below, and
Citi, whose terms we listed immediately above.
On
January 31, 2012, Virtusa UK Limited, our UK subsidiary, entered into a Global Frame Contract with BT, as amended (the "GFA"), which established Virtusa UK Limited as a
preferred, but non-exclusive, vendor of BT for the provision of IT services to BT and its affiliates. The GFA contains rate cards specific to certain geographic locations associated rate card pricing
terms. In addition, the GFA contains provisions regarding warranty, service levels, liquidated damages, insurance, indemnities, limitations of liability and confidentiality and other customary terms
and conditions. The term of the GFA extends through March 31, 2018, although the GFA may be terminated sooner by either party in the event of, among other things, an uncured, material breach of
the other party or by BT upon 90 days prior written notice. BT may also terminate without liability upon certain other conditions, including changes in control of Virtusa UK Limited.
On
May 15, 2015, we executed a new master professional services agreement ("MPSA") with AIG which has a perpetual term, but may be terminated sooner by either party in the event
of, among other things, an uncured, material breach of the other party or by AIG for convenience upon 30 days prior written notice. The MPSA included rate cards specific to certain geographic
locations, as well as
provisions regarding insurance, indemnities, limitations of liability, confidentiality, warranty, service levels, liquidated damages and other customary terms and conditions.
Our approach to global IT services
Our expertise in supporting a broad range of IT services, ability to engage through a global delivery model that optimizes outcomes and use of
proprietary methodologies like platforming to improve IT efficiencies, allow us to be a trusted partner to our clients for their end-to-end IT services requirements.
Broad range of IT services.
We provide a broad range of IT services, either individually or as part of an end-to-end solution,
from business and IT
consulting, customer experience and UX design, technology implementation, and platform assurance to application & infrastructure management. We have significant domain expertise in large
consumer facing industries, such as C&T, BFSI and M&I. Our recent acquisition of Polaris has significantly enhanced our domain strengths in BFSI, allowing us to deliver distinctive solutions across
the complete spectrum of end-to-end banking and financial services requirements. Over the past several years, our investments in building deep capabilities in industry focused solutions has helped us
develop very strong domain-specific capabilities across insurance, healthcare and telecommunications industries as well. We have designed our portfolio of IT services and solutions to enable our
clients to improve business performance, use IT assets more efficiently and optimize IT costs.
Enhanced global delivery model.
We provide our services through our enhanced global delivery model that leverages a
highly-efficient onsite-
to-offshore service delivery mix and proprietary tools and processes to manage and accelerate delivery, foster innovation and promote continual improvement of outcomes delivered to our clients.
Platforming approach.
We apply our innovative platforming approach across our IT consulting, technology implementation and
application outsourcing
services to rationalize IT application portfolios and reduce costs, increase productivity and improve the efficiency and effectiveness of our clients' IT application environments.
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Our services
Business and IT consulting services.
We provide business and IT consulting services to assist our clients in more effectively
managing their
continually-changing business and IT environments, and aligning their IT investments to better support current and future business requirements. Our business consulting services allow clients to
mitigate risks and execute successful IT programs by enabling stakeholder alignment, formulating the business case and ROI, and defining agreed-upon end outcomes using innovative techniques, such as
persona development, DILO (Day-in-the-life-of) journeys and rapid prototyping for each project. We also assist clients in assessing new approaches to improve revenue opportunities within existing
markets, developing new products/solutions for existing and new markets and improving retention and share-of-wallet through a better understanding of customer behavior and engagement. We have enhanced
our business consulting services portfolio with solutions specific to digital enabling our clients' businesses, allowing them to effectively assess and deploy the right kinds of digital technologies
and drive the appropriate outcomes from their digital initiatives.
The
goal of our IT consulting group is to help our clients continually improve the performance of their IT application environments by adopting and evolving towards re-useable software
platforms. We help clients analyze business and/or technology problems and identify and design platform-based solutions. We also assist our clients in planning and executing their IT initiatives and
transition plans.
Our
consulting services allow our clients to critically look at business processes, IT environments and their customer facing application systems, and execute targeted programs that
improve performance of business critical systems, processes and services:
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Business Transformation Services
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Customer Experience Transformation Services
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IT Transformation Services
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Strategic Research services
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Advisory/Target Operating
Model
Business Process
Re-engineering/BPM
Transformational Solution Consulting
Business/Technology Alignment Analysis
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Omni-channel Digital
Strategy
Experience Design
ASD
Employee
Engagement
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Application Portfolio
Rationalization
SDLC
Transformation
BA
Competency Transformation
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Strategic Roadmap, Conceptual Design, Solution Selection & Solution Design ASD
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During
our consulting engagements, we often leverage proprietary frameworks and tools to differentiate our services from our competitors and to accelerate delivery. Examples of our
unique frameworks and tools include our strategic enterprise information roadmap framework, which is a structured service offering for recommending the right IT platform, solution architecture,
transition strategy and approach
to meet current and future business requirements, our business process visualization tools, which enable us to analyze, design and optimize enterprise business processes, and ASD. We have also
invested in our consulting services to help our clients effectively manage large, complex IT programs, and evaluate and develop strategies to millennial-enable their enterprises for the digital
consumer, and support the development of new, differentiated customer experience improvement programs.
We
believe that our consulting services are further differentiated by our ability to leverage our global delivery model across our engagements. Our onsite teams work directly with our
clients to understand and analyze the current-state problems and to design conceptual solutions. Our offshore teams work seamlessly with our onsite teams to design and expand the conceptual solution,
research alternatives, perform detailed analyses, develop prototypes and proofs- of-concept and produce detailed reports. We believe that
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this
approach reduces cost, allows us to explore more alternatives in the same amount of time and improves the quality of our deliverables.
Technology implementation services.
Our technology implementation services involve building, testing, deploying, maintaining and
supporting IT
applications, and consolidating and rationalizing our clients' existing IT applications and environments into platforms. Leveraging our deep skills in software engineering and our expertise in the
innovative use of technology to solve business problems, we help our clients' CIOs to make the right decisions on technology platform selection, support the implementation of core application systems
and help solve critical business problems, while ensuring that the CIO's IT asset estate remains optimized, cost-effective and supports current and future business requirements.
Our
technology implementation services include the following development, legacy asset management, information management and testing services:
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Application Development
Services
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Legacy Asset Management
Services
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Information Management
Services
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Testing and Application
Assurance Services
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Application Development
Software Product
Engineering
CRM
Implementations
SAP
Implementations
Content
Management Services
Enterprise Mobility Services
Cloud Computing
Social Media Solutions
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Systems Consolidation and
Rationalization
Technology
Migration and Porting
Web-enablement of Legacy Applications
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Data Management Services
Business Intelligence,
Reporting and Decision Support
Master Data Management
Data Integration
Big
Data Analytics
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Software Quality Assurance
Testing Frameworks
Test Automation
Performance Testing
Mobility Testing
Continuous Testing Services
Managed testing
services
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Our
technology implementation services span a variety of capabilities from custom application development, testing, maintenance and support services and packaged software implementation
services. We have extensive and deep partnerships with leading technology platform vendors. We have incorporated rapid, iterative development techniques into our approach, extensively employing
prototyping, solution demonstration labs and other collaboration tools that enable us to work closely
with our clients to understand and deliver to their most challenging business requirements. Leveraging our business consulting services with advanced techniques like our ASD workshops, we are able to
develop and deploy applications quickly, often within solution delivery cycles of less than three months.
Application outsourcing services.
We provide a broad set of IT application outsourcing services that enable us to provide
comprehensive support for
our clients' needs to manage and maintain their software applications and platforms cost-effectively. We endeavor to continually improve the applications under our management and to evolve our
clients' IT applications into platforms. We combine a deep understanding of software engineering with an innovation mindset to provide targeted outsourcing services that not only help reduce the cost
of existing IT operations, but also improve the quality of applications over time.
Our
outsourcing services leverage innovative techniques and methodologies to significantly improve IT efficiencies by reducing cycle time and compressing the work required to achieve
specific outcomes. We help our clients reduce the cost of business operations by preemptively identifying and resolving issues in application support and maintenance. We make extensive use of Agile
development methodology to reduce and minimize business disruptions due to IT issues and support the CIO organization in improving the business experience by leveraging RPA to drive automation and
process efficiencies.
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Our
application outsourcing services include the following application and platform management, infrastructure management and IT efficiency improvement services:
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Application and Platform Management
Services
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Infrastructure Management Services
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IT Efficiency Improvement Services
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Application Maintenance
and Support
Maintenance
and Enhancement of Applications
Cloud-environment Management & Support
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Managed Infrastructure
Services
Remote Application
Monitoring & support
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Code Quality Assurance
Gamified development
environments
Agile DevOps
Gamified Continuous
Integration/ Continuous Deployment
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We
believe that our application outsourcing services are differentiated because they are based on the principle of migrating installed applications to flexible platforms that can sustain
further growth and business change. We do this by:
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developing a roadmap for the evolution of applications into platforms
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establishing an ongoing planning and governance process for managing change
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analyzing applications for common patterns and services
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identifying application components that can be extended or enhanced as core components
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integrating new functions, features and technologies into the target architecture
We
continue to strengthen our ability to deliver infrastructure management services ("IMS") and IT support related services to our clients, helping them manage their IT operations
effectively through an offshore outsourced model. We have expanded our investments into the capabilities that we obtained through our acquisition of Apparatus, Inc. in 2015 and are now able to
deliver seamless infrastructure management services to our clients around the clock, but also to do it in an automated, cost-effective manner. Further, we have invested in building out strong
capabilities in improving efficiencies in the developer environment. Our solutions around gamified Continuous Integration/ Continuous Deployment ("gamified CICD") and Agile DevOps have helped us
create a highly agile development environment that allows our clients to accelerate development cycles, improve time-to-market, and become more responsive to changes in markets in which they operate.
Global delivery model.
We have developed an enhanced global delivery model that allows us to provide innovative IT services to
our clients in a
flexible, cost-effective and timely manner by leveraging an efficient onsite-to-offshore service delivery mix and our proprietary global innovation process ("GIP"), and also enables us to manage and
accelerate delivery, foster innovation and promote continual improvement. We manage to a targeted 25% to 75% onsite-to-offshore service delivery mix, which allows us to provide value-added services
rapidly and cost-effectively. During the past four fiscal years, we performed at least 76% of our total annual billable hours at our offshore global delivery centers. However, for the fiscal year
ending March 31, 2018, we anticipate the onsite ratio to slightly increase due to new client engagements and existing work on larger, more complex programs requiring a larger onsite presence.
Our delivery mix may also fluctuate from time to time due to several other factors, including new and existing client delivery requirements, as well as the impact of any acquisitions. Using our global
delivery model, we generally maintain onsite teams at our clients' locations and offshore teams at one or more of our global delivery centers. Our onsite teams are generally composed of program and
project managers, industry experts and senior business and technical consultants. Our offshore teams are generally composed of project managers, technical architects, business analysts and technical
consultants. These teams are typically linked together through common processes and collaboration tools and a communications infrastructure that features
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secure,
redundant paths enabling seamless global collaboration. Our global delivery model enables us to provide around the clock, world class execution capabilities that span multiple time zones.
All
of our major delivery centers, located in Hyderabad, Chennai and Bangalore in India and Colombo in Sri Lanka have been reassessed at CMMI Level 5 maturity. During our fiscal
year ended March 31, 2017, as part of the CMMI re-assessment process (every 3 years), the Hyderabad (first assessed during the fiscal year 2011) and Bangalore (first assessed during the
fiscal year 2014) delivery centers completed the reassessment successfully and maintained their CMMI Level 5 rating. CMMI is a process improvement model used to improve a company's ability to
manage project deliveries to ensure
predictable results. CMMI's process levels are regarded as the standard in the industry for evolutionary paths in software and systems development and management.
Our
enhanced global delivery model is built around our proprietary GIP, which is a software lifecycle methodology that combines our experience building platform-based solutions for
global clients with leading industry standards such as rational unified process, eXtreme programming, capability maturity model and product line engineering. By leveraging GIP templates, tools and
artifacts across diverse disciplines such as requirements management, architecture, design, construction, testing, application outsourcing and production support, each team member is able to leverage
software engineering and platforming best practices and extend these benefits to clients.
During
the initial phase of an engagement, we work with the client to define the specific approach and tools that will be used for the engagement. This process tailoring takes into
consideration the client's business objectives, technology environment and currently-established development approach. We believe our innovative approach to adapting proven techniques into a custom
process has been an important differentiator that allows us to deliver substantially greater value to our clients in a cost effective and timely manner.
The
backbone of GIP is our global delivery operations infrastructure. This infrastructure combines enabling tools and specialized teams that assist our project teams with important
enabling services such as workforce planning, knowledge management, integrated process and program management and operational reporting and analysis.
Two
important aspects of our global delivery model are innovation and continuous improvement. A dedicated process group provides three important functions: they continually monitor, test
and incorporate new approaches, techniques, tools and frameworks into GIP; they advise project teams, particularly during the process-tailoring phase; and they monitor and audit projects to ensure
compliance. New and innovative ideas and approaches are broadly shared throughout the organization, selectively incorporated into GIP and deployed through training. Clients also contribute to
innovation and improvement as their ideas and experiences are incorporated into our body of knowledge. We also seek regular informal and formal client feedback. Our global leadership and executive
team regularly interact with client leadership and each client is typically given a formal feedback survey on a quarterly basis. Client feedback is qualitatively and quantitatively analyzed and forms
an important component of our teams' performance assessments and our continual improvement plans.
Platforming approach.
We apply our innovative platforming approach across our business and IT consulting, technology
implementation and application
outsourcing services to rationalize IT application portfolios and reduce costs, increase productivity and improve the efficiency and effectiveness of our clients' IT application environments. As part
of our platforming approach, we assess our clients' application environments to identify common elements, such as business processes and rules, technology frameworks and data. We incorporate those
common elements into one or more application platforms that can be leveraged across the enterprise to build, enhance and maintain existing and
future applications in a leaner environment. Our platforming approach enables our clients to continually improve their software platforms and applications in response to changing business needs and
evolving technologies while also realizing long-term and ongoing cost savings.
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Our
platforming approach is embodied in a set of proprietary processes, tools and frameworks that address the fundamental challenges confronting IT executives. These challenges include
managing the rising costs of technology ownership, while simultaneously supporting business demands to foster innovation, accelerate time-to-market, improve service and enhance productivity. Our
platforming approach draws from analogs in industries that standardize on platforms composed of common components and assemblies used across multiple product lines. Similarly, we work with our clients
to evolve their diverse software assets into unified, rationalized software platforms. Our platforming approach leads to simplified and standardized software components and assemblies that work
together harmoniously and readily adapt to support new business applications. For example, a software platform for trading, once developed within an investment bank, can be the foundation for the
bank's diverse trading applications in equities, bonds and currencies. Our platforming approach stands in contrast to traditional enterprise application development projects, where different
applications remain separate and isolated from each other, replicating business logic, technology frameworks and enterprise data.
At
the center of our platforming approach is a five-level maturity framework that allows us to adapt our service offerings to meet our clients' unique needs. Level 1 maturity in
our platforming approach represents traditional applications where every line of code is embedded and unique to the application and every application is monolithic. Level 2 applications are
less monolithic and more flexible and demonstrate characteristics such as configurability and customizability. Level 3 applications are advanced applications where the common code components
and software assets are leveraged across multiple application families and product lines. Level 4 applications are framework-driven where the core business logic is reused with appropriate
custom logic built around it. At the highest level of maturity are Level 5 applications, where platforms are greatly leveraged to simplify and accelerate application development and
maintenance. At lower levels of maturity, few assets are created and reused. Consequently, agility, total cost of ownership and ability to quickly meet business needs are suboptimal. As organizations
mature along this continuum, from Level 1 to Level 5, substantial intellectual property is created and embodied in software platforms that enable steady gains in agility, reduce overall
cost of ownership and accelerate time-to-market for business applications and services.
Our
platforming approach improves software quality and IT productivity. Software assets within platforms are reused across applications, their robustness and quality improve with time
and our clients are able to develop software with fewer defects. A library of ready-made building blocks significantly enhances productivity and reduces software development risks compared to
traditional methods. This establishes a cycle of continual improvement in that the more an enterprise embraces platform-based solutions, the better the quality of its applications will be, and the
less the effort required to build, enhance and maintain them.
Our IT solutions
Our go-to-market strategy is to support our clients in accelerating business growth, while reducing the cost of IT operations. Our DTi solutions
help our clients to support business growth initiatives, while our OE solutions allow them to improve IT efficiencies and reduce costs. Underlying these two broad solution areas is a set of
transformational solution capabilities that support and augment our ability to add value through DTi and OE capabilities.
Digital Transformation & Innovation (DTi) solutions.
Our DTi solutions are designed to enable our clients to accelerate
business growth by
capitalizing on market adjacencies, developing new, complementary market segments, creating compelling digital storefronts, and delivering engaging digital consumer experiences. Our DTi solutions
harness innovative technology advances in mobility, social media, cloud computing and big data analytics to help our clients modernize their IT application environments and enable their businesses to
capitalize on the new wave of millennial consumer demand and expectations.
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We have made significant investments in building out and expanding our digital capabilities including investments in UX and digital strategy and consulting, and
in developing a framework to assess our clients' Digital Maturity and helping develop a roadmap to digitally transform their businesses.
We
offer the following solutions which enable our clients to address or serve the growing needs of the millennial generation:
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Strategy & Innovation
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Design & Engineering
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Optimization & Automation
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Innovation Consulting
Mobile Strategy
Omni-channel Strategy
Content Strategy
Data Management Strategy
Cloud Strategy
Cyber Security
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User experience Design
Mobile & Wearable
Apps
Responsive Web
Development
Portal
Simplification
Digital
Marketing & Commerce
Employee Engagement
Enterprise Data Hubs
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Internet of Things
Artificial
Intelligence & Cognitive Computing
Big Data & Analytics
Enterprise Mobile Management
Cloud Deployment & Migration
Robotics Process Automation
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We
have invested in creating digital technology labs and innovation hubs within our global delivery centers to foster the development of emerging technology solutions and enable our
clients to become digital enterprises.
Operational Excellence (OE) solutions.
Our OE solutions enable our clients to use innovative approaches to effort compression,
IT simplification and
automation to generate significant improvements in IT efficiencies in their organizations, including significant cost savings, improved ability to manage and deploy high quality, robust applications,
accelerate time to market and reduce risks to business from IT inefficiencies. Our OE solutions use our proprietary Platforming approach, pre-emptive application management techniques, test
automation, Agile DevOps, gamified CICD, cloud migration & hosting, and Robotics Process Automation ("RPA") to support our client CIOs and COOs reduce technical debt, lower total cost of
ownership of IT assets, improve operational efficiencies and accelerate time to market. We use proprietary business consulting methodologies like ASD to help clients improve accuracy and scope of the
solution being delivered, align organizational stakeholders on common, shared objectives, and accelerate the solution development process. Our unique platforming methodology helps clients rationalize
their IT application infrastructure and develop lean, optimized enterprise application platforms that significantly lower the cost of maintenance, while improving the agility of the business to
respond to emerging market demands.
We
provide a set of OE solutions across the IT lifecycle:
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IT & Business Consulting
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Platforming
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Solutions
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Application Outsourcing
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Accelerated Solution
Design ("ASD")
Business
Process Re-engineering
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Lean Outcomes
Platforming
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Business Process
Management
Robotics Process
Automation
Cloud
Migration
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Pre-emptive Application
Management
IT managed
services
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Over
the past 2017 fiscal year, we have ramped up our investments in areas like cloud computing, RPA, and gamified CICD through the establishment of innovation labs to support solution
development and co-create proofs-of-concept and minimum viable products with our clients.
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Transformational solutions.
We act as trusted advisors to our clients, combining our core services with deep industry
specialization to deliver
transformational solutions that help position our clients' businesses for competitive advantage in their chosen markets.
Our
transformational solutions across IT and business consulting, platforming, technology and application outsourcing areas include:
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IT & Business Consulting
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Platforming
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Solutions
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Application Outsourcing
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Domain solutions
Business process
re-engineering
Large
program management
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Large global
platforms
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Claims management
Policy administration
Client lifecycle management
Know your customer
Regulatory &
compliance
Billing systems
Customer experience
management
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Application
support & maintenance platforms
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We
leverage our business consulting expertise to manage large, complex programs and deliver critical business process re-engineering advice to our clients. We have recently expanded our
platforming expertise to cover large programs impacting global business platforms and multi-country implementations. The industry and domain expertise we have developed over the past decade has helped
us develop business solutions like claims management and policy administration solutions for
insurance companies; client lifecycle management, know your customer, and regulatory and compliance solutions for banks; member reach and care management solutions for healthcare providers; billing
solutions for telecommunication providers; and customer experience management solutions for leisure and hospitality businesses.
Sales and marketing
Our global sales, marketing and business development teams seek to develop strong relationships with IT and business executives at prospective
and existing clients to establish long-term business relationships that continue to grow in size and strategic value. At March 31, 2017 and 2016, we had 298 and 255 marketing and business
development full time equivalents, respectively, including sales managers, sales representatives, client service partners, account managers, telemarketers, sales support personnel and marketing
professionals.
The
sales cycle for our services often includes initiating contact with a prospective client, understanding the prospective client's business challenges and opportunities, performing
discovery or assessment activities, submitting proposals, providing client case studies and references and developing proofs-of-concept or solution prototypes. We organize our sales teams in strategic
business units by geography and with professionals who have specialized industry knowledge. This industry focus enables our sales teams to better understand the prospective client's business and
technology needs and to offer appropriate industry-focused solutions.
Sales and sales support.
Our sales and sales support teams focus primarily on identifying, targeting and building relationships with
prospective
clients. These teams are supported in their efforts by industry specialists, technology consultants and solution architects, who work together to design client-specific solution proposals. Our sales
and sales support teams are based in offices throughout the United States, Europe and Asia.
Account management.
We assign experienced account managers who build and regularly update detailed account development plans for each
of our clients.
These managers are responsible for developing
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strong
working relationships across the client organization, working day-to-day with the client and our service delivery teams to understand and address the client's needs. Our account managers work
closely with our clients to develop a detailed understanding of their business objectives and technology environments. We use this knowledge to identify and target additional consulting engagements
and other outsourcing opportunities.
Marketing.
We maintain a marketing presence in the United States, Europe, (including the United Kingdom), India, Sri Lanka and
Singapore. Our
marketing team seeks to build our brand awareness and generate target lists and sales leads through industry events, press releases, thought leadership publications, direct marketing campaigns and
referrals from clients, strategic alliances and industry analysts. The marketing team maintains frequent contact with industry analysts and experts to understand market trends and dynamics.
Strategic alliances.
We have strategic alliances with software companies, some of which are also our clients, to provide services to
their customers.
We believe these alliances differentiate us from our competition. Our extensive engineering, quality assurance and technology implementation and support services to software companies enable us to
compete more effectively for the technology implementation and support services required by their customers. In addition, our strategic alliances with software companies allow us to share sales leads,
develop joint account plans and engage in joint marketing activities.
Clients and industry expertise
We market and provide our services to companies in North America, Europe and Asia. For additional discussion regarding geographic information,
see note 20 to our consolidated financial statements included elsewhere in this Annual Report. A majority of our revenue for the fiscal year ended March 31, 2017 was generated from
Forbes Global 2000 firms or their subsidiaries. We believe that our regular, direct interaction with senior executives at these clients, the breadth of our client relationships and our reputation
within these clients as a thought leader differentiate us from our competitors. The strength of our relationships has resulted in significant recurring revenue from existing clients. For instance, our
largest client for the fiscal year ended March 31, 2017, Citi, accounted for 17% of our total revenue and for the fiscal years ended March 31, 2016 and 2015, accounted for 3% and 2%,
respectively. During the fiscal years ended March 31, 2017, 2016 and 2015, AIG accounted for
3%, 10% and 11% of our total revenue, respectively. During the fiscal years ended March 31, 2017, 2016 and 2015, BT accounted for 6%, 9% and 12% of our total revenue, respectively.
We
focus primarily on three industries: C&T, BFSI and M&I. We build expertise in these industries through our customer experience and industry alliances by hiring industry specialists
and by training our business analysts and other team members in industry-specific topics. Drawing on this expertise, we strive to develop industry-specific perspectives and services.
Communications and technology.
For our communications clients, we focus on customer service, sales and billing functions and regulatory
compliance
and help them improve service levels, shorten time-to-market and modernize their IT environments. For our technology clients, which include hardware manufacturers and software companies, we provide a
wide range of industry- specific service offerings, including product management services, product architecture, engineering and quality assurance services, and professional services to support
product implementation and integration. These clients often employ cutting-edge technology and generally require strong technical skills and a deep understanding of the software product lifecycle.
Banking, financial services and insurance.
We provide services to clients in the retail, wholesale and investment banking areas;
financial
transaction processors; and insurance companies encompassing life, property and casualty and health insurance. For our BFSI clients, we have developed industry specific
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services
for each of these sectors, such as an account opening framework for banks, compliance services for financial institutions and customer self-service solutions for insurance companies. The need
to rationalize and consolidate legacy applications is pervasive across these industries and we have tailored our platforming approach to address these challenges.
Media and information.
We focus primarily on solutions involving electronic publishing, online learning, content management,
information workflow and
mobile content delivery as well as personalization, search technology and digital rights management. Many M&I providers are focused on building common platforms that provide customized content from
multiple sources, customized and delivered to many consumers using numerous delivery mechanisms. We believe our platforming approach is ideally suited to these opportunities.
Competition
The IT services market in which we operate is highly competitive, rapidly evolving and subject to shifting client needs and expectations. This
market includes a large number of participants from a variety of market segments, including:
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offshore IT outsourcing firms, such as Cognizant Technology Solutions Corporation, HCL Technologies Limited, Infosys Technologies Limited,
Capgemini Service SAS, Tata Consultancy Services Limited, Tech Mahindra Limited and Wipro Limited
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consulting and systems integration firms, such as Accenture PLC., Capgemini Service SAS, Computer Sciences Corporation, Deloitte
Consulting LLP and IBM Global Services
We
also occasionally compete with in-house IT departments, smaller vertically-focused IT service providers and local IT service providers based in the geographic areas where we compete.
For instance on the millennial enablement side, we often compete with established digital services firms like SapientNitro, as well as smaller vendors that compete on the basis of local presence,
pricing and niche solutions/capabilities.
We
expect additional competition from offshore IT outsourcing firms in emerging locations such as Eastern Europe, Latin America and China, offshore IT service providers with facilities
in less expensive geographies within India and lower cost, near shore centers established by our competitors to provide accelerated staffing alternatives at competitive pricing.
We
believe that the principal competitive factors in our business include technical expertise and industry knowledge, a breadth of service offerings to provide one-stop solutions to
clients, a well-developed recruiting, training and retention model, responsiveness to clients' business needs, and quality of services. We believe that we compete favorably with respect to these
factors. Many of our competitors, however, have significantly greater financial, technical and marketing resources and a greater number of IT professionals than we do. We cannot assure you that we
will continue to compete favorably or that we will be successful in the face of increasing competition.
Human resources
We seek to maintain a culture of innovation by aligning and empowering our team members at all levels of our organization. Our success depends
upon our ability to attract, develop, motivate and retain highly-skilled and multi-dimensional team members. Our people management strategy is based on six key components: recruiting, performance
management, training and development, employee engagement and communication, compensation and retention. Although not currently a material component of our people management strategy, we also retain
subcontractors at all of our locations on an as needed basis for specific client engagements.
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Recruiting.
Our global recruiting and hiring process addresses our need for a large number of highly-skilled, talented team members. In
all of our
recruiting and hiring efforts, we employ a rigorous and efficient interview process. We also employ technical and psychometric tests for our IT professional recruiting efforts in India and Sri Lanka.
These tests evaluate basic technical skills, problem-solving capabilities, attitude, leadership potential, desired career path and compatibility with our team-oriented, thought-leadership culture.
We
recruit from leading technical schools in India and Sri Lanka through dedicated campus hiring programs. We maintain a visible position in these schools through a variety of
specialized programs, including IT curriculum development, classroom teaching and award sponsorships. We also recruit and hire laterally from leading IT service and software product companies and use
employee referrals as a significant part of our recruitment process.
Performance management.
We have a sophisticated performance assessment process that evaluates team members and enables us to tailor
individual
development programs. Through this process, we assess performance levels, along with each team member's potential. We create and manage development plans, adjust compensation and promote team members
based on these assessments.
Training and development.
We devote significant resources to train and integrate all new hires into our global team. We conduct a
training program
for all lateral hires that teaches them our culture and value system. We provide a comprehensive training program for our campus hires that combines classroom training with on-the-job learning and
mentoring. We strive to continually measure and improve the effectiveness of our training and development programs based on team member feedback.
Employee engagement and communication.
We believe open communication is essential to our team-oriented culture. We maintain multiple
communication
forums, such as regular company-wide updates from senior management, complemented by team member sessions at the regional, local and account levels, as well as regular town hall sessions to provide
team members a voice with management.
Compensation.
We consistently benchmark our compensation and benefits with relevant market data and make adjustments based on market
trends and
individual performance. Our compensation philosophy rewards performance by linking both variable compensation and salary increases to performance.
Retention.
To attract, retain and motivate our team members, we seek to provide an environment that rewards entrepreneurial initiative,
thought
leadership and performance. During the twelve months ended March 31, 2017, we experienced voluntary team member attrition at a rate of 14.5% and involuntary team member attrition at a rate of
12.9%, which includes 8.5% related to implementation of certain cost saving and restructuring initiatives. We remain committed to improving and sustaining our voluntary attrition levels consistent
with our long-term stated goals. We define attrition as the ratio of the number of team members who have left us during a defined period to the total number of team members that were on our payroll at
the end of the period. Our human resources team, working with our business units, proactively manages voluntary team member attrition by addressing many factors that improve retention,
including:
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providing team members with opportunities to handle challenging technical and organizational problems and learn our platforming approach
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providing team members with clear career paths, rotation opportunities across clients and domains and opportunities to advance rapidly
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providing team members opportunities to interact with our clients and help shape their IT strategy and solutions
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creating a strong peer group work environment that pushes our team members to succeed
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creating a climate where there is a free exchange of ideas cutting across organizational hierarchy
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creating a family-oriented work environment that is fun and engaging
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recognizing team performance through highly-visible team recognition awards
At
March 31, 2017, we had 17,750 team members worldwide. We also engage outside contractors from time to time to supplement our services on an as needed basis. None of our team
members are covered by a collective bargaining agreement or represented by a labor union. We consider our relations with our team members to be good.
Network and infrastructure
Our global IT infrastructure is designed to provide uninterrupted service to our clients. We use a secure, high-performance communications
network to enable our clients' systems to connect seamlessly to each of our offshore global delivery centers. We provide flexibility for our clients to operate their engagements from any of our
offshore global delivery centers by using mainstream network topologies, including site-to-site virtual private networks, international private leased circuits and multiprotocol label switching. We
also provide videoconferencing, voice conferencing and Voice over Internet Protocol capabilities to our global delivery teams and clients to enable clear and uninterrupted communication in our
engagements, be it intra-company or with our clients.
We
monitor our network performance on a 24×7 basis to ensure high levels of network availability and periodically upgrade our network to enhance and optimize network
efficiency across all operating locations. We use leased telecommunication lines to provide redundant data and voice communication with our clients' facilities and among all of our facilities in Asia,
the United States and Europe. We also maintain multiple sites across our global delivery centers in Asia, particularly our largest centers in India and Sri Lanka, and the United States back-up centers
to provide for continuity of infrastructure and resources in the case of natural disasters or other events that may cause a business interruption.
Our
network infrastructure and access is secured using two factor authentication, mobile data management, data leakage prevention, advanced malware protection and periodically subjected
external vulnerability audits. We are ISO 27001 and ISO 22301 certified in all our major Asia centers to safeguard clients' and Virtusa's own information assets, and believe that we meet
all our clients' stringent security requirements for ongoing business with them.
Intellectual property
We believe that our continued success depends in part on the skills of our team members, the ability of our team members to continue to innovate
and our intellectual property rights. We rely on a combination of patent, copyright, trademark and design laws, trade secrets, confidentiality procedures and contractual provisions to protect our
intellectual property rights and proprietary methodologies. It is our policy to enter into confidentiality agreements with our team members and consultants that generally provide that any confidential
or proprietary information developed by us or on our behalf be kept confidential. We have also designed procedures to generally control access to and distribution of our proprietary information. We
pursue the registration of certain of our trademarks and service marks in the United States and other countries. We have registered the mark "Virtusa" in
the United States, the European Community and India and have filed for registration of "Virtusa" in Sri Lanka. We have registered in the United States the service marks "BPM Test Drive" which we use
to describe our consulting service offering involving business process management or BPM project implementation and "ACCELERATING BUSINESS OUTCOMES," which we use to describe the benefits of our
services. We have no issued patents.
Our
business involves the development of IT applications and other technology deliverables for our clients. Our clients usually own the intellectual property in the software applications
that we develop for them. We generally implement safeguards designed to protect our clients' intellectual property in
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accordance
with their needs and specifications. Our means of protecting our and our clients' proprietary rights, however, may not be adequate. Despite our efforts, we may be unable to prevent or deter
infringement or other unauthorized use of our and our clients' intellectual property. Legal protections afford only limited protection for intellectual property rights and the laws of India and Sri
Lanka do not protect intellectual property rights to the same extent as those of the United States and the United Kingdom. Time-consuming and expensive litigation may be necessary in the future to
enforce these intellectual property rights.
In
addition, we cannot assure you that our intellectual property or the intellectual property that we develop for our clients does not or will not infringe the intellectual property
rights of others. Defending against such claims, even if they are not meritorious, could be expensive and divert our attention from operating our company. If we become liable to third parties for
infringing upon their intellectual property rights, we could be required to indemnify our client(s), pay substantial damage awards and be forced to develop non-infringing technology, obtain licenses,
or cease delivery of the applications that contain the infringing technology.
Virtusa Sustainability Program
The goal of our sustainability program is to help reduce our environmental footprint, with ethical maturity, respect and dignity to all and is
an extension of our core corporate values of passion, innovation, respect and leadership (PIRL). We believe in doing more, and better, with less to help reduce the environmental footprint of our
operations.
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Our
sustainability program is based on the following core elements.
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Area
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Framework
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Current Status
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Health & Safety
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OSHAS 18001:2007
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Five technology centers in India and Sri Lanka are certified.
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Environment (Code Green)
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ISO 14001:2004 (EMS)
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Seven technology
centers in India and Sri Lanka are certified for ISO 14001.
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ISO 50001: 2011 Guidance (Energy)
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Encompasses climate
change, emissions, energy, water and waste management.
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ISO 14064 Guidance (Climate Change) GHG Protocol
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We report our GHG
emissions to the Carbon Disclosure Project.
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Business Continuity Management
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ISO 22301: 2012
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Five technology centers in India and Sri Lanka are certified.
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Information Security
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ISO 27001: 2013
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Eleven technology centers in India and Sri Lanka are certified.
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Labor Standards
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SA 8000 Guidance
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Policies formulated under SA 8000 guidance since July 2016.
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Anti-Bribery and Corruption
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Foreign Corrupt Practices Act 1977 (US) and Bribery Act 2010 (UK)
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Policy signed in line with framework.
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Management Engagement, Social Impact & Diversity
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ISO 26000 Guidance
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Create social impact through the following:
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Companies Act 2013 section 135 (India)
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Digital
ReachCreating a digitally inclusive society.
Campus ReachSupporting the next generation of IT professionals to be workforce ready.
Tech ReachUsing technology for good.
CSR Operating
Committee for pan-India formed in 2015.
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Our
sustainability program is backed by relevant certification, policies and employee training for the core areas. In the fiscal year ended March 31, 2017, our main focus was to
integrate heritage Polaris' technology centers into our environmental reporting. In the fiscal year ended March 31, 2017, we reviewed and revised our sustainability policy and its sub-policies,
including our Social Responsibility Policy, which was extended to include the prohibition of forced labor, slavery or human trafficking in our business operations and supply chain so as to be in
alignment with the Modern Slavery Act 2015 (UK).
We
believe that transparency and reporting enable us to continuously improve our sustainability program. As a signatory to the United Nations Global Compact (UNGC), we publish an annual
Communication on Progress (COP), which provides in-depth information on our sustainability program. The report can be accessed at:
https://www.unglobalcompact.org/participation/report/cop/create-and-submit/active/125621. In addition, we have been responding to the Carbon Disclosure Project (CDP) Supply Chain program since 2011.
In
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2016,
we responded to both the CDP Climate Change program as well as the Supply Chain program. Our performance band was "B" and we also received a "B" for the Supplier Engagement Rating, a new score
introduced by CDP in 2016. This score measures an organization's ability to engage with suppliers on climate change.
In
connection with our corporate social responsibility (CSR) activities, we focus on strategic projects where we can provide long term value. CSR projects are administered under three
pillars: Campus Reach, Tech Reach and Digital Reach.
Campus Reach.
Our Campus Reach initiative is an industry-academia partnership designed to support the next generation of IT
professionals to be
workforce ready and thereby contribute to the growth of the IT/BPO industry. Campus Reach includes support on curriculum development, an internship program, mentoring for final year projects and
Academic Excellence Awards.
Tech Reach.
Through Tech Reach we use our software development and consulting expertise to contribute to projects of social
benefit. Details of
current Tech Reach projects are given below:
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Sahana:
80+ employees built the
coordination portal for the Government of Sri Lanka (CNO) within two weeks of the 2004 tsunami. "Sahana" has since been donated for public good and has been used around the world, including in the
United States, Japan, Pakistan and the Philippines for disaster management.
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-
Àkura:
We
developed the "Àkura" open source school management system in order to help schools in Sri Lanka manage their administrative tasks more efficiently.
-
-
Rehabilitation Management System
(RMS):
RMS was developed as a solution to expedite the re-integration of war rehabilitees in Sri Lanka and manage their vocational training
needs. The software was a nominee at Computerworld Honors Program Laureate in 2011 and was selected as a case study by the UN Global Compact for its Responsible Business Advancing Peace program in
2013.
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-
Clean Chennai Mobile App:
Our
employees created a scalable application for the Clean Chennai initiative, which aims to manage waste in a sustainable manner and create public awareness to reduce litter. The application was
developed in collaboration with the SWM and EDP team of Corporation of Chennai.
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-
117 App:
We developed an online
solution for the Disaster Management Center (DMC) of Sri Lanka to facilitate better tracking and responsiveness to aid requests in the aftermath of the 2016 floods. Using the app, citizens could
submit requests through a mobile phone or tablet, making it more accessible in the field. Use of gamification improved transparency and transformed the DMC processes so that requests that were
previously open for days were closed in minutes. Overall, more than 73,000 people were supported through the app.
Digital Reach.
Through Digital Reach, we aim to create a digitally inclusive society by IT-enabling communities. We helped set
up a Digital Learning
Center (DLC) for war rehabilitees in Sri Lanka, and also set up over 70 IT labs in rural schools.
The
CSR Committee was set up in 2015 to oversee CSR activities across our Indian operations. The Committee has identified the following Youth For Seva (YFS) projects to
support:
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Support four Abhyasika: YFS runs 19 Abhyasikas (after school tuition centers) at several slum areas across Hyderabad reaching over 700 children
and their families. We provide support for four such Abhyasikas with a student reach of 94.
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Support for one Computer Center: YFS Hyderabad runs a Skill Development Center (computer training for now) for unemployed youth at various
slums in Hyderabad. An additional center was
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started
in 2016 and 2017 with the support of Virtusa. The center has 126 students and provides courses in C, C++, Microsoft Office, online banking, cashless payments and hardware networking.
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School Kits: YFS Hyderabad supports many school children by providing a school kit, which consists of a school bag, year planner, five
notebooks, pens/pencils, dictionary, water bottle and a label sheet. The aim of the project is to reduce the rate of school drop-outs by providing students from under-resourced backgrounds with basic
stationery. In 2016 and 2017, we sponsored 1,200 school kits.
Business segments and geographic information
We view our operations and manage our business as one operating segment. For information regarding net revenue by geographic regions for each of
the last three fiscal years, see note 20 to our consolidated financial statements for the fiscal year ended March 31, 2017 contained in this Annual Report.
Our corporate and available information
We were originally incorporated in Massachusetts in November 1996 as Technology Providers, Inc. We reincorporated in Delaware as
eRunway, Inc. in May 2000 and subsequently changed our name to Virtusa Corporation in April 2002. Our principal executive offices are located at 2000 West Park Drive, Westborough, Massachusetts
01581, and our telephone number at this location is (508) 389-7300. Our website address is
www.virtusa.com
. We have included our website address
as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of, or incorporated by reference into, this Annual Report. Our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission. In addition, we make available our Code of Business Conduct and Ethics free of charge through our website. We intend to disclose any
amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be publicly disclosed pursuant to rules of the SEC and the NASDAQ Stock Market by filing such amendment or
waiver with the SEC and posting it on our website.
No
information on our Internet website is incorporated by reference into this Annual Report on Form 10-K.
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Item 1A.
Risk Factors.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights
some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Our operating results and financial condition have
varied in the past and may vary significantly in the future depending on a number of factors. We cannot be certain that we will successfully address these risks. If we are unable to address these
risks, our business may not grow, our stock price may suffer and/or we may be unable to stay in business. Additional risks and uncertainties
not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations.
Except
for the historical information in this Annual Report, various matters contained in this Annual Report include forward-looking statements that involve risks and uncertainties. The
following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report and presented elsewhere by management
from time to time. Such factors, among others, may have a material adverse effect upon our business, results of operations and financial condition. You should consider carefully the following risk
factors, together with all of the other information included in this Annual Report. Each of these risk factors could adversely affect our business, operating results and financial condition, as well
as adversely affect the value of an investment in our common stock.
Risks relating to our business
Our revenue is highly dependent on a small number of clients, and the loss of, or material reduction in,
revenue from any one of our major clients could significantly harm our results of operations and financial condition.
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 our fiscal years ended March 31, 2017, 2016 (excluding Citi, which reflects only 29 days of consolidated Citi revenues for our fiscal year ended
March 31, 2016 due to the Polaris acquisition closing on March 3, 2016), and 2015, our top three clients collectively generated approximately 27%, 23%, and 32% of our revenue
respectively. For the fiscal year ended March 31, 2017, Citi accounted for 17% and BT accounted for 6% of our total revenue respectively. In addition, during the fiscal years ended
March 31, 2017 and 2016, 86% and 85% respectively, of our revenue came from clients to whom we had been providing services for at least one year. The loss of, or material reduction in, revenue
from any one of our major clients could materially reduce our total revenue, harm our reputation in the industry and/or reduce our ability to accurately predict our revenue, net income and cash flow.
The loss of, or material reduction in revenue from any one of our major clients could also adversely affect our gross profit and utilization as we seek to redeploy resources previously dedicated to
that client. Generally, our clients retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts and may typically terminate or reduce our engagements
without termination related penalties. Accordingly, we cannot assure you that revenue from our major clients will not be significantly reduced in the future, including from factors unrelated to our
performance or work product such as consolidation by or among our clients, or the acquisition of a client or cost savings initiatives of our clients which may result in immediate lower external spend
by our clients. Further, the loss of, or material reduction in, revenue from any one of our major clients has required, and could in the future
require, us to increase involuntary attrition. This could have a material adverse effect on our attrition rate and make it more difficult for us to attract and retain IT professionals in the future.
We
may not be able to maintain our client relationships with our major clients on existing or on continued favorable terms and our clients may not renew their agreements with us, in
which case our business, financial condition and results of operations would be adversely affected. Our client
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concentration
may also subject us to perceived or actual leverage that our clients may have, given their relative size and importance to us. If our clients seek to negotiate their agreements on terms
less favorable to us and we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless
and until we diversify and expand our client base, our future success will significantly depend upon the timing and volume of business from our largest clients and the financial and operational
success of these clients. If we were to lose one of our major clients or have a major client cancel substantial projects or otherwise significantly reduce its volume of business with us, our revenue
and profitability would be materially reduced and our business and operating results would be seriously harmed.
In connection with the Polaris acquisition, we entered into a master services agreement with Citi under which
we became a preferred vendor of Citi, pursuant to which, if we fail to deliver contractual productivity savings or we fail to perform in a manner satisfactory to Citi, we may not be able to increase
revenue from Citi or we could lose substantial revenues or business from Citi, each of which would have a material adverse effect on our business, our revenues, our profitability and statement of
operations.
We also depend on clients concentrated in specific industries, such as BFSI, and with the Polaris
acquisition, our BFS client concentration increased materially; we are therefore subject to enhanced risks relating to developments affecting these clients and industries that may cause them to reduce
or postpone their IT spending.
In our fiscal year ended March 31, 2017, we derived substantially all of our revenue from clients in three industries: BFSI, C&T, and
M&I. During our fiscal year ended March 31, 2017, we earned approximately 64% of our revenue from clients in the BFSI industries and our
revenue from this industry vertical grew by approximately 68% from the prior fiscal year. Due to the Polaris acquisition, we have increased our industry concentration, most particularly in BFS. If any
decline in the growth of the BFSI industries or large clients in such industries, particularly in the BFS or insurance industry, occurs, or if there is a significant consolidation in these industries
or a decrease in growth or consolidation in other industry verticals on which we focus or impact of large clients in such industries, such events could materially reduce the demand for our services
and negatively affect our revenue and profitability. If economic conditions weaken or slow, particularly in the industries in which we focus, our clients may significantly reduce or postpone their IT
spending. Reductions in IT budgets, increased consolidation or increased competition in these industries could result in an erosion of our client base and a reduction in our target market. Any
reductions in the IT spending of companies in any one of these industries may reduce the demand for our services and negatively affect our revenue and profitability.
The results of the United Kingdom's referendum on withdrawal from the European Union may have a negative
effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum, or Brexit
Referendum. The Brexit Referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom
formally initiates a withdrawal process, which the U.K. government initiated in March 2017. The Brexit Referendum has created political and economic uncertainty about the future relationship between
the United Kingdom and the European Union and as to whether any other European countries may similarly seek to exit the European Union. As we have material operations in the United Kingdom and the
Europe and our global operations serve many customers with significant operations in those regions, our financial condition and results of operation may be impacted by such uncertainty.
For
the fiscal year ended March 31, 2017, revenues from our customers in the United Kingdom and the rest of Europe represented 12% and 11%, respectively, of our consolidated
revenues. A significant portion of our revenues from customers in the United Kingdom is generated in British pounds. This exposure subjects us to revenue risk with respect to our customers in the
United Kingdom as well as to risk
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resulting
from adverse movements in foreign currency exchange rates. In addition, for the fiscal year ended March 31, 2017, revenues from our BFSI customers represented 64% of our consolidated
revenues. Uncertainty regarding future United Kingdom financial laws and regulations, the withdrawal terms of the United Kingdom from the European Union and the future trade terms between the United
Kingdom and the European Union could negatively impact the financial services sector,
including our customers in such sector, and as a consequence adversely impact our financial condition and results of operations. Further, it is uncertain what impact the withdrawal of the United
Kingdom from the European Union will have on general economic conditions in the United Kingdom, the European Union and globally. Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
Our previous acquisitions, including the Polaris acquisition, and any future acquisitions may be difficult to
integrate, could divert the attention of key management personnel, materially disrupt our business, dilute stockholder value and materially adversely affect our financial results, including impairment
of goodwill and other intangible assets, if we are unable to realize the expected revenue and synergy growth or efficiencies from these acquisitions.
For the Polaris and other recent acquisitions, as well as any future acquisitions, we may incur substantial risks,
including:
-
-
inability to generate sufficient revenue or synergy growth to offset transaction costs or to maintain previous forecasts regarding revenue
growth, profit margins and earnings per share forecasts
-
-
underperformance of the acquired company as compared to our forecasts, resulting in lower utilization, lower gross margins and operating
margins, higher operating costs and lower profits from our previous forecasts
-
-
difficulties in integrating operations, technologies, accounting and personnel
-
-
difficulties in supporting and transitioning clients of our acquired companies or strategic partners
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-
diversion of financial and management resources from existing operations
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-
potential loss of key team members
-
-
assumption of responsibilities and obligations of the acquired business pursuant to the terms and conditions of services agreements that are
not consistent with the terms and conditions that we typically accept and require
-
-
unknown liabilities or liabilities for which indemnification may or may not apply and difficulties of recovering any indemnifiable losses
Our
organizational structure could also make it difficult for us to efficiently integrate acquired businesses or technologies into our ongoing operations and assimilate employees of
those businesses into our culture and operations. Accordingly, we might fail to realize the expected benefits or strategic objectives of any acquisition we undertake. Acquisitions also frequently
result in the recording of goodwill and other intangible assets that are subject to potential impairments in the future that could harm our financial results. We have completed nine acquisitions from
November 2009 to March 31, 2017, including the closing of the Polaris acquisition. If we fail to successfully integrate these acquired companies or any company that we may acquire in the future
and maintain their value, or if any existing or future acquired companies materially fail to perform in a manner consistent with our valuations or forecasts, we may suffer an impairment of our assets,
resulting in an immediate charge to our consolidated statement of income. Any such failure to integrate an acquired company, or any impairment of intangible assets or goodwill of any such acquired
company could have a material adverse impact on our consolidated balance sheet and consolidated statements of income.
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There can be no assurance that our business, results of operations and financial condition or our cash needs
will not be adversely affected by our incurrence of indebtedness or obligations incurred in connection with our issuance of convertible preferred stock.
On May 3, 2017, we issued to the Orogen Group, an independent private company focused on supporting growth-oriented businesses, 3,000,000
shares of convertible preferred stock, which requires a 3.875% dividend per annum, payable quarterly in additional shares of common stock and/or cash at our option, for an aggregate purchase price of
$108 million with a maturity/redemption date of May 3, 2024 and an initial conversion price of $36.00 (the "Orogen Preferred Stock Financing"). There is no guarantee that we will be able
make cash payments on our preferred stock, our stockholders will not suffer increased dilution due to terms of our outstanding convertible preferred stock or that we will realize any synergies or
increases in revenue to offset any such dilution to our stockholders.
In
addition to the Orogen Preferred Stock Financing, we also incurred substantial indebtedness under a senior secured debt facility to finance the Polaris transaction. There is no
guarantee that we will be able to service the interest and principal payments on our debt or make cash payments on our preferred stock or that our business, results of operations and financial
condition will not be adversely affected by our incurrence of indebtedness or our stockholders will not suffer increased dilution due to terms of our outstanding convertible preferred stock.
In
connection with the Polaris acquisition and related transactions, on February 25, 2016, we entered into a credit agreement with a bank syndicate providing senior secured debt
financing of $300 million, comprised of a $100 million revolving credit facility and a $200 million multi-draw term loan, and drew down the full $200.0 million of the term
loan. Interest under these facilities accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on Virtusa's ratio of debt to adjusted earnings before interest, taxes, depreciation,
amortization, and stock compensation expense ("EBITDA"). The credit agreement includes customary minimum cash, maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the
credit agreement is five years from the closing date of the loan, ending February 24, 2021. On May 3, 2017, in connection with the Orogen Preferred Stock Financing, we amended our credit
agreement primarily to issue the convertible preferred stock and pay certain dividends with respect to the convertible preferred stock and we used $81 million from the financing to repay part
of our $200 million term loan which remains outstanding.
We
may incur additional indebtedness in the future, which may be significant. If we draw down from our credit facility, or if we want to pay required dividends in cash on our outstanding
convertible preferred stock, we will be required to have sufficient cash available in the United States to pay scheduled installments, accrued interest and fees from time to time and at maturity on
our term loan or for dividends on our preferred stock payments if we want to pay in cash and not pay our dividends in commons stock which will increase the dilutive impact of the financing. If we do
not have sufficient cash available in the United States or we fail to generate sufficient cash from operations in the United States, we may be unable to service the debt or pay dividends in cash on
our convertible preferred stock or we may be required to repatriate earnings held by our foreign subsidiaries. Any such repatriation would cause us to accrue the applicable amount of taxes associated
with such earnings at
that time, which could have a material adverse effect on our results of operations. In addition, we may not have sufficient cash in the United States or abroad to make payments on our debt obligations
or dividends in cash on our convertible preferred stock, which could cause us to seek additional debt or equity capital or restructure or refinance our existing indebtedness. We may not be able to
effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service
obligations or dividend payments on our convertible preferred stock in cash or that we can avoid increased dilution to our stockholders under the terms of our convertible preferred stock.
In
addition, the credit agreement contains certain financial and other covenants, including customary minimum cash, maximum debt to EBITDA and minimum fixed charge coverage covenants.
Failure to
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comply
with these covenants or other provisions of the credit agreement could result in a default under the credit agreement, requiring us to either cure such default, receive a waiver, or in the
absence of such cure or waiver, refinance any outstanding indebtedness under the credit agreement. There is no assurance that we would be able to refinance our debt on acceptable terms and conditions.
Moreover, if we are unable to force conversion of the preferred stock to common stock or there is not a conversion event of the preferred stock holders to common stock prior to May 3, 2024,
under the terms of our convertible preferred stock, we are required to redeem the shares of preferred stock. There is no assurance that we would be able to redeem the preferred stock or obtain
financing on acceptable terms and conditions, if at all.
Despite our senior secured credit facility and the Orogen Preferred Stock Financing, we may need to raise
capital in the future, although our ability to raise capital may be limited.
In connection with the Polaris acquisition and related transactions, we entered into a credit facility for $300 million, of which we have
drawn down the full $200 million term loan to buy the Polaris shares, with $100 million remaining under the revolving credit facility. On May 3, 2017, we closed the Orogen
Preferred Stock Financing, amended our credit agreement primarily to issue the convertible preferred stock and pay certain dividends with respect to the convertible preferred stock and used
$81 million of the convertible preferred stock proceeds to repay part of our $200 million term loan.
If
our remaining revolving credit facility, cash flows and proceeds from the preferred stock sale are not sufficient to fund our strategic investments or operations, we may seek to raise
additional funds through the issuance of equity or convertible debt securities, whereby the percentage ownership of our
stockholders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we seek to obtain additional debt
financing, there is no assurance that existing lenders will permit additional indebtedness, and even if permitted, a substantial portion of our operating cash flow may be dedicated to the payment of
principal and interest on such indebtedness, thus limiting funds available for our business activities and increasing our costs of operations, which could have a material adverse impact on our
operating margins. Any such debt financing could require us to comply with restrictive financial and operating covenants, which could have a material adverse impact on our business, results of
operations or financial condition and there is no guarantee or assurance that any such credit facility will be available or if so, on reasonable terms.
We
cannot assure you that additional financing will be available on terms favorable to us, or at all or in the locations where we need the additional capital. If adequate funds are not
available or are not available on acceptable terms, when we desire them, our ability to fund our operations and growth, take advantage of unanticipated opportunities or otherwise respond to
competitive pressures may be significantly limited.
Our
substantial level of debt and related obligations, including interest payments, covenants and restrictions, as well as our obligations under our Orogen Preferred Stock Financing,
including annual and quarterly dividend obligations and the redemption requirement, could have important consequences, including by:
-
-
impairing our ability to invest in and successfully grow our business and make acquisitions;
-
-
making it more difficult for us to satisfy our obligations with respect to our indebtedness, which could result in an event of default;
-
-
limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures,
acquisitions, debt obligations and other general corporate requirements;
-
-
hindering our ability to raise equity capital;
-
-
increasing our vulnerability to general economic downturns, competition and industry conditions, which could place us at a competitive
disadvantage compared to competitors that are less leveraged
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The
occurrence of any one of these events could have an adverse effect on our business, financial condition, operating results or cash flows and ability to satisfy our obligations under our
indebtedness our preferred stock holders. Insufficient funds may require us to delay, scale back or eliminate some or all of our activities.
We could be subject to strict restrictions on the movement of cash and the exchange of foreign currencies
which could limit our access to cash in non-U.S. locations to fund our U.S. operations or otherwise make investments where needed.
In some countries, we could be subject to strict restrictions on the movement of cash and the exchange of foreign currencies, which would limit
our ability to use this cash across our global operations. This risk could increase as we continue our geographic expansion in emerging markets, which are more likely to impose these restrictions than
more established markets. We therefore may not have ready access to cash in geographies where we need to make investments. For instance, at March 31, 2017, we had approximately
$237.0 million of cash, cash equivalents, short term investments and long term investments of which we hold approximately $152.0 million of cash, cash equivalents, short term investments
and long term investments in non-U.S. locations, particularly in India, Sri Lanka, Singapore and the United Kingdom. Cash in these non-U.S. locations may not otherwise be available for servicing debt
obligations, potential investment or use for operations in the United States or other geographies where needed, as we have stated that this cash is indefinitely reinvested in these non-U.S. locations.
Moreover, even if we were to repatriate this cash back to the United States for use in U.S. investments, this cash would be subject to substantial taxes. Due to various methods by which cash could be
repatriated to the United States in the future, the amount of taxes attributable to the cash is dependent on circumstances existing if and when remittance occurs. Due to the various methods by which
such earnings could be repatriated in the future, it is not practicable to determine the amount of applicable taxes that would result from such repatriation. In addition, some countries could have
tight restrictions on the movement and exchange of foreign currencies which could further limit our ability to use such funds for repayment of debt, global operations or capital or other strategic
investments. Our inability to access our cash where and when needed could impede our ability to service our debt obligations, make investments and support our operations.
The international nature of our business exposes us to many complex risks, which may be beyond our control.
We have operations in the United States, the United Kingdom, the Netherlands, India, Sri Lanka, Germany, Singapore, Austria, Hungary, Malaysia,
Switzerland and Sweden and we serve clients across North America, Europe and Asia, and with the Polaris acquisition, added operations in Hong Kong, United Arab Emirates, New Zealand, Japan, Australia
and Canada. For the fiscal years ended March 31, 2017, 2016 and 2015, revenue generated outside of the United States accounted for 35%, 30% and 33% of total revenue, respectively. Our corporate
structure also spans multiple jurisdictions, with Virtusa Corporation incorporated in Delaware and its operating subsidiaries organized in India, Sri Lanka, the United Kingdom, Hungary, Germany,
Singapore, Austria, Malaysia, Sweden, Switzerland and the Netherlands, as well as Polaris and its operating subsidiaries which are incorporated in Australia, China, the United Arab Emirates, Japan and
Canada. As a result, our international revenue and operations are
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exposed
to risks typically associated with conducting business internationally, many of which are beyond our control. These risks include:
-
-
negative currency fluctuations between the U.S. dollar and the currencies in which we conduct transactions, including most significantly, the
U.K. pound sterling, the euro, the Indian rupee, the Swedish Krona, the Singapore dollar, the Canadian dollar and the Australian dollar (each in which our foreign revenues are principally denominated)
and the Indian and Sri Lankan rupees (in which our foreign costs are primarily denominated)
-
-
adverse income tax consequences resulting from foreign income tax examination, such as challenges to our transfer pricing arrangements and
challenges to our ability to claim tax holiday benefits in the countries in which we operate
-
-
difficulties in staffing, managing and supporting operations in multiple countries
-
-
potential fluctuation or decline in foreign economies
-
-
unexpected changes in regulatory requirements, including immigration restrictions, potential tariffs and other trade barriers
-
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legal uncertainty owing to the overlap of different legal regimes and problems in asserting contractual or other rights across international
borders, including compliance with local laws of which we may be unaware
-
-
government currency control and restrictions on repatriation of earnings
-
-
the burden and expense of complying with the laws and regulations of various jurisdictions
-
-
domestic and international economic or political changes, hostilities, terrorist attacks and other acts of violence or war
Negative
developments in any of these areas in one or more countries could result in a reduction in revenue or demand for our services, the cancellation or delay of client contracts,
business interruption, threats to our intellectual property, difficulty in collecting receivables and a higher cost of doing business, including higher taxes, any of which could negatively affect our
business, financial condition or results of operations.
Restrictions on immigration may affect our ability to compete for and provide services to clients in the
United States, Europe (particularly, the United Kingdom), or other countries, which could result in lost revenue, lower gross margins, delays in or losses of client engagements and otherwise adversely
affect our ability to meet our growth, revenue and profit projections.
The vast majority of our team members are Indian and Sri Lankan nationals. The ability of our IT professionals to work in the United States, the
United Kingdom and other countries depends on our ability to obtain the necessary visas and entry permits, including the H-1(B) visa. The Government conducts a random lottery to determine which H-1(B)
applications will be adjudicated that year. Increasing demand for H-1(B) visas, or changes in how the annual limit is administered, could limit the company's ability to access those visas. In recent
years, the United States has increased the level of scrutiny in granting H-1(B), L-1 and other business visas. The H-1(B) visa classification enables U.S. employers to hire qualified foreign workers
in positions that require an education at least equal to a four-year bachelor degree in the United States in specialty occupations such as IT systems engineering and systems analysis. The H-1(B) visa
usually permits an individual to work and live in the United States for a period of up to six years. Under certain circumstances, H-1(B) visa extensions after the six-year period may be available.
H-1(B) visa holders are required to be paid the higher of the actual wage, or the prevailing wage for their position at the site of their employment. In addition, there
are strict labor regulations associated with the H-1(B) visa classification, including disclosure, attestations and document retention. Employers who are H-1(B)
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dependent
(i.e. those with fifteen percent (15%) or more of their workforce on H-1(B) visas are potentially subject to additional disclosures, attestations and subject to specific affirmative
recruitment requirements if the employees they sponsor for H-1(B) visa do not qualify as "exempt" employees. An exempt employee is one who is either (a) paid an annual salary of at least
$60,000 or b) one who holds a masters or higher degree in a specialty occupation related to their employment. In September 2014, we became an "H-1(B) Dependent Employer." To avoid being subject
to additional attestations, disclosures, and affirmative recruitment requirements, we do not sponsor employees for H-1(B) visas who make less than $60,000 per year. As a result of our being an "H-1(B)
Dependent Employer" it is likely that our petitions are subject to greater scrutiny at the time of adjudication. All users of the H-1(B) program are subject to periodic site visits from the United
States Citizenship and Immigration Services, or USCIS, to verify their compliance with immigration and Labor Regulations. In addition, the Wage and Hour Division of the United States Department of
Labor may also conduct H-1(B) audits to verify compliance with labor regulations. A finding by the United States Department of Labor of willful or substantial failure by us to comply with existing
regulations on the H-1(B) classification may result in back-pay liability, substantial fines, and/or a ban on future use of the H-1(B) program and other immigration benefits. We are users of the
H-1(B) visa classification with respect to some of our key offshore workers who have relocated onsite to perform services for our clients. As a result of our H-1(B) Dependent Employer status, we are
likely subjected to more site visits and a higher level of scrutiny by USCIS and the US Department of Labor than Non Dependent Employers.
We
also regularly transfer employees from our global subsidiaries, primarily those from India and Sri Lanka to the United States to work on projects and at client sites using the L-1
visa classification. The L-1 visa allows companies abroad to transfer certain managers, executives and employees with specialized company knowledge to related United States companies such as a parent,
subsidiary, affiliate, joint venture, or branch office. We have an approved "Blanket L Program," under which the corporate relationships of our transferring and receiving entities have been
pre-approved by the USCIS, thus enabling individual L-1 visa applications to be presented directly to a visa-issuing United States consular post abroad rather than undergoing the individual petition
pre-approval process through USCIS in the United States. In recent years, both the United States consular posts that review initial L-1 applications and USCIS, which adjudicates individual petitions
for initial grants and extensions of L-1 status, have become increasingly restrictive with respect to their interpretation of the regulations governing this category and all applications are subject
to increased scrutiny. For example, all L-1 applicants, including those brought to the United States under a Blanket L Program, must have worked abroad with the related company for one full year in
the prior three years. In addition, L-1B "specialized knowledge" visa holders may not be primarily stationed at the work site of another employer if the L-1B visa holder will be principally controlled
and supervised by an employer other than the petitioning employer. Finally, L-1B status may not be granted where placement of the L-1B visa holder at a third party site is part of an arrangement to
provide labor for hire to the third party, rather than placement at the site in connection with the provision of a product or service involving specialized knowledge specific to the petitioning
employer. As a result, the rate of refusals of both individual and blanket L-1 petitions and of extensions has materially increased. In addition, even where
L-1 visas are ultimately granted and issued, security measures undertaken by United States consular posts around the world have substantially delayed visa issuances as they are allowed the right to
further scrutinize the visa and request for additional supporting documentation. Any inability to bring, or delays in bringing, qualified technical personnel into the United States to staff on-site
customer locations would have a material adverse effect on our client engagements, our business, results of operations and financial condition. Due to these immigration delays, we may also be required
to hire or subcontract resources locally or perform more work onsite, thus negatively impacting our gross margins and overall profitability.
Since
2010 US, immigration law has imposed enhanced filing fees on employers who are significantly dependent upon H-1(B) and L-1 visa holders. An employer whose overall count of
full-time employee equivalents consists of 50% or more of individuals holding H-1(B) or L-1 visas are subject to an enhanced
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filing
fee. While that fee had been $2,000 and $2,250 for each new H-1(B) or L-1 petition filed respectively, that fee was recently increased to $4,000 and $4,500 respectively. We have periodically
been required to pay these enhanced fees, as the percentage of our overall US based workforce holding H-1(B) and L-1 visa status has hovered around the 50% mark. While we closely monitor the visa
makeup of our workforce in an attempt to minimize our exposure to such enhanced fees, and make efforts to recoup these costs either directly from our clients or indirectly through our billing rates,
these enhanced fees have had a negative impact on our gross profit and overall cost of operations. Further growth and increased demand for our services will likely make it increasingly difficult for
us to avoid the payment of these fees, thus impacting our gross margins and overall profitability.
We
also process immigrant visas for lawful permanent residence (green cards) in the United States for employees to fill positions for which there are an insufficient number of able,
willing, and qualified United States workers available to fill the positions. Compliance with existing United States immigration and labor laws, or changes in those laws making it more difficult to
hire foreign nationals or limiting our ability to successfully obtain permanent residence for our foreign employees in the United States, could require us to incur additional unexpected labor costs
and expenses or could restrain our ability to retain the skilled professionals we need for our operations in the United States. Any of these restrictions or limitations on our hiring practices could
have a material adverse effect on our business, results of operations and financial condition.
In
response to terrorist attacks and global unrest, U.S. and U.K. immigration authorities, as well as other countries, have not only increased the level of scrutiny and conditions to
granting visas, but have also introduced new security procedures, which include extensive background checks, personal interviews and the use of biometrics, as conditions to granting visas and work
permits. A number of European countries are considering changes in immigration policies as well. The inability of key project personnel to obtain necessary visas or work permits could delay or prevent
our fulfillment of client
projects, which could hamper our growth and cause our revenue to decline. These restrictions and additional procedures may delay, or even prevent the issuance of a visa or work permit to our IT
professionals and affect our ability to staff projects in a timely manner. Any delays in staffing a project can result in project postponement, delays or cancellation, which could result in lost
revenue and decreased profitability and have a material adverse effect on our business, revenue, profitability and utilization rates.
Immigration
laws in countries in which we seek to obtain visas or work permits may require us to meet certain other legal requirements as conditions to obtaining or maintaining entry
visas. These immigration laws are subject to legislative change and varying standards of application and enforcement due to political forces, economic conditions or other events, including terrorist
attacks. For instance, there are certain restrictions on transferring employees to work in the United Kingdom, where we have experienced growth. The United Kingdom requires that all employees who are
not nationals of European Union countries (plus Bulgaria and Romania) obtain work permission before obtaining a visa/entry clearance to travel to the United Kingdom. New European nationals from
countries such as Hungary, Poland, Lithuania, Slovakia, and the Czech Republic do not have a work permit requirement but do need to obtain a worker registration within 30 days of arrival. The
United Kingdom has introduced a points-based system under which certain certificates of sponsorship are issued by licensed employer sponsors, provided the employees they seek to employ in the United
Kingdom can demonstrate that the employee can accumulate 50 points based on certain attributes, which include academic qualifications, intended salary and other factors plus 10 points for English
language (not necessary where the employee is an intra-company transferee) and 10 points for maintenance. Where the employee has not worked for a Virtusa group company outside the United Kingdom for
at least 12 months, we will need to carry out a resident labor market test to confirm that the intended role cannot be filled by a European Economic Area national. While we are an A-rated
sponsor and have been able to obtain certificates of sponsorship to satisfy our demand for transfers to the United Kingdom, we can make no assurance that we can continue to do so.
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To the extent we experience delays due to immigration restrictions, we may encounter client dissatisfaction, project and staffing delays in new and existing
engagements, project cancellations, project losses, higher project costs and loss of revenue, resulting in decreases in profits and a material adverse effect on our business, results of operations,
financial condition and cash flows. Due to these immigration delays, we may also need to perform more work onsite, or hire more resources locally, thus reducing our gross margins and overall
profitability.
Changes in U.S. immigration law, if approved into law, may increase our cost of revenue and may substantially
restrict or eliminate our ability to obtain visas to use offshore resources onsite, which could have a material adverse impact on our business, revenue, profitability and utilization rates.
The issue of companies outsourcing services to organizations operating in other countries is a topic of political discussion in many countries,
including the United States, which is our largest market. For example, measures aimed at limiting or restricting outsourcing by United States companies are periodically considered in the U.S. Congress
and in numerous state legislatures to address concerns over the perceived association between offshore outsourcing and the loss of jobs domestically.
Immigration
and work permit laws and regulations in the countries in which we have customers are subject to legislative and administrative changes as well as changes in the application
of standards and enforcement. For example, the U.S. Congress has been actively considering various proposals that would make extensive changes to U.S. immigration laws regarding the admission of
high-skilled temporary and permanent workers. Further, the current U.S. administration or Congress may seek to limit the admission of high-skilled temporary and permanent workers and has issued and
may continue to issue executive orders designed to limit immigration. Any such provisions may increase our cost of doing business in the United States and may discourage customers from seeking our
services. Our international expansion strategy and our business, results of operations and financial condition may be materially adversely affected if changes in immigration and work permit laws and
regulations or the administration or enforcement of such laws or regulations impair our ability to staff projects with professionals who are not citizens of the country where the work is to be
performed.
The
potential risks and impact to our business if changes are made to immigration laws relating to use of H-1(B) and L-1 visas are approved could
include:
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Reduced ability to bring in foreign workers on an L-1 or H-1(B) visa
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Increased scrutiny and requests for proof of eligibility on the use of L-1 and H-1(B) visas
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Higher costs, including wages and benefits, for H-1(B) and L-1 visa holders
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Elimination of a company's ability to pay the living expenses of an L-1 visa holder on a tax free basis
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Increased oversight by the Department of Labor ("DOL") over issuance, use and administration of L-1 visas, just as the DOL
currently oversees H-1(B) visas
Even
if we are able to apply for, or obtain, such visas, we could incur substantial delays and costs in processing any such requests and our costs of operations could materially rise,
thus materially and negatively impacting our gross margins and our statement of income. Any inability to obtain, or extended delays in obtaining, these visas, or any delays or inability to hire
resources for existing or future client projects could materially delay or prevent our commencement or fulfillment of client projects, which could hamper our growth and cause our revenue to decline.
In addition, we may have to hire or use local onsite resources at substantially higher wage levels, rather than using existing offshore resources to staff onsite engagements which would materially
reduce our gross margins. Even if we use our offshore resources, we may have to put offshore resources on U.S. payroll at U.S. prevailing wage levels and full benefits, rather than the existing
practice of being able to provide a per diem reimbursement to the offshore resource on a tax free basis to cover living expenses while onsite. Our costs of revenue could then substantially increase
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and
our gross profit and our gross margins could then be materially and adversely affected. Any such delays or inability to staff needed resources on client engagements may cause client
dissatisfaction, project and staffing delays in new and existing engagements, project cancellations, higher project costs and loss of revenue, resulting in decreases in profits and a material adverse
effect on our business, results of operations, financial condition and cash flows.
If we cannot attract and retain highly-skilled IT professionals, our ability to obtain, manage and staff new
projects and expand existing projects may result in loss of revenue and an inability to expand our business.
Our business is labor intensive and our ability to execute and expand existing projects and obtain new clients depends largely on our ability to
hire, train and retain highly-skilled IT professionals, particularly project managers, IT engineers and other senior technical personnel. The improvement in demand for global IT services has further
increased the need for employees with specialized skills or significant experience in IT services, particularly at senior levels and those with special skills. Further, there is intense worldwide
competition for IT professionals with the skills necessary to perform the services we offer. If we cannot hire and retain such additional qualified personnel, our ability to acquire, manage and staff
new projects and to expand, manage and staff existing projects, may be materially impaired. We may then lose revenue and our ability to expand our business may be harmed. For example, in our fiscal
year ended March 31, 2017, our voluntary attrition rate was 14.5%. We, and the industry in which we operate, generally experience high employee attrition and we cannot assure you that we will
be able to hire or retain the number and quality of technical personnel necessary to satisfy our current and future client needs. We also may not be able to hire and retain enough skilled and
experienced IT professionals to replace those who leave. Additionally, if we have to replace personnel who have left our company, we will incur increased costs not only in hiring replacements but also
in training such replacements until they can become productive and billable to our clients. In addition, we may not be able to redeploy and retrain our IT professionals in anticipation of continuing
changes in technology, evolving standards and changing client preferences. Our inability to attract and retain IT professionals, or delays or inability to staff needed resources on client engagements
may cause client dissatisfaction, project and staffing delays in new and existing engagements, project cancellations, project losses, higher project costs and loss of revenue, resulting in decreases
in profits and a material adverse effect on our business, results of operations, financial condition and cash flows.
The IT services market is highly competitive and our competitors may have advantages that may allow them to
compete more effectively than we do to secure client contracts and attract skilled IT professionals.
The IT services market in which we operate includes a large number of participants and is highly competitive. Our primary competitors include
offshore IT outsourcing firms and consulting and systems integration firms. We also occasionally compete with in-house IT departments, smaller vertically focused IT service providers and local IT
service providers based in the geographic areas where we compete. We expect additional competition from offshore IT outsourcing firms in emerging locations such as Eastern Europe, Latin America and
China, as well as offshore IT service providers with facilities in less expensive geographies within India.
The
IT services industry in which we compete is experiencing rapid changes in its competitive landscape. Some of the large consulting firms and offshore IT service providers with which
we compete have significant resources and financial capabilities combined with a greater number of IT professionals. Many of our competitors are significantly larger and some have gained access to
public
and private capital or have merged or consolidated with better capitalized partners, which events have created and may in the future create, larger and better capitalized competitors. Our competitors
may have superior abilities to compete for market share, and compete against us for our existing and prospective clients. Our competitors may also have larger engagements with our existing or
prospective clients which, due to our size and scale, may provide our competitors with significant advantages in any competitive bidding process.
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Our
competitors may also be better able to use significant economic incentives, such as lower billing rates or non-billable resources, to secure contracts with our existing and prospective clients or
gain a competitive advantage by being able to staff engagements that we are unable to staff, due to our shortage of resources, our lack of special skill sets or immigration delays. Our competitors may
also be better able to compete for and retain skilled professionals by offering them more attractive compensation or other incentives. These factors may allow our competitors to have advantages over
us to meet client demands in an engagement requiring large numbers and varied types of resources with specific experience or skill-sets that we may not have readily available in the short-term or the
long-term. We cannot assure you that we can maintain or enhance our competitive position against current and future competitors. Our failure to compete effectively could have a material adverse effect
on our business, financial condition or results of operations.
We may face damage to our professional reputation and be subject to legal claims and litigation, including
high and unexpected costs as a result of any litigation or client disputes, if our services do not meet our clients' expectations or violate contractual terms with our clients.
Many of our projects involve technology applications or systems that are critical to the operations of our clients' businesses and handle very
large volumes of transactions. If we fail to perform our services correctly, we may be unable to deliver applications or systems to our clients with the promised functionality or within the promised
time frame, or to satisfy the required service levels for support and maintenance. If a client is not satisfied with our services or products, including those of subcontractors we employ, we may not
be able to invoice for our services, or if we do invoice, we may not be able to collect the fees due on such engagements and our business may suffer. Moreover, if we fail to meet our contractual
obligations, our clients may terminate their contracts and we could face legal liabilities, and increased costs, including warranty or breach of contract claims against us. If we were not to prevail
in the litigation, we may be required to refund all fees paid, reverse previously recognized revenues or pay damages suffered by the client which may exceed the value of the contract, despite
limitation of liability provisions in the contract. If any adverse litigation or arbitration award were granted against us, we may not have reserved sufficiently (or at all, depending on the
probability of outcome) for these losses and, as such, these losses could result in reversal of revenues or increased and unexpected financial losses which could have a material and negative impact on
our statement of operations and cash position in the financial quarter and fiscal year in which the award was granted. Any failure in a client's project could also result in a claim for substantial
damages, our inability to
recognize all or some of the revenue for the client project, potential reversals of revenue previously recognized, non-payment of outstanding invoices, increased expenses due to increase in reserves
for doubtful accounts, loss of future business with such client, increased costs due to non-billable time of our resources dedicated to address any performance or client satisfaction issues, or
litigation costs and expenses, regardless of our responsibility for such failure.
We may face difficulties in providing end-to-end business solutions or delivering complex and large projects
for our clients that could cause clients to discontinue their work with us, which in turn could harm our business, results of operations and financial condition.
We have been expanding the nature and scope of our engagements and have added new service offerings across the industries we serve. The success
of these service offerings depends, in part, upon continued demand for such services by our existing and prospective clients and our ability to meet this demand in a cost-competitive and effective
manner. To obtain engagements for such end-to-end solutions, we also are more likely to compete with large, well-established international consulting firms, resulting in increased competition and
pricing pressure. Accordingly, we cannot be certain that our new service offerings will effectively meet client needs or that we will be able to attract existing and prospective clients to these
service offerings.
The
increased breadth of our service offerings has resulted and may continue to result in larger and more complex projects with our clients. This requires us to establish closer
relationships with our clients
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and
achieve a thorough understanding of their operations. Our ability to establish such relationships depends on a number of factors, including the proficiency of our professionals and our management
personnel. Our failure to understand our client requirements or our failure to deliver services that meet the requirements specified by our clients could result in termination of client contracts,
client disputes and contractual claims against us, and we could be liable to our clients for significant penalties or damages, as well as legal and litigation costs if claims are not resolved
amicably, each of which could have a material adverse effect on our business, results of operations and financial condition.
Larger
projects often involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or delay additional
planned engagements. These terminations, cancellations or delays may result from factors that have little or nothing to do with the quality of our services, such as the business or financial condition
of our clients or the economy generally. Such cancellations or delays make it difficult to plan for project resource
requirements and inaccuracies in such resource planning and allocation may have a negative impact on our business, results of operations and financial condition.
If we are unable to collect our receivables from, or bill our unbilled services to, our clients, our results
of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate
the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables and unbilled services. Actual losses on client balances could
differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients.
Macroeconomic conditions could also result in financial difficulties, including insolvency or bankruptcy, for our clients, and, as a result, could cause clients to delay payments to us, request
modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of client balances also depends on our ability
to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be
unable to collect our client balances or claims against us for refunds, damages and/or losses, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if
we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
Currency exchange rate fluctuations may materially and negatively affect our revenue, gross margin, operating
margin, net income and cash flows.
The exchange rates among the Indian and Sri Lankan rupees and the U.S. dollar and the U.K. pound sterling, as well as the exchange rates between
the U.S. dollar and the U.K. pound sterling, have changed substantially in prior periods and may continue to fluctuate substantially in the future. We expect that a majority of our revenue will
continue to be generated in the U.S. dollar, U.K. pound sterling, Indian Rupee, the Australian dollar, the Canadian dollar and the Singapore dollar for the foreseeable future. Recently, the U.S.
dollar has appreciated against global currencies, especially the UK pound sterling, euro, and Swedish krona ("SEK") as well as the Canadian dollar and Singapore dollar, which have had, and could
continue to have, a materially negative impact on our revenue generated in the U.K. pound sterling, euro, the Indian rupee, and SEK, as well as on our operating income and net income. Any continued
appreciation of the U.S. dollar against the U.K. pound sterling, the euro, the Indian rupee, the Singapore dollar, the Canadian dollar, the Australian dollar and/or SEK will likely have a negative
impact on our revenue, operating income and net income. For the foreseeable future, we also expect that a significant portion of our expenses, including personnel costs and operating expenditures,
will continue to be denominated in Indian and Sri Lankan rupees. Accordingly, any material appreciation of the Indian rupee or the Sri Lankan rupee against the U.S. dollar or U.K. pound sterling could
have a material adverse effect
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on
our cost of revenue, gross margins and net income, which may in turn have a negative impact on our business, operating results, financial condition and results of operations. Although we have
entered into, and may continue to enter into, derivative contracts to mitigate the impact of the fluctuation in the U.K. pound sterling and the Indian rupee, we cannot assure you that these hedges
will be effective. These hedges may also cause us to forego certain benefits including benefits caused by depreciation of the Indian rupee with respect to our expenses or by a depreciation of the U.K.
pound sterling with respect to our revenue. In addition, use of derivatives includes the risk of non-performance of the counterparty. Credit risk is generally limited to the fair value of the
contracts favorable to us. We have limited our credit risk by entering into derivative contracts only with highly-rated financial institutions, limiting the credit exposure of any one financial
institution and operating under International Swaps and Derivatives Association, or ISDA, agreements with the financial institutions. Accordingly, any material depreciation of the UK pound sterling,
the Indian rupee or the Sri Lankan rupee against the U.S. dollar could have a material adverse impact on our cash balances when consolidated and translated into U.S. dollars.
Our
revenues and cost of revenue in Sweden are subject to fluctuations based on the current exchange rates between the SEK, the U.S. dollar and the euro. Although we have commenced
purchasing multiple foreign currency forward contracts designed to hedge fluctuation of the SEK and the euro against the U.S. dollar, we can make no assurance that these hedges will be effective or
that we will not forego certain benefits if the SEK and the euro appreciates in value.
Our operating results may be adversely affected by our use of derivative financial instruments.
There is no guarantee that our financial results will not be adversely affected by currency exchange rate fluctuations or that any efforts by us
to engage in currency hedging activities will be effective. In addition, in some countries we could be subject to tight restrictions on the movement of cash and the exchange of foreign currencies,
which could limit our ability to use this cash across our global operations.
Although
we have adopted a six quarter cash flow hedging program to minimize the effect of any Indian rupee fluctuation on our financial condition, these hedges may not be effective or
may cause us to forego benefits, especially given the volatility of the currency. In addition, to the extent that these hedges cease to qualify for hedge accounting, we may have to recognize the
derivative instruments' unrealized gains or losses in earnings prior to maturity. If we are unable to accurately forecast our Indian-rupee denominated costs, we may lose our ability to qualify for
hedge accounting. We cannot guarantee our ability to accurately forecast such expenses. In addition, as part of the Polaris acquisition, we have assumed a cash flow program designed to mitigate the
impact of the volatility of the
translation of Polaris U.S. dollar denominated revenue into Indian rupees over a rolling 18 month period. While these hedges are achieving their designed objective for Polaris, upon
consolidation they may cause volatility in our U.S. dollar denominated revenue due to variations between monthly average and contract hedge rates when converting back to U.S. dollars in consolidation.
Furthermore, we are exposed to foreign currency volatility related to other currencies including, the Swedish Krona, the Canadian dollar, the euro, the Singapore dollar, the Sri Lankan rupee, and the
Australian dollar, which are either not hedged or not hedged in full. Any significant change as compared to the U.S. dollar could have a negative impact on our revenue, operating profit, and net
income. Finally, as we continue to leverage our global delivery model, more of our expenses will be incurred in currencies other than those in which we bill for the related services. An increase in
the value of these currencies, such as the Indian rupee or Sri Lankan rupee, against the U.S. dollar or U.K. pound sterling could increase costs for delivery of services at off-shore sites by
increasing labor and other costs that are denominated in the respective local currency.
Our inability to manage to a desired onsite-to-offshore service delivery mix may negatively affect our gross
margins and costs and our ability to offer competitive pricing.
We may not succeed in maintaining or increasing our profitability and could incur losses in future periods if we are not able to manage to a
desired onsite-to-offshore service delivery mix. To the extent that
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our
services engagements involve an increasing number of consulting, production support, software package implementation or other services typically requiring a higher percentage of onsite resources,
we may not be able to manage to our desired service delivery mix. Additionally, other factors like client constraint or preferences or our inability to manage engagements effectively with limited
resources onsite, or difficulty in staffing onsite projects due to immigration issues, resource constraints, new and complex client engagements or other related factors, may result in a higher
percentage of onsite resources than our desired service delivery mix. Accordingly, we cannot assure you that we will be able to manage to our desired onsite-to-offshore service delivery mix. If we are
unable to manage to our targeted service delivery mix, our gross margins may decline and our profitability may be reduced. Additionally, our costs will increase and we may not be able to offer
competitive pricing to our clients which could result in lost opportunities or lost business.
If we do not continue to maintain or improve our operational, financial and other internal controls and
systems to manage our growth and size or if we are unable to enter, operate and compete effectively in new geographic markets, our business may suffer and the value of our stockholders' investment in
our Company may be harmed.
Our growth, including the Polaris acquisition and integration of Polaris into Virtusa, will continue to place significant demands on our
management and other resources and will require us to continue to develop and improve our operational, financial and other internal controls in the United States, Europe, India, Sri Lanka and
elsewhere. In particular, our continued growth will increase the challenges involved in:
-
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recruiting, training and retaining technical, finance, marketing and management personnel with the knowledge, skills and experience that our
business model requires
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maintaining high levels of client satisfaction
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developing and improving our internal administrative infrastructure and controls, particularly our financial, operational, communications and
other internal systems and controls
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preserving our culture, values and entrepreneurial environment
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effectively managing our personnel and operations and effectively communicating to our personnel worldwide our core values, strategies and
goals
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ensuring the accounting and internal controls in Polaris are at least as stringent as those in Virtusa and comply with applicable rules,
regulations and requirements to which Virtusa is subject, such as compliance with Sarbanes-Oxley ("SOX") and SEC rules and regulations.
In
addition, the increasing size and scope of our operations increase the possibility that a member of our personnel will engage in unlawful or fraudulent activity, breach our
contractual obligations, or otherwise expose us to unacceptable business risks, despite our efforts to train our people and maintain internal controls to prevent such instances. If we do not continue
to maintain and/or develop and implement the right processes and tools to manage our enterprise, our ability to compete successfully and achieve our business objectives could be impaired.
We may not be able to obtain, develop or implement new systems, infrastructure, procedures and controls that
are required to support our operations, maintain cost controls, market our services and manage our relationships with our clients.
To manage our operations effectively, we must continue to maintain and may need to enhance our IT infrastructure, financial and accounting
systems and controls and manage expanded operations in several locations. We also must attract, integrate, train and retain qualified personnel, especially in the areas of accounting, internal audit
and financial disclosure. Further, we will need to manage our relationships with various clients, vendors and other third parties. We may not be able to develop and implement on a timely
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basis,
if at all, the systems, infrastructure procedures and controls required to support our operations, including infrastructure management, and controls regarding usage and deployment of hardware
and software, for performance of our services. Any failure by us to comply with these controls or our contractual obligations could result in legal liability to us, which would have a negative impact
on our consolidated statements of income and consolidated balance sheets. Additionally, some factors, like changes in immigration laws or visa processing restrictions that limit our ability to engage
offshore resources at client locations in the United States, the United Kingdom or other countries, are outside of our control. Our future operating results will also depend on our ability to develop
and maintain a successful sales organization and processes that can ensure our ability to effectively monitor, manage and forecast our sales activities and resource needs. If we are unable to manage
our operations
effectively, our operating results could fluctuate from quarter to quarter and our financial condition could be materially adversely affected.
The failure to successfully and timely implement certain financial system changes to improve operating
efficiency and enhance our reporting controls could harm our business.
We have implemented and continue to install several upgrades and enhancements to our financial systems. We expect these initiatives to enable us
to achieve greater operating and financial reporting efficiency and also enhance our existing control environment through increased levels of automation of certain processes. Failure to successfully
implement and execute these initiatives in a timely, effective and efficient manner could significantly increase our costs, distract our management, and result in the disruption of our operations, the
inability to comply with our Sarbanes-Oxley obligations and the inability to report our financial results in a timely and accurate manner.
New and changing corporate governance and public disclosure requirements add uncertainty to our compliance
policies and increase our costs of, and time dedicated to, compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, other SEC regulations, and the Nasdaq Global Select Market rules, are creating uncertainty for companies like ours. These laws, regulations and standards may lack specificity and are subject to
varying interpretations. Their application in practice may evolve over time, as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs of compliance as a result of ongoing revisions to such corporate governance standards.
In
particular, our efforts to comply with Section 404 of the Sarbanes- Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over
financial reporting and our external auditors' audit of that assessment requires the commitment of significant financial and managerial resources. We consistently assess the adequacy of our internal
control over financial reporting, remediate any control deficiencies that may be identified, and validate through testing that our control environment is functioning as documented. While we do not
anticipate any material weaknesses, the inability of management and our independent registered public accountant to provide us with an unqualified report as to the adequacy and effectiveness,
respectively, of our internal controls over financial reporting, including operations of any acquired businesses, such as Polaris, in the applicable reporting period, for future year-ends could result
in adverse consequences to us, including, but not limited to, a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our stock to decline.
Our
management team and other personnel will need to devote a substantial amount of time to these compliance initiatives which extend to all of our subsidiaries, including Polaris and
its subsidiaries. In particular, these increased obligations will require substantial attention from our senior management and divert its attention away from the day-to-day management of our business,
which could materially and adversely affect our business operations.
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We
are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have
resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance
activities. In addition, the laws, regulations and standards regarding corporate governance may make it more difficult for us to obtain director and officer liability insurance. Further, our board
members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with their performance of duties. As a result, we may face difficulties
attracting and retaining qualified board members and executive officers, which could harm our business. If we fail to comply with new or changed laws, regulations or standards of corporate governance,
our business and reputation may be harmed.
Our share price could be adversely affected if we are unable to maintain effective internal controls.
The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide a report from
management to our stockholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. Internal control over financial reporting has
inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, and fraud. Because of these inherent limitations,
internal control over financial reporting might not prevent or detect all misstatements or fraud. If we cannot maintain and execute adequate internal control over financial reporting or implement
required new or improved controls to ensure the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, fail to
meet our public reporting requirements on a timely basis, or be unable to properly report on our business and the results of our operations, and the market price of our securities could be materially
adversely affected.
Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and
violation of these regulations could harm our business.
We are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as anti-corruption, import/export controls, content
requirements, trade restrictions, tariffs, taxation, sanctions, immigration, internal and disclosure control obligations, securities regulation, anti-competition, data privacy and protection,
employment and labor relations. Some of these legal regimes are in emerging markets where legal systems may be less developed or familiar to us. Compliance with diverse legal requirements is costly,
time- consuming and requires significant resources. Violations of one or more of these regulations in the conduct of our business could result in significant fines, criminal sanctions against us or
our officers, prohibitions on doing business and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our clients also could result in
liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to process information and allegations
by our clients that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws may not be well
developed or provide sufficiently clear guidance and may be insufficient to protect our rights.
In
particular, in many parts of the world, including countries in which we operate and/or seek to expand, it is possible that our employees, subcontractors or agents in the local
business community might not conform to international business standards and could violate anti-corruption laws, or regulations, including the UK Bribery Act of 2010 and the U.S. Foreign Corrupt
Practices Act ("FCPA") which prohibit improper payments or offers of improper payments to foreign officials to obtain business or any other benefit. The FCPA also requires covered companies to make
and keep books and records that accurately and fairly reflect the transactions of the company and to devise and maintain an adequate system of internal accounting controls. Although we have policies
and procedures in place that are designed to promote legal and regulatory compliance, our employees, subcontractors and agents could take actions
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that
violate these policies or procedures or applicable anti-corruption laws, regulations or standards. Violations of these laws or regulations by us, our employees or any of these third parties could
subject us to criminal or civil enforcement actions (whether or not we participated or knew about the actions leading to the violations), including fines or penalties, disgorgement of profits and
suspension or disqualification from work, any of which could materially adversely affect our business, including our results of operations and our reputation.
We are investing substantial cash in new facilities and our profitability could be reduced if our business
does not grow proportionately.
We intend to make increased investments in our existing global delivery centers in Asia, particularly our largest centers in India and Sri
Lanka. We may face cost overruns and project delays in connection with these facilities or other facilities we may construct or seek to lease in the future. Such delays may also cause us to incur
additional leasing costs to extend the terms of existing facility leases or to enter into new short-term leases if we cannot move into the new facilities in a timely manner. Such investment may also
significantly increase our fixed costs, including an increase in depreciation expense. If we are unable to expand our business and revenue proportionately, our profitability would be reduced.
We may lose revenue if our clients terminate, reduce, or delay their contracts with us.
Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts. Many of our
contracts for services have terms of less than 12 months and permit our clients to terminate or reduce our engagements on prior written notice of 90 days or less for convenience, and
without termination penalties. Further, many large client projects typically involve multiple independently defined stages, and clients may choose not to retain us for additional stages of a project
or cancel or delay their start dates. These terminations, reductions, cancellations or delays could result from factors unrelated to our work product or the progress of the project,
including:
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client financial difficulties or general or industry specific economic downturns
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a change in a client's strategic priorities, resulting in a reduced level of IT spending
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a client's demand for price reductions
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a change in a client's outsourcing strategy that shifts work to in-house IT departments or to our competitors
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consolidation by or among clients or an acquisition of a client
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replacement by our client of existing software to packaged software supported by licensors
If
our contracts were terminated early, materially delayed or reduced in size or scope, our business and operating results could be materially harmed and the value of our common stock
could be impaired. Unexpected terminations, reductions, cancellation or delays in our client engagements could also result in increased operating expenses as we transition our team members to other
engagements.
We may not be able to continue to maintain or increase the profitability and growth rates of previous fiscal
years.
We may not succeed in maintaining our profitability and could incur losses in future periods. If we experience declines in demand, declines in,
or inability to raise, pricing for our services, cost increases for US based resources, or if wages in India or Sri Lanka continue to increase at a faster rate than in the United States and the United
Kingdom, we will be faced with continued growing costs for our IT professionals, including wage increases. We also expect to continue to make investments in infrastructure, facilities, sales and
marketing and other resources as we expand, thus incurring additional costs and potentially reducing our operating margins. If our revenue does not increase to offset these increases in costs or
operating expenses, our operating results would be negatively affected. In fact, in future quarters
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we
may not have any revenue growth and our revenue and net income could decline. You should not consider our historic revenue and net income growth rates as indicative of future growth rates.
Accordingly, we cannot assure you that we will be able to maintain or increase our profitability in the future.
Our profitability is dependent on our billing and utilization rates, which may be negatively affected by
various factors.
Our profit margin is largely a function of the rates we are able to charge for our services and the utilization rate of our IT professionals.
The rates we are able to charge for our services are affected by a number of factors, including:
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our clients' perception of our ability to add value through our services
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the introduction of new services or products by us or our competitors
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the size and/or duration of the engagement
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the pricing policies of our competitors
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our ability to charge premium prices when justified by market demand or type of skill set or service
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general economic conditions
In
addition, the factors impacting our utilization rate include:
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our ability to transition team members quickly from completed or terminated projects to new engagements
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our ability to maintain continuity of existing resources on existing projects
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our ability to obtain visas or applicable work permits for offshore personnel to commence projects at a client site for new or existing
engagements
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the amount of time spent by our team members on non-billable training activities
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our ability to maintain resources who are appropriately skilled for specific projects
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our ability to forecast demand for our services and thereby maintain an appropriate number of team members
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our ability to manage team member attrition seasonal trends, primarily our hiring cycle, holidays and vacations
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the number of campus hires
If
we are not able to maintain the rates we charge for our services or maintain an appropriate utilization rate for our IT professionals, our revenue will decline, our costs will
increase and we will not be able to sustain or increase our gross or operating profit margins, any of which could have a material adverse effect on our profitability.
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We may be required to spend substantial time and expense in a fiscal period before we can recognize revenue
in such fiscal period, if any, from a client contract.
The period between our initial contact with a potential client and the execution of a client contract for our services is lengthy, and can
extend over one or more fiscal quarters. To sell our services successfully and obtain an executed client contract, we generally have to educate our potential clients about the use and benefits of our
services, which can require significant time, expense and capital without the ability to realize revenue, if any. If our sales cycle unexpectedly lengthens for one or more large projects, it would
negatively affect the timing of our revenue and hinder our revenue growth. Furthermore, a delay in our ability to obtain a signed agreement or other persuasive evidence of an arrangement or to
complete certain contract requirements in a particular fiscal quarter could
reduce our revenue in that period as we are not able to recognize any revenue unless we have a signed agreement or final and persuasive evidence of our arrangement. These delays or failures can cause
our gross margin and profitability to fluctuate significantly from quarter to quarter. Overall, any significant failure to generate or recognize revenue or delays in recognizing revenue after
incurring costs related to our sales processes or services performed in a particular fiscal period, due to factors such as lack of a fully executed agreement with the client, failure to satisfy other
elements of generally accepted accounting standards for revenue recognition or otherwise, could have a material adverse effect on our business, financial condition and results of operations in such
fiscal period or otherwise.
We may not be able to recognize revenue in the period in which our services are performed, which may cause
our revenue and margins to fluctuate.
Our services are performed under both time-and-material and fixed-price arrangements. All revenue is recognized pursuant to generally accepted
accounting standards. These standards require us to recognize revenue once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is
reasonably assured. If we perform our services prior to the period when we are able to recognize the associated revenue, which may be due to our failure to obtain fully executed contracts from our
clients during the performance period of our services, our revenue and margins may fluctuate significantly from quarter to quarter.
Additionally,
a portion of our revenue is obtained from fixed-price arrangements with our clients. Payment of our fees on fixed-price contracts is based on our ability to provide
deliverables on certain dates or meet certain defined milestones. Our failure to produce the deliverables or meet the project milestones in accordance with agreed upon specifications or timelines, or
otherwise meet a client's expectations, may result in non-payment of invoices, termination of engagements and our having to record the cost related to the performance of services in the period that
services were rendered, but delay the timing of revenue recognition to a future period in which the milestone is met, if we are able to achieve such milestone at all.
Unexpected costs, ability to estimate or delays could make our contracts unprofitable.
A portion of our client engagements represent fixed-price engagements. When making proposals for engagements, especially our fixed-price
engagements, we estimate the costs and timing for completion of the projects. These estimates reflect our best judgment regarding the efficiencies of our methodologies, staffing of resources,
complexities of the engagement and costs. The profitability of our engagements, and in particular our fixed-price contracts, may be adversely affected by our ability to accurately estimate effort and
resources needed to complete the project, increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our
control, which could make these contracts less profitable or unprofitable. If we underestimate the effort and resources required to complete a project and cannot
recoup additional costs from our client, or if we endure additional costs or delays, and cannot complete the project, our utilization rates may lower as we remediate project issues, our profit from
these engagements may be adversely affected and we may be subject to litigation claims.
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Our quarterly financial position, revenue, operating results and profitability are challenging to predict and
may vary from quarter to quarter, which could cause our share price to decline significantly.
Our quarterly revenue, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter
in the future. The factors that are likely to cause these variations include:
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unanticipated contract or project terminations, or reductions in scope or size of IT engagements
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the continuing financial stability and growth prospects of our clients
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our ability to recognize the revenue associated with the services performed in the applicable fiscal period due to factors, including having
fully signed contractual agreements with our clients for such periods or our ability to produce the deliverables or meet the project milestones in accordance with agreed upon specifications or
timelines in the applicable fiscal period
-
-
general economic conditions
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-
the number, timing, scope and contractual terms of IT projects in which we are engaged
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delays in project commencement or staffing delays due to immigration issues or our inability to assign appropriately skilled or experienced
personnel
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-
the accuracy of estimates of resources, time and fees required to complete fixed-price projects and costs incurred in the performance of each
project
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changes in pricing in response to client demand and competitive pressures
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the mix of onsite and offshore staffing
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-
the mix of leadership and senior technical resources to junior engineering resources staffed on each project
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unexpected changes in the utilization rate of our IT professionals
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seasonal trends, primarily our hiring cycle and the budget and work cycles of our clients
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the ratio of fixed-price contracts to time-and-materials contracts
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-
employee wage levels and increases in compensation costs, including timing of promotions and annual pay increases, particularly in India and
Sri Lanka
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our ability to have the client reimburse us for travel and living expenses, especially the airfare and related expenses of our Indian and Sri
Lankan offshore personnel traveling and working onsite in the United States or the United Kingdom
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-
acquisitions, including transaction-related costs and write-downs from future impairments of identified intangible assets and goodwill, and
other one-time, non-recurring projects
As
a result, our revenue and our operating results for a particular period are challenging to predict and may decline in comparison to corresponding prior periods regardless of the
strength of our business. Our future revenue is also challenging to predict because we derive a substantial portion of our revenue from fees for services generated from short-term contracts that may
be terminated or delayed by our clients without penalty. In addition, a high percentage of our operating expenses, particularly related to salary expense, rent, depreciation expense and amortization
of purchased intangible assets, are relatively fixed in advance of any particular quarter and are based, in part, on our expectations as to future revenue. If we are unable to predict the timing or
amounts of future revenue accurately, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall and fail to meet our forecasts. Unexpected revenue
shortfalls may also decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. As a result, and in addition to the factors listed
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above,
any of the following factors could have a significant and adverse impact on our operating results, could result in a shortfall of revenue and could result in losses to
us:
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a client's decision not to pursue a new project or proceed to succeeding stages of a current project
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the completion during a quarter of several major client projects resulting in our having to pay underutilized team members in subsequent
periods
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adverse business decisions of our clients regarding the use of our services
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-
our inability to transition team members quickly from completed projects to new engagements
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our inability to manage costs, including personnel, infrastructure, facility and support services costs
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exchange rate fluctuations
Due
to the foregoing factors, it is possible that in some future periods our revenue and operating results may not meet the expectations of securities analysts or investors. If this
occurs, the trading price of our common stock could fall substantially either suddenly, or over time.
We may be audited by software vendors from whom we license or use their software to train our resources or
serve our clients, which may result in claims for infringement, violations of license provisions, or other damages.
From time to time, we are subject to audit by our vendors from whom we license and use software to confirm compliance with usage and deployment
requirements. If, as a result of these audits or otherwise, vendors believe that we have committed usage or deployment violations, we may be required to purchase software from these vendors, and we
may be subject to claims of infringement or wrongful usage which may result in legal liability to us, including damages, legal fees and expenses. In addition to legal liability and related expense of
any litigation, which may include damages and the obligations to purchase software from such software vendor, we may be prevented from using the vendor's software in the future which may have a
material and negative impact on our ability to service our customers, conduct training of our IT professionals and generally perform our services.
Negative public perception in the markets in which we sell services regarding offshore IT service providers
and proposed anti-outsourcing legislation may adversely affect demand for our services.
We have based our growth strategy on certain assumptions regarding our industry, services and future demand in the market for such services.
However, the trend to outsource IT services may not continue and could reverse. Offshore outsourcing is a politically sensitive topic in the United States and the United Kingdom. For example, recently
many organizations and public figures in the United States and the United Kingdom have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of
jobs in their home countries. In addition, there has been recent publicity about the negative experience of certain companies that use offshore outsourcing, particularly in India. Current or
prospective clients may elect to perform such services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be
associated with using an offshore provider. Any slowdown or reversal of existing industry trends towards offshore outsourcing would seriously harm our ability to compete effectively with competitors
that operate out of facilities located in the United States or the United Kingdom. Legislation in the United States or in certain European countries may be enacted that is intended to discourage or
restrict outsourcing. Any changes to existing laws or the enactment of new legislation restricting offshore outsourcing in the United States or the United Kingdom may adversely affect our ability to
do business in the United States or in the United Kingdom, particularly if these changes are widespread, and could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
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Our failure to anticipate rapid changes in technology may negatively affect demand for our services in the
marketplace.
Our success will depend, in part, on our ability to develop and implement business and technology solutions that anticipate rapid and continuing
changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis, which may negatively affect demand for
our solutions in the marketplace. Also, if our competitors respond faster than we do to changes in technology, industry standards and client preferences, we may lose business and our services may
become less competitive or obsolete. Any one or a combination of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements.
Interruptions or delays in service from our third-party providers could impair our global delivery model,
which could result in client dissatisfaction and a reduction of our revenue.
We depend upon third parties to provide a high speed network of active voice and data communications 24 hours per day and various
satellite and optical links between our global delivery centers and our clients. Consequently, the occurrence of a natural disaster or other unanticipated problems with the equipment or at the
facilities of these third-party providers could result in unanticipated interruptions in the delivery of our services. For example, we may not be able to maintain active voice and data communications
between our global delivery centers and our clients' sites at all times due to disruptions in these networks, system failures or virus attacks. Any significant loss in our ability to communicate or
any impediments to any IT professional's ability to provide services to our clients could result in a disruption to our business, which could hinder our performance or our ability to complete client
projects in a timely manner. This, in turn, could lead to substantial liability to our clients, client dissatisfaction, loss of revenue and a material adverse effect on our business, our operating
results and financial condition. We cannot assure you that our business interruption insurance will adequately compensate our clients or us for losses that may occur. Even if covered by insurance, any
failure or breach of security of our systems could damage our reputation and cause us to lose clients.
Some of our client contracts contain restrictions or penalty provisions that, if triggered, could result in
lower future revenue and decrease our profitability.
We have entered in the past, and may in the future enter, into contracts that contain restrictions or penalty provisions that, if triggered, may
adversely affect our operating results. For instance, some of our client contracts provide that, during the term of the contract and for a certain period thereafter ranging from six to twelve months,
we may not use the same personnel to provide similar services to any of the client's competitors. This restriction may hamper our ability to compete for and provide services to clients in the same
industry. In addition, some contracts contain provisions that would require us to pay penalties or liquidated damages to our clients if we do not meet pre-agreed service level requirements. If any of
the foregoing were to occur, our future revenue and profitability under these contracts could be materially harmed.
We may face liability if we breach our obligations related to the protection, security, and nondisclosure of
confidential client information.
In the course of providing services to our clients, we may have access to confidential client information, including nonpublic personal data. We
are bound by certain agreements to use and disclose this information in a manner consistent with the privacy standards under regulations applicable to our clients and are subject to numerous U.S. and
foreign jurisdiction laws and regulations designed to protect this information, such as the European Union Directive on Data Protection and various U.S. federal and state laws governing the protection
of health or other individually identifiable information. If any person, including a team member of ours, misappropriates client confidential information, or if client confidential
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information
is inappropriately disclosed due to a security breach of our computer systems, system failures or otherwise, or if a security breach occurs on a project on which we are engaged, we may
have substantial liabilities to our clients or our clients' customers and may incur substantial liability and penalties in connection with any violation of applicable privacy laws and/or criminal
prosecution. In addition, in the event of any breach or alleged breach of our confidentiality agreements with our clients, these clients may terminate their engagements with us or sue us for breach of
contract, resulting in the associated loss of revenue and increased costs and damaged reputation. We may also be subject to civil or criminal liability if we are deemed to have violated applicable
regulations. We cannot assure you that we will adequately address the risks created by the regulations to which we may be contractually obligated to abide.
In
addition, many of our agreements with our clients do not include any limitation on our liability to them with respect to breaches of our obligation to keep the information we receive
from them confidential. Although we have general liability insurance coverage, including coverage for errors or omissions, there can be no assurance that coverage will continue to be available on
reasonable terms or will be sufficient in amount to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large
claims against us that exceed available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could
have a material adverse effect on our business, results of operations and financial condition.
Cyber-attacks as well as improper disclosure or control of personal information could result in liability and
harm our reputation, which could adversely affect our business and results of operations.
Our business is heavily dependent on the security of our IT networks and those of our clients. Internal or external attacks on any of those
could disrupt the normal operations of our engagements and impede our ability to provide critical services to our clients, thereby subjecting us to liability under our contracts. Additionally, our
business involves the use, storage and transmission of information about our employees, our clients and customers of our clients. While we take measures to protect the security of, and unauthorized
access to, our systems, as well as the privacy of personal and proprietary information, it is possible that our security controls over our systems, as well as other security practices we follow or
those systems of our clients into which we operate and rely upon, may not prevent the improper access to or disclosure of personally identifiable or proprietary information. Such disclosure could harm
our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently
changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services. Our failure to adhere to or successfully implement processes in
response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our
business, financial condition and results of operations.
Our contractual limitations on liability with our clients and third parties may not be enforceable.
Under a majority of our agreements with our clients, our liability for breach of certain of our obligations is generally limited to actual
damages suffered by the client and is typically capped at the greater of an agreed amount or the fees paid or payable to us for a period of time under the relevant agreement. These limitations and
caps on liability may be unenforceable or otherwise may not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to
indemnify our clients or liability for breaches of confidentiality, are generally not limited under those agreements. Our agreements are governed by laws of multiple jurisdictions, therefore the
interpretation of such provisions, and the availability of defenses to us, may vary, which may contribute to the uncertainty as to the scope of our potential liability. In addition,
many of our agreements with our clients do not include any limitation on our liability to them with respect to breaches of our obligation to keep the information we receive from them confidential.
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Our services may infringe on the intellectual property rights of others, which may subject us to legal
liability, harm our reputation, prevent us from offering some services to our clients or distract management.
We cannot be sure that our services or the deliverables that we develop and create for our clients do not infringe on the intellectual property
rights of third parties and infringement claims may be asserted against us or our clients. As the number of patents, copyrights and other intellectual property rights in our industry increase, we
believe that companies in our industry will face more frequent infringement claims. These claims may harm our reputation, distract management, increase costs and prevent us from offering some services
to our clients. Historically, we have generally agreed to indemnify our clients for all expenses and liabilities resulting from infringement of intellectual property rights of third parties based on
the services and deliverables that we have performed and provided to our clients. In some instances, the amount of these indemnities may be greater than the revenue we receive from the client. In
addition, as a result of intellectual property litigation, we may be required to stop selling, incorporating or using products that use or incorporate the infringed intellectual property. We may be
required to obtain a license or pay a royalty to make, sell or use the relevant technology from the owner of the infringed intellectual property. Such licenses or royalties may not be available on
commercially reasonable terms, or at all. We may also be required to redesign our services or change our methodologies so as not to use the infringed intellectual property, which may not be
technically or commercially feasible and may cause us to expend significant resources. Subject to certain limitations, under our indemnification obligations to our clients, we may also have to provide
refunds to our clients to the extent that we must require them to cease using an infringing deliverable if we are unable to provide a work-around or acquire a license to permit use of the infringing
deliverable that we had provided to them as part of a service engagement. If we are obligated to make any such refunds or dedicate time to provide alternatives or acquire a license to the infringing
intellectual property, our business and financial condition could be materially adversely affected.
The loss of key members of our senior management team may prevent us from executing our business strategy.
Our future success depends to a significant extent on the continued service and performance of key members of our senior management team. Our
growth and success depends to a significant extent on our ability to retain Kris Canekeratne, our chief executive officer, who is a founder
of our company and has led the growth, operation, culture and strategic direction of our business since its inception. The loss of his services or the services of other key members of our senior
management could seriously harm our ability to execute our business strategy. Although we have entered into agreements with our executive officers providing for severance and change in control
benefits to them, each of our executive officers or other key employees could terminate employment with us at any time. We also may have to incur significant costs in identifying, hiring, training and
retaining replacements for key employees. The loss of any member of our senior management team might significantly delay or prevent the achievement of our business or development objectives and could
materially harm our business. We do not maintain key man life insurance on any of our team members.
Risks related to our Indian and Sri Lankan operations
Political instability or changes in the central or state governments in India could result in the change of
several policies relating to foreign direct investment and repatriation of capital and dividends. Further, changes in the monetary and economic policies could adversely affect economic conditions in
India generally and our business in particular.
We have subsidiaries in India and a significant portion of our business, fixed assets and human resources are located in India. As a result, our
business is affected by foreign exchange rates and controls, interest rates, local regulations, changes in government policy, taxation, social and civil unrest and other political, economic or other
developments in or affecting India. Since 1991, successive Indian governments have pursued policies of economic liberalization. In the past, the Indian economy has experienced many of the problems
that commonly confront the economies of developing countries, including high inflation,
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erratic
gross domestic product growth and shortages of foreign exchange. The Indian government has exercised, and continues to exercise, significant influence over many aspects of the Indian economy
and Indian government actions concerning the economy could have a material adverse effect on private sector entities like us. In the past, the Indian government has provided significant tax incentives
and relaxed certain regulatory restrictions in order to encourage foreign investment in specified sectors of the economy, including the software development services industry. Programs that have
benefited us include, among others, tax holidays, liberalized import and export duties and preferential rules on
foreign investment. Notwithstanding these benefits, as noted above, India's central and state governments remain significantly involved in the Indian economy as regulators. In recent years, the Indian
government has introduced non-income related taxes, including the fringe benefit tax (which was repealed as of April 1, 2009) and General Sales Taxes ("GST"), and income-related taxes,
including the Minimum Alternative Tax. In addition, a change in government leadership in India or change in policies of the existing government in India that results in the elimination of any of the
benefits realized by us from our Indian operations or the imposition of new taxes applicable to such operations could have a material adverse effect on our business, results of operations and
financial condition. For instance, certain changes to the application of the Minimum Alternative Tax with respect to Special Economic Zone ("SEZ") units may negatively impact our cash flows and other
benefits enjoyed by us which could have a material adverse effect on our business, results of operations and financial condition.
Changes in the policies or political stability of the government of Sri Lanka could adversely affect economic
conditions in Sri Lanka, which could adversely affect our business.
Our subsidiary in Sri Lanka has been approved as an export computer software developer by the Board of Investment ("BOI") in Sri Lanka, which is
a statutory body organized to facilitate foreign investment into Sri Lanka and grant concessions and benefits to entities with which it has entered into agreements. Pursuant to our current agreement
with the BOI, our Sri Lankan subsidiary is entitled to an exemption from income taxation on export revenue for a period of 12 years expiring on March 31, 2019 provided that certain job
creation and retention requirements were met by March 31, 2017. We believe we have achieved the job criteria and have notified the BOI. The BOI, on review, could challenge our hiring
commitments in which case we would have to forego part of the 12 year tax holiday. Further, government policies relating to taxation other than on income would also have an impact on the
subsidiary, and the political, economic or social factors in Sri Lanka may affect these policies. Historically, past incumbent governments have followed policies of economic liberalization. However,
we cannot assure you that the current government or future governments will continue these liberal policies.
Regional conflicts or terrorist attacks and other acts of violence or war in the United States, the United
Kingdom, India, Sri Lanka, or other regions could adversely affect financial markets, resulting in loss of client confidence and our ability to serve our clients which, in turn, could adversely affect
our business, results of operations and financial condition.
The Asian region has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including between
India and Pakistan. Since May 1999, military confrontations between India and Pakistan have occurred in Kashmir. Also, there have been military hostilities and civil unrest in Iraq and Afghanistan.
Terrorist attacks, such as the ones that occurred in Brussels in March 2016, Paris in November 2015, Boston on April 15, 2013, New York and Washington, D.C., on September 11, 2001, New
Delhi on December 13, 2001, Bali on October 12, 2002, London on July 7, 2005, and Mumbai on November 26, 2008, civil or political unrest and military hostilities in Sri
Lanka and other acts of violence or war, including those involving India, Sri Lanka, the United States, the United Kingdom or other countries, may adversely affect U.S., U.K. and worldwide financial
markets. Prospective clients may wish to visit several of our facilities, including our global delivery centers in India or Sri Lanka, prior to reaching a decision on vendor selection. Terrorist
threats, attacks and international conflicts could make travel more difficult and cause potential clients to delay, postpone or cancel decisions to use our services.
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In
addition, such attacks may have an adverse impact on our ability to operate effectively and interrupt lines of communication and restrict our offshore resources from traveling onsite to client
locations, effectively curtailing our ability to deliver our services to our clients. These obstacles may increase our expenses and negatively affect our operating results. In addition, military
activity, terrorist attacks, political tensions between India and Pakistan and, historically, conflicts within Sri Lanka, despite the current cessation of hostilities, could create a greater
perception that the acquisition of services from companies with significant Indian or Sri Lankan operations involves a higher degree of risk that could adversely affect client confidence in India or
Sri Lanka as a software development center, each of which would have a material adverse effect on our business.
Our net income may decrease if the governments of the United States, the United Kingdom, the Netherlands,
India, Sri Lanka, Germany, Singapore, Sweden or Hungary adjust the amount of our taxable income by challenging our transfer pricing policies.
Our subsidiaries conduct intercompany transactions among themselves and with the U.S. parent company on an arm's-length basis in accordance with
U.S. and local country transfer pricing regulations. The jurisdictions in which we operate could challenge our determination of arm's-length profit and issue tax assessments. Although the United
States has income tax treaties with most countries in which we have operations, which should alleviate the risk of double taxation, the costs to appeal any such tax assessment and potential interest
and penalties could decrease our earnings and cash flows.
The
Indian taxing authorities issued assessment orders for the fiscal years ended March 31, 2004 to March 31, 2014 of our Indian subsidiary, Virtusa (India) Private
Limited, now merged with and into our affiliate, Virtusa Consulting Services Private Limited and Virtusa Software Services Private Limited (referred to as "Virtusa India"). At issue in these
assessments were several matters, the most significant of which was the redetermination of the arm's-length profit related to intercompany transactions. For fiscal year ended March 31, 2004 and
2005, we contested both assessments and also filed appeals with Indian tax authorities and U.S. Competent Authorities. Although we have settled certain tax obligations for the fiscal years ended
March 31, 2004 and 2005, we have appealed certain other tax related matters affecting our fiscal year ended March 31, 2004 and 2005 with the Indian tax authorities. During the
fiscal year ended March 31, 2005, we have appealed the redetermination of arm length pricing for transactions with our U.K. subsidiary. Although we have successfully resolved some issues we
continue to appeal several other fiscal years' assessments with the Indian tax authorities. If we do not prevail in our appeals, we may incur an additional legal liability and obligations to pay
additional interest, penalties and costs related to such matters.
Our net income may decrease if the governments of India or Sri Lanka levy new taxes or reduce or withdraw tax
benefits and other incentives provided to us.
Virtusa India is an export-oriented company under the Indian Income Tax Act of 1961 and is entitled to claim tax exemption for each Software
Technology Park ("STP"), which it operates. Virtusa India historically has operated STPs in Hyderabad and in Chennai. The income tax benefits of the STP in Hyderabad and Chennai expired on
March 31, 2010 and 2011, respectively. Historically, however, substantially all of the earnings of both STPs qualified as tax- exempt export profits. Although we believe we have complied with
and were eligible for the STP holidays, the government of India may deem us ineligible for the STP holiday or make adjustments to the profit level in previous tax years, subject to the applicable
statute of limitations, which could result in additional legal liability, including obligations to pay additional taxes, penalties, interest and other costs arising out of such matter. For instance,
the Indian taxing authorities issued an assessment order for the fiscal years ended March 31, 2007 against Virtusa India related to the denial of all STP benefits for our Chennai STP on the
basis that the STP was formed by the splitting up or the reconstruction of our Hyderabad STP. This matter is currently pending before the High Court of Hyderabad. We have filed appeals with the
appropriate Indian tax authorities to appeal
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other
years. We may incur additional legal liability and obligations to pay additional interest, penalties and costs related to such matter. We have appealed such assessments but we can make no
assurance that our appeals will be successful.
We
have located most of our Indian operations in areas designated as a SEZ, under the SEZ Act of 2005. In particular, we are continuing our build out of a facility on a 6.3 acre parcel
of land in Hyderabad, India that has been designated as a SEZ. In addition, we have leased space and operate in SEZ designated locations in Bangalore, Pune and Chennai, India. Although our profits
from the SEZ operations would be eligible for certain income tax exemptions for a period up to 15 years, we may not be able to take full advantage of the tax holidays in each SEZ if we are not
able to grow our operations, including the hiring of IT professionals into the SEZ facilities, and there is no guarantee that we will secure SEZ status for any other future locations in India.
Additionally, the government of India may deem us ineligible for a SEZ holiday or make adjustments to the transfer pricing profit levels resulting in an overall increase in our effective tax rate.
In
addition, our Sri Lankan subsidiary, Virtusa Private Ltd. ("Virtusa SL"), was approved as an export computer software developer by the BOI in 1998 and has been
granted a tax holiday. Virtusa SL has negotiated various extensions and new arrangements of the original holiday period in exchange for further capital investments in Sri Lanka facilities. The most
recent 12-year tax holiday agreement, which is set to expire on March 31, 2019, requires that we meet certain new job creation, retention and investment criteria. As of March 31, 2017,
we believe we have met the job creation target. We have submitted the required details to BOI and are awaiting their confirmation. At March 31, 2017, we were eligible for the entire 12-year tax
holiday. Further, the Sri Lankan Department of Inland Revenue has challenged the eligibility of the initial year of our granted tax holiday. This challenge was affirmed by the Tax Appeals Commission
based on their judgment that we did not meet the required investment commitments. However, during the fiscal year ended March 31, 2015, we received notice from the BOI certifying the tax
holiday for all previously claimed years, including the initial year under challenge. If any such tax assessment were ruled against us, such a ruling may materially harm our business, operating
results, and financial results and materially reduce our profitability.
Wage pressures and increases in government mandated benefits in India and Sri Lanka may reduce our profit
margins.
Wage costs in India and Sri Lanka have historically been significantly lower than wage costs in the United States and Europe for
comparably-skilled professionals. However, wages in India and Sri Lanka are increasing, 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.
In
addition, we contribute to benefit funds covering our employees in India and Sri Lanka as mandated by the Indian and Sri Lankan governments. Benefits are based on the team members'
years of service and compensation. If the governments of India and/or Sri Lanka were to legislate increases to the benefits required under these plans or mandate additional benefits, our profitability
and cash flows would be reduced.
Our facilities are at risk of damage by earthquakes, tsunamis, flooding and other natural disasters.
In December 2004, Sri Lanka and India were struck by multiple tsunamis that devastated certain areas of both countries. Our Indian and Sri
Lankan facilities are also located in
regions that are susceptible to tsunamis. Flooding and other natural disasters may increase the risk of disruption of information systems
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and
telephone service for sustained periods. For instance, in December, 2015 Chennai, India suffered one of the worst flooding and rains in the history of Chennai which shut down our facilities, had a
negative impact on our operations and client engagements and triggered our business continuity plans where we tried to mitigate the impact to our clients, employees and our business. Damage or
destruction that interrupts our ability to deliver our services could damage our relationships with our clients and may cause us to incur substantial additional expense to repair or replace damaged
equipment or facilities. Our insurance coverage may not be sufficient to cover all such expenses. Furthermore, we may be unable to secure such insurance coverage or to secure such insurance coverage
at premiums acceptable to us in the future. Prolonged disruption of our services as a result of natural disasters may cause our clients to terminate their contracts with us and may result in project
delays, project cancellations and loss of substantial revenue to us. Prolonged disruptions may also harm our team members or cause them to relocate, which could have a material adverse effect on our
business.
The laws of India and Sri Lanka do not protect intellectual property rights to the same extent as those of
the United States and we may be unsuccessful in protecting our intellectual property rights. Unauthorized use of our intellectual property rights may result in loss of clients and increased
competition.
Our success depends, in part, upon our ability to protect our proprietary methodologies, trade secrets and other intellectual property. We rely
upon a combination of trade secrets, confidentiality policies, non-disclosure agreements, other contractual arrangements and copyright, patent, and trademark laws to protect our intellectual property
rights. However, existing laws of India and Sri Lanka do not provide protection of intellectual property rights to the same extent as provided in the United States. The steps we take to protect our
intellectual property may not be adequate to prevent or deter infringement or other unauthorized use of our intellectual property. Thus, we may not be able to detect unauthorized use or take
appropriate and timely steps to enforce our intellectual property rights. Our competitors may be able to imitate or duplicate our services or methodologies. The unauthorized use or duplication of our
intellectual property could disrupt our ongoing business, distract our management and team members, reduce our revenue and increase our costs and expenses. We may need to litigate to enforce our
intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be extremely time-consuming and costly and could materially adversely
impact our business.
Risks related to our common stock
The market price of our common stock may fluctuate significantly.
The market price of our common stock has at times experienced substantial price volatility as a result of variations between our actual and
anticipated financial results, announcements by us and our competitors, projections or speculation about our business or that of our competitors by the media or investment analysts or uncertainty
about current global economic conditions. The stock market, as a whole, also has experienced extreme price and volume fluctuations that have affected the market price of the common stock of many
technology companies in ways that may have been unrelated to such companies' operating performance. Furthermore, we believe the market price of our common stock should reflect future growth and
profitability expectations. If we fail to meet these expectations, the market price of our common stock may significantly decline.
In
addition, there are many other factors that may cause the market price of our common stock to fluctuate, including:
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actual or anticipated variations in our quarterly operating results, including fluctuations resulting from changes in foreign exchange rates or
acquisitions by us, or the quarterly financial results of companies perceived to be similar to us
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deterioration and decline in general economic, industry and/or market conditions
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announcements of technological innovations or new services by us or our competitors
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changes in estimates of our financial results or recommendations by market analysts
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announcements by us or our competitors of significant projects, contracts, acquisitions, strategic alliances or joint ventures
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changes in our capital structure, such as future issuances of securities or the incurrence of additional debt
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regulatory developments in the United States, the United Kingdom, India, Sri Lanka or other countries in which we operate or have clients
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litigation involving our company, our general industry or both
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additions or departures of key team members
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investors' general perception of us
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changes in the market valuations of other IT service providers
If
any of the foregoing occurs or continues to occur, it could cause our stock price to fall and may expose us to securities class action litigation. Any securities class action
litigation could result in substantial costs and the diversion of management's attention and resources. Many of these factors are beyond our control.
Provisions in our charter documents and under Delaware law may prevent or delay a change of control of us and
could also limit the market price of our common stock.
Certain provisions of Delaware law and of our certificate of incorporation and by-laws could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to acquire, control of us, even if such a change in control would be beneficial to our stockholders or result in a premium for
your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions
include:
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a classified board of directors
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limitations on the removal of directors
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advance notice requirements for stockholder proposals and nominations
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the inability of stockholders to act by written consent or to call special meetings
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the ability of our board of directors to make, alter or repeal our by-laws
The
affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions that are contained in our
certificate of incorporation. In addition, our board of directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. Also, absent approval
of our board of directors, our by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.
In
addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or
more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to
acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
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These
provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition
proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.