Credit: Shutterstock photoY ou may not have heard of Virtusa, a tech outsourcing and consulting firm that helps businesses develop their IT systems. But you've probably heard of some of its clients, which have included high-profile names such asJPMorgan Chase ( JPM ),American International Group ( AIG ) andThomson Reuters ( TRI ).
Businesses hireVirtusa ( VRTU ) to provide a variety of services, from streamlining billing systems and facilitating mobile payments to building mobile apps, implementing customer-relationship management technology and improving IT infrastructures.
Virtusa's early adoption of mobile -- combined with its focus on an approach known as "platforming," which consolidates a company's IT systems to save money -- has made it a hit with clients and investors.
Meanwhile, as a smaller player in the IT outsourcing market, the shrinking of IT contracts over the past decade has worked in Virtusa's favor as well. Acquisitions have also enhanced its expertise in finance and insurance.
Those factors, along with a strong balance sheet, have enabled Virtusa to grow faster than its industry while expanding margins, analysts say.
This growth, in turn, has helped drive the company's stock price up roughly 35% this year. Shares hit a record high of 58.56 on Oct. 19 and still trade near there.
The company's Q2 results come out on Nov. 4. Analysts polled by Thomson Reuters expect earnings to be flat with the prior year at 34 cents a share, with revenue forecast to jump 20% to $141.9 million.
Virtusa's full-year EPS is expected to grow 10% in its fiscal 2016, which ends in March, and 28% in fiscal 2017.
The company has a best-possible IBD Composite Rating of 99. It is a member of the Computer-Tech Services group, ranked No. 4 out of 197 groups that IBD tracks. Bigger rivals includeInfosys ( INFY ) andWipro (WIT), while rivals closer in size includeSyntel (SYNT) and Tech Mahindra.
Barrington Research, which in August initiated coverage of Virtusa with an outperform rating, notes that the number of Virtusa's active clients has risen 27% over the past two years.
Momentum In India
The company is poised to gain market more share in India, where many of its facilities are located. Its momentum also comes at a time when outsourcers increasingly have to distinguish themselves with higher-quality work rather than cheap labor alone.
"They do things a little more differently than just doing it cheaper overseas," Barrington analyst Vincent Colicchio said of the company's platforming. "What they do is try to find the commonalities among applications, and they basically get rid of extra applications they don't need."
Virtusa was founded in 1996 and went public in 2007. The company is based in Westborough, Mass., but it has much of its operations in India and Sri Lanka. Most of its revenue comes in U.S. dollars, but a lot of its costs are in rupees, allowing for more financial cushion.
The company serves three main segments: banking, financial services and insurance (BFSI); communications and technology; and media and information services.
In its initiation note, Barrington said that platforming "organizes discrete software components into a layered architecture of common services, which reduces clients' IT costs by enabling teams to write software code once and reuse it multiple times."
BFSI is Virtusa's largest segment, comprising roughly 58% of revenue last fiscal year. Sales from that segment grew 19% from the prior year, driven by a push in the finance industry to modernize code and accommodate the shift to online and mobile banking.
"The financial service industry has been the biggest bettor on technology, and there's been a lot of consolidation after the Great Recession," Colicchio said. "And Virtusa has really benefited from their platform expertise, because there's a lot of consolidation and there's a lot of duplication among software assets."
SMACking Down Rivals
Virtusa began investing in the social, mobile, analytics and cloud space, or SMAC, in 2010, ahead of its rivals, who began their investments in SMAC around two years ago, Colicchio says.
Virtusa CEO Kris Canekeratne said in an interview posted online in February that businesses confronted "a duality" in which they had to expand their addressable market while saving cash -- a movement largely driven by tech-savvy millennial consumers.
"Enterprisers have to figure out a way to service them in a way that's 24 by 7, available anytime, on the device of choice," Canekeratne said.
Virtusa executives were unavailable to comment for this article, as the company is in its quiet period before its Q2 results.
In the past, a single tech company might have been contracted to manage all of a client's technological infrastructure.
These days, more contracts are being broken up into smaller pieces going to smaller companies such as Virtusa, as clients become more comfortable with outsourcing and as the tech industry becomes more specialized.
The India-based National Association of Software and Services Companies forecasts the outsourcing industry there to increase revenue by 13% this year. Virtusa is set to outpace that increase by several percentage points, but difficulties could accompany its growth.
"If you're scaling up and you're getting a bigger piece of the pie, you've got to not only manage that growth, but you've got to continue to be as effective on the larger deals as you are on the smaller ones," said Cantor Fitzgerald analyst Joseph Foresi, who initiated coverage on Virtusa this month with a buy rating.
Virtusa's top 10 clients represented 52% of revenue last fiscal year. Its largest customer was British Telecommunications, contribuing 12.4% of revenue. AIG made up 10.5% and JPMorgan Chase 9.1%. If a big client leaves, revenue would suffer. Rising wages in India and Sri Lanka could also affect the bottom line.
Also, if a bigger player likeIBM (IBM) were to get more aggressive in SMAC and lower its cost of services, Virtusa's market share could suffer.
"IBM had a really bad quarter in services, because as things move to the cloud, there's less and less lead to maintain," Colicchio said. "But in their services, overall ... they're bragging about the growth of SMAC."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
