Virtusa's ability to build better software platforms viewed

Virtusa Corp., provides information technology consulting, technology implementation, and builds complex software systems for large companies - which it refers to as software application outsourcing - on site and from global delivery centres in India and Sri Lanka.

In a business environment where companies increasingly look to Indian information technology service vendors that offer faster and cheaper IT services, analysts see a growing offshore IT market.

Virtusa launched its initial public offering recently raising $57 million. The company will use $30 million from the offering to fund the construction of a new 600-employee facility on its planned campus in Hyderabad, India.

The balance of the proceeds will be used for working capital and other purposes, including financing the expansion of centres in Chennai, India, and Colombo, and the hiring of additional personnel.

"Right from the start, I have always viewed going public as part of a process," said Krishan A. Canekeratne, Chief Executive Officer, during an interview at the company's West Park Drive headquarters. It was never billed as an event here, never anything other than the course of business.

"It was the right point, and we felt we had the right business fundamentals and that we would need to raise capital for the building phase of the company. That's exactly what this was. We feel very prepared as a company."

Canekeratne had years of experience in computer and software companies prior to starting Virtusa in 1996, and had been involved in taking another company public. He grew up in Colombo, the capital of Sri Lanka, and came to the United States for his higher education, earning a bachelor's degree in computer science at Syracuse University.

He moved to Westboro from the Boston area in 1994 with his wife, Tushara, who co-founded Virtusa, along with his parents, and John Gillis, who serves as executive vice president of client services and business development.

The company name comes from the Latin word for excellence, and was selected from suggestions made by company team members, he said.

In addition to Virtusa, Canekeratne founded e-Docs Inc., a provider of electronic account management, and was one of the founding members at INSCI Corp., a digital storage and electronic document management company. He was on the executive management team that took the company public in 1994.

He previously worked for IECA, a wholly-owned subsidiary of Automatic Data Processing Inc., where he held technology management positions in software product development and computer systems.

Virtusa was initially founded as Technology Providers Inc., and changed its name to eRunway Inc. in 2000, and to Virtusa in 2002.

Virtusa has been profitable since 2005, and has shown 50 percent compound annual revenue growth over the last five years, according to Canekeratne and analyst Andrew Steinerman of Bear Stearns and Co. Inc., which issued a report on the company earlier this month. Bear Stearns was lead manager for Virtusa's IPO. While Virtusa is an emerging company in a crowded field, Canekeratne believes it can grow into a leader.

The company's 42 clients are grouped in three industry segments: communications and technology, banking, financial services and insurance, and media and information.

Clients include Cisco Systems, IBM and Pegasystems. Virtusa's largest client, British Telecommunications, represents 25 per cent of the company's revenues, which were $37.4m in the last quarter, ended June 30. Net income was $2.7m for the quarter.

About 20 per cent of the company's 3,700 employees work in the United States. British Telecommunications also signed a contract that requires spending at least $200m on IT services over five years.

The types of software applications the company provides vary with the client, Canekeratne said.

"A fairly large part are (software) applications customers use as the core of their operations," he said. "In telecom companies we work across their core systems, managing customers, helping with billing systems. Those are areas we have expertise in."

In the banking sector, the company will work on managing accounts and customers, which is often needed after mergers or acquisitions.

"In each of these situations they start inheriting so many applications, it gets cumbersome. We help them create a unified bill of customer applications," he said.

Without simplifying a bank's overlapping software systems, a bank that has gone through a number of mergers may have a new customer fill out multiple forms.

"A bank may have 20 different account-opening systems," he continued.

"Should they continue to maintain and enhance those tens of systems, which have large costs associated with them?" he said.

Virtusa is a small fraction the size of the so-called tier 1 and 2 Indian IT services vendors, but the company has some competitive advantages, according to Steinerman, whose report shows Virtusa has been able to get work from Global 2000 companies that already use the larger vendors.

Among its advantages is the company's ability to build better computer software platforms that blend IT solutions, technology implementation and software application outsourcing, the report said.

Another is that 80 per cent of its employees work from the company's facilities in India and Sri Lanka. Currently, offshore IT services represent only 4 per cent of the IT services market, and have a "long path for future growth," the Bear Stearns report says.

"We developed what we call our software platforming approach," he said. "This is where we would go in and ask if they want to continue with all the disparity they already have, or have us work with them to rationalise the disparity so they can reduce overall costs of ownership and significantly improve customer service."

Managing Director of Global Alliances and Business Development at Pegasystems Inc. in Cambridge, Douglas Kim, said Virtusa provided his company with cost savings, scalability and elasticity in its technical staff. Pegasystems has integrated key Virtusa staff into its organisation, he said in an e-mail.

"We had people both onshore and offshore from Virtusa," Kim wrote. "Both on and offshore, we integrate the key staff into our organisation, from both a personnel and infrastructure perspective."

Pegasystems is a provider of business process management, developing software that an insurance company would use to process checks, or that a bank would use to sign up new accounts.

Kim said Virtusa provided Pegasystems with offshore price leverage, and because it was geographically close by, "it made it comfortable and safe for us."

Helping to differentiate Virtusa from its competitors, such as Infosys Technologies Ltd., Wipro Ltd. and Patni Computer Systems Ltd., is the industry expertise it has developed in the industry sectors - communications and technology; banking, financial services and insurance; and media and information - it provides services for, Canekeratne said. The company has formed insights as to the technology needs and emerging trends in those industries, he said.

The global offshore IT services market has grown at 25 per cent for the last three years, he said, and will continue at that rate for the next three, he said. But the company's initial public offering gave Virtusa some cash and visibility, he said.

In the days after the company's IPO, Virtusa's share price fell from $14 to as low as $11.04 and climbed as high as $15.49. Steinerman of Bear Stearns set a target price of $16 for the end of Virtusa's 2008 fiscal year.

Canekeratne said he was pleased with how the offering fared, considering that the stock market fell the week of their offering.

"The investment community saw this. We had a strong execution during the IPO," he said. "Since then, Virtusa has done well in a volatile market. It talks to the fundamentals of the company."

Analysts cite appreciation of the Indian rupee as a risk to Virtusa's profits, and say the troubles in the mortgage industry could cut into the IT budgets for financial services companies.

Canekeratne said he has seen no slowdown in IT funding by his banking and financial services clients, and said there is diversity in the company's client base. None of Virtusa's clients work specifically in mortgage processing, he said.