At a recent analyst and advisor event held at its Kiev, Ukraine delivery center, Luxoft showcased its offerings and experiences to demonstrate how it intends to achieve its stated goal of 20% CAGR revenue growth, taking it from $651m in the current fiscal to $1bn by the end of its FY18 (March 31, 2018). And though the word diversification wasn’t mentioned, it was evident that this is very much the approach being taken by the company. Under the banner ‘Luxoft 3.0’ it plans to diversify its capabilities across several dimensions – offerings, clients, and delivery – in order to differentiate itself in a crowded IT services market.

Offering Diversification

Focusing on transformation and digital more than traditional application management and legacy technologies, Luxoft has been expanding its offerings in recent years with an eye on 'next generation' services. It has done this primarily through acquisitions, including:

• Populus in July 2014 to obtain a software platform for human-machine interaction (HMI)
• Radius in October 2014 to expand its IoT and big data capabilities
• Excelian in Feburary 2015 to add packaged solutions and consulting capabilities targeted at financial services.

These incremental capabilities as well as in-house developed solutions enable Luxoft to build on a heritage of product engineering services dating back to its earliest days as a spin-out of Russia-based IBS Group. This product engineering heritage has evolved over time, e.g. to embedded software development services for telecoms providers and ISVs.

Client Diversification

BFSI is still, by far, the biggest industry focus for Luxoft. It accounts for ~69% of revenues, with Luxoft’s two largest clients, Deutsche Bank and UBS, together accounting for ~52% of revenues. DB named Luxoft as named a Strategic Technology Services Provider in 2015: Luxoft has yet to see DB's current woes impact on revenues. Luxoft has sough in recent years to diversify  its client base; it has signed other large banks, also more disruptive industry entrants such as a European digital-only bank.

This expansion in BFSI has been fueled by new offerings. One is Horizon, a data visualization tool initially developed as part of the Deutsche Bank engagement, which was acquired as IP by Luxoft and is now its own offering. The acquisition of Excelian has also enabled this growth, as its services for trading platforms including Murex and Calypso have expanded Luxoft’s capabilities.

Luxoft is also investing to diversify out of its reliance on BFSI. Automotive is its second largest vertical, contributing ~$79m (~12% of revenues) revenues in FY16.. Luxoft is targeting significant growth in automotive, with an internal objective of $300m in revenues from the sector by FY20. Luxoft has made acquisitions to expand its automotive capabilities, and expects to continue to do so, with ~20% of its FY 2020 target being realized through further inorganic growth. In 2016 alone it has made two acquisitions: in February, it acquired Symtavision, which expanded its offerings to include under the hood areas such as the chassis and powertrain. In September, it acquired Pelagicore, which expanded its in-vehicle infotainment and HMI capabilities further.

During the visit to Kiev, Luxoft showcased how these acquisitions augment its product engineering capabilities in an automotive lab working on developing in-dash touch screen systems. 

Luxoft's in-dash touch screen systems at its automotive lab in Kiev

Luxoft is also targeting growth in other verticals, including:

• Manufacturing – in particular around the agriculture and food industry where large companies are expanding their focus on digital and software to increase production and address a rapidly growing population. Luxoft estimates that where agriculture companies previously allocated 0.5% of their total budget to core IT, it is now increasing those budgets to 1-5%. It sees its automotive, IoT and embedded software capabilities as being key to targeting this market
• Healthcare & Pharma – primarily through the acquisition of North American consulting firm, Insys, Luxoft sees this as a new target vertical
• Travel – Luxoft already has relationships with three of the top 10 U.S. airlines, one of top three European airlines, and a total of 20 airlines globally. Travel is an industry where it is targeting extension of the data visualization solutions originally developed for the BFSI industry as well as increasing the use of digital in customer service.

Delivery Diversification

While the Ukraine remains Luxoft’s core delivery location, it is in the process of expanding its delivery footprint away from its eastern European heartland.

Luxoft estimates that in 2003, 80% of its headcount was located in Urkaine. By 2013, when the firm underwent an IPO, it was down to 50%. At the end of FY 2016, Luxoft reported that the Ukraine represented just ~31% of its workforce.

This global expansion has been driven by the shifting of specific skill groups to new locations and the addition of new delivery locations to further expand its footprint. Expansion is a necessity as the firm grows and it seeks to maintain a differentiator in its primary use of experienced resources. Where companies using India as a delivery hub frequently fuel growth by filling in the bottom of the pyramid with inexperienced resources, Luxoft’s delivery model emphasizes experience. It claims that 76% of its workforce has more than 5 years’ experience and 79% possess a master’s degree. Maintaining this level of experience requires a level of geographic diversity as any individual market has only so many experienced resources.

Locations targeted for growth by Luxoft include:

• Poland – Luxoft is in the process of building out a core of BFSI skills in Poland where, since 2010, it has built delivery centers in three locations, Warsaw, Krakow and Tricity, and has shifted portions of its largest BFSI client teams there. Poland now accounts for ~18% of Luxoft’s workforce (2,170 FTEs)
• Germany – Luxoft is growing its German presence to support its growing automotive capability, opening centers near clients in Stuttgart, Braunschweig, and Munich. It is aiming to double its German headcount in the next two years
• U.S. – Its acquisition of Insys and its 400 consultants in addition to the 150 acquired in the Radius acquisition has helped drive the growth of Luxoft in the U.S., a key planned initiative for 2016. It now has ~1k resources located in North America and sees this as an avenue for growing its client base through consulting practice expansion.

Luxoft’s concentration in Ukraine has coincided with engagements heavily leveraging remote delivery. Across three days in Kiev, the lowest offshore-onshore ratio on an engagement that was discussed was 90% offshore / 10% onshore, with others ranging from 95-100% remote delivery. Given Ukraine’s closer time zone proximity to Europe and the U.S., Luxoft has been able to develop a delivery model almost totally remote – which is in part a necessity to maintain cost competitiveness with lower cost delivery locations. But this has also limited its ability to play a business advisor role through an on-site consulting workforce (now ~500 FTEs) that can then pull through additional work going forward. The growing U.S. presence is intended to help address this limitation and has already helped shift the firm’s overall onshore resource percentage from 4% to 14%.

Geographically, Luxoft is also expanding into new locations, opening a delivery center in Penang, Malaysia to help address APAC markets. This center is targeted to reach 550 resources in five years.

Luxoft has found a differentiated place within the IT services market with its eastern European delivery and distinctive transformation focus. However, to achieve its ambitious growth plans, it needs to move beyond the services, clients and geographies that have taken it this far. Luxoft seems to recognize this and is diversifying across the board as it zones in on its $1bn revenue target.