NelsonHall recently attended Luxoft’s first ever analyst event in New York.

Luxoft is a young company - it was founded in 2000 - that is enjoying very fast growth (20%-25% depending on the year). For its FY 2015 it has guided on revenue growth of at least 28% (of which 25% organic) and an adjusted EBITDA margin in the 17% to 19% target range.

Luxoft is targeting $1bn in annual revenues by 2017, while maintaining an adjusted EBIDTA margin in the target range.

The company also wants to reach a market cap of $3bn, up from ~$1.2bn currently during this time frame.

Financial Services the Main Growth Engine

The financial services sector is Luxoft’s primary revenue engine, contributing over two thirds of its total revenue and delivering very high growth (39% in FY 2014; 44% in H1 FY 2015) - and at a time when even the Tier 1 Indian vendors have been seeing market softness in financial services.

Luxoft offers specialized application services, largely around back-office, in areas such as wealth management, trading, treasury and equity derivatives. Luxoft is also very active in regulatory compliance, where it sees no slowdown in demand, with deadlines for new provisions of Basel and Dodd-Frank ranging until 2019. Most activity is project-based.

Luxoft has been moving to more fixed price contracts, away from pure T&M pricing: 58% of revenues are now fixed price (vs. 21% in H1 2013).

A key initiative is around reuse of IP. In one example Luxoft bought the IP of a management reporting tool it developed for Deutsche Bank, and branded it Horizon; it now has five 5 clients for Horizon, which it sells as licensed software. Luxoft is developing a network of service partners around Horizon: Deloitte is a major partner.

Investing Now in Auto and Telecoms Sectors

Luxoft is looking to replicate its success in financial services to the automotive and telecom sectors. In the telecoms sector, focusing on opportunities around software-defined networks and network virtualization.

In automotive, focusing on opportunities in human machine interface (HMI) in-vehicle-infotainment (IVI), IoT and autonomous car. Investing some of the funds it received from its IPO: it has made two acquisitions:

• Populus Suite from Swedish ISV Mecel (a subsidiary of Delphi), helps in designing, developing and deploying HMI for embedded systems. Populus complements the functionality of Luxoft’s Teora and should act as a door-opener to new clients
• Radius, an IoT services firm based in Seattle active in four areas: mobile devices (to collect data), cloud computing (data hosting), data management and analysis, and APIs. While IoT has been inhibited by lack of standards, market conditions are changing as costs of telecoms and of sensors go down, making it easier to make business cases. Radius  also highlights big data technologies are maturing to be able to process data transmitted by sensors. And increasing adoption of API is helping interoperability across devices and sensors
  Radius has been verticalizing its IoT offerings for the high-tech, retail, telecom, manufacturing and aerospace sectors. It is also aiming to develop a IoT offering relevant to automotive together with Luxoft.

Both sectors contribute ~8% of revenues; neither is yet in organic growth mode. Further acquisitions are likely.

Risk Mitigation Initiatives for Delivery and Client Base

With three quarters of its headcount in Ukraine and Russia (45% and 29% respectively), Luxoft is potentially exposed to the current crisis between the two countries. The company highlights none of its personnel worked from Crimea and that the geopolitical conditions in Ukraine have not led to significant work interruption.

Nevertheless, Luxoft wants to de-risk its delivery presence and has launched its global upgrade program (GUP), under which no geography will account for more than 25% of headcount. Luxoft is applying two levers:

• Relocating Ukrainian and Russian personnel to other centers (~150 achieved and plans to reach ~200 by end of FY 2015).
• Growing alternate centers: Romania has reached a headcount of 1,000 (12% of global headcount) and Poland 500. The company recently opened delivery centers in Sofia, Bulgaria and Guadalajara, Mexico, its first nearshore center for the U.S. (with plans to reach 200).

Another risk mitigation initiative that Luxoft is conducting relates to revenue stickiness. The company is not active in run services, which typically provide long-term recurring revenues. Luxoft is not planning to enter the IT outsourcing space, although its provides application outsourcing services as part of enhancement activity, largely because it considers application maintenance and support as a less value-add activity than, say regulatory compliance. Growth in the company’s IP business should drive a larger share of long-term contracts.

Luxoft also addressed concerns about the high level of client concentration in revenues: in H1 FY 2015, its largest clients were Deutsche Bank (~38% of revenues, +60%), UBS (~21%, +38%) and Harman (~8%, +32%). Under its high potential account (HPA) initiative, Luxoft is identifying clients with the potential to contribute revenues of >$5m p.a. It added three new HPA accounts in Q2 FY 2015, none in financial services, and is also counting on acquisitions to diversify its client base. Meanwhile, the company highlights potential for further growth in its largest accounts is still very high.

This event provided more light on a highly-successful but little-known IT services vendor.

Luxoft is emerging as a different kind of application services vendor: it is less process oriented than India-centric firms, has a different pyramid model (75% of Luxoft’s delivery personnel have three years and more of experience), and is very focused on specialist offerings in a few vertical segments.

Mitigating its exposure to a few large clients will be a major focus in the short term.