Luxoft Holding' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Aug.14.13 | About: Luxoft Holding (LXFT)

Luxoft Holding, Inc (NYSE:LXFT)

F1Q 2014 Earnings Conference Call

August 14, 2013 08:00 a.m. ET

Executives

Alina Plaia – Vice President

Dmitry Loschinin – President, Chief Executive Officer

Roman Yakushkin – Chief Financial Officer

Analysts

Moshe Katri – Cowen & Co.

Steven Milunovich – UBS

George Mihalos – Credit Suisse

Peter Christiansen – UBS

Operator

Ladies and gentlemen thank you for holding, and welcome to the Luxoft Holding, Inc. First Quarter of the Fiscal Year 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions)

I would now like to turn the conference over to Alina Plaia, Vice President for investor relations at Luxoft. Alina, please go ahead.

Alina Plaia

Thank you, operator. We are happy to welcome everyone to our earnings call. This is a first call for Luxoft as a public company. We hope that by now you had a chance to receive and review our earnings release for the first quarter ended June 30, 2013. Our press release can also be located on our website luxoft.com, investor center section.

To those of us who are joining us by phone, we would like to let you know that we will be using a presentation during the webcast, which is simultaneous with this call. These slides are also available on the website. Our speakers today include Dmitry Loschinin, the President and CEO; and Roman Yakushkin, Chief Financial Officer.

Before we begin I would like to remind you that some of the comments in our call today may be deemed forward-looking statements. This of course includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainties as described in the company’s earnings release and other filings with the SEC. Please note that we follow US GAAP accounting rules in our financial statements. During our call today, we will reference certain non-GAAP financial measures that we believe are relevant for better understanding of our business dynamic by the markets.

Our call will proceed as follows, first Dmitry Loschinin will give you an operational overview of the company and IT services business. He will also discuss the trends within our verticals of focus and highlight some of the key developments. Then Roman Yakushkin will deliver a financial overview of our performance during the quarter. So with that I would like to pass the call to Dmitry Loschinin. Dmitry, please go ahead.

Dmitry Loschinin

Thank you Alina, and hello everyone. Thank you for joining us today. Last quarter was a great quarter for the company in terms of our operational and financial performance and in terms of the milestone that we have achieved. We are very excited to step into a new era as a publicly traded company on the New York Stock Exchange.

I would like to thank everyone who supported us through the process, including our employees that maintained this company on a path of uninterrupted growth, and our shareholders that showed such a strong interest in our company.

Since this is our first call, I would like to briefly introduce Luxoft to those who might be new to our story. We are a leading provider of software development services and innovative IT solutions to a global client base, consisting primarily of large multinational corporations. Over this 13 years of Luxoft existence, we have become a premier software services and solutions company with most of the engineering resources located in the place we have always believed in Central and Eastern Europe.

We have enjoyed uninterrupted growth every year since day one. Today we employ nearly 6200 people and have 18 offices worldwide. We are providing services to over 130 clients, most of them are global and Fortune 500 companies with whom we have long-standing relationships resulting in stable recurring business. We are pleased to say that our client retention rate has been very high all these years.

We serve clients and build our expertise in six verticals, financial services, travel and aviation, technology, automotive, telecom and energy. The value we bring to our clients that differentiate us from our competition consist of five components, first, unparalleled talent located mostly in Central and Eastern Europe. Second, deep business expertise within ours six verticals of focus to truly understand our client’s business. Third, expertise in cutting-edge technologies. Fourth, proprietary solutions stack for which we are prototyping and developing for our clients. And last but not least, agility in every way, the way we develop and deliver software and respond to the needs of our clients.

Therefore, this experience and a strong engineering IQ, our company is the kind of a provider many enterprises are working for today. We are able to adopt to a quick pace of changing technologies and shortening software development life cycle, and improve in time to market for our client. We are a swat team that does things right the first time. Quality is a cornerstone of all engagements. We will not compromise quality for the sake of aggressive growth.

As a testament to that, we have become a strategic vendor for most of our key accounts. As you know, we operate in a very dynamic market and focus on customer application and product development segments. Our CAGR for the last three fiscal years was 26%. We have managed to grow it much faster than our underlying market, and we believe that we successfully complete with global and Asian IT service providers.

Our industry is a split between low-cost vendors that provide relatively inexpensive commoditized services and high cost vendors that provide specialized and complex services at a premium price. We view ourself as being uniquely positioned thanks to our ability to provide complex, customized and innovative services at a competitive price, deliver high quality of work, and be more agile with many larger global competitors.

We deliver our services to large multinational corporations with substantial amount of these we have long-standing relationships. Thus we have significant visibility into our future revenues. To grow our existing accounts, we have an established business development model that has been proven over time. We call it anchor, develop, grow. The main principle is to invest from the very beginning in building long-term partnerships and provide consistent, high-quality results. At the anchor stage, we built a very strong delivery and account management team from day one. Then we start to document, understand the client’s business and internal IT landscape.

Then we develop by customizing an engagement framework to best fit the client’s ecosystem, and we grow by innovating in every way with increased efficiency and we remain proactive. Our engineers are not afraid to voice their opinion providing constructive feedback. Every single top 10 account of ours has grown in the last few years, despite the market downturn. We anchor, we develop recurring business, we grow as a high quality innovation vendor.

Now transitioning to our first quarter results. I am very pleased to note that the first quarter of financial year 2014 was one of the best first quarters in Luxoft’s history. Our revenues during the period, which is seasonally one of the weakest, amounted to $83.8 million, an 18% increase year-over-year. There were two major reasons for our solid performance. First the overall IT services demand environment and budget cycles have stabilized. Thus the projects that were postponed by our largest clients last year are being launched for the most part of the past two quarters.

Second our high potential clients secured in the financial year 2013 started ramping up engagements in line with our anchor, develop, grow model. In line with our anchor, develop, grow we continued to expand the scope of our services ranging from handling standard outsourcing client directed engagements through managed delivery and transformational engagement. As you may know, last year we have experienced an increased demand for managed delivery engagements in which we assumed full control of the project team.

We are also fully responsible for the execution. We shifted almost 20% of all of our contracts and some of the largest clients into this mode to achieve a bit over 45% in fixed price. Such significant shift required commitment, proficiency and investment from our side last year. This year, this investment started to bear fruit. Looking at the industry dynamics, we believe that this is a trend driven by enterprises. On the other hand, it is a powerful value-add for the vendors, who can properly handle such projects, as enterprises today strive to achieve maximum financial transparency and predictability of their operating costs.

We win certain engagement because we have proven experience in managed delivery and transformational engagements, and one of the main reasons for our strong performance this year thus far. Further our strong performance was supported by the investment we have made over the last two years, especially during financial year 2013. We have beefed up solution sales, and brought several industrial veterans in fields like risk management, fixed income, referral data, embedded technology, in-vehicle infotainment systems.

This push resulted in the record amount of accounts we closed last year, including blue-chip high potential accounts and this strong dynamic continued into this year. Immigration reform that caused quite a bit of turbulence in our industry over the last several months has actually benefited our business. The way our business model works is we have a very low on-site ratio versus our peers, especially over the long term. Our average on-site ratio is less than 10%. In the -- for instance, we have only two people on H1B Visa. Because of this limited exposure to the visa issues we have a competitive advantage over some Asian vendors.

We saw strong momentum in overall client demand across all key accounts, verticals and geographies. Our most significant growth was generated by financial services, automotive and transport, and travel and navigation segments. We also had several significant client wins this quarter, not only in terms of our future revenue growth, but also in terms of breaking into new segments within our verticals of focus, and validate our current solution stack.

We are also making good progress in developing high potential accounts and steadily growing our wallet share. Our high potential account growth has been well into triple digits. Overall verticals have start to grow year-over-year as the demand environment for IT services, our specialized expertise in overall offshore delivery picked up. Roman will guide you through the figures and numbers.

For now, let me highlight the most significant developments in the four industry verticals. Financial vertical, it was a very good quarter, partly driven by demand that shifted from last year’s project. There are several themes that define today’s demand environment. One, clients find it increasingly critical to have clean, correct internal/external data without errors and duplications, a single version of choice throughout the enterprise. They need to aggregate and share correct data across all business lines and business units and therefore, looking for the best possible solutions. We had some significant development in this area over the last quarter, including new project wins within new areas of our current high potential accounts, who demand end-to-end solution.

In the risk management, the clients are definitely after data transparency and comprehensive utilization capabilities. User adoption rates for business in terms of tools are continually increasing. This is the trend on which demand for our product Horizon, risk management visualization tool is shaping up. We are continuing to study the market and prepare for commercialization.

We had dozens of demonstrations to potential customers and partners and had a very good response. Fixed income practice has also enjoyed a very strong quarter, fortunately on the back of an output base of support and development of complex front-office fixed-income systems. Finally, we have further developed over the past several months our product that we called iLUX and we have renamed it to iStockTrack. iStockTrack is a financial visualization platform that enables accelerated development of branded financial mobile applications.

It was actually featured in the Forrester Research report last week. It is a secure app equipped with portfolio tracking tools, instant access to stock market data, market movers, currency and commodity rates, various fundamentals and allows integration of news from sources of choice.

It can easily be scaled, customized, and fully or partly integrated into the corporate ecosystem to fit any unique environment. Automotive and transport, the vertical is doing very well. We have several existing developments, exciting developments going there. The interest in connected car has picked up significantly, and is still gaining velocity. Connectivity is very important to consumers and thus it is very important to OEMs. We see first hand that this trend is transforming the industry and the set of expertise required of OEMs.

Up to now, traditional car components have mostly hardware elements with relatively small portion of software included. Today the proportion of the latter has grown significantly. We see very strong demand for software development services in two domains, connectivity and overall drive experience. Also in their cost, OEMs must address safety and minimize driver distraction.

We continue developing our center of excellence in this space, and believe we are well positioned for this demand. Connectivity is addressed with iviLink. It has gained great visibility among global Tier 1 suppliers after we cooperated with Ford during our last financial year, on the new Open Source connectivity technology standard smart phone link. Our platform for rapid prototyping and development of automotive HTML was further developed during the past quarter.

We augmented it with HTML-5 generation capability and situational human machine interface. It provides the driver with the real-time information to enhance overall experience and safety. These new features have helped us win a new significant deal with a major tier 1 supplier.

Telecom, overall the telecom vertical has been stable quarter-over-quarter, but we noticed pressure on some of our larger customers on a year-over-year basis because of the weakness of the US Federal government market, and the European enterprise market. That has tightened development budget. That said we see a number of developments in these domains, our automated verification of network equipment and deployment of software defined networks, so called SDN.

Last quarter brought significant growth of the development community around Twister, our open source test automation product for the enterprise communication market. In particular, clients are interested in integrated Twister, with hardware based silicon verification offering. We see a strong interest around open source that allow us to easily deploy innovative routers and switching. Open source is used for applications such as virtual machine mobility, high security networks and next-generation IT based mobile networks.

We have successfully participated in industry cross environmental testing of open source protocol implementation during one of their specialized events. As a result of this we are currently working with a number of telecom equipment manufacturers. We have started seeing some tangible benefit from our acquisition of assets from Freedom OSS, earlier this calendar year. We have been able to successfully integrate all of the vital pieces into our business and delivery model. We have also been adding engagement within several segments with the new clients that join us as a result of this transaction.

This turned out to be every bit as successful as we were anticipating. Lastly, before I pass the call on to Roman, I want to mention a couple of important recognitions. During the first quarter of this fiscal year, we received several recognitions for the work done for some of our top five customers. In May, we were awarded best supplier by Avaya in the outsourcing design services category. Luxoft received this award for its long-term engagement with Avaya for the quality, innovation and flexibility of it services.

In April, outsourcing centre awarded Luxoft and Harman International Industries the Best Buyer Synergy. It recognizes the strength and growth of our strategic partnership with Harman. In May, Forrester's profiled Luxoft into five different categories in its report (inaudible) for tech services in Central and Eastern Europe. We were profiled as one of the leading providers, whose value proposition are based on high-end software engineering. We were also featured as one of the two vendors that are positioned at the forefront of the new technology trends, investing in deepening their domain and vertical competencies.

With this, I will pass the call to Roman, who will tell you about the details of our financial performance during the first quarter. Roman?

Roman Yakushkin

Thank you Dmitry. Hello everyone and thank you for being here on the line with us today. As you have already heard from the statements made from Dmitry, and also has probably reviewed some of the key line items in our earnings release, we had a very good quarter. It was definitely one of the strongest in our 15-year history.

Our revenue during the first quarter of the fiscal year 2014 amounted to $83.8 million compared to $71 million in the first quarter of the previous year. That translates into an increase of 18% year-over-year and 2.5% decrease sequentially. To remind you, our business is moderately seasonal due to timing of maturity of fixed price contracts. In addition, our results of operations vary from quarter-to-quarter based in part upon the budget and the work cycles and our clients.

Now turning to some of our other operational measures, our performance by geographies for the past quarter was as follows, US grew by 22.2% over last year to 39.7% of total revenue, UK increased 14.1% to 28.1% of total, Germany increased 28.2% to 15.4% of total, Russia increased 11.4% to 8.4% of total, Canada increased 9.5% to 5.1% of total, and rest of Europe increased 33.9% to 5% of total.

Our vertical dynamics for the past quarter was as follows. Our financial services vertical, comprised 55.80% of total sales that represents an increase of 22.1% year-over-year. Travel and navigation vertical comprised 12.6% of total sales and an increase of 12.2% year-over-year, automotive and transport 10% of total sales and an increase of 44.9% year-over-year, technology vertical 9.5% of total revenue and an increase of 9.7% year-over-year. Telecom comprised 9.2% of total sales and a decrease of 3% year-over-year. And energy contributed 2.4% of total sales, an increase of 2.6% year-over-year.

46.8% of our revenue came from fixed-price contracts during the first quarter that represents the growth by 6% year-over-year. Our top five accounts now amount to 72.2% of sales, and our top 10 accounts amount to 82.9% of sales, which represents quarterly increase of 1.4% and 1% respectively.

Our earnings before interest, taxes, depreciation and amortization have amounted to $14.4 million versus $9.8 million in the quarter a year ago. Our GAAP net income was $9.8 million for the quarter, in comparison with $5.1 million in the first quarter of the previous year. Our GAAP net income margin was 11.7% compared to 7.1% a year ago respectively.

Our non-GAAP net income was $11.1 million for the quarter in comparison with $7.1 million in the first quarter of the previous year. Our non-GAAP net income margin was 13.3% compared to 10% a year ago respectively. Starting from this quarter forward, we will be acquiring a slightly changed definition of adjusted net income. Historically, we adjusted for the stock-based compensation. We also start adjusting it for the acquisition related costs, including the amortization of purchased intangible assets.

This approach is in line with our closest peers and the way many of the analysts calculate this metric, thus making our figures readily comparable. Our GAAP effective tax rate for the first quarter was 5.6%. We have been able to lower our effective tax rate due to successful completion of tax restructuring, involving migration of contracts to Swiss operational headquarters.

Our fully diluted share account for the past quarter was 30.6 million shares, an increase of approximately 409,000 shares from the last quarter of fiscal year 2013. Our diluted EPS amounted to $0.32 per share as compared to $0.17 per share in the quarter a year ago. On a non-GAAP basis, our diluted EPS were $0.37 per share compared to $0.24 per share last year.

Let us now turn to the balance sheet. We have finished the quarter with approximately $6.2 million in cash, in short-term investments, up from $4.5 million at the end of previous quarter ended March 31, 2013. During the first quarter, operating activities generated $5.1 million of cash. Financing activities consumed $0.2 million of cash. We spent approximately $3.1 million for capital expenditures during the quarter.

Our trade receivables were approximately $85 million compared to $78 million as of the end of last quarter. At the end of the quarter, days sales outstanding, including unbilled receivables, stood at 88 days, up from the previous quarter by eight days. This increase is attributable to the change of payment terms with one large client, as well as seasonal delay of invoice approval process.

We have finished the quarter with 6161 personnel, 5213 of which were IT professionals. We would like to remind you that most of our hires are seasoned professionals. The amount of juniors that we take on board is roughly 10%. We define juniors as IT professionals, who have less than three years of experience. Attrition in the first quarter was 12.1% versus 12.9% in the last quarter, the offshore on-site ratio of our personnel stayed around 9% to 10%.

Before we open the phone lines for Q&A, I would like to give you the outlook for the full financial year ending March 31, 2014. We expect to continue delivering solid revenue growth. Based on current conditions and client indications, revenue is expected to be at least $378 million. This represents an increase of at least 20% year-over-year. Adjusted EBITDA margin is expected to be in the range of 17% to 19%. Diluted EPS is expected to be at least $1.30 on a GAAP basis, and at least $1.48 on non-GAAP. The EPS is based on an estimated weighted average of 32,226,000 diluted shares as of March 31, 2014.

Alina Plaia

Thank you, Roman. With that we would like to open the floor for Q&A. Jesse, go ahead please.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is coming from the line of Moshe Katri with Cowen & Co. Please proceed with your questions.

Moshe Katri - Cowen & Co.

Hi, thanks guys, and good quarter. This is Moshe Katri. Going back to your revenue concentration, can we get some data related to the revenue contributions from top one, two and three clients, and also in that respect the year-over-year revenue growth from each one of these categories, top one, two and three. Thanks.

Roman Yakushkin

Hi, Moshe. This is Roman. If you look at our revenue concentration in the first quarter, our top 5 clients increased by 1.4%, and our top 10 clients by 1% year-over-year basis. This is due to the delayed demand, which we started to see last year and which continues. The contribution from Deutsche Bank, our largest client was about 30%, and our top three -- top five clients grew on average by 19% to 20% quarter-on-quarter basis, in comparison to last quarter -- I mean, to the first quarter of 2013.

Moshe Katri - Cowen & Co.

And what about UBS?

Roman Yakushkin

UBS stays at 19% up to this quarter.

Moshe Katri - Cowen & Co.

And what was the growth from UBS and Deutsche Bank, year-over-year growth from Deutsche Bank and from UBS?

Roman Yakushkin

Moshe, just one moment, just checking the numbers.

Moshe Katri - Cowen & Co.

Sure and then in that respect maybe we can go to the next question, which is, how should we think about that September quarter, you didn’t provide any guidance for the next quarter, it is pretty typical to get some guidance maybe directionally, how should we think about, you know, revenues, margins, and any sort of color for the September quarter will be helpful? Thanks.

Dmitry Loschinin

Well, we have provided the guidance for the full year, which is the growth of the top line about 20%. So you can do your maths. So this is our first call. We’re still kind of learning, which arithmetic we should provide. Overall we see very strong momentum among our existing accounts and some new accounts. So basically what we are saying is that we are going to continue developing pretty solid results.

Moshe Katri - Cowen & Co.

Okay, and then can you make any comments on your free cash flow expectations for the year?

Roman Yakushkin

Historically our free cash flow is around 10% of the revenue, and we expect that we would likely see the same pattern in the coming year. And by the way coming back to your question on Deutsche Bank and UBS growth, Deutsche grew by 27% quarter-over-quarter basis, and UBS growth rate was slightly above 17%.

Moshe Katri - Cowen & Co.

Okay, great. Final question, what is the status of the special dividend, and then when should we expect it to be paid, thanks?

Roman Yakushkin

We can state around 60% of the overall amount, and the plan is to fully repay this, what you refer to as special dividend, by the end of this calendar year in equal installments from August to December 2013.

Moshe Katri - Cowen & Co.

Okay, great. Thanks.

Operator

Thank you. Our next question is coming from the line of Steven Milunovich with UBS. Please proceed with your question.

Steven Milunovich - UBS

Thank you. Roman, can you talk a bit about the gross margin, 41.5%, what factors caused it to be up year-over-year, and maybe talk a little bit about pricing and wage inflation, and then any factors affecting the gross margin in your full-year guidance?

Roman Yakushkin

Hello, Steven. I will address your gross margin and wage inflation parts and Dmitry will address the pricing part. So the gross margin for the quarter was 41.5%, which represents an increase by more than 3% in comparison to the same quarter last year. Basically what we saw was part of the system effect from our managed delivery services, which we have started actually to promote for the last couple of years, and we believe that contributed to the increase of the gross margin. What we also saw this quarter more on the operational side was the deferral of compensation increases for our IT professionals with fairly large accounts, and also we have been able to shorten the range period for some large accounts as well.

And also we have been helped by the positive dynamics of ruble, which faced a rather weak -- I mean in comparison to our assumptions against the dollar in the first quarter. Going to the wage inflation side, last year we estimate our wage inflation for the company was between 6% and 7% ranging from 1% to up to 10% depending on the location, and we do not see much difference in the current environment. So you can estimate the close numbers for the current year.

Dmitry Loschinin

Okay, and this is Dmitry. Steven, hi. So, in terms of the pricing environment, what we see that overall the environment in our industry is positive because the US economy is rebounding and European is getting stabilized. Some of the clients they released their budgets, and as we already had said we see some of their projects, which were postponed last year being materialized this one. So I would say it is easier than before. Also it is important to understand then in Luxoft we are much less dependent on the price environment because of a pretty substantial amount of fixed price projects, which are getting closer to 50%. And in the case of fixed-price project it is pretty much about the executional efficiency, efficiency gains and the reuse of some of the experience and components.

Steven Milunovich - UBS

Thank you, and the tax rate was low in the quarter, what sort of tax rate are you factoring into your annual guidance?

Roman Yakushkin

Last year, yes, this is Roman again, last year we ended up with 9%, and we had the conservative estimate of some slight tax increase for the current year. However, it seems like we win by optimistic scenario so we think we can expect the tax rate at least in the last year level, maybe slightly on the lower side.

Steven Milunovich - UBS

So, 9% or a bit less for this year?

Roman Yakushkin

Correct.

Steven Milunovich - UBS

Okay, and then finally can you comment at all about the size of the pipeline, your close rates and so forth?

Dmitry Loschinin

Yes. This is Dmitry. So pipeline is very strong. This year we are actually not going after large amount of new closings, but rather focusing on high potential accounts, which we already described and in this sense our first-quarter was good and we see very large opportunities in there. So basically, you know, it is progressing and developing in the right direction.

Steven Milunovich - UBS

So focusing more on the accounts that you have that you can develop into large accounts as opposed to going after a lot of new people.

Dmitry Loschinin

No, I’m saying that we are focused on closing high potential accounts. So we would really go and bypass some relatively small deals, and try to close deals which will bring in the future multi-million dollar engagements.

Steven Milunovich - UBS

I see. Okay, great. Thank you very much.

Operator

Thank you. Our next question is coming from the line of George Mihalos with Credit Suisse. Please proceed with your question.

George Mihalos - Credit Suisse

Hi guys and congrats on a very good start out at the gate. Maybe just to start off with two questions for Dmitry, one, can you talk about the visibility that you have now into client budgets for the remainder of the year, and also you made a comment about immigration reform, potentially being a bit of a positive for you guys, has that helped you in conversations with existing or prospective clients?

Dmitry Loschinin

Thank you. So visibility is pretty good, usually we have visibility of around 90% even when we start our fiscal year. So it is even better now as because of the budgets for existing clients are fixed in April, and again this year is substantially better than the year before. So we don’t anticipate any surprises, and between 90% and 95% visibility we have, and as for the immigration reform has already was communicated, it is not an issue for us at all due to the very low on-site ratio, and the fact that they are usually higher locals, and as already was said, only two people we have on H1B.

We haven’t explored to the full extent the opportunity, which maybe as a result of this challenge for some of our Asian peers. But definitely this is something which we will be working on.

George Mihalos - Credit Suisse

Okay that is great. And then Roman, just to focus little bit on the guidance, on the adjusted EBITDA side, you started off with over 17% margins in the first quarter, historically your margins ramp over the back half of the year, maybe you can kind of parse out for us the expectation, you know, on the low end, if you are going to achieve 17% margins for the full year, does that just assume a lot more investment in spending in the business?

Roman Yakushkin

Hello George. Yes you are correct, basically we have targeted the range of 17% to 19%, and the extra profit that is to be generated will be invested back into business into expanding our sales capabilities, research and development et cetera. So basically our margin for the year is above 17% that would just mean the higher investment that would boost our future growth.

George Mihalos - Credit Suisse

Okay, and then the last question from me, just the organic revenue growth in the quarter if you can provide that, thank you?

Roman Yakushkin

It is 90% plus, Luxoft is a company that has been growing organically since inception. So the contribution from the acquired Freedom OSS is relatively small.

Operator

Thank you. Our next question is coming from the line of Peter Christiansen with UBS. Please proceed with your question.

Peter Christiansen - UBS

Good morning. Thanks for taking my call. I guess this question is for both Dmitry and Roman, do you expect to have any sales from your products, your platforms, just I guess the IT sales for the year and is that in any way factored into your guidance?

Dmitry Loschinin

Hi, thanks. So there are two kinds of products which we have, one, that is what we have in our portfolio today, it is a open source product such as Twister and iviLink. There is no direct relation between the sales which we have on the product sales because it comes in an open source form, but the monetization comes through the services related and deployment of those products.

So during the first quarter, we had several deployment of Twister and also iviLink. So we see pretty good dynamic in that space, and it is going to continue as well as we are actually expanding the portfolio for our open source platforms. The other type of products where we expect some revenue generation, we have just started. And Horizon that was our first quarter where we started bringing Horizon to the market, and as we said, we have had very good responses from the market, but it still requires some time for us to start generating the result. Or we don’t anticipate any major change this year, as a result of our IT-based activities.

Peter Christiansen - UBS

Great, and then Dmitry, earlier you were talking about this quarter there were some opportunities for you to break into some new sub-sectors, can you just elaborate a bit on that.

Dmitry Loschinin

Well, one we discussed in telecom space, the so-called software defined networks, or in other, it is open floor, it is a rapidly developing area, which is relatively small this year. However, we have got very good traction and we are building a new customer base in this space, as well as we are partnering with some of the industry players. So we expect this year and next year this area to grow.

There we also talked about certain domains in financial services, one is being fixed income, where we have built very strong expertise on our end, and we started seeing some potential interest from new clients. And very promising space for us is automotive. We have been doing quite a lot in building our competencies here, as well as solution stack, we also mentioned the connectivity platform.

We have had a very significant development and improvement of our tool chain in the human machine interface space, and there we actually were able to close quite a large deal, one of their major first tier supplier during the first quarter, and we anticipate that to continue.

Peter Christiansen - UBS

So, in automotive, we saw a really large jump this year, was that primarily -- that growth primarily attributed to activity with Harman or is that spread across other clients?

Dmitry Loschinin

It is -- Harman is our largest account there, and therefore the contribution from Harman is pretty substantial. However, the whole segment is nicely developing because of the investment we did last year, the solution stack, which we built as well as new accounts which we have onboard.

Peter Christiansen - UBS

Thank you.

Dmitry Loschinin

Also the way we work with Harman, it is a true partnership and some of the deals, which we are getting through Harman actually is new wins as a combination of joint activity of Luxoft and Harman.

Peter Christiansen - UBS

Great, and just finally Roman, what was the utilization for the quarter?

Roman Yakushkin

It is around 80% stable in the last year.

Peter Christiansen - UBS

Thanks again. Great quarter guys.

Roman Yakushkin

Thank you.

Operator

Thank you. Our next question is coming from the line of (inaudible) with JP Morgan. Please proceed with your question.

Unidentified Analyst

Hello everyone. I had a question regarding your EPS guidance, given everything that you have said about the performance in the rest of the year, and very strong assumptions for revenue and EBITDA, as well as lower assumptions for effective tax rate, I’m a little bit puzzled with your EPS guidance, and I wonder what else might be, what else might you expect in the second half of the year that could impact EPS, because, you know, I would assume that you would guide for a little bit higher EPS number?

Roman Yakushkin

Hi, (inaudible) this is Roman. We guide $1.30 for GAAP-based UPS and $1.48 for non-GAAP based EPS, and in our guidance we stay conservative for the EBITDA adjusted for stock-based comp, we give the range 17% to 19%. So our EPS guidance is based on the lower side of the range, and lower side of the revenue growth, which is as we mentioned in the press release 20% year-over-year.

Peter Christiansen - UBS

Understood, that is clear. Also could you explain the reasons for a relatively low cash on the balance at the end of the quarter?

Roman Yakushkin

Do you refer to the IPO proceeds, if yes, those were the -- the funds were credited on our account in July, so that is why it does not appear in our June 30 balance sheet. You will see it next quarter.

Peter Christiansen - UBS

Understood. That is clear. Thank you very much.

Roman Yakushkin

Sure.

Operator

Thank you. Our next question is coming from the line of (inaudible). Please proceed with your questions.

Unidentified Analyst

Good morning. Congrats for the great results. I have a few questions, if I may, regarding your margin improvement this quarter, do you -- which in proportion do you estimate the better inputs like better pricing or from the fact or from the fact that you actually coped with the attrition rate, so you managed to decrease the attrition rate of the personnel. And the second question, what may prevent you from kind of not exceeding targeted margins, though yes, the guidance as you said, is already conservative. And the third one, did you manage or when do you plan to start the sale of IP rights, this year and what contribution for overall the year now do you expect if there is any dispute in this regard. And could you please elaborate more on them, any process with your JV, automotive JV, thank you?

Dmitry Loschinin

Yes, thank you. Many questions I assume. Just let me open with a statement of why we stay pretty conservative on our guidance for the full year. We see very good positive trends, but we just want to make sure that they are really stable and consistent, so we want to really make sure that whatever we promise we are going to achieve. That is pretty much the logic which we have.

On your fourth question, let me answer the discussion of JV is still under very initial stage, so it is premature to report any progress right now. And the rest of the question I would address to Roman.

Roman Yakushkin

On the margins, basically we do not see the direct correlation between the change of margins and attrition rates because it is somehow hidden in the cost of sales. So amongst the major reasons, we would say that managed delivery penetration, which enabled us to use the secondary allocations and bring in more juniors as was planned. Number two would be like operational factors, like as I have said we have been able to postpone or defer some of the salary increases for our IT personnel. And number three is for a scenario, as you know, the ruble was rather on the weaker side against the dollar. That helped us basically boost our gross margins as well.

Unidentified Analyst

Thank you, and on IP rights?

Dmitry Loschinin

Going to the IP rights question, basically we are -- in our guidance we stay very conservative when it comes to the revenue generated from IP rights, and we incorporate some very conservative amounts into the second half of the year only.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question is a follow up question from the line of Moshe Katri with Cowen & Co. Please proceed with your question.

Moshe Katri - Cowen & Co.

Hi, thanks. So you had a nice decline in attrition rates, I think that was an issue of concern during the last fiscal year, can you comment on that specifically what have you done to kind of make sure that we are that some of those levels are going to be or will be maintained down the road?

Dmitry Loschinin

Hi, Moshe. So, we have done quite a number of things in order to improve the retention of our personnel. One is we have implemented the so-called internal mobility platform, which allowed our personnel engineers to transform from one project to another. So we realized that in the last year work content was one of the main reasons for them to leave. If someone was pained to work in one account or one project got bored, so now we see the way we have this opportunity for people to retain.

We put a lot of focus and actually investment in building and strengthening our people management skill across our middle management, and therefore we see obvious progress over there, as well as we introduced a lot of other management disciplines, we put in place -- actually just finished the so-called (inaudible). It is a fast track opportunity for some of our managers and significantly improved the communication within the company. So all in all that is the way, you know, that is what resulted in better retention rate.

Moshe Katri - Cowen & Co.

Okay, and then looking at your fixed price for this is relatively new for Luxoft, can you comment on some of the successes of your ongoing efforts to deliver projects in a fixed-price basis, any sort of delivery challenges you have had so far, and obviously this is kind of a tricky way of doing things, especially if you haven’t done it before?

Dmitry Loschinin

Yes. We have so-called delivery transparency models, or basically we track the delivery across all of the accounts, across all of the verticals. And we are proud to say that during first quarter, we haven’t had any issue on the delivery side. So which means that the company is well tuned to deliver on promise, having that substantial amount of fixed price, while a lot of disciplines installed and being developed in Luxoft to make sure that first of all we estimate the efforts required to do the work that we manage client expectation on our side, and we have enough knowledge and experience in the field to deliver that later on.

So overall from the delivery perspective, it has been very successful, and we have started implementing some of the measures which improved the economics, and some of that has translated into numbers which you see.

Moshe Katri - Cowen & Co.

All right, and then last question, you spoke a lot about revenue visibility, can we kind of kind of direct that more towards UBS and Deutsche Bank, or Deutsche Bank and UBS, maybe talk about growth opportunities at these accounts and then just a clarification on my first question, I was asking for growth rates for both Deutsche Bank and UBS, the numbers that you gave where these year-over-year growth numbers, or sequential growth numbers? Thanks.

Roman Yakushkin

Hi, Moshe. Those numbers were year-over-year growth numbers, Q1 2014 versus Q1 2013, not sequential.

Moshe Katri - Cowen & Co.

So can you talk about the revenue visibility into Deutsche Bank and UBS for the next 6 to 12 months?

Roman Yakushkin

Well, typically as you know we have more than 90% visibility for 12 months. So basically now that we have four months already behind us, we can say that we have pretty good visibility close to basically we can think the backlog would be around 95% at this stage.

Moshe Katri - Cowen & Co.

All right. Thanks.

Dmitry Loschinin

Well, I can add to that that in terms of the sales, I think we have done -- for those two large accounts, have done -- the work we kind of set ourself for this year is more on the executional side, how fast can they ramp up, and you know, get more transition and start some of the projects. So, that is where we really can get some improvements. But more sales is required.

Moshe Katri - Cowen & Co.

Okay. Thanks guys.

Operator

Thank you. Ladies and gentlemen we have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any concluding remarks.

Dmitry Loschinin

Thank you everyone for participation in our first earnings call. We are very excited to talk to you and explain the success of the company. Thank you for very good questions, and we look forward for connecting up as we report our second quarter results. Thank you everyone.

Operator

Thank you. Ladies and gentlemen, this does conclude the Luxoft Holding, Inc. first quarter of the fiscal year 2014 earnings conference call. You may now disconnect.

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