Luxoft Holding's (LXFT) CEO Dmitry Loschinin on Q1 2015 Results - Earnings Call Transcript

| About: Luxoft Holding (LXFT)

Start Time: 08:07

End Time: 09:03

Luxoft Holding, Inc. (NYSE:LXFT)

Q1 2015 Earnings Conference Call

August 13, 2014 08:00 AM ET


Dmitry Loschinin - President and CEO

Roman Yakushkin - CFO

Alina Plaia - Investor Relations


Steve Milunovich - UBS

Moshe Katri - Cowen and Company

Charles Brennan - Credit Suisse

Ivan Bojilov - Sears Bank


Greetings and welcome to the Luxoft Holding Inc Financial Results for Three Months ended June 30, 2014. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alina Plaia, Vice President and IRO. Thank you. You may begin.

Alina Plaia

Thank you, Jessie. Good morning, everybody or good afternoon. We are happy to welcome everyone to our earnings call. On this call, we will discuss Luxoft’s financial and operating results for the three months ended June 30, 2014.

Whether you are joining us by phone or by Webcast, we hope that by now you had a chance to review our earnings release. This release and the updated investor presentation, which is being shown during the Webcast, can be located in our Web site, Investor Center section.

Our speakers today are Dmitry Loschinin, the President and Chief Executive Officer and Roman Yakushkin, the CFO.

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

Our call will proceed as follows: at first, Dmitry Loschinin will give you an overview of the past quarter. We have many exciting operational updates to share with you. Dmitry will also go over the predominant growth drivers of our strong performance to date and of course touch upon the progress of our Luxoft global upgrade program. Then Roman will deliver financial overview of the Company’s performance during the first quarter and present the updated guidance for the full-year ending March 31, 2015.

So with that, I’d like to pass the call on to Dmitry Loschinin. Dmitry, please go ahead.

Dmitry Loschinin

Thanks, Alina. Hello, everyone. Thank you for joining our earnings call. I’m pleased to report to you that building on the strong momentum of our financial year 2014; we had a solid quarter fueled by growth in financial, services, automotive and energy segments.

Our revenues for the first quarter increased by 34% on a year-over-year basis compared to the guidance we provided for this quarter of 25% year-over-year growth. The revenues increased 6% sequentially. I’d like to note the remarkable growth in our key verticals. Financial services grew 61%, Energy grew 57% and Automotive and Transport grew 17%, all on year-over-year basis.

Our advanced utilization tool HORIZON continues to gain traction. Now customers include other big enterprises outside of financial area. We expanded our IP portfolio. We purchased an HMI solution Populus Suite from subsidiary of our client Delphi. This was a very important addition from a strategic standpoint to our existing HMI tool chain TEORA.

We added that list three more accounts to high potential list. As we call them HPA. Just a quick reminder, that an account that we qualifies in HPA is the one with potential to bring at least $5 million in recurring revenues by the time this account is three years old. We added a new Fortune 500 name to the list of our top 10 accounts.

We grew our personnel account to almost 7,800 people as of the end of the quarter, while directing attrition to 9.8%. We believe this is the lowest number among the public peers. Please let us know if you hear otherwise.

Our services for the top three accounts continue to grow. HARMAN grew near 40% year-over-year. Top two of our clients grew over 50% year-over-year each, as cost optimization initiatives by means of technology continue to play well.

We’ve moved into a strategic vendor partner status, as per our anchor-develop-grow approach is one of our large clients in the energy vertical. We successfully manage the initial stages of our global upgrade program. It’s even the results we intended for this quarter.

We managed our costs as we anticipated and promised to the market. We’re increasing our global presence by expanding existing dedicated delivery centers in the U.S and EU. As planned, we decreased our core delivery of staff concentration in Ukraine and Russia. One of the major news in that regard is opening our first Latin American location, setting up a delivery center in Guadalajara, Mexico. We are very excited about this development.

Further we got an absolute record number of analyst mentions. There were several from Gartner along, which spend across all of our verticals of focus and practices such as mobility application, security etcetera. We are very proud of our progress to date, especially given that it was not the easiest quarter on the perception front for our business.

Once again, we’re excited for the year that lies ahead of us, therefore increasing our revenue guidance to at least US$486 million or 22% year-over-year increase versus our originally guided US$478 million or at least 20% year-over-year increase. Roman will give you other details on his financial section of review.

Now let’s discuss some of the quarterly operating highlights in a bit more detail. Let’s look at the overall progress of the business on a larger scale. During the first three months of the new financial year, the contracts in revenues have been booked as anticipated. All committed budgets are confirmed and been executed. The ramp up of new engagement continues to follow and plan scheduled and new contracts are being launched for this client.

We continue to invest at the additional facilities and infrastructure in line with our global upgrade. As you know by now we’re very focused on recurring revenues and securing high potential accounts. Over the past quarter we closed and launched three of them. Two accounts signs for financial services vertical and the one is in automotive.

The overall demand for IT and complex software development services is on the rise and enjoying much better dynamic than BPO related services segment. Europe remains to be very active. Because U.K. and other Europe are growing more aggressively than the U.S., above 40%.

The demand for managed delivery and fixed price engagements also does not have any signs of tapering. We continue to be in engagements and benefit from vendor consolidation due to our ability to effectively execute and manage large projects across global enterprises. Thus, our share of fixed price contracts has been slowly increasing and now it’s over 56%.

Now I’d like to give you an update on our global upgrade program. We launched this program during the last quarter. It unveils certain measures first and foremost to geographically diversify our staff mix. It also addresses measures like our perception of being Russian company, which made us prone to (indiscernible). That was reflected in our share price over the last 1.5 months. Thus in April we launched Luxoft global upgrade, corporate change program that spans across internal and external elements of our business.

The aim is to mitigate the risks, secure further growth and change current perception. For those who are not familiar with it, the program has five pillars: global management, global customer experience, global delivery, global communications and global culture. Within each of these pillars, the goal is to reconfirm our current status versus what is expected by the multinational company standards, then upgrade and fulfill any gap between the two.

As a result of our investment over the past several months, we were able to secure additional facilities and infrastructure in the EU and other countries that will provide future growth and scalability as well as accommodate critical personnel that agree to move to EU. Thus far, we’ve moved or about to move about 100 engineers in total. Our current exposure in the Ukraine is just below 46% as of last week versus 49% we reported at the end of March.

We also made a good progress in moving certain corporate functions to the EU. There are more members of senior management who have updated their offices and reallocated to our global operating headquarters in Zug, Switzerland. We are planning to move into a new much larger office in Zug by the end of the year. At this point, there is only one member of senior management left in Russia, Ukraine offices.

Moscow has become simply one of our delivery centers actually starting last year. By the way we continue getting the request from investors to meet in Moscow and encourage everyone to plan meetings with us in Switzerland, U.K. and New York.

Lastly, now all of our data center facilities and corporate services allocated in the EU, the program is expect to global customer experience, global coverage and global communication is also progressing as planned. If you would like to get more details from those pillars, let’s address those in the Q&A portion of our call.

Not surprising, we’ve received many questions during the past months on Ukraine and the Ukraine Russia situation. We had business as usual in all of our location in Russia and Ukraine, every one of the day of the quarter and continue to do so up to to date.

We would like to reiterate that we’re not impacted by sanctions, as we’re a Swiss headquartered global entity and not connected to any political circles in the above mentioned countries.

As I said earlier, we’re all very excited about opening our first Latin American delivery location in Guadalajara, Mexico. It will become our 22nd office. Now we’re present in 14 countries in the -- around the globe and as early as September we can surf our clients from 17 delivery centers.

Guadalajara is a major IT hub for many large global technology companies that have their development centers there, including HP, IBM, Oracle, Intel, Dell and some of our ITO peers, except it was relevant for us (indiscernible) and a strong educational system. We believe this two location will fit very well into the active system of our existing global delivery network. This will be the first initial location for our U.S customer base with all of the related benefits such as ease of travel, close times on their logistics. Previously only our EU clients enjoy the near shore services convenience.

Early in June we opened a new delivery center in Detroit, Michigan to support automotive [ph] [finance] business and be in proximity to the heart of OEM community. We believe that being on the ground will give us an even greater visibility of the current technology in use, to continue optimize our existing offering.

Further, we have been actively growing all of our EU allocations including the newest one Bulgaria. We are very satisfied with the talent and recruitment, training and overall work progress there. The government of Bulgaria is extremely supportive for Luxoft and recently we were actually awarded a grant for supporting the IT segment in the country and for our plans to become a significant employee in Bulgaria. Lastly, over the last quarter we completed a transfer of -- for our tax jurisdiction to London, U.K.

Some vertical highlights. As we reported last quarter, we’re very committed to developing the existing verticals. Our strategy is to go deep not wider, become leaders in certain specialty markets and fully develop marquee accounts in those. We also increase our efforts around two of our key verticals based on the complex and maturity of the current offerings, our current position and competitive landscape, thus our financial services vertical grew a 61% year-over-year and our automotive service grew a 17% year-over-year.

Let me now highlight our operating results. Financial services, the vertical overall and our top clients had another quarter of very strong growth. This team of overall vendor consolidation dedicated to global task continues. Connected to this team, is a stride for cost flexibility and efficiency when working with vendors. Thus, the portion of our fixed price contracts has increased once again to 56%. We believe if the highest ratio among our peers and our ability to execute very well on such engagement is becoming a strong differentiator on the market.

We continue to gain market share with wealth management --- within wealth management and investment banking segments. We are steadily expanding the scope of work we formed in the front offices for our clients. Some of which are multi-year commitments of transformational nature, focused on various application development tasks. For example, ADM for trading platforms across business line such as treasuries, equity derivatives, etcetera.

Actually the ability to perform certain front office tasks on par or better as compared to the internal IT is also becoming our strong competitive advantage versus other ITO players. We continue to diversify our services across business lines, with existing clients and securities lending prime brokerage and global rate areas.

Recently Luxoft became the main vendor in trading area for one of the large U.S based hedge funds. Some of the prevailing seems the secure overall IT demand in the financial services vertical, high integration and data management, know your customer, KYC and regulatory in compliance.

Our most recent transformation initiative is one of the large clients is regulatory related. The main urgent most points related to intensify the regulations that our clients aim to address are: one, find a solution to deal with multitude of regulatory mandates resulting from the Dodd-Frank Act and other laws that force enterprises to become more accountable and more transparent, essentially eliminating too big to fail [ph] [premise].

Two, implementing risk management culture embedded into the ecosystem of the entire global enterprise to address the new regulations and initiatives. This point quickly became a matter of life and death. Apparently even relatively minor mistakes can balloon up into big issues and result in hundreds of millions of dollars of fine. The headline appears almost daily.

The two challenges above are heavily dependent on IT tax transformation that is needed to deal the transparency and compliance requirements. As the requirements I’ve (indiscernible) not always clearly define, it has become increasingly difficult to adequately track compliance using traditional processes and information systems.

Requirements for stress test in modal validation and kept for adequacy are not only this, it relate to many asset classes. Some of this, of the asset classes, requires specialized knowledge infrastructure and data capabilities, including structural products, ABS and derivatives, consumer and commercial loans, municipal bonds etcetera. This is the kind of specialized knowledge Luxoft brings to clients to address pricing issues. It also makes us stand out among other providers on the market.

By the way our product HORIZON and advance utilization tool for the underlying data is a good response to the regulatory over site dilemma as it addresses some of the technology challenges above and helps visualize and monitor regulatory KPIs. Overall, HORIZON continues making a very encouraging progress, helping us secure a more sales of our services and maintaining a healthy pipeline across several verticals, not just financial services.

We continue on the interactions with Basel Committee to wholly present HORIZON capabilities early this year. Such ongoing dialogues adds more credibility to the solution among current and potential clients and brought us already existing interest in the industry for this product. The first quarter also brought HPI wins. We added two accounts and financial services, one of the companies is a new service and data provider for financial service capital markets and other is a large European bank who came to us because of HORIZON.

Automotive and transport vertical updates. The most important event in this vertical is the recent acquisition of Mecel Populus Suite. We believe that Populus was the right choice for us for three simple reasons. First, it fits very well into our existing portfolio of services and solutions that we already have. These are HMI design and consulting services and high-end automotive HMI tool TEORA that all of you probably heard of by now.

Second, it strengthens our ties with key customers and third, it’s a quick entry to an important digital cluster and head up display market. This matter is in high demand with OEMs, but it’s in an uncharted territory for many of our competitors. Perhaps you remember, we covered the subject of digital clusters so needed by OEMs today and how important and rare this expertise is on the market. Populus adds yet another ABS to our portfolio.

We anticipate its license and business model will nicely integrate into our service based revenue model. At the same time, it should increase our potential to gain new projects due to this competitive offering. By adding Populus Suite to (indiscernible) we now have end to end solution for developing HMI system of various complexities. Well as the letter is designed to write complex high-end HMIs that have significant flexibility on the month load etcetera. Populus is designed full to meet key HMI. Therefore it allows us to have tools to address a full range of OEMs niche in that area.

During the Investor Call, (indiscernible) last week, we covered the challenges placed by OEMs in the current age of the customer. We also discuss how HMI, which is crucial part of customer experience, can address those challenges. Lastly, the contracts with clients using Populus were grandfathers to us and continued generating recovery license in the royalty revenues. Therefore, we still expanded our footprint and solidified our position on the OEM market including Asia.

In the upcoming months, we’re planning to further develop TEORA to support QT framework in the near future. We are planning to completely integrate Populus into our solution spec and develop product based business as an alternative revenue model for Luxoft.

We also plan to further enhance our demonstrated and reference design platform for INVITO user experience AllView. By the way, AllView has just received an award for HMI Design Innovation at CAR HMi Concept and Systems 2014 congress, in Berlin. We earn a second place after Volkswagen. This recognition is of utmost significance for our automotive practice.

During the conference, we’ve showcased for the first time a Luxoft branded HMI. The connected car industry is becoming more popular subject daily. To the new technologies like computer vision next generation litigation, seamless in-car connectivity is also been added demand for speech support, next generation advanced drive assist speeches etcetera. Autonomous driving is another upcoming trend and we recently started doing more work utilizing our expertise in solutions in this area. We are very pleased with the performance of this vertical and look forward to the next exciting quarter.

Telecom. We continue to focus on leveraging our core skills -- skillset and deep expertise into new areas such as test and measurement area of the networking in telecom industries. Our joint conformance test suite with Spirent Communication for the last OpenFlow products is getting traction on the market. In addition, to the OpenFlow technology, we’re working to expand in other areas of test and measurement for both our testing solutions as well as services.

We believe that the fundamental shift from hardware to software centric networking technologies is creating a lot of demand for new highly scalable products and services in test and measurement space from suppliers of related equipment as well as operators, providers, and enterprises.

Our solutions pack has been expanded (indiscernible) Network Function Virtualization, NFV in the data centers. In particular, we’ve seen a great interest from the equipment suppliers and their customers in adopting NFV. It is very exciting for us as NFV requires a unique combination of knowledge including virtualization network in service side and bad skill-set and so on. Over the years Luxoft has built a very strong know-how in all of this areas and now we’re getting ready to launch a new NFV platform based on our early investment in Ulmo technology which I’ve talked about in the previous calls.

We expect to unveil this product in the upcoming SDN and OpenFlow World Congress, in October 2014. We have recently hired seasoned a U.S based head of business development with extensive ties within the industry to help us better engage with significant clients in the specialty areas we just discussed.

Energy. Our energy vertical albeit our smallest consistently demonstrates stable growth and actually shift 70% year-over-year revenue growth this past quarter. As you know we’ve developed a number of software, hardware platforms in electricity transmission and distribution areas for the industry.

Our platforms, DMFusion, DMMessenger, and Visual Utility aim to help our customers create solutions with high efficiency and dramatically reduce time to market. Since last year, we added another focus which is automation and utilization system specifically for oil and gas industry.

During last year, we significantly grew our client portfolio in that area. We also received key vendor status from our top clients, which is an industry leader thus advancing our relationship to the next level. As we always aim to do in accordance with our anchor-develop-grow model.

In conclusion, before I pass the word to Roman, I’d like to cover some of the awards and recognition from the past quarter. Luxoft was listed in for Gartner Hype Cycles for four areas of expertise. Location-based services in automotive, along with Google, Yahoo, Telenav. Mobile device integration into automobiles along with Apple, Google, Intel, Microsoft, Continental. Automobile eCall along with Continental and Magneti Marelli. Public Telematics and Intelligent Transportation Systems along with Atos, Deutsche Bank, IBM.

As we can see the Analyst community and industry players are evidenced by (indiscernible) worth or view of bringing us on par this vertical leaders and positioning us as a specialty provider in the space not an outsourcing company. This is exactly our goal. At the same time, we’re getting -- we get ratings and received the awards and recognitions in line with the leading global ITO companies.

As an example, we’ve 2014 Global Outsourcing 100 by IAOP selected Luxoft in the category of leaders and ranked us number 18 in their 2014 Global Outsourcing 100 service provider list. Since 2012, Luxoft has substantially moved up in rank most notably from number 41.

On the industry research front, Luxoft received exclusive coverage on Everest Group webinar focused on IT outsourcing in banking and capital markets. We were elevated to a major contender in the banking application outsourcing 2014 PEAK Matrix. Everest Group commented specifically on our high buyer satisfaction, earning of new clients and our increasingly popular (indiscernible) advantage.

With this, I’d like to pass the call to Roman for a detailed financial overview.

Roman Yakushkin

Thank you, Dmitry. Hello, everyone and thank you for being here. I’m pleased to give you a detailed overview of our operational financial dynamics for the first quarter of the year. We delivered a strong three months performance to our shareholders.

It was one of the strongest first quarter in the history of the Company. Despite usual seasonal trends and some geopolitical instability, our operations were not affected and delivered according to plan. We can note the same about our new revenue bookings. Therefore, we continue to maintain an EBIT outlook for the next year as we believe the top pipeline and operational stability to remain resilient.

Now let me take you through our financial highlights. Our revenue for the three months of financial year ending March 31, 2015 amounted to $112.3 million compared to $83.8 million in the year-ago quarter and $106.3 million in the fourth quarter of last financial year. That translates into an increase of 34.1% year-over-year and 5.7% sequentially. It is very important to underline here that 98.6% of total revenue is our existing accounts. Luxoft has always been focusing on recurrent stable high-quality revenue and this quarter is certainly not an exception. Now let’s go over some of the operational metrics, the four month biogeography.

We would like to remind you that we book our revenues based on the location of the project owner not based on where the work is performed. All of our key revenue generating geographies showed real strong growth. While the mix remains roughly the same versus the first quarter over the last year and the last reported quarter with exception of the UK which increased by 44.1% year-over-year to 30.2% of revenues or 4.4% sequential increase.

U.S. grew by 32.7% over the last year, the 39.3% of total revenue from 39.7% last year. Germany grew by 35.6% to 13.5% of the total close to 13.4% a year ago. Russia increased 16.3% to 7.3% of the total down from 8.4% last year. Canada decreased 73.7% to 1% of the total from 5.1% and rest of Europe increased 47% remaining at around 5% of the total.

Vertical dynamics, for the three months ended June 30, 2014, our business lines performed as follows. Financial services vertical comprised 66.9% of total sales that represents an increase of 60.7% year-over-year. Automotive and transport is 10.3% of total sales, an increase of 16.9% year-over-year.

Travel and aviation vertical comprised 7.1% of total sales decreasing by 11.5% year-over-year. Technology vertical, 6% of total revenue and the decrease of 14.9% year-over-year. Telecom comprised 6.3% of total sales decreasing by 7.9% year-over-year and energy contributed 2.8% of total sales, an increase of 57.1% year-over-year.

Our top three accounts amounted to 67.1% of total revenues for the quarter which is an increase of 62% year-over-year from 59.2% last year. Top five accounts amounted to 75.8% of sales representing 40.8% increase year-over-year from 72.2% a year ago. Our top ten accounts amounted to 84.6% of sales in the current financial year which corresponds to the 36.9% increase year-over-year slightly up from 82.9% last year.

Now, lets move on to statistics on the operational performance of our three largest clients, Deutsche Bank, UBS, Harman. In the first quarter ended June 30th, 2014, Deutsche Bank grew by 58.5% amounted to 36.9% of sales which is an increase from 31.2% last year. In the same period, UBS grew by 47.5% to 20.9% of sales from 19% a year ago. In the financial year 2015, Harman grew by 39.1% to 9.3% of total revenue increasing from 8.9% last year. These figures indeed express a very strong growth by these customers for the reasons that Dmitry outlined to you already.

We are very pleased and encouraged by performance of this accounts which are from 8% for UBS and Harman to 11% for Deutsche Bank a year ago. It is definitely a very strong testament for the type and quality of work that we’re delivering across various business lines of these accounts.

Tied to the accounts performance, lets take a look at our contract types. 56.4% of our revenue came from fixed price contract during the first quarter up from 46.8% of total revenue in the same quarter a year ago and 54% last quarter. Profitability metrics, our adjusted EBITDA amounted to $19.1 million in the current year versus $14.4 million in the year ago quarter and 16.2% in the fourth quarter of last year. This represents 32.8% and 17.8% increase respectively. Our adjusted EBITDA margin in the first quarter ended June 30th, 2014 was 17% versus 17.1% a year ago and 16.2% in the previous quarter.

In the first quarter, our GAAP net income amounted to $12.6 million versus $9.8 million in the same quarter of last year and $10.4 million in the previous quarter. Our GAAP net income margin in the first quarter was 11.2% compared to 11.7% in the year ago quarter and 9.8% in the fourth quarter of last year. In the first quarter, our non-GAAP net income was $14.6 million versus $11.1 million last year, and $11.8 million in the previous quarter.

Our non-GAAP net income margin in the first quarter was 13% compared to 13.3% year-over-year and 11.1% in the fourth quarter of last year. Our weighted average diluted share count for the three months ended June 30th, 2014 was 32,796,042 shares. Our diluted EPS amounted to $0.38 per share as compared to $0.32 per share in the year ago quarter. On a non-GAAP basis, our diluted EPS for the period were $0.45 per share compared to $0.36 per share last year. In the first three months of the financial year ended March 31st, 2015 our effective tax rate was 10.3% in comparison to 5.6% in the same period a year ago and 10.3% in the last reported quarter.

Let’s now turn to the balance sheet. We have finished first quarter with approximately $41.6 million in cash and cash equivalents. During this quarter, operating activities generated $12.5 million of cash compared to $6.3 million in the year ago quarter. Net cash of $2.8 million was used in investment activities while $3.1 million was used in the same period last year. Net cash of $5.7 million was used in financial activities while $1.4 million was used for financial activities during the same period a year ago. Our trade receivables as of June 30, 2013 were approximately $103 million compared to $105 million as of March 31st and $84.6 million as of the end of the first quarter of last year.

Day sales outstanding including unbilled revenue stood at 84 days versus 88 days for the same period last year, and 81 days at the end of the previous quarter. Our total debt as of June 30th, 2014 was $15.2 million versus $20.2 million at the end of previous quarter and $31.9 million as of June 30th, 2013.

We have finished the year with 7,777 personnel, 6601 of which were IT professionals. Our revenue per delivery employee in this financial year was [ph] [$68,900] which is an increase of 5.4% from [ph] [$65,400] in the year-ago quarter. In the fourth quarter of last year, our revenue per delivery employee stood at [ph] [$67,700].

At the same time I’m pleased to report that the attrition for this years quarter further decreased by 100 basis points to 9.8% representing 2.3% decrease for the past 12 months. Further let’s review our upcoming operations, capital expenditure problems. As you know we are incurring some of the non-recurring expenses in relation with our global upgrade.

A capital exchange program that is anticipated to span over the next several year’s and result into increased efficiencies and grow for our company and of course its share holders. We continue to make investments in the infrastructure, in the operations in the first three months of our new financial year actively ramping on Bulgaria location, launching an office in Detroit, Michigan and made some initial investments to establish an entity in Guadalajara, Mexico.

We would like to assure you that we remain vigilant about the promise that we’ll make to the market with respect to the expenditures and profitability levels that we anticipate to achieve by the end of the current financial year.

With that and before we open the lines for Q&A, I would like to give you the outlook for the full financial year ending March 31st, 2015.

We expect to continue delivering solid revenue growth. Based on current conditions and indications, we are increasing our original guidance and now expect to senior the financial year 2015 with at least $486 million in sales as compared to $478 million initially. This represents an increase of at least 22% year-over-year versus previously expected increase of at least 20%.

Adjusted EBITDA margin expectation remains in the range of 17% to 19% in line with our strategy. Diluted EPS is now expected to be at least $1.80 on a GAAP basis and at least $1.95 on a non-GAAP basis related guidance being $0.05 higher from the figure announced to the market last quarter. The EPS is based on an estimated weighted average of 52,840,105 diluted shares as of the end of our financial year ending March 31, 2015.

With that, I would like to open the line for Q&A.



Thank you. (Operator Instructions) Our first question is coming from the line of Steve Milunovich with UBS. Please proceed with your question.

Steve Milunovich - UBS

Great. Thank you, and good morning. You obviously did a 34% growth in the quarter and are guiding towards 22%. Do you see something specifically that suggest decelerating revenue growth ahead and tougher compares or are you just being conservative?

Dmitry Loschinin

Hi, Steve, this is, Dmitry. Nothing special, I had here, definitely had about a good quarter, but its kind of a usual pattern. We are quite conservative the way we promise something to the straight. This is our style. So, nothing real special ahead.

Steve Milunovich - UBS

Okay. On the financial services side, you’re actually getting more concentrated in financial services over the last year, and your biggest accounts seem to be growing quite quickly, maybe not quite as quickly as overall financial services this quarter. Are you concerned about risk there or would you argue that within financial services you’re diversifying by company and by type of work?

Dmitry Loschinin

Well, we’re not concerned about growing the portion of the financial services. I actually see very good momentum in the industry which requires our help and our expertise. A lot of things come in as a result of all of this regulatory requirement’s and large and mid-sized banks are rushing up to comply and that actually reduces lots of requirement’s for the IT work and quite complex and sophisticated projects of huge magnitude. So, again we see this as a great opportunity which will remain for the next few years. Also talking about our clients, as you can see the growth of our top two accounts is very impressive. But inside of those accounts, we deal now with nearly all lines of businesses across the banks including transactional bank and traditional investment bank and all of kind of corporate bank and asset and wealth management, and slowly moving into some retail areas. So, each of this business line has its own budget and the way they are constructed and the way they execute its likely we’re working with a different client there.

Steve Milunovich - UBS

And then on the other hand you did have year-over-year declines in travel and aviation, technology and telecom. Could you talk about what's going on there, and do you expect reversal in any of those?

Dmitry Loschinin

Well, I would say this is, just a function of how advanced is our offering and how strong our competitive position is. So, as of today the most advance and mature position we have in financial service in automotive space where we see very good momentum, lots of new wins and lots of opportunities, very solid pipeline. So, actually telecom is the next one to go. We are investing heavily in building our IP as well as the sales force and bringing new people onboard. And then travel and aviation probably requires more time on our site that we would be more clear on our focus in how to develop and what kind of census should we apply there.

Steve Milunovich - UBS

Thanks. And finally, in terms of Guadalajara, are you going to be staffing out locally or you’re going to try to bring some folks over from Europe?

Dmitry Loschinin

Well, we will use our traditional approach. We would initially bring over some sort of a core team to (indiscernible) and share the practices and the knowledge, we’re talking maybe 20, 30 people, and we’ll hire locally and that’s the only purpose of having the center in Guadalajara. And we do the same in all of our new locations. We have tried the market. So far it looks very good. It’s actually pretty large. I was impressed by the number of companies who are established there, and we kind of find good proximity to our requirements and I believe we’ll see it again, the time will show how fast can they grow. At the same time we also tested to know how this would be accepted by our clients and most of our U.S. -- especially large U.S. clients, they welcome, they are very happy about this move.

Steve Milunovich - UBS

Great. Thank you.

Dmitry Loschinin

Thank you.


Our next question is coming from the line of Moshe Katri with Cowen. Please proceed with your question.

Moshe Katri - Cowen and Company

Thanks guys. Just a couple of those question’s. First of all, can you remind us what sort of [ph] [Voltaire] you’re fighting for at Deutsche Bank and UBS? Talk a bit about what sort of budgets we’re talking about, and then again remind us which sort of, which departments you’re actually servicing within those banks and obviously given the size of those clients right now. I think what you need to do is give us some comfort about the business itself or the health of the business. Thanks.

Dmitry Loschinin

Hi, Moshe. Thanks for that question. Well, first of all the coverage, the coverage was Deutsche and UBS, currently it’s nearly complete. So we work with all of the key alliance of businesses, probably the only one exception would be retail banking, but it’s slowly moving there as well. And its kind of evenly distributed certain areas which we entered relatively are recently growing the most aggressive so far and therefore you can see the growth is quite, very impressive. It’s primarily because of this new area, so we started corporation with the banks. In terms of the budget I don’t have exact number, but I believe Deutsche alone it spends somewhat around $3 billion in IT services, so it’s pretty large money. And they did consolidation via part of that last year, and they actually continued to consolidate the work and distribute it between the key suppliers. We feel very strong in terms of our position, our knowledge and expertise and again all of that is reflected in the numbers.

Moshe Katri - Cowen and Company

Okay. And which new areas -- remind us which new areas did you win business at, at the Deutsche Bank or UBS during the quarter or the past few quarters?

Dmitry Loschinin

Well, wealth management is definitely the one which is growing very nicely. We also started working in the transactional banking. It’s probably the two relatively recent and again the wealth management is usually very country specific. So wealth management in U.S and wealth management in Europe, they’re -- these are different organization. So we work across the globe.

Moshe Katri - Cowen and Company

Okay. And then, is there anything different in terms of pricing on some of the new deals? Is it more fixed price for it kind of dominated and then are you servicing the clients a bit differently? Are you assigning additional senior relationship managers on those relationships?

Dmitry Loschinin

Well, obviously as the relationship grows it requires stronger management support on our end and it has changed drastically over the last two years. We have very strong management team supporting the engagements in all of the key locations like U.S. Europe. We have some of their former managers working on our end and helping us. There is very good knowledge of the client situation. What was the other? What was the question?

Moshe Katri - Cowen and Company

I was asking, how you’re servicing clients and if there was anything different about the nature of the incremental work in terms of pricing or structure?

Dmitry Loschinin

Yes, the biggest difference I would say is in the large deals which are coming our way where we talk and we mentioned that a few times, but in the past it was just one off. Now it’s becoming quite usual that it’s a multi-year, three, five years engagements, very complex in terms of the nature and the execution and requires lots of knowledge and expertise on our end. But the beauty of it is, it kind of secures the business for many years. So we’re not kind of dependant on their budget constraints and stuff like that. So it’s getting more and more, and I would say that currently we’re somewhat around 20%, 40% of the business -- in this type of business, as well as you can see from our numbers the proportion of fixed price slowly growing, and again we definitely recognize this as a very, very solid industry trend. You have to provide fixed price service or outcome based services if you want to be competitive on the market. That’s just the way the client mentality and client maturity has changed here over the past two, three years.

Moshe Katri - Cowen and Company

Okay. Follow-up question, does the guidance include any sort of M&A contribution or acquisition that you haven’t done yet in fiscal year 2015?

Dmitry Loschinin

No, it does not.

Moshe Katri - Cowen and Company

Okay. Thank you.

Dmitry Loschinin

Thank you.


Thank you. The next question is coming from the line of Charles Brennan with Credit Suisse. Please proceed with your question.

Charles Brennan - Credit Suisse

Great. I’ve got three questions, if that’s okay. Firstly, just picking up on M&A. I missed your comments around the likely revenue, your contribution from the Populus deal. Can you give us some color there? It’s the first one. The second one is just on the balance sheet. You’ve given us some greater granularity around the receivables. Can you tell us what's behind the unbilled revenue number in terms of the number of clients, whether that’s been billed yet and whether we should expect that as an ongoing feature of the business? And the third is just an observation around margins. In the fourth quarter of last year we saw strong revenue performance, but volume discounts impacting on the margin profile. Given the growth of UBS and Deutsche Bank at the moment, and the strong revenue contribution there, should we be expecting volume discounts to impact the margin profile this year? Thank you.

Dmitry Loschinin

Okay. Hi, Charles. Yes, we do not discuss the revenue contribution from Populus. We’ve got some of their royalty revenue coming with that and two new accounts. It’s not very large, so it’s not really material. At that stage however the potential of the new sales and the potential of their overall business around Populus in the next upcoming years look pretty good. And then for the next two questions, I would ask Roman to answer.

Roman Yakushkin

Hi, Charles this is Roman. On the margins question we expect that the potential discount in the subsequent quarters should not affect the margin profile and we’ll still be able to sustain the margins like above, around 40% for gross margin and within 17% to 19% for adjusted EBITDA. So, we believe that all the potential fluctuations are already priced into our guidance. And turning to your balance sheet question, we have done the reclassification in the first quarter of some of the Deutsche Bank revenue and we now consider them to be unbilled revenues. And that’s explained by the peer’s trend and because like, what we’ve noted that most of our peers report their day sales outstanding excluding unbilled revenues, and we have reported them including unbilled revenues. So we decided that we might want to switch in the future and also start to reporting DSO excluding unbilled revenue to be more in line with the peers.

Charles Brennan - Credit Suisse

But with the sequential increase -- the sequential increase $10 million is quite significant, is that a seasonal thing that unwinds during the course of the rest of the year. Does that relate to one project that you’ve now completed and billed? I’m just struggling to understand why it wasn’t in the full year numbers, but it’s now a significant Q1 balance?

Roman Yakushkin

Here we’re speaking more about the reclasses and as there are no like significant business events behind those reclasses, I wouldn’t say it had any seasonal effect, and you’re likely to see more unbilled revenues in our balance sheet in the future.

Charles Brennan - Credit Suisse

Okay. Pass on.


Thank you. Our last question will be coming from the line of Ivan Bojilov with Sears Bank. Please proceed with your question.

Ivan Bojilov - Sears Bank

Yes, good evening gentlemen. Thank you for the call. Can you elaborate a bit on the wage inflation for the quarter and your expectation for the year? And also what sort of utilization you saw last year and are you expecting any changes to that? Thank you.

Roman Yakushkin

Hello, on the utilization question, we did not expect any significant change to it and it stays constantly around 80%. And on the wage inflation what we see in the first quarter is -- significant moderation of wage inflation in all our key geographies especially in Russia and Ukraine. Notably in Russia we are being helped by the continuously weak Ruble again the U.S. Dollar. So we did not see any of the wage inflation in the U.S. Dollar terms. And our full year outlook is for the wage inflation to stay within 5% this year.

Ivan Bojilov - Sears Bank

Okay, thank you. And can you also elaborate a bit on your M&A strategy, because it appears in your annual report that you’re going to proceed with some deals this year or next year?

Roman Yakushkin

As we have spoke about that in a few times, we’re very selective in what we acquire and it should fit very well with our strategy and the way we want to evolve. So, we’re not really acquiring something for the volume, but for the quality and for bringing us to the next level. There are several potential targets we are in discussion, hopefully some of that will result, and right now we cannot report anything more.

Ivan Bojilov - Sears Bank

Okay. Thank you very much.


Thank you. We do have an additional question coming from the line of Moshe Katri with Cowen. Please proceed with you question.

Moshe Katri - Cowen and Company

Hi, thanks. I forgot to ask the FX question, I guess. Were there any benefits from FX during the quarter?

Roman Yakushkin

The FX environment stayed largely neutral both in terms of U.S. Dollar versus Ruble and Euro versus U.S. Dollar. So, we did not have any notable FX -- foreign currency effect in the first quarter.

Moshe Katri - Cowen and Company

Got it. Thanks.


Thank you. It appears there are no further questions at this time. I would like to turn the floor back to management for closing comments.

Dmitry Loschinin

Thank you everyone for your time and good questions. Wishing you good rest of the summer and speak to you soon next time, at the end of our next quarter. Thank you.

Roman Yakushkin

Thank you.


Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.

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