Luxoft Holding's (LXFT) CEO Dmitry Loschinin on Q3 2016 Results - Earnings Call Transcript

| About: Luxoft Holding (LXFT)

Luxoft Holding, Inc. (NYSE:LXFT)

Q3 2016 Results Earnings Conference Call

February 12, 2016 08:00 AM ET


Alina Plaia - VP and IR Officer

Dmitry Loschinin - President and CEO

Roman Yakushkin - CFO


Anil Doradla - William Blair

Steve Milunovich - UBS

Alexei Gogolev - JP Morgan

Moshe Katri - Sterne Agee

Arvind Ramnani - Gordon Haskett

Alex Veytsman - Monness, Crespi


Greetings, and welcome to Luxoft Holding, Inc. financial results for the Third Quarter Ended December 31, 2015 Conference Call. 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 Investor Relations Officer. Thank you. You may begin.

Alina Plaia

Thank you, Christine. Good to have all of you on our earnings call. Over the next hour, we will discuss Luxoft financial and operating results for the three and nine months ended December 31, 2015.

We hope that you had a chance to review our earnings release which we filed yesterday after the market close. As always, there is a webcast available during this call. All of our updated investor materials including the earnings press release and updated investor presentation, which is being shown during the webcast, can be found on our website investor center section.

Our speakers to are Dmitry Loschinin, President and Chief Executive Officer; and Roman Yakushkin, Chief Financial Officer. Before we begin, I would like to say that some of the comments in our call may be deemed forward-looking statements. These include our business and financial outlook, any comments with respective to High Potential Account development and the 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 are relevant for better understanding of our business dynamic by the market.

As always, first, Dmitry will give operating overview of the business followed by Roman who will go through all of the key metrics within our financials. Dmitry, the line is yours.

Dmitry Loschinin

Thank you, Alina. Good morning, good day everyone. Thank for joining our earnings call today. I am pleased to give you an overview of our operational and business performance for the three and nine months ended December 31, 2015. I would like to begin by focusing your attention on a few financial highlights. As always, Roman will give you detailed picture and precise numbers later in the call.

I am happy to say that Luxoft again delivered continued strong growth in revenue and profitability. Despite the absence of M&A activities over the last 11 months, our organic growth remains intact and stays around historical CAGR levels, nearly 26% on the top-line on year-over-year basis, and 6.5% sequentially.

On constant currency basis, our revenue increased 35% on year-over-year basis and 7.5% sequentially. Gross margins remains in the target range between 42% and 43% for both three and nine months. This translates into adjusted EBITDA margin that are the top of our guidance, 17% to 19% range. We finished the quarter with 19% and achieved over 20% for the first nine months.

Virtually all of our verticals of focus posted strong growth for the nine months. For example, financial services grew 29%, automotive 39% and technology grew 36% year-over-year.

I had alerted your attention on the last call that our performance in December 2015 quarter was unusually high. Therefore, December 2015 quarterly performance on the comparative basis was expected to be someone muted. Our strong performance during the first six months of the year allowed us to give discounts to some of our key customers without compromising our guided year-end financial results. Also the past quarter is the last quarter of this material ForEx related headwind, which contributed to the lower figures on the reported currency basis.

2015 was the first year in which we launched our stock option program for our senior and mid-level management. Therefore, there are some sizeable adjustments to our non-GAAP calculations. On non-GAAP basis, our operating income and net income grew nearly 40% and over 23%, respectively. We are encouraged by the financial performance of our business, despite the currency commodity market volatility that all of us including our clients are enduring for the past several months.

On the operating front, I’m pleased to say that our business has delivered a very healthy level of organic growth. Furthermore, it’s quite evident that most of it came out through [ph] our legacy account base. Our top one account concentration -- client concentration decreased 6% on the sequential basis, at 6.7% for the past nine months on a year-over-year basis. Our top five and top 10 account concentration for the first nine months of the year decreased by 9% and 8% respectively on a year-over-year basis. This is significantly greater than the 5% reduction that we targeted to achieve by the end of this financial year. Again, I want to remind you that this decrease in customer concentration did not affect our growth, still delivering organic expansion of the top-line of nearly 35% in constant currency

Our bottom five account in the top 10 list remained largely intact from the past couple of quarters with one exception. For the three months ended December 31, 2015, one of the European automotive OEMs broke into the top 10 list, and we are very excited about this particular opportunity. The account has been added less than a year ago and is already one of our star performers on the HPA list and part of the top 10.

Speaking about HPA list, we now have slightly over 35 accounts there. The group has delivered 177% growth for the first nine months on a year-over-year basis and will comprise at least 25% of our total revenues at the end of this fiscal year. During the past quarter, we have added two new HPAs. One of the accounts belongs to technology vertical. It is the U.S. computer data storage company and one of the leading computer hard disk drive manufacturers in the world. The other HPA is Hitachi and it belongs to telecom vertical. Hitachi is an Asian multinational conglomerate operating in numerous business segments with information and telecom systems being the most significant one.

On the delivery front, Luxoft is growing through rapid transformation growing up for presence in the emerging markets and is opening client facing locations in the developed markets. We are now up to 31 offices in 16 countries, 28 of which are engineering delivery centers. We have opened new office in Tricity, Poland, expanded our office in Stuttgart and added new office in Munich, Germany, opened new office in Stockholm, Sweden and opened in a new office in Luxembourg, which is a favorable location to Harbor, [ph] are existing IPs [ph] and develop new ones. As you probably know, Luxoft has operated in Poland since 2010. As of December 31, 2015, this location represents over 17% of our total delivery headcount; Tricity is the home of 10 universities and is one of the fastest growing metropolitan areas within Poland. The advantages of Poland continue to spark interest from all industries that take [ph] vendor differentiation, increased quality for execution and convenience of near shore delivery. Luxoft is now supporting financial services, automotive innovation clients [ph] for Tricity and we expect to grow this location to at least 500 engineers over the next several years.

Further, we solidified our German presence with the new office in Munich and expanded our office in Stuttgart, which has been in operation for over two years, successfully providing services to European clients. These locations in Germany will continue to function as client facing and business development offices, mainly benefiting Luxoft automotive line of business, but both of them possess ample potential to service other verticals in the Company’s portfolio.

Lastly on new locations, Luxoft opened its first office in the Nordic region in Stockholm with a specific mandate to support new engagements with current clients and those established relationships with potential clients in the region. The office is designed to support our marketing in financial services clients.

We are encouraged to see significant changes in our engineering staff mix across major geographical locations, precisely in line with our mid to long-term target indicated back in April of 2014 during our global upgrade program launch. Engineering staff located in our European Union delivery hubs now account to 35% of our total engineering headcount. Russia accounts for only 22%, below the targeted 25% threshold, and Ukraine now accounts for 33%. You should see more news on our delivery centers growth in the upcoming months.

Our productivity continues to grow and increased by another 3.6% this quarter. Now, average annual revenue per engineer is over $77,000. We have grown our engineering staff to over 8,800 people which corresponds to 21% year-over-year, which is significantly below our revenue growth of 25% for the first nine months. Roman will give you detailed breakdown of revenues by geography. I just would like to highlight before we move to our vertical overview, our growth in Western Europe is now accounts 50% [ph] of our revenues while the U.S. accounts for 30%; reminder, it’s booked, based on location of their budget holder. So the U.S. portion of the geographic revenue mix for the first nine months of the year is 9% lower than it was a year ago. It is because we have some amazing opportunity in Western Europe that we are realizing at this span. Therefore, the U.S. revenues while growing in absolute terms are not growing as fast as European revenues on the comparative basis. The U.S. market is certainly underdeveloped for us at this time and represents a great opportunity to going forward.

With that let me move to the overview of core verticals of our focus. Our key verticals of focus delivered a very strong performance for the first nine months of this year. Automotive vertical grew 39%; technology grew 36%; financial services 29%; and telecom 10% on year-over-year basis.

Financial services vertical: Today we are operating in the environment with some alarming earnings trends by many significant financial services players. Many of them are focused on restructuring, business transformation including digitalization and cost saving initiatives in addition to ever present regulatory compliance metrics. In general, financial industry nowadays is exposed to many of these strategic trends, all of which are heavily dependent on IT. Hence, financial institutions are looking for the answers to harsher competition, intensified regulatory requirements and the necessity to adopt the digital revolution. The available pool of money that supports massive IT infrastructure is no longer. [Ph]

Based on the recent comments and earnings announcements, it seems that the traditional IT [ph] providers are under pressure. We believe at such times, these banks need a close collaborator and a business partner. Having domain expertise in complex financial matters and top quality execution are a must and a clear differentiator for us and our immediate peers.

It is important to understand that our financial performance should not necessarily correlate with the financial performance of our clients. On the contrary, there is a renewed sense of urgency for standardized and/or innovative products and services that these clients would like us to deliver. We had been in similar situation in 2008, 2009 and during the financial crisis of 2012 when we [ph] grew north of 15% per annum each of the recession years by focusing on non-discretionary matters for our clients. Despite the pressure on the financial segment for the past year, we have been growing and retaining our market share with our clients. UBS and Credit Suisse are examples of our fastest growing accounts today. We’ve been strengthening our capabilities in wealth management and private banking, including digital in response to great demand from some of our clients who decided to shrink capital consuming businesses and focus on these areas. In additional to structural budget conscious driven transformation, the banks are also looking for new sources of revenue in new markets. Many of our European and U.S. banks find opportunities in Asia Pacific region and redistribute their IT support accordingly. We already have presence in Singapore, Vietnam and Australia, and we are looking to expand our footprint there further.

Back to the structural difficulties in the financial sector; the answers to current challenges lie in the standardization of software, our entrepreneurial services for legacy platforms, and of course in business restructuring which is usually from some internal staff reduction. Our clients such as our top client Deutsche Bank are not exception. You may have seen many articles in the press about Deutsche Bank 2030 initiatives entailing major restructure of the business. The bank also just reported €6 billion loss and announced layoffs. Cost reduction is the biggest priority for the CEO, which may create risk and cost pressure for vendors. At the same time, their CEO committed to overhaul systems, industrialized processes and strengthened controls. Interim CEO, John Cryan has been vocal to the press about their squeaky IT infrastructure that the bank has today.

At Luxoft, our services platforms and consulting capabilities as well as any combination of those comprising our end-to-end solutions resonate well with each initiative that I just listed. We believe that we can make a difference in the way our clients deal with today’s dilemmas and how efficiently they can address that. We have successfully renewed our Master Service Agreement, MSA with Deutsche Bank for another five years and remain one of the few suppliers of Deutsche Bank preferred vendor list. The new rollover date is December of 2020. With that we believe Deutsche Bank account to provide stable level of revenues for the next 12-14 months for Luxoft, but we are not forecasting and anticipating significant growth.

Our client number two UBS has increased its revenues with us which provide us for nearly 36% year-over-year growth. UBS now comprises 21.5% of our revenues. We’re optimistic regarding their upcoming work pipeline which spans across numerous areas globally.

We have been advancing in many areas of the bank including wealth managements in the United States and Europe, investment banking and capital markets divisions. Due to the multitude of task and complex nature of engineering work, we believe that Luxoft is enjoying a solid position with this client. We have been executing on several large multi-year engagements that provide further steady growth and creditability to our teams while delivering cost savings and efficiencies to many areas within UBS.

Further, we have been successfully ramping up other major accounts in this vertical such as CK [ph] and Credit Suisse. The later is going through many interesting fast transformational initiatives. We are also actively growing support with one of the major Nordic financial services clients that we mentioned on our previous calls. The account has seen a lot of activity in the past quarter. Luxoft is happen this financial group to navigate through current complex and urgent issues and establish strong base for near shore services. Among many projects we have due to roll out in the near future in capital markets and global finance, our business analysis, security assessment related engagements and building gold resource of true database.

In addition to enhancing our current offering that helps address budget crunching and respond to economical difficult condition, we are also building out offerings and are accumulating expertise around technologies of the future; one of the technologies is blockchain. If you remember, the ways of opportunities introduced at our last Investor Day, we believe that blockchain, which is still quite vague or still more of buzzword is becoming a significant enabling technology. It’s not been influenced by short-term noise of current market challenges. It is undoubtedly fundamental to how industries, in particular financial services, will operate in the future with simplified processes and reduced costs associated with certain types of repeating transactions such as executive fees [ph] payment, settlements, transfer and property rights and so on by means of a shared ledger.

While today, the picture is not clean in terms of how blockchain related opportunities will be realized, it is clear that current transaction practices will all change. The blockchain related services market is not firm yet due to the lack of meaningful subject expertise and partnership platform providers. The Luxoft is uniquely positioned in the market to take advantage of this opportunity as a key supplier of application development services and complex capital market transactions.

They’re taking a different approach by investing and building best in class blockchain of excellence to service our key accounts. Assuming we already are in discussion and from strategic partnerships this platform provides, the CoE is focusing today on permission blockchain platforms that’s allowed various industry plans including regulators leverage distributed shared ledgers to improve existing and to build new financial ecosystems.

This essentially private blockchains will not require bitcoin mechanism reducing the investment into unnecessary mining hardware. At the same time, this blockchain technology reduces transaction confirmation time. Today bitcoin network can only handle three to seven transactions per second and requires between one and several hours for transaction confirmation time.

Our CoE is around a number of proof-of-concept projects in collaboration with our significant clients during the course of 2016, which will result in production reg implementations from 2017 onwards and positioning us to take advantage of this trend in the subsequent years.

Excelian update: It has now been a year since we acquired Excelian, and I’m very pleased to announce that the full integration of the business has been completed. We were also able to implement the series of efficiency improvements to achieve double-digit EBITDA margin. We are currently focused on leveraging Excelian capability and its well known in Europe brand to build our global premium services structure including consultant solution and sales and further unlock our synergies in the standalone global sales, accelerated cross sales and solidifying Tier 1 positioning on the marketplace.

In addition to consulting and system integration services, Excelian is also focusing on bringing grid and cloud computing and big data technology expertise to our clients. Grid computing is used in financial services to speed up calculations which are used for pricing trade [ph] and managing the risks, banks are taking on capital markets arena. Grid computing is now being used on top of cloud platforms like Amazon Web Services or Microsoft Azure in order to increase the ability to do more calculations in a cost effective way. Thus Excelian helps its clients identify the right grid technology, select the most optimal cloud providers and develop application leveraging this technology.

Big data technologies are coming from the internet world where they are used by large scale websites like Facebook or Google. Banks are now using these technologies to better manage and process increased data volumes prompted by high amount of new rules and regulations. Excelian in collaboration with Luxoft big data center of excellence assists its clients in choosing the right technologies, architecturing their systems and delivering them into production. Therefore, all of these types of services provided by Excelian are actually in great demand.

Usually, difficult times for the financial services sector not only do -- not slow down such demand but are actually further enabling in line with the industry stride for simplification and cost cutting to accommodate tight budgets in uncertain macro. Many banks today have very little choice but to transfer to a single standard software trading platform, as most of them are no longer capable of maintaining several high costs proprietary trading platforms including individual life changes and updates as it was the case in the past. Thus [ph] it is usually new risk for one of its peer solution. As less resources are available to support vast portfolios of exotic securities, the price of hiring proprietary in-house trading systems and expensive development teams to support them is slowly dissipating.

Some of our major European clients have already started sizable rollovers to Murex, Calypso and other similar brands. We believe it is only matter of time before this trend will reach all major players.

Talking about other brands: After Luxoft has acquired Excelian, it become possible to expand the scope and the scale of our cooperation with other packaged solution providers and digital entrepreneurs. [Ph] We are happy to say that Luxoft’s manpower combined with off-the-shelf product expertise of Excelian pave the way for growth of practices focusing on other providers of trading and risk management software that previously were much smaller as compared to Murex practice presence. We see demand for these solutions among clients in Asia-Pacific region which is another great reason for us to beef up our presence there. At this time, we are growing our footprint in our existing location Singapore and are considering other nearby locations for further expansion.

Automotive vertical update: This periodical has been in forefront for our business for the quarter; and for the first nine months of the year this 39% growth for the later period on year-over-year basis. Luxoft Tier 1 customers appreciate our technical expertise and leverage to a great extent our global presence. We have been able to start new progress with the clients in the Americas and Asia. We have been successfully ramping up our engagements with Continental and started rolling out with two new clients, one of which is a U.S. based global automotive electronics suppliers and Fortune-500-company and the other is large Asian OEM.

Our anchor, develop, grow methodology continues to bear fruits. As I mentioned earlier, one of our very young HPAs which also happens to be European OEM, grew so rapidly that it ended the third quarter of their financial year within the top 10 list. At the same time, our legacy accounts such as Harman also continued to develop very well. Harman’s revenue actually grew 25% sequentially and 16% for the first nine-month basis.

During the past several months, we have formed what we believe a very exciting partnership with QNX Software Systems. QNX is a leading solution provider in automotive infotainment with its reliable operating system and middleware in more than 60 million vehicles. More than 40 automotive OEMs use QNX software. Luxoft is very excited for this calculation. The new technology partnership is focused on other systems used by automotive OEMs and Tier 1 suppliers. As a part of this initiative, Luxoft will leverage its expertise in road-model based computer vision algorithm for tracking objects such as vehicles, pedestrians, building, road signs to bring a robust road scene reconstruction engine to the QNX OS platform. The engine utilizes Luxoft’s proprietary CVNAR software framework which incorporates solutions for augmented reality such as augmented guidance, navigation, points of interest, and destination highlighting.

We are looking to add particular technology to our computer vision and augmented reality offering that reduce integration and placing efforts of navigation application into OEM environment. This will cover areas like integration and maintenance of navigation data and its presentation to the driver.

Populus continues to become more versatile. We continue to support more systems on chip. Populus has already been used to build digital instrument plus the HMIs in more than 7 million cars globally. Again, being one of the first IT service providers that can point an excellent brand in cockpit focus areas including infotainment, NMRX, HMI and autonomous driving. Now, it is the time to diversify into other less explored yet extremely viable areas. Embedded software systems are continuously evolving creating more opportunities to collect real time data of numerous components of the car to ensure greater safety, security and performance. Today, we see more and more demand for independent software integration outside of the cockpit or so-called under the hood area of the car. This includes software for power train, chassis and for the body of the car to name a few, which must run and communicate fast enough to meet timing, quality, and safety requirements for the safe continuous operation of the vehicle.

To cover the full spectrum of under the hood offering, we are also now focusing on opportunity to support best collection from various parts under the hood of the vehicle, process this data and then analyze it. We are also looking at the backend opportunities where cloud services can generate significant customer and business value. We see both of these new areas, under the hood and backend as a new opportunity to wave, new market for software development services. We believe, it is enticing for us to focus our time and R&D investment around this opportunity as well as to explore M&A target. I’m forgoing the traditional overview of other business areas to give the floor to Roman for detailed financial overview and to ensure we have ample time for Q&A at the end of our call.

Roman Yakushkin

Thank you, Dmitry. Hello everyone. Let’s now jump into the detailed overview of our operational and financial results for the three and nine months ended December 31st. Our Company generated very healthy levels of growth and profitability for both periods, in line with management expectations.

I would like to start our discussion with the reminder of what was discussed on the previous call. On our last call, we specifically guided for a more muted growth this quarter and we listed the reasons.

There are basically four factors affecting our numbers for the quarter. One, the phased growth of $3.5 million ForEx headwind from relation of receivables and cash balances during the past quarter that significantly affected our bottom-line, yet at the same time, our actual business revenue figures have been affected way beyond the currency relation. [Ph]

For the past nine months, we have experienced approximately $37 million impact due to adverse currency movements, mainly for U.S. dollar, a year ago and past. Otherwise, our revenue for the time period would have been $518.4 million and 35.3% growth on a year-over-year basis. It’s worth noting that while our top line has been materially affected, offsetting positive impact on the margins was more modest, because of a decrease of ruble based costs to below 15% in U.S. dollar terms.

Second, lower pricing and some discounts to a few of our key customers. In the third quarter 2016, this discount totaled circa $4.8 million. This is non-recurring item that we elected to undertake in exchange for a certain level of committed revenue from this customer for the year ahead. Third, the comparison based third quarter 2015 in which we posted 16.5% sequential and 51% [ph] annual growth is very high. The same applies to the sequential quarter dynamic as our intra-quarter volatility is usually seasonally significant. That is why you see some period-over-period comparison actually showing the decline.

Fourth, because we expected more saturated top-line figures this quarter, we did not aggressively raise either full year revenue forecast or our GAAP and non-GAAP EPS with the former being affected by elevated stock option and the increased disbursement and various R&D initiatives, some of which were just covered by Dmitry.

We will discuss GAAP EPS dynamic a bit later on the call. Therefore we view our Q3 performance to be fully in line with our forecast, and we’re very pleased to the results for the first nine months, which generated over 25% reporting currency and more than 35% constant currency growth on a year-over-year basis. While generating such higher level of growth, we have significantly decrease customer concentration on all levels.

Further, we made a series of improvements on the balance sheet front, generating a strong cash flow, finishing the year with record level of cash, close to $100 million and continuing on the path of decreasing DSO and unbilled revenue dynamic. With this, we believe that our business model and our operating performance are proving to be the far resilient to various external disturbances.

Let’s move onto the numbers. Revenue for the first nine months amounted to $481.5 million, compared to $383.2 million for the first nine months of the prior year, which is a 25.7% increase. On the constant currency basis, we have delivered $518.4 million on the top-line, which corresponds to 35.3% annual growth. Our revenue during the third quarter of the fiscal year 2016 amounted to $171.9 million, compared to $145.8 million in the third quarter of the previous year. That translates into an increase of 18% year-over-year and 6.4% increase sequentially. In constant currency, we delivered $181.4 million of revenue, which corresponded to 24.5% year-over-year growth.

Our performance by geographies for the past nine months was as follows: UK grew by 50.5% over the first nine months last year to 35.7% of total revenue. Germany increased 34.6% to 12.9% of the total. U.S. decreased 4.7% to 31% of the total. Russia decreased 8.6% and now comprised 5.4% of the total. Switzerland increased 93.9% to 3.1% of the total. Rest of Europe increased 140.5% to 6.8% of the total. And other geographies increased 61.9% and now comprised 5% of the total.

Our vertical dynamic for the past nine months of the year was as follows: Financial services amounted to 68.7% of total sales, that represents an increase of 28.7% year-over-year. Automotive and transport 11.6% of total sales; it is increase of 39.2% year-over-year. Technology vertical, 6.9% of total revenue and 36.1% year-over-year increase. Telecom comprised 5.7% of total sales and an increase of 10.5% year-over-year. Travel and aviation vertical, 4.5% of total revenue and a decrease of 14.9% year-over-year. And energy contributed 2% of total sales an increase of 5.2% year-over-year.

55% of our revenue came from fixed price contracts during the first nine months of the year as compared to 60% for the same period over the previous year. In the first nine months of the financial year 2016, our top five accounts amounted to 65.2% of sales which is 8.7% decrease from 73.9% last year. Our top 10 accounts in the same period amounted to 74.1% of sales, 8.2% decrease versus 82.3% in the first nine months last year. Notably, in the third quarter, our customer concentration in comparison to the previous quarter continued to decrease results given our overall growth rate. Our top five accounts in the third quarter amounted to 63.5% of sales, representing 7.7% decrease year-over-year and 3.2% decrease sequentially. Our top ten accounts in the December quarter amounted to 72.3% of sales which represent 7.6% decrease on year-over-year basis and 3.6% decrease sequentially. Early in this financial year, we promised to reduce our client concentration by 35%. As you can see, we have achieved and significantly improved from this target.

Top-three client dynamic: Our top three accounts remain to be Deutsche Bank, UBS and Harman. In the nine months, Deutsche Bank grew by 3.4% amounting to 31.3% of sales, down from 38% last year. In the same period, UBS grew by 55.7% to 21.5% of sales from 19.9% a year ago. In the first three quarters of financial year 2016, Harman grew by 15.7% to 7.1% of total revenue. In the third quarter, Deutsche Bank amounted to 27.5% of sales, representing 13.2% decrease from 37.2% last year and 13.1% decrease sequentially. In the same period, UBS grew by 43.5% to 22.8% of sales from 18.8% a year ago and increased by 17.1% sequentially. In the third quarter of financial year 2015, Harman amounted to 7.7% of total revenue, representing 35.2% increase year-over-year and 19.9% increase sequentially.

Moving on to profitability measures. Our adjusted EBITDA amounted to $96.9 million in the first nine months of the year versus $79 million in the first nine months a year ago, representing a 22.7% increase. Our adjusted EBITDA margin in the nine months was 20.1% versus 20.6% in the first nine months of the last year. In the third quarter, our adjusted EBITDA was $32.8 million versus $35.6 million in the same quarter of last financial year and $37 million in the previous quarter. Our adjusted EBITDA margin in the third quarter was 19.1% versus 24.4% in the third quarter last year and 22.9% last quarter.

Operating income margin in the third quarter on the U.S. GAAP basis was 13.4% and 17.6% on non-GAAP. Our GAAP net income was $55.7 million for the first nine months of the year in comparison with $54.1 million in the first nine months of the previous year, a 2.9% year-over-year increase. Our gross net income margin in the first nine months was 11.6% versus 14.1% in the first nine months last year. In the third quarter, our GAAP net income amounted to $18 million versus $23.9 million last year and $23 million in the previous quarter. Our GAAP net income margin in the third quarter was 10.5% compared to 16.4% a year ago and 14.2% in the second quarter of this year. Our non-GAAP net income was $74 million in the first nine months of the year in comparison with $59.9 million last year, 23.5% growth year-over-year.

Our non-GAAP net margin in the first nine months was 15.4% versus 15.6% in the same period last year. In the third quarter, our non-GAAP net income was $24.8 million versus $26.6 million in the last year and $28.6 million in the previous quarter. Our non-GAAP net income margin in the third quarter was 14.4% compared to 18.2% year-over-year and 17.7% in the second quarter of this year.

Our effective tax rate in the first nine months remained stable at 14.6%. We expect to keep this rate to this level for the end of this financial year. Our weighted average diluted share count for the past nine months was 34.3 million shares, an increase of 1.2 million shares from the nine months of the previous financial year.

I believe most of you are very well that on January 1, 2015, we launched our stock option plan program for the top and mid-level management of the Company with the first occurring on January 1, 2016. Part of the grant represents certain amount of shares conditional to the market capitalization for company, which is why the amount of shares we guide for each quarter for the end of financial year changes.

On December 31st, we have finished nine months with SOP related expenses of $13.8 million or 2.9% of revenue. This is our largest non-GAAP adjustment. During the same period of financial year 2015, our stock option plan program expenses were only $2.1 million or 0.5% of revenue. Needless to say that this more than $18 million increase weighted upon our GAAP metrics. Our diluted EPS amounted to $1.62 per share as compared to $1.64 per share in the nine months a year ago. On a non-GAAP basis, our diluted EPS were to $2.16 per share compared to $1.81 per share last year.

As you can see, our financial metrics on both revenue and profitability side, we have experienced significant impact from volatile currency environment. On one hand, our top-line was negatively affected by euro and ruble. On the other hand, our profitability in all key geographies has experienced a tailwind from the same factors that resulted in our margins across the board still being quite high, but not as high as in the third quarter of fiscal 2015 as the basis currency such as ruble for example have shrunk to 13.2% from 21.7% a year ago therefore created a muted impact on our overall benefit.

As the current exchange rate environment remains more or less stable, the ForEx effect positive or negative should start to dissipate in the upcoming quarter and beyond. As of December 31st, the ForEx breakdown was as follow. On the revenue side, U.S. dollar 57%, euro 27%, pound 6%, ruble 3%, Swiss franc 1%, others 6%; and on the cost side, U.S. dollar 47%, ruble 14%, pound 12%, Polish zloty 11%, Romanian leu 9%, euro 2%, Swiss franc 2% and others 3%.

Let’s move on to the cash flow on the balance sheet. We have finished the nine months with approximately $98 million in cash and cash equivalents, the record level in the history of our company. During the first nine months, operating activity generated $76.5 million of cash, which is 15.9% as a proportion of revenue; $4.6 million of cash was used in financing activities. Net cash of $33.9 million was used in investing activities. Our free cash flow in the period were $58 million, which comprised 12% of revenues and 104.2% of our net income. In the third quarter, operating activities is generated $25.5 million of cash, which is 14.8% of revenue. $0.9 million of cash was used in financing activities. Net cash of $7.9 million was used in investing activities.

Our free cash flow to revenue ratio was 10.5%. We have also eliminated virtually all of our borrowings down to $0.5 million for $1.4 million as of March 31, 2015 and once again ended the quarter with overall zero debt. Our CapEx remains at prior level of approximately 4% of revenue. As of December 31st, our trade receivables including unbilled revenue were $137.2 million compared to $134.1 as of September 30, 2015.

At the end of the third quarter, day sales outstanding excluding unbilled revenue revenues stood at 63 days down by four days in comparison to 67 days at the end of the second quarter of the year. For the first nine months, DSO stood at 64 days. We would like to highlight significant improvement in our full DSO from 81 days a year ago by 7 days and significant improvement in the percentage, unbilled revenue and taking the total amount of receivable for the firm.

Only a year ago, the unbilled revenues amounted to 21.5% as compared to 10.6% as of December 31, 2015 and 14.6% as of September 30, 2015. We have finished the quarter with 10,600 personnel of which 8,818 were IT professionals. Attrition in the first nine months of the year was 10.3% versus 10.8% last year. Utilization remains as always at 80% level. Our revenue per engineer increased by 3.6% based on the annualized revenue for the first nine months of the year and is now over $77,200.

Finally, let me share with you our outlook for the full financial year ending March 31, 2016.

We expect to continue deliver the solid revenue growth. We confirm our guidance for the end of the financial year 2016 of achieving at least $645.5 million in sales. This represents an increase of at least 24% year-over-year in USD terms. In the weighted average 2015 fiscal year currencies, we expect the growth to be at least 28%. Adjusted EBITDA margin expectation remains unchanged in the range of 17% to 19%. Diluted EPS is expected to be at least $2.05 on a GAAP basis and $2.60 on a non-GAAP. The EPS is based on an estimated weighted average of 34,456,095 diluted shares as of the end of our financial year ending March 31, 2016.

With that we would like to open the lines for Q&A. Operator, go ahead please.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question comes from the line of Anil Doradla with William Blair. Please proceed with your question.

Anil Doradla

Hey guys, good job on the continued execution, Roman and Dmitry. I had a there are couple of questions. So, you talk about the year-end concession from a client, I suppose it’s single client or is it more than one client, if you can clarify that a little bit. But, can you give us a little bit incremental color, is this something that you usually you see; is it a year-end phenomenon? And how much of that impact was there; and also was it U.S. centric or was it Europe centric?

Roman Yakushkin

Yes, good morning. This is Roman. So, this 4.8 million that we -- decline corresponds to several clients. However, more than 50% is attributable to one of the largest clients. So, basically the bulk comes from one account. And this is not what we usually do. And this is not a recurring item. For example last year while we had base, they were rather small and this year this is rather non-recurring and we view this in exchange for this future revenue commitment which we are hoping to get from our clients in 2017 and beyond. And overall impact on EBITDA margin, as I said, was roughly 2.2%. So, if there were no discounts, our overall EBITDA margin would have been higher by 2.2%. Does that answer the question?

Anil Doradla

Yes, yes, fantastic. Thank you very much. And as a follow-up, obviously you’ve talked about extensively in your prepared remarks about both Deutsche Bank and UBS. But one of the key issues that we are facing obviously on the investment community is we are constantly seeing this new slow about continued concerns with these banks, mostly European banks. Can you talk a little bit about on the visibility, your confidence going forward with these? Obviously, it clearly seems that you are gaining more share but can you give us some color on how much -- at what point do you start getting affected, so to speak? I am trying to understand really the magnitude of so called insulation that you have with the ongoing crisis. I know it’s tough to qualify it but any other incremental color would be appreciated. Thank you very much.

Dmitry Loschinin

So, as we have been talking about that for a while that the time is that much of the turbulence in financial services, is the time for change. And we’ve been historically changed the bank supplier compared to most of our peers being around the bank. And around the bank where certain budget can be got reduced or optimized while in change the bank’s programs, most of this is really related to optimizing the costs complying with the regulatory requirements, moving towards the digital version of the bank. So, the visibility we currently have is our key account’s pretty good. And again, we’ve got some multi-years deals going on, very unlikely the client will change their mind; we don’t see they are in position to change or stop those projects because of the criticality and influence overall, which is true both for Deutsche Bank and UBS. Deutsche Bank is in a tough position, still we believe we can help them big time in reducing -- continue reducing their costs but most importantly bringing the overall IT landscape and IT infrastructure in a much better, organized way which is not the case right now. So, as we reported, we anticipate the revenue to continue stay in more or less at the same level. We don’t expect any significant growth. The booking for the year looks pretty strong. So, we are confident that we shouldn’t be getting any surprise on this front. At the same time, UBS continues to grow; again about 50% while current revenue, their multi-year nature. So there is very good backlog and we still anticipate double-digit growth with this account going forward.

At the same time, again, as we reported there are several large HPAs that are developing into very substantial accounts, being Credit Suisse one of the banks which we mentioned from the Nordic region. And then quite a few recently started engagements, some that came from the Excelian acquisition. So, all-in-all, the turbulence is obviously not an easy time, lots of challenges, but for our business we see it and quite an opportunity. We don’t believe that banks can stop spending money on IT because this is the core of their business, not a support function and they have to move on.


Thank you. Ladies and gentlemen, due to the amount of questions today, today’s call will be extended 10 minutes. Again, today’s call will be extended 10 minutes to answer questions, please stay connected. Our next question comes from the line of Steve Milunovich with UBS. Please proceed with your question.

Steven Milunovich

So Dmitry, regarding Deutsche Bank, obviously the growth rate has slowed pretty dramatically here. Is that a reflection of less work or is it more a change in pricing? And when you guys talk about discounts, is that discounting your work rates, which will have an impact over the course of the contract or is it something to do just with the third quarter and then we go back to more normal rates and prices?

Dmitry Loschinin

So Deutsche -- I think we mentioned that in our previous calls that the account is going slowdown. There are different reasons for that. There is a very high saturation point and now there is very high market share that Luxoft has. At the same time, they continue to cut the budget. And obviously the bank is in a tough position, still for the nine months reported growth even in actual currencies. If you look at the constant currency, the growth is quite substantial.

So, in terms of -- and again, going forward, we see -- we have a very strong position. We remain within the preferred supplier list, while at least one of our competitors most likely will exit. So, there is an opportunity to get to the market share of this company. And still a lot free shuffling and rebalancing of the work going on; some projects are shrinking, at the same time some are starting. So, taking into account our unique position there, I think we should be quite -- should have peace of mind in this account going forward.

In terms of the discount, as we announced this on the previous call, our strong financial performance allowed us to enter into negotiation with some of our clients, Deutsche being one of those. And taken in the consideration their tough position, we provided them discount in exchange of some future revenue commitment. So, this is not that -- it’s just pattern of the year-end. So it’s just decision which we took to support the growth or to support the business there, future business.

Roman Yakushkin

And to add on top of it, this is Roman. Though discounts are structured as lump sum, rebates on the top-line and it’s not changed, it’s the rates card that we have with Deutsche Bank and other bank. So, they are not of structured nature and will not necessarily happen in the future.

Steven Milunovich

Okay, that’s helpful. I think in the past you’ve talked about having something like 90% visibility to 12 months out. And I know you don’t guide the next year. But what do you think you can do in terms of growth in this calendar fiscal ‘17? 27% of your revenue is going to be about flat. Can high potential accounts and UBS and Credit Suisse be sufficient to grow the total top-line over 20%?

Dmitry Loschinin

Yes. As we reported, we see very strong growth momentum with some of the key accounts and new accounts and especially automotive. It looks very promising as well as some other parts of the company. And we also talked about Credit Suisse and couple of accounts in the financial services space. So, looks solid; we are also considering quite a nuance and some of the M&A discussions. So combined, this should allow us to fulfill our commitment with 20% top-line growth.

Steven Milunovich

And then finally, you didn’t talk about telecom and tech, telecom was I think down 11%, tech was up 8%; they both slowed in the quarter. Anything particular to read into that, is that economic?

Dmitry Loschinin

Telco grown 10% -- there are some ongoing fixed price deals that create certain volatility. There is one account that is going -- one of the large accounts for us. This is going through some really difficult times. But at the same time, we’ve got several new accounts growing nicely. So, really no major surprises. Technology did quite well, as you can see 30 plus percent growth.

Roman Yakushkin

With telecom, it’s pretty much of a normal volatility, in the second quarter it grew by 51% year-over-year; so this quarter slightly declined. So overall for the nine months it’s still growing by 10%, so nothing unusual here.


Our next question comes from the line of Alexei Gogolev with JP Morgan. Please proceed with your question.

Alexei Gogolev

Dmitry, may I ask you about the UBS account? I’m very pleased to see strong growth there as well as with Credit Suisse. But I was wondering whether you’ve heard or could comment about UBS considering to reduce the number of vendors, the same way Deutsche Bank did it. Whether you -- think you mentioned huge opportunity there and multiyear contracts with UBS but how confident do you think you make it to the top five strategic vendors for UBS?

Dmitry Loschinin

We play a key role for UBS and we are definitely one of their strategic and key suppliers, also taken into account significant portion of the multiyear deals. I don’t believe they will be in a position and willing to eliminate us from the list. According to the recent survey and provided by their vendor management, we’ve got the highest ratings in terms of the quality and efficiency. So, again moving forward we are confident to stay there, still good growth momentum and quite a few opportunities for us. So the consolidation, it will take place. And for us again as it happened with Deutsche Bank we are definitely looking forward to this consolidation and to some other vendor’s market share.

Alexei Gogolev

And also, could you maybe elaborate on the hunting license in retail for Deutsche Bank that you’ve mentioned last time, any progress there?

Dmitry Loschinin

I am not sure I understood the question.

Alexei Gogolev

I think last time you’ve mentioned Deutsche Bank giving you some exposure to their retail business, your comment on that.

Dmitry Loschinin

What we said that -- yes, hunting license there. Well, it’s a tough business that’s really well regulated, that German business, some peculiarities but we’ll be looking to expand and get our footprint but for now, nothing there really exciting to report.


Our next question comes from the line of Moshe Katri with Sterne Agee. Please proceed with your question.

Moshe Katri

Hey thanks. This is for Dmitry and I totally agree with you that in the long run you will benefit from the structural and the financial issues that the banks are going through. But then our focus now is actually on the potential near term bumps, specifically any sort of spending positives or spending increases or due to budget slippages or are you basically stuck with it, an underutilized bench? I believe Luxoft had these issues in ‘08 and ‘09, I think that that’s when UBS restructured. So, my question to you here is looking into 2016, are there any signs that you are seeing some budget slippages there in financial services; and then how do you prepare for the possibility of having to redeploy an underutilized bench?

Dmitry Loschinin

So, nobody is kind of safe or guaranteed of bad surprises, we all know that, so much volatility in the year. But I still think that our position with our top accounts and new accounts allow us to have that visibility of the budgets unless something really major happens, which again it is a possibility. But in terms of redeploying and managing the bench, as you can see, we’ve been growing and it’s now very well diversified growth. So, for instance Deutsche is muted and everyone was scared that once Deutsche would have stopped growing that would have become a big issue for the company but I think we managed to overcome. So, on the back of Deutsche muted business, we have several very high potential aggressive growing accounts such as Credit Suisse. And we also see that Credit Suisse now is not in easy position. They are far behind the industry peers and how they optimize and what they do in the change the bank site. There are large initiatives out there. So, it’s not the only the example we have quite a few case like that. So, believe that with that diversified portfolio of clients, we should be able to redeploy resources, number one; and number two, rebalance the growth and therefore shouldn’t be in a position to suffer, if someone decides to cut the IT budget.


Our next question comes from the line of Arvind Ramnani with Gordon Haskett. Please proceed with your question.

Arvind Ramnani

So, when you look at your 3Q numbers and EPS certainly below street estimates but in line with ours. And you reiterated your 2016 guidance. And I just wanted to confirm -- I know you mentioned earlier that -- did you all meet your internal targets for 3Q and that you are comfortable with 4Q or did you have to really kind of push hard to meet your full year estimates? And I guess what I am also trying to understand is -- does the street kind of overestimate ability to deliver 3Q and are we in the similar position for 4Q, that street estimates are a little bit too high?

Roman Yakushkin

No, this is basically we can tell the current Q3 result was fully in line with the management’s expectation, because with all this discount totaling roughly $0.14 to our EPS and also we had this ForEx headwind coming from the revaluation of receivables in our cash balances, largely in euro and also some in pounds in Russian rubles and that cost another 2% of EBITDA. So having said that, in Q4, we do not expect such a big difference as we thought last year when the performance, the financial results in Q4 was well below that in Q3. And so, we expect this year Q4 to be more in line with what we saw in prior quarters and we are committed to confirm the guideline for the full year that we made.

Arvind Ramnani

Great. And then on the automotive OEM account that ramped, what is some of the secondarily impact of that account; does it give you additional capabilities or a platform that you can leverage into other accounts?

Dmitry Loschinin

Well, it’s part of quite a large deployment, so called SOP which is a three- year project, we have secured very important position in there. It’s mainly in the HMI space, which has been historically very strong spot for Luxoft. And we are developing very innovative completely new cutting edge HMI experience and digital class of experience for the course of 2018. Obviously we’ll be able to leverage that, the scale and expertise, innovation that we do there with some other clients in the vertical.

Arvind Ramnani

Great. And just one last question on the Deutsche Bank account, I know you’ve already provided a lot of color. But how should we think of kind of Deutsche Bank over the next 12 to 18 months -- or let’s say next 12 months; should we expect Deutsche Bank to be kind of flat or is it going to be a situation where every quarter they coming to us with certain kind of price discounts? I mean how do you expect that account shaping up over the next 12 months?

Dmitry Loschinin

For sure, we do not expect every quarter to provide discounts for them. Our expectation going forward is to be around flat with some minor deviation up and down. Again, we see some opportunities, side of our current scope as we’ve said management before and retail banking as well as some of large vendors being phased out, there is an intention of phased out one of our competitor, so we will see.

There are quite a few strategic initiatives and systems where we took and full ownership. We are confident that we will remain and maintain the volume of the business. But obviously, on top of that taking into account the bank position today, the volatility, there are certain risks. But again, back to the point, they need to change their IT. And probably it’s a good year on top of all of these losses to make some improvements, which will help them in the future.


Thank you. Ladies and gentlemen, due to time constraints our final question will come from the line of Alex Veytsman with Monness, Crespi. Please proceed with your question.

Alex Veytsman

Just wanted to ask you about the trends you’re seeing financial services as far as demand is concerned and if anything is changed in the landscape, especially as we’re looking into fiscal ‘17, just one quarter away for you? Is it still really about the regulatory compliance and the next-gen engagements such as cloud and potential margin constrains faced by some of your banking clients or you’re seeing some other demand variables out there for fiscal ‘17?

Roman Yakushkin

Yes, one trend which we definitely see is moving from proprietary trading and the risk systems to standard packages such as Murex, Calypso, which was definitely not the case before. So, even for us, the banks, they are starting very large implementations. So that’s the trend there. A lot of this noise and buzz around the digital transformation, we see the wave is picking up and some of the banks have become very serious about that. So, then everything which brings IT spend down even on the longer term, it’s a very serious trend, just rearchitecturing, simplifying the landscape, reducing the [indiscernible]. All-in-all, it’s a very disruptive business and just everyone is in a move. Again, the time for changing the banks suppliers that’s why we see our offering is quite appealing and appropriate.

Alex Veytsman

And then you mentioned U.S. and obviously some potential softness there. Once again, as we look into fiscal ‘17, which potential verticals for the U.S. market can provide the upside; is it financial services or should we potentially look elsewhere?

Dmitry Loschinin

Both out to more different financial services; and in both our two key segments, we have concentrated in Europe. So, we are beefing up and growing our sales team as well as we might look at some potential M&As, so that would allow us better footprint there.


Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

Dmitry Loschinin

I would like to thank all of you for the time today during our call. We look forward to seeing some investors at the upcoming conferences and look forward to connecting next time on our call in May to discuss our annual performance. Thank you. Bye.


Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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