Luxoft Holding's (LXFT) CEO Dmitry Loschinin on Q4 2016 Results - Earnings Call Transcript

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Luxoft Holding, Inc. (NYSE:LXFT) Q4 2016 Earnings Conference Call May 13, 2016 8:00 AM ET


Alina Plaia - VP & IR Officer

Dmitry Loschinin - President & CEO

Roman Yakushkin - CFO

Marek Jersak - CEO, Symtavision


Anil Doradla - William Blair

Moshe Katri - Sterne Agee

Joseph Foresi - Cantor Fitzgerald

Steve Milunovich - UBS

Alex Veytsman - Monness, Crespi


Welcome to Luxoft's Holding's, Inc. Financial Results for the quarter and full financial year ended March 31 2016. [Operator Instructions]. 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 morning, good afternoon to all, welcome to our earnings call. We hope that you had an opportunity to review our earnings release filed after New York market hours. As always there is a webcast running during this call. All of the updated investor materials including the earnings press release and updated investor presentation are on our website, Investor Center.

Our speakers today are Dmitry Loschinin, President and Chief Executive Officer; Roman Yakushkin, Chief Financial Officer and [indiscernible] division. Some of the comments in this call may be deemed forward-looking statements examples include our business and financial outlook, any comments with respect to High Potential Account development, integration of our acquisitions 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.

You know that we follow U.S. GAAP accounting rules in our financial statements. During the call, we will also reference certain non-GAAP financial measures that we believe they are relevant for better understanding of our business dynamics. The call proceed as follows. Dmitry will give you an overview of the business performance and highlight major developments for the past year. Mark will introduce [indiscernible] division and describe the synergies with Luxoft and Roman will deliver financial overview of the company's performance for the full year as well as share our guidance for the New Year ending March 31, 2017.

We hope to have about 30 minutes for Q&A section today. Dmitry please go ahead.

Dmitry Loschinin

Thank you, Alina and thank you everyone for being on our call today. We're happy to report strong results for the past quarter and the full year 2016 which are better than our guidance and better than the street consensus across the board. Our businesses are enjoying good momentum despite mutual growth within some of our key legacy accounts. Luxoft posted 25% year-over-year increase on the top line in the reporting currency and 31.5% growth in the constant currency. We believe this solid pace of growth which proves that our corporate strategy is working as expected. Every year our company invests substantial resources to grow its global distributor delivery network, financial year 2016 was not an exception. We had three more countries to our already truly global footprint. We have [indiscernible] Luxemburg and Netherlands.

We have broadened our presence in Poland and Germany thus opening five new offices including Munich, TriCity in Poland and Stockholm. Expansive and scalable delivery platform is one of our key differentiators, on one hand it offers worldwide off shore, near shore similar support to our clients and on the other it serves as a powerful engine fueling the growth of our business and the resolving bottlenecks in talent supply. Combination with our global allocation and internal mobility programs constantly opening doors into new geographies enable scalability without deteriorating the quality of our delivery dates.

Traditional outsourcing as we know it is slowing down, more task conclusion application development and maintenance are becoming standardized or commoditized there by an avoidable created margin pressure and that indeed is normal of course often evaluation in any industry. This is why we are actually investing to enhance our premium services and end to end solutions to move outside of the traditional outsourcing space and adding premium capabilities in order to keep moving up in the value chain. Over the past year we added [indiscernible] flat from architecture selection impact software services, technology consultancy and enhance our in-house products and platforms. All of this margin accretive elements are above traditional services and of extreme importance to our customers at the time of so many disruptive changes in their respective sectors. We will speak in more details about all premium services offerings in financial services and automotive update in a little bit.

The past year has been successful in terms of harvesting our M&A related result. We have completed integrations of companies and assets which we have acquired over the past two years, Radius and [indiscernible]. We’re very pleased with the results and the synergies. We have been buying this complimentary for us companies some of which at relatively low levels of profitability and an adding them on to our management platform meaning running them the way we run our business. The results in measurable optimization and increase efficiency across the Board. This results in measurable optimization and case efficiency across the Board.

On the cost margin back office on shore mix front etcetera. This is an addition to straightforward top line related business synergies which were the catalyst for this transaction to begin with. For example as we mentioned on the previous call the improved EBITDA of Excelian by nearly 10% bringing it from single to double digits. Further all of the key managers from both companies have been retained and moved to global functions at Luxoft across all top management positions including sales, operations, delivery. Such promotion from within a large growing smooth and robust [indiscernible], it ensures that our corporate values, integrity, quality and management styles are intact while providing the necessary cultural diversity to the truly global feel and mindset of our company. It also sends a very positive signal to any of our future acquisition targets. The top line growth for the past year came from our high potential accounts, HBAs several of which are in the Top 10-15 list such as Credit Suisse, Microsoft and large automotive that we spoke about in last call.

Credit Suisse actually ended the year in the top five accounts now replacing OIM, as promised at the beginning of the financial year 2016 our client consideration is down significantly. Top 3 figure is down 4% or 5% and Top 10 are both down about 7% anticipate the trend of reduction of our top client consideration to continue in the upcoming financial year with Top 3 client concentration being lower by at least another 5%, while we’re decreasing revenue concentration from legacy accounts we successfully enter new and grow existing HPAs. Over the past year we have added 12 new HPAs to our list just to remind you HPAs are responsible for majority for our growth at this time as we’re balancing our client composition of top line growth from our top legacy clients to other younger account base.

On the margin front our adjusted EBITDA amounted to 123 million posted 25% year-over-year growth in-line with our top line growth. We made significant investment on numerous from including building centers of expertise, investing in sales team expansion, solutions and platform swap are more historically, financial, the launch of our premium advisory services, funding, ongoing R&D efforts and completing M&A related integrations. Despite all of this funding outflows our EBITDA margins were 19% for the full year which is at top of our guided 79% - 90% range.

We intend to intensify this funding efforts in the upcoming financial year to ensure more active growth away from traditional outsourcing segment into end to end validated services. Our core verticals of focus posted impressive annual EOE upto four months. Financial service 29%, automotive 37%, technology 22% and telecom continues further to around 10% annual growth. On previous calls we have been speaking about the center of expertise that we have been building out by deepening our expertise and focusing on emerging technologies and platform.

On this brand [ph] with former CEO [indiscernible] is now heading global COE related efforts. This is a good example of full integration available resource leverage. Currently focused on five core areas, cloud digital experience, internet of things, big data and DevOps. The purpose of this COE is to operate across all of our verticals and deliver higher customer volume and synergies by reinforcing COEs technical capabilities and each focus the main services within this lines of businesses. For example to bring our big data COE expertise into our current alliance with the technology organization at one of our EU banking client. They are working together on a multi-year strategic program of rebuilding or data warehouse platform used for regulatory and business performance and management. They all spend more time on the COE related subject on our next calls.

Let's move to our vertical update. Financial services, Luxoft has been successfully making major steps forward to complete it's transformation into an end to end solution provider. Our external competition more and more is comprised of global firms rather than traditional IoT tiers. Our technology and expertise take a lowest addressing major industry challenges by leveraging our tools and solutions many of which are based on disruptive technologies. Integration in Excelian has opened many new doors as we expected and put us into a different spotlight in front of new industry players as you can clearly see from our results. Over the past year we once had significant multi-year deals and changing the bank as we [indiscernible] this space. From a global consulting powerhouses. Since most of the providers are [indiscernible] run the bank are RTB segment now overwhelmed this budget and margin pressure under which it is difficult to grow. This piece have more acute need to diversify their focus into digital and other technologies and then business model restructure.

Luxoft historically has been present in the much less crowded and more non-discretionary by CTB space usually characterized by investment growth as it promote organizational change for the sake of survival providing a wide array of services that are relevant to today's market conditions.

Financial services [indiscernible] delivered 29% annual growth mainly driven by our strong presence across European banks, relationship with which we have been actively developing for past years. Credit Suisse has been one of the key growth drivers for us. Luxoft is one of the Credit Suisse main vendors in Eastern Europe. We continue to see very favorable environment for our relationship to progress forward during the financial year 2017. Our financial services vertical as it stands today has about 79 clients, 15 of which are high potential accounts compared to 28 clients and 7 HPAs in a year ago. As you see the dynamic is very positive, we hope that the overall pace of growth of the HPAs will now at least would provide some comfort as to the source of our growth for the next 2 to 3 years since once HPAs really start moving the needle and measurably contribute to the overall total growth in their third year.

One of our most recent wins is the large retail based focus European bank. For a very large scale Murex implementation and maintenance. This is actually great HPA example. We have been previously working with this client for focused on significant AGM engagements that we won last year, it has not been our HPA thus far. This win is within complete in new area of work and the work lies with the new budget holders in new geographies for much longer term. This is why we have now requested by this bank an HPA.

Our pipeline of new business in the financial services segment for the next 6-9 months looks diverse as it includes not only regional banks but also other global investment banks. Insurance companies, asset managers and banking institutions clearly make an in-road into the Asia Pacific region where we see many opportunities. As we are expanding premium offerings we have recently launched rebranding strategy calling all such service to be delivered by Excelian, Luxoft Financial Services. We decided to expand the scope of our expertise to include other capital market focused packages in addition to our significant focus on Murex implementations.

Starting this year adding capitalization, these are the four pillar of the shelf package trading and trading solution providers such as OpenLink and Calypso as well as with customer centered digital trust formation solutions providers such our work in BlackBerry. Top two accounts update, Deutsche Bank, this account posted close to 3% annual growth and 11% growth in constant currency terms. The concentration of Deutsche Bank in our overall revenue has declined significantly to below30% versus 38.6% a year ago. At the same time we have been enjoying and continued strong presence across major segments of the bank especially in the corporate and investment banking area CIB. While we do not expect a meaningful pickup in growth during the fiscal 2017 we believe we will continue to enjoy a solid position with this client in the foreseeable future as we feel more optimistic about our outlook today than we did on our call last quarter.

Our budget positioning is strong, the one of three, four vendors in the ADM space for the bank globally. Luxoft's main functional focus remains to be around regulatory reporting compliance, engagements and various CIB union such as global transactional banking and corporate finance treasure and global prime finance. We also focus on engagements in other area such as wealth management. The bank has confirmed our strategic preferred provider status which is a list containing a very few vendor names, perhaps you remember that all of the past several years, DB has been going through significant overhaul of it's strategy and vision which changed the way that has been engaged and it's resulted in the massive consolidation effort between the years 2012 to 2015.

The dominant reason as to why Luxoft is growing was due to Luxoft benefitting from this consolidation. In-line with it's 2020 strategy the bank has significant amount of investment plan within CTB space to ensure of course perhaps 2020 being active legacy in Q2 thus the bank has a multi-billion dollar IDM budget this only half of it allocated to the strategic vendors while the remaining portion of all 40% of it according to our calculation spent on several 100s small non-strategic vendors which is an impressive ADM legacy sale. We see possible consolidation within that non-core vendor cluster as a potential market share opportunity for Luxoft.

UBS, this account grew close to 40% last year, now accounts for 22% of our revenues. We remain to be a strategic vendor for the bank working across all principle business lines in the investment banking and wealth management segment. Wealth management remains to be the fastest growing area. We are making significant progress with Murex implementation now becoming the bank's key partner for Murex services the significant potential for sales growth.

While we do not provide outlook for individual account we would like to reiterate that we said on the previous calls regarding the future growth, potential with UBS. We still see plenty of opportunities for growth during the financial year 2017. However please keep in mind as we grow from higher bases every year the pace of this growth will be tapering off. Also bear in mind that a slowdown in the pace of growth of our Top 2 account should give us a great ability to grow other accounts in this vertical and will allow to bring in the top client concentration further down. Overall we have a solid list of focus most comprise of European and Asian names illustrating once again that HPA strategy is working and should move the needle on our overall growth. Yes, account development, however has been in reactive mode where we would respond to this but not particularly pursue them.

The U.S. market is one of the examples of opportunity for further growth. There are also still ample opportunities in Asia which are beginning of explore now and have already experienced early successes. Automotive vertical, automotive vertical continues to post very strong results with 37% annual growth for the past financial year, all of this growth has been organic as you already know since Symtavision contributed negligible amount of revenue to our full financial year figures. As of March 31, 2016 our automotive vertical has 22 customers, 10 of which are HPAs. Out of this customers 10 are OEMs, last year at this time we had 12 [indiscernible] represented this vertical of which four were HPAs and only four of them were OEMs.

I hope this illustrate a significant momentum that our automotive business has and opportunities which we see now for future growth. Further this growth came from accounts outside of [indiscernible]. Similar to our focus on financial services we have put a lot of time, resources, efforts into success of this vertical. Over the past year we have been expanded our offer into ad premium services including consultant and advisory capabilities in Under the Hood and diagnostic domains which also expanded our reach into this new areas outside of the cockpit space. We strengthened our management team and expanded our dedicated delivery center footprint.

We spoke many times about the outlook for the automotive sector and it's drivers. We envision around 40% growth in the next financial year from a customer base consistent of OEMs and Tier 1 suppliers and the new clients that we currently have in the pipeline.

We believe that Luxoft which is one of the few sizeable software vendors in this space has established a very strong brand through it's deep domain expertise this quarter and delivery in the IP segment that we utilize in our end to end solutions to bring our customers to market in the most effective manner. To maintain this position we have been adding new capabilities to complement our existing core expertise in the cockpit area. The rapid introduction of the new electronic architecture, separation of hardware and it's functionality in software are driving demand for the better software development and independent software integration expertise outside of the cockpit. This opens the door for the new Under the Hood technologies and allow cloud and diagnostic related services become a new catalyst for growth in this sector. This catalyst led to us the most recent acquisitions in Symtavision, which addresses a critical need to have [Technical Difficulty] separating safely and securing in real time as well as to manage all Under the Hood operation by means of software. On the call is us today is Dr. Marek Jersak, CEO of Symtavision who will briefly introduce the company describe it's synergy with Luxoft. Dr. Jersak will be leading the new Luxoft practice in the Under the Hood space.

Marek Jersak

Thank you, Dmitry. A decade ago our CTO, Dr. Kai Richter and I founded Symtavision as a spin off from the technical University of Braunschweig in Northern Germany. During our time at the university we also established relationships to leading automotive OEMs and Tier 1 suppliers such as Volkswagen and Bosch. Founding Symtavision was motivated by the first wave during which in-vehicle electronics entered to the cars that we drove. That obviously led to quality and reliability problems therefore creating opportunities for businesses like ours.

As our experiences with German OEMs have shown many of the issues were rooted in poor understanding of integration challenges. Symtavision at its core is a hardware agnostic integration company, our focus so far has been on a very specific yet highly important niche aspect of software and systems development which had been badly underestimated by that incumbent automotive players. I'm speaking about real time. All of the vehicle features which you have come to enjoy in your own cars are timing critical achieving the dynamics of your steering and suspension or optimizing the performance of your engine while minimizing fuel consumption and emissions. Even a seemingly simple function like keyless access is not that simple. None of these works correctly if the timing is not right. Today we count many of the automotive big names globally as our customers including premium automotive OEMs such as Audi and BMW, volume OEMs such as Volkswagen, Fiat and Toyota as well as Tier 1 suppliers such as Bosch and then Denso. These companies and many others actually regularly report the advancements they have achieved with our technology at our annual user conference. We are very excited to become a part of the Luxoft family as we see numerous synergies that our two companies can exploit together.

Advanced driver assistance systems commonly known as ADAS are a step stone towards autonomous vehicles which is the key innovation driver in automotive. ADAS lies at the intersection of Luxoft HMI expertise, navigation and connectivity on one side and Symtavision's expertise in real time chassis, power train and body electronics and software and in-vehicle networking on the other thus the combination of our companies will unleash a market offering which is truly unique. Back to you Dmitry.

Dmitry Loschinin

Thank you Marek. We’re very happy to have you as part of our team. Before I pass the word to Roman I would like to summarize the following. First we’re very pleased with the growth that we posted in the financial year 2016 despite a significant Forex headwinds and muted growth even though it was expected at our Top 1 account.

Second, we believe Luxoft continues to enjoy a strong growth and business development momentum supported by our solid positioning on the market in the key verticals and impressive performance of high potential accounts as well as successive COE service offerings included digital and big data. Three, we understand the challenges that we’re facing this year such as rebalancing of growth from legacy account in our Top 3 list which are not growing as aggressively as they did before in the group of young but also prominent in our HPA list.

We’re confident that we will be able to succeed in tackling that challenge. We have a robust pipeline in all of our major parts of our business. High level of funding and capability and relevance of our IP solution to the issues faced by the market. Four, we are going to accelerate our level of investments in several key areas, this includes further enhancing our automotive line of business, beefing up our COE, expanding our presence in Asia, invested into building our digital experience and disruptive technology such as blockchain. We’re also looking into diversifying into new promising areas such as healthcare and pharmaceuticals. We believe that with their current level of accumulated domain expertise and technology knowledge it is the right time for such move by our company.

That said they reiterate our main promise of at least 20% top line growth for the next several years and 70% to 90% margin range on the adjusted EBITDA margin level. And lastly our goal is to reach atleast 1 billion in revenues by March 31, 2018 which is a year ahead of our previously announced plan.

With this I would like to pass the line to Roman.

Roman Yakushkin

Thank you, Dmitry. Hello everyone. Thank you for joining our call. For the sake of leaving an ample time for our Q&A let me guide you only through our operational financial dynamic for the full year ended March 31, 2016. I trust all of you saw figures for the fourth quarter which came above our own guidance as street consensus across all parameters. If you’ve any questions about our fourth quarter, please ask during our Q&A session. Revenue for the full year amounted to $650.8 million compared to $520.5 million in the prior year which is a 25% increase. Because of significant currency fluctuations mostly affected during the year we still have to refer to custom currency numbers in order to adequately compare our figures on a quarter-over-quarter basis this constant currency revenue for the full year amounted to $684.5 million compared to $520.5 million for the prior year which is a 21.5% increase.

Our performance by geographies for the year was as follows, UK grew by 39.8% annually to 34.4% of total revenue. Germany increased 33.4% to 13.3% of the total, U.S. decreased 0.8% to 31.2% of the total, Russia decreased 9.1% and now comprises 5% of the total. Switzerland increased 117.5% to 3.6% of the total. Rest of Europe increased 121.4% to 7.5% of the total and another geographies increased 45.9% now comprise 5% of the total.

Our vertical dynamic for the year was as follows. Financial services amounted to 68.6% of total sales that represents an increase of 28.5% year-over-year. Our growth in this vertical outside of our Top 1 account was in excess of 50% year-over-year. Automotive and transport vertical amounted to 12.1% of total revenue, it's an increase of 37.1% year-over-year. Technology vertical to 6.5% of total revenue which is an increase of 21.6% year-over-year. Telecom comprised 5.7% of total sales and increased by 10.4% year-over-year. Travel and Aviation vertical comprised 4.5% of total revenue and decreased by 10.7% in the total revenue mix on a year-over-year basis and energy contributed 2% of total sales and an increase of 5.8% year-over-year. 54.2% of our revenue came from fixed price contract during the year as compared to 58.8% that we reported at the end of our last financial year, March 31, 2015.

In the financial year ended March 31, 2016, concentration of [indiscernible] accounts has declined in-line with the promises that we made to the market a year ago. Top five concentration amounted to 64.9% of sales, 7% year-over-year decrease, our Top 10 account in the same period now comprised 73.7% of sales, a 6.4% decrease versus 80.1% concentration in the previous year. We’re very encouraged by such dynamic. Top 3 accounts, our Top 3 accounts remain to be Deutsche Bank, UBS and Harman. In the financial year ended March 31, 2016 Deutsche Bank grew by 2.7% amounted to 29.8% of sales down from 36.3% last year. Growth of our company's total revenues outside of Deutsche Bank amounted to over 35% year-over-year. In the same period UBS grew by 39.4% to 22.4% of sales from 20.1% a year ago. For the full year Harman grew by 18.4% to 7.12% of total revenue.

Moving on to the profitability measures, our adjusted EBITDA amounted to $123.5 million for the full year versus 98.8 million a year ago representing a 25% increase which perfectly correlates with the top line growth. Our adjusted EBITDA margin for the full year was at the top of our target range at 19% same as last year. Operating income margin for the full year on the U.S. GAAP basis was 12% and 15.9% on non-GAAP, our GAAP net income was $70.3 million for the full year in comparison with 63.1 million, in the previous year 11.2% year-over-year increase. Our GAAP net income margin for the full year was 10.8% versus 12.1% last year. This decrease in GAAP net income is attributable to expenses related to the stock option program, it was our first full year of stock option plan 3 be in effect which amounted to $17.7 million during the year which represents significant increase from 5.8 million last year.

Our non-GAAP net income was $92.9 million in the full year in comparison with 75.4 million last year, 23.2% increase year-over-year. Our non-GAAP net income margin in the full year is almost unchanged at 14.3% versus 14.5% in the same period last year. In the fiscal 2016 our currency distribution was as follows, on the revenue side U.S. dollar 57.5%, Euro 26.8%, Pound 6.5%, Ruble 3%, Swiss Franc 1.4%, others 4.8% and on the cost side U.S. dollar 25.5%, Ruble 13.8%, Euro 2,8%, Romanian Leu 8.8%, Polish Zloty 12.4%, Pound 11.8%, Swiss Franc 2% and others 2.8%.

Our effective tax rate in the full year was 14.7%, going forward we expect the rate to stay around 15% - 16%. Our weighted average diluted share account for the past year was 34.1 million shares, an increase of 1 million shares from the previous financial year. Our diluted EPS have exceeded our earlier guidance. Our GAAP EPS amounted to $2.06 per share as compared to $1.91 per share in the previous year. On a non-GAAP basis our diluted EPS were $2.72 per share compared to $2.28 per share last year.

Let's now turn to balance sheet, we finished the full year was approximately $108.5 million in cash and cash equivalent. The company continues to generate healthy cash flow both in the first quarter and 2016 fiscal year as a whole. During the financial year operating activities generated $105.4 million of cash which is 16.2% as a proportion of revenue as with 8.2% increase from the last year. $8.9 million of cash was used in financing activities. Net cash of 32.7 million was used in investing activities. Our free cash flow to revenue ratio in the period was 12.3%, that’s above 11.4% last year number and substantially higher than our 10% mid-term target rate. We remain to be debt free, financed our acquisitions with cash without issuing stock or taking on leverage. Our CapEx remains as usual Forex level of approximately 4% of revenues.

As of March 31, our trade receivable included unbilled revenue were approximately $147.3 million compared to 106.5 million as of March 31, 2015. The growth amounted to 7.9%. Unbilled revenue decreased from $34.3 million as of March 31, 2015 to 16.1 million at the end of current year which represents a 53.1% decrease. Day sales outstanding, excluding unbilled and deferred and revenues stood at 66 days while full year DSO including unbilled and deferred revenues stood at 76 days down by 5 days in comparison with 81 days in the year ended March 31, 2015. We have finished the year with approximately 11,100 personnel of which 9229 were IT professionals. Attrition of the financial year was 10.3% versus 10.5% last year. Our revenue for engineering increased by 3.7% and is now over $76,400.

Now I would like to give the outlook for the full financial year ending March 31, 2017. We expect to continue executing our company strategy and delivering solid revenue growth, we have a strong pipeline of business in our vertical of focus as well as solid M&A opportunities. We also have lot of investment plan for the year ahead in order to progress with a strategic shift into premium end to end services space as was just described in detail by Dmitry. We look forward to bring new updates and exciting developments in the quarters ahead and trust that the future changes will keep us on the path of sustained high quality growth.

We forecast our revenue in fiscal 2017 to reach $780.9 million, that represents an increase of 20% year-over-year in USD terms of which we expect 15% to be organic. Adjusted EBITDA margin expectation remains unchanged from our usual annual guidance in the range of 17% to 19%. Let me reiterate that the reason why we usually guide on this range is to maintain flexibility to reinvest as much as necessary back to the top line while maintaining the promise of certain level of profitability to the street thus diluted EPS is expected to be at least $2.10 on a U.S. GAAP basis and at least $2.85 on a non-GAAP.

The EPS is based on an estimate weighted average of 34,144,982 diluted shares as of the end of our financial year ending March 31, 2016.

Alina Plaia

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

Question-and-Answer Session


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

Anil Doradla

So a good job on the continued diversification away from my DB. So I wanted to dig a little bit deeper into Dmitry and Roman, so if look at the March quarter this is a second consecutive quarter over quarter decline for DB. So how would you characterize the dynamics at DB, would you say that DB in general is pulling back on expenses thereby you're seeing that or is got to do a little bit more competitive, you're losing share there and also I think Dmitry you said made a comment saying that you're more optimistic on DB today, what did you actually mean by that? And I had a follow up.

Dmitry Loschinin

So on DB, first I will start from your last question what do I mean by more optimistic last quarter we said that we anticipate decline some slight decline in DB revenue so this time we see more opportunities there. So we anticipate slight growth. So still single digit but instead of declining growths. The situation there we have very strong position, we are part of the preferred supplier list, overall DB is challenged by market situation, the I know risks and challenges, so they are going through substantial cuts in all areas where in some case we can help them. So overall IT budget is going to decline, where we see opportunities for us to grow when in certain cases we can help them reduce cost and as we mentioned in our call there is a whole tale of legacy where we see several 100s of them, they are still working for DB, most of those guys are very expensive for onsite niche providers. So this is our target and we have an agreement with DB side that they should support this move where some of those tails will eventually disappear. So overall it's not going to grow as it did two years ago but it will stay flat or slightly grow in.

Again longer term there might be some better times for us as DB is still committed to execute their 2020 strategy which is supposed to bring on lots of new technologies, lot of digital changes.

Anil Doradla

So building upon that Dmitry you talked about DB you've got -- I think you’ve used several hundreds of vendors and I suppose they're in the process of consolidating and supposedly I hope that you will be one of the handful of guys right? I mean you're confident about that?

Dmitry Loschinin

Yes that’s 100%.

Anil Doradla

And then switching gears you know you talked about I think six or seven HPA accounts and obviously the focus will be on HPA accounts and sounds like fiscal '17 would be all about as you rightly pointed out a balancing between these big accounts declining and HPA is growing. Now when I look at the HPAs strategy going forward, is it going to be centered around your traditional strengths in the financial, you know the risk and compliance or should we be looking at these HPA accounts from new verticals and new domains?

Dmitry Loschinin

So it's both, on financial services as we reported actually our non-DB accounts last year grew 50% and we've built a very strong foundation for the future growth. We also said that we currently have nearly 70 accounts, it's a very good coverage in Europe and some coverage in Asia so we still need to do better work in U.S. but even with the existing clients we see enough opportunities to fill the growth and actually substitute some of the DB. So our focus is really converting some of the deals which we secured last year into scalable, sizeable deals and that's in financial services. The same situation is in automotive where in automotive we can reported more than double the amount of the longest and then we have some new very large opportunities, there are out there including quite a few OEMs which we didn't have before. So the same story there, we want to build our future success and growth based on the already acquired accounts, so account management function is going to be the key but what we believe we have a very solid offering. You know compelling to those clients where we can cross sell as well as many of them are struggling to scale up and down there, they are engineering footprint where Luxoft can become very instrumental.

There are other opportunities outside of those two key areas for us which are supported by the growth of expertise and overall market traction previous our center of expertise where we believe that some of that may lead us to new verticals. We already see some in-roads and some good opportunity in the health care and the pharmaceutical space which is completely new, we never taught about that but at the time when we see that kind of financial services and automotive is being on the very mature phase. So ready to go on it's own, it's time for us to some other alternative of the future growth. So you may see some of the movements of Luxoft into new areas.

Anil Doradla

And one final clarification, the 5% inorganic growth is it from the acquisitions that you've already announced or does this include yet to be announced acquisitions? Thank you.

Dmitry Loschinin



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

Moshe Katri

Just as a follow-up on Deutsche Bank, I believe last quarter you spoke a bit about pricing discounts or volume discounts that are related to this account. I think that's what you said, can you get some color on where we are in terms of pricing trends and maybe not only from Deutsche Bank but from some of the other top clients and then I’ve a follow up. Thanks.

Dmitry Loschinin

So last quarter you mentioned one of discounts for the Deutsche and I guess you know probably were too transparent but never mind. So you know the business here, right it's all about pricing concessions and it's going every day, so it's not like in any other business especially when you go for a big volume quality you are always straight but we have enough leverage on our end to preserve our margins and time to time we agree to help those guys, in return respect we expect the business to grow.

So nothing major compared to what was a year ago or two years ago. So obviously we want to become more efficient so that the client receive more for less and for us to do so it's not only a combination of the pricing concession but increasing the efficiency and reducing certain tools and we also see that we can help Deutsche in many other ways for instance what we have doing with UBS where we took on board large deals where we take full ownership of the certain area provide an immediate cost reduction.

So I would say it's rather a discussion today because the contract and the deal which we have actually is covering next few years. We don't anticipate any other surprises from the bank but our conversation today is really about how and what can we do to reduce their cost and optimize some of the operation.

Moshe Katri

And then a couple of items on the income statement, last from revaluation of contingent liability. They had a pretty big delta year-over-year maybe you can talk a bit about that and then there's also an item called other gain for about $2.3 million to $2.4 million in the quarter, what was that as well? Thanks.

Roman Yakushkin

Well basically a loss of contingent, a relation of contingent liability was a gain of [indiscernible] with results from us -- the P&L the future P&L of the companies that we have previously acquired. So basically actually it's negative income on the cost, it's negative on the cost side which means it's actually gain it's not loss and here we're speaking mostly about the revelation of Radius that was acquired last year as you remember.

Moshe Katri

And then final question where are we on Sarbanes-Oxley Compliance. I believe you’re making some progress and I think the deadline for compliance sometime in June of next year am I correct?

Roman Yakushkin

Yes you’re correct but let me first on the income it's basically the government grant that we receive, so [indiscernible] Poland and on the tax compliant we believe we’re in a pretty good shape. So basically we hired consultant firm who helped us with establishing all of the control and procedures. So now the controls are complete. So basically the system is installed in the company and is right in successful as we believe. So we are now in the process of the focus how [indiscernible] which we believe will see some results that we hear back from our order sometime later in June, so it will come in late in the second part of the June and we’re pretty optimistic about how it goes. We are fully compliant by now when we believe that we’re transparent and all the rules and procedures are in place.


Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.

Joseph Foresi

So my first question here is why is your growth in Europe in financial services as healthy as it has been when we’re seeing some tough results from the banks there and just kind of building on that question. How is visibility to growth in those areas heading into this fiscal year versus historical?

Dmitry Loschinin

So our growth in Europe is primarily results from the efforts which we have been doing there and our and of the concentration of our resources and the sales people and overall client base that is definitely call for action for us to do the same in the United States but it is what it is today. We also see a lot of trends which support our strategy, one of that is a simplification we've been talking about that for like long time. But we see that the package solutions that they become more and choice for not only second tier but the tier one banks. So Murex is doing really great and we won most of the deals where we compare it, in many cases we won it again some of global consulting firms.

So that resulted in the boost in the growth in there, also talking about the prospect of the way we see, a lot of deals which we recently won will be resulted in this fiscal year. So the revenue will start coming this fiscal year and we will see even stronger growth in there following years. So pretty confident about that although the industry overall showing kind of a scary find but for us we see in the [indiscernible] as we said everyone has to change and they has to change with a lot of budget constraints that where we come into play with natural support partner.

Joseph Foresi

And so I guess the second one is, what could cause the cost step up in the quarter on the margin front? And how do we think about the margin progression next year?

Dmitry Loschinin

Well I think we have this question every time we report our fourth quarter. So we have this seasonality of the cost would have been up due to some of the taxes we pay and some of the geographies social and also it's relatively kind of lower quarter in terms of working days. So that is every year is the same, so there is no surprise there, we are actually satisfied as well as that’s a typical pattern for us that we accelerate our spend as the year progresses. So we would reserve or keep some of the initiatives and investment in the first half of the year and then accelerate in the second half that will result in some more spent than the third and fourth quarter. So that explains the performance. Overall we believe the margins which we have had ahead of us going to be good, strong, two factors one that we mentioned we are going to invest significant amount of money in some of the areas. We believe that overall the outsourcing industry is going through tough times and have some of large players are slowing down the growth you know it's really becoming commoditized. So if you stay where we a stay today or at least we don't make an effort to step up and move completely outside of traditional outsourcing space. It's going to be really tough excess for us to maintain the margins and maintain the gross. You know the competition is becoming more and more solid. So a lot of efforts which we do in our key segments also enter into new segments to step up and produce full scale high efficiency company requires investments. Also the fact that we are growing on the basis of new young accounts is also resulting some extra effort. So all in all we believe there will be some margin decrease or potentially margin decrease but at the same time we are committed to keep up with our promise range, 70% to 90%.

Joseph Foresi

Okay. And then last one for me I think you mentioned that you had 12 HPAs signed this year, can we get a breakdown by vertical for those high potential accounts are and also do you see us grew very strong for you? What are you doing for them and do you expect that growth to continue. Thanks.

Dmitry Loschinin

Credit Suisse, yes we have been working for Credit Suisse across multiple domains and the private banking space also in the IB and it's o one of the key growth drivers. We expect and we should expect some more growth to come, but very promising account, very strong relationship, good positioning similar to what we had many years ago with UBS and Deutsche. Also there are a lot of challenges the bank is facing we should help them, so that we do not provide the breakdown for all of the new acquired HPAs as of now, but we already mention and know how many of those we have in the financial services and automotive space you probably can do the account somehow.


Our next question comes from the line of Steve Milunovich with UBS. Please proceed with your question.

Steve Milunovich

I wanted to ask you about pricing and wages, [indiscernible] suggested that pricing might be up a bit less this year maybe 4% what is your outlook and on the wage side currency was a huge benefit for you over the last 12 plus months, how does that look going forward and maybe just remind us about how you pay your people and which currencies?

Dmitry Loschinin

Yes, so pricing -- again we’ve tried to follow the same road to increase several percent may be upto 5% ideally last year to a 3.5% I believe, our average annual billing for billable engineer. So moving up and we expect this trend to continue. We do a lot of things increase efficiency, introduce the some of the actual companies doing a lot just to win this battle. I don’t think you can really achieve it without making principle changes into the business. As on the inflation side, pretty stable. You know there are some geographies that shows high inflation but some are staying pretty flat, so the distributed delivery in that work helps big time here. So we don’t anticipate anything for surprise in here, 5% - 6% in average that’s what we should expect.

Also on the Forex side, even though you might think of the very favorable like the Ruble depreciation but in combination with many other currencies we’ve very little impact overall because euro was lower, ruble was lower, maybe Roman can give the exact numbers.

Roman Yakushkin

So basically on how we pay our people, so basically we pay on local currencies and no allocation except for Ukraine. So Ukraine is linked to the dollars just because it's basically the market, the market pays in U.S. dollars nobody pays in kronas but on the hand we have the inflation in dollar terms. In that allocation probably 4% - 5% which is in-line with CPI and which is basically in-line with what we see today in Romania, in Poland, maybe slightly higher in ruble terms because we are paying in Russian rubles and we do not really do large indexation but again you’ve to let terms because ruble continues to be even though it's a pretty straight -- recently it's much weaker than when it was like a year-end half ago basically the background there is very good.

And on the foreign currency impact it's true that there was quite a bit of tailwind last year with regard to the March but at the same time it was quite a bit of headwind to the top line, right. So basically sort of equaling those things out, the net effect wasn’t all that accurate and was slight positive impact on P&L and quite huge negative impact on the revenues. So going forward we expect this to moderate and we do believe that we won't see as much currency fluctuation as we saw just in the last couple of years.

Steve Milunovich

And is the upgrade program pretty much completed and where are you looking to add resources in the next year in terms of delivery centers, are you still trying to diversify away from Russia and Ukraine or are you pretty happy with your percentage breakdown right now?

Dmitry Loschinin

Well as you can see from our report we are actually reaching the target state and we’re close to 20% in Russia, we will cross down 30% in Ukraine if not crossed already. So, at the same time our EU operations keep growing then you’ve pretty impressive growth in Poland and in Romania and also Bulgaria is picking up, start growing in Mexico but also at the same time we grow in some of our key regions such as Germany, UK, United States. So we will see in the trend of France, Ukraine going down to reach 25% as initially planned. This is still -- may try to accelerate a little bit growth in Russia because that makes perfect sense just to pure resource availability, talent availability and the economical perspective and at the same time we will keep building and expanding our delivery foot print. So our goal today is to create and expand our delivery hub, delivery centers in Asia Pacific as we see it as definitely next place to grow. So we might go and setup another one delivery center there.


Our next question comes from the line of Alex Veytsman with Monness, Crespi. Please proceed with your question.

Alex Veytsman

I wanted to ask about your Harman account, are you anticipating for fiscal '17 single digit growth for that account or are there some tailwinds that could make it stronger into low teens?

Dmitry Loschinin

We anticipate with Harman business is not doing great there, so that also we see a reflection of that in our case. So we anticipate the account to stable as flat around the same amount as last year.

Alex Veytsman

And similarly for Boeing, I think you were talking about single digit growth for '17, is that still the case?

Dmitry Loschinin

Boeing should experience growth. We expect Boeing to grow -- several large programs which we had to kind of exit because of the classified nature so they merged, if you remember we report that they merge civil programs and military but we’re entering and it's very healthy growth in the digital aviation space so we expect Boeing to pick up this year.

Alex Veytsman

And for labor source, just switching gears I think at some point you mentioned it was like a 25% target for geography, you know it looks like Ukraine is approaching that you know around 30%, is 25% still your target or is that--

Dmitry Loschinin

It is our target, again we want to keep diversifying the global footprint and we believe that the current platform, it is very efficiency, it is all of the reallocation initiatives and many delivery centers insight, we will try to grow outside of Europe also to providing some approximate to our clients in Asia and also in the United States, which we started to do but we will intensify their growth. Overall we do not see that as a problem, again what we have done in the past actually this global upgrade initiative helped us realize many other ways how to scale the business at the same time without comprising or reducing the quality of the team. So on this front we’re very confident.


Our final question will come from the line of [indiscernible] with Cowen. Please proceed with your question.

Unidentified Analyst

My question is regarding your planned investment, is a large portion of that related to your plans to enter the healthcare vertical and then which specific areas in healthcare are you targeting? Service providers, payers, life sciences etcetera?

Dmitry Loschinin

It's a bit premature to define our plans. We just see that there is a very good match in the area of data analytics, the predictive data analytics, the big data so the expertise which we have been building and some of the things already start happening but we will work on kind of creating the strategy and defining the target markets for us just we will need some time to report what to think about that. But there are other areas also which we set that we still need to build and expand and invest in our key markets today. The center of expertise which is of very interesting and a very effective way of doing cross selling but at the same time winning new deals outside of our main key domain, financial services and automotive. We keep going to invest and grow there at this space and we will continue growing and expanding our sales team especially in the United States. So as you can see from average results it has declined last year which is definitely not satisfactory. So we will put a lot of focus and also money in establishing our presence in the situation that should be good growth opportunity for us.

The other thing which we said is investing in the APAC region and obviously we see tons of opportunity, actually there are places even financial services, industries experiencing, good growth momentum and IT budget compared to Europe and U.S. in a much better shape so we want to leverage that speed up and get some accelerated growth there. So diversifying the footprint but by the same sales efforts.


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

Thank you everyone. We’re excited for the year ahead. Wishing all of you a good summer and speak in August on our next call. Thank you and 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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