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Luxoft Holding (NYSE:LXFT)
Q4 2018 Earnings Conference Call
May. 24, 2018 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Luxoft Holding's fourth-quarter and full-year fiscal 2018 conference call. At this time, all participants will be 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, Tracy Krumme, vice president of investor relations of Luxoft. Thank you. You may now begin.

Tracy Krumme -- Vice President, Investor Relations

Good morning, everyone. Thank you for joining us on Luxoft's fourth-quarter and full-year fiscal 2018 conference call. On the call with me today are Dmitry Loschinin, chief executive officer and president, and Evgeny Fetisov, chief financial officer.Before we begin, I would like to note that we have provided a slide presentation to help guide our discussion. This presentation can be accessed on the webcast and on our website, luxoft.com.I would like to also caution investors regarding forward-looking statements.

Any statements made in today's presentation that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our 20-F filing for the fiscal year ended March 31, 2017.

Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise.Today's presentation will also include references to certain non-GAAP financial measures. We have reconciled the comparable GAAP and non-GAAP numbers in today's press release as well in the supplemental tables in the slide deck.With that, I will now turn the line over to Dmitry. Dmitry, please go ahead.

Dmitry Loschinin -- President and Chief Executive Officer

Thank you, Tracy, and thanks, everyone, for joining us today. I will begin my remarks with a discussion on the fourth quarter as well as a review of fiscal year 2018. I will then provide an update on our transformational steps that we have also taken to ensure a long-term sustainable growth.Slide No. 4 provides an overview of the fourth quarter and our key highlights.

Our Q4 results were largely in line with our expectations and closed the year of strategic progress despite specific client-related challenges that impacted our performance.While we navigated issues related to our top two accounts and two Fortune 10 telecom and healthcare clients, we advanced our revenue diversification strategy. Excluding our top-two accounts, total revenue increased 20% and financial services revenue increased 37%. This demonstrated the long-term growth potential of our financial services business and how our solutions are unlocking increased wallet share.In fact, this was our 13th consecutive quarter of over 20% revenue growth excluding top-two accounts. There is a clear path for future growth and we are focused on deepening our customer relationships, expanding into Tier 2 and Tier 3 customers in wealth and asset management.

We delivered strong Q4 revenue growth of 58% in automotive, continue to be positioned at the forefront of the mobility revolution, and grow our relationships with top OEMs in Tier 1a. As a matter of fact, this quarter marks the first time we have three automotive customers in our now top 10. This speaks to our value proposition and differentiation as well as our rationale for investing in this fast-growing market.Q4 digital enterprise revenue was down 10%. As we stated last quarter, in an effort to align resources with highest margin opportunities we trimmed down some of our lower margin non-core business really to reduce revenue from two Fortune 10 healthcare and telecom companies.

While it has a near-term impact on the top line, the long-term benefits outweigh this action as we bring margins to our standards and ensure healthy growth. Another important element of our diversification strategy is the growth of our high-performance accounts, or HPAs. Momentum continued in the fourth quarter. HPA revenue was up was 44% compared to the last year and reached 41% of total revenue.In our earnings release, we discuss our outlook.

Given the uncertainty at our accounts and the resultant lack of long-term visibility, we have taken a revised approach to providing an outlook and introducing quarterly guidance for the forward quarter. Evgeny will provide more color in a few minutes.We continue to build upon our strong foundation and long-term value creation for our shareholders. Last month, we announced a 60 million share-repurchase program. This reflects our confidence in the long-term growth of our business.

We believe we can continue to invest in the initiatives that are key to our future success, as well as enhance the value of our company by repurchasing the stock under this program.Moving to Slide No. 5. While this year there were no disappointments and challenges, it was a year where we took important steps to create a more attractive and efficient organization. Today, we are better aligned to capitalize on key technology trends disrupting our markets from a solution, sales, and cost perspective.

While we have made significant progress to-date, more work needs to be done. We'll share details on our efforts during our Investor Day next week. We are well-positioned across our markets. Financial services growth is strong and we have established rapidly growing leadership position in automotive.

We are making advancements in key areas that are critical to driving success digital outcomes such as Blockchain, AI, and cloud.The value we deliver is evident in our year-over-year revenue growth. Financial services growth ex top-two accounts were up 39%, Automotive revenue was up 43%, and digital enterprise revenue was up 23%. We are focused on strengthening our foundation for long-term growth and are confident that our decreased independence on large accounts will be a key driver of long-term accelerated performance. Revenue diversification is key to our growth strategy and we are committed to enhancing our global delivery capabilities and optimizing our core structure.SG&A reduction continues to be a key priority across all lines of business.

We have seen success here. SG&A as a percentage of total revenue has come down 60 basis points from fiscal '17 and we expect further improvement.From a delivery perspective, we have significantly strengthened our reach this year through addition of these delivery centers in five new cities, three in Europe and two in APAC. This brings our total footprint to 42 cities. Our focus this year has been on enhancing capabilities in critical regions like the Asia Pacific, given the rising demand for technology services in these growing economies.

We opened delivery centers in Bangalore, India, and Tianjin, China, and are now well-positioned to meet this demand.Turning to Slide No. 6. This provides a snapshot of our progress diversifying our client concentration and de-risking our portfolio. Financial services remains an important and attractive long-term market.

Our value proposition is demonstrated by our growth, despite declines from our top-two accounts. We see future growth from Tier 1 banks and are working to capture new business in Tier 2 and Tier 3 banks by leveraging our leading solution portfolio. You can see that automotive as a percentage of total annual revenue increased by 3 percentage points compared to last year as we continue to drive increased penetration of our Digital Cockpit, Autonomous, and Connected Mobility solutions. This line of business now represents 17% of our business as compared to 14% one year ago.Looking by geography, revenue in the Asia Pacific and Europe, excluding the U.K., increased during the fourth quarter due primarily to increased penetration of those markets with our five new delivery centers.

Contribution from our top two accounts fell to 34% in the quarter from 38% last year. Top five customers were 47% compared to 52% in the prior year, 65% two years ago. Top 10 account for 56% of revenue compared to 62% last year and 74% two years ago. We have made notable progress diversifying our revenue and client base and continue to be focused on capturing additional share.Slide No.

7 shows our strong growth outside of our top two. As you can see, excluding our top two accounts, full-year revenue grew 33% and financial services revenue grew 39%. We are generating solid revenue growth outside these two accounts, which speaks to the value of our financial services solutions and growth within automotive and digital enterprise.Turning to Slide No. 8 and the review of DB.

Revenue from this account decreased 13% in fiscal 2018 and they continued to reduce their budget and shift their strategic investment priorities. As you'll likely have seen in the news, they recently had CEO and COO change, indicating their goal to be less dependent on investment banking revenue as far as scaling bank operation in the U.S. Given all of these moving parts, we have reduced visibility into their plans and expect strong headwinds going into fiscal '19.Slide No. 9 provides an update on UBS.

We have seen this account stabilize. Revenue was up 9.3% in the fourth quarter and down only 1% in the year. UBS continues to be a valuable partner and we are making continued inroads in the sales of information security, wealth management, and digital offering.Slide No. 10 is a historical look at revenue contribution from our high-potential accounts, or HPAs, over the last four years.

HPA revenue increased 49% in fiscal '18, reaching 38% of total revenue versus 27% last year. In the last four years, we have taken HPA revenue from 10% of our total sales to 38%, which demonstrated both the attractive long-term growth opportunity this account provides as well as our revenue rebalancing strategy.I would like to move to Slide No. 11 and discuss some highlights for each of our business segments, starting first with financial services. Despite the challenges related to Deutsche Bank, we continue to grow our business with revenue up 15% in the quarter and up 6% for the year, with 11 new clients organically and 22 clients through acquisitions during the year, bringing our total number of financial services customers to 96.

With the majority of MiFID II work behind us and challenges within Tier 1 investment business, we are shifting our priorities to focus on wealth management and to go after new business among Tier 2 and 3 accounts. We are well-positioned to capitalize on the shift in trends, given the breadths and depths of our solutions and delivery scale.In fiscal '18 we have continued to build upon strong partnerships with a number of global banking institutions. We secured a strategic client win with an Australian multinational bank and the global market space increases our presence in Australian and APAC.We acquired derivIT in August, a technology consulting company and global alliance partner to Murex. We initiated the strategic replatforming and simplification program for a large Dutch global banking and financial services company where we are decommissioning large legacy software packages and migrate them to Murex.

Additionally, we acquired Unafortis, a wealth-management consultancy that has strengthened our competitive position as we've targeted growth within wealth management, private and the universal banking. We're continuously aligning our service mix with the shift in value in the industry and have seen great success to-date.Turning to the automotive segment. Our automotive business delivered strong Q4 revenue growth of 58%. For the full year, revenues increased 43%, consistent with our expectation of over 40% growth.

We continued to grow our strategic client base. We organically added six OEMs, six Tier 1 suppliers and five technology vendors to our portfolio. A consistent theme in fiscal '18 was our ability to secure a multiyear strategic partnership in order to develop in-car technologies for our clients. We scaled up with a German OEM to integrate next-gen infotainment system in all of its car classes.The OEM awarded a multiyear contract in the field of computer vision and autonomous drive.

We are helping integrate their products into major auto OEMs, insurance providers, and commercial fleets in order to accelerate the development of autonomous vehicles. We had a highly visible presence in CES and worked with Daimler to unveil an intuitive and intelligent multimedia system. This user experience changes the game in terms of how a driver or passenger interacts with the car. Autonomous driving is the fastest growing area within this business.

We see a lot of forward momentum and have secured a strong position here.In addition, opportunities within our Digital Cockpit and Connected Mobility solutions remain strong, continuing to rapidly expand. We recently announced a strategic engagement with the AUTOSAR consortium, a cooperation of OEM suppliers and tool developers, to help develop AUTOSAR Adaptive Platform standard for future in-car applications. This enables OEMs to more flexibly integrate the software from multiple sources, meaning they are less reliant on specific hardware platforms and lower-level software stacks. We secured contracts for this technology with more than three independent clients including two large German car makers.We became a founding member of the MOBI alliance, a consortium that strives to enable mobility services through application of Blockchain technologies.

We co-created and launched an integrated cockpit hardware and software reference platform with Intel. We have built a very solid foundation and are very excited about our strong market position and momentum in fiscal 2019 and beyond.Lastly, looking at digital enterprise. Q4 revenue was down as we continued to eliminate low-margin non-core business and align resources with higher margin opportunities. Revenue for the year increased 23%.

We added 13 new organic clients, bringing our total number of digital enterprise customers 138. Given expanding demand for emerging tech solutions, digital transformation remains a major global investment priority. Our clients' desire to be more agile creates new opportunities across a number of industries.During the year, we were chosen by Amazon Web Services as one of six IT and consulting services companies on their Blockchain-as-a-service. We also collaborated with SoftBank to create hybrid cloud infrastructure for a humanoid robot and we'll continue to evolve this platform to make robotics technology more accessible to business in North America.In fiscal 2018, we realigned our business forming digital enterprise.

Prior to this, we served multiple industries through different silos such as telecom, energy media, healthcare, and others. In that, there are commonalities in servicing digital agenda within various industries. The creation of digital enterprise allows us to provide concentrated efforts and strengthen our additional capabilities. We're currently in the middle transforming this business.

We have trimmed low-margin, non-core business and are investing in areas that we believe will have the most demand in the years ahead. We took this approach in automotive and have seen great success. Our deep domain expertise combined with our technical solution in key areas like AI, Blockchain, and cloud position us well to capitalize on growth opportunities in 2020 and beyond.Turning now to Slide 14. In summary, we took significant steps throughout the year to build the stronger company.

We made solid progress diversifying our revenues through growth in financial services, very strong performance in automotive and a refocused digital enterprise strategy. You have heard us talk about diversification for some time now. The information I shared today speaks to the steady progress we are making, more work needs to be done but we are continuously taking the right steps to de-risk our business and extend our value proposition across our three lines of business. We will continue to invest in our additional capabilities, given strategic priority to offering that we believe we can scale based upon strong client relationships and key emerging digital tech trends.We will capitalize on growth with our new approach to sales and marketing.

To support our go-to-market sales and B2B marketing, our sales organization is now focused on industry and rests within each line of business. Our business realignment efforts and changing revenue mix require optimization to our cost structure. We have taken a hard look at our internal organizational structure, recognizing cost efficiencies through back-off the structure among other things. In sum, we are focused on investing in our sales in order to drive improved execution and capitalize on industry growth.

You will hear more about these initiatives at our upcoming Investor Day on May 31. I hope to see you all at this event.Thanks for your attention. And now, I will turn it over to Evgeny.

Evgeny Fetisov -- Chief Financial Officer

Thank you, Dmitry. Hello, everyone, and thank you for being on the call with us. I will go over some key numbers, provide additional color on our Q4 and full-year operational and financial results and [Inaudible] guidance.If you turn to Slide 16, while conditions at our top account remain challenging, Luxoft delivered a healthy level of year-over-year and sequential revenue growth. Q4 revenue for $232.9 million was up 14% year over year.

We have also made strong progress diversifying our customer and revenue base. Our revenue growth outside of our top two clients was 20% year over year.Now, let me give you the highlights of our Q4 financial performance. Adjusted EBITDA of $29.4 million, up 1% and down 27% sequentially. Our adjusted EBITDA margin was 12.6%, down 170 basis points year over year.

Gross margin was 36.2%, down 32 basis points from Q4 last year. Weighted average diluted share count was 34.4 million shares, up 300,000 shares from last quarter. Diluted EPS amounted to $0.34 per share, as compared to $0.60 last quarter and $0.40 in Q4 last year. On a non-GAAP basis, our diluted EPS was $0.59 per share, compared to $0.89 per share last quarter and $0.63 in Q4 last year.Looking at Slide 17, you'll see our full fiscal year 2018 financial highlights.

Revenue of $906.8 million is up 15.4% from $785.6 million in the fiscal '17. This number beats fiscal '18 guidance of $900 million to $905 million. Adjusted EBITDA for the year is $134.4 million, up 0.4% from fiscal '17. Our adjusted EBITDA margin was 14.8%, down 228 basis points from fiscal '17 and slightly below our fiscal '18 guidance of 15% to 15.2%.Our gross margin is 37.4%, compared to 39.5% in fiscal '17.

This is in line with our message regarding companywide gross margin at or above 37% during the year. Weighted average diluted share count is 34.2 million for fiscal '18, up 250,000 shares from fiscal '17. Diluted EPS amounted to $1.66, compared with $1.84 in fiscal '17. On a non-GAAP basis, diluted EPS was $2.81, compared to $2.89 in fiscal '17.Turning to Slide 18.

During the fourth quarter, SG&A as a percentage of revenue was 26.4%, down visibly from 27.5% a year ago. Over the full year, SG&A as a percentage of revenue was 26.6%, down 60 basis points from fiscal '17.SOP expense as a percentage of revenue was 2.6% in the fourth quarter, down 107 basis points from Q4 last year. For the full year, SOP expense was 3.2%, down from 3.7% in fiscal '17. These numbers are in line with our expectation of annual SOP expense less than $30 million and below 4% of the revenue.

Let's move to Slide 19. Luxoft finished the quarter with $104.4 million in cash and cash-equivalents, with operating cash inflow of $42.1 million, financing activities using $8.2 million of cash, and positive net cash from investing activities of $0.4 million. Full-year DSO was 75 days, up from 69 days last year. DSOs were up due to a structural increase in auto and some operational issues with collections in financial services.We finished the quarter with 12,898 people, of which 10,844 were IT professionals.

Our annualized revenue per engineer continues to grow and is now $84.9 thousand, up 10.5% from $76.9 thousand one year ago.Turning to Slide 20. As Dmitry mentioned, we have taken a new approach to guidance. We will not be providing full-year guidance for fiscal '19. Given the uncertainty and reduced visibility of our top account, we felt that it was prudent.

We are introducing quarterly guidance on a forward-quarter basis. For Q1 fiscal '19, we expect revenue of $210 million to $215 million and adjusted EBITDA margin of 8.5% to 9.5%.The first quarter will be impacted by project timing, seasonality, ramp down of Deutsche Bank and planned expenses related to SG&A optimization. We expect this quarter to be our bottom and expect performance to accelerate throughout the rest of the fiscal year.With this, we are opening the lines and look forward to your questions.

Questions and Answers:

Operator

[Operator instructions]. Our first question comes from Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. So, my first question is on the commentary around FY19. I know that the first quarter is going to be obviously a little bit lighter but, what gives you confidence that the revenue base is going to build from the first quarter on? And maybe you can just give us some color around what you think you know revenue growth for the year will be and margins will be.

Dmitry Loschinin -- President and Chief Executive Officer

Hi, Joseph, this is Dmitry. So, a few things that give us the confidence about Q1. The first one is, this is a usual pattern if you compare it to our previous year Q1, is consistently the weakest quarter. Second, there are like most of the bad news that happened and now they kind of reflect in Q1 results.

So, we see much more growth momentum going forward but also the DB impact still remains throughout the rest of the year. This will be largely offset by the growth of our healthier core business. So, this is about Q1 performance.And as for the overall outlook for the year, basically, what we are saying that DB remains a major unknown but outside of DB, we are very confident seeing automotive continues to grow the same way it's been growing. So, it's really very strong growth momentum.

Our financial services is actually picking up and we expect the same growth outside of top-two as we saw in the previous year. On the digital enterprise, we're still doing a significant transformational effort. As we have also reported, we're trimming down some of the business, improving the margin. So, this one, you're going to see some muted growth but all in all, we are going to see much better performance throughout the year for the entire organization, except DB.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

And then, just on the DB side, you've given color in the past of what the account could do on an annual basis. And it sounds like basically with the new change there, you don't have the visibility this year but, maybe I think you talked about it being, down 15, 20%. Any thoughts on what that account can do? What do you model them internally, what do you have staffed for and how should we think about that throughout the year?

Dmitry Loschinin -- President and Chief Executive Officer

Yes. The range is too wide for us to provide, honestly. And the reasons are obvious. So, a new management on board.

And it's a public knowledge, so both CEO and CFO changed. We should expect more changes I guess throughout the management structure. The biggest question mark for us what they are going to do with the IB, so investment banking side. As currently announced, they are going to reduce, maybe even exit that.

So, there are rumors and scaling back the separation. So, IB's the largest chunk of the business for us. And to what extent will they go with this, we do not know, and still no clear messages. And I guess, they also don't know themselves.

So, this is the biggest uncertainty. And we simply don't believe providing the range that would help anyone at this point in time.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

And then just on the margins, I mean they're going to take a big drop, and I understand seasonality and some of the other factors are there in 1Q. How should we think about the margin recovery? And what is causing the biggest drop in 1Q and how should we think about margins throughout FY19?

Dmitry Loschinin -- President and Chief Executive Officer

Yes. So, again, Q1 is typically weak. There is seasonality. So, we have less working days.

So, it's not a surprise. There is also some sort of a project timing that we also saw last year. So, they are like a large-scale fixed price that is being realized in Q2 instead of Q1. The recent ramp down of DB that is quite material in Q1, so, that is going to hit us.

This is factored in. As well as we reported that we started in our Q4 quite significant rework and restructuring of SG&A that will lead to SG&A improvement but during the first quarter as we do this restructuring and actually some people go, we will have a hit. So, these are four major packages. As you will look throughout the year, I know you should see a similar pattern in terms of the margin behavior.

So you're going to see better improvement on Q2 and further.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

OK. And just for clarity, what do you expect DB to be down in 1Q? Have they stopped spending and you're going to let what's going to happen? I'm just trying to get some color in this 1Q. Thanks.

Dmitry Loschinin -- President and Chief Executive Officer

We are not breaking this down by account on a quarterly basis, because it doesn't provide the relevant picture, because there is also some seasonality that sits in the account. There will be a reduction on DB side that's for sure. Again, I think, this is most important fact that our growth outside of DB and UBS will remain pretty strong, I can now assume roughly around 20% or even above and DB will decline.

Operator

Next question is from the line of Maggie Nolan with William Blair. Please proceed with your question.

Maggie Nolan -- William Blair & Company -- Analyst

I'm curious about your expectations for headcount and in terms of growing rest of the business. I assume you're not growing headcount much in financial services but I'm wondering what your plans are for the full year and when kind of a decreased headcount growth starts to affect top line for future years?

Dmitry Loschinin -- President and Chief Executive Officer

Look, headcount is a function of the revenue growth. So, this is linear. It depends to some extent, maybe less than linear but in a way, this is fully in line. So, you see that the headcount had some decline and this is mainly due to the DB situation.

Once we passed the DB cut, the headcount will increase. The thing is there, it's not really anything significant to the bottom line except the fact that if you do this cut and decreasing in a large chunk of the headcount, then obviously, it's going to increase our bench and we'll have some impact on our bottom line but other than that there is no impact on there, outside of DB performance. We are trying to use these people and refocus them or repurpose them for other accounts every time it is possible; it's not always possible.

Maggie Nolan -- William Blair & Company -- Analyst

And then, how should we expect to see SG&A move as a percentage of revenue? Because you're clearly working to create some leverage there but you're also referencing some planned expenses in the first quarter. So, how do we view that in the first quarter and then also for the full year?

Evgeny Fetisov -- Chief Financial Officer

Maggie, this is Evgeny. So, I wouldn't be breaking out that by the quarter. I can tell you for the year, we are expecting about the same amount of reduction in percentage points. So that's the thing.

So, we want to continue to improve this year and next year actually. So, that's the plan.

Operator

Our next question is from the line of Arvind Ramnani with KeyBanc. Please proceed with your question.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

So, just a follow-up on what you were mentioning earlier. When you have folks get freed up from Deutsche Bank, how are you sort of using those resources? And do you have kind of salespeople who are kind of focused a little bit more on financial services, just given you have kind of capacity and talent from DB?

Dmitry Loschinin -- President and Chief Executive Officer

So, obviously, we try to leverage those free capacity as much as possible. We have all of the ways, so we can anticipate some of the cuts, although at DB it's not always possible once we see something coming that we would start to look at that opportunity. And we have done quite a bit of that in the past. Once it kind of goes through this relatively large chunk, then, of course, it is difficult.

Also, the location matters, the skill set matters, not always guys from financial services you can repurpose and use in automotive. It's nearly impossible but, we also are actually going to some of our clients and take a look we have the opportunity out there, skill set exactly matches your profile and we can become quite aggressive in the price. And we have had several previous successes in that but still, it cannot balance or outweigh the entire downside.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

And from your automotive vertical, can you talk about some of the kind of offerings that have been getting traction? And clearly, you have differentiated skill sets but are there specific kinds of offerings that are gaining more traction than the others?

Dmitry Loschinin -- President and Chief Executive Officer

In automotive?

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Yes.

Dmitry Loschinin -- President and Chief Executive Officer

So, automotive structured in three major offerings today. The one is being Digital Cockpit, this is in-car infotainment and more than that it is entire user experience. So, the skill set requires deep knowledge of the technology stack that's within the car and also knowledge of some of the hardware from OEM. So, that's quite specific.

And then, on top of that, we need certain skills to be able to design in a new car UI, UX. So that's pretty much but that is largest area sort of today. The fast-growing area in automotive is autonomous driving, the one which we just established a little more than a year, that showed incredible growth momentum and it continues to expand and unveil. And the third one is Connected Mobility.

Throughout, small in size but has great potential because that's how you connect the car and leverage all of the services around that and they will have a lot of other adjacent industries that are stepping into this space. The skill set is there and is more kind of traditional that actually best way we can use some of our financial folks and that's because they come with some mobile experience, some cloud experience so on and so forth. So, this is yet to realize the potential through on the long run that can be one of the most promising areas because that's where the future of the car industry and other industries will be.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

And I know in the past, you've had more success with kind of European car manufacturers. Are you seeing kind of traction now with some of the U.S. or Japanese car manufacturers?

Dmitry Loschinin -- President and Chief Executive Officer

You're absolutely right. We've been extremely successful in Europe where the majority of our business is at the moment. We see no reason for us to leverage the same expertise and same-store sales outside of Europe. Even though we believe that European Tier 1 kind of premium plus OEMs, they are more advanced in both the technology front and overall the efforts in investments but the time is definitely coming for the U.S.

car makers to follow the same path. So, Daimler example and it actually has shaken the whole industry. And they went with this incredible exciting user experience. We will show some of that at our Investor Day.

And that was kind of a surprise to the whole industry. Everyone is rushing and trying to do similar things, and we are kind of the key partner there. And that's super powerful and sales pitch these days. So for sure, actually this is the area for investment in fiscal '19 to break shore.

So, we have clients in yes but we definitely need to get the growth momentum. The opportunity is out there just as to put more money, efforts, and people to support it.Asian markets, China is definitely promising. We established our office there and start growing there the presence. It requires some local support.

Korean market looks interesting as well. So that it's not a big problem, not that many players, but we clearly see growth opportunities. We already have a client in Korea. And we actually are looking to set it up, operation in Korea in the near future.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

And then, just a couple of other quick ones with buyback, what is the rationale in the buyback and when do you start your buyback?

Evgeny Fetisov -- Chief Financial Officer

So, the rationale for the buyback is very simple. So, first of all, we think the stock is undervalued and it makes perfect sense for us to return capital by doing a buyback at these levels, plus we believe in the longer-term valuation of the business. So, as for the start date, the earliest it could be the end of May is when the window opens.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Just from a margin perspective, what should we be modeling for a tax that you may have mentioned on the call but just the tax rate and share count assumption for the year?

Evgeny Fetisov -- Chief Financial Officer

Fourteen to 15% for the fiscal '19 is the rate which we will expect ourselves.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

OK. And share count?

Evgeny Fetisov -- Chief Financial Officer

Yes. I think, 34 to 34.5 million.

Operator

Next question comes from the line of Charlie Brennan with Credit Suisse. Please proceed with your question.

Charlie Brennan -- Credit Suisse -- Analyst

I've got three, actually. Firstly on the cash flow side, it feels like it's come in a bit weaker than you are expecting. I think you are expecting a strong recovery that hasn't quite happened. I guess two questions.

Firstly, is there any risk around the unbilled revenue balance? And secondly, where do you expect DSOs to end up for next year? And I've got a couple of follow-ups around FX as well. Thanks.

Evgeny Fetisov -- Chief Financial Officer

So, we did get the cash flow slightly weaker than we expected. So, we targeted 80 days for Q4, we're at 82. However, if you look at the quarterly dynamics, we're definitely on the right track and improving, getting where we want it to be. So, the target for the next year, I mean, again this is ideal but we would like to get down to the fiscal '17 level, so which is around 76 days.

So, that's what's we're targeting internally. As for the unbilled, I don't see much risk. As you may see, we have decreased that to $33 million, down from $41 million first quarter. And as we said, we think anything between 30 and 40 is actually normal level, normal structural level, given the client and the contracts we have in place.

Charlie Brennan -- Credit Suisse -- Analyst

And then, just a couple of others around FX. Can you just quantify the FX benefit you had during fiscal '18?

Evgeny Fetisov -- Chief Financial Officer

Yes, sure. So, the currency tailwinds we had were 3.2%. So revenue in constant currency would have been 20.2.

Charlie Brennan -- Credit Suisse -- Analyst

And so, let me think about your organic growth of 7, on a constant-currency basis, we should be thinking that was 4, is that the correct interpretation?

Evgeny Fetisov -- Chief Financial Officer

I need to check. I wouldn't be able to give you a [Inaudible].

Charlie Brennan -- Credit Suisse -- Analyst

OK. Maybe, I could just turn to the first-quarter guidance then.

Evgeny Fetisov -- Chief Financial Officer

And before we go forward, just on the FX side, so to be clear. So, there were some tailwinds on the top line but we'll get some negative effects on the bottom line. So we'll get a negative impact on EBITDA and bottom line from FX changes.

Charlie Brennan -- Credit Suisse -- Analyst

And then, just to continue that thought process through to the first quarter. I don't have a huge degree of confidence in my ability to forecast but, I think, there is going to be 3% or 4% FX benefit in the first quarter to progressively unwind as we go through the course of the year. You've also got acquisition benefits in the first quarter of the year that again will progressively aligned as we go through the year. Given those Q1 benefits that are going to fade, what gives you confidence that the rest of the business can accelerate to compensate for what could be 6% or 7% benefit according to my model?

Evgeny Fetisov -- Chief Financial Officer

I actually see the Q1 differently. I see this is having FX headwinds, given the exchange rate changes in Dollars, in Euros and Pounds that this is our key exposure. So, I would disagree. I think our current forecast includes FX headwinds.

So that's a different view there.

Dmitry Loschinin -- President and Chief Executive Officer

And on M&A side, there is some tail impact from the M&As which we did in our fiscal '18 but both M&As were small in size. So, the impact is not really material. And at the same time, we see organic growth is pretty strong outside of UBS and DB. So, that gives us the confidence.

Operator

Our next question is from the line of Lou Miscioscia with Pivotal Research. Please proceed with your question.

Lou Miscioscia -- Pivotal Research Group -- Analyst

If you look for where the shortfall was in digital as you highlighted healthcare and telecom, it seems like revenue is falling in shorter than expected, even though the margin structure of what you are replacing might not be that attractive. Why not just keep it for a couple of more quarters to help backfill and I assume would help up bring margin dollars?

Dmitry Loschinin -- President and Chief Executive Officer

So, what we do, we're actually taking steps to have a strong company going forward for long-term, long run. And we are doing some structural changes that would allow us for us to properly manage the business, address the challenges there. And the early we do, the better. And so, things what we do obviously, we are running the business with three business units today.

And we have changed some of the management to make sure that each of the businesses is in right hand, it has a clear strategy, both for the growth and for the margins. And we are taking certain steps to fix the situation, to get it to the basics so that we are ready to grow but not only grow the top line but also achieve throughout the bottom line.So, we have taken a hard look at the digital enterprise, which was a combination of several industries in the past without clear positioning, clear differentiation. The team there is doing OK but still not sustainable, not enough. And as we see incredibly good growth and thus the super strong momentum in automotive, and that's pretty much that we've done there.

We run healthy margin accounts. We have extremely digitally aligned -- the offering there is basically a reflection of what the other disruption [ph] is happening obviously. And it took us a while till we got to that point but it's simply repeating this success. We are structuring or doing these changes in the digital enterprise to have the same growth momentum.

And it's only possible by redirecting our sales efforts, redirecting our change in adapting the offering itself and making sure that everything that we are going to grow will have proper marginality. So, it was not an easy decision to do but we really want to fix it and get to the strong growth path.So, the way we see the business is incredibly strong growth in automotive. We are actually having super strong growth in financial services, except top-two, and it will continue to make this line of business stronger. And the transformational efforts for digital enterprise should be finished this year, and we will get this third part of the business on the growth path.

So this is our kind of thought.

Lou Miscioscia -- Pivotal Research Group -- Analyst

OK. Switching a little bit. When you look at first-quarter guidance and take the high end $215 million, consensus looks like it's $238 million. So, would that gap be basically just cutting doors back massively, which would be helpful for us to understand because if it's the case, because then we could have a bit more confidence that now the Deutsche Bank number is low enough that even though it's going to be negatively impactful for the rest of the year, proportionally less.

Dmitry Loschinin -- President and Chief Executive Officer

Yes. DB is part of that obviously. There is also a seasonality factor, which I guess concerns impact completely into the account. And as we said, there is a portion, which is related to the muted digital enterprise growth.

And then, going forward, again, seasonality will help, we have a decent growth momentum outside of UBS and DB, and especially in automotive. So, that's what is going to improve there, the following quarter.

Lou Miscioscia -- Pivotal Research Group -- Analyst

OK. I've got more but let me pass it on to someone else. Thank you.

Dmitry Loschinin -- President and Chief Executive Officer

Thanks.

Operator

The next question is from the line of Georgios Kertsos with Berenberg. Please proceed with your question.

Georgios Kertsos -- Berenberg -- Analyst

Yes. Hi. Two questions for me, guys. First of all, excluding Deutsche Bank, do you expect UBS to be flat or do you expect revenue from UBS account to also contract year-on-year as we move into '18-'19? That's the first question.

And then, I have a follow-up.

Dmitry Loschinin -- President and Chief Executive Officer

So, UBS-wise, as we said, we see a pretty stable situation. We still continue to do some of the in-sourcing efforts but again we have opportunities on the other hand there. So, our expansion is that the discount will be similar to what we saw in our fiscal '18.

Georgios Kertsos -- Berenberg -- Analyst

OK, understood. The second question is on the HPA accounts. Can you give us some color on what sort of the expectations you have in terms of growth rates within your HPA account list into '19 and to the extent that you have visibility for the next two, three years out?

Dmitry Loschinin -- President and Chief Executive Officer

Yes. So, the growth rate actually year over year is a bit better than I initially projected but our expectation is to have it higher than 30%, close to 40%, and that has been historically the case. So, we expect that to continue. And for the next three years, this is the same commitment, 30 plus percent.

Operator

Next question is from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question.

Vladimir Bespalov -- VTB Capital -- Analyst

Hello and thank you for taking my questions. First, I would like a little bit more clarification on your first-quarter guidance. Just now you mentioned that you expect UBS to be flat but, if we look at your guidance, it looks like if we adjust it for growth, like 20% for other accounts excluding Deutsche Bank and UBS, the decline of Deutsche Bank and UBS will be to the tune of 37% according to my calculations. And if we assume that UBS is more or less flat, then Deutsche Bank is down 75% according to my calculations, if these are correct.

So, could you provide maybe some color, if this is correct, are you looking at the see your guidance for the first quarter the same way?

Dmitry Loschinin -- President and Chief Executive Officer

Right. We give you the outlook for the quarter in terms of the growth and we are saying that the annual growth of outside of top two will be closed 20% or similar to what we saw in the past. And as for the first quarter, there are some seasonality factors, so you shouldn't be just putting everything together. So, basically, DB is going to decline but not at the magnitude that you described.

And UBS and some other businesses, they have also its own seasonality. So, again, you should look at their full-year expectation and full-year expectation of UBS here it should be similar to what we had last year. As for DB, right, we will see probably worse than last year situation but not 75%; this is very unlikely.

Vladimir Bespalov -- VTB Capital -- Analyst

And the other question that I have is on the decline in North American revenues that we saw. Could you maybe provide a little bit more color on what's going on there because it used to be like a kind of focus area for you to grow but we don't see this growth yet? Thank you.

Dmitry Loschinin -- President and Chief Executive Officer

Well, this is easy to explain due to several factors. So, one, we made a very strong push in automotive. And as we could have seen, the automotive growth is mainly in Europe. We are going to change it in the future.

It provides tremendous growth opportunities and that's what we're going to do in our fiscal '19, actually investing in sales, in people and the local presence, building in a similar set up as we have in Europe. So, this is yet to come. And then, also, we've been quite actually investing in the Asia Pacific market, which showed extremely good growth momentum. This has also continued to happen.

At the same time, our focus area for the U.S. remains, so the focus for the U.S. remains. And also, if you look for North America, the revenue was up 15% year over year in Q4.

So, it's done better.

Vladimir Bespalov -- VTB Capital -- Analyst

The last question I have on your digital enterprise and in particular on the cleanup of low margin accounts. It has been going on for quite a while but based on your guidance for the first quarter, we don't see any major impact. And you mentioned that you're going to complete this transformation probably by the end of the year. So, do you expect that we will still see some pressure on margins coming for the next several quarters and like the improvement will be quite slow or just wait and see, it's much earlier?

Dmitry Loschinin -- President and Chief Executive Officer

So, we won't provide more color but all of our [Inaudible] performance and our plans and inspiration during the Investor Day, so very welcome to join. What we do in digital enterprise, so we took a look. And that again, as I explained, some of the accounts came from the acquisition, and they had really low margins. We initially expected us being able to convert but we see the nature of some is really very hard to change.

And it was easier to divest from that business instead of keeping investing and investing and running in extremely low margin for a long time, and at the same time, put the efforts, sales team everything through digital engagement. So that transformation started last year, will continue this year. We have changed the management of the digital enterprise. We have new people there.

We also changed the way we sell. So, the sales side approach is different. There are new people in charge. So all-in-all, it will result to digital enterprise getting back to the growth path throughout the year and kind of getting closer to traditional Luxoft margins, so the margins that we have in automotive and in financial services.

Operator

Dmitry, I turn the floor back to you for any final comments.

Dmitry Loschinin -- President and Chief Executive Officer

Thank you, operator, and thanks, everyone, for participating today. We continue to make progress positioning Luxoft for sustainable long-term growth through expanding addressable market, commitment to innovation and client success. And we are focused on building a stronger company through a number of initiatives, and as we explained enhancing our sales organization, improving cost structure, improving the offering. We will provide more colors on each part of the business and our plan.

So, we look forward to hosting you at our Investor Day next week in New York and we hope to see many of you. Thanks again for your time and have a great day.

Operator

[Operator signoff]

Duration: 57 minutes

Call Participants:

Tracy Krumme -- Vice President, Investor Relations

Dmitry Loschinin -- President and Chief Executive Officer

Evgeny Fetisov -- Chief Financial Officer

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Maggie Nolan -- William Blair & Company -- Analyst

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Charlie Brennan -- Credit Suisse -- Analyst

Lou Miscioscia -- Pivotal Research Group -- Analyst

Georgios Kertsos -- Berenberg -- Analyst

Vladimir Bespalov -- VTB Capital -- Analyst

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