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Luxoft Holding, Inc. (NYSE:LXFT)
Q1 2019 Earnings Conference Call
August 15, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Luxoft Holding's first quarter fiscal 2019 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press * 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracy Krumme, Vice President of Investor Relations at Luxoft. Thank you. You may begin.

Tracy Krumme -- Vice President, Investor Relations

Good morning, everyone. Thank you for joining us on Luxoft's first quarter fiscal 2019 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 31st, 2018.

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 as in the supplemental tables in the slide deck. With that, I will turn the call over to Dmitry. Dmitry, please go ahead.

Dmitry Loschinin -- President and Chief Executive Officer

Thank you, Tracy. And thanks, everyone for joining us today for our first quarter fiscal 2019 conference call. I will begin on slide No. 4 with key highlights from the quarter. We are off to a good start to the year with Q1 results ahead of our expectations on all fronts. This is despite foreign headwinds that had negative impact on $5.3 million or 2.5% of revenue. As we have stated on the Q4 call and at investor day, we believe Q1 is the slowest quarter of the year. And we'll see incremental improvement as we move through fiscal '19. This quarter, we continued to diversify revenues and deliver top-line growth. Financial services revenue increased 4% year-over-year and grew 25%, including our top two account. Concentration dropped to 14% of revenues and 17% over the past year. And UBS is now our largest client. We continue to rebalance our assertion for this quarter and grow our teams to meet evolving client need. Our auto business continues to generate strong growth and revenue up 25% from Q1 in first year.

We continue to strengthen our market position solely in innovation and expanding our partnerships with major OEMs and Tier 1 suppliers. We expect revenues in this line of business to grow all 40% in fiscal '19. We continue to invest in disruptive technologies that will enhance our market position and allow us to provide great ability to our clients. To that count, recently made two small tack-on acquisitions, Smashing Ideas and Objective Software. I will speak to these acquisition in greater detail in a few minutes. They are placed with the strategic progress made during the quarter. As we have stated on previous calls and at the investor day, we're transforming our additional enterprise business and allocating resources to higher margin digital opportunities. We've made a number of additions to our leader team, strengthening our leadership in sales and management of Digital Enterprise.

We've taken initial steps to address our construction and increase efficiency by reducing SG&A expenses and eliminating back-office redundancies, Q1 SG&A and the percentage of revenue declined hundred basis points year-over-year. Lastly, we remain committed to returning capital back into shareholders. We announced the $60 million share repurchase program in April and have repurchased $20 million of our stock today. Slide No. 5 provides an update on our diversified revenues and reducing our client concentration metrics. A few things I want to point out. The auto business has been an areas of strategic emphasis over the last several years. The business represents 21% of our revenues now compared to just 10% three years ago. We have been able to grow that business rapidly, given our strong offerings and established OEM partnerships. From a client concentration perspective, our top ten has fallen five percentage points since Q1 last year.

And our top two concentration has fallen three percentage points. Our expanded level of delivering presence in APAC and Europe drove high revenue contribution this quarter. Revenue from APAC and Europe increased 89% and 12% year-over-year, respectively. US/Canada business remains a key strategic priority in fiscal 2019 and in the years ahead. Turning to slide No. 6 for an update on our financial services business. Business continues to grow despite the challenges in Deutsche Bank. Revenue was up 4% year-over-year and up 25% excluding our top two accounts. Growth in this market is driven by our success across tier one and tier two institutions as well as avoiding a growing demand for solutions in simplification, cloud, and AI adoption. We also see new business in response to the growth and regulatory agenda in the UK, particularly with Brexit and Open Banking regulation in Europe. This change is an united, consistent demand for better latent technologies, including big data.

For example, we create a key solution for [inaudible] finance on the Brexit for one of the world's largest financial group. We continue to build new relationships and fund growing markets, demonstrated by our double-digit growth in North America and APAC. We also have a strong position in this current market and continue to build our team to address greater client demand. We continue to grow our Murex business and recently played an integral role in the leading European multinational banks migration to Murex. In addition, we secured two new strategic contracts for large-scale Avaloq Implementation. We believe foreign demands have been driven by ongoing pressure to improve predictability and key competitor reaffirms introduction to new technologies. We are well-positioned with a strong team to get these trends and have a strong pipeline for beginning of this fiscal year.

Now, turning to UBS on slide seven. UBS is now our largest client. Revenue in the quarter was up 3% year-over-year and down 6% sequentially. This account has performed largely in line with our plan. And we expect the business to remain relatively stable throughout fiscal 2019. Continue to believe that this account offers an excellent opportunity for insurances. And we remain a critical solutions provider to UBS. Now moving to slide No. 8 and an update on Deutsche Bank, our second largest client. Our outlook remains the same. We continue to drive headwinds in Deutsche Bank as stated in our Q4 call and at the investor day. This ability to divest long-term strategy is challenging even the new effective team and shifting erratical focus. The account was down 18% year-over-year and down 24% sequentially. We are looking for ways to leverage our long-standing relationship with DB outside of western bank and aim to really scale in transactional bank in wealth management and information security.

We continue to diversify revenue away from DB. However, the account will have a tailwind back end of this year. We expect continued decline in Q2 and throughout the year. Moving on to automotive, revenue grew 25% year-over-year. This continues to be our fastest growing line of business as it secures new engagements while also growing existing partnerships. We expect this business to grow 40% this year. We have expanded our client base as we see growing interest in our two-wheel drive, Digital Cockpit, and connectability. Our progress demonstrates not only the strengths of our offerings but also the benefit of our early entrance into this market. We have been able to establish multiple cooperative agreements with many tier one suppliers in leading global OEMs with our strong applicational offerings. In fact, today we have established multiyear partnership with all the major European OEMs. Let me highlight a couple of key achievements during this quarter.

We partnered with Daimler's, a key addition, to open research in Europe and centered in Berlin. We began a strategic collaboration around software platforms in Europe and with a large Korean tier one and a leading German OEM. We had double-digit growth in APAC and won a multiyear contract with a leading tier one supplier in Asia. They are uniquely positioned to capitalize on that automotive [inaudible] And we'll continue to evaluate opportunities to round out our solutions and expertise in this rapidly growing business. Turning to slide 10, recently made an exciting and focused addition to our auto business. We acquired Objective, a technologies initial provider with a focus on connected cars and autonomous drive services fully in coherence in tier one. This exposition is very similar to those of Luxoft Holding's inclination where we can combine objectives with subject matter experts and IP-based solutions with our global scale [inaudible].

We are excited to work with an objective team and see great synergies ahead. Lastly, turning to slide 11, and our additional enterprise business, the 16% revenue shortfall was primarily due to the trimming of low-margin, non-core business. We expect this trimming to be completed at the end of Q2. Also, this causes a short-term top-line impact. We are taking a strategic action to enhance our margin profile in the long-term. Additional transformation remains a global investment priority for many of our clients. We expect to see sequential growth throughout the rest of fiscal 2019. A few achievements to highlight in the quarter: We collaborated with our newly acquired Smashing Ideas team and a major travel client to build a comprehensive loyalty program. We started to work with two new energy clients as we grow this practice. We continue to work with our clients on cloud migration and AI and recently, on a cloud migration project for a German OEM.

We were identified as a Representative Vendor in the first blockchain consulting market guide by Gartner. We partnered with a leading e-enterprise blockchain software firm to integrate and identity management applications on the open source blockchain platform. Lastly, we've partnered with the city of Zug & Lucerne University of Applied Sciences to create the first customizable blockchain-based e-voting system. We made an important play in this growing industry and continue to take part in complex projects delivering end to end value to clients. We are taking the right steps to strengthen our Digital Enterprise business and reiterate our medium-term goal to 6% revenue growth. Our transformation, once complete, will place us on track to deliver strong additional growth in fiscal 2020 and beyond. Turn to slide 12. Here, we'll look at our acquisition, Smashing Ideas, the Seattle-based digital innovation and design agency.

This capability of Smashing Ideas will serve us as a disruptive digital capitalist, driving a dramatic transformation for our clients. The company spends across multiple industries, including automotive, aviation, entertainment and media, and health and wellness, and consumer products. Combined with Smashing Ideas strong expertise and product development, and digital transformation in our new technology and industry expertise, we'll enhance our position as a leading technology strategy and innovation partner. Before I turn the line over to Evgeny, I would like to conclude by reiterating that we are on track to deliver on our strategic initiatives laid out at investor day. I'm very confident in our strategy and look forward to executing on our plan. With that, 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 with some key numbers, provide additional color on Q1 results, and introduce our second quarter fiscal '19 guidance. If you turn to slide 14, despite certain declines and challenges within the Q1 revenue for $212.8 million, up 1.7% year-over-year. This was in the midpoint of our guidance range. Q1 FY19 FX impact on revenue was a negative $5.3 million or a negative 2.5%. Our gross margin was 35.4%, up 20 basis points from one year ago. As you know, the percentage of revenue was 26.7%, down 100 basis points from Q1 of last year. SOP expense as a percent of revenue was 2.9%, down 90 basis points from Q1 last year. This is in line with our expectation of any SOP expense less than $30 million and 4% of revenue. Our adjusted EBITDA margin of 11.2% was down 140 basis points year-over-year and was ahead of our Q1 guidance.

We expect to see it generate throughout fiscal '19. GAAP EPS amounted to $0.14 per share compared with $0.18 per share in Q1 last year. This was above our current guidance. On a non-GAAP basis, diluted EPS was $0.43 per share, compared with $0.50 in Q1 last year. The quarterly weighted average with a share count was 34 million shares. Turning to slide 15 where I will provide a bit more detail on our guidance index. Looking at the numbers, you will see 43% of our revenue non-dollar, out of which, 29% is Euro and Euro dependent currencies. So, these revenues were impacted by the stronger dollar in Q1. Looking ahead, our top-line performance will continue to depend on the strength on these currencies. And we anticipate further FX headwinds in Q2. Slide 16. For the second quarter of fiscal 2019, we expect revenue and adjusted EBIT margins to be in the range of $225 to $230 million and 13.5% to 14.5%, respectively.

We expect GAAP EPS to be in the range of $0.28 to $0.36. Our Q2 revenue guidance is impacted by the trimming of low-margin business in Digital Enterprise. As we have stated, we expect growth to accelerate as we move through the fiscal '19 and continue to focus on corporate conservation and high-margin work. We carry down full-year guidance of 20% of saving growth outside of top two accounts. With this, we're opening the line. So, look forward to your questions.

Questions and Answers:

Operator

Thank you. If you'd like to ask a question, please press * 1 on your telephone keypad, and a confirmation tone will indicate your line is in question queue. You may press * 2 if you'd like to remove your question from the queue. For preventing [inaudible] equipment, it may be necessary to pick up your handset before pressing the * key. And our first question is from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your questions

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. My first question here is just on guidance for moving our way through the year. And certainly, give the quarterly guidance again. But why not, at this point, give full-year guidance? And how's the visibility on the numbers for the full-year?

Dmitry Loschinin -- President and Chief Executive Officer

Hi, Joe. This is Dmitry.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi.

Dmitry Loschinin -- President and Chief Executive Officer

Joe, as we explained during our Q4 call, the major factor that does not give us opportunity possible to provide the annual guidance because uncertainty with Deutsche Bank. And it remains the case. So, hopefully, toward the end of the year, we'll see the picture and will understand DB plans. So, for now, the range where DB can end up is quite significant. So, we believe that we are better off with quarterly guidance.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. And so, can you perhaps give us that range, your expectations for DB next quarter, this year, and headed into next and any color you can provide on UBS as well?

Dmitry Loschinin -- President and Chief Executive Officer

So, for DB, the outlook looks secure two and going forward. So, you're gonna see about 30% plus drop year-over-year. We don't believe that DB will go below $80 million for the full year. So, you can see that $80 as the bottom. And then you probably can view it as the top. But that is all.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Okay. And then margins did better than expected. Maybe you could talk about -- so, it looks like you cut some SG&A. Maybe you could talk about the margin improvement, the expectations throughout the year on the margins side and maybe update us on some of the metrics associated with utilization. Did margins hang in there because of some extra work from DB? I'm just trying to get more sense of what the margins are gonna look like.

Dmitry Loschinin -- President and Chief Executive Officer

Yeah. They were quite conservative from a margin guidance. And so, it get little better utilization, which, as you correctly said, DB is a major factor, DB utilization. And also, we started seeing some improvement on SG&A side.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. Thank you.

Dmitry Loschinin -- President and Chief Executive Officer

Thank you, Joe.

Operator

Our next question comes from the line of Avishai Kantor with Cowen & Co. Please proceed with your questions.

Avishai Kantor -- Cowen & Co. -- Analyst

Hi. Thank you. Good morning. And thank you for taking my question. I think you can reasonably boost up your sales capabilities in UBS, your automotive segment. Can you maybe talk a little bit more about your efforts, specifically North America and [inaudible]?

Dmitry Loschinin -- President and Chief Executive Officer

Hi, Avishai. All right. Some decline in North America. As a matter of fact, we see the revenue in the business growing there. And there was some weak loss. But the change of the billing address for one of the large clients whereas we used to charge. And the originated build of NOS was sent to the subsidiary. Now, understand that the Europeans have seen it. So, therefore, there is some shift in the revenue recognition. Other than that, we're on track. We see pretty steady growth and good growth for North America in financial services. As well volume has started picking up in the US.

Avishai Kantor -- Cowen & Co. -- Analyst

Thank you for clarifying that. And going back to the guidance, you have a pretty wide range for revenue and a pretty wide range for EPS. What leads to interest rates in order to integrate applying the lower EPS range?

Dmitry Loschinin -- President and Chief Executive Officer

Again, there are few factors that impact the EPS. One of the major is the DB being down and how well can we absorb the demands. And it just depends. A lot of the growth plans for other parts of the business is how well they can synch up. And another thing is foreign forex and use.

Avishai Kantor -- Cowen & Co. -- Analyst

Thank you and good luck for the rest of the year.

Dmitry Loschinin -- President and Chief Executive Officer

Thank you.

Operator

The next question is from the line of Maggie Nolan with William Blair. Please proceed with your questions.

Maggie Nolan -- William Blair -- Analyst

Hello. You mentioned that you're focusing on 20% revenue growth outside of the top two accounts. I'm wondering how much of that you expect will be from acquisitions.

Dmitry Loschinin -- President and Chief Executive Officer

And I hear. So much acquisition are very small in terms of the revenue contribution. Actually, I would say very small material. The Objective acquisition as well as the college acquisition in the account work a certain skill set of LIT that enables us to be in the certain business in order to see several opportunities where we beat, again, using the informations. And the same would go for Smashing Ideas. It's a relatively small shop but a very good fit for our digital offering. So, the impact is very small in terms of the top-line.

Maggie Nolan -- William Blair -- Analyst

Okay. Great. And then I was curious about what's driving your expectations for the sequential increase in adjusted EBITDA margin.

Dmitry Loschinin -- President and Chief Executive Officer

Few things that I think are very consistent here for what we said in our investor day. We view Deutsche Bank this year as one of the major effect of that hurt the margins and because of the bench presumably. We're also going to scale our automotive business. And we are scaling down low-margin business. So, all in all, we believe we'll be able to improve utilization. We are also working on our SG&A spend and bringing this down. Our plan is to do 1% every year. And at the same time, growing the high-margin business.

Maggie Nolan -- William Blair -- Analyst

Thank you very much.

Dmitry Loschinin -- President and Chief Executive Officer

Thank you.

Operator

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

Georgios Kertsos -- Berenberg -- Analyst

Yes. Hi, guys. Can you please confirm when you expect to complete the remaining part of the share buyback program by? Is it within the current fiscal year? Or do you expect that to fall into the next fiscal year? And then I have a quick follow-up question.

Evgeny Fetisov -- Chief Financial Officer

Yeah. Hi. This is Evgeny. So, the share buyback program was for two years. And so, we just started it last quarter. So, we expect it to happen within that timeframe.

Georgios Kertsos -- Berenberg -- Analyst

Okay. Thank you. And then a follow-up on the -- can you confirm the organic growth rate for the quarter?

Evgeny Fetisov -- Chief Financial Officer

We don't disclose the quarterly guiding growth rate. We usually focus on the yearly number because the number you are gonna deal with there is implication.

Georgios Kertsos -- Berenberg -- Analyst

Okay. Clear. Thank you very much.

Operator

The next question is from the line of Vladimir Bespalov with VTB Capital. Please proceed with your questions.

Vladimir Bespalov -- VTB Capital -- Analyst

Hello and thank you for taking my question. My first question is on the automotive segment. You had a 25% growth this year and then this quarter, year-on-year. But you're going 40% for the full year. Could you maybe provide some color on what slowed down your growth in this quarter and say what's gonna happen in the coming quarters to accelerate it again? Then my second question is on Digital Enterprise. We see that the decline is accelerating. It was minus ten in the previous year-on-year and the previous quarter. Now it's minus 16. So, you expect a turnaround here as well? But maybe you also could give us some color on what to expect next quarter when you're gonna see the cleanup of these long launching accounts and we finally see some growth moving you closer to your near-term target of 20% growth? And the last question is on working capital. I see an increase in working capital attributed to your [inaudible]. So, could you maybe provide some color on that and what you expect in the coming quarters?

Dmitry Loschinin -- President and Chief Executive Officer

Yeah. Hi, Vladimir. I will answer first the questions. And Evgeny will answer the working capital. So, in auto life, I currently point out the 25% this quarter. But we're still confident we can do 40 plus percent for the year. There is a seasonality. You can see it every second quarter, I have a higher revenue growth. And then another one, I'd say, is less aggressive. So, the same is going to happen this year. So, next quarter, fine. So, in automation, we are doing pretty good. But all in all, the growth remains as strong as we saw last year and I explain now. It's really impressive, the development on all fronts. So, confident 40%. The seasonality is the factor. You're gonna see high growth for the next quarter. The Digital Enterprise, yes, it's down 16%. However, we expect the cleanup to be completed in our Q2. You're also gonna see some sequential growth in Q2. And as we move forward in the year, then to where the second half will be, you're gonna see the growth. Was sequentially in there. At the end of the year, you're also gonna see the year-on-year growth. And Evgeny will answer working capital.

Evgeny Fetisov -- Chief Financial Officer

So, on the slow being higher this quarter, the largest impact comes from the lower premium versus the last quarter. If you look at the numbers, the contrast two are actually down $8 million beyond built revenue stubs. There's 12.9. So, it's less than combined. So, on build, we said on build which was already in between $40 million. So, we swiftly bought with where we all wanted to be. But otherwise, we are doing well in track in improving our team. So, we said the results were at 75 days on the quarter moving into Q4. So, that's where we want to be by the end of the year.

Vladimir Bespalov -- VTB Capital -- Analyst

Thank you very much.

Operator

Thank you. And as a reminder, to ask a question today, please press * 1. The next question is coming from the line of Alexander Vengranovich with Sova Capital. Please proceed with your question.

Alexander Vengranovich -- Sova Capital -- Analyst

Yes. Hi. Couple questions from my side. So, first on Deutsche Bank. So, obviously, it was particularly weak this quarter. So, I was just wondering what sort of foreign currency fluctuations impact you've had particularly on the Deutsche Bank revenues. So, looks like, let's just say it's mostly Europe nominated as far as I understand, the induction bills are quite strong. And that's one of the reasons why you are providing bearish outlook for the coming quarters. So, could you first confirm that?

Dmitry Loschinin -- President and Chief Executive Officer

Yes. DB is all Euro. So, obviously, we have the forex headwind here. And also, as we guided for the full year, we still see the DB to go down both -- and obviously, some of the forex headwind but also in terms of the business, itself. So, the rundowns will continue. And again, as we can see now, the floor for DB is somewhat about $80 million. So, it'll be above that number for sure. But still, the range is pretty wide. Yeah. And this is the major factor for us that we don't guide for the full year. Once we see more clarity there, we will come back to the full year guidance.

Alexander Vengranovich -- Sova Capital -- Analyst

Okay. And then the second question on how do you see your headcounts to evolve this year, both in terms of engineers and G&A personnel if you have any comments on that?

Dmitry Loschinin -- President and Chief Executive Officer

So, G&A or SG&A personnel will remain flat as we grow ourself a marketing team and the same time are trimming G&A for back off separation. Again, we are committed to reduce the percent of SG&A by roughly 1% every year. So, that's the target. As for the engineering personnel, usually, it is linked to the growth of the business. So, obviously, for instance, engineering personnel for the life auto business will grow 40%. Maybe little slower than the growth of the top-line as the revenue, purchasing of sales are growing. So, again, we don't provide a full guidance for the year. But the correlation's very simple.

Alexander Vengranovich -- Sova Capital -- Analyst

So, basically, you expect your annual utilization to be broadly flat year-on-year, right? If I understand you correctly.

Dmitry Loschinin -- President and Chief Executive Officer

Yeah. Utilization is typically the same. DB around our intact utilization from 3% to 5%. And again, this is really not -- depending how well we can observe another imbalance and redeploy people. But now we're at just 3% to 5% impact for the whole year. And you'll see as rundown continues throughout the year that utilization will stabilize the same.

Alexander Vengranovich -- Sova Capital -- Analyst

And the last probably one. How would you describe your M&A strategy for this year? Do you have any other acquisitions in mind? Or do you feel that you're pretty full in terms of the capacities you require right now for your product mix and for the main expertise?

Dmitry Loschinin -- President and Chief Executive Officer

So, no immediate plans. Nothing on the short-term horizon. We would continue looking for small acquisition as it provides very clear footprints and also relatively easy integration and much lower risk for the company also for the shareholders.

Alexander Vengranovich -- Sova Capital -- Analyst

Okay. Thank you.

Operator

Thank you. Dmitry, I'll turn the phone back over to you for any final comments.

Dmitry Loschinin -- President and Chief Executive Officer

Thanks, Operator. And thanks, everyone for speaking on today's call. We are proud to report progress and look forward to updating you on our transformation and subsequent goals. Have a good day. Bye.

Operator

Thank you. This concludes today's cell conference. You may disconnect your lines at this time. Thank you for your participation.


Duration: 35 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

Avishai Kantor -- Cowen & Co. -- Analyst

Maggie Nolan -- William Blair -- Analyst

Georgios Kertsos -- Berenberg -- Analyst

Vladimir Bespalov -- VTB Capital -- Analyst

Alexander Vengranovich -- Sova Capital -- Analyst

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