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Luxoft Delivers a Mixed Quarter, Reduces Guidance

By Steve Symington - Feb 13, 2018 at 9:28PM

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Near-term revenue headwinds are in store as the software and IT services leader optimizes its business for the long run.

Luxoft Holding (LXFT) announced mixed fiscal third-quarter 2018 results on Tuesday after the market closed, highlighting the continued diversification of its revenue base away from its two largest customers, as well as broad-based growth across the core business. Even so, the software development and IT service provider followed with a modest reduction to its full fiscal-year guidance.

Let's take a closer look at what Luxoft accomplished last quarter, as well as what investors can expect from the company in the coming months.

Software engineers working together on a coding project

IMAGE SOURCE: GETTY IMAGES.

Luxoft Holding results: The raw numbers

Metric

Fiscal Q3 2018*

Fiscal Q3 2017

Year-Over-Year Growth

GAAP revenue

$236.6 million

$206.9 million

14.3%

GAAP net income

$20.6 million

$18.5 million

10.9%

GAAP earnings per diluted share

$0.60

$0.55

9.1%

DATA SOURCE: LUXOFT HOLDING, *FOR THE THREE MONTHS ENDED DEC. 31, 2017. 

What happened with Luxoft Holding this quarter?

  • On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation and acquisition costs -- net income rose 9% year over year to $30.5 million. Adjusted net income per share increased 8.5% to $0.89.
  • Luxoft doesn't provide specific quarterly financial guidance. But for perspective, investors were looking for lower adjusted earnings of $0.82 per share on higher revenue of $240.4 million.
  • Adjusted EBITDA grew 6.7% year over year to $40.0 million.
  • By industry vertical:
    • Financial services revenue grew 12.9% year over year to $138.1 million.
    • Automotive and transport revenue increased 10.1% to $36.0 million.
    • Telecom revenue increased 57.5% to $28.1 million.
    • Digital revenue grew 13.1% to $26.1 million.
    • Healthcare revenue declined 24.2% to $7.7 million.
    • Revenue from all other verticals fell 24.5% to $0.7 million.
  • Annual revenue per billable engineer grew 4.5% year over year and 3.2% sequentially to $85,392.

What management had to say

"Our third-quarter results demonstrate our continued progress in executing our strategic transformation to diversify our revenue streams, expand our presence in attractive end markets, and strengthen our global delivery capabilities, " stated Luxoft CEO Dmitry Loschinin. "We had a number of bright spots this quarter, including consolidated revenue growth of 26.5% year over year, excluding the top two accounts, and double-digit revenue growth in each of our three lines of business."

Loschinin added that, under a new strategic collaboration with a major German automotive manufacturer, Luxoft opened a new delivery center in Berlin during the quarter aimed at attracting new talent for next-gen automotive user experiences. Luxoft also opened a new office in Bangalore, India, where it plans to quickly ramp its engineer headcount to tackle new opportunities for delivering IT services to financial institutions in the Asia-Pacific region.

Looking forward

However, Luxoft now expects full fiscal-year 2018 revenue in the range of $900 million to $905 million -- down from its previous guidance for "at least $920 million" -- because of lower revenue expectations from two large acquired clients in the telecom and healthcare sectors. Luxoft also reduced its outlook for adjusted EBITDA margin to be in the range of 15% to 15.2%, down from 15.5% to 16.5% previously, which should translate to adjusted earnings per share of $2.77 to $2.85, down from "at least $2.85" previously.

To be fair, management explained that this reduction is primarily the result of Luxoft's conscious decision to de-emphasize its lower-margin, non-core business, which should in turn leave Luxoft better positioned to pursue more attractive high-margin opportunities. 

"Despite this near-term challenge, our confidence in the business remains strong," Loschinin concluded. "We see a number of attractive growth opportunities across our verticals, and we are confident we have the right strategy to further build our long-term growth potential and deliver increasing value to shareholders."

That's fair enough, as it's hard to fault Luxoft management for opting to chase only the most compelling opportunities for profitable growth. So, regardless of whether the market reacts favorably to the news on Wednesday, I think Luxoft investors can take solace in knowing the company is moving with its long-term success in mind.

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