Luxoft’s Strong Start As A Public Company Reflects Growing Interest In Tech Services In Eastern Europe

Central and Eastern Europe (CEE) continues to garner interest from services buyers. Earlier this year, I wrote a report called “A New Dawn For Tech Services In Central And Eastern Europe” that highlighted how the region will become increasingly attractive to companies, as the skills and capabilities to be found there will be ever more important for the next generation of technology engagements. Such engagements will focus on developing software that will empower customers, partners, and employees with context-rich apps, helping them take action in their moment of need — what Forrester calls "systems of engagement."

Six months ago, Luxoft, one of the key providers in the region, announced its IPO. Last week, it released its first half-year results, and so it seemed an opportune time to reflect on both the region and the progress made by Luxoft so far. The highlights of Luxoft’s results are:
 
  • Revenues of $181.4 million for six months to September 30, 2013 (up 25% year-over-year).
  • Second-quarter revenues of $97.7 million compared with $74.1 million for the same period a year earlier.
  • Increased guidance for fiscal year 2014 to $384 million.
 
In reviewing these results, two key points emerge:
 
  1. A focused industry approach has enabled Luxoft to develop its domain expertise. Financial services dominate its revenues (at 57% of the total), with travel, hi-tech, automotive and transport, and telecom predominantly comprising the rest. As a result, Luxoft has been able to develop its domain expertise and in turn invest in IP and solutions highly targeted at these specific industries — for example, it recently announced at Telematics Munich the development of its AllView solution for automotive OEMs.
  2. Domain expertise, investments in IP, and a strong talent pool result in differentiation. Luxoft has been able to make such industry investments because it has scaled back to focus on a few industries where more and more of the business value is coming from software-based products and services. This focused industry approach, its investments in IP and solutions, and its recruiting of the cream of the crop of IT skills in CEE have resulted in a potent mix that allow it to differentiate from its peers. It provides a strong basis for long-term future growth in the changing technology services ecosystem. As additional evidence of this, Luxoft's results also indicate that it has started to decouple headcount from revenue and its revenue per employee remains high (currently $68,000 per delivery employee on an annualized basis).
 
Luxoft has made a strong start in its transition to a public company. But some caution needs to be exercised: Just three large financial services clients dominate its client base, making up more than 60% of its revenues. In addition, while it has developed some interesting front-end mobility skills, these reside in a separate business unit and the lack of integration with its product engineering work may be a future challenge. Six months means Luxoft is still in the early stages of its journey as a public company — so although its stock price has risen significantly since its IPO, the real challenge and proof of its long-term future as a key player in the tech services market will come once it gets into the brutal quarterly grind of meeting market and analyst expectations over the long term. I look forward to watching its progress.

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