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Luxoft Sees Near-Term Weakness After a Challenging Year

Steve Symington, The Motley Fool

Luxoft Holding (NYSE: LXFT) released solid fiscal fourth-quarter 2018 results early Thursday, highlighting sustained double-digit growth outside of its top two accounts and particularly strong showings from clients in the automotive and financial services markets. 

But the software development leader followed with disappointing forward guidance, leaving its shares to decline more than 24% in response. So let's dig in to see exactly what drove Luxoft over the past few months and what investors should be watching in the coming quarters.

Two software engineers working together with multiple monitors displaying source code.

IMAGE SOURCE: GETTY IMAGES.

Luxoft Holding results: The raw numbers

Metric

Fiscal Q4 2018*

Fiscal Q4 2017

Year-Over-Year Growth

GAAP revenue

$232.9 million

$204.1 million

14.1%

GAAP net income

$11.7 million

$13.7 million

(14.8%)

GAAP earnings per diluted share

$0.34

$0.40

(15%)

DATA SOURCE: LUXOFT HOLDING, *FOR THE THREE MONTHS ENDED MARCH 31, 2018.

What happened with Luxoft Holding this quarter?

  • On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation -- net income declined 4.8% to $20.5 million, and fell 6.3% on a per-share basis to $0.59. By comparison, most investors were looking for the same adjusted earnings on slightly lower revenue of $228.8 million. 
  • Adjusted EBITDA increased 0.7% to $29.4 million.
  • Revenue by industry vertical included:
  • Annual revenue per billable engineer increased 10.5% year over year to $84,923.

What management had to say

"Our fourth quarter results were largely in-line with our expectations and marked the end to a year of progress but also continued challenges," stated Luxoft CEO Dmitry Loschinin. "Despite the impact of certain troubled accounts, we continued to execute our strategic mandate of revenue diversification through increased penetration of attractive markets like Automotive and Digital Enterprise, while also identifying incremental value-driven opportunities."

Loschinin also noted that, excluding Luxoft's top two accounts, revenue would have climbed 20.3% year over year, including 37.4% growth from the financial services market. He further credited Luxoft's relative outperformance in the automotive market to their "successful execution and delivery of innovative technologies, solutions, and experiences necessary to enable the mobility revolution."

Looking forward

For the first quarter of fiscal 2019, Luxoft told investors to expect revenue of $210 million to $215 million, the bottom end of which marks slight growth from $209.2 million in last year's fiscal Q1. But even the high end of Luxoft's guidance fell far below consensus estimates for revenue of $238.5 million.

"Based on project timing, seasonality, ramp down of the large Financial Services account and planned expenses related to SG&A optimization," Loschinin explained, "we expect this to be our slowest quarter and for growth to accelerate as we move through fiscal 2019."

Of course, that explains why our near-term-oriented market drove Luxoft shares down so aggressively on Thursday. But longer-term investors can take solace knowing that, if Luxoft is correct in predicting that growth will accelerate as they move through the fiscal year, its fall may prove short-lived. But in the meantime, it's no surprise to see the stock pulling back.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Luxoft Holding. The Motley Fool has a disclosure policy.