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LXFT - Luxoft


zhengmit
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Luxoft is the new breed of outsourcing software company.  The comps are Globant, EPAM or digital arm within Cognizant.  These new breeds bring a new set of skill sets and are going very fast at +20% YoY.  Globant and EPAM trade at 30x while LXFT is down 41% YTD.  LXFT really excels in Financial and Auto segment.  The problem is that LXFT has big client concentration with DB and UBS accounting for 35% of revenue in FY18.  Excluding these two, the other businesses grew 33% YoY in FY18.  DB is in flux and stock got hammered yesterday due to uncertain future there.  I think CSFB has been a bear on the stock.  Wonder if anybody has his latest view.

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i used to own this, but flipped to EPAM. Arkadiy Dobkin is a better operator IMO and the company has a better growth profile. I think they have google, msft, pcln or expedia as clients. EPAM ownership is much cleaner. Headquartered in PA.

 

Luxoft is 51% owned by Anatoly karachinsky and has a dual class structure. It’s now headquartered in Switzerland, but was in moscow earlier. Maybe this is the reason for discount?

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EPAM is a better run company: more diversified client base, better sales forces, more westernized management team (CFO).  LXFT has more Russian touch, but the big discount is more due to the fact that EPS has not grown in 4 years despite revenue increase.  With DB uncertainty, it was hammered.  EPAM trades at +30x P/E and LXFT trades at 16x trough earnings, which is what I see the disconnect.

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  • 4 weeks later...

I agree. I've followed these companies for a few years, and I believe they are competitively advantaged relative to India-based outsourcers, who are facing pressures in various lower-end parts of their business which are being automated away. One example is the increasing use of the cloud (i.e. AWS) to reduce on-premise server testing and maintenance, which often leverages outsourced labor.

 

So, I think the growth path for these businesses is much clearer than other competitors (ex-EPAM which is similar).

 

Valuation also looks compelling if you buy management's argument that they will improve margins from their current depressed levels over time. This seems more likely than not given the long-term margin improvement businesses like CTSH experienced over time as they were growing at 30% rates.

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Anyone have any thoughts on management here, specifically Loschinin? He's a founder-operator type, which is good. That said, even taking into account that English isn't first language, he isn't that great at communicating the business case to shareholders - and it's not from the lack of trying. I can't tell how shareholder friendly he is.

 

Also, lots of stock-based comp, and more capex than I would expect in a "people are our best and only assets" type business.

 

Finally, any thoughts on geopolitical risk here? I believe the largest employee concentration is in Kiev.

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Whatever i am about to say is just my opinion and i can’t back it up with any facts.

 

I don’t think management hasn’t lived up to expectations in terms of managing project pipeline and revenues. One anecdotal example is  EPAM has visibility into billings and revenue upto 90% at the beginning of the year, 95% of revenue visibility for end of quarter. They can predict with higher accuracy what their revs for a quarter are going to be. I think that is a result of better clients and managing project pipeline. I don’t see that kind of confidence in Luxoft. They even cancelled guidance. I am not saying guidance is good, but let’s peel back the layers and say what they still are. They are a staff augmentation company still doing some higher value work.

 

That said, it stock is at a discount. My only thesis is margins return back to 11% while growing at even a low double digit clip should be a good comeback for this stock

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  • 1 month later...

The primary concern i had was it was diversifying away from top 2 quick enough. They bought a few companies trying to get into other industries, but was not that successful, eg. the share crash early this year. So from what i checked, the top 2 is still shrinking, so the question is if they can replace those revenue/profit fast enough. Will see how they report/guide today.

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  • 4 months later...

I've sold as well for my accounts that are LT-gains or tax-deferred. Other accounts have cost basis dates in May, so I may just ride the stock to the deal close. Based on the current price, arbs are not building in a huge premium, so it seems like the deal will get done and waiting a few months to lower taxes seems like a decent risk.

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