Luxoft – Writing the Interface to Growth

Luxoft recently celebrated its second anniversary as a public company with its stock up roughly 250% since the IPO. It also reported over 30% year over year growth for the most recent year.

HfS recently visited the company’s development centers in Kiev and got an inside view into what is driving the company’s success and why this is likely to continue in the medium term.

Luxoft focuses primarily on building and enabling new interfaces tied into legacy systems rather than on backend maintenance and support. It develops proprietary IP as accelerators and thought leadership without any pretense it is going to become a software firm.

Perhaps the service provider’s greatest strength lies in the close partner-like relationships it creates with clients. Repeatedly we learned of engagements that started out with only a dozen dedicated employees to steadily and rapidly expand to a point where they may supply as much as 50% of a client’s core technology staff. We attribute its success to two things. First, Luxoft maintains an inverted staffing pyramid where well over 50% and as much as 85% of the FTEs on any engagement are senior level with advanced degrees or more than 5 years’ experience under its belt. Second, the company is able to build trust in its capability extremely fast bringing in seasoned engineers from the start.

Success has led to some challenges. The service provider has a high concentration of revenues within its top two accounts, Deutsche Bank and UBS, which amounted to 36% and 20% of total revenue in FY 2015. However, Luxoft’s management is committed to reduce this five percentage points by next year and regardless this is a reflection of its success and not of any particular failure.  A more significant challenge is that because of its rapid and mostly organic success, Luxoft has done very little to invest in developing its own sales organization and this could ultimately slow its growth down.

Founded only 15 years ago, Luxoft maintains its entrepreneurial spirit yet management has begun to sow the necessary seeds to mature into a truly global IT services provider. For example, it moved recruiting into its marketing team and established a management mentoring program for bringing the next wave of leaders along.  So while it still faces a few shortfalls such a narrower vertical focus and the need to further build out its UI / UX skills outside of Automotive, we do not believe these are formidable challenges.  Additionally, there are areas where Luxoft leads the way.  Its methodology for contracting agile projects via a fixed priced approach built upon number of story points is relatively unique and forward looking in terms of shifting pricing to IT outcomes and allowing the flexibility required and demanded today.

In short, we see every reason why Luxoft should continue to do well.