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 Luxoft Pursues Continued Growth in Shift Out of Russia, Ukraine

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PostSubject: Luxoft Pursues Continued Growth in Shift Out of Russia, Ukraine   Sat Mar 24, 2018 7:49 pm

Luxoft Pursues Continued Growth in Shift Out of Russia, Ukraine

09.11.2015
Bloomberg by Elena Popina
Luxoft Holdings Inc., the software developer that has benefited from the slumping Russian and Ukrainian currencies amid an almost two-year conflict in the region, is realigning its operations to be closer to customers in developed markets as it seeks to sustain sales growth.
The shares have surged 87 percent since March 2014, when President Vladimir Putin’s annexation of Crimea touched off an armed conflict in eastern Ukraine. Luxoft, which has most of its programmers in the two countries and makes the majority of its sales in the U.S. and Europe, advanced even as investors pulled out, sending the local currencies tumbling to record lows.
Luxoft, originally a Moscow-based startup, is shifting out of the region and expanding into countries closer to its biggest clients, which include UBS Group AG and Deutsche Bank AG. It has reduced the proportion of employees in Ukraine to 38 percent from 49 percent in March 2014, while cutting Russian-based workers from more than 30 percent to less than 25 percent, Chief Executive Officer Dmitry Loschinin said earlier this year.
Meanwhile, revenue has grown about 30 percent in each quarter, while the company has added new customers including Microsoft Corp. and Credit Suisse Group AG.
"Geopolitical uncertainty created some challenges, which Luxoft used as an opportunity to get closer to its customers," Julia Gordeyeva, senior analyst at Sberbank CIB who rates the stock a buy, said by phone. "Big western names that are so reliant on what your company does, at some point will want to have you closer, which Luxoft realized. When you provide service to big-name companies with big budgets and huge resources and they like the job you’re doing, you have a lot of room for growth."
Luxoft, which has offices in 15 countries from Bulgaria to Mexico and about 10,000 employees, intends to limit its presence in any single region to 25 percent of its workforce while expanding in countries including Poland, Romania and Bulgaria.
The company relies on relatively low-cost labor in developing nations to make its rates more competitive.
While the Zug, Switzerland-based software developer was benefiting from the lower costs as its paid workers in local currencies and made most of its sales in dollars and euros, some customers were concerned about its exposure to Ukraine, once home to about half its programmers, according to Arvind Ramnani, senior analyst at Gordon Haskett Research Advisors LLC. It has relocated more than 700 employees, moving senior management to Switzerland, Great Britain and the U.S., doubling its foothold in Poland while scaling back in Russia and Ukraine.
‘Operationally Challenging’
"Clients were worried about the firm’s ability to execute in the midst of a the Russia-Ukraine conflict," Ramnani, who rates Luxoft the equivalent of hold, said by phone from New York. "While operationally challenging, Luxoft’s ability to keep existing clients happy and signing up new clients is impressive."
The stock has rallied 81 percent in 2015, compared with a 2.6 percent gain in the Bloomberg Russia-US Equity Index. Shares rose 4.8 percent to $69.86 last week in New York.
"The geopolitical uncertainty reminded us that while on the revenue side we’re almost exclusively exposed to the developed market, on our talent side we are entirely exposed to the emerging markets, and emerging markets by definition will always be riskier than developed," Alina Plaia, vice president of global communications at Luxoft, said by phone from New York.
Analyst Ratings
On a scale from 1 to 5, Luxoft has a consensus analyst recommendation of 4.1, equal to the average of 11 global peers, data compiled by Bloomberg show. Its relative strength index hovered at around 60 last week, approaching the level of 70 that some technical analysts see as a signal a security may be poised for a decline.
For Vladimir Bespalov, an analyst at VTB Capital in Moscow who rates the stock sell, the rally this year has been excessive. "Such a high dependence on top three clients for sales skews the risks to the upside," he said by phone.
The company gets about a third of its sales from Deutsche Bank, 21 percent from UBS and 6.7 percent from Harman International Industries Inc, a provider of audio solutions.
Luxoft will probably post a 28 percent gain in sales when it reports fiscal second-quarter earnings on November 10, according to the median of three analysts surveyed by Bloomberg.
That compares with a 32 percent gain in the previous three months.
"There is a lot of potential in Luxoft," Sberbank CIB’s Gordeyeva said. "Now that all the relocation was smooth, there is a good opportunity to become more known in the west, thus increasing customer base and boosting sales."
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