PART I
ITEM 3: Key Information
A. Selected Financial Data
The following tables set forth our selected consolidated financial data. You should read the following selected consolidated financial data in conjunction with
"ITEM 5. Operating and Financial Review and Prospects" and our consolidated financial statements and the related notes included elsewhere in this annual report. We have derived the consolidated
statements of income data for the years ended March 31, 2017, 2016, and 2015 and the consolidated balance sheet data as of March 31, 2017 and 2016 from our audited consolidated financial
statements included in "ITEM 18. Financial Statements," which have been prepared in accordance with generally accepted accounting principles in the United States. We have derived the consolidated
statements of income data for the years ended March 31, 2014 and 2013 and the consolidated balance sheet data as of March 31, 2015, 2014 and 2013 from our audited consolidated financial
statements, which are not included in this annual report. Historical results are not indicative of the results to be expected in the future.
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For the years ended March 31,
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2017
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2016
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2015
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2014
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2013
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(in thousands of U.S. dollars, except share and per share amounts)
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Consolidated statements of comprehensive income:
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|
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|
|
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|
|
|
|
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Sales of services
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$
|
785,561
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|
$
|
650,752
|
|
$
|
520,548
|
|
$
|
398,331
|
|
$
|
314,596
|
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Operating expenses
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of services (exclusive of depreciation and amortization)
|
|
|
474,980
|
|
|
379,331
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|
|
293,960
|
|
|
229,537
|
|
|
185,557
|
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Selling, general and administrative expenses
|
|
|
213,723
|
|
|
171,707
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|
|
128,952
|
|
|
95,946
|
|
|
76,911
|
|
Depreciation and amortization
|
|
|
34,847
|
|
|
23,814
|
|
|
16,834
|
|
|
12,944
|
|
|
8,981
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|
(Gain)/ Loss from revaluation of contingent liability
|
|
|
(10,031
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)
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|
(2,511
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)
|
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1,166
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|
|
922
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|
|
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Impairment loss
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5,287
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|
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|
|
|
|
|
|
|
|
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Operating income
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|
66,755
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78,411
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79,636
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58,982
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43,147
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Other income and expenses
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Interest expense, net
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(81
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)
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121
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(543
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)
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(1,508
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)
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(1,277
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)
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Other gain (loss), net
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5,119
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3,947
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1,430
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|
557
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(1
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)
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Gain (loss) from foreign currency exchange contract
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1,314
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|
|
261
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|
|
1,321
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|
(1,134
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)
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(621
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)
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Net foreign exchange (loss)
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(2,604
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)
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(381
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)
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(8,867
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)
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(961
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)
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(66
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)
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Income before income taxes
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70,503
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|
82,359
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72,977
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55,936
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41,182
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Income tax expense
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(7,865
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)
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(12,108
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)
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(9,828
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)
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(4,706
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)
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(3,645
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)
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Income from continuing operations
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62,638
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70,251
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63,149
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51,230
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37,537
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|
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|
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Income/(loss) from discontinued operations
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Net income
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$
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62,638
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$
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70,251
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$
|
63,149
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$
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51,230
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$
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37,537
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Net income attributable to the non-controlling interest
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Net income attributable to the Group
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$
|
62,638
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$
|
70,251
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|
$
|
63,149
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|
$
|
51,230
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|
$
|
37,537
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|
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Actual net income per ordinary share and pro forma per Class A and Class B ordinary shares(1):
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Basic
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$
|
1.88
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$
|
2.13
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$
|
1.93
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$
|
1.59
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$
|
1.27
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Diluted
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$
|
1.84
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|
$
|
2.06
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|
$
|
1.91
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|
$
|
1.59
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|
$
|
1.24
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Actual weighted average number of Class A and Class B ordinary shares
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Basic
|
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|
33,280,771
|
|
|
32,949,807
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|
|
32,790,711
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|
|
32,129,355
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|
29,662,696
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|
|
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Diluted
|
|
|
34,000,674
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|
|
34,088,214
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|
|
33,111,753
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|
|
32,242,488
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|
|
30,235,884
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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Dividends declared per share
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$
|
|
|
$
|
|
|
$
|
|
|
$
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|
|
$
|
0.91
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
1
Table of Contents
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|
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As of March 31,
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|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
|
|
(in thousands)
|
|
Consolidated Statements of Financial Positions Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Cash and cash equivalents
|
|
$
|
109,558
|
|
$
|
108,545
|
|
$
|
45,593
|
|
$
|
37,503
|
|
$
|
4,499
|
|
Work-in-progress
|
|
|
2,805
|
|
|
1,595
|
|
|
1,449
|
|
|
4,720
|
|
|
3,478
|
|
Working capital(2)
|
|
|
177,812
|
|
|
195,005
|
|
|
125,958
|
|
|
65,682
|
|
|
46,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
547,207
|
|
|
394,542
|
|
|
306,569
|
|
|
217,697
|
|
|
155,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings(3)
|
|
|
1,055
|
|
|
817
|
|
|
1,401
|
|
|
20,582
|
|
|
16,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
160,389
|
|
|
92,809
|
|
|
88,445
|
|
|
68,080
|
|
|
59,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
386,818
|
|
$
|
301,733
|
|
$
|
218,124
|
|
$
|
149,617
|
|
$
|
95,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See
note 19 to our annual consolidated financial statements included elsewhere in this annual report for an explanation of the number of shares used in
calculating basic and diluted earnings per share.
-
(2)
-
Working
capital is defined as total current assets minus total current liabilities, adjusted for net initial public offering proceeds of approximately
$31.0 million in 2013.
-
(3)
-
Includes
short-term and long-term borrowings, loans from related parties and capital lease obligations.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for Offer and Use of Proceeds
Not applicable.
D. Risk Factors
An investment in our Class A ordinary shares involves a high degree of risk. You should consider carefully the risks described
below, together with financial and other information contained in this annual report and in our other filings with the United States Securities and Exchange Commission (the "SEC"). If any of the
following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. In that event, the trading price of our Class A ordinary
shares would likely decline and you might lose all or part of your investment. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially
differ from those anticipated in these forward-looking statements, as a result of certain important factors including the risks described below and elsewhere in this report and our other SEC filings.
See "Preliminary Notes
Special Note Regarding Forward-Looking Statements."
Risks related to our business and our industry
We generate a significant portion of our sales of services, and anticipate deriving a large portion of our
sales of products, from a limited number of clients, and any significant loss of business from these clients or failure by such clients to pay for our services would materially adversely affect our
results of operations.
We are dependent on our key clients for a significant portion of our sales of services. Our largest clients, Deutsche Bank and UBS, together
accounted for 56.4%, 52.3% and 43.3% of our sales of
2
Table of Contents
services
in the fiscal years ended March 31, 2015, 2016 and 2017, respectively. In the aggregate, our ten largest clients accounted for 80.1%, 73.7% and 66.0% of our sales of services in the
fiscal years ended March 31, 2015, 2016 and 2017, respectively.
Our
ability to maintain close relationships with these and other major clients is essential to the growth and profitability of our business. We have entered into framework agreements
with each of our key clients, including Deutsche Bank and UBS, which govern substantially all of our arrangements for the provision of services to such clients. These agreements, however, do not grant
us any exclusivity and do
not contain any minimum service conditions. Further, although our framework agreements with Deutsche Bank and UBS entitle us to compensation for any services already rendered by us if prematurely
terminated, they may be terminated by Deutsche Bank and UBS, respectively, generally upon prior written notice of between one and six months' without any penalty. In addition, Deutsche Bank may
terminate any or all of the individual service contracts governed by the master framework agreement if the master framework agreement is terminated for cause or for any other reason. Accordingly, we
cannot provide any assurance that we will succeed in maintaining or growing our business with sales of services from our largest clients.
Our
reliance on any individual client may give that client a certain degree of pricing leverage against us as we negotiate contracts and terms of service. In addition, a number of other
factors outside our control could cause the loss of or reduction in business or sales of services from any client. These factors may include, among others, a client's corporate restructuring or
insolvency, pricing pressure or changes to its outsourcing strategy and budget. A client may decide to reduce spending on technology services or sourcing from us, or shift such spending to one of our
competitors, due to a challenging economic environment, a change of strategy in outsourcing services or other internal or external factors relating to its business.
Furthermore,
as we expand our services and product offerings to clients, we run the risk of approaching our clients' maximum budget allowance for spending on IT services and software
products. If our clients are unable or unwilling to devote more of their IT or overall budget to paying for our services, we risk being unable to increase our sales of services from each of these
clients.
The
loss of any of our major clients, or a significant decrease in the volume of work they outsource to us or the price at which we sell our services to them, would materially adversely
affect our sales of services and thus our results of operations.
We generate a significant portion of our sales of services, and anticipate deriving a material portion of our
sales of products, from clients primarily located in the United States and Europe. Deterioration of economic conditions in the United States or Europe could result in reduced sales of our services and
thus adversely affect our results of operations.
We derive a significant portion of our sales of services from clients in the United States and Europe. If the U.S. or European economies weaken
or slow, pricing for our services may be depressed and our clients may significantly reduce or postpone their technology spending which may in turn lower the demand for our services. Furthermore,
clients in affected regions could terminate their contracts with us, generally by giving between 30 days' and six months' notice, or choose not to renew their contracts with us. Such actions by
our clients would negatively affect our sales of services and profitability.
If
we are unable to successfully anticipate changing economic and other conditions affecting the markets in which we operate, we may be unable to effectively plan for or respond to those
changes, and our results of operations could be materially adversely affected.
3
Table of Contents
Rapid growth may strain our limited resources, and a failure to manage this growth could have a material
adverse effect on the quality of our services and client support.
We have recently experienced rapid growth and significantly expanded our business. Our sales of services grew from $314.6 million in the
fiscal year ended March 31, 2013 to $785.6 million for the fiscal year ended March 31, 2017. As of March 31, 2017, we had 12,766 personnel, as compared to 11,087 personnel
as of March 31, 2016. Our rapid growth has placed, and we expect it to continue to place, significant demands on our management and our administrative, operational and financial infrastructure.
In addition, since the fiscal year ended March 31, 2015, we have been implementing our Global Upgrade Program, which is aimed at increasing the share of our operations in the EU, the U.K., Asia
Pacific and North America. The Global Upgrade Program has resulted in our expansion in Central and Eastern Europe and is expected to facilitate our expansion into new markets. Continued expansion
increases the challenges we face in offering our services in the following areas:
-
-
recruiting and retaining sufficiently skilled IT professionals, as well as marketing and management personnel;
-
-
training and supervising our personnel to maintain our high standards of quality;
-
-
borrowing adequate short-term funds to finance rapid growth;
-
-
developing financial and management controls; and
-
-
preserving our culture and values and our entrepreneurial environment.
If
we are unable to manage our rapid growth effectively, or if we are unable to implement our Global Upgrade Program successfully or promptly, the quality of our services and client
support could suffer, and productivity and results of operations could be materially adversely affected.
We derive a large portion of our sales of services, and expect that we will derive a large portion of our
sales of products, from clients who operate in a limited number of industries. While this gives us deep expertise in those industries, it increases our exposure to adverse conditions in any of them.
We derive a large portion of our sales of services from clients who operate in a limited number of industries. In the fiscal year ended
March 31, 2017, we derived 61.6%, 14.1% and 8.9% of our sales of services from clients operating in the financial services, automotive and transport, and telecom industries, respectively.
Furthermore, we anticipate our product sales will be largely to clients in the same industries. Our business and growth depend to a large extent on continued demand for our services from clients and
potential clients in these industries. Demand for our services and products in general, as well as in any industry specifically, could be affected by multiple factors outside of our control, including
a decrease in growth or growth prospects of the industry, a slowdown or reversal of the trend to outsource technological applications and software development services generally, or consolidation
within the industry. Clients in these affected industries could terminate their contracts with us, generally by giving between 30 days and six months' notice, or choose not to renew their
contracts with us. In addition, serving a major client within a particular industry may restrict our ability to enter into engagements with competitors of that client, and certain of our client
contracts prohibit certain of our employees from working on engagements with our clients' competitors. As businesses within these industries, in particular, the financial services industry, continue
to limit the number of vendors from whom they buy products and services, we may face challenges in gaining new clients or keeping the existing clients. Any significant decrease in demand for our
services by clients in these industries, or other industries from which we derive significant sales of services in the future, may have a material adverse effect on our results of operations.
In
particular, an economic slowdown or financial crisis could result in decreased IT spending by institutions in the financial services industry and/or project delays, making it more
difficult for us to
4
Table of Contents
obtain
new clients, sell our services and products or maintain the current level of demand from our existing clients in this industry. Because the financial services industry is our largest vertical,
such a slowdown could materially affect our revenues and thus our results of operations.
Credit default or a drop in the credit ratings of certain sovereigns or financial institutions could lead to
weakened economic conditions in countries where our clients face exposure, thus adversely affecting our clients' ability to engage in business with us and materially adversely impacting our financial
condition and results of operations.
The large sovereign debts and/or fiscal deficits of a number of European countries and the United States have raised concerns regarding the
financial condition of financial institutions, insurers and other corporations:
-
-
located in these countries;
-
-
that have direct or indirect exposure to these countries; and/or
-
-
whose banks, counterparties, custodians, clients, service providers, sources of funding and/or suppliers have direct or indirect exposure to
these countries.
The
default, or a significant decline in the credit rating, of one or more sovereigns or financial institutions could cause severe stress in the financial system generally and could
adversely affect the businesses and economic condition and prospects of our clients (some of the largest of which are European banks), counterparties, suppliers or creditors, directly or indirectly,
in ways difficult to
predict. The impact of these conditions could be detrimental to us and could materially adversely affect our business, operations and profitability.
We operate in a highly competitive environment and may not be able to compete successfully.
The IT industry in general, and the software development market in particular, is highly competitive, and we expect competition not only to
persist but also to intensify. We believe that the principal competitive factors in our markets are the quality of the services offered, breadth and depth of service offerings, reputation and track
record, industry expertise, effective personnel recruiting, training and retention, marketing and sales skills, scalability of infrastructure, and ability to address clients' timing requirements and
price.
We
face competition from offshore technology service providers in outsourcing destinations with low wage costs such as India, as well as competition from large global consulting and
outsourcing firms and in-house IT departments of large corporations. There is no assurance that we will not face additional competition from new market entrants. We do not enter into exclusive
services arrangements with any of our clients, and as a result, our sales of services could suffer to the extent that clients could obtain services from other competing application and software
engineering outsourcing services. Clients may prefer application and software engineering outsourcing service providers that have more locations or that are based in countries that are more
cost-competitive or more politically and economically stable than the countries in which we operate.
Some
of our current and potential competitors may benefit from substantially greater financial, marketing, or technical resources. Our current and potential competitors may also be able
to respond more quickly to new technologies or processes and changes in client demands; may be able to devote greater resources toward the development, promotion and sale of their services than we
can; and may also make strategic acquisitions or establish cooperative relationships among themselves or with third parties that increase their ability to address client needs. We cannot give any
assurance that we will be able to retain our clients while competing against such competitors. Increased competition, our inability to compete successfully, pricing pressures and resulting loss of
clients could materially adversely affect our business.
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Our computer networks may be vulnerable to security risks that could disrupt our services and cause us to
incur losses or liabilities that could adversely affect our business.
Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses, worms, malicious applications and other
security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information,
including personally identifiable information, or cause interruptions or malfunctions in our operations. Although we intend to continue to implement security measures, computer attacks or disruptions
may jeopardize the security of information stored in and transmitted through our computer systems. Actual or perceived concerns that our systems may be vulnerable to such attacks or disruptions may
deter our clients from using our solutions or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate
problems caused by these breaches.
Data
networks are also vulnerable to attacks, unauthorized access and disruptions. For example, in a number of public networks, hackers have bypassed firewalls and misappropriated
confidential information, including personally identifiable information. It is possible that, despite existing safeguards, an employee could misappropriate our clients' proprietary information or
data, exposing us to a risk of loss or litigation and possible liability. Losses or liabilities that are incurred as a result of any of the foregoing could adversely affect our business.
If we cause disruptions to our clients' businesses or provide inadequate service, our clients may have claims
for substantial damages against us, which could cause us to lose clients, have a negative effect on our reputation and adversely affect our results of operations.
Many of our engagements involve projects that are critical to the operations of our clients' businesses and provide benefits to our clients that
may be difficult to quantify. Our software development services involve a high degree of technological complexity, have unique specifications and could contain design defects or software errors that
our quality assurance procedure may fail to detect and correct.
Errors
or defects may result in the loss of current clients, failure to attract new clients, diversion of development resources and an increase in support or service costs. Furthermore,
any failure in a client's system or any breach of security could disrupt the client's business and could result in a claim for substantial damages against us, regardless of our responsibility for such
failure, if such failure is caused by a breach of our contract obligations under any agreements with clients. In addition, any such failures or errors could seriously damage our reputation and
materially affect our ability to attract new business.
Many
of our contracts contain limitations on liability capped either at between six months and one year of payments under the contract or at the full service contract price, and many of
our contracts disclaim any warranties of merchantability and sell our services "as-is." However, not all client contracts contain liability caps, and these limitations on liability may not apply in
all circumstances, may be unenforceable in some cases or may be insufficient to protect us from liability for damages, direct or consequential. Any substantial liability that we incur as a result of
any of the above could have a material adverse effect on our business and results of operations.
Our insurance may be inadequate to protect us against our losses.
Although we believe our insurance coverage is customary for the jurisdictions in which we operate, insurance for our operations in Central and
Eastern Europe ("CEE") does not cover all the risks that a company of a similar size and nature operating in a more economically developed country could insure. For example, we do not have coverage
for business interruption or loss of key management personnel. In addition, we only have limited product liability insurance to the extent required by our
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client
contracts. We do not maintain separate funds or otherwise set aside reserves to cover such losses or third-party claims. If any such uninsured event were to occur, we might incur substantial
costs and diversion of resources, which, in turn, could have a material adverse effect on our results of operations.
Our success depends on our ability to continue to attract new personnel, and retain and motivate our existing
personnel.
Our ability to maintain and renew existing engagements and obtain new business is critical to our success and will largely depend on our ability
to attract, train and retain skilled professionals, including experienced IT professionals and other professionals, which enables us to keep pace with growing demands for outsourcing, evolving
industry standards and changing client preferences.
We
rely heavily on maintaining a workforce of skilled professionals. Because our business model does not provide for the hiring and training of a large number of junior personnel, we
must depend on lateral hires to provide us with skilled professionals. Competition for skilled professionals in the markets in which we operate can be intense, and, accordingly, we may not be able to
retain or hire all of the professionals necessary to meet our ongoing and future business needs. If our competitors are able to increase the educational level of their workforce, or if clients and
prospective clients become more price-sensitive and choose lower-cost suppliers that have a cheaper labor force, we may lose our competitive advantage notwithstanding the relatively high educational
level of our workforce. In addition, any reductions in headcount for economic or business reasons, however temporary, could negatively affect our reputation as an employer and our ability to hire
qualified professionals to meet our business requirements.
Attrition
rates among our employees were 10.5%, 10.3% and 12.7% for the fiscal years ended March 31, 2015, 2016 and 2017, respectively. We define "attrition" as the total number
of personnel with more than six months of work experience in the Company, who have left the Company during the reporting period, divided by the total number of personnel at the end of the reporting
period, net of employees who have left on the last day of the period. We believe that our competitors calculate attrition based on the same principles, although their methodology may differ slightly
from ours. We may encounter higher attrition rates in the future. A significant increase in the attrition rate among professionals with specialized skills could decrease our operating efficiency and
productivity and could lead to a decline in demand for our services. The competition for highly-skilled professionals may require us to increase salaries, and we may be unable to pass on all these
increased costs to our clients. These factors may, as a result, have a material adverse effect on our profitability and results of operations.
Wage inflation in countries where our delivery centers are located may adversely affect our financial
condition and results of operations.
We operate delivery centers in Russia, Ukraine, Romania, Poland, Bulgaria and Vietnam where wage costs have historically been significantly
lower than wage costs in the United States and Western Europe for comparably skilled professionals. Wages are our most significant operating expense, and wage increases in these countries may prevent
us from sustaining this competitive advantage internationally and may negatively affect our profitability. Russia and Ukraine use inflation as measured by the consumer price index, as a proxy for wage
inflation in official statistics. However, we believe that wage inflation rates for the IT industry can be significantly higher than overall wage inflation rates within each of these countries. We may
need to increase the levels of employee compensation more rapidly than in the past to remain competitive, and we may not be able to pass on these increased costs to our clients. Unless we are able to
continue to increase the efficiency and productivity of our employees as well as the prices we can charge for our services, wage inflation may materially adversely affect our financial condition and
results of operations.
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Fluctuations in currency exchange rates and increased inflation could materially adversely affect our
financial condition and results of operations.
We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency exchange rates. In the fiscal year
ended March 31, 2017, 56.5% of our sales were denominated in U.S. dollars and 28.3% were denominated in euros, and 12.7% of our expenses were denominated in Polish zloty and 12.5% in Russian
rubles. As a result, weakening of the euro against U.S. dollar, as well as strengthening of the Russian ruble and Polish zloty relative to the U.S. dollar, are significant short-term risks to our
financial performance. The Russian ruble-to-U.S. dollar and euro-to-U.S. dollar exchange rates have been volatile in the past few years as a result of instability of the global financial markets. Any
further significant fluctuations in currency exchange rates may have a material impact on our business.
In
addition, economies in CEE countries such as Russia and Ukraine have periodically experienced high rates of inflation. Periods of higher inflation may slow economic growth in those
countries. As a
substantial portion of our expenses are denominated in Russian rubles, the relative movement of inflation can significantly affect our results of operations by increasing some of our costs and
expenses, including wages, rents, leases and employee benefit payments, which we may not be able to pass on to our clients and, as a result, may reduce our profitability and materially adversely
affect our business. Inflationary pressures could also slow economic growth in the applicable countries and limit our ability to access financial markets and take counter-inflationary measures, which
may harm our financial condition and results of operations or materially adversely affect the market price of our securities.
The decision by the United Kingdom to exit from the European Union could materially adversely affect our
business and results of operations.
In a referendum held on June 23, 2016, the people of the United Kingdom voted in favor of the United Kingdom withdrawing from the
European Union ("Brexit") and on March 29, 2017, the United Kingdom formally notified the European Union of its intention to withdraw from the European Union. A two-year period has now
commenced during which the United Kingdom and the European Union will negotiate the future terms of the United Kingdom's relationship with the European Union, including, among other things, the terms
of trade and immigration between the United Kingdom and the European Union. The effects of Brexit will depend on any agreements the United Kingdom reaches to retain access to EU markets either during
a transitional period or more permanently.
We
have two UK subsidiaries, which together employ approximately 380 people, and have operations across the European Union. As a result, we face risks associated with the political and
economic uncertainty and consequences that have flowed, and may continue to flow, from Brexit.
The
announcement of Brexit has caused significant volatility in global financial markets and currency exchange rate fluctuations that have resulted in the strengthening of the U.S.
dollar against the British pound and the euro. The uncertainty in the financial markets created by Brexit has caused, and may continue to cause, the price of our ordinary shares to decline, and may
also cause our clients to closely monitor their costs and reduce their spending budget on our services. In addition, the strengthening of the U.S. dollar relative to the British pound and the euro may
adversely affect our results of operations in a number of ways, including:
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Our sales are denominated in both the U.S. dollar and currencies other than U.S. dollars, including the euro and the British pound. The
depreciation of the euro and the British pound relative to the U.S. dollar may impair the purchasing power of our European clients and could cause clients to cancel contracts or default on payment;
and
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We translate sales and other results denominated in foreign currency into U.S. dollars in the preparation of our financial statements. During
periods of a strengthening dollar, our reported
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For
more information, see "Risks related to our business and our industryFluctuations in currency exchange rates and increased inflation could materially adversely affect
our financial condition and results of operations."
In
addition, because a significant portion of the regulatory framework in the United Kingdom is derived from EU directives and regulations, Brexit could materially change the regulatory
regime applicable to our operations and our clients' operations as the United Kingdom determines which EU directives and regulations to replace or replicate. In particular, the European Union has
implemented various regulations relating to the financial services industry that apply to all member states. Because we generate a significant portion of our sales from clients in the financial
services industry, any decision by the United Kingdom to adopt different or conflicting laws could negatively affect our clients' businesses, which in turn could adversely impact our financial
condition and results of operations.
Although
the long-term effects of Brexit will depend on any agreements the United Kingdom makes to retain access to the EU markets, the United Kingdom could lose access to the single EU
market, including the single market for financial services, and to the global trade deals negotiated by the European Union on behalf of its members, which may materially harm the UK financial services
industry and increase trade barriers, both of which could adversely affect our results of operations. For a company with UK subsidiaries and operations across Europe, such as us, Brexit could result
in adverse changes in applicable tax benefits or liabilities in various jurisdictions within and outside EU, reconsideration of indirect tax rules without EU VAT Directive, restrictions on the
movement of capital or sales of services, and limitations on the mobility of our personnel. Any of these effects of Brexit, among others, could materially adversely affect our business, results of
operations and financial condition.
Significant political or regulatory developments, such as those stemming from the recent change of the
presidential administration in the U.S. could have a materially adverse effect on us.
In the United States, the new presidential administration expressed support for and may implement greater restrictions on free trade and
increases tariffs on goods imported into the United States, as well as a comprehensive tax reform, including in corporate and income taxation. While we cannot predict whether quotas, duties, tariffs,
taxes or other similar restrictions will be imposed by the United States or other countries upon the import or export of our products in the future, given our significant sales operations in the U.S.,
changes in U.S. political, regulatory and economic conditions or in its policies governing international trade and foreign investment in the U.S. could materially and adversely affect our business.
Our competitive position and future prospects depend on the expertise of members of our senior management
team, and our business may be severely disrupted if we lose their services.
Our business is dependent on retaining the services of certain key members of the management team who have extensive experience in the IT
industry. If a key member of the management team is unable or unwilling to continue in his or her present position, our business operations could be disrupted, and we may not be able to replace such a
person easily, or at all. In addition, the number of qualified managerial personnel in the primary jurisdictions in which we operate is limited, and competition for the services of such persons in our
industry is intense. While we have entered into employment contracts with our senior managers and have provided incentives for them to remain with us, including monetary bonuses and share-based
compensation, we cannot guarantee that we will retain their services. We currently do not maintain insurance against any damage that may be incurred in case of the loss or dismissal of our key
specialists or managers.
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If
any of our key personnel, including senior management and business development managers, joins a competitor or forms a competing company, we may lose clients, suppliers,
knowhow and key technology professionals and staff members to them, and our sales of services may be materially adversely affected. Such movement by key personnel could also result in unauthorized
disclosure or use of our technical knowledge, practices or procedures, which may materially adversely affect our competitive position and, consequently, our business.
Our ability to generate and retain business depends on our reputation in the marketplace.
Because many of our specific client engagements involve unique services, our corporate reputation is a significant factor in our clients'
evaluation of whether to engage our services and in our potential and existing employees' decision to join and remain at our Company. However, our corporate reputation is susceptible to damage by
actions or statements made by current or former clients, competitors, vendors, employees, adversaries, government regulators and members of the investment community and the media, irrespective of the
accuracy or the veracity of the information on which such actions or statements are based. There is a risk that negative information about us, even if based on false rumor or misunderstanding, could
adversely affect our business. In particular, damage to our reputation could be difficult and time-consuming to repair, could make potential or existing clients reluctant to select us for new
engagements and could materially adversely affect our recruitment and retention efforts. Damage to our reputation could also reduce the value and effectiveness of the Luxoft brand name and could
reduce investor confidence in us. Our inability to generate or retain business as a result of damage to our reputation could materially adversely affect our business.
If we do not succeed in quickly assimilating new technologies and rapidly changing technologies,
methodologies and evolving industry standards, our business may be materially adversely affected.
The IT industry is subject to rapid and significant changes in technology, methodologies and evolving industry standards. Our clients rely on us
to continue to anticipate and provide them with the most innovative technologies on the market. Our future success will to a large extent depend on our ability to quickly acquire and assimilate
cutting edge technologies, which we can then use to develop our clients' systems. Development and introduction of new services and products involve a significant commitment of time and resources and
are subject to a number of risks and challenges, including:
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difficulty or cost in ensuring that some features of our software work effectively and securely over the Internet or with new or changed
operating systems;
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difficulty or cost in developing and updating our software and services quickly enough to meet our clients' needs and to keep pace with
business, evolving industry standards, methodologies, regulatory and other developments in the industries where our clients operate; and
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difficulty or cost in maintaining a high level of quality as we implement new technologies and methodologies.
We
may not be successful in anticipating or responding to these developments in a timely manner, or if we do respond, the services, technologies or methodologies we develop or implement
may not be successful in the marketplace. Further, products, services, technologies or methodologies that are developed by our competitors may render our services and products non-competitive or
obsolete. Our failure to enhance our existing services and to develop and introduce new services and products in line with the developments in technology, methodologies and standards in the IT
industry that will promptly address the needs of our clients could cause us to lose clients, and materially adversely affect our business.
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Our profitability could suffer if we are not able to manage large and complex projects.
Our profitability and operating results are dependent on the scale of our projects and the prices we are able to charge for our services. The
challenges of managing larger and more complex projects include:
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maintaining high-quality control and process execution standards;
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maintaining planned resource utilization rates on a consistent basis;
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maintaining productivity levels and implementing necessary process improvements;
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controlling project costs;
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maintaining close client contact and high levels of client satisfaction;
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recruiting and retaining sufficient numbers of skilled IT professionals; and
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maintaining effective client relationships.
In
addition, large and complex projects may involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or
delay additional planned engagements. Such cancellations or delays may make it difficult to plan our project resource requirements, and may result in lower profitability levels than we anticipated
upon commencing engagements.
Our profitability could suffer if we fail to maintain favorable pricing for our services.
The pricing of our services is affected by a number of factors, including:
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our clients' perception of our ability to add value through our services;
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our competitors' pricing policies;
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bid practices of clients and their use of third-party advisors;
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our ability to charge premium prices when justified by market demand or the type of service;
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our large clients' pricing leverage; and
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general economic conditions.
If
we are unable to maintain favorable pricing for our services, our profitability could suffer.
If we are unable to collect our receivables from, or bill our unbilled services to, our clients, our results
of operations and cash flows could be materially adversely affected.
Our business depends on our ability to obtain payment from our clients of the amounts they owe us for work performed. We usually bill and
collect such amounts on relatively short cycles. We maintain allowances for doubtful accounts. Actual losses on client balances could differ from those that we currently anticipate and, as a result,
we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. Weak macroeconomic
conditions and related turmoil in the global financial system could also result in financial difficulties, including limited access to the credit markets, insolvency, or bankruptcy for our clients,
and, as a result, could cause clients to delay payments, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations. In
addition, some of our clients may delay payments due to changes in internal payment procedures driven by rules and regulations these clients are subject to. Timely collection of client balances also
depends on our ability to complete our contractual commitments and bill and collect our contracted sales of services. If we are unable to meet our contractual requirements and if we experience an
increase in the time to bill and collect for our
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services,
we might be unable to collect our client balances or experience delays in collection. If this occurs, our results of operations and cash flows could be materially adversely affected.
Our sales of services, operating results or profitability may experience significant variability and our past
results may not be indicative of our future performance.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating
results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.
Factors
that are likely to cause these variations include:
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the number, timing, scope and contractual terms of projects in which we are engaged;
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delays in project commencement or staffing delays due to difficulty in assigning appropriately skilled or experienced professionals;
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the accuracy of estimates on the resources, time and fees required to complete fixed price projects and costs incurred in the performance of
each project;
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inability to maintain high employee utilization levels;
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changes in pricing in response to client demand and competitive pressures;
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changes in the allocation of onsite and offshore staffing;
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the business decisions of our clients regarding the use of our services;
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the ability to further grow sales of services from existing clients;
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the available leadership and senior technical resources compared to junior engineering resources staffed on each project;
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seasonal trends and the budget and work cycles of our clients;
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delays or difficulties in expanding our operational facilities or infrastructure;
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our ability to estimate costs under fixed price contracts;
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employee wage levels and increases in compensation costs, including timing of promotions and annual pay increases;
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unanticipated contract or project terminations;
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the timing of collection of accounts receivable;
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our ability to manage risk through our contracts;
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the continuing financial stability of our clients; and
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general economic conditions.
Based
upon all of the factors described above, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors.
We have incurred, and may continue to incur, significant share-based compensation expenses which could
adversely impact our net income.
We have granted shares and share-based instruments under our stock option plan, as a result of which we have recorded $29.0 million,
$17.7 million, $5.8 million, $1.4 million, and $5.5 million in share-based compensation expenses for the fiscal years ended March 31, 2017, 2016, 2015, 2014 and
2013, respectively.
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U.S. GAAP
prescribes how we account for share-based compensation. U.S. GAAP requires us to recognize share-based compensation as a compensation expense in the statement of
comprehensive income generally based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide
service in exchange for the equity award. Such expenses could adversely impact our results of operations or the price of our Class A ordinary shares. If we do not grant equity awards, or if we
reduce the number of equity awards we grant, we may not be able to attract and retain key personnel. If we adopt additional equity incentive plans in the future in order to attract and retain key
personnel, the expenses associated with such additional equity awards could materially adversely affect our results of operations.
We may be subject to third-party claims of intellectual property infringement that could be time-consuming
and costly to defend.
Our success largely depends on our ability to use and develop our technology, tools, code, methodologies and services, which might also require
us to utilize the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. All intellectual property rights created by our employees and contractors
are transferred to us subject to local laws and regulations. Typically, we transfer to our clients all of the intellectual property rights to the software we develop for them within the scope of our
custom software development and software engineering
arrangement, without retaining any rights for ourselves. In developing software for our clients we use third-party environment software under separate license agreements, or, if requested by clients,
we may incorporate third-party software into our software development for them. In these cases, we acquire all necessary licenses for such software once we reach a preliminary agreement with our
clients.
Following
the software industry trend of making an increasing use of open source software in its development work, we incorporate open source technology in our services, which may expose
us to liability and have a material impact on our software development services and sales. The open source license may require that the software code in those components or the software into which
they are integrated be freely accessible under open source terms. There is a possibility that third-party claims may require us to disclose our own source code to the public, to make the same freely
accessible under open source terms. Any such requirement to disclose our source code or other confidential information related to our work product could materially adversely affect our competitive
position, results of business operations, financial condition and client relationships.
Claims
that we have infringed the intellectual property rights of others may be asserted against us in the future. For example, we may be unaware of intellectual property registrations
or applications relating to our services that may give rise to potential infringement claims against us. Our contracts may be deemed to result in the assignment to our clients of the rights to any
developments or improvements in our proprietary delivery platform, software development tools, or residual know-how developed by us during the course of our engagements. Such an interpretation may
give rise to a potential claim that our product improvements or residual know-how were previously assigned to our client and can no longer be used by us on behalf of ourselves or other clients, or
subject us to liability for infringement of our client's intellectual property rights. There may also be technologies licensed to and relied on by us that are subject to infringement or other
corresponding allegations or claims by third parties which may damage our ability to rely on such technologies.
Further,
our current and former employees and/or independent contractors could challenge our exclusive rights in the software they have developed in the course of their employment or
engagement. In Russia and certain other countries in which we operate, (a) where intellectual property was created by an employee of a company as part of their employment relationship, the
respective employee retains authorship of such intellectual property, while the employer, unless otherwise provided in the employment agreement, is deemed to own the exclusive rights to such
intellectual property, and (b) where an engaged specialized contractor creates the intellectual property by contract with the client,
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the
latter is by default the holder of exclusive rights to such intellectual property, unless the contract provides otherwise. However, in either case, the authors, regardless of whether they were
employees of the company or of any of its contractors (as the case may be), may retain authorship and should be paid consideration for the intellectual property work performed. In the case of
intellectual property work created by an employee during his/her employment, the employer may be required to satisfy
additional legal requirements in order to make further use or dispose of such intellectual property. Courts have been inconsistent in their approach to enforcing such applicable legal requirements. As
a result, there can be no guarantee that we would be successful in defending against any claim by our current or former employees or contractors challenging our exclusive rights over the use and
transfer of works that the respective employees and contractors created or requesting additional compensation for such works.
Parties
making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology containing the allegedly infringing intellectual
property.
We
may also be subject to litigation involving claims of patent infringement or violation of other intellectual property rights of third parties. Furthermore, most of our client
contracts require us to indemnify the client in these circumstances for any damages and expenses the client incurs in defending any such claims by third parties, and we may be required to indemnify
the client even if the claim by the third party against our client is without merit or is dismissed.
If
we fail to defend ourselves and our clients against such claims, our reputation as well as our financial condition may be adversely affected.
We may not be successful in protecting our intellectual property rights, including our unpatented proprietary
knowhow and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others.
We rely on unpatented proprietary know-how and trade secrets and employ commercially reasonable methods, including confidentiality agreements
with employees and consultants, to protect our know-how and trade secrets. However, these methods and our patents and trademarks may not afford complete protection and there can be no assurance that
others will not independently develop the knowhow and trade secrets or develop better production methods than us. Further, we may not be able to deter current and former employees, contractors and
other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use our information and
proprietary technology without authorization or otherwise infringe on our intellectual property rights. Additionally, in the future we may develop and license trade secrets and similar proprietary
rights to third parties. Third parties may take actions that could materially adversely affect our rights or the value of our intellectual property, similar proprietary rights or reputation. In the
future, we may also rely on litigation to enforce our intellectual property rights and contractual rights and, if not successful, we may not be able to protect the value of our intellectual property.
Furthermore, no assurance can be given that we will not be subject to claims asserting the infringement of the intellectual property rights of third parties seeking damages, the payment of royalties
or licensing fees and/or injunctions against the sale of our products. Any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations
regardless of its outcome.
We may be liable to our clients for damages caused by violations of intellectual property rights and the
disclosure of other confidential information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient to cover these damages.
We often have access to sensitive or confidential client information, including personally identifiable information. The protection of our
clients' intellectual property rights and other
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confidential
information, including personally identifiable information of our clients, is particularly important for us since our operations are mainly based in CEE countries. CEE countries have not
traditionally enforced intellectual property protection to the same extent as countries such as the United States. To protect proprietary information and other intellectual property, we require our
employees, independent contractors, vendors and clients to enter into written confidentiality agreements with us.
Despite
measures we take to protect the intellectual property and other confidential information or personally identifiable information of our clients, unauthorized parties, including
our employees and subcontractors, may attempt to misappropriate certain intellectual property rights that are proprietary to our clients or otherwise breach our clients' confidences. The agreements we
enter into with employees, independent contractors, vendors and clients may not provide meaningful protection for trade secrets, knowhow or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, knowhow or other proprietary information. Policing unauthorized use of proprietary technology is difficult and expensive. The
steps we have taken may be inadequate to prevent the misappropriation of our and our clients' proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our and our
clients' proprietary technologies, tools and applications could enable third parties to benefit from our or our clients' technologies, tools and applications without paying us for doing so.
Unauthorized disclosure of sensitive or confidential client information, including personally identifiable information, or a violation of intellectual property rights, whether through employee
misconduct, breach of our computer systems, systems failure or otherwise, may subject us to liabilities, damage our reputation and cause us to lose clients.
Our
client contracts generally provide for indemnity for intellectual property infringements of third-party rights that arise from our breach under such contracts. Although we attempt to
limit our contractual liability for consequential damages in rendering our services, and provide limitation of liabilities for amount of such liabilities, typically to one year's payment under the
relevant agreement, these limitations on liability may be inapplicable, unenforceable or insufficient to protect us from liability for damages. There may be instances when liabilities for damages are
greater than the
insurance coverage we hold and we will have to internalize those losses, damages and liabilities not covered by our insurance. Furthermore, if any third party brings any claims against our clients,
claiming that our work product or intellectual property transferred to our clients infringes upon such third party's IP rights, any such claims could result in claims by our clients against us, which
could result in the loss of such client, could seriously damage our reputation, could result in other clients terminating their engagements with us and could make it more difficult to obtain new
clients.
If we fail to integrate or manage acquired businesses efficiently, or if the acquired companies are difficult
to integrate, divert management resources or do not perform to our expectations, we may not be able to realize the benefits envisioned for such acquisitions, and our overall profitability and growth
plans could be materially adversely affected.
On occasion we have expanded our service capabilities and gained new clients through selective acquisitions. During the fiscal year ended
March 31, 2017, we completed four acquisitions, and we plan to continue making selective acquisitions in the future. Our ability to successfully integrate an acquired business and realize the
benefits of an acquisition requires, among other things, successful integration of technologies, operations and personnel. Challenges we face in the acquisition and integration process
include:
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integrating operations, services, personnel and corporate, IT and administrative infrastructures in a timely and efficient manner;
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diverting significant management attention and financial resources from our other operations and disrupting our ongoing business;
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unforeseen or undisclosed liabilities and integration costs;
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incurring liabilities from the acquired businesses for infringement of intellectual property rights or other claims for which we may not be
successful in seeking indemnification;
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incurring debt, amortization expenses related to intangible assets, large and immediate write-offs, or issuing ordinary shares as consideration
for the acquired assets that would dilute our existing shareholders' ownership;
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generating sufficient revenues and net income to offset acquisition costs;
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potential loss of, or harm to, employee or client relationships;
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properly structuring our acquisition consideration and any related post-acquisition earn-outs and successfully monitoring any earn-out
calculations and payments;
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failing to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisition;
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retaining key senior management and key sales and marketing and research and development personnel, particularly those of the acquired
operations; and
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increased complexity or risks from potentially doing business in unfamiliar markets and operating additional geographically dispersed sites.
In
addition, the primary value of many potential acquisition targets in the IT services industry lies in their skilled IT professionals and established client relationships.
Transitioning these types of assets to our business can be particularly difficult due to different corporate cultures and values, geographic distance and other intangible factors. For example, some
newly acquired employees may decide not to work with us or to leave shortly after their move to our company and some acquired clients may decide to discontinue their commercial relationships with us.
These challenges could disrupt our ongoing business, distract our management and employees and increase our expenses, including causing us to incur one-time expenses and write-offs, and make it more
difficult and complex for our management to effectively manage our operations. If we are not able to successfully integrate an acquired business and its operations and to realize the benefits
envisioned for such acquisition, our overall growth and profitability plans may be adversely affected.
Our international operations involve risks that could increase our expenses, adversely affect our results of
operations and require increased time and attention from our management.
We have operations in a number of jurisdictions, including Russia, Ukraine, Romania, Bulgaria, the United States, the United Kingdom, Germany,
Poland, Mexico, South Africa, Australia, Canada, Singapore and Vietnam, and we serve clients across North America, Australia, Europe and Asia. As a result, we may be subject to risks inherently
associated with international operations. Our global operations expose us to numerous and sometimes conflicting legal, tax and regulatory requirements, and violations or unfavorable interpretation by
the respective authorities of these regulations could harm our business.
Additional
risks associated with international operations include difficulties in enforcing contractual rights, the burdens of complying with a wide variety of foreign laws and
potentially adverse tax consequences, including permanent establishment and transfer pricing issues, tariffs, quotas and other barriers and potential difficulties in collecting accounts receivable. In
addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations. Additionally, such companies may
have longstanding or well-established
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relationships
with desired clients, which may put us at a competitive disadvantage. We may also face difficulties integrating new facilities in different countries into our existing operations, as
well as integrating employees that we hire in different countries into our existing corporate culture. Our international expansion plans may not be successful and we may not be able to compete
effectively in other countries. We cannot ensure that these and other factors will not impede the success of our international expansion plans or limit our ability to compete effectively in other
countries.
Our business operations and financial condition could be adversely affected by negative publicity about
offshore outsourcing or anti-outsourcing legislation in the United States or other countries in which our clients operate.
Concerns that offshore outsourcing has resulted in a loss of jobs and sensitive technologies and information to foreign countries have led to
negative publicity concerning outsourcing in some countries, including the United States. Current or prospective clients may elect to perform services that we offer themselves, or may be discouraged
from transferring these services to offshore providers such as ourselves to avoid any negative perceptions that may be associated with using an offshore provider. As a result, our ability to compete
effectively with competitors that operate primarily out of facilities located in these countries could be harmed. In addition, anti-outsourcing legislation, if adopted, could materially adversely
affect our business, financial condition and results of operations, and impair our ability to service our clients.
We may need additional capital to support our growth, and a failure by us to raise additional capital on
terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.
We believe that our current cash balances, cash flow from operations and credit facilities should be sufficient to meet our anticipated cash
needs for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain another credit facility.
The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree
to operating and financing covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties,
including:
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investors' perception of, and demand for, securities of IT services companies;
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conditions of the U.S. and other capital markets in which we may seek to raise funds;
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our future results of operations and financial condition; and
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economic, political and other conditions in CEE and globally.
Financing
may not be available in amounts or on terms acceptable to us, or at all, and could limit our ability to grow our business and develop or enhance our service offerings to
respond to market demand or competitive challenges.
We face risks associated with having significant resource commitments to provide services prior to realizing
sales for those services.
We have a long selling cycle for our IT services (generally up to 18 months for new clients), which requires significant investment of
human resources and time by both our clients and us. Before committing to use our services, potential clients require us to expend substantial time and resources educating them on the value of our
services and our ability to meet their requirements. Therefore, our selling cycle is subject to many risks and delays over which we have little or no control, including our
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clients'
decisions to choose alternatives to our services (such as other IT services providers or in-house resources) and the timing of our clients' budget cycles and approval processes. Our selling
cycle for new clients can be especially unpredictable. In the past, we have received sales from new clients up to six months later than expected. If our selling cycle unexpectedly lengthens for one or
more large projects, it would negatively affect the timing of our sales and hinder our sales growth.
Implementing
our services also involves a significant commitment of resources over an extended period of time from both our clients and us. Our clients may experience delays in obtaining
internal approvals or delays associated with technology, thereby further delaying the implementation process. Our current and future clients may not be willing or able to invest the time and resources
necessary to implement our services, and we may fail to close sales with potential clients to which we have devoted significant time and resources. Any significant failure to generate sales, or delays
in recognizing sales after incurring costs related to our sales or services process, could materially adversely affect our business.
Our effective tax rate could be materially adversely affected by a number of factors, including recent OECD
initiatives
We conduct business globally and file income tax returns in Switzerland, the United States, the United Kingdom, Russia, Romania, Poland, Ukraine
and multiple other tax jurisdictions. Our effective tax rate could be materially adversely affected by a number of factors, including changes in the amount of income taxed by or allocated to the
various jurisdictions in which we operate and which have different statutory tax rates; changing tax laws, regulations and interpretations of such tax laws in multiple jurisdictions; implementation,
by various jurisdictions, of measures developed by the Organization for Economic Cooperation and Development (OECD) and aimed at preventing base erosion and profit shifting (BEPS) and enhancing
international exchange of financial and tax information; and the resolution of issues arising from tax audits or examinations and any related interest or penalties; acquisition or setting up of new
businesses in jurisdictions with higher statutory rates, undeveloped or evolving tax regimes.
We
report our results of operations based on our determination of the amount of taxes owed in the various jurisdictions in which we operate. We have certain intercompany arrangements
among our subsidiaries in relation to various aspects of our business, including operations, marketing, sales and delivery functions, as well as financing and licensing arrangements that are subject
to transfer pricing regulations of the respective jurisdictions. U.S. transfer pricing regulations, OECD regulations, as well as regulations applicable in CEE countries in which we operate, require
international transactions involving associated enterprises be on arm's-length terms. We consider the transactions among our subsidiaries to be on arm's-length terms; however, the determination of
transfer prices for intercompany transactions and relevant tax liabilities in each particular jurisdiction requires estimates, judgment and complex calculations, and the ultimate tax determination may
not be certain.
The
Organization for Economic Cooperation and Development ("OECD") has been working on a Base Erosion and Profit Shifting project ("BEPS"), resulting in issuance in 2015 and further
years guidelines and proposals that may change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which we do business. It is expected
that OECD will continue issuing further comments and practical guidelines on BEPS in the future which can also impact our approaches to future tax computations.
Actions
8-10 of BEPS seek to update guidance on practical application of arm's-length principle, removing outdated emphasis on contractual allocation of risks, functions and assets,
which has proven to be vulnerable to manipulation. Instead, OECD proposes using pricing methods that will allocate profits to jurisdictions with the most important economic activities, functions
performed and risks undertaken and align transfer pricing outcome with value created in such locations. Many countries,
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where
we operate, have implemented at least some of OECD guidelines by introducing new tax legislation of varying scope and wording. It is currently unknown what would be the effect of applying
updated guidelines to our intercompany arrangements, but we cannot exclude that it will lead to increase of our effective tax rate.
Action
13 of BEPS proposes an addition to transfer pricing documentation in the form of Country-by-Country Report ("CbCR"). The new guidance requires large multinational enterprises to
provide tax authorities a global overview of enterprise operations and taxation in a format of unified report. This overview contains business activities description, information about employees,
assets, revenue, profits before tax, accrued and paid income taxes and several other indicators for each jurisdiction, where the Group operates. Such reporting requirements are proposed to be
applicable to multinational enterprises with annual consolidated Group revenue exceeding EUR 750 million (although some countries have established a different threshold for national purposes).
The proposed reporting rules have met worldwide recognition, and majority of developed countries have adopted CbCR legislation. We are not in the scope of CbCR reporting for the year ended
March 31, 2017; however we expect to exceed reporting threshold in the next two years. Visibility of global operations and taxation may lead tax authorities in some countries to increased
scrutiny of intercompany arrangements and challenging tax treatment of transactions, which was not questioned before. In addition, automatic exchange of information, which is implemented by tax
authorities worldwide, may also result in additional tax claims to us.
If
a tax authority in any jurisdiction reviews any of our tax returns and proposes an adjustment and/or imposes fines and/or penalties, including, as a result of a determination, that
the transfer prices and terms we have applied are not appropriate, this could have a negative impact on our financial results.
We may encounter difficulties in obtaining withholding income tax benefits envisaged by the Cypriot double
tax treaties for dividends distributed from our subsidiaries.
Our subsidiary in Cyprus is a sub-holding company, which is a direct or indirect 100% parent of all other legal entities of the Group, except
for Luxoft Holding, Inc. Upstream dividends, which could be paid to Cyprus by our major operational legal entities, may be subject to withholding income tax upon distribution.
Cyprus
has a wide range of double tax treaties with various jurisdictions, which often provide either decreased tax rate or complete exemption from withholding taxes. For example, under
a tax treaty between Cyprus and Switzerland the withholding tax on dividends may be reduced to zero. At the same time, most of the double tax treaties contain a limitation on benefits provisions
and/or special provision regarding the beneficial owner of the dividends. Under beneficial ownership concept, double tax treaty benefits are only available to the recipient of income if such recipient
is the beneficial (economic) owner of the relevant income. Based on OECD commentaries, the beneficial owner is defined as a person holding directly, through its direct and/or indirect participation in
other organizations or otherwise, the right to own, use or dispose of income, or the person on whose behalf another person is authorized to use and/or dispose of such income. Entities are not
recognized as beneficial owners of income if they have limited authorities to use or dispose income, perform agency or other similar functions in favor of third parties, not taking any risks, or
transfer such income (either partially or in full) to third parties that are not eligible to double tax treaty benefits. Some of the double tax treaties contain additional requirements to apply
reduced rate or exemption.
Although
in the case of dividend payment we will seek to claim treaty protection, there is a risk that the applicability of the reduced rate or exemption may be challenged by tax
authorities. As a result, there can be no assurance that we would be able to avail ourselves of the benefits under double
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tax
treaty in practice, if the treaty clearance procedures are not duly performed at the date when the dividend payment is made.
Ongoing corporate tax reform in Switzerland may result in abolition of privileged tax regime and increase in
our effective tax rate
Switzerland is undertaking a comprehensive corporate tax reform ("CTRIII") that will among others result in the phasing out of the so-called
holding, mixed company, domiciliary company and other special tax regimes with a timeline to adopt anticipated changes within 2018 - 2020, most likely in 2019 and earliest as from
January 1, 2018.
Our
Swiss subsidiary, which also serves as group operational headquarters, has been enjoying mixed company regime in the canton of Zug since its incorporation in 2013. Under cantonal tax
law a mixed company is partially exempted from cantonal taxation of profits earned outside of Switzerland. The income tax saving from utilizing this regime was $1.9 million for the year ended
March 31, 2017 and $3.2 million for the year ended March 31, 2016.
Switzerland's
privileged taxation of holdings as well as mixed companies has been under increasing international pressure over the last decade, particularly from the European Union and
the OECD. On 17 June 2016, the Swiss Parliament approved the final bill on CTRIII. The bill announced abolition of privileged regimes and several compensating measures to retain Switzerland's
attractiveness as a business location. Companies, which previously used privileged regimes, were provided with a 5-year transitional period and, subject to certain limitations, were expected to
maintain the effective tax rate at the pre-reform level during this period. Several cantons, including canton of Zug, also announced plans to decrease their statutory rate, if CTRIII is implemented.
However
Swiss voters rejected the new law on 12 February 2017. Since abolition of preferential tax regimes is a commitment made by Switzerland to European Union and OECD, it
remains widely undisputed that reform is required. Thus, a new draft law will likely be proposed in the near future. If no or reduced compensating measures would be available in the new bill, our
financial results may significantly suffer from immediate rise in effective tax rate.
Planned tax reform in the United States may affect us in a negative manner
New U.S. administration is actively considering a largest tax reform since 1986, which is aimed to improve U.S. tax landscape and increase
competitiveness of U.S. economy. Several reform ideas have been presented, yet none materialized in the draft bill.
Although
proposals include inter alia a substantial decrease in nominal U.S. federal corporate tax rate and possibilities to immediately expense capital investments, several measures are
planned to compensate the respective loss of tax revenues by the federal government. In particular, a suggestion to introduce a border-adjustment tax, or "a destination-based cash flow tax" would
drastically change how corporate taxation in U.S. works. Currently, it is not clear how the proposed tax would exactly be implemented, what types of goods, services, other transactions would be in
scope, or the effects on various business models. Nonetheless, understanding that the aim of border-adjustment tax is to promote businesses to place their operations in U.S., and we currently serve
U.S. customers mainly with off-shore personnel, we believe that adoption of any similar measure will be unfavorable to us. At the same time, since both proposals (decrease of CIT tax rate and
increase/introduction of new special taxes) compensate each other, it is currently not feasible to assess possible impact of the reform on our tax liabilities in the US.
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International hostilities, terrorist activities, other violence or war, natural disasters, pandemics and
infrastructure disruptions could delay or reduce the number of new service orders we receive and impair our ability to service our clients.
Hostilities and acts of terrorism, violence or war, natural disasters, global health risks or pandemics or the threat or perceived potential of
these events could materially adversely affect our operations and our ability to provide services to our clients. We may be unable to protect our people, facilities and systems against any such
occurrences. Such events may cause clients to delay their decisions on spending for IT services and give rise to sudden significant changes in regional and global economic conditions and cycles. These
events also pose significant risks to our people and to physical facilities and operations around the world, whether the facilities are ours or those of our clients, which could materially adversely
affect our financial results. By disrupting communications and travel, giving rise to travel restrictions, and increasing the difficulty of obtaining and retaining highly-skilled and qualified IT
professionals, these events could make it difficult or impossible for us to deliver services to some or all of our clients. Travel restrictions could cause us to incur additional unexpected labor
costs and expenses or could restrain our ability to retain the skilled IT professionals we need for our operations. In addition, any extended disruptions of electricity, other public utilities or
network services
at our facilities, as well as system failures at, or security breaches in, our facilities or systems, could also adversely affect our ability to serve our clients.
Risks related to conducting business in CEE countries
Emerging markets, such as CEE countries, are subject to greater risks than more developed markets, and
financial turmoil in any emerging market in which we operate could disrupt our business.
CEE countries are generally considered to be emerging markets. Investors in emerging markets should be aware that these markets are subject to
greater legal, economic and political risks than more developed markets. Emerging markets are subject to rapid change, and information relating to our operations in such markets set out in this annual
report may become outdated relatively quickly. Moreover, financial or political turmoil in any emerging market country tends to adversely affect prices in the equity markets of all emerging market
countries, as investors move their money to more stable, developed markets. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging
economies could dampen foreign investment in the CEE region and adversely affect regional economies. In addition, during such volatile times, companies that operate in emerging markets could face
severe liquidity constraints as foreign funding sources are withdrawn. Thus, even if the economy of the CEE region remains relatively stable, financial turmoil in any emerging market country could
adversely affect our business which could result in a material decrease in the price of our Class A ordinary shares.
Sanctions imposed by the United States, the EU and other countries as a result of the ongoing crisis in
Ukraine may have a material adverse effect on our business.
In late 2013 and the first half of 2014, deteriorating economic conditions and general social unrest in Ukraine resulted in a wide-scale crisis
provoking armed confrontations in Eastern Ukraine that ultimately involved the Russian Federation.
The
United States, the European Union and a number of other jurisdictions and authorities (including Australia, Albania, Canada, Iceland, Japan, Moldova, Montenegro, Norway, Switzerland,
the United Kingdom and Ukraine) have imposed sanctions on a number of Russian officials and individuals,
former Ukrainian officials, and several Russian companies and banks, with the consequence that entities and individuals in the United States and European Union cannot do business with such persons or
provide funds or economic resources to such persons. Certain assets in the relevant sanctioning jurisdictions are subject to seizure and the sanctioned individuals to visa bans. In addition,
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the
United States and European Union have applied "sectoral" sanctions, whose principal consequence is that several leading Russian banks have been restricted from accessing international capital
markets. These sanctions have adversely affected the Russian economy and Russia's financial markets, increased the cost of capital and capital outflows, and worsened the investment climate in Russia.
No
individual or entity within the Group has been designated by either the United States or the EU as a target of their respective sanctions imposed in connection with the situation in
Ukraine. However, no assurance can be given that none of those individuals or entities will be made subject to any such sanctions in the future. Additionally, no assurance can be given that broader
sanctions against Russia or parts of Ukraine that affect us will not be imposed. Certain of our subsidiaries are U.S. or EU Persons and are therefore subject to U.S. and EU sanctions restrictions,
including prohibitions on dealing with any persons subject to U.S. blocking sanctions or the EU asset freeze. However, the majority of Group entities are neither U.S. nor EU Persons, and these
entities are therefore restricted in dealings with sanctioned persons only to the extent those dealings involve U.S. nor EU Persons or U.S.-dollar denominated transactions, are conducted within the
United States or in EU member states, or otherwise fall within EU jurisdiction.
We
may engage in certain operations with Russian and Ukrainian persons and entities that are currently sanctioned. Such operations are rare and, according to our estimates, the overall
volume of such operations with such persons and entities is not material and such operations are limited to the territory of the Russian Federation and Ukraine.
The
scope and consequences of U.S. and EU sanctions remain subject to interpretation by competent authorities and courts in the United States and the EU and no assurance can be given
that a broader interpretation may not affect any of our entities. Non-compliance with applicable sanctions could result in, among other things, the inability of the relevant entities to contract with
the U.S. and/or EU governments or their agencies, civil or criminal liability, including the imposition of significant fines, the disgorgement of profits, and/or the imposition of a court-appointed
monitor, negative publicity and reputational damage, and designation under U.S. and/or EU sanctions. Designation under U.S. and/or EU sanctions could affect our ability to transact with U.S. and/or EU
Persons.
We
have significant exposure to the Russian and Ukrainian economies and the attendant risks. The current difficult economic environment in Ukraine and Russia and any future downturns in
the
economies of these countries could diminish demand for our services, increase our costs, constrain our ability to retain existing customers and collect payments from them and prevent us from executing
our strategies. Although we believe that the Russian IT industry is unlikely to be specifically targeted by OFAC or EU sanctions, if sanctions were generally brought against such industry or
specifically against us, such sanctions would likely have a material adverse impact on our business, financial condition, results of operations or prospects.
Regional and international political and diplomatic conflicts involving Russia and Ukraine could create an
uncertain operating environment that could adversely affect our business.
Ukraine has enacted sanctions with respect to certain Russian entities and individuals. The sanctions impose various limitations on economic
activities in Ukraine and restrict entry into Ukraine of certain individuals. The sanctions became effective on September 22, 2015 and were set to expire on September 22, 2016. The
sanctions apply to 388 individuals and 105 companies, including two Russian IT companies. On October 17, 2016, the President of Ukraine enacted the decision of the Ukranian National Security
and Defense Council imposing new personal sanctions against 335 individuals and 167 entities, and extending the sanctions imposed in September 2015 for one more year. On March 15, 2017, the
President of Ukraine enacted the decision of the Ukrainian National Security and Defense Council to impose sanctions on five Ukrainian banks with the capital of Russian state-owned banks:
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Sberbank
PJSC; VS Bank PJSC; Prominvestbank PJSC; VTB Bank PJSC; and BM Bank PJSC. The Sanctioned Banks are prohibited from transferring capital outside the territory of Ukraine in favour of any
affiliated entities.
Russia
has responded with countermeasures to international and Ukrainian restrictions and sanctions, currently including limiting the import of certain goods from the United States, the
European Union, Ukraine and other countries, imposing visa bans on certain persons, and imposing restrictions on the ability of Russian companies to comply with sanctions imposed by other countries.
In
addition, Russia's involvement in the armed conflict in Syria, since September 2015, has occasionally put, and may continue to put, pressure on international relations between Russia
and other countries. Russia's involvement in the conflict in Syria could further lead to an escalation of geopolitical tensions, the possible introduction or expansion of international sanctions
against Russia by other countries and an increased risk of terrorist attacks.
The
instability in Crimea and Eastern Ukraine specifically, and in the surrounding region more generally, economic sanctions and related measures, and other geopolitical developments
(including with respect to the current conflict and international interventions in Syria) could result in further instability and/or worsening of the overall political and economic situation in
Ukraine, Russia, Europe and/or in the global capital markets generally, which could adversely impact us. Further conflict, sanctions, export controls and/or other measures, including sanctions on
additional persons or businesses (including vendors, joint venture and business partners, affiliates and financial institutions) imposed by the United States, the European Union, Ukraine, Russia,
and/or other countries, could materially adversely affect our business, financial condition, results of operations, cash flows and prospects.
We
have delivery centers in Ukraine, employing over 3,340 engineers located in Kiev, Dnipro and Odessa. We have delivery centers in Russia, employing over 2,000 engineers located in
various cities. At present we have not experienced any interruption in our office infrastructure, utility supply or Internet connectivity. All our offices remain open and fully functional to support
our clients. Our contingency plans include relocating work or personnel to other locations and adding new locations as appropriate. We recently opened new delivery centers in Sofia, Bulgaria, and
Guadalajara, Mexico. In May 2014, we launched a multiyear Global Upgrade Program to implement another level of globalization across our organization and to accelerate our expansion in the EU, the
U.K., Asia Pacific and North America. As part of this program, to better support our global client base, during our fiscal year ended March 31, 2017, we relocated over 700 professionals to key
geographies such as Mexico, Poland, Romania, the U.S. and the United Kingdom. While we have contingency plans in place to address volatility in Russia and Ukraine, if we are unable to conduct business
with our existing or potential clients or partners, or continue our operations in an uninterrupted manner as a result of these geopolitical developments or the reaction to these developments by
international authorities through expanded sanctions or otherwise, our business could be materially adversely affected.
Political and governmental instability in CEE countries could materially adversely affect our business and
operations in these countries.
We have significant operations in Russia, Ukraine, Poland, Bulgaria and Romania. Since the early 1990s, Russia, Ukraine, Romania and other CEE
countries have sought to transform from one-party states with a centrally planned economy to democracies with a market economy to various degrees. Despite various reforms, the political systems of
many CEE countries remain vulnerable and unstable. In addition, the political and economic situation in these countries is negatively affected by the global financial and economic crisis, the ongoing
economic recession in some parts of the world and political conflicts.
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Although
the political situation in Ukraine is stabilizing, minor armed clashes are still ongoing in the eastern regions of Ukraine, though our operations are in the western part of the
country. On September 5, 2014, representatives of Ukraine, the Russian Federation, the Donetsk People's Republic, and the Lugansk People's Republic agreed to the Minsk Protocol, an agreement to
halt the war in the Donbass region of Ukraine. In February 2015, the leaders of Ukraine, the Russian Federation, France and Germany reached a ceasefire deal on the Ukrainian conflict. The standing
cease-fire has been continuously violated. Although the conflict has transitioned to a stalemate after it first erupted in early 2014, shelling and skirmishes occur regularly. A spike in violence and
civilian casualties in the summer of 2016 has raised concerns of further escalation. Such escalation of the political instability or military action could have a material negative impact on our
operations in Ukraine.
Since
the start of this conflict, there have been multiple waves of partial mobilization to the Ukrainian army. The mobilization has not materially affected our delivery centers in
Ukraine; however, any future impact is difficult to predict. In the event the conflict worsens and the Ukrainian government triggers the application of martial law, it could have a material adverse
effect on our operations in Ukraine.
The
current political environment in Romania is dynamic and may become unstable. After the collapse of the Democrat-led government in early 2012, the Social Democrats held power in a
coalition with the Liberals, until February 2014 when the Liberals terminated their alliance with the Social Democrats. While moving into opposition, the Liberals have since merged with the Democrats.
This has fragmented the Romanian Parliament and may ultimately give rise to populist measures at the government level. Moreover, in late 2014, the Liberal-nominated candidate won the presidential
election, while the incumbent Social Democrat Prime Minister was reconfirmed by Parliament. The Social Democrat Prime Minister subsequently resigned and his cabinet was dissolved in November 2015
following a corruption scandal, to be replaced by a President-nominated independent Prime Minister and a new cabinet. Romania held parliamentary elections on December 11, 2016. The Social
Democratic Party (SDP) and the Allience of Liberals and Democrats (ALDE) formed a government in January 2017 led by a Social Democrat Prime Minister, after winning 250 seats in the 465-seat parliament
in the December 2016 election.
Separately,
recent military conflict in Ukraine has resulted in a negative impact in the region, affecting Romania's political and economic outlook. Romania has a significant land border
with Ukraine and, as a result, ongoing instability or military conflicts in Ukraine could have a significant and adverse effect on Romania's economic and financial stability either directly or
indirectly as a result of sanctions or restrictions on gas exports from Russia. Any escalation of the conflict would heighten the risk of significant unfavorable consequences, both
indirectlythrough effects on Romania's EU trade partnersand directly, through financial flows. Amendments in the policies pursued by the Romanian government and the political
and regional instability may have a material negative impact on our operations in Romania.
Although
the current political situation in Russia has stabilized, future political instability could result in a worsening overall economic situation, including capital flight and a
slowdown of investment and business activity. Following Russian parliamentary elections in December 2011 and presidential elections in March 2012, controversy concerning alleged voting irregularities
led to organized protests in several Russian cities, including Moscow. In addition, any change in the Russian government or the
Russian government's program of reform in Russia or lack of consensus between the President, the Prime Minister, the Russian government, Russia's Parliament and influential economic groups could lead
to political instability and a deterioration in Russia's investment climate.
The
emergence of new or increased tensions among CEE countries could further exacerbate tensions between CEE countries and the United States and the European Union, which may have a
negative effect on their economy, our ability to obtain financing on commercially reasonable terms, and
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the
level and volatility of the trading price of our Class A ordinary shares. Any of the foregoing circumstances could materially adversely affect our business and operations in CEE countries.
Deterioration in political and economic relations among CEE countries in which we operate and/or between CEE
countries and the United States and the European Union could materially adversely affect our business and operations in CEE.
Political and economic relations among Russia, Romania, Ukraine and the other countries in which we operate are complex, and recent conflicts
have arisen among many of their governments. Likewise, many CEE countries continue to have a complicated relationship with the United States and the EU. Political, ethnic, religious, historical and
other differences have, on occasion, given rise to tensions and, in certain cases, military conflicts between countries of CEE which can halt normal economic activity and disrupt the economies of
neighboring regions. Moreover, various acts of terrorism have been recently committed in various parts of the world. The risks associated with such terrorism events could materially and adversely
affect the investment environment and overall consumer and entrepreneurial confidence in the countries where we operate, including the CEE countries.
The
relationship between Russia and Ukraine has been historically strained due to, among other things, disagreements over the prices and methods of payment for gas delivered by Russia
to, or for transportation through, Ukraine, issues relating to the temporary stationing of the Russian Black Sea Fleet in the territory of Ukraine, a Russian ban on imports of meat and milk products
from Ukraine and antidumping investigations conducted by Russian authorities in relation to certain Ukrainian goods. Political tensions have escalated recently following the political situation in
Crimea and a number of associated events, including the adoption of a Ukrainian law cancelling neutral status to military blocks, the signing of the Ukraine-European Union Association Agreement and a
new wave of gas price negotiations. In 2015 and 2016, economic confrontation between Russia and Ukraine has continued to
grow. New bilateral sanctions and restrictions were imposed in the sphere of transport (mostly regarding transit, including air transit), trading and agriculture.
Any
further adverse changes in Ukraine's relations with Russia, in particular any such changes adversely affecting supplies of energy resources from Russia to Ukraine or Ukraine's
revenues derived from transit charges for Russian oil and gas, may have negative effects on the Ukrainian economy as a whole. Similarly, sanctions imposed by Ukraine against certain Russian entities
could further strain the Russian economy. Although we primarily target markets outside of Russia, stress on the Russian economy from Ukrainian sanctions could materially adversely affect our business.
The conflicts among CEE countries and conflicts within CEE countries have, in some instances, also harmed their relationship with the United States and the EU and, at times, have negatively impacted
their financial markets. See "Sanctions imposed by the United States, the EU and other countries as a result of the ongoing crisis in Ukraine may have a material adverse effect on our
business" above.
Similarly,
economic deterioration in CEE countries may strain political relationships with neighboring regions, and vice versa. For example, Romania joined the European Union in January
2007, and is subject to certain post-accession benchmarks mandated by the EU under the Cooperation and Verification Mechanism to help Romania address outstanding shortcomings in various social fields
such as judicial reform and anti-corruption. On January 27, 2016, the European Commission presented a report recognizing Romania's "impressive" track record and assessing the fact that such
trend is a "sign of developing sustainability" towards the goals of the Cooperation and Verification Mechanism and made recommendations for further steps in certain areas including judicial
independence, judicial reform, integrity and anti-corruption initiatives. If Romania does not adequately progress towards these benchmarks, the European Commission is authorized to apply safeguard
measures against Romania, including the suspension of Member States' obligation to recognize and enforce, under the conditions set forth in the Community laws, the decisions of Romanian courts. The
application of any of the sanctions referenced above may have a negative effect on the Romanian economy and investor
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confidence
in the Romanian economic environment, which could lead to material adverse consequences on our operations in Romania. Furthermore, any future allegations or evidence of corruption or money
laundering in Romania may have an adverse effect on the Romanian economy, and in turn could adversely affect our operations in Romania.
The legal and tax systems in CEE countries can create an uncertain environment for business activity, which
could materially adversely affect our business and operations in the CEE.
The legal and tax framework to support a market economy remains new and in flux in Russia, Ukraine, Romania, Poland, and other CEE countries
and, as a result, these systems can be characterized by:
-
-
inconsistencies between and among laws and governmental, ministerial and local regulations, orders, decisions, resolutions and other acts;
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extensive regulation of businesses in general and substantial protection afforded to domestic IT businesses;
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gaps in the regulatory structure resulting from the delay in adoption or absence of implementing regulations;
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selective or inconsistent enforcement of laws or regulations, sometimes in ways that have been perceived as being motivated by political or
financial considerations;
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limited judicial and administrative guidance on interpreting legislation;
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relatively limited experience of judges and courts in interpreting recent commercial legislation;
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a perceived lack of judicial and prosecutorial independence from political, social and commercial forces;
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inadequate court system resources;
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a high degree of discretion on the part of the judiciary and governmental authorities; and
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under-developed bankruptcy procedures that are subject to abuse.
In
relation to our business operations in the emerging markets in which we operate, legal ambiguities, inconsistencies and anomalies and, in certain cases, doubts around constitutional
or legislative basis exist due to the relatively recent enactment of many laws, the lack of consensus about the scope, content and pace of political and economic reform and the rapid evolution of
legal systems in ways that may not always coincide with market developments. Furthermore, legal and bureaucratic obstacles and corruption exist to varying degrees in each of the regions in which we
operate, and these factors are likely to hinder our further development. These characteristics give rise to investment risks that do not exist in countries with more developed legal systems. We also
face risks with respect to property rights in CEE countries. The expropriation or nationalization of any of our entities, their assets or portions thereof, in these countries, potentially without
adequate compensation, could materially adversely affect our business, financial condition and results of operations.
In
addition, as is true of civil law systems generally, judicial precedents generally have no binding effect (with a few exceptions in Ukraine) on subsequent decisions. Not all
legislation and court decisions in CEE countries are readily available to the public or organized in a manner that facilitates understanding. Enforcement of court orders can be very difficult in
practice. All of these factors make judicial decisions difficult to predict and effective redress uncertain. Additionally, court claims and governmental prosecutions may be used in furtherance of what
some perceive to be political or commercial aims.
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Any
of the factors mentioned above may result in ambiguities, inconsistencies and anomalies in the application and interpretation of laws and regulations in CEE countries, and may affect
our ability to enforce our rights under our contracts or to defend ourselves against claims by others. These factors may also subject us to unpredictable requirements.
Loss of taxation benefits related to our employees' personal taxes that are enjoyed in CEE countries could
have a negative impact on our operating results and profitability.
The Russian government provides qualified Russian IT companies with substantial tax benefits through a reduced social contribution charge rate
program. This program resulted in savings for us of $7.9 million in the fiscal year ended March, 31, 2016 and $9.5 million in the fiscal year ended March 31, 2017. However, the
reduced tax rates for social contributions (14% in total) is a temporary measure. In 2016 application of reduced rates was prolonged until 2023, after which the Russian government may take the
decision to gradually increase the tax rates. If the Russian government were to change its favorable treatment of Russian IT companies by modifying or repealing its current favorable tax measures, or
if we become ineligible for such favorable treatment, it would significantly impact our financial condition and results of operations.
In
Poland the law provides for a deemed personal income tax cost deduction in the amount of 50% of employment income (but not greater than PLN 43,000 for each individual). Such benefit
is available only for employees who, while performing their daily duties, are creating intellectual property with the condition that the result of the creation process qualifies as "work." This
deduction has resulted in the personal income tax savings of $3.4 million in the fiscal year ended March, 31, 2016 and $4.1 million in the fiscal year ended March 31, 2017. If our
employees would not be entitled for this benefit either through a change in the law or through a failure to comply with the rules, we may suffer additional payroll costs to compensate the lost
benefit.
In
Romania employment income of IT specialists is exempt from personal income tax, if the employer and employee meet certain criteria, such as company's nature of activity, employees'
position and education and other. This deduction has resulted in the personal income tax savings of $4.5 million in the fiscal year ended March, 31, 2016 and $5.4 million in the fiscal
year ended March 31, 2017. If our employees would not be entitled for this benefit either through a change in the law or through a failure to comply with the rules, we may suffer additional
payroll costs to compensate the lost benefit.
Selective or arbitrary government action resulting from uncertain application of commercial laws and
regulations in CEE countries could materially adversely affect our business and operations.
Many commercial laws and regulations in CEE countries are relatively new and have been subject to limited interpretation. As a result, their
application can be unpredictable. Government authorities have a high degree of discretion in Russia, Ukraine and other CEE countries and have at times exercised their discretion in ways that may be
perceived as selective or arbitrary, and sometimes in a manner that is seen as being influenced by political or commercial considerations. These governments also have the power, in certain
circumstances, to interfere with the performance of, nullify or terminate contracts. Selective or arbitrary actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal
prosecutions and civil actions.
Federal
and local government entities have also used common defects in documentation as pretexts for court claims and other demands to invalidate and/or to void transactions. In this
environment, our competitors could receive preferential treatment from the government, potentially giving them a competitive advantage. Government officials may apply contradictory or ambiguous laws
or regulations in ways that could materially adversely affect our business and operations in CEE countries. We cannot offer assurance that regulators, judicial authorities or third parties in Russia,
Ukraine and other CEE countries will not challenge our compliance (including that of our subsidiaries) with applicable laws,
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decrees
and regulations. In addition to the foregoing, selective or arbitrary government actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil
actions, all of which could materially adversely affect our business, financial condition and results of operations.
In
addition, governments may revise existing contract rules and regulations or adopt new contract rules and regulations at any time and for any reason. Any of these changes could impair
our ability to obtain new contracts or renew or enforce contracts under which we currently provide services. Any new contracting methods could be costly or administratively difficult for us to
implement, which could materially adversely affect our business and operations in CEE countries.
Changes in the tax system in CEE countries or arbitrary or unforeseen application of existing rules could
materially adversely affect our financial condition and results of operations.
There have been significant changes to the taxation systems in CEE countries in recent years as the authorities have gradually replaced or
updated legislation regulating the application of major taxes such as corporate income tax, VAT, corporate property tax with new legislation. In addition, recently, the tax authorities of several CEE
countries (including Russia, Poland and Romania) have joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and the Multilateral Competent
Authority Agreement on the Exchange of Country-by-Country Reports. These agreements provide for automatic exchange of information regarding financial accounts and so-called "country-by-country
reports" related to the transfer pricing documentation. The first exchange between Poland and Romania will take place in September 2017, and the first exchange between Russia and Switzerland will take
place in September 2018. In June 2017, these countries also signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, implementing the
BEPS measures into bilateral tax treaties, and effectively amending the existing bilateral tax treaties. Significant developments in transfer pricing rules, introduction of controlled foreign
corporation legislation and other recent changes in tax laws bring additional uncertainty to the Group's tax affairs. Tax authorities in CEE countries have also been quite aggressive in their
interpretation of certain tax laws and their many ambiguities, as well as in their enforcement and collection activities. Incorrect interpretation of contradictory laws and regulations, many of which
are relatively new and have not been subject to extensive practical application, may lead to additional tax exposure. High-profile companies may be particularly vulnerable to judgmental application of
unclear requirements. Our tax liability may become greater than the estimated amount we have expensed to date, particularly if the tax benefits we receive are revised or removed. The additional
burdens and costs that the tax systems of the CEE countries impose on our business as well as the frequent substantial changes in legislation complicate our tax planning and related business
decision-making process. Any additional tax liability, as well as any unforeseen changes in tax laws, could materially adversely affect our future results of operations, financial condition or cash
flows.
Recent de-offshorization law and other related administrative and international measures in Russia may have a
material adverse impact on our operations.
In early 2015, Russia's De-offshorization Law came into force via amendments to the Russian Tax Code. This law aims at preventing the use of
offshore companies and unincorporated foreign structures (e.g. funds, partnerships, trusts, others form of collective investment vehicle and/or trust management) for tax planning purposes.
The
De-offshorization Law regulates, among other things, the taxation of controlled foreign companies. Under the law, with certain exceptions, undistributed profits of foreign companies
and unincorporated foreign structures (such as funds and partnerships), which are controlled by Russian tax residents (individuals or legal entities), are subject, in certain circumstances, to
taxation in Russia. As
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required
by the De-offshorization Law, Russian tax residents must disclose their participation in the foreign companiesin all cases when their stock ownership in a foreign entity exceeds 10% as well
as file special notifications concerning the "controlled foreign companies" ("CFC") which broadly mean holding of (i) more than 25% of entity's stock or (ii) more than 10% of the
entity's stock if a joint ownership of such entity by other Russian tax resident(s) exceeds 50%.
The
tax implication of being recognised as a CFC is that undistributed profits earned by such a CFC shall be included in the tax base of a Russian tax resident (i.e. the
controlling person of the CFC) pro-rata to its participation and shall be subject to tax in Russia at a rate of 20% (if the controlling person is a company) or 13% (if the controlling person is an
individual).
Additionally,
the De-offshorization Law introduced the concept of tax residency of organizations in Russia. For non-Russian legal entities, tax residency is defined by the place of
"actual management." Based on this concept Russian tax authorities may seek to recognize certain foreign companies as Russian tax residents by claiming that their daily operational management and
control are performed from Russia. Foreign entities recognised as Russian tax residents should be subject to tax in Russia at a rate of 20%.
The
De-offshorization Law also incorporates a "beneficial ownership" concept for non-resident legal entities that claim double tax treaty relief with respect to Russian-source income.
This concept is broadly repeating similar concept adopted by OECD. The beneficial ownership concept and other anti-treaty shopping concepts give the Russian tax authorities a stronger basis for
challenging issues relating to deductibility of Russian-source cross-border income payments and the grant of treaty relief to such income payments. Recent court practice indicates that Russian courts
tend to support the Russian tax authorities in applying the "beneficial ownership" concept in a much wider manner than one would usually see in other jurisdictions.
On
July 1, 2015, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the "Convention"), initially developed by the OECD and the Council of Europe in
1988, entered into force in Russia. Membership in a mutual tax assistance club is expected to increase Russia's options for obtaining tax information from foreign tax authorities but it will also
require mutual disclosures. As a result of the Convention's ratification, Russian tax authorities are authorized to obtain certain information relating to taxation matters from a number of countries,
including certain offshore jurisdictions, and to participate in simultaneous tax examinations and assistance in recovery of tax claims. The list of countries that have signed the Convention includes
the Netherlands, Luxembourg, UK, Switzerland, British Virgin Islands and Cyprus, as well as Romania, Poland and Ukraine. Pursuant to the procedure for information exchange stipulated in the Convention
and in bilateral double tax treaties, the Russian tax authorities may obtain not only information on the fact whether a foreign
contractor of a Russian taxpayer pays taxes, but also information on its staff headcount, office premises, recognition of certain business transactions on its books, providers of funds later
transferred to Russia and its ownership structure.
In
addition to the Convention, Russia signed the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information and the Multilateral Competent
Authority Agreement on the Exchange of Country-by-Country Reports. On March 6, 2017, the Russian Ministry of Finance published a draft bill adding new provisions to Part I of the Russian
Tax Code for implementing the international automatic exchange of financial account information and new standards of the transfer pricing documentation for multinational corporations. It is expected
that the bill will be enacted soon and that from 2018 the Russian tax authorities will be able to receive tax information from all participating countries which include, among others, a number of
offshore jurisdictions (such as the British Virgin Islands).
Furthermore,
on June 7, 2017, Russia signed the Multilateral Convention to Implement Tax Treaty related Measures to Prevent Base Erosion and Profit Shifting, aimed at
implementation of various
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anti-BEPS
measures and anti-abuse rules into bilateral tax treaties, by effectively amending the existing treaties between Russia and the countries that signed (and that will later sign) the
convention. Apart from this, over the recent years, the Russian Federation has been in the process of revising its bilateral tax treaties by including or expanding the provisions on exchange of
information and anti-abuse of treaty.
In
addition, the Russian AML Law was amended with effect from December 2016, obliging Russian legal entities to collect information about their beneficial owners and disclose it upon
request, and providing for liability for non-disclosure of beneficial owner.
No
assurance can be currently given as to possible impact of the De-offshorization Law and the other tax-related legislative and administrative and international initiatives on our
business. Taking into account the named De-offshorization Law and other related legislative and international initiatives in Russia, we cannot exclude the possibility that some of these regulatory
developments could have a material adverse effect on our business, financial condition and results of operations.
We may be exposed to additional taxation in Ukraine related to the activities of our non-Ukrainian companies
or Ukrainian independent contractors
The Ukrainian Tax Code contains the concept of a permanent establishment in Ukraine as a basis for taxing foreign legal entities, which carry
out regular entrepreneurial activities in Ukraine beyond those of preparatory and auxiliary character. Ukraine's double tax treaties with other countries contain a similar concept. Double tax treaties
provide for a narrower definition of permanent establishment than the Ukrainian Tax Code and overrule Ukrainian tax law, which is expressly recognized by the Tax Code. However, not all countries where
the Luxoft companies operate have double tax treaties with Ukraine.
The
practical application in Ukraine of the concept of a permanent establishment under Ukrainian law and double tax treaties is not well developed. For this reason, foreign companies
having even limited operations in Ukraine, which would not normally satisfy the conditions for creating a permanent establishment, may be at risk of being treated as having a permanent establishment
in Ukraine and hence being liable to Ukrainian taxation. Accordingly, there is a risk that activities of our non-Ukrainian companies will be treated by the Ukrainian authorities as creating such a
permanent establishment.
If
activities of any of our non-Ukrainian subsidiaries were treated as creating a permanent establishment in Ukraine, such company would be subject to Ukrainian taxation on the part of
its income that is attributable to that permanent establishment in a manner broadly similar to the taxation of any Ukrainian legal entity (with 18% applicable corporate income tax rate). There is,
therefore, a risk that the tax authorities might seek to assess Ukrainian tax on the entire income of such company if it were treated as having a permanent establishment in Ukraine. Having a permanent
establishment in Ukraine may also have other adverse tax implications, including jeopardizing the right to benefit from the reduced withholding tax rate under an applicable double tax treaty, and
affecting the VAT obligations in Ukraine. There is also a risk that penalties could be imposed by the tax authorities for failure to register the permanent establishment with the Ukrainian tax
authorities and improper fulfilment of tax obligations. Any such taxes or penalties could have a material adverse effect on Luxoft's business, results of operations, financial condition and prospects.
Luxoft
provides significant portion of its services to multinational clients using Ukrainian IT specialists. Substantial part of Ukrainian IT specialists who provide services to Luxoft
are independent contractors who are properly registered as private entrepreneurs with the tax authorities. They are third party suppliers operating as independent contractors, for whom we are not
required to pay social duties and personal income tax applicable to employees. There is, nevertheless, a risk that Ukrainian tax authorities may take a different view. Since laws and regulations
governing the status and classification
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of
independent contractors are subject to change or interpretation by various authorities, it is possible that Ukrainian tax authorities could assert a position on the classification of our
independent contractors contrary to ours and even combine their assessment of independent contractors status with permanent establishment status. As a result, they could claim we had to withhold
personal income tax and to accrue single social contribution in relation to employees' remuneration. In addition, if a national authority or court enacts legislation or adopts regulations that change
the manner in which employees and independent contractors are classified, or makes any adverse determination with respect to some or all of our independent contractors, we could incur significant
costs arising from fines or judgments as a result of tax withholding. We may also decide to hire these independent contractors as our employees, and, we may, as a result, incur significant personnel
expenses. All of these factors could in turn result in material adverse effects on our financial condition.
In
March 2017, Ukraine and the International Monetary Fund signed the Memorandum of Economic and Financial Policies. In accordance with the memorandum the tax reform will aim to increase
the efficiency and equity of the tax system. Ukraine declared that it will refrain from any major tax cuts and will not introduce new tax exemptions and amnesty schemes. It was also announced that the
requirements to qualify for the simplified tax regime which is typically used by individual entrepreneurs for tax purposes will be tightened starting from January 2018 to address existing gap in the
tax system. Such developments may require us to decision to hire these independent contractors as our employees, and, we may, as a result, incur significant personnel expenses. All of these factors
could in turn result in material adverse effects on our financial condition.
We may be exposed to liability for actions taken by our subsidiaries.
In certain cases we may be jointly and severally liable for obligations of our subsidiaries. We may also incur secondary liability and, in
certain cases, liability to creditors for obligations of our subsidiaries in certain instances involving bankruptcy or insolvency.
In
particular, under new Article 53
1
of the Russian Civil Code, a "controlling person" of a legal entity may be held directly liable for losses that the entity
suffers because of his or her "fault", and any agreement that seeks to limit or waive such liability will not be valid. Generally, a controlling person is anyone who holds the power to determine the
entity's actions, including the right to direct the actions of officers or executives. When a controlling person causes losses, officers and executives may all be held jointly and severally liable. (A
parent entity may also be held jointly liable with a subsidiary for actions directed by the parent or made with its consent.) Liability may also apply to shareholders or controlling persons when the
company is a foreign legal entity but conducts its business primarily in Russia.
Further,
an effective parent is secondarily liable for an effective subsidiary's debts if the effective subsidiary becomes insolvent or bankrupt as a result of the action or inaction of
the effective parent. In these instances, the other shareholders of the effective subsidiary may claim compensation for the effective subsidiary's losses from the effective parent that caused the
effective subsidiary to take action or fail to take action, knowing that such action or failure to take action would result in losses. We could be found to be the effective parent of the subsidiaries,
in which case we could become liable for their debts, which could have a material adverse effect on our business, financial condition and results of operations or prospects.
Our CEE subsidiaries can be forced into liquidation on the basis of formal non-compliance with certain legal
requirements.
We operate in CEE countries primarily through locally organized subsidiaries. Certain provisions of the laws of CEE countries may allow a court
to order liquidation of a locally organized legal entity on the basis of its formal noncompliance with certain requirements during formation, reorganization or during its operations.
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Russian corporate law, Ukrainian corporate law and Romanian corporate law require liquidation of a company if its net assets fall below a certain threshold and,
in the case of Romania, it does not take remedial steps, in which case any interested person may request in court the dissolution of the applicable Romanian company. For example, under Russian
corporate law, in case of negative net assets calculated on the basis of Russian accounting standards as of the end of the year following the second or any subsequent year of a company's existence,
the company is required to reduce its share capital or to liquidate the company. Many Russian companies have negative net assets due to a very low historical value of property, plant and equipment
reflected on their Russian accounting standards balance sheets. However, their solvency, which is defined as their ability to pay debts as they come due, has not been otherwise adversely affected by
such negative net assets. Also, the Russian Civil Code provides for liquidation of a legal entity by a court decision: if, among other things, a legal entity operates without proper authorization
(license) or operations are illegal or the state registration was invalid, and these violations may not be cured.
There
have also been cases in CEE countries in which courts have used formal deficiencies in the establishment process of a legal entity or noncompliance with provisions of law as a
basis for liquidation of a legal entity. Weaknesses in the legal systems of CEE countries create an uncertain legal environment, which makes the decisions of a court or a governmental authority
difficult to predict. If
involuntary liquidation of any of our subsidiaries were to occur, such liquidation could materially adversely affect our financial condition and results of operations.
Planned tax changes in Russia may negatively affect our financial results
Russian government is considering measures aimed at reducing an overall level of social security contributions with simultaneous increase of
indirect taxes to compensate a decrease of tax revenue to the budget. Under these initiatives the following tax rate amendments are proposed (with a contemplated effective date of January 1,
2019):
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the social security contribution rate to be reduced from 30% to 22%;
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the VAT rate to be increased from 18% to 22%.
The
foregoing measures are aimed at reducing the tax burden of certain industries involving significant human resources and thus having higher payroll expenses.
Although
these changes have not been implemented in any legislation and are only being dicussed at the government level as one of the tax initiatives considered for 2017-2025, we believe
that the adoption of such measures may adversely impact our tax liabilities in Russia. The reason is that being an IT company Luxoft may be able to continue using its special beneficial preferential
rate for social security contributions (14%), however, an increase of VAT by 4 percentage points may lead to a significant increase of our VAT liabilities in Russia.
On-going regulatory changes in Russia, including software purchase regulation, Civil Code reform and personal
data regulation, among others may have a material adverse effect on our operations there.
The full-scale reform of the Civil Code aimed at making the code more flexible, up-to-date and attractive to foreign investors. Russia's efforts
to reform the Russian Civil Code has continued, and in June 2015, a set of amendments to the code's general contract law provisions came into effect. In addition, the revision of the legislation on
legal entities that aimed to bring it in line with the recently amended Russian Civil Code are expected to continue in 2017.
Several
new concepts were introduced, such as insolvency of a citizen, alternative and optional obligations, a fine for failure to perform under a court ruling ("astrent"), the so-called
option agreement, inter-creditor and framework agreements, new types of legal entities, protections for
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shareholders
in nonpublic companies, right to expel a shareholder, shareholder agreements, joint signatures, mandatory audits, new minimum of charter capital, etc.
Although
recent and potential amendments could ultimately expand our possibilities for doing business and taking advantage of innovative legal structures, they may initially also pose
difficulties to us in negotiating and entering into contracts insofar as the underlying legal concepts are not sufficiently developed in the Russian legal system. Additionally, we may face problems
enforcing our rights where the application of these concepts by Russian authorities has not been tested or where they carry less weight among counterparties to contracts.
In
addition to the Civil Code reform, Russian legislation is being amended in various sectors. For example, new legislation was introduced regarding the regulation of software purchases,
pursuant to which after January 1, 2016 Russian governmental bodies are required to renounce foreign software in favor of Russian software. It is still be possible to buy foreign software but
only if necessary programs do not have domestic equivalents or the client can explain why the domestic software is not suitable.
Changes
in personal data protection regulations have also occurred. For example, all data operators collecting personal data of Russian citizens through electronic communications,
including the Internet, must ensure that its storage takes place in databases located in the territory of Russia. The new law applies not only to local data controllers but also to data controllers
established outside Russia to the
extent they gather personal data relating to Russian nationals through websites aimed at the territory of Russia.
Starting
from 2016 employee leasing is prohibited in Russia and only specially accredited employment agencies or affiliated entities can provide staff and only in the exceptional cases.
In practice, this means that companies that previously used agency work will have to completely revise the conditions of work with outstaffing companies providing staff to them, and outstaffing
companies will have to obtain the appropriate accreditation.
In
the absence of sufficient official guidance and clear practical enforcement examples, we cannot predict how these new laws will be applied and enforced and their influence on our
operations. Our failure to comply with the legal requirements may lead to the imposition of penalties and may adversely affect our business, financial condition and results of operations.
Risks related to our Class A ordinary shares
The price of our Class A ordinary shares may be volatile, and you may lose all or part of your
investment.
Following our initial public offering (the "IPO"), the price of our Class A ordinary shares has ranged from a high of $80.64 to a low of
$18.55 through the date of this annual report. Some of the factors that have caused or may cause the market price of our Class A ordinary shares to fluctuate
include:
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fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
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changes in estimates of our future financial results or recommendations by securities analysts;
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geopolitical instability in some locations where we operate, such as Ukraine and Russia;
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failure to develop or deliver our services as expected;
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changes in market valuations of similar companies;
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successes by our competitors;
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changes in our capital structure, such as future issuances of securities or the incurrence of debt;
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-
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sales of large blocks of our Class A ordinary shares;
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announcements by us or our competitors of significant services, contracts (or terminations), acquisitions, strategic alliances or actions/news
concerning our major clients;
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regulatory developments in Russia, Ukraine, Poland, Romania or elsewhere;
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litigation involving our company, our general industry or both;
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additions or departures of key personnel;
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investors' general perception of us, including any perception of misuse of sensitive information;
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changes in general economic, industry and market conditions;
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our ability to forecast revenue and control our costs; and
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changes in regulatory and other dynamics.
In
addition, if the market for shares in our industry, or the stock market in general, experience price and volume fluctuation or a loss of investor confidence, the trading price of our
Class A ordinary shares could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our share price to fall
and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
The dual class structure of our ordinary shares has the effect of concentrating voting control with certain
shareholders who held our shares prior to our IPO, including IBS Group Holding Limited, one of our directors and our chief executive officer, and limiting the ability of other shareholders to
influence corporate matters.
Each of our Class B ordinary shares has ten votes per share and each of our Class A ordinary shares has one vote per share.
Shareholders who hold Class B ordinary shares together beneficially own shares representing approximately 84.1% of the voting power of our outstanding shares as of June 30, 2017.
IBS
Group Holding Limited, our controlling shareholder ("IBS Group") beneficially owns through its two wholly-owned subsidiaries 97.2% of our outstanding Class B ordinary shares
and controls 81.8% of our voting power as of June 30, 2017. As a result of this concentration of share ownership, IBS Group, through its two wholly-owned subsidiaries, has and will have
sufficient voting power to effectively control all matters submitted to our shareholders for approval. These matters include:
-
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the composition of our board of directors;
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approving or rejecting a legal merger, demerger or other business combination; and
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amending our Amended Memorandum and Articles of Association, which govern the rights attached to our ordinary shares.
This
concentrated control will limit the ability of holders of Class A ordinary shares to influence corporate matters for the foreseeable future, and, as a result, the market
price of our Class A ordinary shares could be adversely affected. Specifically, this concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender
offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give Class A shareholders the opportunity to realize a premium over the then-prevailing
market price of our ordinary shares. The interests of our controlling shareholder and holders of our Class B ordinary shares generally may not always coincide with the interests of our other
shareholders.
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Future
transfers by holders of Class B ordinary shares will generally result in those shares converting to Class A ordinary shares, which will have the effect, over time,
of increasing the relative voting power of those holders of Class B ordinary shares who retain their shares in the long term.
Future sales of our Class A ordinary shares by our principal shareholders, or the perception that such
sales could occur, may cause the market price of our ordinary shares to decline.
Future sales of Class A ordinary shares by our principal shareholders, including two wholly-owned subsidiaries of IBS Group, Dmitry
Loshchinin, Morgan Stanley Investment Management, JPMorgan Chase & Co., Wasatch Advisors, Inc. and FMR LLC who beneficially owned in the aggregate 65.7% of our
Class A ordinary shares as of June 30, 2017, may cause the market price of our Class A ordinary shares to decline. Further, shares issuable under our share incentive plans have
been registered on a Form S-8 registration statement and may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their
ability to sell. Sales of substantial amounts of our ordinary shares in the public marketplace by us or our shareholders, including our principal shareholders who have the right to cause us to
register their shares for resale with the SEC, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares and may make it more difficult for
investors to sell ordinary shares at a time and price that such investors deem appropriate.
If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research
about our business, our Class A ordinary share price and trading volume could decline.
The trading market for our Class A ordinary shares is affected by any research and reports that securities or industry analysts publish
about us and our business. If one or more of the analysts who currently cover us or our business publish inaccurate or unfavorable research about us or our business, and in particular, if they
downgrade their evaluations of our Class A ordinary shares, the price of those shares would likely decline. If one or more of these analysts cease coverage of the Company, we could lose
visibility in the market for our Class A ordinary shares, which in turn could cause the price of those shares to decline.
As a foreign private issuer, we are not subject to U.S. proxy rules or Regulation FD and are exempt
from filing certain Exchange Act reports.
As a foreign private issuer, we are exempt from certain rules and regulations under the Exchange Act related to the furnishing and content of
proxy statements, and our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We are also exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. In addition, we are not required under the Exchange Act to
file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
However,
we would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet certain additional
requirements. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance
costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration
statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our
policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely
upon exemptions from certain
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corporate
governance requirements on U.S. stock exchanges that are available to foreign private issuers.
As a foreign private issuer, whose shares are listed on the NYSE, we may in the future elect to follow
certain home country corporate governance practices instead of certain NYSE requirements.
We have elected to comply with the corporate governance rules of the NYSE applicable to controlled companies, with the exception of maintaining
an internal audit function, even though, as a foreign private issuer, we are permitted to follow the corporate governance practices of our home country, the British Virgin Islands. Nevertheless, we
may in the future follow home country corporate governance practices instead of some or all of the NYSE's requirements. A foreign private issuer that elects to follow a home country practice instead
of NYSE requirements must disclose in its annual reports filed with the SEC any significant ways in which its corporate governance practices differ from those followed by domestic companies under NYSE
listing standards.
Certain
corporate governance requirements are not reflected in the BVI Business Companies Act, 2004 (as amended from time to time; the "BVI Act") or other British Virgin Islands law,
such as the requirement to obtain shareholder approval for certain dilutive issuances of shares, including the sale of our Class A ordinary shares in below-market private placement transactions
if greater than 20% of our pre-transaction issued and outstanding shares are sold, or are subject to different approval requirements, such as in connection with the establishment or amendment of
equity compensation plans. Moreover, the BVI Act does not require the implementation of a nominating committee or establishment of a formal director nomination process, the formation of an audit
committee or if such a committee is formed that it have any specific composition, that a board of directors consists of a majority of independent directors or that independent directors be involved in
the determination of executive compensation. See "ITEM 6. Directors, Senior Management and EmployeesC. Board PracticesCorporate governance practices." Accordingly, our
shareholders may not be afforded the same rights as provided under the NYSE's corporate governance rules.
We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax
consequences to U.S. holders.
Based on our financial statements, relevant market data, and the projected composition of our comprehensive income and valuation of our assets,
including goodwill, we do not
believe we were a passive foreign investment company (a "PFIC") for the fiscal year ended March 31, 2017, and we do not expect to become one in the foreseeable future, although there can be no
assurance in this regard. If we become a PFIC, holders of our Class A ordinary shares in the United States may become subject to increased tax liabilities under U.S. federal income tax laws and
regulations and may become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our
comprehensive income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. federal income tax purposes if either (i) 75% or more of our gross
income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in that taxable year which produce or are held for the production of
passive income is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our Class A ordinary shares, which is subject to change. See
"ITEM 10. Additional Information
E. TaxationUnited States federal income taxation."
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If we are unable to satisfy the requirements of Section 404 of the Sarbanes Oxley Act of 2002, or if
our internal control over financial reporting is not effective, we may be unable to report our financial information on a timely basis, our costs may increase, the reliability of our financial
statements may be questioned and our share price may suffer.
We are required to comply with the internal control evaluation and certification requirements of Section 404 ("Section 404") of
the Sarbanes Oxley Act of 2002 (the "Sarbanes Oxley Act"). Section 404(a) of the Sarbanes Oxley Act requires annual management assessments of the effectiveness of our internal control over
financial reporting. We are also required to obtain an annual auditor attestation on the effectiveness of our internal control over financial reporting, as required under Section 404(b) of the
Sarbanes Oxley Act.
As
a result of our management's assessment of the effectiveness of our internal control over financial reporting, our management may conclude that our internal control over financial
reporting is not effective due to any identified material weakness or otherwise. If we fail to achieve and maintain effectiveness of our internal control over financial reporting, we may be unable to
report our financial information on a timely basis, we may not be able to timely provide disclosure in accordance with the Sarbanes-Oxley Act and rules promulgated by the SEC thereunder relating to
the effective ness of internal control over financial reporting, our independent auditors may not be able to attest to the effectiveness of our internal control over financial reporting, and we may
suffer adverse regulatory consequences. Further, the evaluation by our management of the effectiveness of our internal control over financial reporting, and any remedial actions required, could result
in us incurring unanticipated additional material costs. Compliance with the auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act could further increase our expenses and
divert significant management time.
In
addition, timely and accurate financial reporting requires us to retain a sufficient number of U.S. GAAP experienced accounting personnel. There is strong demand for
U.S. GAAP experienced accounting personnel in the regions in which we operate, and as such, we may not be able to effectively compete for such personnel, which could make it more difficult for
us to maintain the effectiveness of our internal control over financial reporting and obtain an annual auditor attestation concluding that our internal control over financial reporting is effective.
Irrespective
of compliance with Section 404, any material weaknesses detected in our internal control over financial reporting could have a material adverse effect on our stated
results of operations and harm our reputation. As a result of such weaknesses, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees. If we are
unable to maintain the effectiveness of our internal control over financial reporting efficiently, it could adversely affect our operations, financial reporting and/or results of operations and could
result in an adverse opinion on the effectiveness of our internal control over financial reporting from our independent auditors. Further, if our internal control over financial reporting is not
effective, the reliability of our financial statements may be questioned and our share price may suffer.
We have taken advantage of NYSE's "controlled company" exemption from certain corporate governance
requirements, to a limited extent, and therefore, our shareholders will not have the same protections afforded to shareholders of companies that are subject to such requirements.
As a result of the number of shares beneficially owned by IBS Group through its two wholly-owned subsidiaries, we are eligible to take advantage
of the "controlled company" exemption under NYSE's corporate governance rules. A "controlled company" is a company of which more than 50% of the voting power is held by an individual or group of
shareholders. Pursuant to the "controlled company" exemption, a company that qualifies as a "controlled company" is not required to comply with the requirements of having a majority independent board
of directors or of having a nominating and corporate governance committee and a compensation committee, each composed entirely of
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independent
directors. See "ITEM 6. Directors, Senior Management and EmployeesC. Board PracticesBoard Committees." We currently rely on this exemption to the extent necessary
to permit Anatoly Karachinskiy and Glen Granovsky to serve on our compensation committee, even though they do not satisfy NYSE's definition of an "independent director." We also do not have a
nominating and corporate governance committee. If available to us, we may elect to use the controlled company exemption more broadly in the future. If we do so, our shareholders will not
have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.
We are not subject to the supervision of the British Virgin Islands Financial Services Commission and so our
shareholders are not protected by any regulatory inspections in the British Virgin Islands.
We are not an entity subject to any regulatory supervision in the British Virgin Islands by the Financial Services Commission. As a result,
shareholders are not protected by any regulatory supervision or inspections by any regulatory agency in the British Virgin Islands and we are not required to observe any restrictions in respect of its
conduct save as disclosed in this annual report or our Amended Memorandum and Articles of Association incorporated by reference herein.
As a public company we may become subject to further compliance obligations, which may strain our resources
and divert management's attention.
New or amended laws, regulations and standards in the United States, relating to corporate governance and public disclosure and other matters,
may be implemented in the future, which may increase our legal and financial compliance costs, make some activities more time-consuming and divert management's time and attention from
revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to
ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Being a publicly traded company in the United States and being subject
to U.S. rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified
executive officers.
It may be difficult to enforce a U.S. or foreign judgment against us, our directors and officers named in
this annual report outside the United States, or to assert U.S. securities laws claims outside of the United States.
Most of our assets are located outside of the United States. A majority of our directors and officers are nationals or residents of
jurisdictions other than the United States and a substantial portion of their assets are located in Russia, Ukraine and other CEE countries. As a result, it may be difficult for a shareholder to
effect service of process within the United States upon these persons, or to enforce against us or them, judgments obtained in U.S. courts, including judgments
predicated upon the civil liability provisions of the securities laws of the United States or any state therein. Additionally, it may be difficult to assert U.S. securities law claims in actions
originally instituted outside of the United States. Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a
claim. Even if a foreign court agrees to hear a claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim. Further, if
U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be
governed by the law of the jurisdiction in which the foreign court resides.
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Additionally,
although arbitration awards are generally enforceable in Commonwealth of Independent State ("CIS") countries, judgments obtained in the United States or in other foreign
courts, including those with respect to U.S. federal securities law claims, may not be enforceable in many CIS countries including Russia. A foreign court judgment may be recognized and enforced in
Ukraine only on the basis of an international treaty to which Ukraine is a party providing for enforcement of such judgments, and then only in accordance with the terms of such treaty. Ukraine is a
party to more than 20 mutual legal assistance treaties in civil matters (mostly with CIS and former Socialist countries) and, by way of legal succession, a party to nine mutual legal assistance
treaties of the former USSR. However, while Ukraine does have such treaties in place with several EU countries, it is not a party to mutual legal assistance treaties in civil matters with the United
States, Canada, the U.K., Germany and France. As a result, there are no international treaties that could be relied upon to enforce in Ukraine a civil judgment rendered in those countries. In the
absence of an international treaty providing for enforcement of judgments, the courts of Ukraine may only recognize or enforce a foreign court judgment on the basis of the principle of reciprocity,
which, unless proven otherwise, is deemed to exist in relations between Ukraine and the country where the judgment was rendered. At the same time, the principle of reciprocity is a relatively new and
undeveloped concept in Ukrainian legislation, and there is no official interpretation or established court practice on the application of the principle of reciprocity. Therefore, it is possible that a
U.S. or other foreign court judgment issued in a country, which has no mutual legal assistance treaty with Ukraine, could be refused recognition and/or enforcement in Ukraine, and the parties would
have to re-litigate the dispute in Ukrainian courts. In addition, the lack of practice and varying approaches towards recognition and enforcement in Ukraine of foreign court judgments potentially make
such recognition and enforcement problematic, if possible at all.
In
Romania, foreign civil and commercial judgments issued by courts of a non-EU member state may be recognized and enforced only if certain conditions are met, including reciprocity
between Romania and the relevant foreign state in respect of the effects of the foreign court rulings. Under the existing Romanian legal framework, the existence of a bilateral instrument or agreement
providing for the mutual recognition of the legal effects of civil judgments is seen as an important facilitator for the recognition and enforcement of such court judgments. No such agreement or
instrument is currently in place between Romania and the United States. In Poland, rulings of foreign state courts issued in civil matters, even from non-EU member states, are recognized by virtue of
law unless there exist obstacles specified in the Polish Code of Civil Procedure, such as if the ruling was issued in a case which falls
under the exclusive jurisdiction of Polish courts. As a result of the difficulty associated with enforcing a judgment against us, our investors may not be able to collect any damages awarded against
us by either a U.S. or foreign court.
We do not intend to pay regular dividends for the foreseeable future.
Our investors should not rely on an investment in our Class A ordinary shares to provide dividend income. Although we have declared and
paid dividends in prior years, we do not intend to declare or pay regular dividends to holders of our Class A ordinary shares for the foreseeable future, and any future credit facility may
contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our Class A ordinary shares. While we currently intend to retain all available funds and any future
earnings to fund the development and growth of our business, we may, by a resolution of the board of directors, authorize a special one-time dividend or other form of distribution to our shareholders
at such time and in such amount as the board of directors determines to be appropriate and in the best interest of the Company. Any payment of dividends in the future would be at the discretion of our
board and will depend on, among other things, our earnings, availability of distributable profits, liquidity and financial position, business opportunities, tax considerations, planned acquisitions
and other strategic plans of the Company, the restrictions in our debt agreements, and other considerations that our board deems relevant. As a result, if we do not pay dividends, capital
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appreciation,
if any, of our Class A ordinary shares will be investors' sole source of gain for the foreseeable future. Accordingly, investors must rely on sales of their Class A
ordinary shares after price appreciation, which may never occur, as the only way to realize any return on their investment. Investors seeking annual cash dividends should not purchase our
Class A ordinary shares.
In
addition, our ability to pay dividends is dependent upon the earnings of our subsidiaries and their distribution of funds to us, primarily in the form of dividends. The ability of our
subsidiaries to make distributions may be subject to statutory restrictions and retained earnings criteria, and is contingent upon the cash flow and earnings of those subsidiaries.
Provisions in our organizational documents may delay or prevent our acquisition by a third party.
Our Amended Memorandum and Articles of Association contain a number of provisions that may make it more difficult or expensive for a third party
to acquire control of us without the approval of our board of directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that
might otherwise result in our shareholders receiving a premium over the market price for their ordinary shares. These provisions include, among others:
-
-
a dual class ordinary share structure for seven years following the completion of our initial public offering;
-
-
our board of directors' ability to issue, from time to time, one or more classes of preferred shares and, with respect to each such class, to
fix the terms thereof by resolution;
-
-
restrictions on the ability of shareholders to call meetings and bring proposals before meetings;
-
-
absence of the ability of shareholders to act by written consent;
-
-
the requirement of an affirmative vote of two-thirds or more of the shares entitled to vote to amend certain provisions of our Amended
Memorandum and Articles of Association;
-
-
the requirement of an affirmative vote of two-thirds or more of the shares entitled to vote on special matters such as mergers or acquisitions;
and
-
-
the ability of directors in their absolute discretion to decline to register or delay the registration of any transfer of shares without
assigning any reason.
These
provisions of our Amended Memorandum and Articles of Association could discourage potential takeover attempts and reduce the price that investors might be willing to pay for our
Class A ordinary shares in the future, which could reduce the market price of our Class A ordinary shares. For more information, see "ITEM 10 Additional InformationB.
Memorandum and Articles of Association."
Risks Related to Our Incorporation in the British Virgin Islands
As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have
fewer protections as a shareholder.
Our corporate affairs are governed by our Amended Memorandum and Articles of Association, the BVI Act and the common law of the British Virgin
Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law
are to a large extent governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial
precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of shareholders and
the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some
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jurisdictions
in the United States. In particular, the British Virgin Islands has a less developed body of securities laws than that of the United States, and some states (such as Delaware) have more
fully developed and judicially interpreted bodies of corporate law. In addition, British Virgin Islands law does not make a distinction between public and private companies and some of the protections
and safeguards (such as statutory pre-emption rights, save to the extent that they are expressly provided for in the Amended Memorandum and Articles of Association) that investors may expect to find
in relation to a public company are not provided for under British Virgin Islands law.
As
a result of all of the above, holders of our Class A ordinary shares may have more difficulty in protecting their interests in the face of actions taken by our management,
directors or major shareholders than they would as shareholders of a U.S. company. For a discussion of significant differences between the provisions of the BVI Act and the laws applicable to
companies incorporated in the United States and their shareholders, see "ITEM 10. Additional InformationB. Memorandum and Articles of Association."
Shareholders in British Virgin Islands companies may not be able to initiate shareholder derivative actions,
thereby limiting shareholders' ability to protect their interests.
While statutory provisions do exist in British Virgin Islands law for derivative actions to be brought in certain circumstances, shareholders in
British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought,
and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of
shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British
Virgin Islands courts are also unlikely to: (i) recognize or enforce against us judgments of courts in the United States based on certain civil liability provisions of U.S. securities law; or
(ii) to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.
There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will in certain circumstances recognize
and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
The laws of the British Virgin Islands provide little protection for minority shareholders, so minority
shareholders will have little or no recourse if those shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the British Virgin Islands, there is little statutory protection of minority shareholders other than the provisions of the BVI
Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the BVI Act or the constituent documents of the corporation, the
Amended Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the Amended Memorandum and Articles of
Association.
There
are common-law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is
limited. Under the general rule pursuant to English company law known as the rule in
Foss v. Harbottle
, a court will generally refuse to interfere with
the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company's affairs by the majority or the board of directors.
However, every shareholder is entitled to have the affairs of the company conducted properly according to British Virgin Islands law and the company's constituent documents.
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As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company's Amended Memorandum and
Articles of Association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the
authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute a "fraud on the minority" where the wrongdoers control the company; (3) acts
that infringe or are about to infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring the approval
of a majority of shareholders, which are more limited than the rights afforded to minority shareholders under the laws of many states in the United States.
ITEM 4. Information About Luxoft
A. History and Development of Luxoft
Our legal name is Luxoft Holding, Inc. Including our predecessors, we have been in business since March 2000. Luxoft Holding, Inc was incorporated as a
company limited by shares under the laws of the British Virgin Islands on March 7, 2006. Over the past 17 years, the Company grew from the initial team of 20 people and one office to
over 12,700 employees and offices across 39 cities and 19 countries worldwide, covering North America, Western and Eastern Europe, Latin America, and Southeast Asia as of March 31, 2017. In
June 2013, we listed our shares on the New York Stock Exchange (the "NYSE") under the symbol "LXFT." During the fiscal years ended March 31, 2016 and 2017, we completed a number of
acquisitions, as discussed in further detail in "ITEM 5. Operating and Financial Review and ProspectsA. Operating ResultsAcquisitions." Additionally, in 2012, our subsidiary
Luxoft International Company Limited, which had previously been a British Virgin Islands company, reincorporated in Cyprus. We have principal executive offices located at Gubelstrasse 24, 6300 Zug,
Switzerland. Our registered office is located at Commerce House, Wickhams Cay 1, PO Box 3140, Road Town, Tortola, British Virgin Islands. Our telephone number is
+41 417 262 060. We have appointed Luxoft USA, Inc. ("Luxoft USA"), 100 Wall Street, Suite 503, New York, NY 10005, as our agent upon whom process
may be served in any action brought against us under the securities laws of the United States.
For
more information about us, our website is www.luxoft.com. The information contained therein or connected thereto shall not be deemed to be incorporated by reference in this annual
report.
Principal Capital Expenditures
During the fiscal years ended March 31, 2017, 2016 and 2015 we invested $106.5 million, $32.7 million and
$42.3 million, respectively, of which $19.6 million, $24.2 million and $14.2 million, respectively, related to acquisitions of property and equipment and
$77.7 million, $3.5 million and $24.3 million were spent on acquisitions of Business. In order to support our overall business expansion, we intend to continue to invest in
production equipment. Moreover, we may spend additional amounts of cash on acquisitions from time to time, if and when such opportunities arise. We anticipate that our next major capital expenditures
in the fiscal years ending March 31, 2018 and March 31, 2019 will be related to the expansion of our business and possible merger and acquisition transactions in Europe, APAC and the
United States. We currently anticipate our capital expenditures in the years ending March 31, 2018 and March 31, 2019 will be financed from cash generated from operations, our current
cash position and currently available credit facilities.
B. Business Overview
Overview
We are a leading provider of software development services and innovative IT solutions to a global client base consisting primarily of large,
multinational corporations predominantly in Europe, the U.S.
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and
Asia Pacific. Our software development services consist of core and mission critical custom software development and support, product engineering, and technology consulting. Our bespoke solutions
include technology architecture selection and other consulting, our proprietary products and/or standard system software and platforms, as well as implementation and maintenance. These solutions
directly impact our clients' business outcomes and efficiently deliver continuous innovation. Through our services and solutions, we help our clients improve their competitive position by increasing
efficiency, optimizing costs, and enabling changes through disruptive digital technologies that enhance end-user experience and shorten time-to-market. We have developed a reputation and track record
of delivering consistently high quality service that has allowed us to establish long-term strategic relationships with many of our clients, translating into significant revenue growth and recurring
business.
During
the past three years we have been actively enhancing our premium services and scale of our end-to-end solutions to move outside of the traditional outsourcing space by adding
advanced capabilities, thereby offering more value to our clients. Over the past year we expanded our advisory, platform architecture selection and packaged software services, such as consulting and
implementation of Murex, OpenLink, Qt Automotive, IBM-BPM, Pivotal, and PEGA, and enhanced our in-house platforms.
We
utilize our deep industry and domain specific expertise to develop green field innovative software, as well as replace legacy IT ecosystems for our clients to improve their core
products, processes, and applications. We focus on four industry verticals on which we concentrate the majority of our resources and management efforts at this time. These verticals are: financial
services; automotive and transport; telecommunications ("telecom"); and healthcare and pharmaceuticals. Companies in these industries have significant and growing demand for IT services and consider
innovation and deploying disruptive technologies to be a top priority in achieving their business goals. We also perform a portion of our work for various enterprises within travel, aviation, retail,
energy, technology, agriculture and other
industries. Engagements that we execute for such clients may entail deployment of new technologies within Luxoft Digital Enterprise ("Luxoft Digital").
Luxoft
Digital brings a wide variety of modern and emerging technologies and expertise across industry verticals. It plays an important role in differentiation from our peers as it
enriches our company's capabilities and the service catalogue for all of our current and perspective clients. Modern cutting edge technologies include Cloud, Internet of Things ("IoT"), Big Data /
Data Analytics, Digital Experience, Mobile, and DevOps. They occupy an increasing part of corporate IT budgets today. Emerging technologies are focused on bleeding edge IT trends and include
blockchain, robotics, machine learning, artificial intelligence and deep learning. More details are in "Luxoft Digital Enterprise" section. Each practice within Luxoft Digital focuses on the research
and development of its respective subject matter and has a dedicated pool of IT professionals. The purpose of Luxoft Digital is to contribute knowledge and expertise to generate better offering for
our customers through synergies between technical capabilities and niche-focused domain services within all of our lines of businesses. For example, we bring our Big Data expertise into our current
alliance with the technology organization at one of our European Union based banking clients. We are working together on a multi-year strategic program of rebuilding core data warehouse platform used
for regulatory reporting and business performance management. We believe the combination of our broad range of services and solutions, along with our deep industry and domain expertise, allows us to
work concurrently on multiple mission critical engagements for a single client, leaving us well positioned to increase our share of our clients' core technology budgets. We also believe that services
and solutions delivered by Luxoft Digital will allow us to diversify our current business and access new clients thereby lowering customer and vertical revenue concentration.
We
serve large multinational corporations that rely on our IT solutions and software development capabilities for many of their mission critical systems. For the fiscal year ended
March 31, 2017, a
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significant
portion of our sales was to
Fortune Global 500
companies, including Deutsche Bank, UBS, Boeing and Credit Suisse. During this period, we
derived 57.6% of our sales from clients located in Europe, 33.3% from clients in the United States and 9.1% from clients in other geographies. As of March 31, 2017, seven out of our top ten
clients have been with us for five or more years and, in the three fiscal years ended March 31, 2017, 2016 and 2015, the majority of our new clients were referred to us.
The
scope of our services ranges from handling standard outsourcing client-directed engagements to transformational, managed services engagements. Over the past several years we have
experienced steady demand for managed services, by which we assume full control of the project team, including the project manager, lead analyst and lead architect, and manage all facets of execution.
In managed services engagements, we have a higher degree of control over the staffing mix and the deployment of resources across our global dedicated delivery platform. These engagements allow us to
embed
ourselves in our client's business, thereby increasing client loyalty and barriers to entry for competition. In some cases, our long-standing relationships with large multinational clients lead to
transformational engagements, in which we frequently replace a portion of the client's entire IT team and interface directly with the internal end user, instead of merely augmenting our client's IT
department. We seek to continually improve our delivery by using optimized software development methodologies, such as Agile. Agile methodology entails the delivery of software at frequent iterations
by cross-functional geographically distributed teams, often working remotely across various time zones. This methodology, along with our products and platforms, reduces time-to-market and lower
development costs for our clients.
We
operate through an expansive and scalable global dedicated delivery model, which we believe is one of the key factors that differentiate us from the competition. We provide our
services and deliver our solutions from 34 cities with delivery centers located primarily in CEE, including Bulgaria, Poland, Romania, Russia and Ukraine, where we have access to a significant pool of
highly educated IT professionals who possess technical expertise and business domain knowledge. We also have delivery centers in Australia, Canada, Germany, Malaysia, Mexico, Singapore, South Africa,
Sweden, the United Kingdom, the United States, and Vietnam. Our CEE delivery centers are strategically located near current and potential client sites in Eastern and Western Europe and in Asia
Pacific. They are designed to offer worldwide offshore and nearshore seamless support and to meet our clients' security and infrastructure requirements. We believe that our global delivery model
allows us to better serve our clients, providing us with agility, logistical and time zone convenience and the cost advantage of having fewer dedicated on-site personnel. We also believe the
similarities in engineering culture between CEE, where the majority of our engineering talent is located, and our primary revenue-generating geographiesEurope and the United
Statesafford us a competitive advantage over non-CEE based competitors in pursuing engagements in those geographies. Our delivery model also serves as a powerful recruitment engine
supporting the growth of our business by providing access to numerous emerging markets worldwide and allowing us to resolve bottlenecks in talent supply.
We
believe that our strong brand, corporate culture and our focus on efficient innovation aimed at promoting our clients' business goals and outcomes allow us to successfully recruit and
retain highly qualified IT engineers and developers ("IT professionals"). As of March 31, 2017, we had 12,766 personnel of whom 10,807 were IT professionals. We support our growth through our
human resources infrastructure that allows us to scale the workforce globally as our business grows. During the fiscal year ended March 31, 2017, we hired, on average, more than 350 IT
professionals per month.
Our
work has earned us significant client recognition and visibility, including from our large multinational clients. During fiscal year 2017 our company became one of the first supplier
members of SmartDeviceLink Consortium, which was formed by Ford and one of the key Japanese OEMs, and is a nonprofit organization working to manage an open source automotive software
platforma standard set of protocols and messages that connect applications on a smartphone to a vehicle's head unit.
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The
quality of our operational processes has been recognized by our Capability Maturity Model Integration, or CMMI, Level 5 certification, which is the highest level of the
Software Engineering Institute's CMMI categorization for measuring the maturity of software development processes. We have also achieved TMMi Level 4 maturity level in quality management and
testing.
Our
sales have grown from $314.6 million in the fiscal year ended March 31, 2013 to $785.6 million in the fiscal year ended March 31, 2017, representing a
compound annual growth rate ("CAGR") of 25.7%. Our net income has grown from $37.5 million in the fiscal year ended March 31, 2013 to $62.6 million in the fiscal year ended
March 31, 2017, representing a CAGR of 13.7%. As of March 31, 2017, we had over 270 active clients and over 45 high potential accounts ("HPA"), including Credit Suisse, Continental and
Microsoft. In the aggregate, all HPA accounts generated over $229 million in revenue during the year, which represents at least 90% growth as compared to the aggregated revenues of the HPA
accounts during the previous year. We define HPA as a client account which, according to management's estimates, has potential to reach at least $5 million in recurring annual revenues within
three years from the inception of such account and is capable of generating a three-year CAGR of at least 30%. Our management determines which of our clients should be deemed HPAs.
Industry background
IT services outsourcing and offshoring
For a multinational corporation to remain competitive and meet the increasingly diverse needs of its worldwide client base, it must have
sufficiently high-quality underlying IT architecture, stay current with constant technological evolution and have access to high-quality IT talent at a competitive cost. Furthermore, the combination
of shrinking product lifecycles and the scarcity and associated cost of local IT engineering talent are driving companies to increasingly rely on the capabilities of IT outsourcing firms, instead of,
or in addition to, their own offshore IT operations.
Multinational
corporations seek IT services providers that have industry-specific knowledge, the ability to manage dynamic, short development cycles, scale and recruit talent with
relevant expertise, agility, cost-effectiveness and global delivery capabilities. Furthermore, IT spending is becoming more aligned with companies' broader business strategies towards innovation.
The
increased importance of IT-related decisions requires companies to look for providers with specific domain practice and vertical expertise, as opposed to generalists with
commoditized skill sets. The offshore outsourcing business model has matured and evolved since its beginning in the early 1990s to provide proven advantages and fewer risks. The outsourcing industry
is also moving away from a singular focus on cost toward a broader focus on efficiency and innovation. With that we believe that the need for traditional industry agnostic application development and
maintenance (ADM) services is losing momentum in lieu of the end-to-end services concept. The idea of the end-to-end services concept is based on delivery of a complete solution that addresses a
defined type of problem(s) typically faced by customers in a given vertical in its entirety without a need for additional vendors, subcontractors, and middlemen. The solution is a final product
created by us reflecting the combination of necessary components, such as proprietary IP, expert engineering and custom software development services, selection and deployment of standard off-the
shelf software and any combination of those. ADM-related stand-alone tasks, when not supplemented by premium services, are becoming standardized or commoditized, thereby unavoidably creating margin
pressure. Multinational corporations no longer utilize IT outsourcing only in an effort to achieve cost efficiencies and labor arbitrage. They also seek to increase agility, introduce innovation and
reduce complexity by replacing, or complementing in-house IT resources through partnerships with vendors that can provide wide array of domain-focused services. Therefore, we are actively enhancing
our premium services and end-to-end
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solutions
to move outside of the traditional outsourcing space and adding premium capabilities, including consulting, in order to keep moving up the value chain.
The
financial crisis of 2008 and 2009 accelerated several trends in multinational corporations' sourcing strategies that have led to growth of the overall technology expertise
outsourcing market and changed the provider landscape. The first trend is the need to innovate while reducing costs. This continues to drive multinational corporations to seek talent with tailored
skills, and to expand the use of multiple providers in order to gain access to scalable and cost-effective resources. The second trend is increasingly thoughtful management of global vendor sourcing.
Multinational corporations vary the number of vendors they use based on their budgets, mission critical and discretionary needs, and prevailing business conditions. Therefore, many multinational
corporations may look to consolidate their outsourcing firms by using fewer vendors and focusing on those that provide high quality, expert services. Our top client Deutsche Bank is a good example of
such trend. Over the past years it went through significant consolidation efforts and developed a Supplier Partnership Program, which was successfully launched in June 2014 in order to concentrate
Deutsche Bank's outsourcing efforts on the small number of strategic vendors capable of delivering the most profound business impact. Our company is once again participating in this program as a
Strategic Partner 2016 of Deutsche Bank. In
other cases, corporations may seek to selectively add new vendors for additional or specialized expertise and/or geographic diversity in order to manage concentration risk. Some of our client wins are
related to such diversification strategies, where clients seek to add the nearshore convenience of Eastern European outsourcing. The third trend is the increasing importance of vendor possession of
specialized expertise and solutions that address defined challenges specific to the client or to a given industry vertical. Therefore, we perceive achieving end-to-end provider status in the niche
domains of our focus to be one of the top priorities and necessary steps to successful execution of managed delivery engagements. For example, we consider ourselves to be an end-to-end provider of
software development services covering the entire spectrum of applications necessary for entertainment, navigation, and telematics hardware to be integrated and properly function in cockpits of cars.
Trends of IT spend in key industry verticals
Financial services:
The financial services industry has traditionally been one of the most IT-intensive industries. Most of the IT
services providers
are concentrating their efforts within the Run the Bank (RTB) segment, which is now challenged with budget and margin pressure, and thus these providers are facing a challenging growth environment.
Our company historically has been present in the less crowded and more non-discretionary by nature Change the Bank (CTB) space, providing a wide array of services that are designed to achieve growth
and are relevant to current markets conditions.
In
order to preserve their capital, financial institutions need to invest in their IT architecture and change many legacy business processes in line with new, modern and disruptive
technologies available today. This enables these institutions to modernize their mostly in-house developed, vertical-specific legacy systems, which often increases the demand for managed services in
front-office IT, to introduce new technologies and processes.
We
believe that the following broad trends currently drive financial services IT spending: innovation in response to digitizationdriven disruption; ongoing cost optimization
in order to increase efficiency; standardization and simplification of existing legacy systems and unnecessary complex software architecture to reduce on-going expenses; and ongoing regulatory and
compliance challenges:
-
-
Innovation:
Financial services industry is driven by ongoing necessity to
innovate, especially in line with the recent digital transformation in the industry. Financial services industry, especially its investment banking part with high exposure to capital markets and sales
and trading, is undergoing rebalancing. Management focus is shifting to the end consumer-oriented parts of the
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business,
such as wealth management, asset management and retail and private banking. The progress and the competitive edge in all of the above segments are driven by digital transformation. These
include technologies that become non-discretionary such as big data, private cloud, various FinTech tools and products, UI/UX, as well as less immediate technologies, such as blockchain, machine
learning, grid computing, which we believe will become a must to deploy in a more distant future.
-
-
Optimization:
Banks have hundreds of applications but need to reduce the
number of applications by sun-setting some legacy items. There is a mounting need to decrease infrastructure costs and increase computing capacity, which generates ample demand for cloud migration
services to make the underlying data cheaper to maintain, and become available quickly. Today Financial Services clients try to optimize their IT, including applications and systems infrastructure, by
looking for opportunities to run these operations via a utility-based Platform As-A-Service ("PAAS") model.
-
-
Standardization:
IT infrastructure and custom trading systems built in the
capital markets over the last decades became quite massive in size and are difficult and expensive to maintain. The banks used to spend a lot of money on creative proprietary trading systems and
efforts focused on unifying the data. At this juncture, IT operations of most banks, especially large global banks, represent a significant cost item and a burdensome legacy to carry. Thus, standard
platforms, such as Murex and Calypso, have started receiving an increased amount of attention. The areas of significant demand growth for standard package implementations are Capital Markets as well
as wealth and asset management divisions.
-
-
Regulatory and compliance:
On-going regulatory reporting, governance and
compliance (GRC) challenges fueling consistent demand for data-related technologies, including big data. The latest regulations require financial institutions to make changes to their systems in order
to be compliant with Basel Committee's Fundamental Review of the Trading Book (FRTB) and E.U.'s Markets in Financial Instruments Directive (MIFID II).
Our
clients in this vertical include Deutsche Bank, UBS, Credit Suisse and Citi.
Automotive and transport:
The rapid introduction of new electronic architecture and the separation of hardware and its functionality
and software are
driving demand for embedded software development and independent software integration expertise inside and outside of the cockpit. The way the cars are being designed and produced as well as the
length of software development cycles are radically changing. Inside of the cockpit infotainment and navigation, the Human Machine Interface (HMI) features / user experience, and autonomous driving
are all undergoing continuous transformation. Outside of the cockpit the disruption spans across all of the Under The Hood (UTH) elements: the powertrain, chassis, motor, breaks, and other components.
The capabilities of a car receiving over-the-air updates is increasing, allowing for a shorter time to market from design room to the end consumer. Regulation and competitive pressure from other
industries place new demands on vehicle User Experiences and UTH control functions, as more and more autonomous driving features are added into the vehicles.
Sharing
economy, electrification of the vehicle and overall increased presence of software in the car opens the door for relevant technologies and allows various services related to
fully digital lifestyle to come into the cars of today. Thus, cloud- and diagnostics-related services have become a new catalyst for growth and IT expenditures, in this sector. Furthermore, IT
expenditures in the automotive and transport industry is also increasingly driven by improving safety and complying with regulatory requirements. Ensuring safety and limiting driver distraction while
improving the in-car experience is remaining one of the key priorities of OEMs and their immediate suppliers.
Our
clients in this vertical include Harman, Continental, Ford and BMW.
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Telecom:
The growth of tablets and smart phones, combined with the accelerating growth of video and
multimedia traffic, will continue to increase the demands on network providers' networks and enterprises' systems. The growth in adoption of wireless communications (including 4G/LTE), virtualization
technologies and cloud computing will require service providers and enterprises to further invest in their network infrastructure. Software Defined Networking ("SDN") and Network Function
Visualization ("NFV") are technologies that carriers and network equipment manufacturers are pursuing and aggressively testing in their lab environments and selected networks. New eco-systems are
being developed around NFV Conformance and Interoperability testing.
Wireless
competition has intensified in the U.S. and underlying technologies are advancing to ensure better economics and agility. The nature of competition and change continues to put
pressure on our customers in the service provider, equipment manufacturer, and large enterprise spaces. Our core technical services remain in demand and we continue to build out additional
capabilities in 4G/LTE, Over-the-top (OTT) video enablement, big data management, and software systems that make our customers more efficient. New software technology persists as the dominant change
agent in the advancement of communications services.
The
customers in this line of business are looking for providers with highly relevant expertise, including offshore and onshore data analytics and software development capabilities
specifically tailored to communications services providers and their end customers. Service providers and media companies in this vertical are seeking out vendor partners with deep expertise in
systems technology for network equipment manufacturers and new OTT media competences.
Our
clients in this vertical include Cobham Wireless, Spirent, and a top Fortune 500 company.
Healthcare and Pharmaceuticals:
Patients are increasingly empowered with access to personal health data and supporting technologies.
Pharmaceutical
companies are being driven towards outcomes based medicines and are required to embrace new technologies to streamline and accelerate their drug discovery and commercialization activities.
Furthermore, the Healthcare & Life Sciences industries are converging, opening up a significant potential within each of these two fields especially in the R&D domain. For example, clinical,
pharmacovigilance, and regulatory processes will be advanced and accelerated with techniques, such as machine learning and natural language processing. Competitive landscape in this vertical is
comprised of traditional IT vendors without extensive industry experience, and sector-focused providers who do not have adequate capabilities with cutting edge technologies. The clients are looking
for vendors who are capable of handling complex domain-focused engagements, which are outside of the scope of commoditized IT services, and incorporating innovation and technologies of tomorrow.
Our
clients in this vertical include two top Fortune 500 companies.
Consumers of today choose providers of goods and services based on convenience, speed of service, ease of use and quality of their experiences
with desired goods and services. For companies, digitalization is becoming an important way to differentiate, become more efficient, acquire new customers, and measurably improve their output. Data is
becoming a valuable source of intelligence, effective consumer targeting, and source for improvement of business outcomes. Combination of various expertise within Luxoft Digital, such as IoT, Big
Data, Data Analytics, Artificial Intelligence, Machine and Deep Learning ensures that we enable competitive differentiation for our clients across all lines of businesses.
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Automation
and robotics are becoming important trends in retail, services, logistics, and even financial services. Below are examples of trends in various domains of the economy where
Luxoft Digital can and is making a difference:
Travel and aviation
: New technologies, an all-round shift to mobile devices and social media have transformed the way
the travel experience is offered and managed. Concepts like connected airplane made possible through IoT based technologies and airplane infotainment on demand are becoming more and more popular with
the clients in this vertical. With software technologies transforming the travel industry, highly personalized customer service of the traditional travel agent has been nearly eliminated in favor of
customer self-service. The players in the travel and aviation industry demand new solutions that return the business focus onto the customer while improving the way the travel experience is offered
and managed. This change from a transactional model to a relationship based consumer centric model opens up additional opportunities for travel technology companies, from new product development to
the transformation of legacy systems. For aerospace companies, in addition to stringent industry regulations and security requirements, it is necessary to keep with the pace of technological
innovation while managing overall profitability. Thus, with increasing cost and competitive pressures, travel and aviation companies will continue to be attracted to high quality, low cost IT services
and solutions providers. Therefore, we see prevailing demand from existing clients in the areas of big data processing, analysis and visualization. Clients are also interested in developing mobile
applications for travel, such as travel assistants, disruption management, loyalty and in-flight entertainment. We have also started seeing interest in emerging technologies, such as Near Field
Communication (NFC), and indoor positioning based on low-power consuming technologies, such as Bluetooth.
Our
clients in this domain include Boeing, Expedia and AlcatelLucent.
Technology
: Embedded Software has become a crucial component of ecosystems, helping to put products ahead of the
competition. Original Equipment and Device Manufacturers (OEMs and ODMs) as well as leading semiconductor companies strive to create innovative software solutions that meet the latest market
requirements. With the continued migration to new operating systems and open standards, escalating adoption of cloud technologies and increasing mobile, high performance cross-platform and smart
electronics development and proliferation of new concepts, such as IoT, technology companies are required to keep up with the pace of rapid technological evolution. OEMs and ODMs focus
on multiple industries, including automotive, wireless, consumer electronics, manufacturing, medical handheld devices, telecom, video, multimedia, security and identification, and vendors, which can
help them address product engineering tasks that cover the entire technology stack. For example, the rising demand for IoT and connected solutions creates a new challenge for automation intelligence
in the space of smart sensors and cloud data processing. Disruptive technologies and new ways of customer interactions introducing new avenues for security threats are becoming more complex and
impactful on business. That is why embedded software is increasing in its importance and the players in the technology industry must increasingly invest in controlling features like security in a
"built-in" (i.e. embedded) manner, rather than a "bolt-on" (i.e. added later) manner, for their products to minimize security vulnerabilities and flaws.
Our
clients in this domain include AMD, Loewe and Microsoft.
Energy
: With an aging energy distribution infrastructure and increased regulatory pressures to implement smart grid and
demand response services, the IT needs of energy companies will continue to grow. Furthermore, the popularity and progress of green and renewable technologies combined with the ever-increasing need to
cut costs is expected to drive demand for innovative, high quality and low cost IT services providers. Prevailing digitization trends are also affecting this sector generating demand for IoT-based
technologies and big data / analytics, including telemetry. Technology plays greater and greater role in increasing effectiveness and enhancement of the oil & gas production process. The
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enterprises
in this segment are looking for IT capabilities in automation of geological data collection, modeling of drilling logs, extraction optimization, well completion analysis, as well as
analysis of drilling data pools delivered by the connected censors participating in the entire drilling process.
Our
clients in this domain include GE, Synergy Energy and Kent County Council.
Growth of CEE as a services delivery location
Availability of high-quality talent
CEE's large pool of highly educated and experienced IT professionals with strong technical skills makes the region an appealing outsourcing
destination. Countries in CEE have historically demonstrated a strong focus on technical education, exemplified by the high proportion of students in this region completing higher education in the
areas of applied mathematics, physics and engineering. Students from universities in CEE have also historically dominated world computer programming competitions.
The
availability of human resources throughout the region, in particular in Russia, Ukraine, Romania, Poland, and Bulgaria allows providers to be as agile and scalable as necessary.
Russia.
The United Nations Educational, Scientific and Cultural Organization ("UNESCO") estimates that 28% of all graduates in Russia
receive degrees
in the field of science and technology. Our engineering headcount as of March 31, 2017 in Russia amounted to 2,008 engineers. According to the May 11, 2017 Gartner report, "Evaluate
Offshore/Nearshore Countries for Outsourcing, Shared Services and Captives in EMEA, 2016," by Neil Barton, et.al. (the "May 2017 Gartner Report"), "Russia's software export industry is worth
$6 billion a year and grows at an 11% CAGR. Some 90,000 engineers currently work in the software export industry, with a similar number of STEM (science, technology, engineering and
mathematics) graduates arriving each year. Russian universities perform strongly in programming competitions, and English is spoken by around 75% of IT workers. Labor costs in secondary cities such as
St. Petersburg and Novosibirsk can be 20% to 30% lower. Employee attrition and labor cost inflation are low compared with Eastern Europe."
Ukraine.
According to the May 2017 Gartner Report, "over 50% of developers are in Kiev. Secondary cities include Kharkiv, Lviv, Dnipro,
Odessa and
Vinnytsia. The rapid growth of the software engineering industry in Ukraine from 2009 to 2013 attracted many young people to technology degrees. Good supply and falling demand means that labor rates
in Ukraine have remained attractively low, even more so for Western viewers because of the Ukrainian hryvnia has fallen by 75% against most Western currencies since 2014." Our engineering headcount as
of March 31, 2017 in Ukraine amounted to 3,344 engineers.
Romania.
The language capabilities of the local human capital position Romania as an attractive offshore destination for IT services
outsourcing,
although competition for skilled resources may be intense. Our engineering headcount as of March 31, 2017 in Romania demonstrated an 11.8% year over year increase and amounted to 1,624
engineers. According to the May 2017 Gartner Report, "Romania has invested heavily in technology parks, with 2.25 million square meters of office space available in Bucharest and increasing
options in cheaper secondary cities such as Cluj, Iasi and Timisoara. In addition to English language skills, Romania is an interesting option for customers needing other European languages: 27% of IT
workers speak French, and, in total, Romania offers 2.7 million French speakers. German and Spanish speakers are also widely available. Romania's political stability has improved as an
established member of the EU, and service exports continue to grow at above 10% per year. Romania is now home to delivery centers for more than 50 well-known multinational brands."
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Poland.
During fiscal year 2017 we increased the size of our Polish engineer presence by 7.1% year over year, which now exceeds 1,800
employees.
According to the May 2017 Gartner Report, "over 450 companies have now located delivery centers in Poland, and the service export economy has grown at an 18% CAGR since 2009. Krakow is the largest
cluster of delivery centers, with 30,000 workers, Warsaw and Wroclaw both offer around 20,000 workers, and Lodz has a further 10,000. Smaller secondary cities include Katowice, Lublin, Bydgoszcz,
Posnan and Szczecin. The availability of resources with strong foreign language skills is very good in Poland. The government has made learning a modern foreign language (most often English) mandatory
in the education system for children aged five and over. English is the most widely spoken language followed by German, French, and also Spanish and Italian."
Bulgaria.
Our engineering headcount in Bulgaria as of March 31, 2017 amounted to 194 engineers, representing a 24.4%
year-over-year increase.
According to the February 2016 Gartner Report, "Bulgaria's offshoring industry is growing at a 13% CAGR through a combination of low labor costs and a stable economic environment. As a full EU member,
Bulgaria's workforce is free to work
anywhere within the EU. Bulgaria is a member of intellectual property protection organizations such as the World Intellectual Property Organization (WIPO), WTO and TRIPS. The currency is also stable,
having been successfully pegged to the euro for many years."
The
Gartner Report(s) described herein, (the "Gartner Report(s)") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by
Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Annual Report) and the opinions
expressed in the Gartner Report(s) are subject to change without notice.
In
May 2014, we began our "Luxoft: Global Upgrade" program (the "Global Upgrade"), through which we have aimed to disseminate our workforce across relocation hubs in several key
geographies. We believe this internal mobility model further differentiates us from other providers, which operate via large hubs predominantly committed to a single country. Since the Global Upgrade
was completed in 2015, we have expanded our recruitment efforts to a global scale utilizing the processes and the relationships we have established while we were executing on that program to the
benefit and continuous improvement of our recruitment. During fiscal year 2017, we have placed over 700 professionals in key geographies such as Mexico, Poland, Romania, and the United Kingdom.
We
seek out engineering excellence worldwide, especially in emerging markets, and move these resources to our larger locations, such as Poland, Romania or Bulgaria, utilizing benefits
and established processes obtained during the initial relocation of our staff. Those benefits include monetary incentives from the governmental organizations of Eastern European countries. During the
fiscal year ended March 31, 2017, we received 8.08 million RON, or $1.86 million, of government incentives in Romania, 3.48 million PLN, or $0.83 million, in Poland
and 0.39 million BGN, or $0.2 million, in Bulgaria. See more information on governmental programs and incentives in the "Government support for the IT industry in CEE" section.
Increasing popularity of near-shoring
As the model for offshoring has evolved, the industry has seen the emergence of near-shoring, which involves outsourcing to countries with lower
labor costs that are in geographical and/or time zone proximity to client locations. Near-shoring improves communication between clients and delivery teams, increases efficiency, reduces complexity
and risks and increases the ultimate value delivered to clients. Given the physical proximity, cultural affinity, ease of travel, minimal time zone difference and high-quality talent offered by CEE,
this region is becoming an increasingly popular destination for near-shoring and a diversification alternative for Western European companies, as well as European
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divisions
of large global companies. Other popular near-shoring destinations for clients in North America include Mexico, and for clients in Asia Pacific include Malaysia, Singapore and Vietnam.
Government support for the IT industry in CEE
The CEE region's IT industry is supported by favorable governmental policies. Russia has announced a number of initiatives to promote IT growth
as part of a broader focus on modernization and innovation. For example, qualified IT companies under the Russian Tax Code benefit from a substantially reduced social contribution rate and an
exemption on value added tax in certain circumstances.
The
National Program of Informatization has been implemented in Ukraine since 1998. The Program has the following goals: formation of legal, organizational, scientific and technical,
economic, financial, methodical and humanitarian pre-conditions for development of information technology; application and development of modern information technologies in the corresponding spheres
of public life; and formation and support of market for information technology related products and services.
According
to the clause 261 of the paragraph 2 of the transitional period provisions of the Tax Code of Ukraine starting January 1, 2013 until January 1,
2023, IT companies that perform activities in Ukraine are exempted from value added tax payments on supply of software products. Software products are defined as the results of computer programming in
the form of operating system, systemic, applied, entertaining and/or educational computer software (or their components) as well as websites and/or online services and cryptographic data protection.
Additionally, in 2012 the Parliament of Ukraine adopted Law No. 5450-17 "On the State support of the software development industry," via which the Ukrainian government ratifies, on a yearly
basis, an annual plan of measures.
The
Romanian government has also recognized the IT sector as a priority for the national economy. A number of government policies, such as the exemption from income taxes of programmers
who are employed by software companies and who satisfy certain criteria, have been put in place to foster further growth of the country's IT sector. Further, starting on February 1, 2013, the
allowed R&D deduction that was introduced into the Romanian Fiscal Code effective on January 1, 2009 was increased to 50% of the eligible expenses from R&D activities from the taxable profit
base, instead of the previous 20%. In addition, income reinvested in the production and/or acquisition of technological equipment, IT equipment and software utilized for performing economic activities
is exempt from corporate income tax. With effect from 1 January 2017, the exemption also applies to rights to use
software. The exemption was first introduced with effect from 1 July 2014 up until 31 December 2016, but subsequently extended for an unlimited period as of 1 January 2017.
In
addition, in 2012, the Romanian government started a state aid program for support of investments promoting regional development by using new technologies and creating working places.
In the third quarter of 2013, our subsidiary Luxoft Professional Romania ("Luxoft Romania") applied to participate in this state aid program and received the requisite approvals in February 2014. As a
condition to being accepted into the state aid program and receiving a 40% reimbursement from the Romanian government of the total salary costs of new workers during a period of 24 months
starting on their respective hiring dates, Luxoft Romania undertook to do the following: (i) make an investment in equipment, furniture, and licenses of RON 1.7 million, or approximately
$0.4 million, during 2014 and 2015, as part of the investment plan submitted to the Romanian government, and to maintain the investment for a period of five years thereafter; (ii) hire
250 workers during 2014 and 2015 and maintain the new working places for a period of five years after the first payment of the state grant related to each new working place, as part of the hiring plan
submitted to the Romanian Government; and (iii) pay to the state budget, in the course of five years from the completion date of the investment, social tax payments of RON 41.7 million,
or approximately $9.8 million, as stated in the business plan submitted by Luxoft Romania to the Romanian government.
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In 2013, the government of Bulgaria implemented measures to support IT companies, including reimbursing employers in Bulgaria for the social security
contributions they are required to make in relation to newly hired personnel. In 2014, we received a grant for the reimbursement of such social security contributions we must pay for new personnel we
hire in Bulgaria. This incentive applies to remuneration to be paid by us to such employees during the first year of employment. During fiscal year ended March 31, 2017, we received a
reimbursement under the grant in the amount of 0.4 million BGN or $0.2 million.
Additionally,
during fiscal year 2016 we received an award from the Polish Agency of Foreign Investments. The award provides for a monetary subsidy of 8,688 PLN to our company for each
individual hired in Poland over the next five years subject to certain conditions. During fiscal year ended March 31, 2017, we received a payment under the award in the amount of 3.5 million
PLN or $0.8 million.
Competitive strengths
We believe the following strengths differentiate us from our competitors:
Deep vertical expertise with focus on end-to-end service offerings and solutions.
We focus on four industry verticals that are
technology- and
data-intensive, that, we believe, present a large and growing market opportunity. To further enhance our expertise, we recruit highly skilled IT professionals with significant understanding of
industry-specific business operations and issues and substantial technology experience. We have also built substantive practice areas within our verticals to address our clients' most pressing
problems, such as risk management, reference data, and asset-backed securities within the financial services vertical, and HMI and UTH practices within the automotive vertical. We invest in research
and development to create cross-functional and vertical-specific proprietary products and platforms that help us deliver our services rapidly and cost-effectively. During the past two fiscal years, we
have considered the Financial Services and Automotive verticals as our primary growth opportunities and investment priorities. During fiscal year 2017, these two verticals comprised 75.7% of the
Company's revenues and grew 13.3% on a year over year basis. This growth represented 51.8% of the total revenue growth the company delivered during fiscal year 2017. We believe that our expertise,
services, platforms, and products offered within these verticals are superior to those of our competitors and serve as compelling differentiators for our customers.
Strong domain practices anchored within Luxoft Digital.
Over the past several years, we have developed expertise in domain
practices, including IoT,
Big Data, Cloud, DevOps, and Digital Experience. The purpose of these domain practices is to operate across all of our verticals and deliver higher customer value and synergies by reinforcing Luxoft
Digital's technical capabilities and niche-focused domain services within these lines of businesses. We believe these domain practices are critical to the ongoing success of our clients. To support
the development of these innovative expertise, we have established dedicated resources specifically to research and development for each of them. Each practice has a dedicated pool of resources,
including its own budget, time and IT professionals. We believe that our domain practice knowledge, applied within the industry vertical context of our clients' business needs, provides us with a
strong competitive advantage. We rely on the strength of our programmers to integrate a wide variety of programming languages, hardware platforms, operating systems and third-party software to meet
emerging trends. Our focused investment in people, platforms and technology allows us to compete effectively with other vendors for additional business from our clients. It also helps our clients
optimize their own technology and processes, achieve crucial business goals and become more competitive.
Long-term relationships with multinational clients.
Our largest clients consist primarily of
Fortune
Global
500
companies such as Deutsche Bank, UBS, Boeing, HP and Credit Suisse. As of March 31, 2017, seven out of our top ten clients have been with us for five or more years
and we have
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experienced
very low client turnover in the past. Many of our large client relationships began as standalone pilot projects, the success of which enabled us to win additional mission critical,
multi-year development engagements. Because of our delivery of consistently high quality and innovative results, our relationship with many of these clients evolved into large scale collaborative
relationships and managed delivery engagements whereby we entered into outcome-based arrangements with our clients. We generally enter into multi-year master services agreements with our clients that
encompass multiple stages of their IT development cycle. The dedicated teams of IT professionals we assign to each client combined with a personnel attrition rate that we believe to be lower than many
other industry players, results in the continuity of personnel and, importantly, the retention of knowhow and strengthening of client relationships. We leverage these deep relationships to develop a
sophisticated understanding and extensive knowledge of our clients' businesses, aiming to become vendor-partners for our clients for a wide variety of their CTB IT needs, and thus providing higher
quality services, better business outcomes and stronger client relationships.
Highly educated and experienced workforce.
We are committed to recruiting, developing and maintaining a work force of high
quality IT professionals.
We have invested significant resources to grow from 2,619 IT professionals as of March 31, 2009 to 10,807 technically sophisticated IT professionals as of March 31, 2017. Certain of our
delivery locations, such as Bulgaria, Poland, Romania, Russia, Ukraine, and Vietnam, are strategically established in regions with large pools of highly skilled engineers and a strong focus on
technical education. We have improved relationships with key academic institutions in strategically important and fast-growing locations of Luxoft, including Poland, Romania and Bulgaria. In addition
to helping us to attract talent, this enables us to continue increasing employer brand awareness in these regions. We have also launched a new campaign known as "One Company" aimed to enhance global
corporate culture and employee retention through the instilling of corporate values and identity and the further integration of our recent acquisitions. For more information on our recruitment and
retention programs, see "Recruitment and Retention" below. We believe a continuous increase of our average annual revenues per billable engineer is a result of us consistently training and
successfully retaining our staff that is delivering higher quality value-added services to our clients. During the fiscal year 2017, our revenue per delivery engineer increased to
$78.3 thousand as compared to $77.3 thousand for the fiscal year 2016, which represents an annual increase of 2.5%.
Global delivery platform.
Our secure delivery centers in Australia, Bulgaria, Canada, Germany, Malaysia, Mexico, Poland, Romania,
Russia, Singapore,
South Africa, Sweden, Ukraine, the United Kingdom, the United States, and Vietnam allow us to provide managed delivery and value added services for software development and innovative IT solutions. As
of March 31, 2017, our company had delivery centers in 34
cities and 16 countries. We believe that having such an expansive and scalable delivery platform is one of our key differentiating factors. On one hand, it offers worldwide offshore and near-shore
seamless support to our clients. And on the other hand, it serves as a powerful engine fueling the growth of our business and resolving bottlenecks in talent supply. As we execute engagements for many
clients we have a certain degree of discretion with respect to workflow distribution between our delivery locations with differing macro attributes (i.e. wage inflation and interest and
currency rates), for example, Krakow and Wroclaw in Poland, Bucharest in Romania and Kiev in Ukraine versus Omsk, Russia, Dnipro, Ukraine and Ho Chi Minh City, Vietnam. The latter group usually has
lower wages, lower wage inflation, stable talent pool and lower attrition. Managing work flows in that fashion enables us to increase the utilization of our IT professionals by effectively allocating
work based on resource and talent requirements to balance cost and achieve scalability, and mitigates certain economic risks, such as wage inflation, that might affect any single geography. Our
dedicated delivery centers are distributed across time zones among our delivery locations and consist of teams of IT professionals dedicated to a single client. This setup allows us to work seamlessly
for clients in different time zones and maintain a cultural and geographic cohesiveness with our clients' on-site teams. We believe that serving our clients by means of this model, combined with the
mission
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critical
nature of engagements, reduces the risk that our clients will switch vendors and drives recurring revenue. We have been keeping, on average, approximately 85% of our engineering workforce
located in offshore and nearshore delivery centers as of March 31, 2017, which is intended to reduce our costs by limiting the use of expensive on-site personnel.
Strong and experienced management team.
We benefit from the effective leadership of an international management team with diverse
backgrounds and
extensive experience in IT services. Each member of our senior management team has on average more than 16 years of industry experience as of March 31, 2017, and has extensive experience
in working both inside and outside of CEE for large and multinational corporations. Our CEO has been with us since our inception in 2000, and many of our managers have been with us for seven or more
years. Moreover, our management team has successfully guided our rapid expansion primarily through organic growth.
Strategies
Our goal is to become the end-to-end solutions provider of choice for core systems and mission critical software that enhance business outcomes
and help enterprises remain competitive. Typically, within our four verticals we specifically target HPAs, which are large multinational companies that require significant amounts of sophisticated IT
services and solutions on
an ongoing basis with an intention to become an embedded, strategic provider for their high-end technology needs. To expand business substantially with these accounts, we follow our "Anchor-
Develop-Grow" model: we aim to successfully complete smaller engagements at the "Anchor" stage; then we undertake a longer term engagement, upon completion of which we aim to become a strategic vendor
during the "Develop" stage; and finally, we increase the amount of services to the existing business and expand the offering to other business lines during the "Grow" stage. We intend to expand our
offerings to current clients and to win business from new clients by pursuing the following:
Develop new capabilities and service offerings within our verticals.
We plan to expand our offerings to large multinational clients
with whom we
already have a strong relationship, and to win new clients within our four industry verticals. We intend to use our multi-site global dedicated delivery model, vertically aligned client-facing teams
and innovative industry-specific products and platforms to increase our share of high value engagements and diversify across our existing clients' divisions and departments. For example, for our
financial services vertical, we opened a delivery center in Gothenburg, Sweden in 2015 to be in close proximity and better serve our clients in the Nordic region of Europe. Further, in automotive, we
seek to expand beyond software development services around cockpit, and increasingly target new sources of revenues. Today we see more and more demand for independent software integration outside of
the cockpitfor the Under the Hood area of the car. This includes software for powertrain, chassis, and for the body of the car, which must run and communicate fast enough to meet timing,
quality and safety requirements for the safe continuous operation of the vehicle. As a result of the acquisition of Symtavision, discussed in more depth under "Acquisitions," we obtained deep subject
matter expertise, industry recognition, direct OEM relationships and references in UTH technologies. In addition to thought leadership and expertise, Symtavision also brings proprietary IP-based
tooling that we believe will help us build a scalable service-based, consulting business with revenue per engineer exceeding the current annual average rate for our Company.
We
also seek to expand our service offerings in all of our verticals by taking over our clients' captive IT operations, which also benefits clients by reducing the total cost of
ownership. We plan to continue to invest proactively in and develop our innovative proprietary solutions around emerging technologies, supporting trends and critical client needs in our industry
verticals.
Leverage domain practice expertise to win new business.
We intend to leverage the domain practice expertise we have developed in each
of our five
COEs, and to develop new technical expertise. We believe that our continued dedication to several key domain practices will result in substantial business
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outcomes
for clients who use our services and solutions, and will translate into more business for us. In addition to being helpful to existing clients, we plan to use the products and platforms we
have developed within our domain practices as pre-sale tools to demonstrate our capabilities to new clients in the existing verticals and to help us diversify to other industries, such as retail,
manufacturing, healthcare, pharmaceuticals and others.
Provide managed delivery model.
In an effort to better serve our clients' needs, a meaningful portion of our engagements is executed as
managed
delivery. We believe managed delivery provides advantages for both our clients and our operations. For clients, managed delivery greatly enhances visibility, transparency and cost predictability of
the outsourcing process, thereby reducing their risks. For us, managed delivery is a means of expanding our role in our clients' projects, thereby embedding us in our clients' core IT operations and
ensuring stability of our ongoing relationships with these clients. Managed delivery, especially when used in conjunction with Agile methodologies, improves utilization of our IT professionals and
resources, streamlines the engineering of complex distributed systems, and increases the visibility of our potential revenue stream and the scalability of our operations. It also allows us to gain
real-time knowledge of our clients' business, thus further growing our expertise in given business domain practices, ensuring our quality service and increasing client loyalty. Our aim is to increase
our ownership of client projects to the point of providing transformational engagements and those within which we substantially or fully replace a portion of our clients' IT departments.
Continue to develop our proprietary platforms.
We will continue to develop our existing proprietary platforms and demonstrators to
showcase our
expertise in a given domain, further enhance capabilities of existing solutions and create new products and platforms. For example, our technology demonstrator AllView utilizes an in-house reference
design platform for creating an in-vehicle user experience ("UX"), linking instrument cluster, head unit and mobile devices. AllView shows automakers the possibilities in optimizing car user
experience and improving safety by reducing driver distraction, while encouraging third-party application development. We intend to continue building up our IP portfolio by selectively acquiring
platforms and companies that own platforms that expand our current end-to-end offerings. We believe that expanding our portfolio of platforms differentiates us from other software services providers.
These proprietary assets also help us target aspects of our clients' software budgets that were not previously accessible to us, and position us well for continued growth.
Attract and retain top quality talent.
To support our growth and maintain our competitive position as a leading high-end IT service
provider, we grow
our highly skilled employee base by continuing to execute our sourcing and hiring practices and enhancing our brand as an employer of choice in the industry and numerous countries around the worlds in
which we currently have presence. We plan to continue to enhance our human resources infrastructure as our business grows. We seek to maintain
our low attrition rates through our internal training programs and employee initiatives, including rewards and incentives for high-performing employees. Since 2001, we have been building a successful
track record of establishing delivery centers in CEE, Asia Pacific and Western Europe, where we have access to highly educated IT professionals at attractive wages. Over the past fiscal year, we have
successfully opened delivery centers in Gothenburg, Sweden, Penang, Malaysia, Ruesselsheim, Germany, Warsaw, Poland, and other areas. We plan to continue opening delivery centers in CEE and other
emerging and developed markets that strategically fit into our existing nearshore and offshore delivery network.
Selectively pursue strategic acquisitions and strategic partnerships.
While we focus primarily on organic growth, we continue to
consider
complementary acquisitions that would expand our technological and/or domain knowledge and client relationships to be a critical part of our growth strategy. From a strategic perspective, our goal is
to pursue acquisitions that will measurably contribute to our positioning as a preferred end-to-end solution provider of certain domain-focused quality IT
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services.
We aim to acquire new capabilities in our core verticals to enhance our value-added offering to our existing client base and help secure new HPAs to underpin the long-term growth outlook for
the business.
On
January 31, 2017, we acquired IntroPro, an engineering consultancy with deep expertise spanning the complete lifecycle of enterprise and embedded software architecture,
development, testing and QA, maintenance and managed services for content delivery and management specifically focused on TV, Media, and Entertainment industry. This acquisition further deepened
Luxoft's vertical expertise and widened current offering for the wireless and cable/satellite providersa customer audience that it has been actively targeting for the last few years. It
has solidified our embedded software development expertise specifically around content delivery and management for TV, Media, and Entertainment industries. Thus, we expanded our presence in one of our
top Fortune 500 clients, a major wireless carrier, and extended our telecom service catalogue, playing into our end-to-end premium services strategy. Synergies between our organically built
expertise in telecom segment around SDN/NFV together with the expertise obtained through Insys and IntroPro not only solidify our position with one of our top Fortune 500 clients, a major
wireless carrier, but also allow us to roll out a unique offering to other wireless carriers and cable/network operators. As an immediate result such top Fortune 500 client became one of our
top 5 accounts replacing Avaya. See "ITEM 5. Operating and Financial Review and ProspectsA. Operating ResultsAcquisitions."
On
September 13, 2016 we acquired Pelagicore AB, a leader in open source software (OSS) platforms and services for in-vehicle infotainment (IVI) and human machine interface
(HMI) development. The company serves a number of blue-chip corporations and enjoys industry recognition as thought leaders
in the HMI space with deep expertise in open source technologies, the cross-platform user interface (UI) development framework Qt, and in IVI systems. Its product portfolio facilitates richer user
experiences (UX) and user interfaces (UI) in line with the next generation of consumer electronics. As a result of this acquisition, we added several significant OEM and Tier I marquee clients,
as well as added tech expertise in open source platform Qt, which is a golden standard in open source software development process. Synergies between our organically built expertise and capabilities
brought with Symtavision and Pelagicore acquisitions made stronger Luxoft's automotive brand of a go-to system integrator capable to provide skills and solutions along the entire services stack.
On
July 15, 2016, we acquired Insys Group, Inc. ("Insys"), a U.S.-based IT consulting provider serving a large number of blue-chip corporations, with a significant
proportion of revenue being generated from the healthcare, pharmaceuticals & biotech and telecom verticals. The core service offering of Insys includes advanced predictive analytics, business
intelligence and data warehousing, digital marketing, and enterprise information management. Insys, which delivers services to marquee clients including Fortune 100 companies served by their focus
verticals, diversifies Luxoft's client base and decreases current client and geographical concentration, measurably expanding Luxoft's North American footprint in particular. In addition, Insys's
employment of seasoned industry professionals with deep vertical knowledge complements Luxoft's business. INSYS's sales executives with a proven track record of anchoring Fortune 100 accounts are
expected to significantly build out Luxoft's current sales efforts in North America; and its talented senior management team that has been growing these Fortune 100 accounts to substantial levels is
expected to amplify the capabilities of Luxoft's current senior management team.
Further,
in fiscal year 2017, we have successfully completed the integration of Symtavision and Excelian acquired in fiscal year 2016 and 2015, respectively. Our strategy is to acquire
companies that complement our business and work to increase their profitability. This strategy results in measurable optimization and increased efficiencies, in addition to straightforward top line
related business synergies. These synergies were among the catalysts for the Radius acquisition completed in fiscal year 2015 and the Excelian acquisition.
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In
addition to strategic acquisitions, we also look to form strategic collaborations with industry leaders as a way to anchor significant accounts within our key verticals of focus. An
example of such collaboration in the Financial Services vertical is our collaboration with Murex, in telecomour relationship with Spirent, in retailour Competency Partner
relationship with Amazon Web Services.
Recent Initiatives
During the financial year 2017 we have committed and started executing on a series of steps that we believe lead to a strengthening of our
business with respect to the following: reduction in customer concentration, reduction in vertical concentration, enhanced geographic presence in the U.S. and Asia Pacific, entrance into new
verticals, expansion of the global sales force, growth of global delivery centers, acquisition of attractive HPAs, continued reduction of concentration of the engineering staff to below 25% of the
total engineering headcount in any given geography.
As
a result of our efforts, Top 10 account concentration decreased by 10% year over year; revenue concentration around financial services vertical decreased by 8% year over year; we
strengthened our value proposition for our clients; further expanded our global presence in the U.S. through organic hiring of sales customer facing personnel, as well as through Insys acquisition;
continued to build-out our vertically aligned offerings, and created a deeper and more diverse customer portfolio. For example, we increased the amount of customers with revenues of $5 million
and under by 45 accounts year over year.
As
of March 31, 2017, our on-shore headcount was approximately 15% of total delivery personnel.
We
continue on the way to our goal to limit exposure to any geography to no more than 30% of the engineering headcount in the mid-term and 25% in the long term. As of March 31,
2017, our presence in Ukraine is 31% of our engineering headcount as compared to 32% as of March 31, 2016. As of March 31, 2017, our presence in Russia is down to 19% of the engineering
headcount as compared to 21% as of March 31, 2016. All other geographies also have less than 25% of the overall engineering personnel in line with our mid-term target. We plan to continue
reducing our staff concentration in Ukraine by means of accelerated hiring in each respective EU location. In addition to the EU, we are also planning to further expand our dedicated global delivery
model in Asia Pacific and other regions in the mid to long-term.
Our services
Our software development service offerings consist of three primary categories:
Custom software development and support services
We provide a comprehensive set of core and mission critical software development services, including application software development, software
architecture design, performance engineering, optimization and testing, process consulting and software quality assurance, to enterprise clients in our financial services, automotive and transport,
travel and aviation, and energy verticals. Our services span the entire development lifecycle, and combine sophisticated processes for solving complex problems with domain and business knowledge,
project management tools and global delivery capabilities. In certain cases we also provide maintenance and support services for the software and applications that we have developed for our clients.
In addition, we provide re-engineering and migration services for transferring legacy applications to our clients' new operating systems and enhancing their functionality.
Product engineering and testing
We provide a wide range of product engineering services for the full product lifecycle, including functional specification and mock-ups, product
design, engineering, automated testing, maintenance,
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support
and performance engineering, to our clients in the technology, telecom, automotive and transport and energy verticals. We provide product engineering services by assembling specialized teams
of IT professionals who use Agile development methodologies to deliver our work product incrementally.
Technology consulting
Our technology consulting services are designed to address clients' needs in each of our four verticals, while leveraging our in-depth expertise
in technology and our best practices to optimize our clients' software processes and data security procedures. Our technology consulting services generate a small portion of our sales and include IT
strategy consulting, software engineering process consulting and data security consulting. We use our best practices, methodologies and frameworks to assist clients in establishing and improving their
software development processes, including metrics analysis, quality control and appraisal procedures. In an effort to expand our premium offerings, we have recently launched a rebranding and
repositioning strategy, where all Luxoft financial technology consulting, services and solutions will be delivered by the 'Excelian Luxoft Financial Services' brand. We have also extended the scope of
our expertise to include other capital markets-focused packages in addition to our significant focus on Murex implementations. In fiscal year 2017 we started collaborating with other popular off-the
shelf packaged trading and treasury solutions providers, such as OpenLink and Calypso, as well as with customer-centric digital transformation solutions providers. We also became one of the first IoT
Consulting Competency Partners for Amazon's AWS platform and have been partnering with Microsoft Azure to bring the best cloud-based solutions for our customers.
All
of these margin-accretive services are above traditional IT services offering found across our peers and these elements are of extreme importance to our customers at a time of
disruptive change in their respective sectors.
Our solutions
Our solutions, consisting of products and platforms, are a small, but growing portion of our business model. We intend to increase future sales
using our organically built and acquired products as standalone software and as a part of our software development services offering. Our platforms are also a part of our proprietary solutions
portfolio that we utilize within the scope of our software development services to clients. From time to time we make available parts of our platforms under non-commercial open-source licenses to
allow potential users to quickly evaluate the characteristics of the technology, but these components are not sufficient for a commercial use.
Our
products and platforms include the following:
Platforms
TEORA.
Teora is a set of developer tools that are designed to help Automotive HMI developers build the logic of their user interface
independently
from the rendering and the run-time environments. The automotive industry is accelerating the transition from fully analog displays to a software driven, higher resolution, connected and increasingly
touch-enabled user experience. OEMs and Tier 1s are working hard to enable the same brand-centric user experience across multiple car models and regional markets. Very often, due to
hardware limitations or design choices, different rendering technologies such as native 2D, QT, HTML5 or even high-end 3D will be used in various cars from the same automaker. It is very difficult to
re-use user interface logic, graphical assets and user interface translations across these different platforms, leading to high costs and delays due to the need to re-implement the same back-end code
and common functionality across these disparate platforms. Teora solves this problem by separating interface logic and common back-end functionality from the rendering technology and making it easy
via native tooling integration to build the core, back-end code
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once
and re-use it with other front-end technologies. Another advantage of this approach is that it reduces technology risks for OEMs and Tier1s by simplifying migration from one rendering
platform to another, allowing OEMs additional flexibility to save costs or take advantage of a new technology.
Teora
is fully compatible with QT, HTML5 and easily integrated with multiple proprietary toolchains. Teora is fully compatible with our own Populus platform (discussed below) and serves
as an extension to allow its users build HMIs that scale to multiple screens, cover complex user interface behaviour and regional variants.
Populus.
Populus Suite is a complete tool chain for HMI design, HMI development and the deployment of automotive user interfaces for
distributed
embedded systems. It minimizes the time and cost of producing full-featured automotive HMIs. Populus has been designed for the automotive industry to deliver high- performance car user interfaces with
a short time-to-market and efficient software life cycle management. Populus Suite is built upon a concept called Database Driven Human Machine Interface. Populus Editor is used to create the entire
HMI layout and HMI logic in an XML database. It is also used to specify the functional interfaces to the applications that are part of the system. These
applications are called Functional Units. An HMI design is created and verified in Populus Editor without having to write any software. The HMI is stored in a database and downloaded to the target
environment in a binary format for improved efficiency. The HMI database contains all of the HMI logic and appearance. Populus Engine executes the HMI layout in run-time and communicates with the
applications using the Open Display Interface protocol. The software needed for supporting this protocol can be automatically generated for the applications from the Populus Editor. The Editor
supports team collaboration and reuse of HMI parts between projects. An HMI can be divided into parts of any granularity and every part is a stand-alone unit which can be re-used by other HMI
developments. The HMI design can be done directly within Populus Editor. Populus covers the entire HMI development process, from creating a system HMI architecture to developing a series production
HMI ready for download to the embedded target.
While
TEORA is designed for development of complex high-end HMIs, Populus is used for low- to mid-tier HMIs. These two products complement each other by allowing us to have tools to
address the full range of OEMs' needs in this area of expertise.
Populus
recently has become more versatile. We now support more Systems on Chips (SoCs) that play a significant role in future mid- and high-end digital instrument clusters. We have
improved Populus's versatility by recently porting it to the one of the most popular microcontrollers made by Renesas Electronics, a premier provider of advanced semiconductor solutions. This
combination enables quicker and more cost-efficient development of robust and attractive car HMIs with a low memory usage. Populus has already been used to produce the cluster HMIs in more than seven
million cars. Through our collaboration with Renesas, we are looking to expand that reach even further.
AllView.
AllView is a holistic user-experience demonstrator. AllView utilizes Luxoft's reference design platform to create an
in-vehicle user
experience, or UX. AllView links together instrument cluster, head unit, head-up display and mobile devices. Based on our original, reference automotive grade user interface design and a combination
of in-house and emerging third party technologies, AllView enables Luxoft to demonstrate to OEMs how to optimize a car user experience and improve safety by reducing driver distraction, while
encouraging third-party application development and introduction of new technologies such as touch, eye tracking, and native language recognition.
Our verticals and practices
We have developed specific expertise and grown our business in four industry verticals:
-
-
financial services;
-
-
automotive and transport;
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-
-
telecom; and
-
-
healthcare and pharmaceutical
The
following table sets forth our sales by vertical and Luxoft Digital practices, by amount and as a percentage of our sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
Amount in
thousands
|
|
% of
Sales
|
|
Amount in
thousands
|
|
% of
Sales
|
|
Amount in
thousands
|
|
% of
Sales
|
|
Industry Vertical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
$
|
483,801
|
|
|
61.6
|
%
|
$
|
446,138
|
|
|
68.6
|
%
|
$
|
346,027
|
|
|
66.5
|
%
|
Automotive and transport
|
|
|
110,839
|
|
|
14.1
|
|
|
78,698
|
|
|
12.1
|
|
|
57,516
|
|
|
11.0
|
|
Telecom
|
|
|
69,900
|
|
|
8.9
|
|
|
37,200
|
|
|
5.7
|
|
|
33,683
|
|
|
6.5
|
|
Healthcare and pharmaceutical
|
|
|
28,258
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luxoft Digital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
48,581
|
|
|
6.2
|
|
|
42,398
|
|
|
6.5
|
|
|
35,581
|
|
|
6.8
|
|
Travel and aviation
|
|
|
27,744
|
|
|
3.5
|
|
|
29,232
|
|
|
4.5
|
|
|
33,100
|
|
|
6.4
|
|
Energy
|
|
|
13,345
|
|
|
1.7
|
|
|
12,873
|
|
|
2.0
|
|
|
12,164
|
|
|
2.3
|
|
Other
|
|
|
3,093
|
|
|
0.4
|
|
|
4,213
|
|
|
0.6
|
|
|
2,477
|
|
|
0.5
|
|
Total
|
|
$
|
785,561
|
|
|
100
|
%
|
$
|
650,752
|
|
|
100
|
%
|
$
|
520,548
|
|
|
100
|
%
|
Financial services
The financial services industry is our largest vertical. Since we began working with financial services companies as clients in 2003, we have
been engaged by global institutions to develop, deploy and maintain a broad range of systems. We provide our clients with complex end-to-end engineering services and solutions, such as the development
of trading platforms, risk management systems, clearing and settlement solutions and low latency exchange connectivity adapters. We have also developed comprehensive risk visualization and mobile
products and platforms that are specifically focused on clients in the financial services sector. We possess not only expertise in technologies that are crucial for financial services players, such as
big data, mobile, cloud and information security, but also in reference data management, risk management, and others.
Banks
are currently aiming to streamline and simplify their IT infrastructure in response to contracting budgets and narrowing margins. As a result, they are now also deploying standard
software solutions for core banking, buy side and front offices of the financial industry players. Our acquisition of Excelian, completed in February 2015, helped us enter this segment of the market.
Currently we are building out Excelian, Luxoft Financial Services, to provide an array of consulting services and solutions and system integration services to banking, insurance and commodity players
world-wide. We have partnered with major players in this space, such as Murex, OpenLink and Calypso that provide turnkey products. We also perform implementation of other packaged solutions like PEGA
and IBM BPM. This allows us to embed our services into the ecosystem of the banks providing end-to-end services
around standard packages and custom software development, thereby gaining wallet share within our HPAs. Our most significant areas of growth during the past year were Europe and Asia Pacific.
During
fiscal year 2017 we have continued to gain market share within the wealth management and investment banking segments of various clients. We are also expanding the scope of work
performed in the front offices of our clients. This includes application, development and maintenance ("ADM") for trading platforms across business lines, such as treasuries and equity derivatives, as
well as platform architecture selection, packaged software services, and technology consulting.
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Automotive and transport
In our automotive vertical, we provide product development and system engineering services to various categories of automotive and transport
industry players including car manufacturers (OEMs), tier-one and tier-two suppliers and diversified service companies. Up until the end of fiscal year 2017, our main focus has been exclusively on
in-vehicle infotainment ("IVI") systems, which cover a broad range of modern car functionality and state-of-the-art features that include multimedia, connectivity, navigation, and telematics,
HMI, digital clusters, computer vision, and autonomous driving.
Our
services cover the entire product development cycle from innovation vision and design to prototyping, development, system testing, verification and infield car drives. We have been
investing in internal R&D programs aimed at creating platforms and frameworks that may significantly reduce time and efforts required for development of new IVI and HMI solutions by our clients.
Currently, our portfolio includes such products, platforms and demonstrators as Populus, Teora and Allview. We are an active member of different industry associations focused on developing unified
standards for IVI systems, such as GENIVI.
The
automotive industry is currently experiencing rapid technological evolution driven by digital disruption and electrification of the vehicles, requiring complete re-design of
in-vehcle architectures and off-board service infrastructure. We view ourselves to be one of the few sizeable independent software development service providers in the automotive space. To further
capitalize on this position we have developed expertise in the UTH space as well as enhanced our offering within HMI space through the acquisition of Pelagicore, to complement our existing expertise
in the cockpit area. Pelagicore AB, a leader in open source software (OSS) platforms and services for IVI and human HMI development was
acquired by us in September 2016. The company serves a number of blue-chip corporations and enjoys industry recognition as thought leaders in the HMI space with deep expertise in open source
technologies, the cross-platform user interface development framework Qt, and in IVI systems. Its product portfolio facilitates richer user experiences and user interfaces in line with the next
generation of consumer electronics. Pelagicore has strong relationships with premium automotive OEMs, Tier-1s and silicon vendors.
Our
end-to-end offering for our clients is covering three major areas:
-
-
Digital Cockpit
we engineer solutions enabling carmakers to develop user
experiences that are natural extensions of consumers digital lifestyles
-
-
Under the hood
we design next generation electrical architectures and develop the
software that collects and analyses data generated by various mechanical parts of the car
-
-
Extended Vehicle
we enable intelligent services in the cloud and connect the vehicle to core
business processes. For example, remote diagnostics into which we have been proactively investing during the past quarters is becoming increasingly important from the connected car advancement and
safety standpoints. Remote diagnostics allows gathering data from the vehicle fleet in the field and using diagnostic tools to understand the condition and the performance data in each vehicle.
Telecom
Today's carriers, Multiple System Operators (MSOs) and service providers, are faced with intense competition, profit margin pressures,
challenges relating to network capacity, speed and quality, and new generation technologies requiring significant infrastructure investment. Our field engineers, software developers, solution
architects and data scientists are currently engaged in networking and data communication development projects for several leading global infrastructure equipment and network analytics, service
providers as well as test and measurement market leaders in the telecom and
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networking
industry sector. We predominantly deliver our services and solutions within the following four areas:
-
-
Analytics
we are working closely with our customers to understand their customers
digital experience. Through Analytics, we are helping this specific global service provider understand how customers are using their infrastructure. This insight helps plan for current and future
infrastructure needs. This "infrastructure" is not just your normal networking type infrastructure but also the OTT content that is running. We are helping our customers look at the networks and
services in different ways to provide the best customer experience and increase revenue opportunities.
-
-
Over-the-top (OTT) content providers
in January of 2017 we have completed an
acquisition of IntroPro, an engineering consultancy with deep expertise in complete lifecycle of enterprise and embedded software architecture, development, testing and QA, maintenance and managed
services for content delivery. It is specifically focused on TV, Media, and Entertainment industry. Thus, this acquisition further deepened our vertical expertise and widened our offering for the
wireless and cable/satellite providers.
-
-
Chatbots
we have seen strong interest in our chatbot technology to aid in customers
retention and new customer services. During this year we have executed on our first communications chatbot offering with another tier-one communications service provider in the U.S. This CSP is using
Chatbot technology coupled with our work in AI to help in customer retention. Working with Customer Services divisions of our clients, we are providing a first responded chatbot to aid in customer
support. We feel that this will help improve customer satisfaction and reduce operating costs.
-
-
Network Function Viertualization (NFV)
we continue see strong movement by service
providers around NFV. Because of the immaturity of the standards and lack of tools required to deploy additional testing, our SDL (Software Defined Lab) assists communication providers in much needed
testing and assurance measurement aspects.. Based on our expertise with Network Equipment Manufacturers, we have been in development of SDL for over 2 years. SDL will equip communications
providers with a vendor-agnostic testing tool that can be used virtually, physically and as a hybrid. Thus, as communications providers look to reduce costs by moving to NFV, they can test a veriety
of scenarios in the environment of their choice.
Our
capability to understand and add value to our customers' efforts depends on our ability to learn these new and emerging technologies at a rapid pace, and applying our knowledge in
the carrier and enterprise environments. Our core engineering development services, including test automation, remain a valuable contribution to our customers' product plans. Furthermore, we see a
tightening of the skills resource pools in our customer base, making our ability to recruit and hire talent particularly attractive to our customers.
Healthcare and Pharmaceutical
We believe our company is ideally positioned to leverage deep expertise of technologies, digital solutions and global scale to support
significant opportunities across the Healthcare & Life Science landscape. Through our recent acquisition of Insys we have obtained an existing client base in the payer/provider and large pharma
segments. We are building this vertical to become one of the four verticals of our focus and believe that these two segments will be exposed to leading technology capabilities that drive both
operational efficiencies (automation, analytics, cloud adoption, user experience) and business model innovation (NLP, IoT, AI, blockchain).
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At the same time we plan on further investments into broader industry resources, acquiring talent and capabilities from across the Healthcare and Pharmaceutical
domain, focusing on deep client relationships and delivery-based reputations. We aspire that these investments will complement the existing technology assets and gain us greater access to other parts
of the eco-system in this vertical, including contract research organizations, medical devices and biotechnology companies, and service providers.
Luxoft Digital
Travel and aviation
The
travel and aviation industry faces many challenges, including changing regulatory and security requirements, fluctuating fuel prices, intense competition and
industry consolidation. Therefore, OEMs, suppliers, airlines, aircraft manufacturers, e-commerce travel providers and other participants in the travel and aviation industry are looking to optimize
their operating expenses, reduce environmental impact and improve passenger comfort, convenience and safety. Our capabilities include design of engineering data, management and flight control systems,
aircraft assembly and maintenance, airport ecosystem management and e-commerce and reservations system solutions for clients such as airlines, hotels, car rentals companies, travel agencies and cruise
lines. There are two different types of IT needs generated within the travel and aviation industry: one is for airlines and hotels, which require product approach, and the other is for Global
Distribution Systems ("GDS") companies, which largely look for technology services.
Technology
Our
technology vertical focuses on independent software vendors, chipset and computer electronics vendors and computer hardware providers who rely on us to help them
create innovative software-intensive products, solve software integration challenges and create and implement complex algorithms, while helping to manage their costs. Partnering with us allows these
vendors to increase their efficiency, for example by reducing time-to-market for their products and enhancing R&D productivity. We deliver embedded development and system verification of software
components and tools for hardware produced by our technology clients, as well as high-performance transactional systems, real time embedded applications and application security. Additionally, as we
continue to grow our global operating platform and software delivery capacity, we seek to have more of these customers engage us as a channel partner to deliver their product or service to their end
customers.
Energy
Electricity transmission and distribution.
We provide software and hardware development services to leading energy companies, smart
grid vendors,
energy service companies, energy solutions vendors and energy equipment manufacturers across the globe. We primarily provide distributed energy resource management, renewable generation monitoring and
control, smart grid and metering solutions in the following areas: distribution and outage management; energy transmission management; market management; substation automation; supervisory control and
data acquisition integration; solution
integration and deployment. We have also independently developed innovative cloud-based renewable generation monitoring and control solutions, such as LuxSolar, which helps to aggregate, analyze and
forecast generation from renewable sources of energy.
LuxSolar.
We provide solar system monitoring and control platform that would collect data from different devices (inverters, battery
controllers and
smart meters using IoT devices such as Raspberry PI that can be accessed wirelessly), clean, aggregate and analyze it, then store and visualize the data for customers of solar panel producers,
electric utilities and industry vendors. We created a Web Portal for utilities, solar equipment manufacturers and end-users to monitor the systems installed. The portal has
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integrated
GIS support with social media using a variety of pre-defined dashboards and diagrams, and system alerts.
Oil & Gas.
We provide software development services for certain key industry vendors. We help with development of solutions on
fields of
transportation, geological and geophysical data visualization and interpretation, production allocation and modeling, field digitalization and unconventional resources production enhancement. As
technology development is the main driver for production costs optimization we expect opening new horizons with advanced analytics of reservoir testing and borehole seismic systems development. With
this understanding we have developed two innovative products for this industry, which help to utilize information visualization on mobile platforms in a real-time collaborative manner:
Mobile FM (Mobile Field Module):
Mobile FM is a software platform designed specifically for the Oil and Gas production filed
digitalization. It
significantly simplifies the process of collecting production data on oil and gas fields, and allows field engineers to use necessary parts of entire enterprise systems in the field, even without an
internet or mobile connection. Mobile FM provides the functionality for entering, validating, processing and storing such types of data as daily readings, oil hauls, well tests, gas analysis,
downtimes, purchaser statements, integrated volumes, monthly LACT tickets and other. This platform enhances the existing process, and makes it more efficient and reliable by reducing human error. This
solution is able to be implemented on such mobile platforms as Android, iOS and Windows Phone, which allows use of the full range of mobile functionality, such as geolocation and camera features,
making the field engineers' work simpler and faster.
Geo Viewer:
Geo Viewer is a smart suite of applications that uses a scientific approach to visualize geophysical and geological data for
the
petroleum industry. This application equips users with instant access to graphical representations of exploration data and with an innovative user interface that tells a story behind the numbers in a
context that stakeholders understand. Geo Viewer provides an extensive set of advanced tools to display geoscience data such as 2D/3D seismic data, well logs, survey deviation and scientific plots. It
is lightweight, portable and compatible with all major devices and browsers, so it allows dynamic views and interacts with both remotely and locally stored data. The viewer set is implemented on Java
technology as a platform-independent solution. It is easy to integrate with corporate systems and is installed and maintained on the server, enabling simple deployment and maintenance without a
time-consuming installation process.
Our domain practices
Luxoft Digital brings a wide variety of modern and emerging technologies and expertise across industry verticals and enriches our company's
capabilities and the service catalogue for all of our current and perspective clients. We have several domain practices that comprise the Luxoft Digital Enterprise segment:
Our
mobile practice offers our clients full product lifecycle development of mobile applications. Our engineers have expertise in mainstream mobile platforms, including iOS, Android and
others, as well as specific frameworks for cross-platform development. These frameworks allow rapid building and deployment and cost effective maintenance of products for a range of consumer devices,
while providing a unique user experience. Our services span through every functional area, from user interface design to development of server-side solutions to integration with enterprise back-end
applications and payment systems. Our broad project portfolio includes a number of innovative applicationssuch as enterprise dashboards, media monitoring systems, animated user guides,
electronic document management, booking and reservation and home automation solutionsfor the travel, financial services, retail, energy, automotive and other industries.
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DevOps
The need for a defined DevOps focused CoE has been gaining momentum. This has been driven by the need to reduce friction between development and
operations groups within organizations that historically have been focusing on different and usually conflicting goals. Applying DevOps approaches and culture leads to numerous improvements including
faster time to market, higher quality code delivery, increased infrastructure stability, enhanced scalability and automation of controls and development processes. All of these improvements lead to
reduced costs and increased effectiveness of our clients' businesses. We currently have Continuous Delivery Transformation and Infrastructure Automation offerings that are relevant for virtually all
business verticals.
Internet of Things (IoT)
Luxoft IoT helps our clients find the right end-to-end solutions that integrate hardware, applications and cloud services to maximize the impact
to their operations. The Luxoft IoT team has helped clients in a variety of industries including manufacturing, retail, high tech, communications and aerospace. With our purchase of Radius in October
2014, we continue on the path of building out this domain practice. We are advancing the IoT offerings across Luxoft vertical industries, and at the same time, we help support cross-selling of our
services to legacy Radius enterprise accounts. We continue to advance our IP and solutions portfolio using both internal resources as well as our marketing platform. In May 2015, we announced at the
Internet of Things World event our Retail Engagement Suite, an integrated set of cloud-managed mobile and tablet applications that enables a range of customer-facing interactive content, video display
capabilities and sales engagement reporting tailored for demanding retail environments.
Big Data
Our big data practice delivers services and creates critical enterprise-wide solutions based on big data technologies and knowhow. Big data
technologies are coming from the Internet world, where they are used by large-scale websites, like Facebook or Google. Banks are now using these technologies to better manage and process increased
data volumes prompted by numerous new rules and regulations. Excelian, in collaboration with our big data CoE, assists its clients in choosing the right technologies, architecting the systems and
delivering them into production. We develop innovative approaches to comprehensive information storage, processing and analysis in order to deliver business and operational benefits to our clients.
Within this domain practice we perform services focused on adapting an open-source software framework, Hadoop, which supports
data-intensive distributed applications to the enterprise environment. This is the key differentiator of our big data offering. We believe that our approach is vital for many strategic enterprise
initiatives in various verticals, such as risk management and reporting in financial services, metering information processing in energy and data channel processing though SDN/OpenFlow architecture in
telecom. Our architects, consultants and developers utilizing their significant engineering experience with large business-critical applications, combined with expertise in Hadoop-based systems
development, engineered a solution accelerator and data transformation engines for low-risk adoption of Hadoop to specific corporate requirements and rules. We partner with one of the market leaders
in big data platforms for enterprises, Cloudera, and implement its innovative technologies to maximize value of Hadoop adoption for enterprises. We have successfully delivered several critical
projects for our largest clients in our financial services vertical during our last fiscal year.
Digital Experience
Our user interface/user experience/HMI practice consists of concept development, prototyping and design development for car connectivity systems
based on various user studies. Its main focus is to create products and solutions that can manage and then present information in the car without
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distracting
the driver, while making the in- car experience seamless, effortless and interactive. Our engineers have years of experience in developing efficient, intelligent, reliable and
user-friendly HMIs for the world's leading automakers. We believe that these car features can become a distinct part of the brand strategy and value, and thus represent a competitive advantage for the
OEMs.
Agile
Our Agile practice helps clients to develop new applications using Agile methodology and to transition their existing enterprise development
processes such as waterfall (end-to-end development with delivery upon the completion of defined tasks) into Agile. The principal differentiator of Agile methodology is its ability to deliver code
frequently and consistently, usually every two to four weeks. The Agile approach usually involves small cross- functional teams of engineers (Scrum teams) that work on the same project, often in a
distributed environment. The main advantage of utilizing Agile methodology, and a reason why we built a COE within the Agile practice, is its
flexibility and quick response to change, which is critical to our clients because of shrinking product lifecycles. Agile's client-driven iterative development lets the client steer projects,
iteration by iteration, and determine execution priority. This approach helps foster stronger client relationships, identifies mistakes and allows us to implement last minute changes without losing
critical time and generating additional expenses. It also enhances shared learning and communications processes and solidifies teamwork. As of March 31, 2017 we employ more than 600
professionals with ICAgile Certified Professional, Professional Scrum Master or Certified Scrum Master certifications and more than 3,000 professionals who work on Agile projects and consistently
evolve our Agile practice and its applicable methodologies. Luxoft was accredited as a Member Training Organization of International Consortium for Agile ("ICAgile") in January 2014. ICAgile develops
education tracks and learning objectives for its members' training classes, and accredits course materials for covering particular set of topics. We have 3 accredited courses for Agile professionals:
ICP Agile Fundamentals, ICP Business Value Analysis and ICP Agile Team Facilitation, participants of which are recognized as ICAgile Certified Professional after successful completion of learning
objectives. Other options for continuous Agile at Luxoft include regular webinars and blog articles on Agile/Lean practices, coaching and facilitation techniques.
Our delivery centers
With a presence in 19 countries, offices in 39 cities and delivery centers in 34 cities, as of March 31, 2017, we service multinational
organizations through our global dedicated delivery model that continues to comprise an optimized mix of nearshore, offshore and on-site delivery capabilities.
During
the fiscal year ended March 31, 2017, we expanded our delivery network organically and via acquisitions adding new offices in line with our strategy for continued growth
and diversification of our global sales and delivery. Demand for our engineering services and deep domain expertise from new and existing clients continued to steadily rise during the fiscal year,
creating a need to open three new offices and expand our presence in Stuttgart, Germany. As a result of the Company's current business pipeline, we have not only built upon our core presence in
Central and Eastern Europe, but also entered into new geographies, such as Sweden, Denmark and Netherlands. During the past fiscal year our company has opened the following new offices: Gothenburg,
Sweden, Penang, Malaysia, Ruesselsheim, Germany, and Warsaw, Poland.
We
are now supporting Financial Services, Automotive, and Aviation projects from Tricity. Our management expects to grow this location at least to 500 engineers over the next several
years. Our expanded offices in Germany, a new location in Munich and a bigger office within Stuttgart, will continue to function as client-facing and business development offices, mainly benefitting
our company's automotive line of business.
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Our
office in the Nordic region, in Gothenburg, Sweden, has a specific mandate of serving new contracts and helping manage our current and potential client relationships in the region.
The office is designed to respond to all current lines of business (focusing on Financial, Automotive and Telecommunications in the short term), and expand its current support of the Company's
market-leading financial services clients.
We
employ a number of on-site IT professionals in Canada, Germany, Singapore, Switzerland, the United Kingdom, and the United States. The sophistication of our offshore delivery centers
has allowed us to keep approximately 85% of our delivery personnel offshore as of March 31, 2017, deploying personnel to client sites on an as-needed basis. Our on-site and offshore delivery
teams are linked through common processes, collaboration applications and tools, and a secure communications infrastructure that enables global collaboration. This connectivity grants our clients a
choice between managing their work through offshore, near-shore and on-site delivery or any combination thereof.
As
of March 31, 2017, we employed 2,007 IT professionals in Russia, who represent approximately 19% of our IT professionals. Our Russian delivery centers leverage the country's
advanced technological climate and engineering legacy to build a talented, motivated team of IT professionals.
As
of March 31, 2017, we had 3,344 IT professionals in Ukraine, who represent approximately 31% of our IT professionals. Our operations in Ukraine leverage a strong talent pool
and relatively low average wages to provide effective software development services to both national and global clients.
As
of March 31, 2017, we employed 1,624 IT professionals in Romania, who represent approximately 15% of our IT professionals. Our operations in Romania leverage a substantial
talent pool that primarily services clients within the telecom vertical. Romania, a member of the European Union, provides geographic and cultural proximity to our clients throughout Europe and plays
an important role in our global dedicated delivery model, providing geographic diversification and cost effectiveness.
As
of March 31, 2017, we employed 1,807 IT professionals in Poland, which represents approximately 17% of our IT professionals. According to the May 2017 Gartner Report, "The
Polish government established 14 Special Economic Zones, which have attracted investors to Poland through incentives such as tax rebates. Polish Information and Foreign Investment Agency is one of the
organizations backed by the government, dedicated to support investors planning to locate in Poland. Poland is part of the European Union and is familiar with Western culture. A common cultural
understanding is beneficial in ease of doing business, and Polish natives understand the context in how organizations operate in the U.S. or Europe."
The
Gartner Report(s) described herein, (the "Gartner Report(s)") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by
Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Annual Report) and the opinions
expressed in the Gartner Report(s) are subject to change without notice.
Quality and process management
We have built a suite of comprehensive, customized applications and tools to manage the quality, security and transparency of our delivery
process.
Our
quality management system is ISO 9001:2008, ISO 27001:2005 and CMMI level 5-certified to ensure timely and high-quality delivery to our clients. This system
enables clients to objectively evaluate our performance against their standards and procedures by identifying, documenting and resolving non-compliance issues and providing feedback to the client's
project staff. It also includes systematic problem prevention activities like internal audits and causal analysis and resolution programs that detect root causes of problems and prevent them from
occurring in the future.
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We
assure the quality of our execution via Delivery Transparency and Maturity controls that cover all of our delivery centers, provide comprehensive reporting on project execution and
assessment of management quality, and enable proactive preventive and corrective actions concerning delivery milestones, quality and customer satisfaction.
We
have developed the LUXProject system, a web-based collaborative project environment for software development that we consider critical to meeting the service levels required by our
clients. LUXProject is designed to reduce risks and provide control and visibility across all project lifecycles. Key features include:
-
-
multi-site, multi-project capabilities;
-
-
support of several types of software development processes, including waterfall, iterative and Agile;
-
-
tracking of all software development activities;
-
-
role-based access control;
-
-
fully configurable workflow engine with built-in notification and messaging;
-
-
key performance tracking indicators and broad reporting capabilities;
-
-
integration with Microsoft Project and Outlook; and
-
-
24x7 secured web-based and remote access for users.
LuxProject
provides full transparency for work done by distributed teams aligned with best practices in the software development industry.
Clients
Our clients include large multinational corporations in the financial services, travel and aviation, technology, telecom, automotive and
transport, healthcare and pharmaceutical, energy, and other industries. We have longstanding relationships with many of our clients, and seven of our top ten clients have been with us for five years
or more. We derive a large portion of our sales of services from clients who operate in a limited number of industries. In the fiscal year ended March 31, 2017, we derived 61.6%, 14.1% and 8.9%
of our sales of services from clients operating in the financial services, automotive and transport, and telecom industries, respectively. We have derived, and believe that in the foreseeable future
we will continue to derive, a significant portion of our sales from a small number of major clients. See "ITEM 3. Key InformationD. Risk FactorsRisks related to our business
and our industryWe derive a large portion of our sales of services, and expect that we will derive a large portion of our sales of products, from clients who operate in a limited number
of industries. While this gives us deep expertise in those industries, it increases our exposure to adverse conditions in any of them."
In
the fiscal year ended March 31, 2017, our ten largest clients accounted for 66.0% of our sales. This included Deutsche Bank, whose relationship with us is described below, and
UBS, which accounted for 20.0% of our total sales. No other client represented more than 10.0% of our total sales. For the risks associated with our dependence on these major clients, see "ITEM 3. Key
InformationD. Risk FactorsRisks related to our business and our industryWe generate a significant portion of our sales of services, and anticipate deriving a
large portion of our sales of products, from a limited number of clients and any significant loss of business from these clients or failure by such clients to pay for our services could materially and
adversely affect our results of operations."
Our
largest client is Deutsche Bank, with whom we have worked since 2003 and which accounted for 23.3% of our sales in the fiscal year ended March 31, 2017. Our outsourcing master
service
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agreement
with Deutsche Bank (the "DB Agreement") will be up for renewal on December 1, 2020. Typically we renew such client agreements upon their termination in the ordinary course of
business. Prior to this date, the DB Agreement can be terminated by Deutsche Bank if, among other things: we commit a material breach of the DB Agreement and do not remedy it within 30 days; we
breach the confidentiality provisions of the DB Agreement; we become insolvent; we experience a change of control; we experience more than a set amount of service level defaults or service
disruptions; or a dispute arises regarding the credits owed to Deutsche Bank in the case of service defaults. We may
terminate the DB Agreement if Deutsche Bank does not pay us, and does not remedy the non-payment within 30 days. Deutsche Bank can terminate the DB Agreement without cause by giving six months
written notice. In addition, Deutsche Bank may terminate individual work orders of Framework Service Descriptions (year-long interim agreements) entered into under the DB Agreement with prior written
notice. For further discussion, see "ITEM 3. Key InformationD. Risk FactorsWe generate a significant portion of our sales of services, and anticipate deriving a large portion
of our sales of products, from a limited number of clients and any significant loss of business from these clients or failure by such clients to pay for our services could materially adversely affect
our results of operations."
For
the past several years, we have been building up a portfolio of HPAs, which are accounts that we believe have significant revenue potential and are capable of generating at least
$5 million in recurring annual revenues within three years from the inception of such accounts and are capable of generating a three-year CAGR of at least 30%. Currently we have over 45 of such
accounts, representing a large variety of industries, including certain industries outside of our current core lines of business (such as healthcare, insurance, and retail). This group of accounts in
the aggregate is responsible for contributing at least 90% of annual growth to our company for fiscal year 2017. We believe that the contribution of these accounts to our total revenues should
increase, and at least replace the growth of our top two accounts, which is currently slowing down due to their stage of maturity.
The
following table sets forth sales by our top five and top ten clients, by amount and as a percentage of our total sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
Amount
|
|
% of
Sales
|
|
Amount
|
|
% of
Sales
|
|
Amount
|
|
% of
Sales
|
|
Client concentration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top five clients
|
|
$
|
429,200
|
|
|
54.6
|
%
|
$
|
422,504
|
|
|
64.9
|
%
|
$
|
374,254
|
|
|
71.9
|
%
|
Top ten clients
|
|
$
|
518,496
|
|
|
66.0
|
%
|
$
|
479,632
|
|
|
73.7
|
%
|
$
|
416,737
|
|
|
80.1
|
%
|
We
define the geography in which our clients' revenues originate based on the location of the clients' key decision-makers.
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The
following table sets forth sales by client location as a percentage of our sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
Amount
in thousands
|
|
% of
Sales
|
|
Amount
in thousands
|
|
% of
Sales
|
|
Amount
in thousands
|
|
% of
Sales
|
|
U.S.
|
|
$
|
261,443
|
|
|
33.3
|
%
|
$
|
202,855
|
|
|
31.2
|
%
|
$
|
204,541
|
|
|
39.3
|
%
|
UK
|
|
|
213,547
|
|
|
27.2
|
|
|
223,567
|
|
|
34.4
|
|
|
159,866
|
|
|
30.7
|
|
Germany
|
|
|
115,301
|
|
|
14.7
|
|
|
86,333
|
|
|
13.3
|
|
|
64,723
|
|
|
12.4
|
|
Russia
|
|
|
36,905
|
|
|
4.7
|
|
|
32,748
|
|
|
5.0
|
|
|
36,022
|
|
|
6.9
|
|
Switzerland
|
|
|
34,833
|
|
|
4.4
|
|
|
23,489
|
|
|
3.6
|
|
|
10,800
|
|
|
2.1
|
|
Romania
|
|
|
30,940
|
|
|
3.9
|
|
|
17,009
|
|
|
2.6
|
|
|
7,869
|
|
|
1.5
|
|
Poland
|
|
|
21,403
|
|
|
2.7
|
|
|
14,381
|
|
|
2.2
|
|
|
3,431
|
|
|
0.7
|
|
Singapore
|
|
|
4,889
|
|
|
0.6
|
|
|
10,154
|
|
|
1.6
|
|
|
15,216
|
|
|
2.9
|
|
Rest of Europe
|
|
|
36,148
|
|
|
4.7
|
|
|
17,554
|
|
|
2.7
|
|
|
10,809
|
|
|
2.1
|
|
Other
|
|
|
30,152
|
|
|
3.8
|
|
|
22,662
|
|
|
3.4
|
|
|
7,271
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
785,561
|
|
|
100
|
%
|
$
|
650,752
|
|
|
100
|
%
|
$
|
520,548
|
|
|
100
|
%
|
The
following table sets forth the percentage of our sales by age of accounts for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Age of Account
|
|
|
|
|
|
|
|
|
|
|
New
|
|
|
10.0
|
%
|
|
3.9
|
%
|
|
4.5
|
%
|
More than 1 year
|
|
|
15.1
|
|
|
13.3
|
|
|
7.4
|
|
More than 3 years
|
|
|
5.5
|
|
|
7.9
|
|
|
8.6
|
|
More than 5 years
|
|
|
69.0
|
|
|
74.7
|
|
|
79.0
|
|
Non-core sales
|
|
|
0.4
|
%
|
|
0.2
|
%
|
|
0.5
|
%
|
Sales and marketing
Our B2B (business to business) marketing teams are organized by industries and are collocated with our Sales teams for key industries in London,
Stuttgart, New York and Kirkland.
The teams are focused on positioning Luxoft brands and offering in the key markets, growing brand awareness, and driving leads. In addition, we also have B2E (business to employee) division that is
focused on positioning Luxoft as employer of choice in the key markets where we hire talent, and driving candidates to our recruitment pipeline. Our sales and marketing teams focus on expanding our
services offering into the new business lines of existing clients and targeting new clients through subject matter technical experts responsible for business development in corresponding industry
segments.
Our
sales structure undergoes regular review and process improvements. We have been increasing our number of client-facing practice- and vertical domain- focused senior personnel members
who are located in key geographies (such as the United Kingdom and the United States). These client-facing representatives effectively manage relationships with new and emerging clients. Further, we
are continuing to increase the presence of senior technology specialists available on-site to work with the internal IT teams of potential clients, providing process transformation consulting and
aiding internal IT process optimization, which is intended to generate cost savings to these clients. We believe that this will help us win more clients aiming to switch to vendors proficient in
handling managed delivery
71
Table of Contents
engagements.
We are also in the process of establishing a lead generation and nurturing structure that will allow us to follow up thoroughly on and process the leads we gather through industry events.
Our
strategy for winning new business includes:
-
-
Organic growth and expansion.
We have been successful in expanding our
services into new areas of existing clients' businesses, and engaging in higher complexity work for clients who originally engaged us for more basic projects. Approximately 44% of our sales growth in
the fiscal year ended March 31, 2017 and 81% of our sales growth in the fiscal year ended March 31, 2016, was generated from existing clients.
-
-
Referrals.
Our strong reputation, along with excellent references from
existing clients, provides a healthy pipeline of engagements and contacts from new and prospective clients. Many of the new companies that have become our clients in recent years have done so as a
result of referrals from client decision makers who have worked with us and subsequently changed employment.
-
-
Brand management, marketing and external relations activities.
We actively
participate in select industry trade shows, conferences and promotional events. These enable us to demonstrate our technological solutions and platforms and interact with industry representatives,
analysts and potential clients. We also have a targeted external relations strategy that includes cultivating relations with industry analysts and research firms such as Forrester and IDC, along with
third party advisory firms such as ISG, KPMG, Deloitte, and Avasant, and with the global media outlets. We are increasing our investments into brand equity and develop programs that increase our brand
recognition in the key geographies for our brand recognition, such as Western Europe, APAC and the United States.
During
the fiscal year ended March 31, 2017 we were recognized or mentioned by prominent independent technology research firms.
-
-
Luxoft was among the leading providers in The Breakthrough Sourcing Standouts category for the Americas, EMEA, APAC regions based on annual
contract value won over the last 12 months, according to the ISG Global Outsourcing Index.
-
-
Luxoft Among the Winners of The Car HMI Awards 2016 in The Category "Most user-friendly HMI Feature." Luxoft won a close
3
rd
place for 'most user-friendly HMI' at Europe's leading HMI and UX event, Car HMI Europe. Held in Berlin on June 20-21 and attended by over 200 experts from the
automotive and tech industries, the award recognizes the ongoing innovative HMI work from Luxoft.
-
-
"Market Guide for MDM External Service Providers," authored by Bill O'Kane, et al, and published on, March 20, 2017.
-
-
"Market Guide for IoT Service Providers," authored by Denise Rueb, et al, and published on August 26, 2016.
-
-
"Hype Cycle for Smart Machines, 2016," authored by Ken Brandt, et al and published on July 21, 2016.
-
-
"Hype Cycle for Mobile Device Technologies, 2016," authored by Tuong Huy Nguyen, et al and published on July 11, 2016.
-
-
"Market Trends: The Future of Business-Led Models for IoT Services," authored by Jacqueline Heng, et al., and published on June 16 2017.
-
-
"Market Trends: Security Platforms for Connected Home Devices," authored by Werner Goetze et al and published on May 16, 2016.
72
Table of Contents
-
-
"Market Trends: Application Testing Services Must Address the Shift to Digital Business Requirements," authored by Susanne Matson, and
published on May 6, 2017.
The
Gartner Report(s) described herein, (the "Gartner Report(s)") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by
Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Annual Report) and the opinions
expressed in the Gartner Report(s) are subject to change without notice.
Gartner
does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings
or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not
be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular
purpose.
Training and development
We grow and develop talent through a combination of professional training and mentorship programs involving senior technology specialists and
industry experts. Each new hire is exposed to a training curriculum that covers methodology and industry standards, technologies and tools, management and communication skills, software engineering
processes, and domain knowledge.
Additionally,
our four training centers in Russia, three in Ukraine, one in Romania, one in Bulgaria, four in Poland, two in the U.K., two in Germany, two in the USA, one in Vietnam, one
in Malaysia, and one in Mexico conduct more than 1800 training courses per year and host over 400 specialists (including our personnel and external students) for general training courses and
client-specific education programs. We typically conduct between 130 and 200 resident training sessions per month with an average of 10 students per group, and fulfill nearly 250 additional training
requests per month via our e-learning system via LuxTalent and E-learning library. Additionally, during the fiscal year ended March 31, 2017 we completed 181 four month foreign language
training requests for English, Polish, Bulgarian, and Romanian as well as 122 closed foreign training requests using our e-learning tool that are comprised of thirty 12 month long licenses. Our
training program delivers different professional competencies, including disciplines rarely covered by university curriculums, such as system analysis, system architecture and project management.
Each
new hire is placed on a probation period for up to six months. During this time, new hires become part of a mentoring, monitoring, coaching and motivational program. Each IT
professional is assigned to a People Manager, who is responsible for project evaluation, performance appraisal and planning of professional development of the new hire. Additionally, each IT
professional undergoes a performance appraisal session at least once a year to measure technical performance, teamwork skills and possession of the core competencies required for his or her respective
role within the Company.
Recruitment and retention
We believe our Company's culture and reputation, along with the talent in the regions in which we operate, enhances our ability to recruit and
retain sought after IT professionals. As of March 31, 2017, we had a dedicated human resources staff of 526 people including 249 recruiters and researchers. We have compiled a database of over
443,000 IT specialists who have experience and
specific skills relevant to our business. Our database, along with our referral program, has accounted for 35% of all new hires in the fiscal year ended March 31, 2017. During the fiscal year
ended March 31, 2017, we hired on average more than 350 IT professionals each month.
73
Table of Contents
Our
candidates come from a variety of sources, including external referrals, our regional network, our internal database and public sources. As of March 31, 2017, approximately
75% of our personnel had more than five years of industry experience.
In
order to keep our attrition rate low, we focus on retaining our personnel through mandatory monthly evaluation reports, an employee rotation program and a targeted approach to enable
different career opportunities within the Company. We motivate and promote key personnel through our High Performers Club, which identifies personnel with strong management potential and offers them
additional training as well as direct interaction with top management. We also offer executive training programs, corporate MBA programs and executive leadership programs at top schools including the
University of Pennsylvania, Harvard University, Stanford University and Massachusetts Institute of Technology, in which several of our top managers have already participated.
Competition
The markets in which we compete are changing rapidly and we face competition from global and Asia-based IT services providers as well as local
providers based in CEE. We believe that the principal competitive factors in our business include breadth and depth of service offerings, technical expertise and industry knowledge, reputation and
track record for high-quality and on-time delivery of work, effective personnel recruiting, training and retention, responsiveness to clients' business needs, ability to scale, financial stability and
price. Our industry is split between low-cost vendors that provide inexpensive, commoditized services and high-cost vendors that provide specialized and complex services at a premium cost. Our ability
to provide complex, customized services at competitive cost has positioned us between these two classes of vendors.
We
face competition primarily from:
-
-
IT outsourcing service providers in India, such as Cognizant Technology and Infosys;
-
-
Global multinational consulting and outsourcing firms such as Accenture, Capgemini and CSC;
-
-
Local CEE technology outsourcing IT service providers such as EPAM; and
-
-
In-house IT departments of our clients and potential clients.
Although
we do not often compete for engagements with providers in Brazil, China, Israel or Mexico, we may experience competition from vendors in these countries in the future. We
believe that we have a strong competitive position in the market for complex software outsourcing and custom application development based on third-party industry rankings and client feedback. We
believe our focus on complex software product development services, our skilled technical personnel base and continuous improvement of process methodologies, applications and platforms positions us to
compete effectively in the future. Furthermore, we believe that the barriers to entry into our niche segment are relatively high, as new entrants must secure substantial amounts of financial and
high-quality human resources to provide adequate services, flexibility and scale to compete for a comparable client base. See "ITEM 3. Key InformationD. Risk FactorsRisks
related to our business and our industryWe operate in a highly competitive environment and may not be able to compete successfully."
Intellectual property rights
We rely on a combination of intellectual property laws, trade secrets, confidentiality procedures and contractual provisions to protect our
intellectual property. In addition, our intellectual property is protected under a number of international conventions. Russia, Ukraine, Romania, Poland and the United States are participants to the
Berne Convention for the Protection of Literary Artistic Works and the Stockholm Convention establishing the World Intellectual Property
Organization. Russia, Ukraine and the United States participate in the Universal Copyright Convention adopted under the
74
Table of Contents
Geneva
Convention; and the United States, Ukraine and Romania participate in WTO agreements including the Agreement on Trade-Related Aspects of Intellectual Property Rights and ITA. We also rely on
local civil legislation to protect our intellectual property rights.
We
customarily enter into master services agreements or general framework agreements with our clients that include terms for the transfer and use by our clients of intellectual property
created by us. All intellectual property rights created by our employees and contractors are transferred to us subject to local laws and regulations and terms of agreements entered into with such
employees and contractors. Most of our software development services are specifically ordered and custom-built for the client, and therefore all intellectual property rights created by our employees
and contractors are transferred to the client at the time of delivery. Furthermore, our agreements with clients typically contain provisions that allow us to grant a perpetual, worldwide,
royalty-free, non-exclusive, transferable and non-revocable license to our clients to use our own intellectual property, but only to the extent necessary in order to use the software or systems we
developed for them. Historically, we have rarely relied on and granted licenses under these provisions, but may do so in the future as we seek to commercialize our solutions. Sometimes the
intellectual property rights for some of our software are not registered, which may expose us to intellectual property risks if we rely on these provisions to grant rights to our unregistered software
in the future.
If
requested by clients, we may incorporate third-party software into our software development for clients. In these cases, we acquire all necessary licenses for such software once we
reach a preliminary agreement with clients. Intellectual property rights for such third-party software are always subject to separate license agreements with third parties. We are in the process of
developing our own intellectual property rights for products which we are planning to sell to end users based on license agreements with end users. For example, we have acquired intellectual property
rights for the Horizon software from one of our financial services clients and we have been licensing the same to some of our clients. See "ITEM 3. Key InformationD. Risk
FactorsRisks related to our business and our industryWe may be subject to third-party claims of intellectual property infringement that could be time-consuming and costly to
defend."
Government legislation and regulation
Due to the industry and geographic diversity of our operations and services, our operations are subject to a variety of rules and regulations,
and several government agencies in the United States and abroad, especially in CEE countries, regulate various aspects of our business. See the following risk factors in "ITEM 3. Key
InformationD. Risk Factors" for more information on regulation material to our business, financial condition and results of operations:
-
-
"Risks Relating to Our Business and Our IndustryOur international operations involve risks that could increase our
expenses, adversely affect our results of operations and require increased time and attention from our management."
-
-
"Risks Relating to Our Business and Our IndustryOur effective tax rate could be materially adversely affected by a
number of factors."
-
-
"Risks related to conducting business in CEE countriesLoss of certain tax benefits that we enjoy in Russia and
Ukraine could have a negative impact on our operating results and profitability."
-
-
"Risks related to conducting business in CEE countriesChanges in the tax system in CEE countries or arbitrary or
unforeseen application of existing rules could materially adversely affect our financial condition and results of operations."
75
Table of Contents
-
-
"Risks related to conducting business in CEE countriesSelective or arbitrary government action resulting from
uncertain application of commercial laws and regulations in CEE countries could materially adversely affect our business and operations."
-
-
"Risks related to conducting business in CEE countriesThe legal and tax systems in CEE countries can create an
uncertain environment for business activity, which could materially adversely affect our business and operations in the CEE."
-
-
"Risks related to conducting business in CEE countriesRecent Russian tax legislation and decisions by Russian courts
on tax matters could have a material adverse effect on our business, and could subject us to fines, penalties, additional taxes or uncertain and costly litigation."
-
-
"Risks related to conducting business in CEE countriesRecent de-offshorization law and other related administrative
and international measures in Russia may have a material adverse impact on our operations."
-
-
"Risks related to conducting business in CEE countriesWe may be exposed to liability for actions taken by our
subsidiaries."
-
-
"Risks related to conducting business in CEE countriesOur CEE subsidiaries can be forced into liquidation on the
basis of formal non-compliance with certain legal requirements."
-
-
"Risks related to conducting business in CEE countriesOur subsidiaries established outside of Russia may be exposed
to taxation in Russia."
-
-
"Risks related to conducting business in CEE countriesLuxoft may be exposed to taxation in Ukraine if activities of
non-Ukrainian companies of Luxoft are treated as creating a permanent establishment for Ukrainian tax purposes."
-
-
"Risks related to conducting business in CEE countriesOn-going regulatory changes in Russia, including software
purchase regulation, Civil Code reform and personal data regulation, among others may have a material adverse effect on our operations there."
We
also benefit from tax incentives promulgated by certain Eastern European governments. See "ITEM 5. Operating and Financial Review and ProspectsB. Liquidity and Capital
ResourcesIncome Taxes."
Seasonal trends in operations
Our business is moderately seasonal and our results of operations vary from quarter to quarter based in part upon the budget and work cycles of
our clients. Our operating results are typically lower in the first fiscal quarter of each year due to increases in wages and other costs that typically occur in the beginning of each fiscal year. For
more information, see "ITEM 5. Operating and Financial Review and ProspectsA. Operating ResultsQuarterly results of operations and seasonality."
76
Table of Contents
C. Organizational Structure
As of March 31, 2017, we held directly and indirectly the percentage indicated of the outstanding capital stock of the following subsidiaries:
|
|
|
|
|
|
|
Entity
|
|
Jurisdiction of Incorporation
|
|
Percentage
Ownership
|
|
Luxoft International Company Ltd.
|
|
Cyprus
|
|
|
100.00
|
%
|
Excelian (Singapore) Pte Ltd
|
|
Singapore
|
|
|
100.00
|
%
|
Symtavision Inc.*
|
|
United States
|
|
|
100.00
|
%
|
Symtavision GmbH
|
|
Germany
|
|
|
100.00
|
%
|
Luxoft Luxembourg S.a.r.l
|
|
Luxembourg
|
|
|
100.00
|
%
|
Luxoft Sweden
|
|
Sweden
|
|
|
100.00
|
%
|
Luxoft Netherlands B.V.
|
|
Netherlands
|
|
|
100.00
|
%
|
Luxoft UK Ltd.
|
|
United Kingdom
|
|
|
100.00
|
%
|
Excelian Ltd. (UK)
|
|
United Kingdom
|
|
|
100.00
|
%
|
Luxoft USA, Inc.
|
|
United States
|
|
|
100.00
|
%
|
Radius Inc.
|
|
United States
|
|
|
100.00
|
%
|
Excelian, Inc.
|
|
United States
|
|
|
100.00
|
%
|
Luxoft Canada Ltd.
|
|
Canada
|
|
|
100.00
|
%
|
Excelian Ltd. (Canada)
|
|
Canada
|
|
|
100.00
|
%
|
Luxoft Eastern Europe Ltd.
|
|
British Virgin Islands
|
|
|
100.00
|
%
|
Luxoft Mexico S.A. de C.V.
|
|
Mexico
|
|
|
100.00
|
%
|
Luxoft Singapore PTE. LTD.
|
|
Singapore
|
|
|
100.00
|
%
|
Luxoft Poland sp.z.o.o.
|
|
Poland
|
|
|
100.00
|
%
|
Luxoft GmbH
|
|
Germany
|
|
|
100.00
|
%
|
Luxoft (Switzerland) GmbH
|
|
Switerland
|
|
|
100.00
|
%
|
Luxoft Global Operations GmbH
|
|
Switerland
|
|
|
100.00
|
%
|
Luxoft Vietnam Company Ltd.
|
|
Vietnam
|
|
|
100.00
|
%
|
Luxoft Bulgaria EOOD
|
|
Bulgaria
|
|
|
100.00
|
%
|
Luxoft Professional Romania S.R.L.
|
|
Romania
|
|
|
100.00
|
%
|
Software ITC S.A.
|
|
Romania
|
|
|
99.40
|
%
|
Luxoft Services , LLC
|
|
Russia
|
|
|
100.00
|
%
|
Luxoft Professional , LLC
|
|
Russia
|
|
|
100.00
|
%
|
Luxoft Research, LLC
|
|
Russia
|
|
|
100.00
|
%
|
Luxoft Dubna , LLC
|
|
Russia
|
|
|
100.00
|
%
|
Luxoft Training Center
|
|
Russia
|
|
|
100.00
|
%
|
Luxoft Ukraine LLC
|
|
Ukraine
|
|
|
100.00
|
%
|
Luxoft Denmark ApS
|
|
Denmark
|
|
|
100.00
|
%
|
INSYS Group, Inc.
|
|
United States
|
|
|
100.00
|
%
|
Intro Pro US, Inc.
|
|
United States
|
|
|
100.00
|
%
|
Intro Pro Software Company Limited
|
|
British Virgin Islands
|
|
|
100.00
|
%
|
Intro Pro Ukraine, LLC
|
|
Ukraine
|
|
|
100.00
|
%
|
Pelagicore AB
|
|
Sweden
|
|
|
100.00
|
%
|
Pelagicore AG
|
|
Sweden
|
|
|
100.00
|
%
|
Luxoft Malaysia Sdn Bhd
|
|
Malaysia
|
|
|
100.00
|
%
|
SMEScience Management and Engineering AG
|
|
Germany
|
|
|
100.00
|
%
|
Luxoft India, LLP
|
|
India
|
|
|
100.00
|
%
|
-
*
-
Subsequently
liquidated
77
Table of Contents
D. Property, Plants and Equipment
Facilities
We are currently present in 39 cities with offices across nineteen countries, totaling 123,980 square meters of office space. As of
March 31, 2017, we had the capacity for 14,314 workplaces, which provides us with a 35% reserve for growth. We lease all of our facilities except for one facility in Romania, which we acquired
as part of our acquisition of ITC Networks in 2008.
The
following table sets forth our office locations and the number of personnel at each office as of March 31, 2017, excluding all on-site personnel and any personnel on long-term
leave.
|
|
|
|
|
|
|
|
|
Location
|
|
Total
square
meters
|
|
Personnel
|
|
Principal Use
|
Eastern Europe:
|
|
|
|
|
|
|
|
|
Kiev, Ukraine
|
|
|
29,209
|
|
|
2,660
|
|
Delivery center
|
Moscow, Russia
|
|
|
9,824
|
|
|
1,033
|
|
Delivery center; sales, marketing & other admin
|
Omsk, Russia
|
|
|
8,121
|
|
|
673
|
|
Delivery center
|
Odessa, Ukraine
|
|
|
7,991
|
|
|
634
|
|
Delivery center
|
St. Petersburg, Russia
|
|
|
6,831
|
|
|
641
|
|
Delivery center
|
Dnipro, Ukraine
|
|
|
3,568
|
|
|
323
|
|
Delivery center
|
Dubna, Russia
|
|
|
662
|
|
|
70
|
|
Delivery center
|
Central Europe:
|
|
|
|
|
|
|
|
|
Bucharest, Romania
|
|
|
21,130
|
|
|
1,233
|
|
Delivery center
|
Krakow, Poland
|
|
|
11,315
|
|
|
666
|
|
Delivery center
|
Wroclaw, Poland
|
|
|
5,498
|
|
|
236
|
|
Delivery center
|
Sofia, Bulgaria
|
|
|
3,360
|
|
|
220
|
|
Delivery center
|
Tricity, Poland
|
|
|
676
|
|
|
50
|
|
Delivery center
|
Warsaw, Poland
|
|
|
321
|
|
|
47
|
|
Delivery center
|
Western Europe:
|
|
|
|
|
|
|
|
|
Boeblingen, Germany
|
|
|
2,166
|
|
|
65
|
|
Delivery center
|
Munich, Germany
|
|
|
1,329
|
|
|
46
|
|
Delivery center; sales, marketing & other admin
|
Leinfelden-Echterdingen (Stuttgart), Germany
|
|
|
1,272
|
|
|
87
|
|
Delivery center; sales, marketing & other admin
|
London, United Kingdom
|
|
|
1,251
|
|
|
138
|
|
Delivery center; sales, marketing & other admin
|
Zug, Switzerland
|
|
|
943
|
|
|
22
|
|
Operational headquarters
|
Braunschweig, Germany
|
|
|
544
|
|
|
27
|
|
Delivery center; sales, marketing & other admin
|
Gothenberg, Sweden
|
|
|
452
|
|
|
40
|
|
Delivery center
|
Welwyn Garden City, Hertfordshire, United Kingdom
|
|
|
322
|
|
|
17
|
|
Delivery center; sales, marketing & other admin
|
Frankfurt am Main, Germany
|
|
|
135
|
|
|
6
|
|
Delivery center
|
Strassen, Luxembourg
|
|
|
123
|
|
|
1
|
|
Delivery center
|
Ruesselsheim, Germany
|
|
|
88
|
|
|
|
|
Delivery center
|
Nicosia, Cyprus
|
|
|
84
|
|
|
1
|
|
Sales, marketing & other admin
|
78
Table of Contents
|
|
|
|
|
|
|
|
|
Location
|
|
Total
square
meters
|
|
Personnel
|
|
Principal Use
|
North America:
|
|
|
|
|
|
|
|
|
Kirkland (Seattle), WA, USA
|
|
|
1,188
|
|
|
96
|
|
Delivery center; sales, marketing & other admin
|
Guadalajara, Mexico
|
|
|
1,111
|
|
|
97
|
|
Delivery center
|
Jersey City, NJ, USA
|
|
|
1,031
|
|
|
21
|
|
Delivery center; sales, marketing & other admin
|
New York, NY, USA
|
|
|
438
|
|
|
23
|
|
Delivery center; sales, marketing & other admin
|
Los Angeles, California, USA
|
|
|
154
|
|
|
|
|
Sales, marketing & other admin
|
Menlo Park, CA, USA
|
|
|
139
|
|
|
1
|
|
Delivery center; sales, marketing & other admin
|
Detroit, MI, USA
|
|
|
55
|
|
|
2
|
|
Delivery center; sales, marketing & other admin
|
Toronto, Canada
|
|
|
15
|
|
|
|
|
Sales, marketing & other admin
|
Eden Prairie (Minneapolis), Minnesota, USA
|
|
|
11
|
|
|
|
|
Sales, marketing & other admin
|
APAC:
|
|
|
|
|
|
|
|
|
Ho Chi Minh City, Vietnam
|
|
|
1,146
|
|
|
40
|
|
Delivery center
|
Penang, Malaysia
|
|
|
915
|
|
|
30
|
|
Delivery center; sales, marketing & other admin
|
Sydney, Australia
|
|
|
148
|
|
|
16
|
|
Delivery center
|
Singapore, Singapore
|
|
|
99
|
|
|
7
|
|
Delivery center; sales, marketing & other admin
|
Other:
|
|
|
|
|
|
|
|
|
Cape Town, South Africa
|
|
|
315
|
|
|
8
|
|
Delivery center
|
Total
|
|
|
123,980
|
|
|
9,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 4A. Unresolved Staff Comments
None.
ITEM 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section
titled "ITEM 3. Key InformationA. Selected Financial Data" and the consolidated financial statements included elsewhere in this report. This discussion and analysis may contain
forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify
forward-looking statements. Our actual results may differ materially from those anticipated in the forward-looking statements made herein as a result of various risks, uncertainties and other
important factors, including those set forth in "ITEM 3. Key InformationD. Risk Factors" of this annual report. Any such forward-looking statements represent management's estimates
as of the date of this annual report. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our
views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this annual report. Our financial statements have been
prepared in accordance with U.S. generally accepted accounting principles.
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Table of Contents
A. Operating Results
Factors affecting our results of operations
We believe the following factors have had and may continue to have a significant effect on our results of operations:
-
-
Wage inflation:
Wage inflation has been growing rapidly in the countries in
which we maintain a significant number of personnel. Wage inflation contributes to increases in our cost of services, and selling, general and administrative expenses. The impact of wage inflation is
heightened by increased attrition, which is caused by the increasing demand for qualified IT personnel. The impact of wage inflation is mitigated to a limited extent by several factors, including our
ability to shift work away from delivery centers that may be disproportionately affected by wage inflation, as well as our ability to pass some of the cost to our clients through provisions in a
number of our contracts that permit us to increase prices based on inflation and related indicators.
-
-
Demand for IT services outsourcing in the United States and Western
Europe:
The demand for IT services outsourcing is growing steadily in the United States and Western Europe, the regions in which most of our
clients operate. The growth in demand for IT services outsourcing in key regions in which we operate gives us the ability to increase our sales of services and, therefore, may positively impact our
results of operations. Conversely, if the growth in demand for IT services outsourcing slows or declines, our revenues may be negatively impacted. We focus on providing services primarily to mission
critical aspects of our clients' businesses, which we believe reduces the risk of our clients decreasing their IT spending on our engagements during economic downturns relative to those IT services
providers who focus on discretionary projects and business process outsourcing.
-
-
Client concentration:
In the fiscal year ended March 31, 2017, 61.6%
of our sales were derived from clients in the financial services industry. We believe we will continue to have similar levels of revenue concentration in the financial services industry in the near
term. The developments in this industry that impact the demand for software development services and solutions are likely to have a greater impact on us than on competitors, who do not have a
similarly high level of revenue concentration in this vertical. Furthermore, we have a high degree of client concentration and our top five clients represented an aggregate of 54.6% of our sales in
the fiscal year ended March 31, 2017. We believe that the financial services industry will remain one of the most significant sources of demand for IT services in the near term, driven by
ongoing pressure to restore growth and improve profitability, industry-wide regulatory reforms, requirements to increase transparency and manage risk exposure, as well as the adoption of new
technologies such as cloud computing, mobile and data analytics. We believe that the financial industry's strong reliance on IT outsourcing services and the mission critical nature of the services we
provide for key clients within the financial industry, should reduce the risks we face from client concentration.
-
-
Foreign currency fluctuation:
We operate in a multi-currency environment,
and exchange rate fluctuations, especially between the U.S. dollar and the euro and currencies pegged to the euro, impact our results of operations. Our sales are largely denominated in U.S. dollars
and euros, and, to a lesser extent, in British pounds and Russian rubles, whereas our expenses are largely denominated in U.S. dollars, Russian rubles, Polish zloty, British pounds and Romanian leu.
As a result, currency fluctuations, especially the appreciation of the Russian ruble relative to the U.S. dollar and the depreciation of the euro and British pound relative to U.S. dollar, could
negatively impact our results of operations. Currency exchange rates in the British pound and the euro with respect to each other and the U.S. dollar have been affected by the June 23, 2016
referendum in the United Kingdom, pursuant to which the people of the United Kingdom voted
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for
the United Kingdom's withdrawal from the European Union ("Brexit"), and the United Kingdom formally notified the European Union of its intention to withdraw from it. As a significant portion of
our revenues are derived from sales to clients located in the United Kingdom and due to our operations in the United Kingdom and Europe, further exchange rate fluctuations as a result of Brexit could
adversely affect our business and our results of operations. See "ITEM 3. Key InformationD. Risk FactorsThe decision by the United Kingdom to exit from the European
Union could materially adversely affect our business and results of operations."
-
-
Inflation in CEE:
Our results of operations are affected by inflation rates
in CEE because our expenses are largely denominated in Russian rubles and other CEE currencies, such as Romanian leu and Polish zloty. If we are unable to increase our revenues in line with our costs
in CEE, it could have a material effect upon our results of operations and financial condition. See "ITEM 3. Key InformationD. Risk FactorsRisks related to our business and
our industryFluctuations in currency exchange rates and increased inflation could materially adversely affect our financial condition and results of operations."
-
-
Tax reduction programs:
We benefit from tax reduction programs in Russia,
Switzerland and Poland.
-
-
In Russia, we benefit from a reduced social contributions tax rate program available to qualified IT service providers complying
with certain conditions set out in the Russian law. Russia's social contributions are mandatory taxes consisting of contributions paid by employers to the Russian Pension Fund, the Russian Social
Insurance Fund and the Federal Medical Insurance Fund. The social contributions tax rate varies depending on the employer's beneficial status and the status of a particular employee (such as a foreign
citizen or Russian citizen). Under the program, the applicable aggregate tax rate is currently reduced from the maximum of 30% to 14%. However, the reduced tax rates for social contributions payable
by qualified IT service providers are expected to be available only until December 31, 2023.
-
-
Our Swiss subsidiary, which also serves as Group operational headquarters, has been enjoying mixed company regime in the canton of
Zug since its incorporation in 2013. Under cantonal tax law a mixed company is partially exempted from cantonal taxation of profits earned outside of Switzerland. Amount of profits exempted from
cantonal taxation depend on the number of Swiss employees of the Group and in our case equals to 80% of profits. It is expected that this privileged taxation of foreign profits will be abolished from
2020. It is expected that new special tax regimes or preferential tax rates may be introduced after the abolishment of the mixed company regime, however it is currently difficult to assess to what
extent such new incentives will be similar to the current one.
-
-
Our subsidiary in Poland conducts a part of its operational activities in the territory of Krakow special economic zone ("SEZ")
under the permit, which entitles the Group to use a tax incentive. Our profit generated from operations in the SEZ is non-taxable within the amount of tax credit calculated based on eligible expenses.
Since the amount of the relevant tax credit currently exceeds the amount of income tax payable with respect to profits earned in the SEZ, we pay no income tax in relation to this subsidiary's
operations in the SEZ.
-
-
Government grants:
During the fiscal year ended March 31, 2017, we
participated in government grants programs in Romania, Poland, Bulgaria, Mexico and Malaysia. The programs require certain investments regarding creating new workplaces and maintaining them during
certain periods of up to five years. As a result of fulfilling the programs' requirements, we received five government grants in the total amount of $3.8 million; in 2016 we received three
government grants in the total amount of $2.9 million.
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Table of Contents
Acquisitions
During the fiscal years ended March 31, 2017 and 2016 we completed a number of acquisitions that allowed the Company to expand the
existing verticals, increase revenue and create new offerings of services currently provided. The Company used the acquisition method of accounting to record these business combinations. All our
acquisitions during these two fiscal years were settled in cash. For some transactions, purchase agreements contain contingent consideration in the form of an earnout obligation.
Acquisition of IntroPro
On January 31, 2017, the Group closed an equity purchase transaction to acquire IntroPro, a group of engineering consultancy companies
generating the majority of its revenue from the telecom and media sector, serving several blue chip clients based in North America.
Luxoft
acquired all of the issued and outstanding shares of three companies constituting the IntroPro group, namely Intro Pro US Inc., Intro Pro Software Company Limited and Intro
Pro Ukraine LLC for $28.3 million of cash consideration, paid at closing, of which $5.0 million was placed in escrow by the sellers for up to 3 years as security for the
indemnification and certain other obligations of the sellers under the terms of the stock purchase agreement. In accordance with the agreement, the Sellers are entitled to additional cash payments,
subject to achievement of certain financial performance milestones by IntroPro for its 2017 and 2018 fiscal years. As of March 31, 2017, the fair value of the contingent consideration was
$24.4 million.
Acquisition of Pelagicore
On September 13, 2016, the Group has completed the acquisition of Pelagicore AB, a Swedish company, provider of open source software
platforms and services for in-vehicle infotainment systems and human machine interface (HMI) development.
In
accordance with the stock purchase agreement, Luxoft Global Operations GmbH paid €16.9 million, or $18.9 million, upon closing of this
transaction. Additionally, Luxoft agreed to pay up to € 5.0 million or $5.5 million in 2017 subject to Pelagicore achieving certain order backlog from
defined clients till the end of 2017 calendar year. The fair value of the contingent consideration as of March 31, 2017 was $5.4 million.
Acquisition of INSYS Group, Inc.
On July 15, 2016, Luxoft USA, Inc. completed the acquisition of INSYS Group, Inc. ("Insys"), an IT consulting provider
focusing on advanced predictive analytics, business intelligence and
data warehousing, digital marketing, and enterprise information management. Luxoft acquired all of the issued and outstanding shares of common stock of Insys for an initial payment of
$37.9 million with the remaining amount payable being subject to certain revenue and EBITDA targets to be achieved by Insys for the six-month period ending December 31, 2016, and its
2017 and 2018 fiscal years. The total amount of contingent purchase consideration was not to exceed $33.5 million. Additionally, under the Purchase Agreement, certain managers of Insys were
eligible for incentive payments under a management earnout participation plan in an amount of up to $7.0 million. In conjunction with the mutual election under Section 338(h) of the U.S.
Internal Revenue Code ("Section 338(h)"), Luxoft USA and the Insys Sellers agreed to treat the Insys purchase as an asset purchase for tax purposes.
In
March 2017, the management of Luxoft and the former shareholders of Insys Group, Inc. reached an agreement in negotiations regarding certain changes to the original SPA. The
main changes include re-allocation of the earn-out percentages among the former Insys shareholders and introduction of a minimum guaranteed amount of the earn-out of $2.6 million. Additionally
the maximum amount
82
Table of Contents
of
the management earnout participation plan was decreased to a maximum of $3.0 million due to resignation of one of the participants. As of March 31, 2017, the fair value of the
contingent consideration was $7.9 million.
Acquisition of Symtavision GmbH
On February 23, 2016, Luxoft Global Operations GmbH, a wholly-owned Swiss subsidiary of the Company ("LGO"), completed its
acquisition of Symtavision GmbH ("Symtavision"), a boutique provider of automotive software tools and consulting services focused on scheduling analysis, architecture optimization, and timing
verification. Symtavision's tools, building on its proprietary intellectual property, focus on the Under the Hood ("UTH") technology around increasingly important software integration and timing
analysis in the chassis, powertrain, body, and driver assistance domains as well as in-vehicle networking.
The
Symtavision acquisition enhanced our capabilities in the UTH practice and expanded our list of automotive high potential accounts ("HPAs").
In
accordance with the stock purchase agreement LGO paid a cash purchase price of €3.9 million, or $4.4 million at the then-current exchange rate of
€1=$1.14, upon closing of this transaction.
Sales of services
Sales of services consist primarily of the provision of software development, which includes core custom software development and support,
product engineering and testing and technology consulting services to our clients. Sales of services also includes sales generated from non-core activities, including external project consulting,
quality management consulting, recruitment services provided to our clients and training services provided to third parties, as well as reimbursements of expenses of our IT professionals by clients.
Historically, non-core sales have accounted for a small portion of total sales. In the past two fiscal years, we derived a substantial majority of the growth in our sales of services to existing
clients. Below is a discussion of our revenue organized by client location, industry vertical, client concentration and contract type.
Client locations
We present client location based on the location of the client's key decision-maker. We seek to maintain the current geographical balance of
sales. Our revenue by client location has generally experienced balanced growth during the periods under review. For more information on sales by client location, see "ITEM 4. Information About
LuxoftB. Business OverviewClients."
Industry Verticals
While financial services have historically been our largest industry vertical, we have deep expertise in each of the industry verticals we
serve. We target four industry verticals within which we have maintained a relatively stable revenue mix during the periods under review. For information on sales by industry vertical, see "ITEM 4.
Information About LuxoftB. Business OverviewOur verticals."
Client concentration
We have deep and long-standing relationships with our top clients. As a percentage of total sales, revenue generated by our top five clients
declined from 64.9% for the fiscal year ended March 31, 2016, to 54.6% in the fiscal year ended March 31, 2017. Revenue generated by our top ten clients for the same periods decreased
from 73.7% to 66.0% as a percentage of total sales. Over the long-term, we expect client concentration from our top ten clients to continue to decrease as a result of increase in
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demand
from other existing clients, as well as business from new clients. New clients for any period are defined as clients who were not on our client list as of the end of the applicable prior fiscal
year. For information on sales by client, see "ITEM 4. Information About LuxoftB. Business OverviewClients."
Contract types
We derive revenue from fixed price contracts and time-and-materials contracts. Under time-and-materials contracts, we are compensated for actual
time incurred by our IT professionals at negotiated hourly, daily or monthly rates. The majority of our fixed price contracts
allow monthly or quarterly revenue recognition based on monthly and quarterly milestones, with clear customer acceptance criteria that could be assessed at the end of respective periods. We believe
the use of proportional performance with monthly or quarterly contractual milestones for customer acceptance continues to be an appropriate revenue recognition method for fixed price contracts.
The
following table sets forth sales by contract type, by amount and as a percentage of our total sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
Amount
in thousands
|
|
% of
Sales
|
|
Amount
in thousands
|
|
% of
Sales
|
|
Amount
in thousands
|
|
% of
Sales
|
|
Contract type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-and-materials
|
|
|
568,510
|
|
|
72.4
|
%
|
|
298,367
|
|
|
45.8
|
%
|
|
214,259
|
|
|
41.2
|
%
|
Fixed price
|
|
|
217,051
|
|
|
27.6
|
%
|
|
352,385
|
|
|
54.2
|
%
|
|
306,289
|
|
|
58.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
785,561
|
|
|
100
|
%
|
$
|
650,752
|
|
|
100
|
%
|
$
|
520,548
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
Our operating expenses consist of:
Cost of services
Cost of services includes salaries and related benefits for our delivery center employees, compensation for our contractors and other
project-related costs, including travel, materials and other direct costs. Most of our IT professionals are salaried employees except for personnel in Ukraine and the United States, where a
substantial part are contractors. The majority of our costs of services comprise compensation to our employees and contractors, and we expect substantially the same
composition of costs of services in the future. Where services are performed by contractors, the entire cost of contractors is included in cost of services. With respect to employees, the compensation
for the time that our employees log for specific projects is included in our cost of sales, and the remainder of the total compensation for logged time is recorded in selling, general and
administrative expenses. The travel expenses of our employees and contractors directly related to specific projects are recorded in our cost of services. Cost of services also includes social
contribution charges payable on the salaries for our employees.
Selling, general and administrative expenses
Selling expenses include primarily advertising and marketing expenses. General and administrative expenses include compensation and other
expenses of our senior management, administrative personnel, and R&D personnel, as well as compensation expenses for the time of our IT professionals not assigned to a specific project. General and
administrative expenses also include office rent and
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Table of Contents
maintenance
and professional services, including legal, audit and insurance services, travel and entertainment expenses other than those directly related to projects for clients, and other expenses.
Depreciation and amortization
Depreciation and amortization includes depreciation of property and equipment and amortization of capitalized software costs, acquired
contract-based client relationships and other intangible assets. We use the straight-line method to determine depreciation and amortization.
Loss/gain from revaluation of contingent liability
Loss from revaluation of contingent liability includes results from revaluation of contingent liabilities arising as part of business
combinations. Contingent liabilities are remeasured to fair value at each reporting date until the contingency is resolved.
Other income and expenses
Our other income and expenses consist of:
Interest expense, net:
Interest income and interest expense are accrued by reference to the principal amount outstanding at the
applicable interest
rate. We earn interest income on our cash deposits and loans provided to related parties.
Other gains/(loss), net:
Other gains, net consists of government grants, subleasing office space, operational leasing of equipment and
disposal of
old computer equipment.
Gain/(loss) from foreign currency exchange contracts:
Gain (loss) from foreign currency exchange contracts is represented by gains and
losses from
settlement and revaluation of derivatives related to forward foreign currency exchange contracts not designated as cash flow hedges.
Starting
January 2016, due to an increased volume of hedged transactions, extended periods of foreign exchange contracts and a risk of significant fluctuations of fair values of
derivatives affecting our Statement of Comprehensive income, we started to apply hedge accounting to forward contracts offsetting our forecasted transactions denominated in euro and British pounds.
All
gain or loss on a derivative instrument designated as a cash flow hedge is recognized in other comprehensive income until reclassified into earnings in the same period when the
hedged forecasted transaction affects earnings, i.e. when a forecasted sale actually occurs or an expense is incurred. Gains or losses related to hedging of forecasted sales are recognized in
Sales of services, and those attributable to forecasted expense are recognized in Cost of services.
Net foreign exchange income/(loss):
We enter into foreign exchange transactions as we have contracts denominated in both U.S. dollars,
euros, rubles,
and, to a lesser extent, Swiss francs, British pounds and other currencies. Re-measurement of monetary assets, such as receivables, denominated in foreign currencies that are different from functional
currencies of the respective subsidiaries, result in and are recorded as net foreign exchange income/ (loss).
Income tax expense
Our income tax includes both current and deferred income taxes. Because we operate in a number of countries, our income is subject to taxation
in differing jurisdictions with a range of tax rates. Therefore, we need to apply significant judgment to determine our consolidated income tax position. Due to our multi-jurisdictional operations, we
are exposed to a number of different tax risks including, but not limited to, changes in tax laws or interpretations of these tax laws. In the fiscal year ended March 31, 2017, our effective
income tax rate decreased to 11.2% comparing to 14.7% in the fiscal year
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Table of Contents
ending
March 31, 2016 due to positive effect of SOP tax deduction, utilization of tax losses and other beneficial tax planning strategies.
The following tables set forth our results of operations for the periods presented and as a percentage of sales of services for those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Sales of services
|
|
$
|
785,561
|
|
$
|
650,752
|
|
$
|
520,548
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
474,980
|
|
|
379,331
|
|
|
293,960
|
|
Selling, general and administrative expenses
|
|
|
213,723
|
|
|
171,707
|
|
|
128,952
|
|
Depreciation and amortization
|
|
|
34,847
|
|
|
23,814
|
|
|
16,834
|
|
(Income)/ loss from revaluation of contingent liability
|
|
|
(10,031
|
)
|
|
(2,511
|
)
|
|
1,166
|
|
Impairment loss
|
|
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
66,755
|
|
$
|
78,411
|
|
$
|
79,636
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expenses
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(81
|
)
|
|
121
|
|
|
(543
|
)
|
Other gain/ (loss), net
|
|
|
5,119
|
|
|
3,947
|
|
|
1,430
|
|
Gain/ (loss) from foreign currency exchange contract
|
|
|
1,314
|
|
|
261
|
|
|
1,321
|
|
Net foreign exchange loss
|
|
|
(2,604
|
)
|
|
(381
|
)
|
|
(8,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
70,503
|
|
|
82,359
|
|
|
72,977
|
|
Income tax expense
|
|
|
(7,865
|
)
|
|
(12,108
|
)
|
|
(9,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
62,638
|
|
$
|
70,251
|
|
$
|
63,149
|
|
Net income attributable to the non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Group
|
|
$
|
62,638
|
|
$
|
70,251
|
|
$
|
63,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss), net of tax
|
|
|
95
|
|
|
(2,281
|
)
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
62,733
|
|
$
|
67,970
|
|
$
|
62,724
|
|
Comprehensive income/ (loss) attributable to the non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to the Group
|
|
$
|
62,733
|
|
$
|
67,970
|
|
$
|
62,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended March 31, 2017 compared to fiscal year ended March 31, 2016
Sales of services
In the fiscal year ended March 31, 2017, our revenues demonstrated 20.7% growth year over year, increasing by $134.8 million to
$785.6 million in the fiscal year ended March 31, 2017 from $650.8 million in the fiscal year ended March 31, 2016. The increase was primarily due to a growing volume of
sale in three of our verticals, financial services, telecom and automotive and transport, which contributed 5.8%, 5.0% and 4.9% of overall growth, respectively. Luxoft Digital practice which includes
technology, travel and aviation and energy practices, contributed 0.8% to the overall growth year-on-year.
From
a geographical standpoint, our revenue increased substantially due to our U.S. clients, providing 9.0% of overall revenue growth, as well as clients from Germany and Poland,
contributing 4.5% and 2.1% of total revenue growth, respectively. In comparison to the prior fiscal year, in the fiscal
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year
ended March 31, 2017, our revenue generated from the U.S. clients increased by 39.8% from 28.9% to 33.3% of total revenue resulted both from increased volume of sales to our top clients in
the telecom vertical as well as revenue from the Insys and IntroPro businesses, which were acquired in July 2016 and January 2017, respectively; Germany increased by 33.6% from 13.3% to 14.7% of the
total primarily due to growth of our automotive vertical clients; Poland demonstrated an increase of 81.9% from 2.6% to 3.9% of the total revenue mainly due to continuing growth in our financial
vertical.
We
continuously develop relationships with our clients and as a result, sales to our existing clients accounted for 43.6% of the increase in sales of services for the fiscal year ended
March 31, 2017, while sales to new clients accounted for 39.8% of the increase. Sales of services to new clients represented 10.0% of total sales in the fiscal year ended March 31, 2017,
as compared to 3.9% of total sales in the fiscal year ended March 31, 2016. Our non-core sales accounted for 0.4% and 0.2% of total sales in the years ended March 31, 2017 and 2016,
respectively.
To
support our growing sales, we increased the number of our IT professionals to 10,807 as of March 31, 2017, from 9,239 IT professionals as of March 31, 2016.
Operating expenses
Cost of services
Cost of services increased by $95.6 million, or 25.2%, to $475.0 million in the fiscal year ended March 31, 2017 from
$379.3 million in the fiscal year ended March 31, 2016. Gross margin decreased from 41.7% to 39.5% in the fiscal year ended March 31, 2017, when compared to the prior fiscal year.
The increase in cost of services and related decrease in gross margin during the latter fiscal year was primarily attributed to a larger portion of the new business generated by HPAs compared to the
prior fiscal year. To enable faster growth of our HPAs we made certain upfront investments into these accounts, including training of our engineering personnel, the time which cannot be billed to a
client, billing clients at lower rates during smaller proof of concept engagements, providing higher paid onshore consultants at the initial engagements with a low ratio of lower-salaried off-shore
engineering support, which we usually increase at later, more mature stages of relationships.
As
a percentage of sales, cost of services increased to 60.5% for the fiscal year ended March 31, 2017, from 58.3% in the fiscal year ended March 31, 2016.
Selling, general and administrative expenses
During the fiscal year ended March 31, 2017, our selling, general and administrative expenses increased by $42.0 million, or
24.5%, to $213.7 million mainly due to organic expansion of our business functions. As a percentage of sales, selling, general and administrative expenses increased to 27.2% for the fiscal year
ended March 31, 2017, from 26.4% in the fiscal year
ended March 31, 2016. This increase was attributable primarily to the stock option plan and continuing investments in R&D activities.
Payroll
and bonuses expenses, including payroll taxes and excluding share-based compensation, increased by $26.8 million, or 32.7%, from $82.0 million in the fiscal year
ended March 31, 2016 to $108.8 million in the fiscal year ended March 31, 2017, primarily due to an expansion of our R&D activities, contributing 15.6% of the total increase in
our selling, general and administrative expenses.
Share-based
compensation increased by $11.2 million from $17.7 million in the fiscal year ended March 31, 2016 to $29.0 million in the fiscal year ended
March 31, 2017, principally due to new grants under our SOP III program. The growth of share-based compensation expenses impacted the overall selling, general and administrative expenses by
6.5%.
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Table of Contents
Our
spending on professional services increased by $1.8 million, or 7.6%, to $25.8 million in the fiscal year ended March 31, 2017, contributing 1.1% to the total
increase in our selling, general and administrative expenses, primarily due to consulting fees to support our M&A activities.
Depreciation and amortization
Depreciation and amortization increased by $11.0 million, or 46.3%, to $34.8 million in the fiscal year ended March 31,
2017 from $23.8 million in the fiscal year ended March 31, 2016. As a percentage of sales, depreciation and amortization increased from 3.7% in the fiscal year ended March 31,
2016 to 4.4% in the fiscal year ended March 31, 2017. The increase was primarily a result of increased amortization of intangible assets recognized in business combinations, specifically
customer relationships of Insys and IntroPro. Another contributing factor was an increase in computers and office equipment due to a growing headcount.
Income from revaluation of contingent liability
Gain from revaluation of contingent liability increased by $7.5 million from $2.5 million in the fiscal year ended
March 31, 2016 to $10.0 million in the fiscal year ended March 31, 2017. The gain from revaluation of contingent liability was primarily associated with lowering of the
performance forecasts for the companies acquired during the fiscal year ended March 31, 2017. The changes in the forecast have also resulted in an impairment loss discussed below.
Impairment loss
During the fiscal year ended March 31, 2017, we recorded an impairment loss of $5.3 million related to the Insys client base. The
principal factor leading to the impairment was the reduction in the projected future cash flows due to an adverse change in the cumulative average revenue growth rate. No impairment of intangible
assets occurred as of March 31, 2016.
Operating income
Due to the increases in cost of services and general and administrative expenses discussed above, our operating income decreased by
$11.7 million, or 14.9%, to $66.8 million in the fiscal year ended March 31, 2017 from $78.4 million in the fiscal year ended March 31, 2016. As a percentage of
sales, our operating income decreased to 8.5% in the fiscal year ended March 31, 2017, from 12.0% for the fiscal year ended March 31, 2016.
Other income and expenses
Other gain/(loss), net
Other gains increased by $1.2 million from $3.9 million in the fiscal year ended March 31, 2016 to $5.1 million in
the fiscal year ended March 31, 2017. The increase is attributable to $3.4 million from five government grants received in Romania, Poland, Bulgaria, Mexico and Malaysia during the
fiscal year ended March 31, 2017. See also "ITEM 4. Information About Luxoft
Government support for the IT industry in CEE
."
Gain from foreign currency exchange contracts
Gain from foreign currency exchange contracts increased by $1.1 million from $0.3 million in the fiscal year ended
March 31, 2016 to $1.3 million in the fiscal year ended March 31, 2017, mainly due to increased fluctuation in the U.S. dollar/euro exchange rates during the fiscal year ended
March 31, 2017, when compared to the fiscal year ended March 31, 2016, resulting in higher gains realized on our euro/U.S. dollar forward contracts.
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Table of Contents
Net foreign exchange loss
Net foreign exchange loss increased by $2.2 million from $0.4 million in the fiscal year ended March 31, 2016 to
$2.6 million in the fiscal year ended March 31, 2017, primarily due to depreciation of the euro against the U.S. dollar during the fiscal year ended March 31, 2017, which
adversely affected our euro-denominated receivables; and appreciation of the Russian ruble against the U.S. dollar resulting in a foreign exchange loss from our Ruble-denominated payables.
Income from continuing operations before income taxes
Income from continuing operations before income taxes decreased by $11.9 million, or 14.4%, to $70.5 million in the fiscal year
ended March 31, 2017, from $82.4 million in the fiscal year ended March 31, 2016, and demonstrated a decrease as a percentage of sales from 12.7% to 9.0% in the years ended
March 31, 2016 and 2017, respectively.
Income tax expense
Income tax expense decreased by $4.2 million, or 35.0%, to $7.9 million in the fiscal year ended March 31, 2017 from
$12.1 million in the fiscal year ended March 31, 2016. Our effective income tax rate decreased to 11.2% of income from continuing operations before income taxes in the fiscal year ended
March 31, 2017 from 14.7% in the fiscal year ended March 31, 2016. The rate decrease represents a combined effect of SOP tax deduction, utilization of tax losses and other beneficial tax
planning strategies. Corporate income tax deduction was made for the amount of exercised SOP III instruments in the United States, the United Kingdom, Germany and Switzerland. We have successfully
utilized some of the previously unrecognized tax losses mainly in the United Kingdom and Australia either through group relief or through availability of taxable income. Also, use of beneficial tax
treatment and actualization of the income tax provisions upon filing of tax returns had a positive effect on our effective tax rate.
Fiscal year ended March 31, 2016 compared to fiscal year ended March 31, 2015
Sales of services
In the fiscal year ended March 31, 2016, our revenues demonstrated 25.0% growth year over year, increasing by $130.2 million to
$650.8 million in the fiscal year ended March 31, 2016
from $520.5 million in the fiscal year ended March 31, 2015. All our verticals, except for travel and aviation, experienced growth during the fiscal year ended March 31, 2016,
while the main increase is attributable to increased volume of sales in our largest verticals, financial services and automotive and transport, which contributed 19.2% and 4.1% of overall growth,
respectively.
From
a geographical standpoint, our revenue increased substantially due to our UK clients, providing 12.2% of our overall revenue growth, and clients from Germany and Switzerland,
contributing 4.2% and 2.4% of total revenue growth, respectively. In comparison to the prior fiscal year, in the fiscal year ended March 31, 2016, our revenue generated from the UK clients
increased by 39.8% from 30.7% to 34.4% of total revenue; Germany increased by 33.4% from 12.4% to 13.3% of the total and Switzerland increased by 117.5% from 2.1% to 3.6% of the total. The increase in
sales of services to our UK clients resulted both from an increased volume of sales to our top clients in the financial services vertical as well as revenue from the Excelian business, which was
acquired in February 2015. The increase in revenue from our clients in Germany and Switzerland is attributable mainly to an increased volume of sales to clients in the financial and automotive and
transport verticals.
We
continuously develop relationships with our clients and as a result, sales to our existing clients accounted for 81.3% of the increase in sales of services for the fiscal year ended
March 31, 2016, while sales to new clients accounted for 19.4% of the increase. Sales of services to new clients represented
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3.9%
of total sales in the fiscal year ended March 31, 2016, as compared to 4.5% of total sales in the fiscal year ended March 31, 2015. Our non-core sales accounted for 0.2% and 0.5% of
total sales in the years ended March 31, 2016 and 2015, respectively.
To
support our growing sales, we increased the number of our IT professionals to 9,239 as of March 31, 2016, from 7,850 IT professionals as of March 31, 2015.
Operating expenses
Cost of services
Cost of services increased by $85.4 million, or 29.0%, to $379.3 million in the fiscal year ended March 31, 2016 from
$294.0 million in the fiscal year ended March 31, 2015. Gross margin decreased from 43.5% to 41.7% in the fiscal year ended March 31, 2016, when compared to the prior fiscal year.
The increase in cost of services and related decrease in gross margin were attributable primarily to the growth of personnel expenses directly attributable to client projects as a result of increased
headcount in the locations with higher salaries.
As
a percentage of sales, cost of services increased to 58.3% for the fiscal year ended March 31, 2016, from 56.5% in the fiscal year ended March 31, 2015.
Selling, general and administrative expenses
During the fiscal year ended March 31, 2016, our selling, general and administrative expenses increased by $42.8 million, or
33.2%, to $171.7 million. As a percentage of sales, selling, general and administrative expenses increased to 26.4% for the fiscal year ended March 31, 2016, from 24.8% in the fiscal
year ended March 31, 2015. This increase was attributable to a number of factors, including the stock option plan implemented in December 2014 and expansion of our business functions.
Payroll
and bonuses expenses with payroll taxes (excluding share-based compensation) increased by $21.5 million, or 35.5%, from $60.5 million in the fiscal year ended
March 31, 2015 to $82.0 million in the fiscal year ended March 31, 2016, primarily due to expansion of our R&D activities and sales team. Share-based compensation increased by
$12.0 million from $5.8 million in the fiscal year ended March 31, 2015 to $17.7 million in the fiscal year ended March 31, 2016, mainly due to the timing of the
stock-based compensation program, which was launched in late 2014.
We
continued to invest in our infrastructure. To accommodate the increased headcount, we rented new facilities which resulted in a $5.6 million, or 19.3% increase in general and
administrative expenses due to an increase in office rent and maintenance expenses to $34.6 million for the fiscal year ended March 31, 2016 from $29.0 million for the fiscal year
ended March 31, 2015.
Depreciation and amortization
Depreciation and amortization increased by $7.0 million, or 41.5%, to $23.8 million in the fiscal year ended March 31, 2016
from $16.8 million in the fiscal year ended March 31, 2015. The increase was attributable primarily to depreciation of computers and office equipment due to increased headcount, as well
as amortization of customer relationships related to acquisitions of Radius and Excelian. As a percentage of sales, depreciation and amortization increased from 3.2% in the fiscal year ended
March 31, 2015 to 3.7% in the fiscal year ended March 31, 2016.
Income from revaluation of contingent liability
The financial results from revaluation of contingent liability changed by $3.7 million from a loss of $1.2 million in the fiscal
year ended March 31, 2015 to a gain of $2.5 million in the fiscal year ended March 31, 2016 mainly due to the agreement with the Sellers of Radius Inc. to reduce the
remaining
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consideration
payable by 15%; and due to a shift in timing of previously expected revenues, subject to contingent royalty payments beyond the royalty period ending December 31, 2017.
Operating income
Due to the increases in cost of services and general and administrative expenses discussed above, our operating income decreased by
$1.2 million, or 1.5%, to $78.4 million in the fiscal year ended March 31, 2016 from $79.6 million in the fiscal year ended March 31, 2015. As a percentage of sales,
operating income decreased to 12.0% in the fiscal year ended March 31, 2016, from 15.3% for the fiscal year ended March 31, 2015.
Other income and expenses
Other gain/(loss), net
Other gains increased by $2.5 million from $1.4 million in the fiscal year ended March 31, 2015 to $3.9 million in
the fiscal year ended March 31, 2016. The increase is attributable to $2.9 million from three government grants received in Romania, Poland and Bulgaria during the fiscal year ended
March 31, 2016, partially offset by a $0.4 million decrease in income from operating leases of IT equipment in one of our subsidiaries.
Gain from foreign currency exchange contracts
Gain from foreign currency exchange contracts decreased by $1.0 million from $1.3 million in the fiscal year ended
March 31, 2015 to $0.3 million in the fiscal year ended March 31, 2016, mainly due to decreased fluctuation in the U.S. dollar/euro exchange rates during the fiscal year ended
March 31, 2016, when compared to the fiscal year ended March 31, 2015, resulting in lower gains realized on our euro/U.S. dollar forward contracts.
Net foreign exchange loss
Net foreign exchange loss decreased by $8.5 million from $8.9 million in the fiscal year ended March 31, 2015 to
$0.4 million in the fiscal year ended March 31, 2016.
The
loss in the fiscal year ended March 31, 2015 was driven primarily by the depreciation of the euro against the U.S. dollar, which resulted in losses from our euro-denominated
receivables. During the fiscal year ended March 31, 2016, the euro depreciated against the U.S. dollar by 3% while during the fiscal year ended March 31, 2015, the euro depreciated
against the U.S. dollar by 11%. Also, in the fiscal year ended March 31, 2015, the Russian ruble depreciated significantly against the U.S. dollar, which affected adversely our
Ruble-denominated receivables. During the fiscal year ended March 31, 2016, the Russian ruble depreciated against the U.S. dollar by 14% while during the fiscal year ended March 31,
2015, the Russian ruble depreciated against the U.S. dollar by 39%.
Income from continuing operations before income taxes
Income from continuing operations before income taxes increased by $9.4 million, or 12.9%, to $82.4 million in the fiscal year
ended March 31, 2016, from $73.0 million in the fiscal year ended March 31, 2015, and demonstrated a decrease as a percentage of sales from 14.0% to 12.7% in the years ended
March 31, 2015 and 2016, respectively.
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Income tax expense
Income tax expense increased by $2.3 million, or 23.2%, to $12.1 million in the fiscal year ended March 31, 2016 from
$9.8 million in the fiscal year ended March 31, 2015. Our effective income tax rate in the fiscal year ended March 31, 2016 increased to 14.7% of income from continuing operations
before income taxes in the fiscal year ended March 31, 2016, from 13.5% in the fiscal year ended March 31, 2015. The rate increase represents a combined effect of our acquisitions
completed during the fiscal year ended March 31, 2015, which increased the portion of our taxable profits attributable to jurisdictions with higher tax rates, and an overall increase in taxable
profits in Switzerland, the United Kingdom and the United States.
Quarterly results of operations and seasonality
Our business is moderately seasonal and our results of operations vary from quarter to quarter based in part upon the budget and work cycles of
our clients. Our operating results are typically lower in the first fiscal quarter of each year due to increases in wages and other costs that typically occur in the beginning of each fiscal year. The
following table presents our unaudited condensed consolidated
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Table of Contents
quarterly
results of operations for the eight quarters in the period from April 1, 2015 to March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2017
|
|
Dec 31,
2016
|
|
Sept 30,
2016
|
|
Jun 30,
2016
|
|
March 31,
2016
|
|
Dec 31,
2015
|
|
Sept 30,
2015
|
|
Jun 30,
2015
|
|
|
|
(in thousands)
|
|
Consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of services
|
|
$
|
204,131
|
|
$
|
206,924
|
|
$
|
196,457
|
|
$
|
178,049
|
|
$
|
169,209
|
|
$
|
171,946
|
|
$
|
161,542
|
|
$
|
148,055
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
129,632
|
|
|
124,688
|
|
|
114,908
|
|
|
105,752
|
|
|
103,496
|
|
|
97,412
|
|
|
90,446
|
|
|
87,977
|
|
Selling, general and administrative expenses
|
|
|
56,193
|
|
|
54,291
|
|
|
54,315
|
|
|
48,924
|
|
|
48,202
|
|
|
45,229
|
|
|
39,611
|
|
|
38,665
|
|
Depreciation and amortization
|
|
|
10,260
|
|
|
9,362
|
|
|
7,990
|
|
|
7,235
|
|
|
6,703
|
|
|
6,201
|
|
|
5,550
|
|
|
5,360
|
|
(Income)/loss from revaluation of contingent liability
|
|
|
(8,668
|
)
|
|
(1,424
|
)
|
|
344
|
|
|
(283
|
)
|
|
(3,356
|
)
|
|
61
|
|
|
41
|
|
|
743
|
|
Impairment loss
|
|
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,427
|
|
|
20,007
|
|
|
18,900
|
|
|
16,421
|
|
|
14,164
|
|
|
23,043
|
|
|
25,894
|
|
|
15,310
|
|
Other income and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(91
|
)
|
|
6
|
|
|
(28
|
)
|
|
32
|
|
|
149
|
|
|
61
|
|
|
(61
|
)
|
|
(28
|
)
|
Other gain/(loss), net
|
|
|
755
|
|
|
3,630
|
|
|
327
|
|
|
407
|
|
|
2,346
|
|
|
1,025
|
|
|
283
|
|
|
293
|
|
Gain/(loss) from foreign currency exchange contracts
|
|
|
|
|
|
953
|
|
|
(30
|
)
|
|
391
|
|
|
(1,019
|
)
|
|
595
|
|
|
517
|
|
|
168
|
|
Net foreign exchange gain/(loss)
|
|
|
889
|
|
|
(2,847
|
)
|
|
21
|
|
|
(667
|
)
|
|
1,524
|
|
|
(3,474
|
)
|
|
421
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
12,980
|
|
|
21,749
|
|
|
19,190
|
|
|
16,584
|
|
|
17,164
|
|
|
21,250
|
|
|
27,054
|
|
|
16,891
|
|
Income tax expense
|
|
|
755
|
|
|
(3,217
|
)
|
|
(2,899
|
)
|
|
(2,504
|
)
|
|
(2,572
|
)
|
|
(3,211
|
)
|
|
(4,046
|
)
|
|
(2,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to the non-controlling interest
|
|
|
13,735
|
|
|
18,532
|
|
|
16,291
|
|
|
14,080
|
|
|
14,592
|
|
|
18,039
|
|
|
23,008
|
|
|
14,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Group
|
|
|
13,735
|
|
|
18,532
|
|
|
16,291
|
|
|
14,080
|
|
|
14,592
|
|
|
18,039
|
|
|
23,008
|
|
|
14,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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B. Liquidity and Capital Resources
At March 31, 2017, our principal sources of liquidity were cash and cash equivalents totaling $109.6 million and $87.0 million of available
borrowings under our revolving lines of credit. As of that date, $91.4 million was held in U.S. dollar denominated accounts primarily in Switzerland.
Under
the legislation of the countries we operate in, there are no restrictions on our ability to distribute dividends from our subsidiaries to our parent company other than a
requirement that dividends be limited to the cumulative net profits of our operating subsidiaries, calculated in accordance with local accounting principles. The cumulative net profit of our
subsidiaries calculated in accordance with local accounting principles differs from the cumulative net profit calculated in
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accordance
with U.S. GAAP primarily due to the treatment of accrued expenses and differences arising from the capitalization and depreciation of property and equipment. In addition, these
dividends cannot result in negative net assets at our subsidiaries or render them insolvent.
We
have not provided for dividend withholding taxes on the unremitted earnings of our subsidiaries as they are considered permanently reinvested.
Our
cash requirements have principally been driven by working capital requirements and capital expenditures. Our working capital requirements are, in turn, generally driven by the growth
in our business and the impact on our cash flows arising out of the difference in timing between when our payment obligations arise and when we receive payment from clients. We fund working capital
primarily from cash and cash equivalents on hand, cash flows provided by our operating activities and our short term credit facilities in those cases when it is deemed necessary or most efficient way.
Our average time for collecting receivables, which include trade receivables, unbilled revenue and deferred revenue balances, decreased to 69 days for the fiscal year ended March 31,
2017, from 76 days for the fiscal year ended March 31, 2016, mainly due to increased efficiency of our collecting cycle.
As
of March 31, 2017, we did not have any material commitments for capital expenditures. We believe that, based on our current business plan, our cash and cash equivalents on
hand, cash from operations and borrowings available to us will be adequate to meet our working capital, capital expenditure requirements and liquidity needs for the foreseeable future. We may require
additional capital to meet our longer term liquidity and future growth requirements.
Credit facilities
INSYS Group Inc. utilizes a credit facility provided by TD Bank N.A. The Loan and Security agreement was modified effective
August 29, 2016, to provide an aggregate amount of $8.0 million at LIBOR plus 2.00% interest rate. There was no outstanding amount as of March 31, 2017, under this agreement.
Excelian Ltd
uses an invoice discounting facility of up to £3.0 million provided by Royal Bank of Scotland. On November 19, 2016, the facility was
reduced to £1.0 million. Under this arrangement Excelian Ltd can assign certain receivables in exchange for cash less a discount based on 1.90% per annum. There was no
outstanding amount as of March 31, 2017, under this agreement.
On
December 27, 2016, Luxoft USA Inc. and Luxoft Global Operations GmbH respectively entered into the Facility agreement with Amsterdam Trade Bank N.V. for
the aggregate available credit amount up to $18.0 million. For both of the facilities the applied interest rate is the cumulative of the applicable LIBOR and a 3% margin. There was no
outstanding amount as of March 31, 2017 under these agreements.
On
February 20, 2014, Luxoft USA, Inc. entered into a credit facility agreement with Citibank, N.A. for up to $5.5 million. The loan bears an interest rate LIBOR
plus 1.25% per annum. There was no outstanding amount as of March 31, 2017 under this agreement.
On
November 20, 2013, Luxoft UK Ltd., Luxoft Eastern Europe Ltd. and Luxoft GmbH entered into an uncommitted Pre- and Post-Shipment Advances Facility
Agreement with Citibank Europe PLC for up to $5.0 million. On November 13, 2014 Luxoft Global Operations GmbH acceded to the mentioned Facility Agreement as a Borrowing
Entity. On November 25, 2016 Citibank increased the total credit amount available for the Group to $17.4 million. This is a continuing agreement and remains in full effect subject to its
terms until 30 days after the bank's receipt of written notice of termination from the borrower's agent. Under this agreement the borrower can use pre- or post-shipment advance. The interest
rate for pre-shipment is LIBOR plus 2.0% per annum and the interest rate for post-shipment is LIBOR plus 1.25% per annum. There was no outstanding amount as of March 31, 2017 under this
agreement.
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On
January 15, 2013, the Group entered into an uncommitted receivables purchase agreement with BNP Paribas Dublin Branch. Under the agreement the Group can assign certain
receivables in exchange for cash based on LIBOR for the relevant purchase term (30/60 days) plus 3.0% per annum. The current limit available under this facility is up to $30.0 million.
There was no outstanding amount as of March 31, 2017 under this agreement.
Overdraft facilities
On December 27, 2016 Luxoft International Company Ltd. entered into the Facility agreement with Amsterdam Trade Bank N.V.
for up to $3.0 million of the available overdraft limit. The overdraft facility bears interest at a rate of one-month LIBOR plus 3.75% per annum. There was no outstanding amount as of
March 31, 2017, under this facility.
On
November 12, 2013 Luxoft Professional Romania SRL entered into an overdraft facility agreement with ZAO Citibank for $0.9 million. As of March 31, 2017, this
facility has not been drawn down. The overdraft facility bears interest at a rate of one-month LIBOR plus 2.00% per annum overnight interest rate paid monthly. The overdraft facility is guaranteed by
Luxoft Holding, Inc. and Luxoft Professional, LLC. There was no outstanding amount as of March 31, 2017, under this agreement.
On
October 25, 2012 Luxoft Professional, LLC entered into an overdraft facility agreement with ZAO Citibank for $3.0 million. As of March 31, 2017, this
facility has not been drawn down. The overdraft facility bears interest at a rate of one-month LIBOR plus 2.25% per annum overnight interest rate paid monthly. The overdraft facility is guaranteed by
Luxoft Holding, Inc. There was no outstanding amount as of March 31, 2017, under this facility.
Cash flows
The following table presents the major components of net cash flows for the years ended March 31, 2017, 2016 and 2015.
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Years ended March 31,
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2017
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2016
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2015
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(in thousands)
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Net cash flow provided by operating activities
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$
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122,027
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$
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105,389
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$
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76,278
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Net cash used in investing activities
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(106,468
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(32,725
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(42,280
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)
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Net cash used in financing activities
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$
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(14,218
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$
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(8,904
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)
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$
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(21,995
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)
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Net cash provided by operating activities
Net cash provided by operating activities increased by $16.6 million, or 15.8%, to $122.0 million in the fiscal year ended
March 31, 2017, from $105.4 million in the fiscal year ended March 31, 2016, primarily due to the decrease in amounts due from and to clients from $14.6 million in the
fiscal year ended March 31, 2016 to $2.8 million in the fiscal year ended March 31, 2017, as a result of increased efficiency of our collecting cycle discussed above. Another
contributing factor was the net effect of the decrease in net income, which includes impairment loss and higher incentive based compensation payments in 2017 fiscal year as compared to 2016 fiscal
year, partially offset by the increase in non-cash gain from revaluation of contingent liabilities.
Net
cash provided by operating activities increased by $29.1 million, or 38.2%, to $105.4 million in the fiscal year ended March 31, 2016, from $76.3 million
in the fiscal year ended March 31, 2015. The increase is explained primarily by higher net income from continuing operations adjusted for non-cash stock based compensation expense,
demonstrating an overall increase of $19.1 million from $68.9 million to $88.0 million, where stock based compensation expense contributed $12.0 million of
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such
increase. Another $8.1 million increase in cash flows from operating activities was attributable to a decrease of amounts due from and to clients from $22.7 million in the fiscal
year ended March 31, 2015 to $14.6 million in the fiscal year ended March 31, 2016, as a result of increased efficiency of our collecting cycle discussed above.
Net cash used in investing activities
Net cash used in investing activities increased by $73.7 million, or 225.3%, to $106.5 million in the fiscal year ended
March 31, 2017, from $32.7 million in the fiscal year ended March 31, 2016. The change was mainly due to increased investments in acquisitions of new businesses which together
with deposits on escrow accounts amounted to $82.7 million in the fiscal year ended March 31, 2017, and $3.5 million in the fiscal year ended March 31, 2016. This increase
was partially offset by decreased investments in our existing businesses, in particular purchases of new electronic and office equipment and other purchases of property and equipment, which decreased
from $24.2 million to $19.6 million when comparing the years ended March 31, 2016 and 2017, respectively.
Net
cash used in investing activities decreased by $9.6 million, or 22.6%, to $32.7 million in the fiscal year ended March 31, 2016, from $42.3 million in the
fiscal year ended March 31, 2015. The change was mainly due to decreased investments in acquisitions of new businesses which amounted to $24.3 million in the fiscal year ended
March 31, 2015, and $3.5 million in the fiscal year ended March 31, 2016. This decrease was partially offset by increased investments in our existing businesses, in particular
purchases of new electronic and office equipment and other purchases of property and equipment, which increased from $14.2 million to $24.2 million when comparing the years ended
March 31, 2015 and 2016, respectively.
Net cash used in financing activities
Cash used in financing activities increased by $5.3 million to $14.2 million in the fiscal year ended March 31, 2017, from
$8.9 million in the fiscal year ended March 31, 2016. The increase was primarily attributable to repayment of short-term borrowings, amounting to $5.9 million and
$0.9 million in the years ended March 31, 2017 and 2016, respectively. The majority of these short-term borrowings belonged to the companies acquired during 2017 fiscal year. Another
$1.8 million of increase was attributable to repurchase of ordinary shares as a result of personal income taxes withheld from
SOP III participants upon exercise of vested RSUs, SARs and PSAs which increased from $1.8 million in the fiscal year March 31, 2016 to $3.6 million in the fiscal year
March 31, 2017. This increase was partially offset by the decrease in the amount of deferred purchase consideration paid for the acquired businesses from $6.1 million in the fiscal year
ended March 31, 2016, to $4.6 million in the fiscal year ended March 31, 2017.
Cash
used in financing activities decreased by $13.1 million to $8.9 million in the fiscal year ended March 31, 2016, from $22.0 million in the fiscal year
ended March 31, 2015. The decrease was primarily attributable to repayment of short-term borrowings, amounting to $0.9 million and $18.6 million in the years ended
March 31, 2016 and 2015, respectively, partially offset by an increase in the amount of deferred purchase consideration paid for acquired businesses from $2.7 million in the fiscal year
ended March 31, 2015, to $ 6.1 million in the fiscal year ended March 31, 2016, and repurchase of ordinary shares in amount of $1.8 million as a result of personal income
taxes withheld from SOP III participants upon exercise of vested RSUs, SARs and PSAs.
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and
assumptions that affect: (i) the reported amounts of assets and liabilities; (ii) disclosure of contingent assets and liabilities at the end of each reporting period; and
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(iii) the
reported amounts of sales and expenses during each reporting period. The most significant estimates relate to the recognition of revenue, allowance for doubtful accounts, income
taxes, goodwill and other long-lived assets, assumptions used in valuing share-based compensation awards and contingencies. We evaluate these estimates and assumptions based on historical experience,
knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis
for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from
those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our consolidated financial statements, you should consider
(i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported
results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places
significant demands on the judgment of our management.
An
accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate
is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the
consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of
our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and
other disclosures included in this annual report.
Revenue recognition
The Company derives its revenues from software development services, including in such areas of competence as (a) custom software
development and support, (b) product engineering and testing and (c) technology consulting.
Revenues
under time and materials and fixed price contracts are recognized in the period in which these services are performed and contract stages are accepted by clients by using a
proportional performance method. We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is
reasonably assured. In such contracts, our services, measured by time incurred, typically are provided in less than a year and represent the contractual stages or output measures which define the
pattern of contractual earnings.
The
complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the proportional performance method of
accounting affects the amounts of sales reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor hours and changes in
specification and testing requirements.
Time-and-material contracts.
We recognize sales from time-and-material contracts as services are performed, based on actual hours and
applicable
billing rates, with the corresponding cost of providing those services reflected as cost of sales. The majority of such sales are billed on a monthly basis whereby actual time is charged directly to
the client at negotiated hourly billing rates.
Fixed price contracts.
We recognize sales from fixed price contracts based on the proportional performance method, during the period in
which amounts
become billable in accordance with the terms of the contracts. Services under fixed price contracts are delivered in stages. Revenues recognized for completed stages are generally representative of
the percentage of completion of the entire contract, as
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they
are based on actual hours incurred compared with the total hours estimated to complete the entire contract. Costs related to completed stages are expensed as incurred, while those related to
uncompleted stages are recorded in work-in-progress on the balance sheet. In instances where final acceptance is specified by the client, sales are deferred until all acceptance criteria have been
met. In the absence of a sufficient basis to measure progress towards completion, sales are recognized upon receipt of final acceptance from the client. We have not yet had any significant contracts
for which estimates of completion could not be developed or final project completion and client acceptance was so uncertain as to require deferral of revenue until the completion of the project.
Multiple elements arrangements.
During the fiscal year ended March 31, 2017, we have entered into multiple elements arrangements
with the
customers that purchase software and further maintenance and support. We evaluate our contracts for multiple deliverables, and, when appropriate, separate the contracts into separate units of
accounting for revenue recognition. Support services, if they are required by clients, are generally contracted for and commence upon completion of the software development services. We allocate
revenue to these deliverables in a multiple element arrangement based upon their relative selling prices. The relative selling price is based on the price charged for the deliverable when it is sold
separately. For multiple element arrangements under time-and-material contracts, revenue is recognized as services are performed for each deliverable based on hours incurred and applicable hourly
rates. For arrangements under fixed price contracts, software development revenue is recognized upon delivery of development services under the proportional performance method, as described above and
for support serviceson a straight-line basis over the support period, which is generally from 6 months to a year.
We
report gross reimbursable travel and "out-of-pocket" expenses incurred as both sales and cost of sales in the consolidated statements of comprehensive income.
Accounts receivable
Accounts receivable are shown at their net realizable value, which approximates their fair value. Since we generally do not require collateral
or other security from our clients, we establish an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific clients.
Allowances for doubtful accounts are made for specific accounts in which collectability is doubtful. If the financial condition of our clients were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. Recoveries of losses from accounts receivable written off in prior years are presented within income from operations on our
consolidated statements of comprehensive income.
Our
client base primarily consists of large multinational companies. The timing of invoicing and collection of our accounts receivable under our contracts is impacted by the life cycle
of each project and related payment milestones.
Our
management periodically monitors outstanding receivables and collection status and assesses the adequacy of allowances for accounts where collection may be in doubt as frequency and
amount of client defaults change due to our clients' financial condition or general economic conditions.
Goodwill
Goodwill represents an excess of the cost of business acquired over the fair value of the amounts assigned to tangible and intangible assets
acquired less liabilities assumed. The determination of the fair value of intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the
cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
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We
perform a test for impairment annually, or when indications of potential impairment exist, utilizing a fair value approach at the reporting unit level. We determine fair value using
the income approach, which estimates the fair value of our operating units based on the future discounted cash flows.
The
basis for the cash flow assumptions includes forecasted revenue, operational costs and other relevant factors, including estimated capital expenditures. Assumptions under this method
have been adjusted to reflect increased risk due to current economic volatility. In testing for a potential impairment of goodwill, we estimate the fair value of our operating units to which goodwill
relates and determine the carrying value (book value) of the assets and liabilities related to those operating units. If an impairment of goodwill has occurred, we recognize a loss for the difference
between the carrying amount and the implied fair value of goodwill.
Long-lived assets
We amortize intangible assets, principally software and acquired contract-based client relationships, on a straight-line basis over their
estimated useful lives. We review long-lived assets, including intangible assets that are subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. We base our evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or factors that may be present. The carrying value is not recoverable if it exceeds the undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. If impairment has occurred, we measure any impairment of intangible assets based on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the risk inherent in our business. If such assets were determined to be impaired, we recognize a loss for the difference between the carrying
amount and the fair value of the asset. As of March 31, 2017, we recorded impairment loss of $5.3 million relating to Insys client base. See
Impairment of Long
lived assets
and Note 7, Impairment loss, below.
Government Grants
We participates in government grants programs in several countries. Due to the absence of authoritative regulations for government grants in
U.S. GAAP, we base our accounting on IFRS guidance as a non-authoritative source. We recognize a grant as non-operating income based on the evidence that the company has fulfilled the
requirements of the program and the grant was received.
Income taxes
Determining the consolidated provision for income tax expense, deferred income tax assets and liabilities and related valuation allowance, if
any, involves judgment. We are required to calculate and provide for income taxes in each of the jurisdictions where we operate. Changes in the geographic mix or estimated level of annual pre-tax
income can also affect the overall effective income tax rate.
Because
we operate in a number of countries, our income is subject to taxation in differing jurisdictions with a range of tax rates. Therefore, we need to apply significant judgment in
order to determine our consolidated income tax position. As a result of our multi-jurisdictional operations, we are exposed to a number of different tax risks including, but not limited to, changes in
tax laws or interpretations of these tax laws. The tax authorities in the jurisdictions where we operate may audit our tax returns and may disagree with the position taken in those returns. An adverse
outcome resulting from any settlement or future examination of our tax returns may result in additional tax liabilities and may adversely affect our effective tax rate, which could have a material
adverse effect on our financial position, results of operations and liquidity.
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Deferred
tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the consolidated financial statement carrying amounts and
their respective tax bases at each reporting date. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary
differences are expected to be reversed. Changes to enacted tax rates would result in either increases or decreases in the provision for income taxes in the period of changes. We evaluate the
realization of deferred tax assets and recognize a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.
The
realization of deferred tax assets is primarily dependent on future taxable income. Any reduction in estimated forecasted results may require that we record valuation allowances
against deferred tax assets. Once a valuation allowance has been established, it will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the
deferred tax assets will be realized.
If
the allowance is reversed in a future period, the income tax provision will be correspondingly reduced. Accordingly, the increase and decrease of valuation allowances could have a
significant negative or positive impact on future earnings.
Our
provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related interest and penalties. Tax exposures can
involve complex issues and may require an extended period to resolve. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax
outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
Accounting for share-based employee compensation plans
Share-based employee compensation is determined based on the grant date fair value of the awards ultimately expected to vest. We recognize these
compensation costs on a straight-line basis over the requisite service period of the entire award, provided it is no less than the amount that would have been recognized for the vested portion of the
award.
The
expected life of an option usually represents the weighted-average period during which our option awards are expected to be outstanding. We have no experience or history to be able
to determine the expected life over which our option awards will be held before exercise. However, we believe it is reasonable to assume exercise or issuance upon vesting, since the exercise price is
nil.
If
any of the assumptions used in the valuation model changes significantly, share-based compensation for future awards may differ materially compared to awards previously granted.
We
estimate forfeitures at the time of a grant and revise our estimates, if necessary, in subsequent periods if actual forfeitures or vesting differ from those estimates. The assumptions
used in the valuation model are based on subjective future expectations combined with management judgment. We use an estimated 3% attrition rate based on the history of retention amongst key employees
and management. If the actual forfeiture rate is materially different from the estimate, share-based compensation expense could be materially lower than what has been recorded.
Recent accounting pronouncements
In January, 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350):
Simplifying the
Test for Goodwill Impairment
. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its
implied fair
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value
to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of
goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The amendments will be effective
for the Group for the fiscal year beginning April 1, 2020, and are not expected to have a material effect on the consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805):
Clarifying the Definition of a Business
. The amendments
in this update provide guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU amends ASC 805 to "provide a more robust
framework to use in determining when a set of assets and activities is a business." In addition, the amendments "provide more consistency in applying the guidance, reduce the costs of application, and
make the definition of a business more operable." The update will be effective for the Group starting April 1, 2018, and is not expected to have a material effect on the consolidated financial
statements.
In
August 2016, the FASB issued Accounting Standards Update 2016-15Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This
Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The Group adopted the amendments of this update from April 1, 2016. The ASU
did not have any material effect on the Company's consolidated financial statements.
In
March 2016, the FASB issued Accounting Standards Update 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The
amendments in this update simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to
recognize gross share-based compensation expense with actual forfeitures recognized as they occur, and classification on the statement of cash flows. The Group
adopted the amendment for the fiscal year beginning April 1, 2016. The amendment resulted in recognition of $1,411 of excess tax benefit in current year's earningssee
Note 15
Income Tax
below.
In
February 2016, the FASB issued Accounting Standards Update 2016-02, "Leases (Topic 842)". The purpose of this update is to increase transparency and comparability among organizations
by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases
classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. The amendment is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal
years. The Group is currently evaluating the impact of this accounting update on its consolidated financial statements.
In
November 2015, the FASB issued Accounting Standards Update 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", which requires that deferred tax
liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify disclosure. The Group adopted the new standard from April 1, 2016, and, as a
result of the implementation of this standard, changed the presentation of the prior year's deferred tax current assets and liabilities to noncurrent.
In
September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments". The amendments in this update require
that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The update
eliminates the current requirement to retrospectively adjust provisional amounts recognized at the acquisition date. The amendment is effective for the Group beginning April 1, 2016. The
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implementation
of this standard did not have a material effect on the Group's consolidated financial statements.
In
May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue RecognitionRevenue from Contracts with Customers
(Topic 606), which will replace substantially all current revenue recognition guidance once it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early
adoption permitted but not earlier than the original effective date. The FASB issued subsequent amendments to
the initial guidance in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08, 2016-10, 2016-12, 2016-20, respectively. The new standard provides accounting guidance for all revenue
arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other standards. The
new standard is less prescriptive and may require software entities to use more judgment and estimates in the revenue recognition process than are required under existing revenue guidance. The Company
intends to adopt the provisions of the new standard for its fiscal year starting April 1, 2017. The new standard allows the option of modified retrospective adoption with certain reliefs
according to which the new standard will be applied to existing contracts from the initial period of adoption and thereafter with no restatement of comparative data. Under this option, we would
recognize the cumulative effect of the initial adoption of the new standard as an adjustment to the opening balance of retained earnings (or another component of equity, as applicable) as of the date
of initial application. Alternatively, the new standard permits full retrospective adoption with certain reliefs. We are continuing to evaluate the impact of the standard, and its adoption method is
subject to change. We are in the process of analyzing our contracts to quantify the impact that the adoption of the standard will have on revenue. We are also continuing to evaluate the impact of the
standard on our costs related to obtaining customer.
In
November 2016, the FASB issued Accounting Standards Update 2016-18 "Restricted Cash". The standard requires restricted cash to be included with cash and cash equivalents when
reconciling the beginning and ending amounts in the statement of cash flows and also requires disclosures regarding the nature of restrictions on cash, cash equivalents and restricted cash. The
standard is effective for fiscal years beginning after December 15, 2017, including interim periods and requires for retrospective adoption with early adoption permitted. We do not intend to
adopt the provisions of the new standard early and do not anticipate a material effect on our financial condition, results of operations or cash flows as a result of adopting this standard.
C. Research and Development, Patents and Licenses
Research and development costs are expensed as incurred. The total amount of research and development activities was $15.4 million, $6.7 million and
$3.2 million for the years ended March 31, 2017, 2016 and 2015, respectively.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from
April 1, 2016 to March 31, 2017 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity or capital resources, or that caused the
disclosed financial information to be not necessarily indicative of future operating results or financial condition.
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E. Off-Balance Sheet Arrangements
We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest
entities, which includes special purposes entities and other structured finance entities.
F. Contractual Obligations
The following table represents a summary of our estimated future payments under material contractual cash obligations as of March 31, 2017. Changes in our
business needs, cancellation provisions, changing interest rates and other factors may result in actual payments differing from these estimates. We cannot provide certainty regarding the timing and
amounts of payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Total
|
|
Less than
1 year
|
|
1 - 3
years
|
|
3 - 5
years
|
|
More than
5 years
|
|
|
|
(in thousands)
|
|
Capital lease obligations
|
|
$
|
422
|
|
|
157
|
|
|
127
|
|
|
78
|
|
|
59
|
|
Operating leases
|
|
|
60,268
|
|
|
22,395
|
|
|
27,156
|
|
|
10,458
|
|
|
259
|
|
Short term debt obligations
|
|
|
643
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,333
|
|
$
|
23,195
|
|
$
|
27,283
|
|
$
|
10,536
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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ITEM 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth the name, age, and position as of the date of this annual report regarding each of our directors, executive officers and director
nominees.
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Executive officers
|
|
|
|
|
|
Dmitry Loshchinin
|
|
|
50
|
|
Chief Executive Officer and President
|
Mikhail Friedland
|
|
|
50
|
|
Executive Vice President, Global Chief Operating Officer
|
Evgeny Fetisov
|
|
|
42
|
|
Chief Financial Officer
|
Przemyslaw Berendt
|
|
|
36
|
|
Vice President, Global Marketing
|
Roman Trachtenberg
|
|
|
41
|
|
Managing Director, Global Head of Excelian Luxoft Financial Services
|
Yuri Elkin
|
|
|
41
|
|
Managing Director, Luxoft Digital
|
Elena Goryunova
|
|
|
43
|
|
Vice President, Global Human Resources
|
Lincoln Popp
|
|
|
43
|
|
Managing Director, North America
|
Doru Mardare
|
|
|
61
|
|
Managing Director, Telecom Solutions
|
Alwin Bakkenes
|
|
|
46
|
|
Managing Director, Automotive
|
Sergey Kuznetsov
|
|
|
42
|
|
Managing Director, Enterprise and Manufacturing Solutions
|
Eugene Agresta
|
|
|
37
|
|
Vice President of Sales, North America, Global Sales Organization
|
Directors
|
|
|
|
|
|
Esther Dyson(1)(3)
|
|
|
66
|
|
Director
|
Glen Granovsky(2)
|
|
|
54
|
|
Director
|
Marc Kasher(1)(2)(3)
|
|
|
47
|
|
Director
|
Anatoly Karachinskiy(2)
|
|
|
58
|
|
Director
|
Thomas Pickering(1)(3)
|
|
|
85
|
|
Director
|
Dmitry Loshchinin
|
|
|
50
|
|
Director
|
Sergey Matsotsky
|
|
|
55
|
|
Director
|
Yulia Yukhadi(2)
|
|
|
46
|
|
Director
|
-
(1)
-
Member
of our Audit Committee.
-
(2)
-
Member
of our Compensation Committee.
-
(3)
-
Determined
by our board of directors to be "independent" as defined in Rule 10A-3(b)(1) under the Exchange Act and the rules of the NYSE Listed Company
Manual.
Executive officers
Dmitry LoshchininChief Executive Officer and President, Director
Dmitry Loshchinin has served as our Chief Executive Officer since our inception in 2000. Mr. Loshchinin also became a director of Luxoft
in November of 2013. Prior to joining Luxoft, Mr. Loshchinin served in management roles within software companies such as Kerntechnik, Entwicklung, Dinamyk GmbH (KED), Siemens Nixdorf
Informationssysteme, AG (SNI) and IBM Corp. Beginning in 1998, he also oversaw IBS Group's initiative to offer offshore services. This initiative eventually became Luxoft. Mr. Loshchinin holds
a Master of Science degree in Applied Mathematics from Moscow State University and completed an executive education program at the Wharton School of the University of Pennsylvania.
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Mikhail FriedlandExecutive Vice President, Global Chief Operating Officer
Mikhail Friedland has served as our Executive Vice President since 2006. In May 2017 Luxoft corporate functions were consolidated under a new
Global COO organization, and Mr. Friedland has been appointed to Global Chief Operating Officer role overseeing the following business functions: (i) HR and Recruitment,
(ii) global delivery locations, (iii) infrastructure, operation, security and internal automation, (iv) procurement and purchasing, (v) change management and communication,
(vi) process excellence and integration, (vi) digital and key performance indicators, and (vii) M&A. Mr. Friedland has more than 20 years of experience in the IT and
software services industry. Prior to joining Luxoft, Mr. Friedland worked as a software engineer for Merrill Lynch, Lehman Brothers and Merck (formerly Medco). In 1993, Mr. Friedland
co-founded IT Consulting International ("ICTI"), which provided consulting and later outsourcing services for various U.S. clients. In 2006, we acquired ICTI. Mr. Friedland completed an
executive education program at the Wharton School of the University of Pennsylvania and London Business School.
Evgeny FetisovChief Financial Officer
Evgeny Fetisov joined us as the Chief Financial Officer effective March 31, 2017. Prior to that from 2013, Mr. Fetisov served as
the Chief Financial Officer and a management board member at the Moscow Exchange MICEX-RTS, where he led several successful major corporate M&A transactions and was responsible for overseeing the
finance, investor relations, procurement and administrative functions. From 2007 to 2013, Mr. Fetisov served as a managing director and partner at Da Vinci Capital Management, an independent
investment manager focusing on mid-market private equity investments in Russia and other Eurasian Economic Union countries. From 2003 to 2007, Mr. Fetisov served as the deputy Chief Executive
Officer at New Square, a real estate company. From 2001 to 2003, he served as a consultant at McKinsey and Company. From 2000 to 2001, he served as a Trader and Marketing Officer, Treasury at
Citibank. Mr. Fetisov served as a board member at RTS Stock Exchange from 2009 to 2011 and at B2B-Center during 2012. He also served as a member of the Corporate Governance Committee,
Remuneration Committee and the Strategy Committee at MICEX-RTS at various times between 2009 and 2013. Mr. Fetisov was ranked as a top CFO in Financial Services by Kommersant TOP-1000 in
2014-2016 and as a top CFO for Investor Relations by Extel in 2015. Mr. Fetisov received a university degree in international economics from the Finance Academy under the Government of the
Russian Federation. He also completed Advanced Management Program at Harvard Business School.
Przemyslaw BerendtVice President, Global Marketing
Przemyslaw Berendt joined us as Managing Director for Poland in 2010, and has served as our Vice President of Global Marketing since April 2011.
Mr. Berendt is responsible for our overall marketing strategy. Prior to joining us, Mr. Berendt served in the Global Business Services division of Procter & Gamble, and as a
branch manager of Betware, a midsize, international software development company. Mr. Berendt holds a Master of Science degree in Computer Science from DePaul University and a Bachelor of Arts
degree in Computer Science from the National Louis University. He is also an alumnus of Harvard Business School where he completed the Program for Leadership Development in 2014.
Roman TrachtenbergManaging Director, Global Head of Excelian Luxoft Financial Services
Roman Trachtenberg joined us in 2009 as Financial Services Accounts Director, and has served as Chief Executive Officer of Luxoft North America
since 2011 and as our Global Head
of Excelian Luxoft Financial Services since April 2017. Prior to joining us, Mr. Trachtenberg served as Chief Operating Officer at SMINEX LLC and as Vice President of Operations
at Rosbuilding Investment Company, both Russian private equity firms. Mr. Trachtenberg has also held management positions at
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companies
including Republic National Bank of New York, Gateway, Deutsche Bank and AIG. Mr. Trachtenberg has more than 16 years of technology experience in various industries, including
financial services, consumer retail and real estate. Mr. Trachtenberg holds a Bachelor's degree in Business Administration from Southern State University. In 2015 Mr. Trachtenberg has
successfully completed Advanced Management Program at Harvard Business School.
Yuri ElkinManaging Director, Luxoft Digital
Yuri Elkin joined Luxoft in 2000 and has served as Managing Director since 2005. Mr. Elkin has more than 17 years of technology
experience. Mr. Elkin holds a Master of Science Degree in Applied Mathematics from Moscow State Institute of Electronics and Mathematics, where he graduated summa cum laude.
Elena GoryunovaVice President, Global Human Resources
Ms. Goryunova has led Luxoft's Human Resources department since the Company's inception in 2000. Ms. Goryunova has helped open
numerous Luxoft offices in the Russian cities of St. Petersburg, Omsk, Dubna and Nizhny Novgorod. She has also introduced and implemented a best-practice personnel management system. Prior to
joining Luxoft, Ms. Goryunova headed the human resources department at Austrian Investment Bank Creditanstalt. Before that, starting in 1994, Ms. Goryunova worked as a human resources
specialist at KPMG. Ms. Goryunova graduated from Moscow Academy of International Business with an undergraduate degree in Economics.
Lincoln PoppManaging Director, North America
Lincoln Popp has served as our Managing Director of North America since December of 2015. In that role, Mr. Popp leads the regional
operations functions of North America. Mr. Popp has over 20 years of experience in enterprise systems and business processes. Prior to joining us, Mr. Popp has held several
operations and technology related positions at leading companies including Microsoft. Mr. Popp served as Sr. Vice President of Corporate Development at iSoftStone from March 2008 to November
2011. Mr. Popp served as President of the interactive media company Nation 9 from November 2011 to May 2013. Mr. Popp served as Sr. Vice President, Corporate Development at Radius from
June 2013 to November 2015. Mr. Popp holds a Bachelor's degree in BusinessInformation Systems from the University of Washington.
Doru MardareManaging Director, Telecom Solutions
Doru Mardare joined us as the Managing Director for Telecommunications Solutions in 2008. In 2000, Mr. Mardare founded ITC Networks, and
in eight years brought the company to the leading position in the software development arena in Eastern Europe. Mr. Mardare served as a Managing Director at ITC Networks and has more than
15 years of experience in software engineering for the telecommunications industry. Mr. Mardare holds a Bachelor of Science degree in Electrical Engineering from the Polytechnic
Institute in Bucharest, Romania, and a Master of Engineering Science from the University of Western Ontario.
Alwin BakkenesManaging Director, Automotive
Alwin Bakkenes joined us in 2016 through the acquisition of Pelagicore, where he served as the CEO starting in 2011. Prior to that, Mr. Bakkenes
held the position of Director Infotainment & Driver Information at Volvo Car Corporation responsible for the development of all electronics in the Cockpit, including HMI. Since 2013,
Mr. Bakkenes has been serving as a Board Member on the GENIVI Alliance, a non-profit organization dedicated to driving the adoption of Open Source for in-vehicle intertainment.
Mr. Bakkenes holds a Master's degree in Knowledge Management from the Middlesex
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University
and a Bachelor's degree in Computer Science from the Amsterdam University of Applied Sciences.
Sergey KuznetsovManaging Director, Enterprise and Manufacturing Solutions
Sergey Kuznetsov joined Luxoft in 2003 and has served as Managing Director for Enterprise and Manufacturing Solutions since 2014.
Mr. Kuznetsov has vast experience in industry specific sales, strategic business development, contracting, budgeting and software delivery management. Prior to joining us, Mr. Kuznetsov
held positions in software development in a number of major international companies based in Germany and the United States. Mr. Kuznetsov holds a Master's degree in physics from the Moscow
Engineering Physics Institute.
Eugene AgrestaVice President of Sales, North America, Global Sales Organization
Eugene Agresta joined us in October 2016 as the Sr. Vice President of Sales, North America for the Global Sales Organization. Eugene manages and
leads the North America sales organization. Eugene's professional career extends over 18 years in which he has held senior executive roles in sales management for a number of global product and
service companies. Prior to joining us, from 2008 to 2016, Eugene was the Vice President of Business Development for Cyient, a global technology solutions provider, where he built, managed and led
successful goal-oriented sales teams, which established strategic contract engagements with well-known Fortune 500 companies across a variety of industries. Eugene graduated from Polytechnic
University, now known as the New York University Tandon School of Engineering Polytechnic Institute, and holds a Bachelor of Science degree in Computer Engineering.
Directors
Esther DysonDirector
Esther Dyson has been a member of our board of directors since February 2014. In May 2013, Ms. Dyson founded the Way to Wellville, a
not-for-profit organization focused on community health. Previously, she worked as a technology analyst and a journalist at Forbes, New Court Securities and Oppenheimer & Co.
Additionally, Ms. Dyson worked as editor-in-chief for and was chairman of EDventure Holdings from 1983. Ms. Dyson is a member of the boards of 23andMe, Meetup Inc., Pressreader,
Wellpass, XCOR and Yandex (NASDAQ: YNDX). She was also the founding chairman of the Internet Corporation for Assigned Names and Numbers (ICANN). Between 1997 and 2013, Ms. Dyson was a member of
the advisory board of IBS Group. Ms. Dyson holds a Bachelor of Arts in economics from Harvard University and a certificate of training completion from Yuri Gagarin Cosmonaut Training Center.
Glen GranovskyDirector
Glen Granovsky has been a member of our board of directors since 2006. He has served as Director of IBS Group since 1999. Mr. Granovsky
served as President and CEO of Luxoft USA, Inc. (formerly IBS USA, Inc.) between 2005 and 2010. Mr. Granovsky is also a Director of WB Services Inc., Discreet Management
and Consulting Limited, The Custodians of Russian Culture Inc., RS-Technologies Ltd., Press Reader Limited and Jazva Inc. Prior to joining us, Mr. Granovsky was head of the
IT sales team at Intermicro Joint Venture and a manager at Asiatronics Limited, U.K. Mr. Granovsky holds a Master's degree in Applied Mathematics and Information Systems Management from Gubkin
Russian State University of Oil and Gas.
Marc KasherDirector
Marc Kasher has been a member of our board of directors since September of 2013. Mr. Kasher is the Founder and CEO of Sapiens Advisors,
an international consulting company working with global
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institutions
providing advisory services in raising capital, strategic acquisitions, corporate governance, financial management, and investor relations. Prior to founding Sapiens Advisors,
Mr. Kasher was a Managing Director at PineBridge Investments (formerly known as AIG Investments). Prior to PineBridge Investments, Mr. Kasher worked for the United States Agency for
International Development, where he was involved in projects that focused on privatization strategies in several countries of the former Soviet Union. Mr. Kasher currently serves or has in the
past served as a director of several Pine Bridge Investments' portfolio companies, and also sits on the board of directors of New Media Distribution Company, a content producer for the Russian
television market. Mr. Kasher holds a Master of Business Administration with a concentration in finance from Georgetown University and a Bachelor of Arts degree from Tufts University.
Anatoly KarachinskiyDirector
Anatoly Karachinskiy has been a member of our board of directors since 2013. Mr. Karachinskiy is the co-founder of IBS Group. Prior to
founding IBS Group, Mr. Karachinskiy was the technical director of Intermicro Joint Venture. Mr. Karachinskiy previously worked at PROSYSTEM, an Australian computer hardware company, and
at the All-Union Research and Development Institute for Railroad Transport. Mr. Karachinskiy has an undergraduate degree in systems engineering from the Moscow Institute of Railroad Engineers.
Thomas PickeringDirector
Thomas Pickering has been a member of our board of directors since June 2013. Mr. Pickering is the Vice Chairman at international
consulting firm Hills & Company. He served as Senior Vice President for International Relations at the Boeing Company until his retirement in 2006. Prior to joining the Boeing Company,
Mr. Pickering served as Undersecretary of State for Political Affairs at the U.S. Department of State. Mr. Pickering was U.S. ambassador to the Russian Federation, India, Israel, El
Salvador, Nigeria and the Hashemite Kingdom of Jordan. Mr. Pickering received a Bachelor's degree in history from Bowdoin College and a Master's degree from the Fletcher School of Law and
Diplomacy at Tufts University.
Dmitry LoshchininDirector
Dmitry Loshchinin was appointed to our board of directors in November 2013. See "ITEM 6. Directors. Senior Management and
Employees
A. Directors and Senior ManagementExecutive Officers."
Sergey MatsotskyDirector
Sergey Matsotsky has been a member of our board of directors since November 2013. Mr. Matsotsky is a co-founder and Senior Vice President
of IBS Group, and Chief Executive Officer of IBS IT Services. Prior to founding IBS Group in 1992, Mr. Matsotsky was commercial director of a large Russian IT company. Mr. Matsotsky
holds an undergraduate degree in Automation and Applied Mathematics from the Gubkin Russian State University of Oil and Gas.
Yulia YukhadiDirector
Yulia Yukhadi has been a member of our board of directors since February 2015. Ms. Yukhadi has served as Chief Financial Officer of IBS
Group since 2006. Prior to that, Ms. Yukhadi served as financial director and vice president of finance with various consumer goods and telecom companies between 2003 and 2006, and held a
position as the financial controller in the financial department of IBS Group between 1998 and 2003. She holds an undergraduate degree in mathematical economics from the Moscow State University.
Ms. Yukhadi is a Certified Management Accountant.
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B. Compensation
The aggregate compensation paid to or accrued on behalf of our directors and executive officers as a group during the year ended March 31, 2017 consisted
of approximately $18.5 million in salary, bonuses, stock-based compensation and directors' fees. This amount includes approximately $0.5 million set aside or accrued to provide pension,
severance, retirement or similar benefits or expenses. This amount does not include any professional and business association dues, business travel, relocation costs and other expenses and benefits
commonly reimbursed or paid by companies in our industry and geographies.
We
pay each of our three independent directors, Ms. Dyson and Messrs. Kasher and Pickering, an annual fee of $70,000. Each independent director receives an additional
annual fee of $10,000 for his or her service on any Board committee, and a further annual fee of $10,000 for serving in the role of a Chairperson of any Board committee. We also reimburse our
directors for reasonable and documented travel expenses incurred to attend board meetings. None of our directors is party to a service contract that provides for benefits upon the termination of the
director's engagement.
During
the year ended March 31, 2017, a total amount of 135,948 RSUs, 96,714 PSAs and 55,738 SARs have been vested into the ownership of our directors and executive officers under
our Incentive Plan described below. Upon vesting or exercise of these instruments, 90,588 Class A ordinary shares have been issued.
Agreements with our Chief Executive Officer
Second Amended and Restated Employment Agreement
In November 2015, Mr. Dmitry Loshchinin, our President and CEO, entered into a Second Amended and Restated Employment Agreement,
effective as of August 12, 2014, with LGO. Under Mr. Loshchinin's employment agreement, he has agreed to serve as our President and CEO. Mr. Loshchinin also is a member of our
board of directors. Mr. Loshchinin's initial term of service under this agreement continues until August 11, 2019. Thereafter, the agreement continues for successive one-year terms
unless terminated by either party, generally by delivering six months' prior written notice on or before February 11 of any year. Mr. Loshchinin's salary and annual bonus are subject to
review for increase at the discretion of our board of directors. Mr. Loshchinin may also participate in certain executive benefit plans, in particular a pension plan established by LGO in
accordance with the Swiss Federal Law on occupational pension schemes, as well as a loss of earnings insurance in case of illness, accident insurance and health insurance. We believe these are
customary benefits made
available to executive officers resident in Switzerland by employers of similar size operating in our industry. LGO currently pays 100% of the premium for all insurance coverages listed above.
If
Mr. Loshchinin's employment is terminated (i) by us without cause (as defined in the employment agreement and described below), (ii) by Mr. Loshchinin with
good reason (as defined in the employment agreement, and which includes a material reduction in his base salary or bonus, a material reduction in his title, duties and authority or a material adverse
change in the reporting structure, LGO's material breach of the employment agreement or our material breach of the RSU agreement (described below), or our failure or LGO's failure to obtain assumption
of the employment agreement by a successor), in each case of (i) and (ii) whether or not in connection with a change in control, or (iii) due to disability or death, he or his
designated beneficiary or estate administrator, as applicable, is entitled to receive: (1) accrued salary and accrued but unused vacation through the termination date, (2) any earned but
unpaid annual bonus for our completed fiscal year immediately preceding the termination date, pro-rated through the termination date, (3) a payment equal to twelve months of his then base
salary, payable over the twelve-month period following the termination date, and (4) the continuation of life, accident and health insurance coverage in the same scope as covering
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Mr. Loshchinin
and his family immediately prior to termination date, for eighteen months following the termination date. Additionally, the unvested portion of Mr. Loshchinin's RSU award
(as described below) will immediately vest pro-rated based upon the portion of the period of restriction (as defined in the RSU agreement) that Mr. Loshchinin was employed prior to the date of
termination, and all remaining unvested RSUs will be forfeited. Mr. Loshchinin also will be entitled to sell or otherwise transfer the shares underlying his vested RSUs upon expiration of
12 months from the termination date, notwithstanding the transfer restrictions contained in his Restricted Stock Unit Award Agreement, provided that Mr. Loshchinin complies with
restrictive covenants described below.
In
addition, in the event of a change in control (as defined in the employment agreement), if Mr. Loshchinin resigns his employment within one year following such change in
control with at least six months' prior written notice of such termination, Mr. Loshchinin's resignation will be deemed a resignation for good reason and he will be entitled to the above
described severance and related benefits. Additionally, the unvested portion of Mr. Loshchinin's RSU award under the RSU agreement (described below) will immediately vest pro-rated based upon
the portion of the period of restriction (as defined in the RSU agreement) that Mr. Loshchinin was employed prior to the date of a change in control ("Pro-Rata Vesting"), and one-half of any
RSUs not vested after application of the Pro-Rata Vesting provisions will also vest immediately prior to the date of a change in control. All remaining unvested RSUs will be forfeited, if our Board
does not exercise its right to fully vest all of Mr. Loshchinin's RSUs in connection with a change of control, or the parties to a change in control do not assume or convert the RSUs into a
substitute award for successor's stock on an economically equivalent basis.
If
we terminate Mr. Loshchinin's employment agreement for cause, which includes his material breach of the employment agreement, gross negligence or gross misconduct, conviction
of, or pleading nolo contendere to, a crime involving moral turpitude or a felony, or willful failure to comply with any valid and legal direction of our board of directors, or if
Mr. Loshchinin voluntarily terminates his employment agreement with us without good reason and not due to death or disability, which can be done by an immediately effective written notice
delivered by the terminating party to the other party, then Mr. Loshchinin will only be entitled to receive his accrued base salary and to sell or otherwise transfer the shares underlying his
vested RSUs upon expiration of 24 months from the termination date, notwithstanding the transfer restrictions contained in his RSU agreement, (described below) provided that
Mr. Loshchinin complies with restrictive covenants described below. All of Mr. Loshchinin's unvested RSUs will be forfeited.
Mr. Loshchinin
is also subject under the terms of his employment agreement to non-competition covenants in the CEE, the United States and Asia, and to non-solicitation covenants
with respect to our clients and employees, in each case for a period of twelve months after termination of employment, along with ongoing confidentiality and non-disclosure requirements.
The
employment agreement is governed by Swiss law.
Restricted Stock Unit Award Agreement
In December 2014, Mr. Loshchinin was granted RSUs in respect of 328,513 of our Class A ordinary shares with no par value pursuant
to the Incentive Plan and a Restricted Stock Unit Award Agreement (the "RSU agreement"). See "ITEM 6. Directors, Senior Management and EmployeesC. Board
PracticesStock Option PlansLuxoft Holding, Inc 2014 Incentive Compensation Plan." The RSUs vest annually in equal installments over a period of five years (each referred to
as a period of restriction), commencing on August 12, 2015. In order to receive the shares underlying his vested RSUs, Mr. Loshchinin must deliver an exercise notice to us, specifying
the number of our Class A ordinary shares he wishes to receive in settlement of such vested RSUs. As soon as practicable after receipt of such notice, we will deliver to Mr. Loshchinin
the number of shares stated in the notice, in
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accordance
with the Incentive Plan. The Restricted Stock Unit Award Agreement contains transfer restrictions with respect to shares underlying vested RSUs. In particular, Mr. Loshchinin agrees
not to sell or otherwise transfer more than 25% of the shares underlying each vested annual portion of RSUs
during the period ending August 12, 2019, subject to customary exceptions for estate planning purposes. Mr. Loshchinin may additionally participate in the Incentive Plan and our other
long-term incentive plans thereafter.
Performance Unit Agreement
In November 2015, Mr. Loshchinin received performance-based RSUs ("Performance Units") in respect of up to 328,513 of our Class A
ordinary shares with no par value pursuant to the Incentive Plan, as amended and restated, and a Performance Unit Agreement thereunder. The Performance Units are eligible to vest on August 31,
2019, subject to Mr. Loshchinin's continued service through such date (or upon an earlier termination of Mr. Loshchinin's employment by us without "cause" or by him for "good reason"
(each as defined in his employment agreement, as described above) and the number of Performance Units which will vest on such date will be calculated based upon our achievement of a weighted average
market cap of at least $2,000,000,000 for the six-month period prior to such date, with 100% of the Performance Units vesting in the event that our weighted average market cap for such period is at
least $3,000,000,000 (and with ratable vesting of 70% of the Performance Units if our weighted average market cap is between $2,000,000,000 and $2,500,000,000 for such period, and the vesting of 70%
of the Performance Units and ratable vesting of the remaining 30% of the Performance Units if our weighted average market cap is between $2,500,000,000 and $3,000,000,000 for such period). In the
event of the occurrence of a "change in control" (as defined in the Incentive Plan) prior to such vesting date, if the parties do not agree to the assumption or substitution of this award, then the
performance Units will be eligible to vest immediately prior to the consummation of such change in control, and the number of Performance Units which will vest on such date will be calculated ratably
based upon our achievement of a weighted average market cap for the six-month period prior to such date above the base amount of $1,188,220,670, with 100% of our the Performance Units vesting in the
event that our weighted average market cap for such period is at least $3,000,000,000 (subject to our discretion to increase the number of Performance Units that vest upon a change in control, based
upon such factors as the investment multiples achieved in such transaction, Mr. Loshchinin's personal contributions to the economic results obtained for our shareholders, and/or in
consideration for achievement of management retention objectives). The shares underlying the Performance Units shall be delivered to Mr. Loshchinin no later than 15 days following the
applicable vesting date. The award of Performance Units to Mr. Loshchinin will not affect his eligibility for, participation in or benefits under the Incentive Plan or any other plan maintained
by us or our affiliates.
C. Board Practices
Corporate governance practices
We are a foreign private issuer under SEC and NYSE rules and a "controlled company" under NYSE rules. While we voluntarily follow certain NYSE
corporate governance rules that normally would not bind foreign private issuers, we take advantage of exemptions from other NYSE rules due to our status as a "controlled company."
A
"controlled company" is a company of which more than 50% of the voting power is held by an individual, group or another company. We are a controlled company on the basis that IBS Group
through its two wholly-owned subsidiaries has 81.8% of our voting power. As a "controlled company," we are not required to follow certain corporate governance rules of the NYSE. In particular, we are
exempt from the requirement to maintain a nominating and corporate governance committee and a compensation committee, each of which is composed entirely of independent directors, has a written
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charter
addressing the committee's purpose and responsibilities and is subject to an annual performance evaluation, and from the requirement to maintain a majority independent board of directors.
We
have elected to follow the corporate governance rules of the NYSE applicable to controlled companies, with the exception of maintaining an internal audit function, even though, as a
foreign private issuer, we are permitted to follow the corporate governance practices of our home country, the British Virgin Islands, instead of most of these NYSE requirements. Nevertheless, we may
in the future follow home country corporate governance practices instead of some or all of the NYSE's requirements, including in the event we are no longer eligible for the "controlled company"
exemption.
A
foreign private issuer that elects to follow home country practice instead of the NYSE's requirements must submit to the NYSE in advance a written statement from an independent counsel
in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws. In addition, a foreign private issuer must disclose in its annual reports filed with
the SEC each such requirement that it does not follow and describe the home country practice followed instead of any such requirement.
Certain
NYSE corporate governance requirements are not reflected in the BVI Act or other British Virgin Islands law, such as the requirements to obtain shareholder approval for certain
dilutive issuances of shares, including the sale of our Class A ordinary shares in below-market private placement transactions if greater than 20% of our pre-transaction issued and outstanding
shares are sold, or are subject to different approval requirements, such as in connection with the establishment or amendment of equity compensation plans. Moreover, the BVI Act does not require the
implementation of a nominating committee or establishment of a formal director nomination process, the formation of an audit committee or, if such a committee is formed, that it have any specific
composition, that a board of directors consist of a majority of independent directors or that independent directors be involved in the determination of executive compensation. Accordingly, our
shareholders may not be afforded the same protection as provided under the NYSE corporate governance rules.
Furthermore,
as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We are also exempt from
Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. In addition, we are not required under the Exchange Act to file annual, quarterly
and current reports and financial statements with the SEC, as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
Board structure
Our board of directors consists of eight members. Our board has determined that Thomas Pickering, Marc Kasher and Esther Dyson are independent
under applicable SEC and NYSE rules. Each director serves until the next annual shareholders meeting or earlier resignation, removal or death.
Board committees
Audit committee
Our audit committee (the "Audit Committee") consists of Mr. Kasher, Mr. Pickering and Ms. Dyson. Pursuant to SEC and NYSE
corporate governance rules, we maintain an audit committee consisting of at least three independent directors. Our board of directors has determined that Mr. Pickering, Mr. Kasher and
Ms. Dyson are "independent" as such term is defined in
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Rule 10A-3(b)(1)
under the Exchange Act, and the independence requirements under the NYSE corporate governance rules.
All
members of our Audit Committee meet the requirements for financial literacy under the applicable rules of the NYSE. Our board of directors has determined that Mr. Kasher is an
"audit committee financial expert," as such term is defined by the SEC.
Our
board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the NYSE, which
include:
-
-
retaining and terminating our independent auditors, subject to board of directors and shareholder ratification;
-
-
pre-approval of audit and non-audit services to be provided by the independent auditors;
-
-
reviewing with management and our independent directors our quarterly and annual financial reports prior to their submission to the SEC; and
-
-
approval of certain transactions with office holders and controlling shareholders, as described above, and other related party transactions.
The
charter of the Audit Committee is available on our website at
http://investor.luxoft.com/phoenix.zhtml?c=251988&p=irol-govHighlights.
Compensation committee
Our compensation committee (the "Compensation Committee") consists of Messrs. Kasher, Karachinskiy and Granovsky, and Ms. Yukhadi.
Mr. Kasher serves as the Chairman of the compensation committee. Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee which
include:
-
-
reviewing and recommending overall compensation policies with respect to our Chief Executive Officer and other executive office holders;
-
-
reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other office holders
including evaluating their performance in light of such goals and objectives and determining their compensation based on such evaluation;
-
-
implementing and administering our stock option plans for all employees, including reviewing and approving the granting of options and other
incentive awards; and
-
-
reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.
The
charter of the Compensation Committee is available on our website at http://investor.luxoft.com/phoenix.zhtml?c=251988&p=irol-govHighlights.
Duties of directors
Under British Virgin Islands law, our board of directors has a duty to act honestly in good faith with a view to our best interest. Our
directors also have a duty to exercise the care, diligence and skills that a reasonable director would exercise in comparable circumstances. In fulfilling their duty of care to us, our board of
directors must ensure compliance with the BVI Act and our Amended and Restated Memorandum and Articles of Association. Under the Section 184B of the BVI Act, "if a company or a director of a
company engages in, proposes to engage in or has engaged in, conduct that contravenes this Act or the memorandum or articles of the company, the Court may, on the application of a member or a director
of the company, make an order directing the company or director to comply
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with,
or restraining the company or director from engaging in conduct that contravenes, this Act or the memorandum or articles."
Under
the BVI Act, the board of directors has the responsibility and has all the powers necessary for managing, directing or supervising our business and affairs, including, but not
limited to, the following:
-
-
convening shareholders' annual general meetings and reporting its work to shareholders at such meetings;
-
-
appointing officers and determining the term of office of officers;
-
-
exercising the borrowing powers of our company and mortgaging the property of our company; and
-
-
approving the transfer of shares of the Company.
2014 Incentive Compensation Plan
During the financial year ended March 31, 2015, the Company launched a share-based remuneration plan, "The Luxoft Holding, Inc Amended
and Restated 2014 Incentive Compensation Plan" (the "Incentive Plan"), for management of the Luxoft group of companies. The Incentive Plan consists of remuneration programs for the CEO, the top
management of the Company and other employees and consultants ("participants"). A total of 2,300,000 Class A ordinary shares, with no par value, of the Company were initially authorized for
issuance under the Incentive Plan. The shares that may be issued under the Incentive Plan may be authorized and unissued shares, shares held in treasury or shares purchased on the open market or by
private purchase.
On
November 10, 2015, the share pool available for the Incentive Plan was increased to 2,452,000 Class A ordinary shares, with no par value. Additionally, on that date, the
Company's Board of Directors approved an amendment to the Incentive Plan pursuant to which the number of Class A ordinary shares available for issuance under the Incentive Plan automatically
increases on January 1 of each calendar year during the term of the Incentive Plan, commencing on January 1, 2016, by an amount equal to the lesser of: (i) an amount determined by
the Company's board of directors, if so determined prior to the January 1 of the calendar year in which the increase will occur, (ii) 2% of the total number of Class A ordinary
shares outstanding on December 31 of the immediately preceding calendar year and (iii) 1,000,000 Class A ordinary shares.
All
awards, except for RSUs and performance-based RSUs granted to our CEO as described above (See "Item 6. Directors, Senior Management and EmployeesB.
CompensationAgreements with our Chief Executive OfficerRestricted Stock Unit Award Agreement;Performance Unit Agreement"), vest in instalments over four years,
commencing on January 1, 2016. The number of shares that can be received by participants pursuant to PSAs and SARs depends on certain market-related conditions.
On
August 12, 2014, our Board of Directors adopted a share-based remuneration plan ("Top Bonus") for certain members of our management. In accordance with the terms of the Top
Bonus, the Company provided 164,257 RSUs which entitle the Top Bonus receipients to receive our Class A shares, allocated for issuance under this plan, at no cost subject to continued service
conditions and approval by our Compensation Committee and the Board of Directors. The RSUs are subject to service conditions and are vesting in annual increments on March 31 over a five-year
period starting March 31, 2015. For additional details, please see "Part III. ITEM 17. Financial StatementsNote 18 Share-Based Compensation."
Any
stock options granted under the Incentive Plan may be either "incentive stock options," which may be eligible for special tax treatment under the U.S. Internal Revenue Code, or
options other than
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incentive
stock options (referred to as "non-qualified stock options"), as determined by our compensation committee and stated in the option agreement. The option price of each option granted under
the Incentive Plan must be equal to or greater than the fair market value of a share on the option grant date, with certain limited exceptions for options that may be granted in exchange for other
outstanding awards in connection with a corporate transaction. The exercise price of any stock options granted under the Incentive Plan may be paid in cash, by withholding of shares otherwise
deliverable upon exercise, a cashless broker-assisted exercise that complies with law, a net exercise where the exercise price is satisfied by our withholding shares of equal value otherwise
deliverable to the option holder upon exercise or any other method permitted by law and approved by the compensation committee. Options expire at such time as determined by the compensation committee
as of the grant date and set forth in the award agreement, provided, however, that incentive stock options that are not exercised within ten years from the grant date expire, unless otherwise
determined by our board of directors or the compensation committee, as applicable. In the event of termination of employment or services, any stock option will cease to become exercisable, provided,
however, that the compensation committee may determine that a stock option may be exercised following any such termination of service as set forth in the Incentive Plan. We do not expect to grant
stock options under the Incentive Plan.
SARs
may be granted under the Incentive Plan alone or together with specific stock options granted under the Incentive Plan. SARs are awards that, upon their exercise, give a participant
the right to receive from our company an amount equal to (1) the number of shares for which the SAR is exercised,
multiplied by (2) the excess of the fair market value of a share on the exercise date over the grant price of the SAR. The grant price of each SAR granted under the Incentive Plan is equal to
or greater than the fair market value of a share on the SAR's grant date, with certain limited exceptions for SARs that may be granted under the Incentive Plan in exchange for other outstanding awards
in connection with a corporate transaction. As a general matter, a SAR may be settled in cash, shares or a combination of cash and shares, as determined by the compensation committee; however, it is
our present intention that any SARs granted under the Incentive Plan may only be settled in shares. If an option and a SAR are granted in tandem, the option and the SAR may become exercisable and will
terminate at the same time, but the holder may exercise only the option or the SAR, but not both, for a given number of shares.
Restricted
stock awards are shares that are awarded to a participant subject to the satisfaction of terms and conditions established by the compensation committee. Until such time as the
applicable restrictions lapse, restricted shares are subject to forfeiture and may not be sold, transferred, assigned, pledged or otherwise disposed of by the participant who holds those shares.
Restricted stock units are denominated in units of shares, except that no shares are actually issued to the participant on the grant date. When a restricted stock unit award vests, the participant is
generally entitled to receive shares, a cash payment based on the value of the shares or a combination of shares and cash; however, it is our present intention that any restricted stock units granted
under the Incentive Plan may only be settled in shares.
Other
stock-based awards are share-based or share-related awards generally payable in shares or cash on terms and conditions set by the compensation committee and may include a grant or
sale of unrestricted shares. It is our present intention that any other stock-based awards granted under the Incentive Plan, including performance share awards, may only be settled in shares. The
compensation committee may provide for the payment of dividend equivalents with respect to shares subject to an award, such as restricted stock units, that have not actually been issued under that
award. A cash-based award entitles a participant to receive a payment in cash upon the attainment of applicable performance goals, and/or satisfaction of other terms and conditions, determined by the
compensation committee. We do not expect to grant cash-based awards under the Incentive Plan.
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Our
compensation committee administers the Incentive Plan. Our board of directors may, subject to any legal limitations, exercise any powers or duties of the compensation committee
concerning the Incentive Plan. The compensation committee will select eligible employees, directors and/or consultants of us and our subsidiaries or affiliates to receive awards under the Incentive
Plan and will determine the sizes and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards.
Holders
of options, SARs, unvested restricted stock and other awards may not transfer those awards, unless they die or, except in the case of incentive stock options, the compensation
committee determines to allow transfer of an award for customary estate planning purposes.
A
change in control of our Company (as defined in the Incentive Plan) will have no effect on outstanding awards under the Incentive Plan that our board of directors or the compensation
committee determines will be honored or assumed or replaced with new rights by a new employer so long as any such alternative award is substantially equivalent to the outstanding award and has certain
terms that appropriately protect the holder of the award, as determined under criteria set forth in the Incentive Plan. These criteria require (among other things) that if the holder's employment with
the new employer terminates under any circumstances, other than due to termination for cause or resignation without good reason, within two years following the change in control (or prior to a change
in control, but following the date on which we agree in principle to enter into that change in control transaction), the holder's assumed or alternative awards will become fully vested and
exercisable. If our board of directors or the compensation committee does not make this determination with respect to any outstanding awards, then (a) the awards will fully vest and, if
applicable, become fully exercisable and will be settled in cash and/or publicly traded securities of the new employer, generally based on the fair market value of our shares on the change in control
date, in the case of options or SARs, reduced by the option price or grant price of the option or SAR, or the price per share offered for our share in the change in control transaction, or, in some
cases, the highest fair market value of our share during the 30 trading days preceding the change in control date, in the case of restricted stock, restricted stock units and any other awards
denominated in shares, (b) the target performance goals applicable to any outstanding awards will be deemed to be fully attained, unless actual performance exceeds the target, in which case
actual performance will be used, for the entire performance period then outstanding; and (c) our board of directors or the compensation committee may otherwise adjust or settle outstanding
awards as it deems appropriate, consistent with the plan's purposes.
In
the event of a change in our capital structure, a corporate transaction or any unusual or non-recurring event (including a change in control), the compensation committee may in its
discretion make adjustments that it deems equitable to the Incentive Plan and outstanding awards, such as adjusting the securities available under the Incentive Plan and outstanding awards, the option
or other prices of securities subject to outstanding awards and other terms of outstanding awards, cancellation of outstanding awards in exchange for payments of cash and/or property or substitution
of stock of another company for our shares subject to outstanding awards.
Subject
to particular limitations specified in the Incentive Plan, our board of directors may amend or terminate the Incentive Plan, and the compensation committee may amend awards
outstanding under the Incentive Plan. The Incentive Plan will continue in effect until all shares available under the Incentive Plan are delivered and all restrictions on those shares have lapsed,
unless the Incentive Plan is terminated earlier by the board of directors. No awards may be granted under the Incentive Plan on or after the tenth anniversary of the effective date of the Incentive
Plan.
Indemnification
British Virgin Islands law does not limit the extent to which a company's articles of association may provide for indemnification of officers
and directors, except to the extent any such provision may
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be
held by the British Virgin Islands courts to be contrary to public policy, such as to indemnify for liability relating to civil fraud or criminal offenses. Our articles of association provide for
the indemnification of our directors against all losses or liabilities incurred or sustained by him or her as a director of our company in defending any proceedings, whether civil or criminal, and
this indemnity only applies if he or she acted honestly and in good faith with a view to our best interests and, with respect to any criminal action, he or she must have had no reasonable cause to
believe his or her conduct was unlawful. See "ITEM 10. Additional InformationB. Memorandum and Articles of Association."
D. Employees
As of March 31, 2017, we had 12,766 employees worldwide. The geographical breakdown of our personnel is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
Russia
|
|
|
2,778
|
|
|
2,633
|
|
|
2,364
|
|
Ukraine
|
|
|
3,818
|
|
|
3,399
|
|
|
3,603
|
|
Poland
|
|
|
2,051
|
|
|
1,921
|
|
|
948
|
|
Romania
|
|
|
1,844
|
|
|
1,674
|
|
|
1,261
|
|
United States
|
|
|
975
|
|
|
409
|
|
|
282
|
|
United Kingdom
|
|
|
371
|
|
|
379
|
|
|
299
|
|
Other locations
|
|
|
929
|
|
|
672
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,766
|
|
|
11,087
|
|
|
9,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
breakdown of our personnel by department is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Department
|
|
|
|
|
|
|
|
|
|
|
Engineering and development(1)
|
|
|
10,792
|
|
|
9,301
|
|
|
7,850
|
|
Human resources, sales and marketing(2)
|
|
|
596
|
|
|
612
|
|
|
494
|
|
Administration
|
|
|
1,360
|
|
|
1,136
|
|
|
809
|
|
Executive management
|
|
|
18
|
|
|
38
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,766
|
|
|
11,087
|
|
|
9,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
This
department consists of all of our IT professionals.
-
(2)
-
Human
Resources includes recruitment and training departments.
Most
of our personnel are salaried employees. While the majority of our personnel in Ukraine are engaged as independent contractors, they otherwise have a substantially equal basis and
terms with our salaried employees in Russia. None of our employees are members of unions or are represented by collective bargaining agreements. We believe we have a good working relationship with our
employees and contractors and we have not experienced any labor disputes.
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E. Share Ownership
For information regarding the share ownership of our directors and executive officers, please refer to "ITEM 6. Directors, Senior Management and
EmployeesC. Board Practices2014 Incentive Compensation Plan" and "ITEM 7. Major Shareholders and Related Party TransactionsA. Major Shareholders."
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information regarding the beneficial ownership of our outstanding ordinary shares as of June 30, 2017
by:
-
-
each person or entity that, to our knowledge, beneficially owns 5% or more of our ordinary shares;
-
-
each of our directors and executive officers individually; and
-
-
all of our directors and executive officers as a group.
The
beneficial ownership of ordinary shares is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person exercises sole or shared
voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table below, we deem shares subject to options, warrants or other exercisable or convertible
securities that are exercisable or convertible currently or within 60 days of June 30, 2017, to be outstanding and to be beneficially owned by the person holding the options, warrants or
other exercisable or convertible securities for the purposes of computing the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the percentage
ownership of any other person. The percentage of shares beneficially owned is based on 33,568,346 ordinary shares outstanding as of June 30, 2017, comprising 22,132,324 Class A shares
and 11,436,022 Class B shares. Holders of our Class A and Class B ordinary shares have identical rights, including dividend and liquidation rights, provided that, on any matter
that is submitted to a vote of our shareholders, holders of our Class A ordinary shares are entitled to one vote per Class A ordinary share and holders of our Class B ordinary
shares are entitled to ten votes per Class B ordinary share. Furthermore, one Class B ordinary share is convertible at any time at the option of the holder into one Class A
ordinary share. See "ITEM 10. Additional InformationB. Memorandum and Articles of AssociationVoting rights." Unless otherwise indicated below, to our knowledge, all persons
named in the table have sole voting and investment power with respect to their shares, except to the extent authority is shared by spouses under community property laws. We have set forth below
information regarding any significant change in the percentage ownership of our shares by any of our major shareholders during the past three years. Unless otherwise noted below, each shareholder's
address is c/o Luxoft Holding, Inc, Commerce House, Wickhams Cay 1, PO Box 3140, Road Town, Tortola, British Virgin Islands.
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For
a description of any material relationship that our principal shareholders have had with us or any of our predecessors or affiliates during the periods under review, see
"B. Related Party Transactions."
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned
|
|
|
|
Class A
|
|
Class B
|
|
|
|
|
|
% of Total
Voting Power
|
|
Name of Beneficial Owner
|
|
Shares
|
|
%
|
|
Shares(7)
|
|
%
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awosting Ltd.(1)
|
|
|
8,587,100
|
|
|
25.7
|
|
|
8,587,100
|
|
|
73.8
|
|
|
62.0
|
|
Codeffroy Ltd.(1)
|
|
|
2,867,748
|
|
|
8.6
|
|
|
2,730,482
|
|
|
23.4
|
|
|
19.8
|
|
Morgan Stanley Investment Management(2)
|
|
|
2,435,102
|
|
|
11.0
|
|
|
|
|
|
|
|
|
1.8
|
|
JPMorgan Chase & Co.(3)
|
|
|
2,015,269
|
|
|
9.1
|
|
|
|
|
|
|
|
|
1.5
|
|
Wasatch Advisors, Inc.(4)
|
|
|
1,582,644
|
|
|
7.2
|
|
|
|
|
|
|
|
|
1.2
|
|
FMR LLC(5)
|
|
|
1,523,866
|
|
|
6.9
|
|
|
|
|
|
|
|
|
1.1
|
|
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anatoly Karachinskiy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Przemyslaw Berendt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Kasher
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sergey Matsotsky
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mikhail Friedland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glen Granovsky
|
|
|
56,425
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
Yuri Elkin
|
|
|
3,791
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
Dmitry Loshchinin(6)
|
|
|
946,933
|
|
|
4.2
|
|
|
318,440
|
|
|
2.8
|
|
|
2.3
|
|
Elena Goryunova
|
|
|
22,759
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
Eugene Agresta
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lincoln Popp
|
|
|
625
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
Doru Mardare
|
|
|
8,357
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Alwin Bakkenes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sergey Kuznetsov
|
|
|
7,132
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
Roman Trachtenberg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evgeny Fetisov
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Pickering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Esther Dyson
|
|
|
90,175
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
Yulia Yukhadi
|
|
|
21,250
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (19 persons)
|
|
|
1,157,447
|
|
|
5.0
|
|
|
318,440
|
|
|
2.8
|
|
|
2.3
|
|
-
*
-
Less
than 1%.
-
(1)
-
Based
on a Schedule 13G/A jointly filed on February 10, 2017 by IBS Group Holding Limited ("IBS Group"), Awosting Ltd. ("Awosting") and
Codeffroy Ltd. ("Codeffroy"), IBS Group has shared voting power and shared dispositive power over 11,317,582 of our Class B ordinary shares and 137,266 of our Class A ordinary
shares. IBS Group holds these shares indirectly through Awosting and Codeffroy, its wholly owned subsidiaries. Awosting has shared voting power and shared dispositive power over 8,587,100
Class B ordinary shares. Codeffroy has shared voting power and shared dispositive power over 2,730,482 Class B ordinary shares and 137,266 Class A ordinary shares. All
Class B ordinary shares (which are convertible into Class A ordinary shares) held by each shareholder were deemed to be converted for the purposes of (i) determining the aggregate
amount of Class A ordinary shares beneficially owned by it and (ii) calculating the percentages of Class A ordinary shares owned by it. IBS Group is controlled by Croyton Limited,
which serves as the trustee for IBS Group founders trust. Croyton Limited has sole voting and
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Table of Contents
dispositive
power over the shares. The address for IBS Group, Awosting and Codeffroy is c/o IBS Group Holding Limited, 11 Hope Street, Douglas, Isle of Man, IM1 1AQ.
-
(2)
-
Based
on Schedule 13G jointly filed on February 10, 2017 by Morgan Stanley ("Morgan Stanley") and Morgan Stanley Investment Management Inc.
("Morgan Stanley Investment Management") holds sole voting power with respect to 1,669,832 Class A ordinary shares and shared dispositive power over 2,015,269 Class A ordinary shares.
Morgan Stanley holds these Class A ordinary shares indirectly through Morgan Stanley Investment Management, its wholly owned subsidiary. The address of Morgan Stanley and Morgan Stanley
Investment Management is 1585 Broadway, New York NY 10036.
-
(3)
-
Based
on a Schedule 13G/A filed on January 13, 2017, JPMorgan Chase & Co. ("JPMorgan") holds sole voting power over 1,830,205
Class A ordinary shares and sole dispositive power over 1,538,927 Class A ordinary shares. JPMorgan reported its securities holdings in the Company on behalf of itself and its wholly
owned subsidiaries J.P. Morgan Investment Management, Inc., JPMorgan Chase Bank, National Association, and JPMorgan Asset Management (UK) Limited. The address of JPMorgan is 270 Park Avenue,
New York NY 10017.
-
(4)
-
Based
on a Schedule 13G/A filed on February 14, 2017, Wasatch Advisors, Inc. ("Wasatch") holds sole voting power and sole dispositive power over
1,582,644 Class A ordinary shares. The address of Wasatch is 505 Wakara Way, Salt Lake City, UT 84108.
-
(5)
-
Based
on a Schedule 13G filed on February 14, 2017, FMR LLC ("FMR") holds sole dispositive power over 1,523,866 Class A ordinary shares
and sole voting power over 34,316 ordinary shares. FMR reported its securities holdings in the Company on behalf of itself and certain of its affiliates and subsidiaries. Members of the Johnson
family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B shares of FMR LLC, representing 49% of the voting power of FMR LLC. The
Johnson family group and all other Series B shareholders have entered into a shareholders' voting agreement under which all Series B shares will be voted in accordance with the majority
vote of Series B shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under
the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of
the shares owned directly by the various investment companies registered under the Investment Company Act ("Fidelity Funds") advised by Fidelity Management & Research Company ("FMR Co"), a
wholly owned subsidiary of FMR LLC, which power resides with the Fidelity Funds' Boards of Trustees. Fidelity Management & Research Company carries out the voting of the shares under
written guidelines established by the Fidelity Funds' Boards of Trustees. The address of FMR LLC is 245 Summer Street, Boston, MA 02210.
-
(6)
-
All
Class B ordinary shares (which are convertible into Class A ordinary shares) held by Mr. Loshchinin were deemed to be converted for the
purposes of (i) determining the aggregate amount of Class A ordinary shares beneficially owned by him and (ii) calculating the percentages of Class A ordinary shares owned
by him. Based on information provided by Mr. Loshchinin to the Company, Mr. Loshchinin holds sole voting and dispositive power over 431,387 Class A ordinary shares and 318,440
Class B ordinary shares. Mr. Loshchinin also holds 65,702 restricted stock units vested on August 12, 2015, 65,702 restricted stock units that vested on August 12, 2016,
and 65,702 restricted stock units that vest on August 12, 2017. The receipt of the underlying Class A shares is subject to Mr. Loshchinin's submission of an exercise notice to us.
Mr. Loshchinin's address is c/o Luxoft Global Operations GmbH, Gubelstrasse 24, 6300 Zug, Switzerland.
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Table of Contents
Significant Changes
Prior to our June 2013 IPO, IBS Group owned 2,512,291, or 80.5%, of our Class A ordinary shares and 23,153,965, or 84.3%, of our
Class B ordinary shares. Following its sale of shares in the IPO, IBS Group owned 466,256, or 9.0%, of our Class A ordinary shares, while its Class B ordinary share holdings
remained the same. Pursuant to an internal reorganization which took effect in November 2014, IBS Group transferred to its public shareholders 8,003,828 Luxoft Class B ordinary shares, which
converted into Luxoft Class A ordinary shares, decreasing IBS Group's ownership in the share capital of Luxoft from approximately 68.6% to approximately 44.2%. In June 2015, IBS effected a
restructuring, as a result of which its two wholly-owned subsidiaries, Awosting and Codeffroy, became record holders of the shares formerly held by IBS Group. IBS Group through these two subsidiaries
remains our controlling shareholder because of its holdings of our Class B ordinary shares.
Pursuant
to Schedule 13G/A filed with the SEC on March 9, 2017, BlackRock Inc. ceased to be a beneficial owner of 5% or more of our ordinary shares.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of June 30, 2017, there were ten registered holders of our
Class A ordinary shares in the United States, representing 99.1% of our outstanding Class A ordinary shares. Additionally, as of that date, none of our Class B ordinary shares
were held in the United States. The United States record holders included Cede & Co., the nominee of the Depositary Trust Company. The number and the U.S. residence of record holders may
not be representative of the number of beneficial owners or where the beneficial owners have residence because it includes beneficial owners whose shares are held in street name by brokers and other
nominees.
B. Related Party Transactions
The following is a description of material transactions, or series of related material transactions, since March 31, 2016, to which we were or will be a
party and in which the other parties included or will include our directors, executive officers, holders of 10% or more of our voting securities or any member of the immediate family of any of the
foregoing persons.
Relationship with IBS Group
Our principal shareholders are Awosting and Codeffroy, two wholly-owned subsidiaries of IBS Group. IBS Group's business consists of two primary
segments: IT services and software development. Luxoft's business comprises IBS Group's entire software development segment. As described in more detail below, historically, IBS Group's business
segments have been operated on a substantially independent basis, with the exception of certain financing arrangements and limited service agreements, equipment purchases and leasing arrangements. We
continue to provide to and purchase from IBS Group certain services on a limited basis in the ordinary course of our business on terms similar to those in arm's-length transactions, but do not plan to
obtain financing from IBS Group as we have in the past. As of June 30, 2017, IBS Group beneficially owned through its two wholly-owned subsidiaries 34.3% of our Class A ordinary shares,
97.2% of our Class B ordinary shares and 81.8% of our total voting power.
Contracts for the provision of services
We have previously entered into, and continue to enter into, a number of agreements with IBS Group affiliates for the provision to IBS Group
affiliates of software development services, recruitment services, consulting services and services related to staffing and creating dedicated delivery centers. The majority of these agreements are
framework agreements entered into for an indefinite term or for a
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Table of Contents
term
ranging from one to three years, such as our recruiting services agreements which have one-year automatically renewable terms (unless either party terminates by an advance notice). Our framework
agreements do not contain exclusivity provisions or minimum purchase requirements or service commitments. The services agreements include customary limitations on liability and indemnification
provisions, and are subject to customary termination provisions. Each project under these framework agreements is governed by an individual statement of work. In the aggregate, our sales of services
to IBS Group affiliates amounted to $0.6 million, $5.6 million and $3.6 million for the years ended March 31, 2017, 2016 and 2015, respectively.
Contracts for the purchase of services
In addition to providing services to IBS Group, we have previously entered into, and continue to enter into, numerous written agreements and
arrangements with IBS Group affiliates through which we purchase IT and telecom services, management services, marketing services and consulting services from the affiliates of IBS Group. The
agreements have a term of one year, which automatically renews unless either party terminates. The agreements also contain customary termination provisions, but lack exclusivity provisions and minimum
purchase requirements and service commitments. The agreements include customary limitations on liability and indemnification provisions. In the aggregate, our purchases of services from IBS Group
affiliates amounted to less than $0.1 million for the year ended March 31, 2017.
Contracts for the purchase of equipment
We have previously entered into, and continue to enter into several agreements for the purchase of software, computers and related components
and other equipment from IBS Group affiliates. The purchases are not on an installment basis, and we did not enter into any financing arrangements in connection with these purchases. We purchase this
equipment on an "as-is" basis.
During
the years ended March 31, 2017 and 2016, our total expenses in connection with the purchase of software, computers, related components and other equipment, excluding
software licenses, amounted to $0.4 and $0.7 million, respectively.
On June 5, 2015, LGO and Area 52 Property AG, a company controlled by our Chief Executive Officer and Roman Yakushkin, our former Chief
Financial Officer, entered into a lease agreement for an office space of 388 square meters located at the 21
st
floor of the building in Zug, Switzerland, as well as some parking
space, where our operating headquarters are situated at a different floor. The lease term is from January 1, 2016 through December 31, 2020. The base rent is $0.3 million per
annum and is subject to annual increases based on index of consumer prices not to exceed 2%. We entered into the foregoing leases as part of our efforts to expand our operating headquarters. The
agreements were negotiated at arm's length and were approved by the Company's audit committee.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Consolidated financial statements
We have appended our consolidated financial statements at the end of this annual report, starting at page F-1, as part of this annual
report.
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Table of Contents
Legal proceedings
From time to time, we are involved in routine legal proceedings incidental to the ordinary course of business. We do not believe that the
outcome of these legal proceedings has had in the recent past material effects on our financial position or profitability. Currently, we are not a party to any material legal proceeding, nor are we
aware of any material legal or governmental proceeding against us, or contemplated to be brought against us.
Dividend policy
Although we have declared and paid dividends in prior years, we do not intend to declare or pay any regular dividends on our Class A
ordinary shares and Class B ordinary shares for the foreseeable future. While we currently intend to retain all available funds and any future earnings to fund the development and growth of our
business, we may, by a resolution of the board of directors, authorize a special one-time dividend or other form of distribution to our shareholders at such time and such amount as the board of
directors determines to be appropriate and in the best interest of the Company. Any future determination relating to our dividend policy will be made at the discretion of our board of directors,
subject to the BVI Act, and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition and future prospects, strategic plans of
the Company and other factors our board of directors may deem relevant. Any future dividend that our board of directors declares will be shared equally on a per share basis.
B. Significant Changes
No significant changes have occurred since March 31, 2017, except as otherwise disclosed in this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our Class A ordinary shares have been trading on the NYSE since June 26, 2013 under the symbol "LXFT." Prior to that time, there was no public
market for our Class A ordinary shares. The following table sets forth for the periods indicated the high and low prices per Class A ordinary share as reported by the NYSE:
|
|
|
|
|
|
|
|
|
|
NYSE
|
|
|
|
High
|
|
Low
|
|
|
|
(price per
Class A
ordinary share)
|
|
Annual
|
|
|
|
|
|
|
|
Fiscal year ended March 31, 2017
|
|
|
66.18
|
|
|
46.58
|
|
Fiscal year ended March 31, 2016
|
|
|
80.64
|
|
|
46.85
|
|
Fiscal year ended March 31, 2015
|
|
|
55.52
|
|
|
24.09
|
|
Fiscal year ended March 31, 2014 (beginning on June 26, 2013)
|
|
|
43.56
|
|
|
18.55
|
|
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Table of Contents
|
|
|
|
|
|
|
|
|
|
NYSE
|
|
|
|
High
|
|
Low
|
|
|
|
(price per
Class A
ordinary share)
|
|
Quarterly
|
|
|
|
|
|
|
|
First quarter ended June 30, 2017
|
|
|
67.85
|
|
|
58.75
|
|
Fourth quarter ended March 31, 2017
|
|
|
62.85
|
|
|
54.50
|
|
Third quarter ended December 31, 2016
|
|
|
56.85
|
|
|
48.20
|
|
Second quarter ended September 30, 2016
|
|
|
60.71
|
|
|
46.58
|
|
First quarter ended June 30, 2016
|
|
|
66.18
|
|
|
51.30
|
|
Fourth quarter ended March 31, 2016
|
|
|
77.28
|
|
|
46.85
|
|
Third quarter ended December 31, 2015
|
|
|
80.64
|
|
|
61.66
|
|
Second quarter ended September 30, 2015
|
|
|
68.85
|
|
|
49.80
|
|
First quarter ended June 30, 2015
|
|
|
60.33
|
|
|
49.00
|
|
|
|
|
|
|
|
|
|
|
|
NYSE
|
|
|
|
High
|
|
Low
|
|
|
|
(price per
Class A
ordinary share)
|
|
Most Recent Six Months
|
|
|
|
|
|
|
|
June 2017
|
|
|
64.90
|
|
|
60.05
|
|
May 2017
|
|
|
67.85
|
|
|
58.75
|
|
April 2017
|
|
|
63.50
|
|
|
59.75
|
|
March 2017
|
|
|
62.85
|
|
|
55.70
|
|
February 2017
|
|
|
61.65
|
|
|
54.50
|
|
January 2017
|
|
|
62.50
|
|
|
56.75
|
|
The
closing price of our Class A ordinary shares as of June 30, 2017 was $60.85.
B. Plan of distribution
Not applicable.
C. Markets
See "Offer and Listing Details" above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
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Table of Contents
B. Amended and Restated Memorandum and Articles of Association
General
We are a company incorporated in the British Virgin Islands and our affairs are governed by the provisions of our memorandum of association and
articles of association, as amended and restated from time to time (the "Amended and Restated Memorandum and Articles of Association"), and by the provisions of applicable British Virgin Islands laws.
As
of June 30, 2017, pursuant to our Amended and Restated Memorandum and Articles of Association, we are authorized to issue a maximum of 80,000,000 ordinary shares of no par
value of which 33,446,221 shares are issued and outstanding.
The
following are summaries of material terms and provisions of our Amended and Restated Memorandum and Articles of Association and the BVI Act, insofar as they relate to the material
terms of our ordinary shares. Unless otherwise stated, the following summaries are of the terms of our shares as of the date of this annual report. This summary is not intended to be complete, and for
a full discussion, you should directly consult our Amended and Restated Memorandum and Articles of Association, which was filed as an exhibit to our registration statement on Form F-1.
Shareholder Rights
Voting rights of shareholders
In line with British Virgin Islands law, the voting rights of shareholders are governed by the Company's Amended and Restated Memorandum and
Articles of Association and, in certain circumstances, the BVI Act. The Amended and Restated Memorandum and Articles of Association governs matters such as the quorum for the transacting business, the
rights of shareholders and the voting standards required to approve any action or resolution at a meeting of the shareholders.
Holders
of our Class A ordinary shares and Class B ordinary shares have identical rights, including dividend and liquidation rights,
provided
that
, except as otherwise expressly provided in our Amended and Restated Memorandum and Articles of Association or required by any applicable law, on any matter that is
submitted to a vote of our shareholders, holders of our Class A ordinary shares are entitled to one vote per Class A ordinary share and holders of our Class B ordinary shares are
entitled to ten votes per Class B ordinary share. Except as required by any applicable law or as provided for in this annual report, the holders of Class A ordinary shares and
Class B ordinary shares will vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders. There are no limitations on the rights of
non-resident shareholders to hold or exercise voting rights on the Company's securities.
Under
the BVI Act, the ordinary shares are deemed to be issued when the name of the shareholder is entered in a company's register of members. Our register of members is maintained by
our transfer agent, American Stock Transfer & Trust Company, LLC. If (a) information that is required to be entered in the register of shareholders is omitted from the register or
is inaccurately entered in the register, or (b) there is unreasonable delay in entering information in the register, a shareholder of the company, or any person who is aggrieved by the
omission, inaccuracy or delay, may apply to the British Virgin Islands courts for an order that the register be rectified, and the court may either refuse the application or order the rectification of
the register. The court may also direct the company to pay all costs of the application and any damages the applicant may have sustained.
Meetings of shareholders
Pursuant to our Amended and Restated Memorandum and Articles of Association, we are required to convene a meeting of shareholders upon written
request of the shareholders entitled to
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Table of Contents
exercise
at least 30% of the voting rights with respect to the meeting's subject matter. Under British Virgin Islands law, we may not increase the required percentage to call a meeting above 30%.
Subject
to our Amended and Restated Memorandum and Articles of Association, a meeting of shareholders of the Company must be announced with at least ten days' prior written notice.
Notice of every meeting of shareholders may be delivered electronically and will be given to all of our shareholders. However, the meeting can still be validly held even if a shareholder does not
receive notice, including in the event that the convener(s) inadvertently failed to provide it.
Meetings
may also be called with shorter notice than that mentioned above. Subject to our Amended and Restated Memorandum and Articles of Association, notice may be waived by the vote of
shareholders representing at least 90% of the total voting rights on all the matters to be considered at the meeting. A shareholder waives notice for all shares he or she holds by appearing at the
meeting.
A
meeting of shareholders is duly constituted if, at the start of the meeting, at least 50% of the votes of the shares entitled to vote at the meeting are present. A single shareholder
or proxy may constitute a quorum and may, by signing a certificate, pass a valid resolution of shareholders if authorized to act as a proxy. A shareholder may not vote, and his or her vote may not
count for the purposes of a quorum, unless he or she is registered as of the record date.
Subject
to any rights or restrictions attached to any shares, at any general meeting on a show of hands every shareholder of record who is present in person (or, in the case of a
shareholder being a corporation, by its duly authorized representative) or by proxy shall have one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a
corporation, by its duly appointed representative) or by proxy shall have one vote for each share held. Voting at any meeting of the shareholders is by show of hands unless a poll is demanded. A poll
may be demanded by
shareholders present in person or by proxy if the shareholder disputes the outcome of the vote on a proposed resolution. Shareholders of record may also pass written resolutions without a meeting.
Cumulative voting
There is nothing under the laws of the British Virgin Islands which specifically prohibits or restricts the creation of cumulative voting rights
for the election of our directors, unlike the requirement under Delaware General Corporation Law where cumulative voting for the election of directors is permitted only if expressly authorized in the
certificate of incorporation. As a British Virgin Islands company, we have made provisions in our Amended and Restated Memorandum and Articles of Association to prohibit cumulative voting for such
elections.
Protection of minority shareholders
Under the laws of the British Virgin Islands, there is little statutory law protecting minority shareholders other than the provisions of the
BVI Act granting shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the BVI Act or the constituent documents of the company, our
Amended and Restated Memorandum and Articles of Association. Shareholders are entitled to have our affairs conducted in accordance with the BVI Act and the Amended and Restated Memorandum and Articles
of Association.
There
are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is
limited. Under the general rule pursuant to English company law known as the rule in
Foss v. Harbottle
, a court will generally refuse to interfere with
the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the company's affairs as conducted by the majority of shareholders or the board of
directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to British Virgin Islands law and the constituent documents of
126
Table of Contents
the
company. As such, if those who control the company have persistently disregarded the requirements of British Virgin Islands company law or the provisions of the company's Amended and Restated
Memorandum and Articles of Association, the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act that is outside the scope of the
authorized business, illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that
infringe or are about to infringe on the personal rights of the shareholders, such as the right to vote; and (4) failure by the company to comply with applicable rules requiring approval of a
special or extraordinary majority of shareholders. These protections are more limited than the rights afforded minority shareholders under the laws of many states in the United States.
Conversion of shares
Each Class B ordinary share is convertible at any time at the option of the holder into one Class A ordinary share. In addition,
each Class B ordinary share converts automatically into one Class A ordinary share upon the earlier of (i) any date specified by the affirmative vote or written consent of the
holders of two-thirds or more of the outstanding Class B ordinary shares, (ii) the death or disability of a holder of such Class B ordinary share, (iii) a change of control
transaction (as described in the Amended and Restated Memorandum and Articles of Association) with respect to a holder of such Class B ordinary share, (iv) any transfer, whether or not
for value, except for certain transfers described in our Amended Restated Memorandum and Articles of Association, including, without limitation, transfers to certain affiliates and for tax and estate
planning purposes, so long as the transferring holder of Class B ordinary shares continues to hold exclusive voting and dispositive power with respect to the shares transferred, (v) the
first trading day after the earliest date on which the number of outstanding Class B ordinary shares represents less than 10% of the aggregate combined number of outstanding Class A and
Class B ordinary shares or (vi) June 7, 2020 (the seventh anniversary of the adoption of the Amended and Restated Memorandum and Articles of Association).
Preferred shares
Our board of directors may, without shareholder consent, fix the rights, preferences, privileges and restrictions of a number of preferred
shares determined in its discretion and authorize the issuance of the preferred shares. Specifically, with respect to preferred shares, the board of directors may fix dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of
such series, and in turn give preferred shareholders greater rights than those afforded to holders of Class A ordinary shares. The issuance of our preferred shares could thus adversely affect
the voting power of holders of our Class A ordinary shares and their ability to receive dividends and liquidation payments. In addition, the issuance of preferred shares could have the effect
of delaying, deferring or preventing a change of control or other corporate action. Presently we have no preferred shares outstanding, and we have no present plan to issue any preferred shares.
Pre-emption rights of shareholders
British Virgin Islands law does not distinguish between public and private companies, and does not provide some of the protections and
safeguards investors might otherwise expect of a publicly traded company. In particular, there are no pre-emption rights applicable to the issuance of new shares under British Virgin Islands law,
unless specifically created in a company's corporate documents. Our Amended and Restated Memorandum and Articles of Association do not grant preemption rights.
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Table of Contents
Liquidation rights of shareholders
As permitted by British Virgin Islands law and our Amended and Restated Memorandum and Articles of Association, we may voluntarily liquidate
under Part XII of the BVI Act if we have no liabilities or we are able to pay our debts as they fall due and the value of our assets equals or exceeds our liabilities by both director and
shareholder resolutions. Further, as permitted by British Virgin Islands law and our Amended and Restated Memorandum and Articles of Association, shareholders have the rights to an equal share in the
distribution of the surplus assets of the company at its liquidation.
Modification of the rights of shareholders
As permitted by British Virgin Islands law, and our Amended and Restated Memorandum and Articles of Association, we may vary the rights attached
to our Class A and Class B ordinary shares only with the written consent of or by the vote (at a meeting) of at least 50% of the issued shares of the respective class of shares.
Transfer of shares
Subject to any applicable restrictions set forth in our Amended and Restated Memorandum and Articles of Association, any of our shareholders may
transfer all or any of his or her shares in writing in the common form or in any other form approved by our directors.
Our
board of directors may, in its absolute discretion, resolve to refuse or delay the registration of any transfer of any share for reasons that shall be specified in the Resolution of
Directors. If our directors refuse or delay the registration of a transfer, they must send notice of the refusal or delay in agreed form to each of the transferor and the transferee.
Share repurchase
As permitted by the BVI Act and our Amended and Restated Memorandum and Articles of Association, shares may be repurchased, redeemed or
otherwise acquired by us.
Forfeiture of shares
British Virgin Islands law does not impose any procedures or timelines whereby the board may make calls on shareholders in terms of outstanding
taxes or fees. See "ITEM 10. Additional InformationE. TaxationTaxation in the British Virgin Islands." However, where a shareholder is issued a par value share and does not
pay the full share price, section 47(3) of the BVI Act requires the shareholder to pay the company the difference between the price and the par value. Additionally, Article 5 of our
Amended and Restated Memorandum and Articles of Association sets out certain forfeiture procedures with respect to shares not fully paid by recipient shareholders on issue. We may deliver a written
call notice requiring payment within 14 days from the date notice is served. If the shareholder fails to pay for the shares, at or before the time set out in the notice, the shares may be
forfeited. Despite the forfeiture rules set forth in our Amended and Restated Memorandum and Articles of Association, these rules do not apply to our Class A and Class B shares, because
they are of no par value.
Dividends
Subject to the BVI Act and our Amended and Restated Memorandum and Articles of Association, our directors may, by resolution, authorize a
distribution to shareholders at such time and of such an amount as they think fit, if they are satisfied, on reasonable grounds, that, immediately after the distribution, we would satisfy the
"solvency test." A British Virgin Islands company will satisfy the
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solvency
test if (i) the value of the company's assets exceeds its liabilities; and (ii) the company is able to pay its debts as they fall due. Where a distribution is made to a
shareholder at a time when the company did not, immediately after the distribution, satisfy the solvency test, it may be recovered by the company from the shareholder unless (i) the shareholder
received the distribution in good faith and without knowledge of the company's failure to satisfy the solvency test; (ii) the shareholder has altered his position in reliance on the validity of
the distribution; and (iii) it would be unfair to require repayment in full or at all.
Untraceable shareholders
We are entitled to sell any shares of a shareholder who is untraceable, as long as:
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all checks, but no less than three, for any sums payable in cash to the holder of such shares have remained uncashed for a period of
12 years;
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we have not during that time or before the expiry of the three-month period received any indication that the shareholder, or a person entitled
to such shares by death, bankruptcy or operation of law, indeed exists; and
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upon expiration of the 12-year period, we have published in newspapers notice of our intention to sell these shares, and a period of three
months or such shorter period has elapsed since the date of such advertisement.
The
net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.
Board of Directors
We are managed by a board of directors which currently consists of eight directors. Our Amended and Restated Memorandum and Articles of
Association provide that the board of directors will consist of at least two directors. There are no share ownership qualifications for directors.
Our
shareholders may, pursuant to our Amended and Restated Memorandum and Articles of Association, at any time remove any director before the expiration of his or her period of office
for cause, and may, pursuant to our Amended and Restated Memorandum and Articles of Association, elect another person in his or her stead. Subject to our Amended and Restated Memorandum and Articles
of Association, the directors have power at any time and from time to time to appoint any person to be a director, either as an addition to the existing directors or to fill a vacancy, as long as the
total number of directors (exclusive of alternate directors) does not at any time exceed the maximum number fixed by or in accordance with our Amended and Restated Memorandum and Articles of
Association (if any).
Meetings
of our board of directors may be convened at any time deemed necessary by any of our directors. A meeting of our board of directors may make lawful and binding decisions if at
least a majority of the directors are present or represented. At any meeting of our directors, each director, whether by his or her presence or by his or her alternate, is entitled to one vote.
Questions
arising at a meeting of our board of directors are required to be decided by simple majority votes of the directors present or represented at the meeting. In the case of a tie
vote, the chairman of the meeting may have a second or deciding vote. Our board of directors may also pass unanimous written resolutions without a meeting.
The
compensation to be paid to the directors is determined by the directors by a resolution under our Amended and Restated Memorandum and Articles of Association. Under our Amended and
Restated Memorandum and Articles of Association, the independent directors are also entitled to
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reimbursement
of out-of-pocket expenses in connection with the performance of their duties as director.
Issuances of additional ordinary shares
Our Amended and Restated Memorandum and Articles of Association permit our board of directors to issue additional ordinary shares from time to
time as our board of directors shall determine.
Our
Amended and Restated Memorandum and Articles of Association authorize our board of directors from time to time to issue ordinary shares to the extent permitted by the BVI Act.
Changes in authorized shares
We are authorized to issue 50,000,000 Class A ordinary shares and 30,000,000 Class B ordinary shares, which are subject to the
same provisions with reference to the payment of calls, liens, transfers, transmissions, forfeitures and otherwise as the shares in issue. We may by resolution:
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combine and divide all or any of our ordinary shares, thus increasing the number of ordinary shares;
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sub-divide our ordinary shares into shares of a smaller number than that fixed by our Amended and Restated Memorandum and Articles of
Association, subject to the provisions of the BVI Act;
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cancel any ordinary shares which have not been taken or agreed to be taken by any person by the date of the resolution; or
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create new classes of ordinary shares with preferences as determined by the board of directors, although any such new classes of shares may
only be created with prior shareholder approval.
Inspection of books and records
Under British Virgin Islands law, holders of our ordinary shares are entitled, on giving written notice to us, to inspect and make copies or
take extracts of our: (a) Amended and Restated Memorandum and Articles of Association; (b) register of shareholders; (c) register of directors; and (d) minutes of meetings
and resolutions of shareholders and those classes of shareholders to which the inspecting shareholder belongs.
Subject
to our Amended and Restated Memorandum and Articles of Association, our board of directors may, if they are satisfied that it would be contrary to our interest to allow a
shareholder to inspect any document, or part of a document as referenced above, refuse to permit the shareholder to inspect the document or limit the inspection of the document, including limiting the
making of copies or the taking of extracts from the records. Where our directors exercise their powers in these circumstances, they must notify the shareholder as soon as reasonably practicable.
Differences in corporate law
We were incorporated under, and are governed by, the laws of the British Virgin Islands. The flexibility available under British Virgin Islands
law has enabled us to adopt the Amended and Restated Memorandum and Articles of Association that provides shareholders with rights that do not vary in any material respect from those under the
Delaware Corporate Law.
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Conflicts of interest
Pursuant to the BVI Act and the Company's Amended and Restated Memorandum and Articles of Association, a director of a company who has an
interest in a transaction and who has declared such interest to the other directors, may:
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vote on a matter relating to the transaction;
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attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting
for the purposes of a quorum; and
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sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates to the transaction.
Anti-money laundering laws
In order to comply with legislation or regulations aimed at the prevention of money laundering, we are required to adopt and maintain anti-money
laundering procedures, and may require subscribers to provide evidence to verify their identity. Where permitted, and subject to certain conditions, we may also delegate the maintenance of our
anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person.
We
reserve the right to request such information as is necessary to verify the identity of a subscriber. In the event of delay or failure on the part of the subscriber in producing any
information required for
verification purposes, we may refuse to accept the application, in which case any funds received will be returned without interest to the account from which they were originally debited.
If
any person resident in the British Virgin Islands knows or suspects that another person is engaged in money laundering or terrorist financing and the information for that knowledge or
suspicion came to their attention in the course of their business, the person will be required to report his belief or suspicion to the Financial Investigation Agency of the British Virgin Islands,
pursuant to the Proceeds of Criminal Conduct Act 1997 (as amended). Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any
enactment or otherwise.
Duties of directors
British Virgin Islands law provides that each director of a company in exercising his or her powers or performing his or her duties must act
honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director must exercise the care, diligence and skill that a reasonable
director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision and the position of the director and his responsibilities. British Virgin
Islands law requires that a director exercise his powers for a proper purpose and not act, or agree to the company acting, in a manner that contravenes British Virgin Islands law or the Amended and
Restated Memorandum and Articles of Association.
Anti-takeover provisions
The BVI Act does not prevent companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred shares,
removal of directors only for cause and provisions restricting the rights of shareholders to call meetings and to submit shareholder proposals. Our Amended and Restated Memorandum and Articles of
Association contain the following provisions which may be regarded as defensive measures: (i) a requirement of the affirmative vote of two-thirds or more of the shares entitled to vote on
special matters such as mergers or acquisitions; (ii) the prevention of "business combinations" with "interested shareholders" for a period of three years after
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the
date of the transaction in which the person became an interested shareholder, unless the business combination is approved in accordance with our Amended and Restated Memorandum and Articles of
Association by a general meeting of our shareholders or satisfies other requirements specified in our Amended and Restated Memorandum and Articles of Association; (iii) directors' ability, in
their absolute discretion, to decline to register any transfer of shares without assigning any reason; (iv) our board of directors' ability to issue, from time to time, one or more classes of
preferred shares and, with respect to each such class, to fix the terms thereof by resolution; (v) restrictions on the ability of shareholders to call meetings and bring proposals before
meetings; and (vi) the requirement of the affirmative vote of 75% of the shares entitled to vote to amend certain provisions of our Amended and Restated Memorandum and Articles of Association.
Interested directors
The BVI Act provides that a director must, after becoming aware that he is interested in a transaction entered into or to be entered into by the
company, disclose that interest to the company's board of directors. The failure of a director to disclose that interest does not invalidate the subject transaction, so long as the director's interest
is disclosed to the board before the company enters into the transaction or is not required to be disclosed (for example, where the transaction is between the company and the director or is otherwise
in the ordinary course of business). As permitted by British Virgin Islands law and our Amended and Restated Memorandum and Articles of Association, a director interested in a particular transaction
may vote on it, attend meetings at which it is considered and sign documents on our behalf which relate to the transaction.
Voting rights and quorum requirements
Under British Virgin Islands law, the voting rights of shareholders are regulated by the company's Amended Memorandum and Articles of
Association and, in certain circumstances, the BVI Act. The Amended and Restated Memorandum and Articles of Association governs matters such as quorum for the transaction of business, rights of
shares, and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Unless the Amended and Restated Memorandum and Articles of Association
otherwise provides, the requisite majority is usually a simple majority of votes cast.
Mergers and similar arrangements
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two
or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company. In order to merge or consolidate,
the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by a resolution approved at a duly convened and constituted meeting of the
shareholders of the Company by the affirmative vote of a majority of two- thirds or more of the votes of the shares entitled to vote thereon which were present at the meeting and voted, or a
resolution consented to in writing by the same number of the votes of the Shares entitled to vote thereon.
Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan or merger or consolidation contains any provision which, if
proposed as an amendment to the Amended and Restated Memorandum and Articles of Association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders
must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or
consolidation.
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Shareholder suits
We are not aware of any reported class action or derivative action having been brought against the Company in a British Virgin Islands court.
Under
the BVI Act, if a company or a director of a company engages in, or proposes to engage in, conduct that contravenes the BVI Act or the memorandum of association or articles of the
company, the British Virgin Islands court may, on the application of a shareholder or a director of the company, issue an order directing the company or director to comply with, or restraining the
company or director from engaging in that conduct.
In
addition, under the BVI Act, a British Virgin Islands court may, upon the shareholder's request, grant leave to a shareholder to bring proceedings on the company's behalf or to
intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on the company's behalf. In determining whether to grant leave for
such derivative actions, the court must take into account certain matters, including whether the shareholder is acting in good faith, whether the derivative action is in the interests of the company
taking account of the views of the company's directors on commercial matters and whether an alternative remedy to the derivative claim is available.
A
shareholder of a company may bring an action against the company for breach of a duty owed by the company to him as a shareholder. The BVI Act also includes provisions for actions
based on oppression and for representative actions where the interests of the claimant are substantially the same as those of other shareholders.
Corporate governance
British Virgin Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty to act honestly, in good
faith and in what the directors believe to be in the best interests to the companies for which they serve.
Indemnification
British Virgin Islands law does not limit the extent to which a company may provide for indemnification of its officers and directors, unless
such indemnification would violate public policy in the view of the British Virgin Islands courts, such as where the director has committed civil fraud or a criminal offense. Our Amended and Restated
Memorandum and Articles of Association provide for the indemnification of our directors against all losses or liabilities incurred or sustained by him or her as a director of our Company in defending
any proceedings, whether civil or criminal. To be entitled to indemnification, the director must have acted honestly and in good faith with a view to our best interests and, with respect to any
criminal action, must not have had reasonable cause to believe his or her conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers or persons controlling us under the foregoing provisions, we have
been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.
Staggered board of directors
The BVI Act does not contain statutory provisions that require staggered board arrangements for a British Virgin Islands company and our Amended
and Restated Memorandum and Articles of Association does not provide for a staggered board.
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C. Material Contracts
The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which we or any of our subsidiaries is a
party, for the two years immediately preceding the filing of this annual report:
We
entered into an underwriting agreement between us, IBS Group and UBS Limited, as representative of the underwriters, on June 25, 2013, with respect to the Class A
ordinary shares sold in our IPO. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect of such liabilities.
Summaries
of the following material contracts and amendments to these contracts are included in this annual report in the places indicated:
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Material Contract
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Location
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Amended and Restated Global Framework Agreement with UBS AG
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"ITEM 3. Key InformationD. Risk FactorsWe generate a significant portion of our sales of services, and anticipate deriving a large portion of our sales of products, from a limited number of clients, and any
significant loss of business from these clients or failure by such clients to pay for our services would materially adversely affect our results of operations"
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Outsourcing Master Service Agreement with Deutsche Bank
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"ITEM 4. Information About LuxoftB. Business OverviewClients"
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Credit Agreement with Amsterdam Trade Bank, N.V. and amendments thereto
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"ITEM 5. Operating and Financial Review and ProspectsB. Liquidity and Capital ResourcesCredit facilities"
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Luxoft Holding, Inc Stock Plan
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"ITEM 6. Directors, Senior Management and EmployeesC. Board PracticesStock option plansU.S. stock option plan"
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Registration rights agreement
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"ITEM 7. Major Shareholders and Related Party TransactionsB. Related Party TransactionsRelationship with IBSRegistration rights agreement"
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D. Exchange Controls
There is no income or other tax of the British Virgin Islands imposed by withholding or otherwise on any payment to be made by us.
We
are free to acquire, hold and sell foreign currency and securities without restriction. There is no exchange control legislation under British Virgin Islands law and accordingly there
are no exchange control regulations imposed under British Virgin Islands law that would prevent us from paying dividends to shareholders in U.S. dollars or any other currencies, and all such dividends
may be freely transferred out of the British Virgin Islands, clear of any income or other tax of the British Virgin Islands imposed by withholding or otherwise without the necessity of obtaining any
consent of any government or authority of the British Virgin Islands.
E. Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our
Class A ordinary shares. Investors should
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consult
their own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing
jurisdiction.
Taxation in the British Virgin Islands
The Government of the British Virgin Islands will not, under existing legislation, impose any income, corporate or capital gains tax, estate
duty, inheritance tax, gift tax or withholding tax upon the company or its security holders (who are not tax resident in the British Virgin Islands).
The
company, and all distributions, interest and other amounts paid by the company to persons who are not tax residents in the British Virgin Islands are exempt from any income,
withholding or capital gains taxes in the British Virgin Islands, with respect to the shares in the company owned by them and dividends received on such shares, nor will they be subject to any estate
or inheritance taxes in the British Virgin Islands.
No
estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not tax resident in the British Virgin Islands with respect to any shares,
debt obligations or other securities of the company.
All
instruments relating to transactions in respect of the shares, debt obligations or other securities of the company and all instruments relating to other transactions relating to the
business of the company are exempt from the payment of stamp duty in the British Virgin Islands,
provided that
they do not relate to real estate
situated in the British Virgin Islands.
There
are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to the company or its shareholders.
United States federal income taxation
The following discussion sets forth the material U.S. federal income tax consequences to U.S. Holders (as defined below) of owning and disposing
of Class A ordinary shares as of the date hereof. This discussion is not a complete analysis or listing of all of the possible tax consequences and does not address all tax considerations that
may be relevant to investors in light of their particular circumstances. This summary applies only to U.S. Holders that hold Class A ordinary shares as capital assets for U.S. federal income
tax purposes (generally, property held for investment), and it does not describe all of the U.S. federal income tax consequences that may be relevant to U.S. Holders subject to special rules, such
as:
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banks and other financial institutions;
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insurance companies;
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regulated investment companies;
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real estate investment trusts;
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dealers and traders in securities that use mark-to-market accounting for U.S. federal income tax purposes;
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U.S. Holders holding Class A ordinary shares as part of a hedging transaction, straddle, conversion transaction or other integrated
transaction;
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U.S. Holders whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
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tax-exempt organizations or entities;
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U.S. Holders that received the Class A ordinary shares as compensation for the performance of services;
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U.S. Holders holding Class A ordinary shares that own or are deemed to own 10% or more of the voting shares of the Company; or
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former citizens and residents of the United States subject to tax as expatriates.
Moreover,
this description does not address the Medicare tax on net investment income, any U.S. federal estate, gift or alternative minmum tax conseqeunces, or any state, local or
foreign tax
consequences, in each case, with respect to the ownership and disposition of the Class A ordinary shares.
This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury
regulations, all as currently in effect and available. These authorities are subject to change, possibly with retroactive effect. U.S. Holders should consult their own tax advisers concerning the U.S.
federal, state, local, and non-U.S. tax consequences of owning and disposing of Class A ordinary shares in their particular circumstances.
For
purposes of this summary, a "U.S. Holder" is a beneficial owner of Class A ordinary shares who is, for U.S. federal income tax
purposes:
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a citizen or individual resident of the United States;
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a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the
United States, any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust that (1) is subject to the primary supervision of a U.S. court and one or more U.S. persons that have the authority to control
all substantial decisions of the trust or (2) has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.
If
a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds the Class A ordinary shares, the tax treatment of a partner in such
partnership generally will depend upon the status of the partner and upon the activities of the partnership. Prospective investors who are
partners in a partnership should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of Class A ordinary shares in their particular
circumstances.
This
discussion assumes that the Company is not, and will not become, a "passive foreign investment company," or a PFIC, for U.S. federal income tax purposes. See "ITEM 10. Additional
InformationE. TaxationPassive foreign investment company considerations" below. Further, this summary does not address the U.S. federal estate and gift, state, local or
non-U.S. tax consequences to U.S. Holders of owning, and disposing of Class A ordinary shares. Prospective investors should consult their own tax advisors regarding the U.S. federal, state,
local and non-U.S. income and other tax consequences of owning and disposing of Class A ordinary shares in their particular circumstances.
Taxation of distributions
Distributions paid on Class A ordinary shares will be treated as dividends to the extent paid out of our current or accumulated earnings
and profits (as determined under U.S. federal income tax principles). Such dividends paid to a U.S. Holder with respect to Class A ordinary shares generally will be taxable as ordinary income
at the time of receipt. Distributions in excess of our current and
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accumulated
earnings and profits will be treated first as a non-taxable return of capital, thereby reducing a U.S. Holder's adjusted tax basis in Class A ordinary shares (but not below zero),
and thereafter as either long-term or short-term capital gain depending upon whether the U.S. Holder has held the Class A ordinary shares for more than one year at the time such distribution is
received. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported as dividends.
Distributions of additional Class A ordinary shares to U.S. Holders that are part of a
pro rata
distribution to all of our shareholders generally
will not be subject to U.S. federal income tax. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. As used below,
the term "dividend" means a distribution that constitutes a dividend for U.S. federal income tax purposes.
With
respect to non-corporate U.S. Holders, dividends received may be subject to reduced rates of taxation
provided that
our
Class A ordinary shares are readily tradable on a qualifying U.S. securities market and that (i) such U.S. Holder holds such Class A ordinary shares for 61 days or more
during the
121-day period beginning on the date which is 60 days before the date on which such shares become ex-dividend with respect to such dividends and (ii) the U.S. Holder is not under an
obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to existing or substantially similar or related property. Our Class A ordinary shares currently
trade on the NYSE, which is currently treated as a qualifying U.S. securities market. However, there is no assurance that our Class A ordinary shares will remain "readily tradable" and,
additionally, such reduced rate will not apply if we are a PFIC for the taxable year in which we pay a dividend or were a PFIC for the preceding taxable year (see "ITEM 10. Additional
InformationE. TaxationPassive foreign investment company considerations" below).
Dividends
received on the Class A ordinary shares will be treated as foreign source income and will not be eligible for the dividends-received deduction generally allowed to U.S.
corporations under the Code.
Sale or other taxable disposition of shares
For U.S. federal income tax purposes, gain or loss realized on the sale or other taxable disposition of Class A ordinary shares will be
capital gain or loss, and will be long-term capital gain or loss if a U.S. Holder held such Class A ordinary shares for more than one year. Non-corporate U.S. Holders may be eligible for
preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses is subject to limitations under the Code.
The
amount of the gain or loss realized will be equal to the difference between a U.S. Holder's adjusted tax basis in the Class A ordinary shares disposed of and the amount
realized on the sale or other taxable disposition. A U.S. Holder's initial tax basis in its Class A ordinary shares generally will be the amount paid for the Class A ordinary shares.
Such gain or loss generally will be U.S.-source gain or loss for U.S. foreign tax credit purposes.
Passive foreign investment company considerations
The Company will be classified as a PFIC in any taxable year in which, either:
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at least 75% of its gross income is passive income; or
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at least 50% of the average quarterly value of its total gross assets (which may be determined, in part, by the market value of its
Class A ordinary shares, which is subject to change) is attributable to assets that produce passive income or are held for the production of passive income.
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Passive
income for this purpose generally includes, among other things, dividends, interest, royalties, rents and gains from commodities and securities transactions. If a non-U.S.
corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the
other corporation and as receiving directly its proportionate share of the other corporation's income. Under the PFIC rules, if we were considered a PFIC at any time a U.S. Holder holds Class A
ordinary shares, we would continue to be treated as a PFIC with respect to such holder's investment unless (i) we cease to be a PFIC and (ii) the U.S. Holder has made a "deemed sale"
election under the PFIC rules.
Based
on our financial statements, relevant market data and the projected composition of our income and the valuation of our assets, including goodwill, we do not believe we were a PFIC
for the taxable year ended March 31, 2017 and do not anticipate becoming a PFIC in the foreseeable future. Because PFIC status is based on our income, assets and activities for the entire
taxable year, it is not possible to determine whether we will be characterized as a PFIC for the current taxable year until after the close of the year. In addition, because the market price of our
Class A ordinary shares is likely to fluctuate and because that market price may affect the determination of whether we will be considered a PFIC, there can be no assurance that we will not be
considered a PFIC for any future taxable year.
If,
however, we were a PFIC for any taxable year during which a U.S. Holder held Class A ordinary shares, gain recognized by a U.S. Holder upon a disposition (including, under
certain circumstances, a pledge) of Class A ordinary shares would be allocated ratably over the U.S. Holder's holding period for such shares. The amounts allocated to the taxable year of
disposition and to years before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for that
taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax attributable to the allocated amount. Further, to the extent that any distribution
received by a U.S. Holder on Class A ordinary shares exceeds 125% of the average of the annual distributions on such shares received during the preceding three years or the U.S. Holder's
holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, described immediately above. Certain elections may be
available that would result in alternative treatments (such as mark-to-market treatment) of the Class A ordinary shares. We do not intend to provide information necessary for U.S. Holders to
make qualified electing fund elections if, contrary to our expectation, we are classified as a PFIC. U.S. Holders should consult their tax advisers to determine whether any of these elections would be
available and if so, what the consequences of the alternative treatments would be in their particular circumstances. U.S. Holders should consult their tax advisers concerning their annual filing
requirements if the Company were to become a PFIC.
If
we are classified as a PFIC, the PFIC tax consequences described in the previous paragraph would also apply to distributions and gains deemed to be received by U.S. Holders in respect
of any of our subsidiaries that are also classified as PFICs.
U.S.
Holders should consult their tax advisers regarding whether we are a PFIC and the potential application of the PFIC rules.
Information reporting and backup withholding
Payments of dividends and proceeds from the sale or other taxable disposition that are made within the United States or through certain
U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (1) the U.S. Holder is a corporation or other exempt
recipient or (2) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
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Backup
withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder's U.S. federal
income tax liability and may entitle such holder to a refund,
provided that
the required information is timely furnished to the U.S. Internal Revenue
Service.
Foreign asset reporting
Certain non-corporate U.S. Holders are required to report information relating to ownership of our Class A ordinary shares in excess of
certain thresholds, subject to certain exceptions (including an exception for Class A ordinary shares held in accounts maintained by certain financial institutions). U.S. Holders are urged to
consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of Class A ordinary shares.
United Kingdom Taxation
In May 2014, we completed transfer of the tax residence of our holding company from the British Virgin Islands to the UK to better align our
legal and operating structures with business needs of the Group.
The
following summary is intended to apply only as a general guide to certain UK tax considerations and is based on current UK tax law and current published practice of HM Revenue and
Customs, both of which are subject to change at any time, possibly with retrospective effect. This summary relates only to certain limited aspects of the UK taxation treatment of investors who are
resident outside the UK, who will hold the Class A ordinary shares as investments and who are the beneficial owners of the Class A ordinary shares.
Any
shareholder or potential investor should obtain advice from his or her own investment or taxation advisor. Shareholders and/or potential investors who are in any doubt as to their
tax position, or who are subject to tax in any jurisdiction other than the UK, should consult a suitable professional adviser.
Taxation of dividends
A dividend payment in respect of a Class A ordinary share may be made without withholding or deduction for or on account of UK tax.
An
individual holder of a Class A ordinary share who is non-UK resident for UK tax purposes will not be chargeable to UK income tax on a dividend paid by the Company unless such
holder carries on (whether solely or in partnership) a trade, profession or vocation in the UK through a branch or agency in the UK to which the Class A ordinary share is attributable. In these
circumstances, such holder may, depending on his or her individual circumstances including the application of any available relief, be chargeable to UK income tax on a dividend received from the
Company.
A
corporate holder of a Class A ordinary share who is non-UK resident for UK tax purposes will not be subject to UK corporation tax on a dividend received from the company unless
it carries on a trade in the UK through a permanent establishment to which the Class A ordinary share is attributable. In these circumstances, such holder may, depending on its particular
circumstances including the application of any available relief, be chargeable to UK corporation tax on a dividend received from the Company.
Taxation of capital gains
An individual holder who is non-UK resident for UK tax purposes will not be liable to UK capital gains tax on a capital gain realized on the
disposal of a Class A ordinary share unless such holder carries on (whether solely or in partnership) a trade, profession or vocation in the UK through a
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or agency in the UK to which the Class A ordinary share is attributable. (In these circumstances, such holder may, depending on his or her individual circumstances including the
application of any available relief, be chargeable to UK capital gains tax on a chargeable gain arising from a disposal of his or her Class A ordinary share.)
However,
an individual shareholder who ceases to be resident in the UK for UK tax purposes for a period of five years or less (or, for departures before April 6, 2013, ceases to
be resident or ordinarily resident or becomes treaty non-resident for a period of less than five tax years) and who disposes of Class A ordinary shares during that period may be liable upon his
or her return to the UK to UK taxation on any capital gain realized (or upon ceasing to be regarded as resident outside the UK for the purposes of double taxation relief), subject to the application
of any available relief.
A
corporate holder of a Class A ordinary share who is non-UK resident for UK tax purposes will not be liable for UK corporation tax on a capital gain realized on the disposal of a
Class A ordinary share unless it carries on a trade in the UK through a permanent establishment to which the Class A ordinary share is attributable. In these circumstances, a disposal of
a Class A ordinary share by such holder may give rise to a chargeable gain or an allowable loss for the purposes of UK corporation tax, subject to the application of any available belief.
Stamp duty and stamp duty reserve tax
No UK stamp duty or stamp duty reserve tax ("SDRT") will be payable on the issue of Class A ordinary shares and UK stamp duty should
generally not be chargeable on a transfer of Class A ordinary shares
provided that
the instrument of transfer is executed outside the UK and does
not relate to any matter or thing done or to be done in the UK. No UK SDRT will be payable in respect of any agreement to transfer Class A ordinary shares
provided
that
the shares are registered in a register kept outside the UK by or on behalf of the Company.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are currently subject to the informational requirements of the Exchange Act applicable to foreign private issuers. We fulfill these requirements by filing
annual, quarterly and current reports and other information with the SEC, which you can access using the means described below. As a foreign private issuer, we are exempt from the rules under the
Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. In addition, we
are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange
Act. However, we intend to file with the SEC, within 120 days after the end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which will be
examined and reported on, with an opinion expressed, by an independent public accounting firm. We also intend to file with the SEC reports on Form 6-K containing unaudited quarterly financial
information within 90 days after the end of each quarter.
You
may read and copy any document we file with the SEC without charge at the SEC's public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may
also obtain copies
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of
the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Reports and other information regarding issuers that file electronically with the SEC, including our filings with the SEC, are also
available to the public through the SEC's website at http://www.sec.gov.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK.
We are exposed to a variety of risks, including foreign currency exchange fluctuations, changes in interest rates and inflation. We regularly
assess currency, interest rate and inflation risks to minimize any adverse effects on our business as a result of those factors. See also Note 2 included in our accompanying audited
consolidated financial statements.
Foreign currency risk
We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency exchange rates. In the year ended
March 31, 2017, 56.5% of our sales were denominated in U.S. dollars and 28.3% were denominated in euros. On the cost side, however, in the year ended March 31, 2017, 12.7% of our
expenses (excluding currency losses and changes in deferred tax) were denominated in Polish Zloty and 12.5% in Russian rubles. As a result, weakening of euro against U.S. Dollar and strengthening of
the Russian ruble relative to the U.S. dollar present the most significant risks to us. Fluctuations in currency exchange rates may impact our business significantly.
Based
on our results in the year ended March 31, 2017, a 1.0% increase (decrease) in the value of euro against the U.S. dollar would have increased (decreased) our sales by
$2.3 million. Based on our results in the year ended March 31, 2017, a 1.0% increase (decrease) in the value of the Russian ruble against the U.S. dollar would have decreased (increased)
our cost of services and operating expenses by $0.9 million.
We
manage our foreign currency risk primarily through short-term forward contracts in order to reduce our exposure to volatility in the currency markets. During the year ended
March 31, 2017, we engaged in forward sales contracts to hedge the euro against the U.S. dollar. Typically, our outstanding instruments have maturities from one to six months, with the longest
maturity not exceeding 12 months. We have obtained credit limits from our counterparty banks and therefore are not required to maintain deposits on margin accounts in case of adverse market
movements.
Currency
forward contracts concluded before January 2016 were not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging (originally issued as
SFAS 133). Therefore, we have been incurring financial loss or income as a result of these derivatives. Currency forward contracts concluded starting January 2016 were designated as cash flow
hedges and qualified for hedge accounting under ASC 815. Changes in the intrinsic value of such contracts are accounted in accumulated other comprehensive loss in our consolidated condensed balance
sheet, until the forecasted transaction occurs. As of March 31, 2017, we had $1.1 million receivable for our hedging positions. See also Note 9 included in our accompanying
audited consolidated financial statements.
Inflation risk
Inflationary factors such as increases in the cost of our services and overhead costs may adversely affect our operating results. Wage inflation
in Russia, Ukraine, Romania, Poland,
South Africa, Bulgaria and Vietnam, where we operate our delivery centers, could also lead to payroll increases,
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which
may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of
inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales if the selling prices of our services do
not increase in line with increases in costs.
Interest rate risk
Our exposure to market risk for changes in interest rates relates primarily to our variable rate borrowings. See "ITEM 5. Operating and
Financial Review and ProspectusB. Liquidity and Capital Resources."
We
have not been exposed to material risks due to changes in market interest rates. However, our future interest expense may increase and interest income may fall due to changes in
market interest rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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