A KeyBanc analyst's skepticism surrounding the prospects for custom software development company Luxoft Holding Inc LXFT was allayed amid an abatement in Luxoft's customer concentration.
The top-2 customer concentration at Luxoft is expected to fall from 35 percent currently and a peak of 60 percent in the second quarter of fiscal year 2015 to the mid-20s in the next 12-18 months, Ramnani said in a Monday note. (See Ramnani's track record here.)
The reduction is likely to be achieved on the back of deceleration at top-2 accounts and healthy growth in other parts of the business by the end of fiscal 2019, Ramnani said.
The analyst expects high-potential accounts, or HPAs, to contribute 37 percent of revenue and to grow from 2016's 18-percent year-over-year rate to 50 percent. KeyBanc projects some of the top talent from Deutsche Bank AG (USA) DB and UBS Group AG (USA) UBS will be redeployed to its Luxoft's HPAs to propel growth at smaller accounts.
Shares of Luxoft are trading at a significant discount to EPAM Systems Inc EPAM's valuation, according to KeyBanc. The firm expects the discount to compress as overall customer concentration reduces.
KeyBanc estimates Luxoft's 2018 revenues at $923.6 million and earnings per share of $2.87, below the consensus. For fiscal 2019, KeyBanc is below-consensus, with revenue and EPS estimates at $1.07 billion and $3.59, respectively.
KeyBanc sees a significant slip at Deutsche Bank or UBS in the near term or a further slowdown in HPAs as the risks to its thesis.
The Price Action
Dragged by a steep sell-off in early August following the release of first quarter results, Luxoft shares are down about 10 percent year-to-date.
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