20-F 1 a20ffy2018.htm 20-F Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 20-F
(Mark One)
 
 
o
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2018
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from    to
Commission File Number
luxoftlogo.jpg
LUXOFT HOLDING, INC
(Exact Name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Gubelstrasse 24
6300 Zug, Switzerland
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A Ordinary Shares with no par value
 
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of March 31, 2018: 22,884,525 Class A ordinary shares with no par value and 11,117,582 ordinary shares with no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes o    No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o    No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of "large accelerated filer" "accelerated filer", "smaller reporting company"and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filerx
 
Accelerated filer o
 
Non-accelerated filer o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
 
International Financial Reporting Standards as issued
by the International Accounting Standards Board o
 
Other o



If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o    Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes o    No x



PRELIMINARY NOTES
As used herein, and unless the context suggests otherwise, the terms "Luxoft," "Company," "Group," "we," "us" or "our" refer to Luxoft Holding, Inc and its direct and consolidated subsidiaries unless otherwise stated or indicated by context. We define Central and Eastern Europe ("CEE") to include Albania, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Kosovo, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine.
Throughout this annual report, we refer to various trademarks, service marks and trade names that we use in our business. "Luxoft" is our registered trademark. We also have several other registered trademarks, service marks and pending applications relating to our products and services. Other trademarks and service marks appearing in this annual report are the property of their respective holders.
Special Note Regarding Forward-Looking Statements
In addition to historical facts, this annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We make forward-looking statements in this annual report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business and financial condition, as well as the results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as "believe," "could," "seek," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "will," "would," "expect," "predict," "project," "potential" or the negative of these terms or other similar expressions that convey uncertainty of future events. These statements may be found in the sections of this annual report on Form 20-F (the "annual report") titled "ITEM 3. Key Information—Risk Factors," "ITEM 4. Information About Luxoft," "ITEM 5. Operating and Financial Review and Prospects," "ITEM 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Considerations," "ITEM 11. Quantitative and Qualitative Disclosures About Market Risk" and elsewhere in this annual report, including the section of this annual report entitled "ITEM 4. Information about Luxoft—Business Overview—Overview" and "ITEM 4. Information about Luxoft—Business Overview—Industry Background," which contain information obtained from independent industry sources. These statements include, but are not limited to, statements regarding:
the persistence and intensification of competition in the information technology ("IT") industry;
the future growth of spending in IT services outsourcing generally and in each of our lines of business, application outsourcing and custom application development and offshore research and development services;
the level of growth of demand for our services from our clients;
the level of increase in revenues from our new clients;
general economic and business conditions in our locations, including geopolitical instability and social, economic or political uncertainties, such as in Russia and Ukraine, and any potential sanctions, restrictions or responses to such conditions imposed by some of the locations in which we operate;
seasonal trends and the budget and work cycles of our clients;
the levels of our concentration of revenues by line of business, by geography, by client and by type of contract in the future;
the expected timing of the increase in our corporate tax rate;
our expectations with respect to the proportion of our fixed price contracts;
our expectation that we will be able to integrate and manage the companies we acquire and that our acquisitions will yield the benefits we envision;
the demands we expect our rapid growth to place on our management and infrastructure;
the sufficiency of our current cash, cash flow from operations and lines of credit to meet our anticipated cash needs;
the high proportion of our cost of services comprised of personnel salaries;
IBS Group Holding Limited and its subsidiaries consideration of further divesting all or a portion of its ownership interest in us; and
our continued financial relationship with IBS Group Holding Limited and its subsidiaries including expectations for the provision and purchase of services and purchase and lease of equipment.

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The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors, some of which lie beyond our control or ability to predict, that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks discussed in "ITEM 3. Key Information—D. Risk Factors" and elsewhere in this annual report.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this annual report to conform these statements to actual results or to changes in our expectations.
Industry Data and Other Information
This annual report includes data, forecasts and information obtained from industry publications and surveys and other information available to us. Forecasts and other metrics included in this annual report to describe our industry are inherently uncertain and speculative in nature and actual results for any period may materially differ. Estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed above and in "ITEM 3. Key Information—D. Risk Factors" of this annual report.
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.


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TABLE OF CONTENTS

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iv


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, 2018, 2017, and 2016 and the consolidated balance sheet data as of March 31, 2018 and 2017 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, 2015 and 2014 and the consolidated balance sheet data as of March 31, 2016, 2015, and 2014 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.
 
For the years ended March 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
(in thousands of U.S. dollars, except share and per share amounts)
Consolidated statements of income:
 
 
 
 
 
 
 
 
 
Sales of services
$
906,766

 
$
785,561

 
$
650,752

 
$
520,548

 
$
398,331

Operating expenses
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
567,874

 
474,980

 
379,331

 
293,960

 
229,537

Selling, general and administrative expenses
241,239

 
213,723

 
171,707

 
128,952

 
95,946

Depreciation and amortization
42,673

 
34,847

 
23,814

 
16,834

 
12,944

(Gain)/ Loss from revaluation of contingent liability
(13,340
)
 
(12,021
)
 
(3,680
)
 
1,166

 
922

Impairment loss
8,241

 
5,287

 

 

 

Operating income
60,079

 
68,745

 
79,580

 
79,636

 
58,982

Other income and expenses
 
 
 
 
 
 
 
 
 
Interest income/(loss), net
173

 
(81
)
 
121

 
(543
)
 
(1,508
)
Unwinding of discount for contingent liability
(1,215
)
 
(1,990
)
 
(1,169
)
 

 

Other gain, net
2,773

 
5,119

 
3,947

 
1,430

 
557

Gain (loss) from derivative financial instruments
(1,791
)
 
1,314

 
261

 
1,321

 
(1,134
)
Net foreign exchange gain/(loss)
2,767

 
(2,604
)
 
(381
)
 
(8,867
)
 
(961
)
Income before income taxes
62,786


70,503


82,359


72,977


55,936

Income tax expense
(5,773
)
 
(7,865
)
 
(12,108
)
 
(9,828
)
 
(4,706
)
Income from continuing operations
57,013


62,638


70,251


63,149


51,230

Income/(loss) from discontinued operations

 

 

 

 

Net income
$
57,013


$
62,638


$
70,251


$
63,149


$
51,230

Net income attributable to the non-controlling interest

 

 

 

 

Net income attributable to the Group
$
57,013


$
62,638


$
70,251


$
63,149


$
51,230

Actual net income per ordinary share and pro forma per Class A and Class B ordinary shares(1):
 
 
 
 
 
 
 
 
 
Basic
$
1.69

 
$
1.88

 
$
2.13

 
$
1.93

 
$
1.59

Diluted
$
1.66

 
$
1.84

 
$
2.06

 
$
1.91

 
$
1.59

Actual weighted average number of Class A and Class B ordinary shares

 
 
 
 
 
 
 
 
Basic
33,703,069

 
33,280,771

 
32,949,807

 
32,790,711

 
32,129,355

Diluted
34,247,805

 
34,000,674

 
34,088,214

 
33,111,753

 
32,242,488

Dividends declared per share
$

 
$

 
$

 
$

 
$


1


 
As of March 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Consolidated balance sheets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
104,357

 
$
109,558

 
$
108,545

 
$
45,593

 
$
37,503

Work-in-progress
3,734

 
2,805

 
1,595

 
1,449

 
4,720

Working capital(2)
230,693

 
177,812

 
195,005

 
125,958

 
65,682

Total assets
603,820

 
547,207

 
394,542

 
306,569

 
217,697

Total borrowings(3)
1,122

 
1,055

 
817

 
1,401

 
20,582

Total liabilities
133,871

 
160,389

 
92,809

 
88,445

 
68,080

Total equity
$
469,949

 
$
386,818

 
$
301,733

 
$
218,124

 
$
149,617

______________________________________
(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.
(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 NotesSpecial 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 52.3%, 43.3% and 34.7% of our sales of services in the fiscal years ended March 31, 2016, 2017 and 2018, respectively. In the aggregate, our ten largest clients accounted for 73.7%, 66.0% and 57.6% of our sales of services in the fiscal years ended March 31, 2016, 2017 and 2018, 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.

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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, we may become further dependent on our key customers in case of global consolidation processes.
Due to the nature of our business, our operations are, to a large extent, based on the clients’ trust. The implementation of an IT system, which has critical importance for the client’s business, usually results in signing a long-term agreement with the system user. The quality of solutions and services provided to such clients determines their confidence in us. The implementation of contracts with key clients may heavily impact the level of sales revenues generated by us in the coming years. Loss of a major client or deterioration in the financial terms for provision of services to a major client would have a significant adverse impact on the operations, financial position, financial results and prospective development of our 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.
A significant decline in the economies of the countries where our clients are exposed could have a material adverse effect on our business.  If we are unable to anticipate changing economic and other conditions affecting the markets in which we operate, we may be unable to plan effectively for or respond to those changes, and our results of operations could be materially adversely affected. In the European Union, despite measures taken by several governments and monetary authorities to provide financial assistance to certain Eurozone countries and to avoid default on sovereign debt obligations, concerns persist regarding the debt burden of several countries. 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. A resurgence of the sovereign debt crisis in Europe or, on a lesser scale, a 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.
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 intend to continue our expansion for the foreseeable future and pursue available opportunities. Our sales of services grew from $398.3 million in the fiscal year ended March 31, 2014 to $906.8 million for the fiscal year ended March 31, 2018. As of March 31, 2018 we had 12,898 personnel, as compared to 12,766 personnel as of March 31, 2017. 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, in fiscal year ended March 31, 2015, we implemented our Global Upgrade Program, which aimed at increasing the share of our operations in the EU, the UK, Asia Pacific and North America. The Global Upgrade Program has resulted in our expansion in Central and Eastern Europe and has facilitated 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;

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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, 2018, we derived 56.7%, 17.5% and 25.8% of our sales of services from clients operating in our financial services, automotive and transport, and digital enterprise lines of business, respectively. 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 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.
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 continue 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.
Our computer and data 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.
As a multinational service provider with customers in a broad range of industries, we believe that an appropriate information technology infrastructure is important in order to support our daily operations and the growth of our business. In

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the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyber-attacks targeting businesses such as ours. In a number of public networks, hackers have bypassed firewalls and misappropriated confidential information, including personally identifiable information, for various reasons, including political, economic and commercial gain.
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 our proprietary information or cause interruptions or malfunctions in our operations. We also have access to sensitive customer information in the ordinary course of business. 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. Such data networks are vulnerable to attacks, unauthorized access and disruptions.
We implement from time to time new technologies and solutions to assist in the prevention of potential and attempted cyber-attacks, as well protective measures and contingency plans in the event of an existing attack. Additionally, we analyze the risks we face on an ongoing basis and, accordingly, strengthen our information technology infrastructure, update our policies and conduct training for our employees to enhance our ability to prevent and respond to such risks. However, we can provide no assurance that our current IT system or any updates or upgrades thereto, or the current or future IT systems of our business partners, are fully protected against third-party intrusions, viruses, hacker attacks or other similar threats. We expect to experience actual or attempted cyber-attacks of our IT networks. We cannot guarantee that any such incidents will not have such a material impact on our operations in the future. Actual or perceived concerns that our systems or the systems of our business partners 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. There is also no assurance that we will be insulated from criminal or civil enforcement actions or private claims relating to cyber-attacks or that we will withstand legal challenges in relation to our agreements with third parties. Legislative or regulatory action in these areas is evolving, and we may be unable to adapt our IT systems or to manage the IT systems of third parties to accommodate these changes.  Finally, if a significant data breach occurred, our reputation could be materially and adversely affected, and confidence among our customers may be diminished.
These risks will increase as we continue to grow our cloud-based offerings and services, store and process increasingly large amounts of customer data and host or manage parts of our customers’ businesses, especially in industries involving particularly sensitive data such as the financial services industry. Losses or liabilities that are incurred as a result of any of the foregoing could adversely affect our business and reputation, thus adversely affecting our results of operations and the value of an investment in our ordinary shares.
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.
Changes in the European regulatory environment regarding privacy and data protection regulations could expose us to risks of noncompliance and costs associated with compliance.

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On April 14, 2016 the European Parliament approved the General Data Protection Regulation (GDPR), which came into effect on May 25, 2018. The GDPR is directly applicable in every EU member state, without the necessity of national implementation laws. The new regulation replaces the Data Protection Directive 95/46/EC and is designed to harmonize data privacy laws across the European Union and to reshape the way organizations across the region approach data privacy. The GDPR have a significant impact on how businesses can collect and process the personal data of individuals in the European Economic Area. The regulation contains many key changes, such as: stronger enforcement, increased accountability, new approach to consent and data transfer, new privacy rights, data breach regulation, data protection officer appointment, data processing agreements, and privacy impact assessment.

The Company has been undertaking measures to comply with the GDPR. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may limit the use and adoption of our products and solutions, alter the way we conduct business and/or could otherwise have a material adverse impact on our results of operations. We may be unsuccessful in establishing legitimate means of transferring data from the European Economic Area, we may experience hesitancy, reluctance, or refusal by European or multi-national customers to continue to use our services due to the potential risk exposure to such customers as a result of the implementation of GDPR, and we and our customers are at risk of enforcement actions taken by the European Union data protection authority until such point in time that we ensure that all data transfers to us from the European Economic Area are legitimized. We may find it necessary to establish systems to maintain EU-origin data in the European Economic Area, which may involve substantial expense and distraction from other aspects of our business. Further, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us, may limit the use and adoption of our products and solutions and could have a material adverse impact on our 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 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.
Furthermore, the cost of work is increasing. Salaries account for a significant share of each project implementation costs. Our operations and development outlook depend to a large extent on the knowledge, experience and professional qualifications of the employees who implement the IT projects. Because we mainly rely on highly skilled professionals, any increase in salaries may negatively affect the margins achieved on our projects, and consequently have an unfavorable impact on our financial results. The significant market demand for IT specialists and competitors’ activities may induce our qualified personnel to leave our organization and make it quite difficult to recruit new employees with suitable knowledge, experience and professional qualifications.
Attrition rates among our employees were 10.3%, 12.7% and 17.8% for the fiscal years ended March 31, 2016, 2017 and 2018, 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. Although we believe that our competitors calculate attrition based on the same principles, their methodology may differ from ours. We may encounter higher attrition

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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 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, India, 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.
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, 2018, 54.9% of our sales were denominated in U.S. dollars, 26.5% were denominated in euros, 9.5% of our expenses were denominated in Polish zloty and 10.9% 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 largely 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. While the United Kingdom and the European Union are expected to reach an agreement by 2019, political changes in the UK following the “Brexit” referendum, including recent attempts by certain members of the UK Parliament to expand their influence over the “Brexit” process in case the United Kingdom fails to come to an agreement with the European Union, along with other factors, leave it unclear when exactly the United Kingdom will exit and on what terms. The impact on us from Brexit will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Because this is an unprecedented event, it is unclear what long-term economic, financial, trade and legal implications the withdrawal of the UK from the EU would have and how such withdrawal would affect the regulation applicable to our business globally and specifically in the region.
We have two UK subsidiaries and a holding company of the group, which is an UK tax resident, together employing approximately 325 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 may 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
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 sales and earnings could be reduced because the euro and British pound may translate into fewer U.S. dollars.
For more information, see "Risks related to our business and our industry—Fluctuations 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 European Union directives and regulations, Brexit could materially change the regulatory regime applicable to our operations and our clients' operations as the United Kingdom determines which European Union 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 European Union markets, the United Kingdom could lose access to the single European Union 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 European Union 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 United States and the rise of anti-establishment movements in Europe could have a materially adverse effect on us.
Recent events, including the policies introduced by the current U.S. presidential administration, have resulted in substantial regulatory uncertainty regarding international trade and trade policy. For example, the current U.S. presidential administration has called for substantial changes to trade agreements, such as the North American Free Trade Agreement (“NAFTA”), has increased tariffs on certain goods imported into the United States and has raised the possibility of imposing significant, additional tariff increases. The announcement of unilateral tariffs on imported products by the United States has triggered retaliatory actions from certain foreign governments and may trigger retaliatory actions by other foreign governments, potentially resulting in a “trade war.” While we cannot predict the extent to which the United States or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions upon the import or export of our products in the future, a “trade war” of this nature or other governmental action related to tariffs or international trade agreements could have an adverse impact on demand for our services, sales and customers and affect the economies of the United States and various European countries, materially harming our business.

Additionally, the outcome of the “Brexit” referendum in the United Kingdom, the results of the referendum in Italy on constitutional reform, which led to a possible coalition of anti-establishment parties, the Syrian refugee crisis and the increasing appeal to voters of populist and anti-austerity movements in Germany, France, The Netherlands and other countries have created rising political uncertainty throughout Europe. An escalation of political risks could have unpredictable consequences for economy of European countries and in turn for our business, as customers may rein in activity levels in light of decreased economic output and increased insecurity, which would materially adversely affect our operating results and financial condition. In sum, given our significant sales operations in the U.S. and Europe, changes in U.S. or European political, regulatory and economic conditions or in its policies governing international trade and foreign investment in the U.S. or Europe 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

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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.
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:
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;
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
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.
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:
maintaining high-quality control and process execution standards;
maintaining planned resource utilization rates on a consistent basis;
maintaining productivity levels and implementing necessary process improvements;
controlling project costs;
maintaining close client contact and high levels of client satisfaction;
recruiting and retaining sufficient numbers of skilled IT professionals; and
maintaining effective client relationships.

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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:
our clients' perception of our ability to add value through our services;
our competitors' pricing policies;
bid practices of clients and their use of third-party advisors;
our ability to charge premium prices when justified by market demand or the type of service;
our large clients' pricing leverage; and
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 United States, European or 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. For more information, see “-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.” In addition, some of our clients may delay payments due to changes in internal payment procedures driven by rules and regulations to which they are subject. 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 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:
the number, timing, scope and contractual terms of projects in which we are engaged;
delays in project commencement or staffing delays due to difficulty in assigning appropriately skilled or experienced professionals;
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;
inability to maintain high employee utilization levels;
changes in pricing in response to client demand and competitive pressures;
changes in the allocation of onsite and offshore staffing;
the business decisions of our clients regarding the use of our services;
the ability to further grow sales of services from existing clients;
the available leadership and senior technical resources compared to junior engineering resources staffed on each project;
seasonal trends and the budget and work cycles of our clients;
delays or difficulties in expanding our operational facilities or infrastructure;
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;
unanticipated contract or project terminations;
the timing of collection of accounts receivable;
our ability to manage risk through our contracts;
the continuing financial stability of our clients; and
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. If we fail to meet expectations regarding our financial and operating results for any given period announced by us or by analysts, the market price of our Class A ordinary shares could decrease substantially, and we could face costly lawsuits, including securities class action suits, thus adversely affecting our results of operations and business.
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, $29.0 million, $17.7 million, $5.8 million, and $1.4 million in share-based compensation expenses for the fiscal years ended March 31, 2018, 2017, 2016, 2015 and 2014, respectively.
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.
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, 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 must be paid consideration for the intellectual property work performed. In the case of intellectual property work created by an

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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.
Our use of open source software may expose us to risks.

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. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Any such requirement to disclose our source code or other confidential information related to our work product or such additional costs could materially adversely affect our competitive position, results of business operations, financial condition and client relationships.
We may not be successful in protecting our intellectual property rights, including our unpatented proprietary know-how 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 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.

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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, 2018, we completed two 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:
integrating operations, services, personnel and corporate, IT and administrative infrastructures in a timely and efficient manner;
diverting significant management attention and financial resources from our other operations and disrupting our ongoing business;
unforeseen or undisclosed liabilities and integration costs;
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;
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;
generating sufficient revenues and net income to offset acquisition costs;
potential loss of, or harm to, employee or client relationships;
properly structuring our acquisition consideration and any related post-acquisition earn-outs and successfully monitoring any earn-out calculations and payments;
failing to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisition;
retaining key senior management and key sales and marketing and research and development personnel, particularly those of the acquired operations; and
increased complexity or risks from potentially doing business in unfamiliar markets and operating additional geographically dispersed sites.

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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, India 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 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:
investors' perception of, and demand for, securities of IT services companies;
conditions of the U.S. and other capital markets in which we may seek to raise funds;
our future results of operations and financial condition; and
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.

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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 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, Germany 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 (the "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. The determination of our provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination by authorities in various jurisdictions
We have certain intercompany arrangements among our subsidiaries in relation to various aspects of our business 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 and APAC 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 OECD has been working on BEPS project, 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, 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.

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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. 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 the majority of developed countries have adopted CbCR legislation. We were not in the scope of CbCR reporting for the fiscal year ended March 31, 2017. However, since in the fiscal year ended March 31, 2018 we have exceeded reporting threshold we will have to file CbCR reporting for the subsequent fiscal year ending March 31, 2019. Material penalties may be applied in case of failure to file the CbC report. 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.
We are implementing reasonable and sufficient procedures, documents and policies required by the mentioned BEPS and global transfer pricing rules. However, if a tax authority in any jurisdiction proposes an adjustment to our tax reruns 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.
Changes in the tax system in CEE and Asian countries or court practice, or unforeseen application of existing rules could adversely affect our financial condition and results of operations.
There have been significant changes to the taxation systems in CEE and Asian 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 countries (including Russia, Poland, Romania, Singapore, India and China) 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. 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, which following ratification process, will amend the existing bilateral tax treaties. Significant developments in transfer pricing rules, introduction of controlled foreign corporation legislation, anti-avoidance legislation (such as adopted by European Union) and other recent changes in tax laws bring additional uncertainty to the Group's tax affairs.
Tax authorities in CEE and Asian 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. 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.
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, substantial part of undistributed profits is accumulated at our operational headquarters in Switzerland; under a tax treaty between Cyprus and Switzerland the withholding tax on dividends may be reduced to zero. We have obtained tax clearance to apply zero withholding tax rate for dividends that may be paid from Switzerland to Cyprus. Most of the double tax treaties contain a limitation on benefits provisions and/or special provision regarding the beneficial owner of the dividends; also practical interpretation of beneficial double tax treaty provisions may vary from a county to country.
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 tax treaty in practice, if the treaty clearance procedures are not 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.

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Switzerland is undertaking a comprehensive corporate tax reform ("Tax Proposal 17") that will among other things result in the phasing out of the so-called holding, mixed company, domiciliary company and other special tax regimes with a timeline for adoption of anticipated changes within 2019 to 2021.
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 approximately $1.5 million for the year ended March 31, 2018 and approximately $1.9 million for the year ended March 31, 2017.
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. Despite the previous version of tax reform, called CTR III, was rejected by Swiss voters on February 12, 2017, abolition of preferential tax regimes is a commitment made by Switzerland to European Union and OECD. So it remains widely undisputed that reform has to be implemented. Federal Council has submitted the renewed version of Tax Proposal 17 for parliamentary discussion. The bill includes 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 transitional period (in the canton of Zug up until 2024) 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 Tax Proposal 17 is enacted.
If no or reduced compensating measures are available in the final bill, our financial results may significantly suffer from increase in the effective tax rate. In addition, we may record an extraordinary one-time loss due to revaluation of deferred tax liabilities in the period of enactment. Unless a referendum is held, the bill is expected to be adopted during the year ended March 31, 2019.
Our business may be materially adversely affected by tax reform in the United States.
The U.S. Tax Cuts and Jobs Act of 2017 (the "TCJA") was approved by the U.S. Congress on December 20, 2017 and signed into law by President Donald J. Trump on December 22, 2017. This legislation makes significant changes to the U.S. Internal Revenue Code of 1986, as amended (the "IRC"). Such changes include a reduction in the corporate tax rate from 35% to 21% and limitations on certain corporate deductions and credits, among other changes. In addition, the TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced.
In addition, the final impacts of the TCJA could be materially different from our expectations. For example, adverse changes in the underlying profitability and financial outlook of our operations or changes in tax law could lead to changes in our valuation allowances against deferred tax assets on our consolidated balance sheets, which could materially affect our results of operations. The U.S. Treasury Department, the Internal Revenue Service (the IRS), and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. Finally, foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations. The uncertainty surrounding the effect of the reforms on our financial results and business could also weaken confidence among investors in our financial condition. This could, in turn, have a materially adverse effect on the price of our ordinary shares.

We may incur additional liabilities if we fail to comply with UK Corporate Criminal Offense rules.
UK rules for Corporate Criminal Offense for failure to prevent facilitation of tax evasion (CCO) came into force in September 2017. The CCO is part of civil and criminal law measures aimed at both tax evaders and those that facilitate tax evasion. CCO focuses on the failure to prevent facilitation crimes by those who act for or on behalf of an entity e.g. as its employees, agents, subsidiaries or others that provide services on the company’s behalf. A company will be criminally liable if it fails to take reasonable steps to prevent an associated person facilitating the commission of an UK tax evasion offense or an overseas tax evasion in the part related to UK.
We are implementing reasonable and sufficient procedures, documents and policies to comply with CCO rules. However, if the tax authorities find our procedures and actions not sufficient, we may be imposed with penalties and our business, financial condition and results of operations may be adversely affected.
Globally mobile employees may potentially create additional tax liabilities for us in different jurisdictions.
The OECD’s BEPS project has sharpened the focus on the risks posed by global mobility in order to ensure profits are taxed in the territory where the value creating activity is performed. Location of employees and activities they perform is having greater and more substantial tax implications.

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During performance of professional duties our employees may be required to travel to various locations. Depending on the length of the required travel and the nature of employees’ activities the tax implications of travel arrangements vary, with generally more extensive tax consequences in cases of longer travel. Such tax consequences mainly include payroll tax liabilities related to employee compensation and, in cases envisaged by international tax legislation, taxation of profits generated by employees during their time of travel.
We elaborate internal procedures, policies and systems, including internal mobility program, for monitoring our tax liabilities arising in connection with the business travel. Nevertheless, considering that the tax authorities worldwide are paying closer attention to global mobility issues our operations might be adversely affected by additional tax charges related to the activity of mobile employees.
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. The development of the IT services sector in the CEE region is closely related to the country’s overall economic prosperity. The main factors affecting our financial results obtained therein include GDP growth, value of customer orders for IT solutions, level of capital expenditures made by enterprises, clients' demand for complex IT solutions, inflation rate and the exchange rate of currencies in the countries where we operate. 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 that could result in a material decrease in the price of our Class A ordinary shares.
Sanctions imposed by the United States, the European Union 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.

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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 (including the United Kingdom) 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, 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. The United States has periodically expanded the list of Russian companies and individuals placed under the sanctions regime and it is currently unclear whether new sanctions may be imposed.
Furthermore, on August 2, 2017 the U.S. Congress enacted legislation, the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), that updates existing sanctions against Russia and requires the imposition of “secondary sanctions” on non-U.S. companies and individuals who engage in certain sanctionable transactions even in the absence of a connection to the United States. CAATSA, among other things, (a) requires the U.S. President to impose certain secondary sanctions on non-U.S. persons that were discretionary under the existing U.S. sanctions legislation (including, but not limited to, secondary sanctions for investing in or supporting special Russian crude oil projects and the facilitation of transactions on behalf of Russian Specially Designated Nationals); (b) allows the U.S. President to impose secondary sanctions on non-U.S. persons (including those that invest in the construction or servicing of Russian energy export pipelines); and (c) requires the U.S. President, subject to the ability to claim a national interest waiver, to impose asset-blocking and travel sanctions, including certain secondary sanctions, on any person who knowingly engages in significant activities that undermine the cybersecurity of any person or government, including a democratic institution, on behalf of the Russian government. Secondary sanctions can also be imposed on non-U.S. persons who knowingly facilitate significant transactions or significant financial transactions for or on behalf of a party subject to the U.S. sanctions against Russia. The U.S. government has not yet issued guidance on how it intends to enforce the new secondary sanctions against non-U.S. persons, so no assurance can be given that secondary sanctions would not be applied to any Group entity that engages in sanctionable transactions related to Russia. These sanctions may have a material adverse effect on the Russian financial markets and investment climate and the Russian economy generally, which could in turn result in a material adverse impact on our business.
The sanctions imposed by the U.S. and the EU in connection with the Ukraine crisis so far have had an adverse effect on the Russian economy, prompting revisions to the credit ratings of the Russian Federation and a number of major Russian companies that are ultimately controlled by the Russian Federation, causing extensive capital outflows from Russia and impairing the ability of companies to access international capital markets. The governments of the U.S. and certain EU member states, as well as certain EU officials have indicated that they may consider additional sanctions should tensions in Ukraine continue. Further confrontation in Ukraine and any escalation of related tensions between Russia and the U.S. and/or the EU, the imposition of further sanctions, or continued uncertainty regarding the scope thereof, could have a prolonged adverse impact on the Russian economy, particularly levels of disposable income, consumer spending and consumer confidence. In addition, Russia’s involvement in the armed conflict in Syria since September 2015 may put further pressure on the 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. These impacts could be more severe than those experienced to date. All of the above could have a material adverse impact on our business, financial condition, results of operations or prospects in Russia.
No individual or entity within the Group has been designated by either the United States or the European Union as a target of its 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. Notably, the United States has increasingly utilized the authority under an existing Executive Order for cyber-related sanctions to target Russian entities operating in the information technology sector. Additionally, no assurance can be given that broader sanctions against Russia or parts of Ukraine that affect us will not be imposed (and/or that there will not be certain related changes to the UK sanctions compliance regime as a result of Brexit). Although the majority of our Group entities are neither U.S. nor European Union Persons, certain of our subsidiaries are U.S. or European Union Persons and are therefore subject to U.S. and European Union sanctions restrictions, including prohibitions on dealing with any persons subject to U.S. blocking sanctions or the European Union 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 primarily 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.

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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. 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 Ukrainian 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: 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 favor of any affiliated entities. The sanctions against these banks were extended by the Ukrainian National Security and Defense Council in March 2018.
On January 18, 2018, the Ukrainian parliament, the Verkhovna Rada, adopted the law "On the peculiarities of state policy on ensuring Ukraine's state sovereignty over temporarily occupied territories in Donetsk and Luhansk regions," in which Russia is recognized as an aggressor state carrying out temporary occupation of part of Ukrainian territory.
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 3,265 engineers located in Kiev, Dnipro and Odessa. We have delivery centers in Russia, employing 1,872 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 Penang, Malaysia, and Bangalore, India. In 2014, we launched a

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multi-year Global Upgrade Program to implement another level of globalization across our organization and to accelerate our expansion in the European Union, the UK, Asia Pacific and North America. As part of this program, to better support our global client base, since launch, we relocated over 3,300 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.
Ukraine. Although the political situation in Ukraine is stabilizing, 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.
Romania. 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 (PSD) and the Alliance 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. In January 2017, the newly elected coalition government passed a decree that would have decriminalized some major corruption cases, which spurred the largest public protests since the Revolution of 1989. As a consequence, the controversial decree was withdrawn. This issue, together with rows within the PSD, led to the dismissal of Prime Minister Sorin Grindeanu with a no-confidence vote in parliament in June. On January 15, 2018, Mihai Tudose, the prime minister (in office since June 2017), was forced from office by the ruling PSD due to disagreements with the party leadership. The governing coalition composed of the PSD and the ALDE appointed a cabinet on January 29, 2018, following the resignation of a short-lived cabinet that governed from June 2017 to January 2018.
Separately, on-going 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 further escalation of the conflict would heighten the risk of significant unfavorable consequences, both indirectly—through effects on Romania's EU trade partners—and 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.

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Poland. In Poland, since the last Parliamentary elections won by the conservative political party named Law and Justice (Prawo i Sprawiedliwosc) in 2015, there have been significant changes in policies to increase government influence over the country’s media, judiciary, civil service, and education system. New regulations have increased government options for telephone and internet surveillance without a court order and introduced additional restrictions on the freedom of assembly.
The conflict between the government and the Polish Constitutional Tribunal has led to legal uncertainty in which the courts can follow either the government’s interpretation or that of the Constitutional Tribunal, which decreased legal certainty of the Polish legal system and resulted in damaging Poland’s reputation as an investment target among international investors. Increased government control over the Constitutional Tribunal has allowed the government to pursue the amendments to the Polish judicial system.
Russia. 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. 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 further 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 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, Poland, 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 that 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 Ukraine, a Russian ban on imports of meat and milk products from Ukraine and anti-dumping investigations conducted by Russian authorities in relation to certain Ukrainian goods. In response to the ban on imports of meat and milk products from Ukraine, The Cabinet of the Ministers of Ukraine amended its decree No. 1147 of December 30, 2015 prohibiting the importation of goods produced in the Russian Federation into the Ukraine’s territory to extend the ban until December 31, 2018.
Political tensions have escalated following the political situation in Crimea and a number of associated events, including the adoption of a Ukrainian law canceling neutral status to military blocks, the signing of the Ukraine-European Union Association Agreement and a new wave of gas price negotiations. In recent years, economic confrontation between Russia and Ukraine has continued to grow. New bilateral sanctions and restrictions in the areas of transit, trading and agriculture were imposed. Any further adverse changes in relations between Ukraine and Russia may have negative effects on the Ukrainian and Russian economies as a whole, which could in turn have a material adverse effect on our business. 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. Conflicts among CEE countries and conflicts within CEE countries have, in some instances, also harmed their relationship with the United States and the European Union and, at times, have negatively impacted their financial markets. See "-Sanctions imposed by the United States, the European Union 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 other CEE countries may strain political relationships with neighboring regions, lead to economic uncertainty and decrease confidence in the economies of the CEE countries, which could negatively affect our ability to conduct business in these countries. For example, since it joined the European Union in 2007, Romania has been subject to certain post-accession benchmarks mandated by the European Union under the Cooperation and Verification Mechanism to help Romania address outstanding shortcomings in various social fields such as judicial reform and anti-

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corruption. On January 27, 2016, the European Commission 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 such sanctions may have a negative effect on the Romanian economy and investor 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.

Similarly, in its report on Polish economy, the European Commission noted a number of challenges and areas for improvement. Although Poland is gradually improving in international ”doing business” rankings, the regulatory framework weighs on the business environment in some areas. Frequent changes in regulations often passed with limited public consultations coupled with regulatory and policy uncertainty already dampened investment and may continue to impact business confidence. Among the most significant regulatory changes introduced by the new government was the pension reform, aimed to decrease the retirement age from 67 to 65 for men and 60 for women, which took effect in October 2017 despite the European Union concerns. The pension reform was followed by a number of social spending initiatives such as “Family 500’ program” which is estimated to costs approximately PLN 22.9 billion (about 5.3 billion EUR) or 1.3% of Poland’s GDP. Furthermore, since taking office, the Law and Justice government has faced criticism from the United States, the European Union, and various civil rights groups for working to diminish the powers of the Polish Constitutional Tribunal and altering its composition in ways that prevent its ability to serve as core element of check and balances system in Poland. In December 2017, the European Commission has triggered Article 7 of the Treaty on European Union stating that that there is a clear risk of a serious breach of the rule of law by the Republic of Poland, primarily related to the lack of an independent and legitimate constitutional review and judicial independence in Poland. Under Article 7 proceedings the European Council may rule that Poland has committed a serious and persistent breach of common EU values and decide to suspend certain rights Poland has due to its membership in the EU and impose economic sanctions such as limiting Poland’s access to EU funds and subsidies. The application of such sanctions may have a negative effect on the Polish economy and investor confidence in the Polish economic environment, which could lead to material adverse consequences on our operations in Poland.
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;
extensive regulation of businesses in general and substantial protection afforded to domestic IT businesses;
gaps in the regulatory structure resulting from the delay in adoption or absence of implementing regulations;
selective or inconsistent enforcement of laws or regulations, sometimes in ways that have been perceived as being motivated by political or financial considerations;
limited judicial and administrative guidance on interpreting legislation;
relatively limited experience of judges and courts in interpreting recent commercial legislation;
a perceived lack of judicial and prosecutorial independence from political, social and commercial forces;
inadequate court system resources;
a high degree of discretion on the part of the judiciary and governmental authorities; and
under-developed bankruptcy procedures that may be 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 challenging in practice.

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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.
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 employment-related 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 $9.5 million in the fiscal year ended March 31, 2017 and $11.8 million in the fiscal year ended March 31, 2018. However, the reduced tax rates for social contributions (14% in total) are 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 personal income tax benefit in part of employment income provided by an application of a deemed cost deduction (but not greater than PLN 85,528 for each individual). Such benefit is available only for employees who, while performing their daily duties, are creating intellectual property, subject to certain local requirements. Furthermore, personal income tax regulations have been changed from January 1, 2018 and a deemed cost deduction is now available only for specific areas, determined by law. The new law was implemented without specific guidelines, leading to conflicting interpretations within IT sector. Some industry participants decided to continue applying this tax deduction relying on inconsistency of new regulations. The Polish government is working on an amendment to a personal income tax by adding additional categories, also within the IT sector.
This deduction has resulted in the personal income tax savings of $4.1 million in the fiscal year ended March 31, 2017 and $4.6 million in the fiscal year ended March 31, 2018. If our employees would not be entitled to 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 addition, new provisions in social security legislation of Poland were enacted recently. Under these provisions the taxation threshold for social security contributions will be abolished from January 2019. Currently certain social security contributions are paid by Polish employer and employees from gross employment income until it cumulatively reaches 133,290 PLN. Removal of this cap may cause additional payroll costs for us of approximately $2.2 million starting with the fiscal year ending March 31, 2019.
Also, a new obligatory pension plan is expected to be introduced in Poland. Under the proposed amendment, establishing employees’ capital pension schemes, all employers in Poland will be obliged to participate in additional pension plan. We expect to implement the plan starting January 2019, which will lead to additional payroll costs in the fiscal year ending March 31, 2019, estimated approximately as $1.2 million per year and approximately $0.3 million for the year ended March 31, 2019.
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 $5.4 million in the fiscal year ended March 31, 2017 and $5.7 million in the fiscal year ended March 31, 2018. 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

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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, 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.
We may be exposed to additional taxation in Ukraine related to the activities of our non-Ukrainian subsidiaries 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 our subsidiaries operate have double tax treaties with Ukraine.
The practical application of the concept of a permanent establishment in Ukraine under Ukrainian law and double tax treaties is not well developed. For this reason, foreign companies having even limited operations in Ukraine, which would normally satisfy the conditions for not 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 subsidiaries may 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 related to Ukraine 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 fulfillment of tax obligations. Any such taxes or penalties could have a material adverse effect on our business, results of operations, financial condition and prospects.
We provide significant portion of our services to multinational clients using Ukrainian IT specialists. Substantial part of Ukrainian IT specialists who provide services to us 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 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 statuses 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. As a result some developments in the areas of tax administration, taxation of royalties, transfer pricing rules came into force from January 1, 2018. It was also announced that the requirements to qualify for the simplified tax regime which is typically used by individual entrepreneurs for tax purposes was expected to be tightened to address existing gap in the tax system. To date, no such change to the simplified regime has been effected. If such developments occur, we may be required to hire these

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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 Article 53 part 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.
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.
On-going regulatory changes in Russia may have a material adverse effect on our operations there.
In June 2015, a set of amendments to the Russian Civil Code's general contract law provisions came into effect.
Several new concepts were introduced to the code, such as personal insolvency, 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 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.

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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 domestic software developed by entities owned by the state, by non-profits or by entities with 50% or more Russian ownership. It is still 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. In particular, under new resolution issued by the Russian government in June 2018, Russian governmental bodies shall acquire certain types of domestic office and internal accounting software in a centralized manner through the Ministry of Communication of the Russian Federation.
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 out-staffing companies providing staff to them, and out-staffing 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:
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in estimates of our future financial results or recommendations by securities analysts;
geopolitical instability in some locations where we operate, such as Ukraine and Russia;
failure to develop or deliver our services as expected;
changes in market valuations of similar companies;
successes by our competitors;
changes in our capital structure, such as future issuances of securities or the incurrence of debt;
sales of large blocks of our Class A ordinary shares;
announcements by us or our competitors of significant services, contracts (or terminations), acquisitions, strategic alliances or actions/news concerning our major clients;
regulatory developments in Russia, Ukraine, Poland, Romania or elsewhere;
litigation involving our company, our general industry or both;
additions or departures of key personnel;
investors' general perception of us, including any perception of misuse of sensitive information;
changes in general economic, industry and market conditions;
our ability to forecast revenue and control our costs; and
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.

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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 83.2% of the voting power of our outstanding shares as of June 30, 2018.
IBS Group Holding Limited, our controlling shareholder ("IBS Group") beneficially owns through its two wholly-owned subsidiaries 100.0% of our outstanding Class B ordinary shares and controls 83.2% of our voting power as of June 30, 2018. 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:
the composition of our board of directors;
approving or rejecting a legal merger, demerger or other business combination; and
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.
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.
We cannot predict the impact that a modification of our dual class share arrangement may have on our share price.

Our Class B ordinary shares - which currently grant their holders 83.2% of our voting power while they own 33.2% of our shares - convert into Class A ordinary shares on June 7, 2020, the seventh anniversary of the adoption of the Amended and Restated Memorandum and Articles of Association.  It is possible that this provision of our articles of association could be amended by our controlling shareholder in order to change the terms of when a conversion might otherwise occur.  We cannot predict whether such an action would be upheld as valid if challenged, nor the likelihood that such an action might be challenged, nor can we predict the impact such an action might have on our share price or on investor perceptions of our company.
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, FMR LLC and M&G Investment Management Limited who beneficially owned in the aggregate 61.2% of our Class A ordinary shares as of June 30, 2018, 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.

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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 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 Employees—C. Board Practices—Corporate governance practices." Accordingly, our shareholders may not be afforded the same rights as provided under the NYSE's corporate governance rules.
Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a controlled foreign corporation.

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be measured in part by the market value of our Class A ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company (a "PFIC") for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the Code). 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 PFIC for the fiscal year ended March 31, 2018, 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. As a result, it is not possible to determine whether we will be characterized as a PFIC for the taxable year ending March 31, 2019, or for any subsequent year, until we finalize our financial statements for that year. 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. Taxation-United States federal income taxation."

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Additionally, certain U.S. holders of our Class A ordinary shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a controlled foreign corporation (a "CFC") under Section 957(a) of the Code. Certain changes to the CFC constructive ownership rules under Section 958(b) of the Code introduced by the TCJA may cause one or more of our non-U.S. subsidiaries to be treated as CFCs, may also impact our CFC status, and may affect holders of our Class A ordinary shares that are United States shareholders. Generally, for U.S. shareholders that own 10% or more of the combined vote or combined value of our Class A ordinary shares, this may result in negative U.S. federal income tax consequences and these shareholders may be subject to certain reporting requirements with the U.S. Internal Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the U.S. tax consequences of acquiring, owning, or disposing our ordinary shares and the impact of the TCJA, especially the changes to the rules relating to CFCs.
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.
To maintain the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, we expect that we will need to continue enhancing existing, and implement new, financial reporting and management systems, procedures and controls to manage our business effectively and support our growth in the future. The process of evaluating our internal control over financial reporting requires an investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. Additionally, as part 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 identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404(a) or 404(b) of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion or issues an adverse opinion in its attestation as to the effectiveness of our internal control over financial reporting required by Section 404(b), investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our ordinary shares could be negatively affected. We could also become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources.
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.
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 independent directors. See "ITEM 6. Directors, Senior Management and Employees—C. Board Practices—Board Committees." We currently rely on this exemption to the extent necessary to permit Anatoly Karachinskiy, Glen Granovsky and Yulia Yukhadi to serve on our compensation committee, even though they do not satisfy NYSE's definition of an "independent director" for purposes of such committee service. 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.

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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.
Changing 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.
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

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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 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 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 Information—B. 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,

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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 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 Information—B. 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 tsahat 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.
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



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A.
History and Development of Luxoft
Luxoft Holding, Inc. was founded in March 2000 and incorporated as a company, limited by shares under the laws of the British Virgin Islands, on March 7, 2006. Over the past 18 years, the Company grew from an initial team of 20 employees to over 12,800 employees, across 42 cities and 21 countries, covering North America, Western and Eastern Europe, Latin America, and Southeast Asia. In June 2013, the shares were listed on the New York Stock Exchange ("NYSE") under the symbol "LXFT."
During the fiscal years ended March 31, 2017 and 2018, we completed a number of acquisitions, as discussed in further detail in "ITEM 5. Operating and Financial Review and Prospects—A. Operating Results—Acquisitions." 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, 2018, 2017 and 2016 we invested $55.2 million, $106.5 million and $32.7 million, respectively, of which $20.6 million, $19.6 million and $24.2 million, respectively, related to acquisitions of property and equipment and $34.2 million, $77.7 million and $3.5 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, 2019 and March 31, 2020 will be related to the expansion of our business and possible merger and acquisition transactions in Europe, Asia-Pacific ("APAC") and the United States. We currently anticipate our capital expenditures in the years ending March 31, 2019 and March 31, 2020 will be financed from cash generated from operations, our current cash position and currently available credit facilities.

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B.
Business Overview
Overview
Luxoft is a global provider of innovative IT services and technology solutions that deliver measurable business outcomes to multinational companies across a number of end markets. Our offerings encompass strategic consulting, custom software development services, and digital solution engineering. Luxoft delivers competitive advantage to customers by leveraging its deep multi-industry expertise in the financial services, automotive, communications, healthcare and life sciences, and other industries. Its managed delivery model is underpinned by a highly-educated workforce, allowing the company to continuously innovate upwards on the technology stack to meet evolving digital challenges.
Luxoft has more than 12,800 employees across 42 cities in 21 countries within five continents, with its operating headquarters office in Zug, Switzerland.
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-based applications, our proprietary products and/or standard system software and platforms, as well as implementation and maintenance. These solutions directly impact our clients' business outcomes through efficient delivery of continuous innovation. Through our services and solutions, we help our clients strengthen their competitive position through increased efficiency, cost optimization and productivity gains, and drive change through disruptive digital technologies that enhance end-user experience and shorten time-to-market.
We have developed a reputation and track record of delivering consistent, high-quality service and establishing long-term strategic relationships with many of our clients. We continue to increase our value proposition through advanced capabilities, an enhancement of our premium services, and a shift from traditional outsourcing to digital agendas. This includes expansion of our advisory, platform architecture selection and packaged software services, such as consulting and implementation of Murex, OpenLink, Avaloq, Qt Automotive, IBM BPM, Pivotal and PEGA, and enhanced proprietary platforms.
We utilize our deep industry and domain specific expertise to develop green field innovative software and to replace legacy IT ecosystems for our clients to improve their efficiency, competitiveness, core products, processes, and applications.
Our resources and management efforts are currently concentrated on three lines of business: Financial Services; Automotive and Transport; and Digital Enterprise. We are well positioned in these industries given companies have significant and growing demand for IT services and consider innovative and 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.
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, 2018, a significant portion of our sales was from Fortune Global 500 companies. During this period, 60.5% of sales were from clients located in Europe (including UK and Russia), 34.1% from clients in North America and 5.4% from clients in other geographies. Additionally, five out of our top ten clients were with us for five or more years.
Our engagements with clients are based on the implementation of transformational and managed services offerings. For these offerings, we assume full control of the project team, including the project manager, lead analyst and lead architect, and manage all facets of project 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 and capture deeper client loyalty while also strengthening barriers to entry for competition.
Our long-standing relationships with large multinational clients can lead to transformational engagements, where we 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 lowers development costs for our clients.

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We operate through an expansive and scalable global dedicated delivery model, creating a key competitive advantage, whereby we can meet our clients' diverse needs and provide a compelling value proposition. We provide our services and deliver our solutions from 37 cities with delivery centers located primarily in CEE, including Bulgaria, Poland, Romania, Russia, 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, India, 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 geographies—Europe and the United States—afford 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 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, 2018, we had 12,898 personnel of whom 10,844 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, 2018, we hired, on average, more than 500 IT professionals per month.
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 maturity of software development processes. We have also achieved TMMi Level 4 maturity level in quality management and testing.
As of March 31, 2018, we had over 280 active clients and over 54 high potential accounts ("HPA"). In aggregate, HPA accounts generated over $340 million in revenue during the year. We define HPAs as client accounts which, according to management's estimates, have potential to reach at least $5 million in recurring annual revenue within three years from inception and are capable of generating a three-year CAGR of at least 30%.
Industry background
IT services outsourcing and offshoring
For a multinational corporation to remain competitive and meet the increasingly diverse needs of its client base, it must have high-quality underlying IT architecture that keeps pace with constant technological evolution. It must also have access to high-quality IT talent at a competitive cost, which leads firms to rely on capabilities of IT outsourcing firms in lieu of high-cost local IT engineering talent. Multinational corporations continue to seek IT services providers that have industry-specific knowledge, global delivery capabilities, and the ability to manage dynamic, short development cycles with agility.  Furthermore, IT spending is becoming more aligned with companies' broader business strategies towards innovation and digital agendas.
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. 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 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. We provide a solution reflecting the combination of necessary components, such as proprietary IP, expert engineering and custom software development services, and selection and deployment of standard off-the shelf software. We actively enhance our premium services and end-to-end solutions to move outside of the traditional outsourcing space and add capabilities, such as consulting, in order to move up the value chain.
Trends of IT spend in our lines of business
Financial Services: The financial services industry is 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. Historically, we have been present in the less crowded and more non-discretionary Change the Bank (CTB) space, providing a wide array of services designed to achieve growth.
        In order to stay competitive in an evolving marketplace, financial institutions need to invest in their IT architecture and change many legacy business processes. 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.

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        We believe the following key trends drive financial institutions' IT spending: innovation in response to digital disruption, standardization and simplification of legacy systems, and ongoing regulatory and compliance challenges:
Innovation:  The financial services industry is driven by an ongoing necessity to innovate, especially with the recent digital transformation in the industry. Digital transformation provides new sources of revenue and a competitive advantage. Data-driven investment decisions, AI-powered productivity tools, Straight Through Processing (STP), automation, and other digital initiatives all work to create a streamlined client experience. Technologies such as big data, private cloud, various FinTech tools and products, UI/UX, as well as less immediate technologies, such as blockchain, machine learning, and grid computing, are becoming necessities in the modern financial services industry. These technologies require a drive towards off-the-shelf technology augmented by custom systems, creating a wealth of opportunity.
The massive proliferation of data acquisition enables advances in AI and a new paradigm in automation. Rules are not necessarily programmed into systems; Instead, systems are taught and identify patterns and make decisions with minimal human intervention. Machines can process data far quicker than humans, findings patterns and triggers. This enables companies to analyze more complex data and deliver faster, more accurate results, providing a better a chance of identifying profitable opportunities and avoiding unknown risks.
Simplification:  Banks have hundreds of applications but need to reduce the number of applications by sun-setting some legacy items. They have a dispersion of platforms with no centralized view by geography, product, or client. 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.
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, 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 regulations in the fiscal year ending March 31st, 2018 that required financial institutions to make changes to their systems were E.U.'s Markets in Financial Instruments Directive (MIFID II), Brexit, Securities Financing Transactions Regulation (SFTR), final minimum total loss-absorbing capacity (TLAC) standard, General Data Protection Regulation (GDPR) and PSD.
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 levels of automating the driving task, from ADAS (Advanced Driver Assistance System) to HAD (Highly-Automated Driving) to fully autonomous. 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 are 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.
Digital Enterprise: 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. Digitalization is becoming an important way to differentiate, become more efficient, acquire new customers, and improve our clients' output. Data is becoming a valuable source of intelligence, effective consumer targeting, and source for improvement of business outcomes. Our expertise in Internet of Things ("IoT"), Big Data, Data Analytics, Artificial Intelligence, Machine and Deep Learning ensures that we enable competitive differentiation for our clients across all verticals.
Automation and robotics are becoming important trends in retail, services, logistics, and even financial services. Below are examples of trends in various industry verticals where we are making a difference:

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Media, Telecommunications and Networks: 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.
Customers 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.
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 and 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. 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.
Travel and Aviation: New technologies and a 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 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. Additionally, there is interest in emerging technologies, such as Near Field Communication (NFC), and indoor positioning based on low-power consuming technologies, such as Bluetooth.
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.

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Energy and Utilities: With an aging energy distribution infrastructure and increased regulatory pressures to implement smart grid and demand response services, 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 a greater role in increasing effectiveness and enhancement of the oil and gas production process. The 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.
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 with higher education degrees in the areas of applied mathematics, physics and engineering.
The availability of human resources throughout the region, in particular in Ukraine, Russia, Poland, Romania, and Bulgaria allows providers to be as agile and scalable as necessary.
Ukraine. According to the July 2017 Gartner Report, Evaluate Offshore/Nearshore Countries for Outsourcing, Shared Services and Captives in EMEA, 2017," by Neil Barton, et.al., "Ukraine grew rapidly as a location of nearshore software development until 2014: The labor pool of programmers alone was estimated as 30,000 in 2015. Technical skills are excellent; English language skills are good; and labor rates remain very attractive, given current exchange rates". The report continues "most buyers of software development in Ukraine now do so through large system integrators headquartered in the West". Our engineering headcount as of March 31, 2018 in Ukraine amounted to 3,265 engineers.
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, 2018 in Russia amounted to 1,872 engineers. According to the July 17, 2017 Gartner report, "Evaluate Offshore/Nearshore Countries for Outsourcing, Shared Services and Captives in EMEA, 2017," by Neil Barton, et.al. (the "July 2017 Gartner Report"), "According to Russoft, Russia's software development and IT service export industry is worth $4 billion a year and grows at a 14% CAGR. Some 110,000 engineers currently work in the IT service industry, with around 60,000 STEM graduates entering the workforce each year. The Russian government continues to fund universities to perform at worldwide standards, and students continue to achieve excellent results in software development competitions. Around 75% of IT workers speak English, while 3% speak German. Moscow has the largest cluster of delivery centers. Lower rates can be found at secondary cities such as St. Petersburg, Novosibirsk, Nizhny Novgorod, Kazan, Yekaterinburg, Tomsk, Taganrog, Rostov-on-Don and Voronezh."
Poland. During fiscal year 2018, our engineering headcount in Poland was 1,741, a 3.7% decrease year over year. According to the July 2017 Gartner Report, "Poland was one of the first countries in Eastern Europe to build a nearshore service capability, and it remains one of the most successful. Over 900 delivery centers operate from the country, with 140,000 people working for service providers, and a further 70,000 working in captive and shared-service centers operated by multinational corporations. About 60% of the labor pool is in Krakow, Warsaw and Wroclaw. Secondary cities such as the Gdansk Tri-City and Katowice agglomerations are growing fast, and activity is now growing in Lodz, Poznan, Bydgoszcz, Rzeszow, Lublin and Szczecin. Gartner estimates that a software developer with two years of experience earns between $23,000 and $25,000. Labor inflation for IT workers is 3% to 5%, and labor attrition rates are between 12% and 18%."
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, 2018 in Romania amounted to 1,477. According to the July 2017 Gartner Report, "According to the Association of Business Service Leaders in Romania (ABSL), the country's IT service industry is worth over $2.5 billion and is expected to continue growing due to its labor costs and technical and language skills. 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-Napoca, 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, Italian 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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Bulgaria. Our engineering headcount in Bulgaria as of March 31, 2018 amounted to 170 engineers. According to the July 2017 Gartner Report, "Building on its legacy as a key hardware and software supplier to Russia, Bulgaria has become a major provider of technical skills within southeast Europe, with service exports now contributing over 3% of the country's economy. Despite relatively low numbers of staff, Bulgaria's service export industry is growing rapidly due its healthy economy, political stability and strong foreign language offerings. Supported by a business-friendly environment and a legislative base derived from its EU membership, Bulgaria is being used as an outsourcing destination by an increasing number of European and North American businesses."
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, 2018, we received 1.7 million PLN, or $0.5 million, in Poland and 0.1 million BGN, or $0.1 million, in Bulgaria. See more information on governmental programs and incentives in the "Government support for the IT industry in CEE" section.     
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.
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 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, 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 $9.5 million in the fiscal year ended March 31, 2017 and $11.8 million in the fiscal year ended March 31, 2018. 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.
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 49.3 million, or approximately $13.1 million at the exchange rate as of March 31, 2018, as stated in the business plan submitted by Luxoft Romania to the Romanian government.
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, 2018, we received a reimbursement under the grant in the amount of 0.1 million BGN or $0.1 million.
The Special Economic Zones ("SEZ") in Poland are areas in the country where investors may set-up a company and run their business under preferential conditions. These conditions include an exemption from the corporate income tax for companies in Poland. Our subsidiary in Poland conducts a part of its operational activities in the territory of Krakow SEZ. 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

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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.
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, 2018, we received a payment in the amount of 1.7 million PLN or $0.5 million. Also, in Poland the law provides for a personal income tax benefit in part of employment income provided by an application of a deemed cost deduction (but not greater than PLN 85,528 for each individual). Such benefit is available only for employees who, while performing their daily duties, are creating intellectual property with certain conditions. This deduction has resulted in the personal income tax savings of $4.1 million in the fiscal year ended March 31, 2017 and $4.6 million in the fiscal year ended March 31, 2018.
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 three lines of business that are technology- and data-intensive, that, we believe, present a large and growing market opportunity. To enhance our expertise further, 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 lines of business to address our clients' most pressing problems. We believe that our expertise and services offered within these verticals are superior to those of our competitors and serve as compelling differentiators for our customers.
Strong domain practices anchored within Digital Enterprise. 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 our Digital Enterprise'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. 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.
Long-term relationships with multinational clients. Our largest clients consist primarily of Fortune Global 500 companies. As of March 31, 2018, five out of our top ten clients have been with us for five or more years and we have experienced very low turnover in the past. Many of our large 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. We generally enter into multi-year master services agreements that encompass multiple stages of clients' IT development cycle. We leverage these relationships to develop a sophisticated understanding and extensive knowledge of the clients' businesses, aiming to become vendor-partners for a wide variety of their CTB IT needs, and thus providing higher quality services, better business outcomes and stronger 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 10,844 technically sophisticated IT professionals as of March 31, 2018. 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. 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 2018, our revenue per delivery engineer increased to $82.2 thousand as compared to $78.3 thousand for the fiscal year 2017.
Global delivery platform. Our secure delivery centers across 35 cities allow us to provide managed delivery and value added services for software development and innovative IT solutions. 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. 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.

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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 critical nature of engagements, reduces the risk that our clients will switch vendors and drives recurring revenue. We have been keeping, on average, approximately 84% of our engineering workforce located in offshore and nearshore delivery centers as of March 31, 2018, 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, 2018, 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.
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 three lines of business, we target HPAs having potential to reach at least $5M in recurring annual revenue and three year forward CAGR of at least 30% within three years of inception.
HPAs 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. 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 lines of business. 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 three lines of business. 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 line of business, 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. We opened delivery centers in Bangalore and Malaysia in order to expand our services within the growing APAC market. Additionally, we opened a new delivery center in Berlin in early 2018, the result of a strategic collaboration with a major German multinational automotive manufacturer. This has helped to attract new automotive talent for the software development of next-generation intelligent user experience.
Further, in Automotive and Transport line of business, 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 cockpit—for 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.
We also seek to expand our service offerings in all of our lines of business 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 and to continue to develop new technical expertise. We believe that our continued dedication to several key domain practices will result in substantial business 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

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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.
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 comparatively 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 opened delivery centers in Eindhoven, Berlin, Bangalore, and Tianjin. We plan to continue opening delivery centers in CEE, APAC, 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 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 September 27, 2017, we acquired Unafortis AG (subsequently renamed to Excelian Luxoft Financial Services AG), a Swiss-based wealth management consultancy specializing in Avaloq implementations and business consulting anchored in IT services. Avaloq is a provider of fully integrated banking software for the back, middle, and front office. With a team of in-depth experts dedicated to Avaloq-related services, Excelian Luxoft Financial Services AG is one of its leading implementation partners. This acquisition deepened our expertise in standardized software and enables our Financial Services line of business to target a growing global client base within the wealth management, private, and universal banking sectors.
On August 22, 2017, we acquired DerivIT, a Singapore-based financial services-focused technology consulting provider. DerivIT provides a unique blend of technology expertise, deep domain understanding and strong knowledge of leading platforms in credit and risk management and capital markets. This transaction cemented a strong foundation on which we have been building out delivery platform in APAC to service numerous high-potential clients in the region. In addition to helping us pursue new business opportunities in financial, automotive, telecom and other sectors in the region, this transaction also positioned us to better respond to interest on the part of a number of our existing global customers. Furthermore,we have recognized immediate cross-selling opportunities between derivIT and Excelian, our Financial Services line of business, due to a highly synergistic customer base and deep expertise in financial software platforms. After the acquisition, our delivery footprint, catering to enterprises located in Singapore, Australia, Hong Kong and the Middle East, also includes India, Malaysia, and China.
Recent Initiatives
During fiscal 2018 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, and acquisition of attractive HPAs.
As a result of our efforts, top ten account concentration 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, continued to build-out our vertically aligned offerings, and created a deeper and more diverse customer portfolio.
As of March 31, 2018, our on-shore headcount was approximately 14% of total delivery personnel.
We continue to limit our 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, 2018, our presence in Ukraine was 30% compared to 31% in the prior year. As of March 31, 2018, our presence in Russia was 17%, compared to 19% in the prior year. All other geographies have less than 25%

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of the overall engineering personnel, in-line with our mid-term target. We plan to continue reducing staff concentration in Ukraine by accelerated hiring in other regions. In addition, we plan to further expand our global delivery model in APAC and North America.
Our capabilities
Luxoft 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 capabilities and service offerings. Modern cutting edge technologies include Cloud, Internet of Things ("IoT"), Big Data / Data Analytics, Digital Experience, Mobile, and DevOps, which 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.
Luxoft focuses on the research and development of its respective subject matter and has a dedicated pool of IT professionals. The purpose is to contribute knowledge and expertise to generate better 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 our services and solutions will allow us to diversify our current business and access new clients, resulting in lowered customer and vertical revenue concentration.
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 the reason 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. 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.
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.
Blockchain

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Distributed Ledger Technologies (commonly known as blockchain) are recognized as a likely disrupter of business models across most industry eco-system. Over the last three years, Luxoft has invested resources into understanding and building our blockchain expertise.
Luxoft is a founding member of the Crypto Valley Association, established partners with Chain, R3 and Evernym, and one of six IT consulting and services companies with blockchain capabilities available to Amazon Web Services (AWS) users. We focus on enabling companies to adopt a blockchain strategy quickly and easily while engaging closely with stakeholders to ensure it delivers business value.
We have a long-term technology strategy which enables us to work with a customer to evaluate whether blockchain makes sense for the selected use-case. We then help clients pick and choose a solution that will deliver the highest value, whether that be the best individual platform or a combination of ledger technologies.
DevOps
The need for a defined DevOps focused center of excellence ("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 lines of business.
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 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.
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. Since our purchase of Radius Inc. in October 2014, we have continued to build out this domain practice and to advance our IoT offerings across all lines of business. We are advancing our intellectual property ("IP") and solutions portfolio using both internal resources as well as our marketing platform.
Mobility
Our mobility practice offers our clients full product life cycle 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 applications—such as enterprise dashboards, media monitoring systems, animated user guides, electronic document management, booking and reservation and home automation solutions—for the travel, financial services, retail, energy, automotive and other industries.
Our services
Our software development service offerings consist of three primary categories:

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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, 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 three lines of business, 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.
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:
Our platforms
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.
Qt Automotive Suite. The Qt Automotive Suite was released in 2016, and we continue to build upon the suite and progress its development. Qt empowers developers to create stunning user experience and ease the integration toward the system backend. For frontend QML enables developers to composite beautiful UI screens by combining UI elements in a storytelling way. Qt also supports backend developers to mix QML with C++ components to fit the backend logic or Integration toward micro services through IPC. While Qt Automotive suite complements the solution by providing multi-process and multi-app architecture through Qt Wayland Compositor and Qt Application Manager.

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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.
Symtavision Tools. We provide software tools and consulting services focused on scheduling analysis, architecture optimization, and timing verification. These tools and services are for planning, optimizing, and verifying embedded, real-time systems within all modern automobiles. Symtavision tools, building on our proprietary intellectual property, focus on increasingly important software integration and timing analysis in the chassis, powertrain, body, and driver assistance domains as well as in-vehicle networking. As the automotive industry increasingly adopts and implements Advance Driver Assisted Systems (ADAS) and Driver Automation, the demand for tooling and expertise around real-time systems design and development creates a growing opportunity. Symtavision Timing Analysis Tools are market-leading for scheduling analysis, architecture optimization, and timing verification for ECUs and software integration, embedded networks, communication and distributed embedded systems (E/E).
Pelux. Pelux is a base development platform designed to provide the building blocks for automotive software development projects, which is now available on Open Source. PELUX 1.0 was developed from Luxoft’s PELUX software suite, which for over four years helped carmakers and tier one suppliers to develop converged automotive systems for infotainment, autonomous driving, body control and communication. PELUX 1.0 leverages well known open source projects such as Linux, Yocto and GENIVI in order to provide a base development platform. The platform is complemented with project blueprints and documentation that provides a state of the art development experience in embedded Linux device creation, tailored specifically to automotive needs. Luxoft Automotive’s PELUX team leverages Open Source, Agile ways of working and smart integration concepts enabling carmakers to build next generation in-vehicle infotainment systems and accelerate HMI development projects.
ARP. ARP is Luxoft’s Automotive Hardware Reference Platform developed together with Intel. It is uniquely positioned to drive co-creation of smart solutions in the following areas: Designing for advanced prototyping of Digital Cockpit platforms; Capable of driving a vehicle’s instrument cluster, head unit display, cockpit occupant monitoring and driver assistance systems simultaneously; On-board FPGA - powerful expansion capabilities for advanced I/O requirements; Interchangeable SoC modules (supporting both Intel & ARM architectures) via open SMARC 2.0 standard; Fully supported by PELUX / Qt Automotive Suite software stacks. With ARP, Luxoft demonstrates the capabilities of the Silicon and Technology Vendor Practice as well as thought leadership through a unique technology knowledge portfolio that cultivates both the understanding of silicon, sensor, display, AI technologies as well as the relation between human and machine.
Our Lines of Business
We have developed specific expertise and grown our business in three lines of business:
Financial Services;
Automotive and Transport; and
Digital Enterprise.
The following table sets forth our sales by line of business, both by dollar amount and as a percentage of our sales for the period indicated:
 
Years ended March 31,
 
2018
 
2017
 
2016
 
Amount in
thousands
 
% of
Sales
 
Amount in
thousands
 
% of
Sales
 
Amount in
thousands
 
% of
Sales
Lines of Business
 
 
 
 
 
 
 
 
 
 
 
Financial services
$
514,313

 
56.7
%
 
$
483,801

 
61.6
%
 
$
446,138

 
68.6
%
Automotive and transport
158,430

 
17.5
 
110,839

 
14.0
 
78,698

 
12.0
Digital enterprise
234,023

 
25.8
 
190,921

 
24.0
 
125,916

 
19.0
Total
$
906,766

 
100
%
 
$
785,561

 
100
%
 
$
650,752

 
100
%
Financial Services
Financial Services is our largest line of business. 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

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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 narrowing margins and elevated regulatory and compliance requirements. As a result, they are deploying standard software solutions for core banking, enterprise trading and risk management. Our acquisition of Excelian, completed in February 2015, helped us enter this segment of the market. We help our clients to execute highly complex, business critical, technology transformation projects with precision and competitive pricing. Our Financial Services line of business provides an array of consulting, solutions, and system integration services to investment banks, commercial banks, asset managers, wealth managers and private banks world-wide. We have partnered with major platform providers in this space, such as Murex, Calypso, and Avaloq 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.
During fiscal year 2018, we continued to gain market share within the capital markets industry, particularly within wealth management, due to our unique combination of technology skill and deep understanding of the financial services market. We are also beginning to expand into Tier 2 banks, which have a high growth potential. Over the last 14 years, we transformed from a CEE software outsourcing partner to a global consultancy, operating in four regional markets (CEE, Western Europe, North America, Asia Pacific). We've also expanded our delivery hubs from a local base in Europe to locations in North America and APAC. We will continue to focus our efforts on building a diversified business portfolio in the growing segments of the financial services market.
Automotive and Transport
In our Automotive & Transport line of business, 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. We enable the mobility revolution by co-creating smart solutions that empower our clients to make the transition to sustainable mobility. We have deep industry and technology know-how and the global delivery scale that allows us to partner independently with OEMs and tier-one suppliers.
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 several platforms and products 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 Qt Automotive, Pelux, Populus, Allview. We are an active member of different industry associations focused on developing unified standards for Automotive systems, such as Autosar and 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-vehicle 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 Autonomous Driving space as well as enhanced our offering within Digital Cockpit space through the acquisition of Pelagicore, to complement our existing expertise in the IVI area. We fully integrated Pelagicore in fiscal year 2018 and continue to serve a large number of blue-chip corporations, enjoying 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. Our end-to-end offering for our clients is covering four major areas:
Autonomous Driving - we offer system architecture and network design, along with large-scale integration of autonomous technologies for Tier-1 suppliers. We additionally enable faster and higher quality software development with our technology & expertise-driven services in the areas of timing analysis and automated data annotation.
Digital Cockpit - we engineer solutions enabling carmakers to develop user experiences that are natural extensions of consumers digital lifestyles
Connected Mobility - we enable intelligent services in the cloud and connect the vehicle to core business processes. For example, remote diagnostics 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.
Silicon Vendors and Technology Partners - we collaborate with a variety of silicon vendors and technology partners in order to offer offer silicon software development and consulting services. These services include board support packages, Linux driver and related hardware enablement, and compiler and tooling support.

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Digital Enterprise
Our Digital Enterprise line of business supports digital transformation and capabilities across a wide variety of industries:
Media, Telecommunications, & Networks
Today's telecom & wireless carriers and Multiple System Operators (MSOs) face 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 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 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 Virtualization (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 variety 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 Pharmaceuticals
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 Group, Inc. 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).
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.
Travel and Aviation
The travel 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

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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 expertise 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 & Utilities
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 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 Field Module (Mobile FM):    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 can 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 delivery centers

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With a presence in 21 countries, offices in 42 cities and delivery centers in 37 cities, we service multinational organizations through our global dedicated delivery model that comprises an optimized mix of nearshore, offshore and on-site delivery capabilities.
During the fiscal year ended March 31, 2018, we expanded our delivery network organically and via acquisitions. This is in line with our strategy for continued growth and diversification of global sales and delivery. In order to meet increasing demand for our engineering services and deep domain expertise, we opened new delivery centers in Eindhoven, Berlin, Bangalore, and Tianjin.
 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 84% of our delivery personnel offshore as of March 31, 2018, 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 gives our clients a choice between managing their work through offshore, near-shore and on-site delivery or any combination thereof.
As of March 31, 2018, we employed 1,872 IT professionals in Russia, representing approximately 17% 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, 2018, we employed 3,265 IT professionals in Ukraine, representing approximately 30% 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, 2018, we employed 1,477 IT professionals in Romania, representing approximately 14% 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, 2018, we employed 1,741 IT professionals in Poland, representing approximately 16% 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."
As of March 31, 2018, we employed 978 IT professionals in North America, representing approximately 9% of our IT professionals. This number should continue to grow as we increase our focus on this market.
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 9001:2015, 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.
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;

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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, automotive and transport, healthcare and life sciences, travel and aviation, technology, telecom, energy, and other industries. We have longstanding relationships with many of our clients, and five 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, 2018, we derived 56.7%, 17.5% and 25.8% of our sales of services from clients operating in the financial services, automotive and transport, and digital enterprise 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 Information—D. Risk Factors—Risks related to our business and our industry—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."
In the fiscal year ended March 31, 2018, our ten largest clients accounted for 57.6% of our sales. This includes both Deutsche Bank and UBS, whose relationships are described below. 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 Information—D. Risk Factors—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 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 17.6% of our sales in the fiscal year ended March 31, 2018. Our outsourcing master service agreement with Deutsche Bank (the "DB Agreement") will be up for renewal on December 1, 2020. Typically we renew such client agreements upon their expiration 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.
UBS is our second largest client which accounted for 17.1% of our total sales in the fiscal year ended March 31, 2018. The Global Framework Agreement (the «UBS GFA») signed with UBS in 2010 is up for renewal on September 30, 2019. Typically we renew such client agreements upon their expiration in the ordinary course of business. Either party is entitled to unilaterally terminate the UBS GFA for common business reasons such as: a material breach not cured within 30 days including non-payment of fees by UBS; in case of insolvency and/or winding-up procedure; entering into credit arrangements or court applications to protect assets from creditors. UBS can terminate the UBS GFA, among other reasons, in case of: our breach of the security and confidentiality undertakings; our staff turnover exceeding a set threshold level during 6 months; a change of control event. Additionally, UBS can terminate the UBS GFA and any service order for convenience upon a 60 day written notice. For further discussion, see "ITEM 3. Key Information—D. Risk Factors—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 could materially adversely affect our results of operations."
For the past several years, we have been building up a portfolio of HPAs. These are accounts that we believe have recurring annual revenue potential of at least $5 million within three years from the inception, and are capable of generating a three-year CAGR of at least 30%. Currently we have 55 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).
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:

52


 
 
Fiscal years ended March 31,
 
 
2018
 
2017
 
2016
 
 
Amount
 
% of
Sales
 
Amount
 
% of
Sales
 
Amount
 
% of
Sales
Client concentration
 
 
 
 
 
 
 
 
 
 
 
 
Top five clients
 
$
429,553

 
47.4
%
 
$
429,200

 
54.6
%
 
$
422,504

 
64.9
%
Top ten clients
 
$
522,218

 
57.6
%
 
$
518,496

 
66.0
%
 
$
479,632

 
73.7
%
We define the geography in which our clients' revenues originate based on the location of the clients' key decision-makers.
The following table sets forth sales by client location as a percentage of our sales for the periods indicated:
 
Fiscal years ended March 31,
 
2018
 
2017
 
2016
 
Amount
in thousands
 
% of
Sales
 
Amount
in thousands
 
% of
Sales
 
Amount
in thousands
 
% of
Sales
North America
$
308,770

 
34.1
%
 
$
266,429

 
33.9
%
 
$
209,582

 
32.2
%
Europe (excl. UK)
295,777

 
32.6
 
235,522

 
30.0
 
157,517

 
24.2
UK
200,024

 
22.1
 
213,547

 
27.2
 
223,567

 
34.4
Russia
52,200

 
5.8
 
36,905

 
4.7
 
32,748

 
5.0
APAC
42,618

 
4.7
 
26,585

 
3.4
 
24,689

 
3.8
Other
7,377

 
0.7
 
6,573

 
0.8
 
2,649

 
0.4
Total
$
906,766

 
100
%
 
$
785,561

 
100
%
 
$
650,752

 
100
%
The following table sets forth the percentage of our sales by age of accounts for the periods presented:
 
Fiscal years ended
March 31,
 
2018
 
2017
 
2016
Age of Account
 
 
 
 
 
New
11.3
%
 
10.0
%
 
3.9
%
More than 1 year
8.1
%
 
15.1
%
 
13.3
%
More than 3 years
21.6
%
 
5.5
%
 
7.9
%
More than 5 years
59.0
%
 
69.0
%
 
74.7
%
Non-core sales

 
0.4
%
 
0.2
%
Sales and marketing
Our B2B (business to business) marketing and sales teams are organized by industries and located in London, Stuttgart, New York and Kirkland. The teams are focused on positioning Luxoft brands and offerings in key markets, growing brand awareness, and driving leads. In addition, we have an Employer Branding division that is focused on positioning Luxoft as an employer of choice in key markets where we hire talent and driving candidates to our recruitment pipeline. Our sales and marketing teams focus on expanding service offerings with existing clients and targeting new clients through subject matter technical experts responsible for business development. As part of our focus on increasing sales capabilities, we continue to invest in our sales organization. We have been increasing our number of client-facing practice - and line of business-focused senior staff who are located in key geographies (such as the United Kingdom and the United States). These client-facing representatives manage relationships with new and emerging clients.
Further, we continue to increase the presence of on-site senior technology specialists who work with our clients internal IT teams.They provide process transformation consulting and aid internal IT process optimization, intended to generate cost savings to these clients.
Our strategy for winning new business includes:
Organic growth and expansion.  This includes 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.

53



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, 2018 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 IndexTM.

Gartner, "Market Guide for Blockchain Consulting and Proof-of-Concept Development Services" authored by David Groombridge et al. and published on March 20, 2018.
Gartner, "Competitive Landscape: Agile and DevOps Services" authored by Patrick Sullivan et al. and published on January 28, 2018.
Gartner, "Market Guide for Agile and DevOps Services" authored by Neil Barton et al. and published on October 31, 2017.
Gartner, "IoT: Think Big, Start Small, Move Fast" authored by Denise Rueb et al. and published on October 15, 2017.
Gartner, "Competitive Landscape: Mobile Application Testing Services" authored by Susanne Matson and published on August 25, 2017.
Gartner, "Hype Cycle for Personal Technologies, 2017" authored by Brian Blau and published on August 1, 2017.
Gartner, "Hype Cycle for Connected Vehicles and Smart Mobility, 2017" authored by Martin Birkner et al. and published on July 28, 2017.
Gartner, "Hype Cycle for Drones and Mobile Robots, 2017" authored by Gerald von Roy et al. and published on July 28, 2017.
Gartner, "Hype Cycle for Hybrid Infrastructure Services, 2017" authored by Christine Tenneson et al. and published on July 26, 2017.
Gartner, "Hype Cycle for Managing Operational Technology, 2017" authored by Kristian Steenstrup et al. and published on July 25, 2017.
Gartner, “Hype Cycle for Artificial Intelligence, 2017" authored by Kenneth F. Brant et al. and published on July 24, 2017.
Gartner, "Hype Cycle for the Internet of Things, 2017" authored by Alfonso Velosa, et al. and published on July 24, 2017.
Gartner, "Hype Cycle for Mobile Device Technologies, 2017" authored by Tuong Huy Nguyen, et al. and published on July 21, 2017.
Gartner, "Hype Cycle for Application Services, 2017" authored by Kris Doering and published on July 20, 2017.
Gartner, "Market Guide for Mobile Application Testing Services" authored by Susan Matson, et al and published on June 28, 2017.
Gartner, "Market Share Analysis: Consulting Services, Worldwide, 2016" authored by Dean Blackmore, et al. and published on May 30, 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.
Training and development

54


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 UK, two in Germany, two in the United States, one in Vietnam, one in Malaysia, one in Mexico and one in India conduct more than 3,000 training sessions per year and host over 15,800 specialists (including our personnel and external students) for general training courses and client-specific education programs. We typically conduct between 200 and 300 resident training sessions per month with an average of 10 students per group, and fulfill nearly 1800 additional training requests per month via our e-learning system via LuxTalent and E-learning library.
During fiscal 2018, we completed 260 four-month foreign language training requests for English, Polish, and German. 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, 2018, we had a dedicated human resources staff of 526 people including 250 recruiters and researchers. During the fiscal year ended March 31, 2018, we hired on average more than 500 IT professionals each month.
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 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 Information—D. Risk Factors—Risks related to our business and our industry—We operate in a highly competitive environment and may not be able to compete successfully."

55


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 theGeneva Convention 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. See "ITEM 3. Key Information—D. Risk Factors—Risks related to our business and our industry—We 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 Information—D. Risk Factors" for more information on regulation material to our business, financial condition and results of operations:
"—Risks Relating to Our Business and Our Industry—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."
"—Risks Relating to Our Business and Our Industry—Our effective tax rate could be adversely affected by a number of factors."
"—Risks Relating to Our Business and Our Industry - changes in the tax system in CEE and Asian countries or court practice, or unforeseen application of existing rules could adversely affect our financial condition and results of operations."
"—Risks Relating to Our Business and Our Industry - we may encounter difficulties in obtaining withholding income tax benefits envisaged by the Cypriot double tax treaties for dividends distributed from our subsidiaries."
"—Risks Relating to Our Business and Our Industry - ongoing corporate tax reform in Switzerland may result in abolition of privileged tax regime and increase in our effective tax rate."
"—Risks Relating to Our Business and Our Industry - we may incur additional liabilities if we fail to comply with UK Corporate Criminal Offense rules."
"—Risks Relating to Our Business and Our Industry - globally mobile employees may potentially create additional tax liabilities for us in different jurisdictions."
"—Risks Relating to Our Business and Our Industry - our business may be materially adversely affected by tax reform in the United States."
"—Risks related to conducting business in CEE countries—loss of taxation benefits related to our employment-related taxes that are enjoyed in CEE countries could have a negative impact on our operating results and profitability."
"—Risks related to conducting business in CEE countries—we may be exposed to additional taxation in Ukraine related to the activities of our non-Ukrainian subsidiaries or Ukrainian independent contractors."
"—Risks related to conducting business in CEE countries— our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a controlled foreign corporation."

56


We also benefit from tax incentives promulgated by certain Eastern European governments. See "ITEM 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Income 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 Prospects—A. Operating Results—Quarterly results of operations and seasonality."


57


C.
Organizational Structure

As of March 31, 2018, 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
%
Excelian Luxoft Financial Services (Switzerland) AG
Switzerland
 
100.00
%
Symtavision GmbH
Germany
 
100.00
%
Luxoft Luxembourg S.a.r.l
Luxembourg
 
100.00
%
Luxoft Sweden (previously Pelagicore AB)
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
Switzerland
 
100.00
%
Luxoft Global Operations GmbH
Switzerland
 
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, Autonomous Non-commercial Organization
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
%
Luxoft India, LLP
India
 
100.00
%
Oftlux AB (previously Luxoft Sweeden AB)
Sweden
 
100.00
%
Luxoft Malaysia Sdn Bhd
Malaysia
 
100.00
%
DerivIT Solutions Pte., Ltd.
Hong Kong
 
100.00
%
DerivIT Solutions Pte., Ltd.
Singapore
 
100.00
%
DerivIT Solutions Private Ltd.
India
 
98.00
%
Deriv Information Technology (Tianjin), Ltd.
China
 
100.00
%
DerivIT Solutions SDN BHD
Malaysia
 
100.00
%
SME—Science Management and Engineering AG
Germany
 
100.00
%



58


D.
Property, Plants and Equipment
Facilities
We are currently present in 42 cities with offices across twenty-one country, totaling 134,026 square meters of office space. As of March 31, 2018, we had the capacity for 14,705 workplaces, which provides us with a 37% 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, 2018, excluding all on-site personnel and any personnel on long-term leave.
Location
Total
square
meters
 
Personnel
 
Principal Use
Eastern Europe:
 
 
 
 
 
Kiev, Ukraine
27,790

 
2,524

 
Delivery center
Moscow, Russia
10,949

 
1,007

 
Delivery center; sales, marketing & other admin
Odessa, Ukraine
9,506

 
776

 
Delivery center
St. Petersburg, Russia
7,951

 
685

 
Delivery center
Omsk, Russia
6,128

 
466

 
Delivery center
Dnipro, Ukraine
3,172

 
308

 
Delivery center
Nizhniy Novgorod, Russia
611

 
32

 
Delivery center
Dubna, Russia
562

 
59

 
Delivery center
Central Europe:
 
 
 
 
 
Bucharest, Romania
21,817

 
1,237

 
Delivery center
Krakow, Poland
11,359

 
632

 
Delivery center
Wroclaw, Poland
5,466

 
243

 
Delivery center
Sofia, Bulgaria
3,360

 
192

 
Delivery center
Tricity, Poland
3,261

 
16

 
Delivery center
Warsaw, Poland
1,697

 
86

 
Delivery center
Western Europe:
 
 
 
 
 
Munich, Germany
2,279

 
73

 
Delivery center; sales, marketing & other admin
Boeblingen, Germany
2,166

 
69

 
Delivery center
London, United Kingdom
1,446

 
114

 
Delivery center; sales, marketing & other admin
Leinfelden-Echterdingen (Stuttgart), Germany
1,421

 
109

 
Delivery center; sales, marketing & other admin
Gothenberg, Sweden
1,219

 
43

 
Delivery center
Braunschweig, Germany
1,205

 
33

 
Delivery center; sales, marketing & other admin
Zug, Switzerland
943

 
27

 
Operational headquarters
Berlin, Germany
510

 
66

 
Delivery center
Welwyn Garden City, Hertfordshire, United Kingdom
322

 
14

 
Delivery center; sales, marketing & other admin
Frankfurt am Main, Germany
135

 
3

 
Delivery center
Ruesselsheim, Germany
88

 

 
Delivery center
Nicosia, Cyprus
84

 
1

 
Sales, marketing & other admin
Eindhoven, Netherlands
41

 

 
Delivery center
Strassen, Luxembourg
5

 

 
Delivery center

59


Location
Total
square
meters
 
Personnel
 
Principal Use
North America:
 
 
 
 
 
Guadalajara, Mexico
1,345

 
179

 
Delivery center
Kirkland (Seattle), WA, USA
1,188

 
74

 
Delivery center; sales, marketing & other admin
Jersey City, NJ, USA
962

 
33

 
Delivery center; sales, marketing & other admin
New York, NY, USA
438

 
21

 
Delivery center; sales, marketing & other admin
Detroit, MI, USA
282

 
5

 
Delivery center; sales, marketing & other admin
Los Angeles, California, USA
154

 

 
Sales, marketing & other admin
Toronto, Canada
15

 

 
Sales, marketing & other admin
Eden Prairie (Minneapolis), Minnesota, USA
11

 

 
Sales, marketing & other admin
APAC:
 
 
 
 
 
Bangalore, India
1,492

 
48

 
Delivery center
Ho Chi Minh City, Vietnam
1,146

 
41

 
Delivery center
Penang, Malaysia
915

 
40

 
Delivery center; sales, marketing & other admin
Singapore, Singapore
398

 
27

 
Delivery center; sales, marketing & other admin
Sydney, Australia
148

 
9

 
Delivery center
Tianjin, China
40

 
6

 
Delivery center
Other:
 
 
 
 
 
Dubai, United Arab Emirates

 
1

 
Delivery center
Total
134,026

 
9,299

 
 
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 Information—A. 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 Information—D. 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.

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

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through provisions in a number of our contracts that permit us to increase prices based on inflation and related indicators.

Demand for IT services in the United States and Western Europe: The demand for IT services 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 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 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, 2018, 56.7% of our sales were derived from clients in the financial services industry. We believe that revenue concentration in the financial services industry will continue decreasing 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 line of business. Furthermore, we have a high degree of client concentration and our top five clients represented an aggregate of 47.4% of our sales in the fiscal year ended March 31, 2018. 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 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. In addition, we have experienced very strong growth in our Automotive Line of Business and expect continued growth among these clients. In fact, in Fiscal Year 2018, 3 of our Top 10 Clients were in the Automotive industry. As we continue to build our solutions and capitalize on new markets, our overall client concentration should continue to fall.

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 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 Information—D. Risk Factors—The 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 Information—D. Risk Factors—Risks related to our business and our industry—Fluctuations 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

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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 until December 31, 2023 with clarity on further prolongation of this tax benefit.

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 75% of profits. It is expected that this privileged taxation of foreign profits will be abolished from approx. 2020.

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, 2018, we participated in government grants programs in Romania, Poland, Bulgaria, Mexico and Malaysia. The programs require certain investments in creation and maintaining new workplaces as well as certain capital expenditure during certain periods of up to year 2021. As a result of fulfilling the programs' requirements, in the fiscal year ended March 31, 2018 we either received or were guaranteed further receipt of five government grants in the total amount of $1.8 million; in the fiscal year ended March 31, 2017 we received five government grants in the total amount of $3.8 million.
Acquisitions
During the fiscal years ended March 31, 2018 and 2017 we completed a number of acquisitions that allowed the Company to expand the existing lines of business, 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 Unafortis AG (Excelian Luxoft Financial Services (Switzerland) AG)
On September 27, 2017, Luxoft Global Operations GmbH, a wholly owned subsidiary of the Company, acquired 100% of the registered shares of Unafortis AG (subsequently renamed to Excelian Luxoft Financial Services AG) in consideration of: (i) $16.3 million paid in cash upon closing, (ii) $1.0 million to be paid in cash upon achievement of certain strategic milestones by the Group’s business unit into which Excelian Luxoft Financial Services will be integrated, and (iii) a series of deferred cash payments to be made to the sellers, contingent upon the achievement of certain financial performance milestones for the period from October 1, 2017 through March 31, 2020 up to a maximum of $28.0 million. As of March 31, 2018, the fair value of the contingent consideration was $1.0 million.
Excelian Luxoft Financial Services AG is a Swiss-based wealth management consultancy specializing in Avaloq implementations and business consulting anchored in IT services. Avaloq is a provider of fully integrated banking software for the back, middle, and front office.
Acquisition of DerivIT Solutions Pte Ltd.
On August 22, 2017, Luxoft International Ltd, a wholly owned subsidiary of the Company, acquired DerivIT Solutions Private Limited. DerivIT Solutions Private Limited is a Singapore-based financial services-focused technology consulting company. The initial consideration paid for 98% of the outstanding shares of DerivIT was $18.7 million. $1.5 million was deposited in an escrow for funding indemnity claims of the sellers. Further, if certain conditions are satisfied, the sellers will be paid an amount equivalent to $4.1 million, subject to certain adjustments, towards the final consideration for the sale and purchase of 98% of the outstanding shares. The sellers will be entitled to additional cash payments for the 2% of the outstanding shares which shall be contingent upon the achievement of certain financial performance milestones by DerivIT for the period from April 1, 2017 through March 31, 2018. As of March 31, 2018, the fair value of the contingent consideration was $3.1 million.

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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 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. Subsequently additional non-financial milestones were introduced to the purchase agreement and $4.0 million was released from escrow with a corresponding decrease in contingent consideration. As of March 31, 2018, the fair value of the contingent consideration was $1.2 million and the amount of current payable related to IntroPro performance up to date was $3.7 million which was fully paid in April 2018.
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 conditions till the end of 2017 calendar year. As of March 31, 2018 all of Luxoft's additional obligations to the sellers were fully settled in amount of $5.3 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 included 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 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, 2018, the fair value of contingent consideration was nil and the amount of current payable was $325.
Certain comprehensive income statement line items
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, line of business, client concentration and contract type.

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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 Luxoft—B. Business Overview—Clients."
Lines of business
While financial services have historically been our largest line of business, we have deep expertise in each of the lines of business we serve. We target three lines of business within which we have maintained a relatively stable revenue mix during the periods under review. For information on sales by lines of business, see "ITEM 4. Information About Luxoft—B. Business Overview—Our lines of business."
Client concentration
As a percentage of total sales, revenue generated by our top five clients declined from 54.6% for the fiscal year ended March 31, 2017, to 47.4% in the fiscal year ended March 31, 2018. Revenue generated by our top ten clients for the same periods decreased from 66.0% to 57.6% 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 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 Luxoft—B. Business Overview—Clients."
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,
 
2018
 
2017