EPAM Systems Inc (EPAM) — Q1 2016 Earnings Call Transcript

Thank you, and good morning, everyone. By now you should have received your copy of the earnings release for the company's first quarter 2016 results. If you have not, the copy is available in the Investors section on our website at epam.com. The speakers on today's call are Arkadiy Dobkin, CEO and President; and Anthony Conte, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Arkadiy?

Thank you, Lilya, and thanks everyone for joining us today. We've had a strong quarter and a solid start for 2016 with Q1 revenue of $264 million. This represents 32% year-over-year growth and 34.5% constant currency growth and puts us well on our quest to achieving our financial performance goals for 2016. In addition, it's important to know that our organic growth for the quarter was 24% and 26% in constant currency. Our quarterly results are above guidance, and we do believe are driven by our ability to address strong demand for new advanced technologies and digital services across all our key markets. During our call last quarter, and then during the Investor Day when many of you joined us in New York City, I referred to the main market drivers, our key challenges, and the ways we are addressing or plan to address those. So today while Anthony will provide a detailed update on our financial performance, I would like just to summarize one more time the main trends in client demand and how we are shaping our services to take advantage of significant opportunities that we see in the market for firms like EPAM. So let's start from markets, customer spend in new clients. First of all and very simply, we see continuous emphasis from existing and prospective customers on partners who can help them deliver differentiated business solutions, which allow better competition in their respective markets. It doesn't mean competing just with the traditional or historical competitors. But in many cases with new types of technology-driven players, sometimes very well established like Google and sometimes with completely unknown startups. In many cases this need for differentiated products is driven by digital transformation programs, but in many cases as well, the demand might be coming from the downstream necessity to modernize core technology platforms in response to competitive disruption or sometimes regulatory or compliance mandates. As a result, the broader set of services includes traditional applications, but in addition digital touchpoint creation, digital business strategy, process and service design engagements, back-end refactoring, and a number of related as-a-service offerings and finally an aggregation of all of the above. Platform build-ups and their implementations, including heavy-duty custom development and complex integration and overall orchestration efforts across many sophisticated and best-in-class components of those platforms. In addition, we also see customers beginning their efforts and initiatives involving such key emerging trends like the Internet of Things, virtual and augmented reality, and Smart Software components and platforms. In most of those areas, our initial product and engineering heritage gives us an advantage over traditional solution providers, especially in organizations where there is a desire to eliminate or significantly reduce the reliance on legacy systems or when heavy legacy modernization is required. All of this translates into the opportunity for us to serve significantly broader markets than we would have captured even a few years ago with a more diverse portfolio of services that are very tightly integrated into what we call hybrid type of engagements. Overall, we are benefiting from an upward trend on the size of programs we are engaging. And while there is pricing pressure evident as a result of the overall global lower inflationary environment, we are pleased to say that we are negating those challenges well. We believe that for those of you who were able to join our Investor Day in March, all the above trends were well illustrated by three clients' stories presented during the event. Think about it. Wolters Kluwer is a client, which we started to serve more than 10 years ago. That was our traditional outsourced product development client. Today, the information and publishing business is at the center of the digital transformation story, and they feel a lot of competitive pressure. We really started to change ourselves three to four years ago to help them address those new challenges. We've brought different EPAM capabilities together and added strong innovative thinking to help solve some very critical problems and as a result, differentiated EPAM significantly from a majority of other vendors serving Wolters Kluwer today. Another client presenting was Liberty Global, the largest global company in the world. We have worked for them just a bit over three years. Working for them, we've been able to combine agency and engineering capabilities and deliver a number of innovative applications and as a result, also to differentiate ourselves strongly from competitors. Finally, Human Longevity, Inc., only about a year in relationship, and probably too early to claim any overall success yet. But still we put together a team of designers, subject matter experts from various countries, VR and AR developers, and in addition to strong software engineering capabilities, proved that we can make it all work together and deliver the first version of the product in record time. All are among our top 20 or 30 clients today and all driven by the same market pressure to engage with their own clients faster, better, and stronger. We are growing with them just because we demonstrated in a very practical way those hybrid capabilities in which we invested heavily during the last several years and in which we plan to continue investing in the future. That is probably why despite overall market pressure in financial services, there is still demand for our services in this vertical. We are also seeing significant acceleration in demand for digital services in traditional banks and also the rise in demand for the next-generation payment models and related technologies, both from customer expectations, as well as the regulatory requirements point of view. In support of this trend, we've seen increased traction with the key new and existing customers in the financial services market. Sometimes with a need to accelerate on volume for some engagement from zero to 100 engineers just in one quarter. We are sharing that to address specifically regarding financial services business, based on the kind of remarks we're getting from you. But beyond financial services, across our main geographies in Europe and North America, Q1 for us was marked by significant uptick in the number of new digital engagements, seven in total, with some of those being very promising to potentially large multi-year relationships, specifically around e-commerce and digital marketing platforms. For example, for Everson Everywhere in the U.K. and for Amway across the continents. In terms of our go-to-market positioning, we are pleased to see the increased visibility our growing capabilities are driving. Our recognition among market-leading independent research agencies, including Forrester, Gartner, Zinnov, and some others has increased significantly, positioning us as a new type of service provider. In Q1, we were covered in 11 industry analyst reports focusing on a range of areas, from business intelligence to SAP core technologies, to service design and customer experience, and to B2B commerce services. We've also seen recognition of our unique value proposition for companies looking to take engineering into the age of digital transformation. Just in April of 2016, EPAM was recognized by Forrester as a leader in the digital product and platform engineering wave. They cited us as being the company which exhibited the strongest grasp and execution of digital platform engineering services of all the vendors evaluated. All that is translating to an increased pipeline of opportunities and we hope to see these new deals, as well as the larger sized deals to accelerate as we move into the year. At the same time, to keep the level of expectation and target, I would like to state that even with increased recognition and number of recent awards, we are still very much in the beginning of our journey. Our focus continues to be on building and deploying hybrid capabilities and integrated teams better and on making sure that our strong customer delivery track record continues to be our main driver of value. This brings us to another key area we tried to cover during Investor Day, balance, scale, hiring. From an end market perspective, we continue to face a very competitive global environment as we position EPAM as an employer of choice in all EPAM key locations across the globe. While this challenge is part of the overall competitive talent environment, we believe that EPAM is well positioned to not only hire but also to train and deploy multi-disciplinary teams. To this end, we continue our focused investment program in training events and professional development for our entire global employee base. Previously, and during the Investor Day, we have shared some examples of these investments in training and global collaboration platforms we developed internally. Interestingly, just recently we hosted, utilizing such investments, our Global Information Technology Week event that engaged over half of EPAM's total employee base and featured 400 strategic technology and people development sessions shared across 23 countries and 75 cities. In regards to this quarter, I am happy to share that we are performing well across the board on talent acquisition targets, with total delivery personnel reaching 17,150 employees at the end of Q1. We continue to see strong hiring metrics in key European markets, and this translates into better support for faster engagement ramp-ups and gives us the scale needed to bring larger near-shore engagements. With that, I will turn to Anthony to provide more details on our financial results and Q2 guidance.

Thank you, Ark, and good morning everyone. We turned in a strong performance in the first quarter and our key highlight is still revenue growth. Revenue closed at $264.5 million, 32.2% over the first quarter of last year and 1.6% over Q4 2015. As a reminder, Q1 is typically our slowest quarter from a sequential growth perspective due to CIS holidays in January, a short month in February, and the beginning of a new budget season for most customers, causing a slow ramp-up in Q1. Currency still remains a part of our story. We saw about $4.5 million of year-over-year headwinds, making our constant currency growth rate 34.5%. Organically, revenue grew year-over-year 24.2% and 26.5% in constant currency. Growth remains very well distributed across all verticals, with all verticals turning in over 25% growth year-over-year. Geographically, North America grew 45% and 29% organically; Europe was up 19% and APAC up 14%. We are encouraged by the return of double-digit growth in CIS, which has struggled the past several years and currently represents only 3.4% of revenue. It has grown 15% over Q1 2015 and 36% in constant currency. Turning now to profitability, GAAP income from operations increased 32.9% year-over-year to represent 11.5% of revenue in the quarter. Our non-GAAP income from operations for the quarter, after all adjustments, increased 28.6% over the prior year to $3 million, representing 16.3% of revenue. Our effective tax rate for the quarter came in at 21%. And for the quarter, we generated $0.72 of non-GAAP EPS, $0.02 above the top end of our guidance, and $0.45 of GAAP EPS, based on approximately 52.9 million diluted shares outstanding. I want to take some time to dive a bit deeper into our non-GAAP net income and EPS figures. As many of you know and have discussed with me in the past, the adjustments between GAAP and non-GAAP are not tax affected. Based on these discussions and the growth that we have seen in those adjustments over the past several years, we've elected to make a change in our reporting and begin reflecting the tax impact. For Q1 2016, the tax effect was $3.1 million on non-GAAP net income and $0.06 on non-GAAP diluted EPS, making Q1 2016 tax-affected non-GAAP net income $34.7 million and non-GAAP diluted EPS of $0.66. This compares to Q1 2015 tax effect of $4.6 million, resulting in non-GAAP net income of $26.5 million and non-GAAP diluted EPS of $0.52. The two main components of non-GAAP adjustments are first, stock compensation, which has increased over the past several years due to stock price appreciation, headcount growth, and stock used in M&A, which is also tied to employment. The second main adjustment to our GAAP figures is amortization of intangibles and other related acquisition costs. We completed eight acquisitions over the past four years, which has caused the spike in this figure. If you would like to see the historical impact of the tax-affected numbers, you can find the quarterly and annual details in our factsheet on the website. Turning to our cash flow and balance sheet; cash from operations for Q1 was $10.9 million, 58% above Q1 2015 of $6.9 million and $1 million below Q4 2015. Overall, Q1 cash flows were strong. Uncollected revenue, the combination of AR and unbilled, did continue to cause a slight drag, but not significant and not anything we are concerned about. However, since there has been a consistent area of questions from investors and analysts, I'll dive a bit deeper into a few key components of the cash flow. Let's start with our DSO. As you know, we've experienced consistent growth over 20% since IPO. So as we become larger, we become a more significant expense to our customers, which makes us a larger part of their procurement and cash flow strategy, which equals longer payment terms. This quarter, our DSO is 58, and our unbilled DSO is 94, higher than in the past. We are aware of the impact and have already taken steps to address this by adding more focus on our collections group and re-staffing some of the key financial personnel. A few other key points I would like to further highlight around our billing cycle, which directly impacts the DSO and how you compare those to our peers. You need to remember that the majority of our revenue is T&M, significantly higher than many of our peers, meaning that roughly 85% of the last month's revenue will be in unbilled at the end of any month. This is a short-term impact and usually resolves itself by the end of the year. Lastly, working capital continues to grow, ending 41% above Q1 2015 and 11% above Q4 2015. So while I understand there are some concerns in the marketplace around our balance sheet and DSO, our cash position, operating cash flows, and working capital all continue to grow and strengthen. Turning now to our guidance. We are reiterating our full-year 2016 guidance of year-over-year revenue growth of at least 26%, net of currency headwinds estimated at 3%, meaning constant currency growth of 29%. The full-year GAAP diluted EPS will be at least $2.05, with an effective tax rate of approximately 21%. Under our old method, the full-year non-GAAP diluted EPS was estimated to be at least $3.20, but once adjusted for the full-year tax effect, which we expect to be $12.6 million, the non-GAAP diluted EPS will be at least $2.97. The full-year weighted average share count is expected to be approximately 53.6 million diluted shares outstanding. And now for the second quarter. Revenues for the second quarter will be at least $280 million, representing a growth rate of at least 28.6% over second quarter 2015 revenue. This includes 3% anticipated currency headwinds, meaning constant currency growth of at least 31%. Second quarter 2016 GAAP diluted EPS will be at least $0.46. Second quarter 2016 non-GAAP diluted EPS is expected to be at least $0.70 after adjusting for the tax effect and based on estimated second quarter 2016 weighted average of 53.2 million diluted shares. With that, I would like to turn the call back to the operator for Q&A.

Good morning, guys. I wanted to ask some questions about the seven new digital engagements that you mentioned in the prepared remarks. It sounded like at least some number of those could become sizable. I wanted to get a sense of whether these engagements are with new or existing clients and could some of these end up creating a new top 10 client for you guys?

Those seven engagements we mentioned are all new clients. So whether they will translate into really large relationships, it's too early to say. But, as I mentioned, a couple of them definitely have the potential. No, these engagements are not impacting our top 10.

Not yet, okay. Understood. And then, just on the pricing front, I know you'd mentioned that there is some pricing pressure, just given macro conditions around the world, but have you changed any of the pricing expectations that are baked into your full-year guidance, because from what I recall, I think you've taken a little bit less pricing expectation for 2016 versus what your actual experience had been in the last couple of years?

Yes. At this point, we have the same assumptions as last time in projecting our numbers.

Okay. And then just last for me, on the margin front, I think we're at 16.3% on the non-GAAP operating margins for the quarter. Obviously, it's still within your range, but kind of the lower part of your range. Do you think this will be a trough level for the year? Were there any factors that impacted that metric a bit, and do you expect it to pick up a little bit during the balance of 2016?

Yes, we anticipate seeing some improvement as the year progresses. Remember that the first quarter is typically our tightest for margins, and revenue doesn't usually increase significantly compared to the fourth quarter. Utilization has decreased slightly compared to both the first quarter of last year and the fourth quarter, primarily due to the short month of February and holidays in January. We typically experience margin pressure in the first quarter, and this year it was about 0.4%, slightly more than usual, but nothing that raises major concerns. We expect to see an increase as we continue through the year.

Okay. Sounds good. We will see you guys next week. Thank you.

Great. Take care.

Hi guys, good morning. Good job on the top line growth. Anthony, I appreciate the incremental explanations on balance sheet and cash flow. One thing I wanted to confirm on Q2 guidance is, the Q2 guidance for EPS does already exclude the tax effect. Does it not? So that would be roughly $0.06?

Correct. Yes, it's looking like $0.06, $0.07 of the impact in Q2, so it's already baked into my guidance number.

Okay. So, when I look at that versus the consensus that's out there, that did not have that impact, you're basically guiding inline-ish. Got it?

Inline-ish, yes, exactly.

Yes. Okay. So, question on this client concentration. I know from time to time we do get a lot of questions about your top two clients and how they're doing, particularly being financial services focused. Could you dive in deeper to the extent possible into sort of the growth potential of those?

Well, first off, our top two clients are no longer in financial services. UBS remains our top client, but Barclays is not number two anymore. They've maintained their position while others have experienced growth around them. This situation has changed. Regarding the outlook for financial services, we don’t have any new information to share. It remains consistent with what we previously communicated. Although there has been considerable news surrounding financial services in the market, we are not experiencing any impact or changes in our numbers at this time.

Ashwin, I would say that we have three other large banks which became clients during the last 18 to 24 months and we've grown with all of them at this point. So basically, we're starting from a pretty low point, but at this specific time all of them are growing fast.

Yes. The question likely arises from the expectation in financial services regarding same-store sales not being high, starting from a low base is positive. However, there is pricing pressure and vendor consolidation that might be more noticeable; any additional comments on that would be helpful.

I don't think we can add additional colors on what you are asking. So at this point we continue to grow in this sector. I think for a significant portion of what we do there it's driven by these digital type of engagements, which we see a very good level of demand. So, again, we clearly cannot guarantee that any hiccups are not going to happen in the future, but at this point we cannot share the same sentiments as some other players.

Okay. Understood. Last real quick question. Anthony, cash flow expectation for FY 2016, I might have missed that; could you provide the range or number?

Cash flow from operations is consistent with what I shared at the last call. Basically, I'm expecting cash flow from operations to be at the levels it was at in 2014. We took a little bit of a dip last year, down to about $75 million. I expect to get it up over $100 million for fiscal 2016.

Thanks. Just two quick questions. First, just on the mechanics of the adjustments, Anthony, as you get to the new methodology on the stock comp or on the non-GAAP adjustments. Should we just really take the 21% and closely apply it to the entire adjustment?

You could do that, David. Unfortunately, not all of the adjustments provide a tax benefit. I calculated this by reflecting the actual tax deduction we receive, which has varied over the years. I believe the net benefit for the current year was approximately 22% to 23% from the adjustments. Historical data will show different figures, and we hope to achieve greater benefits moving forward. I will keep you updated as we progress. For the full year, the benefit is around $12.6 million, translating to about $2.5 million to $2.7 million per quarter in tax effects through 2016.

Okay. Thanks. And has there been any change to the stock comp for the year with any acquisition realization comp?

The stock comp charge will fluctuate because we do have liability treatment for a few of the acquisitions, plus this year's grant included some cash-settled RSUs which also have a liability treatment. So there will be a little bit of volatility, but that was baked into my stock comp guidance. So we've made some estimations on where the stock price will go and how that would be reflected. So if you use the guidance I gave you for stock comp at the beginning of the year, we're still holding to that guidance.

And is that about $53 million this year, that sounds all right?

It was $55 million, was about $14 million per quarter for Q2, Q3, and Q4. We saw a little bit of a break in Q1. It came in about $1.6 million lower than we expected in Q1, primarily because of where the stock price went in the mark-to-market. I'm not changing my forward look, simply because I want to maintain some of that in there for future volatility. I'm optimistic about our stock price obviously. So I want to keep the $14 million per quarter going out. So it will probably still be $53 million to $55 million is where I put it right now.

Got it. I know you addressed this a moment ago in your prepared remarks about the unbilled. Is the vast majority of the change due to the fact that the billed receivables decreased significantly? However, the unbilled increased, so the total remains roughly the same. Is this simply a result of the quarter's cutoff and the amount of time and materials that you carry forward into April, or were there other factors in the March quarter that contributed to this increase?

Well, the time and materials aspect is definitely a part of it. My Days Sales Outstanding did increase a bit. There are a few customers with longer payment cycles at the beginning of the year that are extending payments and affecting my unbilled and accounts receivable for the quarter. We are actively working to reduce those. I am not overly concerned, but we have reassessed our efforts in collections within finance to manage that Days Sales Outstanding and address the issues that caused the increase this quarter.

Got it. Does any of this relate to the acquisition of Alliance? Are their billing cycles and collection cycles different from yours?

No, Alliance really didn't have too much of an impact; it was relatively small compared to our AR and unbilled. So it was really just some longer payment cycles, kind of as I discussed last time when I was trying to get kind of our hands around that and manage those payment cycles down a little bit and then a couple of just clients who had some administrative delays and caused a little bit of a drag on my unbilled this quarter.

Okay, Arkadiy, could you provide some insight on whether the recent expansion of your infrastructure in India through the Alliance acquisition is resulting in any changes in the sourcing of content for the EPAM client base? How is that situation developing?

Well, it's still very early. It's practically only one quarter in play. At the same time, we have several engagements where EPAM India is starting to serve EPAM clients. So there are already preparations, and there are opportunities in the pre-sales state right now. So, it's started to happen as we expected, but again, it's very, very volatile to mention. But the reason why we brought India to the EPAM map was that we very clearly indicated that global clients need different types of services in different time zones and this is starting to benefit us.

Very good. Thank you.

This is Ben in for Steve this morning. Thanks for taking my question. I just wondered if you could make kind of a general comment on what you're seeing from the more traditional IT vendors trying to move into higher level digital offerings, just how much success they are having? Thanks.

Let me consider this briefly, as it relates to the growing competition not just from our traditional rivals. If I answer broadly, yes, we are observing competition emerging from various sectors, particularly from those who previously did not engage in complex deals. After certain acquisitions and investments, they are attempting to enter this space. However, at this level of digitalization, the market remains extensive and the demand is high, with significant quality expectations for delivery. Therefore, I don’t believe we can say that the market has significantly changed for us. In many instances, the strategy involves traditional system integrators or integration companies adopting agency-type capabilities, or traditional agencies incorporating new technology, in an effort to compete for intricate deals that necessitate not only creativity but also robust engineering skills. From our perspective, we still maintain an advantage, and it is challenging to achieve this through mere acquisitions. We are merging creativity with IT services, rather than focusing on software development or engineering services. While many are trying to enter this arena and are progressing in that direction, I don’t think it’s a crucial market yet.

Okay. And then one more question on financial services. Relatively speaking, how much growth is coming from kind of the new digital initiatives versus legacy work and compliance as well?

So, as we mentioned, it is a significant growth, but we do not provide any split or specific number. So I don't think I can answer precisely to the question. Specifically, this is very difficult to answer precisely, because it's some type of engagement, which is triggering other type of engagements, and the separation line is very wide. Some companies very clearly separate this. It's interesting to know how it's happening. But we're not ready yet for that.

Hey, guys. Hi, Arkadiy and Anthony. Couple of questions. Arkadiy, you talked about Alliance, why you acquired them, locations, the diversifications and all that stuff. Can you chat a little bit and tell us how that integration is coming by and how do you plan to position Alliance from a kind of quality work and the nature of work in the bigger context of EPAM?

Yes. That's what I chatted already about. I don't simply go into position EPAM India very differently from EPAM in general. There are some specific areas of expertise, like we mentioned when we announced the deal about very strong test capabilities and specifically test automation capabilities. Clearly, that's improving our competence in this area. But in general, also we were sharing that we were looking for a kind of company which would be in line with type of services EPAM provided. And from this point of view, we are not going to separate it too much from the type of work again. Would separation could be? Yes, there is convenience from time zones, from locations, and again, a couple of specialization areas, but it would be a very integrated part of EPAM global delivery.

Now in the past Arkadiy, you've talked about converging the billing rates of Alliance with EPAM. What is your latest thoughts on that? Do you feel comfortable seeing Alliance billing rates pretty much in line with EPAM?

That's still clearly we are talking about three months, four months working together; it is too early. So you understand that it's impossible to change rates for existing clients. We are working together on changing kind of these assumptions and bringing different capabilities together, but I don't think it's going to be so up within one or two or three quarters.

Very good. And Anthony, you talked about a lot of work that you're doing on the DSOs front; you gave a very good explanation of the puts and takes. But when we step back and look at the big picture, 12 months from now, 24 months from now, are we talking about a new norm at these levels or are we talking about the trend which is going to be downward moving or slightly upward moving? How should we be looking at a kind of big picture over the next couple of years?

Well, absolutely, the Q1 numbers are not going to be a new trend. The Q1 numbers are too high as we have a couple specific instances that are dragging my DSO in Q1 up, higher than I want it to be. I think that I'm still targeting as kind of a new norm to keep my AR DSO kind of in the mid 50s, call it 55-ish. And from a long-term perspective, on the unbilled DSO, I'd like to get that down to kind of the mid 80s is where I'd like to see it. So right now we closed at 94 DSO; that's much too high. But we are definitely seeing a new norm in the function of kind of extended terms where our customers are pushing us for longer payment cycles, as we become a bigger part of their expense budgets and working through their procurement channels, they're pushing us a lot more on that, where they haven't in the past. So basically, it's becoming more of a balancing act for myself, which is why we are putting more efforts around kind of collection processes and finance processes to manage that, to make sure it stays in line, but we can also make sure we work with our customers accordingly.

Great. And congrats on the continued execution.

Hi. I had two questions, I'll just ask them both upfront. The first one is on the trends in the top customers. So when I look at the fact sheet, going back for a while now, it looks like the customers outside of the top 10 are actually growing faster than the rest. So I guess my question is, because you don't actually break that out, I guess you can kind of solve for it mathematically, but what is the growth outside of the top 10 and how sustainable is that? When do you expect some refresh in the top 10 customers? That's the first question. Then on the cash flow, Anthony, I was just wondering if there's any opportunity to go to intra-quarter billing. I know that's tough, but because your explanation in your prepared remarks was about the T&M waterfall each month. So can you accelerate the billing at all to bring down the unbilled DSO? So those are my two about the top 10 trajectory and then the unbilled. Thank you.

The dynamics among our top 10 customers are interesting because every year, one or two customers change in that group. If you look at the first quarter this year, you'll see that our customer concentrations have decreased. This is a result of the two acquisitions we made last year, which brought in some reputable names, but only one of them entered our top 20, while none made it to the top 10. Essentially, the Alliance and NavArts acquisitions contributed good revenue, but that revenue primarily came from accounts outside the top 10 and top 20. Consequently, we see a decrease in our concentrations for the top 5 and top 10, while those outside this group are increasing. Additionally, historically, our growth has been largely driven by new customers outside of the top 20, which ramp up year over year, contributing to a balanced growth. Our top accounts continue to grow, but the accounts outside the top 10 tend to grow even faster because they are typically new clients ramping up quicker than those in the top 10. This dynamic is evident in our first quarter this year.

Yes, it does. Thank you.

So on the second one, as far as billing, it's something I've thought about. I assume you mean intra-month, not intra-quarter. We do monthly billing right now, and with T&M, to break it down into multiple bills in one month, quite frankly I think would fall flat with our customers. Most of our customers will actually push us for one single consolidated bill each month for, in a lot of cases, covering most of the projects, except for some of the bigger accounts where you have multiple divisions. So I think if I went to them and said, I need to break it, and I am now going to send you two bills a month, that would fall a little bit flat. And I'm not sure would help a whole lot, because it would actually create two separate billing cycles a month, whereas right now we're doing one process and we're getting it out. If we break it into two, that could actually create additional problems and probably not keep our customers very happy, because they have to deal with it on their side.

Got it. Thank you for the color.

Yes. Hi, good morning. Just one quick question. Can you please talk about your plans for the healthcare vertical in 2016 and beyond if you can share some details on that?

It's a fairly open-ended question. I mean, our plans, is there something specific you'd like us to dive into? I mean, obviously, we're looking to continue to grow and expand in that segment. But, is there some specific area that you wanted to dive into?

I mean, are you looking to grow more into the payer and the service providers' area? Which areas will be your focus basically?

The total size of the life science and healthcare area right now is close to around $100 million. So, a bigger portion of this sitting inside of the life science segment with large pharma companies where we have very interesting differentiating expertise around R&D IT. What we're trying to do, we're trying to benefit from this expertise but extend across more general markets and in markets and sales iterations of pharma companies with our offerings. But also trying to find a good overlay between life sciences and healthcare providers, on both providers and payers sides, like with all growing demand for engagement of patients and engagement of the doctors, which in our belief, creating certain opportunities how to utilize our skills in 4,000 digital engagement platforms, which we build up, working with consumer media and business information companies and have the appliances to this industry segment. So that's what we're trying to do.

My second question, any update on your plans to slowly grow your sales capabilities?

We are gradually expanding our sales capabilities. I believe we currently have a sufficiently sized team. Additionally, this aligns closely with our clients' management accounts and industry expert groups. Therefore, I think we are making good progress in this area.

Sure. And then two final questions. One on wage level impact, the timing, and if you could quantify it as well, both onsite and offshore. And then how the attrition rates are trending in your business?

Attrition, right now, for Q1, was actually down a little bit, about 8% versus 10% that we saw last year. Wage inflation is looking like it's going to be in that 4% to 5% range as well. Most of that will hit us in Q2. From a timing perspective, that's almost seeing a big uptick.

Anthony, is that a blended number? If you could break it down between onsite and offshore, that will be very helpful.

No, we don't typically break down wage inflation between the two locations. We look at it really at a blended rate as well.

Sure. Thank you.

Good morning. Referring back to the inquiries about your top five to ten clients, we have noticed a slowdown. Was the decline in performance from Barclays and UBS anticipated? In other words, could this situation affect your ability to meet expectations this year, considering the significant decrease we've observed? Thank you.

I didn't say there was a deceleration in the top accounts. I mentioned that the accounts outside of the top 10 and top 20 are growing at a faster rate. We're not seeing any deceleration in our top accounts. UBS is not necessarily slowing down. Barclays has been flat, but that has been the case for two years now, so it's not much of a change. We're not indicating that there is a deceleration in our top accounts; rather, we're highlighting that the accounts outside are experiencing faster growth, primarily due to new customers coming in and ramping up quickly. This is more about the dynamics of size than about traction.

So, should we expect UBS to grow in line with we've seen in Q1 this year or are we going to see again numbers below that in terms of growth? And again, this is a question that we've been getting from investors this morning, was that the slowdown that we're seeing versus the rest of the business was expected or not?

We don't provide specific customer guidance. UBS is growing, and we're continuing to work with them extensively, seeing ongoing traction with that account. Given the size of the account, UBS has larger numbers now. We have been growing quite aggressively with them over several years. The trend suggests they will continue to grow with us, generally in line with company expectations. However, I can't provide specific growth guidance for UBS.

All right. And then, Ark, you mentioned three new accounts in financial services that you kind of picked up, and they're ramping. Can we get some more color on that? Are they U.S.-based, are they European base, etc.?

I mentioned that it's during the last 24 months we have three potentially large clients, it's a European bank, but some of them with a very light global footprint as well.

That's fine. Last question about CIS, can you talk a bit about what's driving some of that growth? Is it new accounts, is this more a function of stabilization of what you're seeing there? Thanks.

I think it has reached a relatively low base, so from this perspective, it's stabilizing. The ruble situation is also somewhat beneficial. Between these two factors, there is a degree of firmness, but it still represents a very small footprint at this time. As a result, even one or two mid-sized deals can significantly impact growth in the region. Therefore, I wouldn't place too much emphasis on this right now.

Got it. Thank you.

Hi. I was wondering, would you say that demand has actually accelerated given the seven new deals that you talked about and are all those clients new to the digital engagements?

I often mention that we're still a small player in this market, even though we have a run rate of over $1 billion. While seven new deals are definitely beneficial for us, I don’t think we can claim any overall market acceleration based on this decision. That answers your question. What was the second question?

Were all the clients new to digital?

Not all of them are new. Can you specify more? Are you asking if these clients have never done digital projects before or if they are all coming to us because of digital, or is it a mix?

Yes, are they working with a different digital provider and moved over to us, or are they new to digital altogether?

It's a combination of all of this. Some of them are moving to us from competitors, some of them with new initiatives, and for some of them, it's a very new initiative. Some of them have already good experience. So fixed assets and no fixed assets. So, all of the play.

Got it. Okay. And then regarding Europe in general, maybe you could just talk about your growth expectations for some of your European clients, particularly given some of the macro climate things that we've seen in the news?

I mean, our expectations, we don't really give, again, guidance by region, but we expect kind of all our regions to grow in line with the guidance that we've given. So we don't really provide any specific geographic guidance, but we remain optimistic on Europe, as well as North America.

And it's difficult to say that it's easier to predict what's happening in Europe versus North America right now, especially in North America as well for U.S. and Canada, and nothing is perfect right now anyway.

Got it. Okay. And then, the pricing pressure that was kind of cited earlier in the call, where was that pricing pressure coming from exactly?

I don't think we alluded to any pricing pressure. I think we're just saying we're not seeing price upticks as we've seen in the past year. So we're still seeing some improvement on our pricing; it is just not as optimistic, because it's partially impacted.

I think I mentioned something along those lines earlier, regarding the general statement you were asking about. There are overall concerns and potential macroeconomic pressures in Europe and North America, especially considering the recent developments in Europe and the U.S. election campaign. These factors can create additional pressure on nearly all clients. However, despite these challenges, our focus on a specific segment of the market is not really affecting us. That was my point, and I apologize if it was unclear.

I understand. So, essentially what you're saying is that you're receiving the price increases, but you're not seeing anything beyond what you would normally expect.

At least mitigation this result is impacting our pricing situation.

Got it. Okay. Thank you.

Thank you everybody for participating today. Again, it was a good quarter in our view, and we're looking forward to talking to you in three months. Thank you very much.