EPAM Systems Inc (EPAM) — Q1 2020 Earnings Call Transcript

Thank you, Operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's first quarter 2020 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Ark Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Thank you, David, and good morning, everyone. I hope that all of you are staying safe and healthy during this global crisis, and I want to thank you for joining us. While it has been only three months since we shared our 2019 results and provided our somewhat expected 20%-plus annualized growth outlook for 2020, the COVID-19 pandemic has made it clear that everything we thought we knew then has changed significantly. The impact we are seeing all over the world is immediate, serious, and localized for each and every one of us and for our clients. More importantly, we believe that we are far from the end of this event. In fact, according to many, we are somewhere near the end of just the first period of disruption. While we understand that significant uncertainty is with us for some time, we want to give you perspective on how EPAM is adapting to this new reality and where we think we might be going in the near future. Since January, we've been responding to the COVID-19 crisis and its impacts in our APAC region. To our benefit, we were able to take advantage of substantial work done over the past years to put in place realistic actions for business continuity as well as investments in our internal platforms, which enabled us to support truly agile global delivery environments, including readiness for remote workplaces and enhanced productivity measurements. Because of these efforts, and combined with early learnings from our APAC experiences in January and February, already in March, we were able to move nearly all of EPAM to a productive and safe work-from-home environment practically in a matter of days. This transition, which represented a significant effort, was noticed by many of our clients for its speed and reliability of service continuity. I wanted to share my deep appreciation to the thousands of EPAMers who are doing everything possible to support each other, to our customers for trusting us with their most critical issues, and to our communities around the world, which we are supporting constantly through various means for fighting the pandemic on the front lines. The health of our people continues to be a top priority for all of us during this time. With that in mind, let me switch to our Q1 performance and then cover some of the changes we are making to support customers as we navigate this challenging environment and end with how we see the forces shaping the next few quarters of demand before turning the call over to Jason. First of all, I am pleased to share that we delivered stronger-than-expected first quarter results with revenues of $651 million, representing 26% in constant currency growth. Despite some early COVID-19 reactions in APAC and the first global pandemic impacts in March, Q1 came in $9 million higher than our initial guidance, underscoring the value of our diverse and high-quality portfolio and our ability to continue providing relevant and mission-critical services to our clients. Q1 also marked EPAM's 37th consecutive quarter of 20%-plus organic growth, the rate of growth we plan to return to post-crisis. Starting from the end of Q1, and through the current quarter, the effect of the coronavirus on our customers has been significant and wide-ranging, with more than one-third of our portfolio experiencing some form of revenue impact. Some industries have encountered never-before-seen disruption in their end markets. Customers in our travel and consumer verticals have taken varied serious steps to protect their people and to ensure continued liquidity and viability of their businesses. We believe that we may see various impacts as the crisis continues to unfold across other market segments as well. It is important to note that across our portfolio, while discussions about managing costs during the crisis are taking place, many customers still continue to move forward with programs or, in some cases, have chosen to accelerate the pace of their digital transformation to support radically changed demands for how they engage and serve their clients. We have supported some of these changes in a remarkably short period, from virtually shutting down brick-and-mortar operations for a major retailer and the move to pure-play online commerce to the massive scaled infrastructure and demand required to support virtual entertainment events for a major gaming platform. Throughout the past several months, we have been certain that the pandemic's pace and scale have taken EPAM into new territory, from the challenges of shifting our own way of thinking and doing things to really key directions in our offerings, ranging from how we imagine new digital platforms to what it means to be cloud-first. To date, our success in managing the disruption has been due to our ability to leverage our product engineering heritage and expertise and to push ourselves to move and adapt even faster. Internally, this means a more serious push to break down silos towards increased investments into knowledge management and collaboration, productivity platforms, and establishing new, faster processes that enable our teams to address challenges more seamlessly and productively. Supported by all the investment in our network and security infrastructure, much of which has been stress-tested by our own hybrid delivery centers over the past years, we continue to develop new ways of working and helping our customers respond to the crisis now. All these demands for continued operations and faster, more reliable service offerings bring us back to our top priority as an organization: to be ready for the post-crisis time. That is to retain, find, attract and develop our top talent. By continuing to invest in our delivery, collaboration, education, and community platform and focusing on our people, we are fulfilling a critical aspect of current and future demand for what will be an increasingly digital world. Now I want to say a few words about the outlook for our industry segment and for EPAM, specifically. As most of you know, the digital service segment in which we operate was generally seen as a high-growth market, and it is. Unfortunately, in the current environment, it is nearly impossible to count on previous business-as-usual trends and prior period assumptions to establish near-term models. This is why today we are relying on very different and often real-time indicators and signals, first reviewing daily the changes occurring across our specific market and delivery geographies, industries, and individual accounts. We are also looking at market trends in general, competitors' disclosures, and industry and financial market analyst projections. For example, we looked into financial modeling across publicly traded companies and saw that the projected revenue ranges for many of them just for the current Q2 of 2020 could vary significantly, sometimes up to 20%. This is just another confirmation of how unpredictable the situation is. Just three to four weeks back, we didn’t think we would be able to guide even for the second quarter. But today, we are more comfortable and ready to provide a range for our Q2 results, and Jason will share those details shortly. At the same time, we still think it is extremely challenging to say with acceptable confidence what would be happening in Q3, as we are seeing high volatility in client behavior. At this point, we are open to all types of scenarios, including another sequential revenue decline. That's why we decided not to provide guidance for the whole of 2020 at this time. Our key priorities right now are to continue to protect our people and our financial position as well as to invest continuously into our core capabilities and platforms to be better prepared for the comeback. While these actions may have a temporary impact on our profitability, we are confident in our ability to reclaim our leading position in the turnaround. In our view, now more than ever, the fundamental case for digital product and platform engineering services, combined with the ability to bring integrated consulting on the front end, is very much intact. Our proven ability to adapt ourselves and our company to a new operating environment in such a short time has given us the confidence to say that EPAM will emerge from this challenging time a more value- and result-driven company and continue growing in a post-pandemic environment, with our expected 20%-plus growth rate. With that, let me hand the call over to Jason.

Thank you, Ark, and good morning, everyone. I'll start with our first quarter financial highlights, follow with industry vertical performance, and then touch on a few operational metrics, ending with thoughts for Q2. Revenue for Q1 came in at $651.4 million, a year-over-year growth of 24.9% on a reported basis or 26% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.1%. Q1 revenue was higher than expected due to a greater-than-planned level of availability across our client teams, along with stronger performance from a few of our acquired companies. During the quarter, we delivered consistent growth across most industry verticals. Business information and media, which in Q1 became our largest industry vertical, posted growth of 46%. Life sciences and healthcare grew 26.4% in the quarter, reflecting a tougher year-over-year comparison given the robust performance in Q1 2019. Software and Hi-Tech grew 21.9% in the quarter. Financial services delivered 16.2% growth. Travel and consumer grew 14.6%. Our emerging vertical delivered 30.3% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 59.9% of our Q1 revenues, grew 23.1% year-over-year. Europe, representing 34.2% of our Q1 revenues, grew 28.6% year-over-year or 30% in constant currency. CIS, representing 3.8% of our Q1 revenues, grew 36.8% year-over-year and 45.8% in constant currency. Finally, APAC grew 4.7% and now represents 2.1% of our revenues. In the first quarter, growth in our top 20 clients was 30.5%, and growth outside our top 20 clients was 21% compared to the same quarter last year. Now moving down the income statement, our GAAP gross margin for the quarter was 34.9% compared to 33.9% in Q1 of last year. Non-GAAP gross margin for the quarter was 35.5% compared to 36.3% for the same quarter last year. GAAP SG&A was 19.2% of revenue compared to 19.5% in Q1 of last year. Non-GAAP SG&A came in at 17.6% of revenue compared to 17.7% in the same period last year. GAAP income from operations was $87.5 million or 13.4% of revenue in the quarter compared to $64.7 million or 12.4% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 11.3%, which includes a lower-than-expected level of excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits, was 22.8%. Diluted earnings per share on a GAAP basis was $1.47. Non-GAAP EPS was $1.43, reflecting a 14.4% increase over the same quarter in 2019. In Q1, there were approximately 58.1 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q1 was $63.3 million compared to a negative $0.2 million in the same quarter for 2019. Free cash flow was $34.2 million compared to negative $13.6 million in the same quarter last year, resulting in a 41.2% conversion of adjusted net income. As a reminder, our cash flow in Q1 is impacted by payments related to our annual variable compensation programs, a portion of which will be paid in Q2. EPAM ended the quarter with over $1 billion in cash and available borrowing capacity, made up of $916 million in cash and cash equivalents and $270 million of available credit. DSO was 76 days compared to 72 days at the end of Q4 2019 and 78 days in the same quarter last year. Moving on to a few operational metrics, we ended the quarter with more than 33,100 engineers, designers, and consultants, an 18.7% increase year-over-year and a net addition of 550 production professionals. Our total headcount for Q1 was more than 37,300 employees. Utilization was 79.5% compared to 79.9% in the same quarter last year and 77.9% in Q4 of 2019. Before moving to our outlook for the second quarter, I would like to spend a few minutes talking about the steps we've taken to improve EPAM's responsiveness to our rapidly changing business environment. By staying close to our customers and updating expected demand on a daily basis, we have developed a detailed and real-time demand view for each customer around the world. This heightened view of demand has been used to drive tighter connections between our supply and demand, allowing us to deliver revenues while dramatically reducing incremental hiring. Additionally, we continue to evaluate our cost structure and reduce a substantial amount of discretionary spending while improving efficiency and retaining capacity to respond to future improvements in the demand environment. Now let's turn to the guidance. As we mentioned in our April 9 pre-announcement, due to heightened uncertainty related to the potential impacts of COVID-19 on our business results, we have suspended our full-year 2020 financial outlook. However, our current thinking is to provide guidance for Q2, adopting ranges we think are more appropriate than our historical and latest guidance. Revenues will be in the range of $590 million to $605 million, producing a year-over-year growth rate of 8.3% at the midpoint of the range. For the second quarter, we expect GAAP income from operations to be in the range of 11% to 13% and non-GAAP income from operations to be in the range of 14% to 16%. We expect our GAAP effective tax rate to be approximately 13% and non-GAAP effective tax rate to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $0.93 to $1.12 for the quarter, and non-GAAP EPS to be in the range of $1.12 to $1.31 for the quarter. We expect a weighted average share count of 58.4 million diluted shares outstanding. Finally, some key assumptions that support our GAAP to non-GAAP measurements for Q2 include stock compensation expense projected to be approximately $16.1 million. The impact of foreign exchange is expected to be approximately a $3 million loss for the quarter. Tax effect of non-GAAP adjustments is expected to be around $4.5 million. We expect excess tax benefits to be around $7.2 million. We expect interest and other income to be $1.4 million in Q2. While we've seen some stabilization in our portfolio, we believe that certain of our end markets will continue to absorb the effects of the global pandemic. At this time, we feel confident we have the right focus on the things that matter in our business, including taking the necessary steps to position EPAM for a future that will demand higher levels of consulting, digital engagement, and software engineering services.

Rob, this is David Straube. We have had some technical problems with our webcaster. We are going to go live to read our script. Can you just confirm that your system is operational?

Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's first quarter 2020 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Ark Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Thank you, David, and good morning, everyone. I hope that all of you are staying safe and healthy during the global crisis, and I want to thank you for joining us. While it has been only three months since we shared our 2019 results and provided our somewhat expected 20%-plus annualized growth outlook for 2020, the COVID-19 pandemic has made it clear that everything we thought we knew then has changed significantly. The impact we are seeing all over the world is immediate, serious, and localized for each and every one of us and for our clients. More importantly, we believe that we are far from the end of this event. In fact, according to many, we are somewhere near the end of just the first period of disruption. While we understand that significant uncertainty is with us for some time, we want to give you perspective on how EPAM is adapting to this new reality and where we think we might be going in the near future. Since January, we've been responding to the COVID-19 crisis and its impacts in our APAC region. To our benefit, we were able to take advantage of substantial work done over the past years to put in place realistic actions for business continuity as well as investments in our internal platforms, which enabled us to support truly agile global delivery environments, including readiness for remote workplaces and enhanced productivity measurements. Because of these efforts, and combined with early learnings from our APAC experiences in January and February, already in March, we were able to move nearly all of EPAM to a productive and safe work-from-home environment practically in a matter of days. This transition, which represented a significant effort, was noticed by many of our clients for its speed and reliability of service continuity. I wanted to share my deep appreciation to the thousands of EPAMers who are doing everything possible to support each other, to our customers for trusting us with their most critical issues, and to our communities around the world, which we are supporting constantly through various means for fighting the pandemic on the front lines. The health of our people continues to be a top priority for all of us during this time. With that in mind, let me switch to our Q1 performance and then cover some of the changes we are making to support customers as we navigate this challenging environment and end with how we see the forces shaping the next few quarters of demand before turning the call over to Jason. First of all, I am pleased to share that we delivered stronger-than-expected first quarter results with revenues of $651 million, representing 26% in constant currency growth. Despite some early COVID-19 reactions in APAC and the first global pandemic impacts in March, Q1 came in $9 million higher than our initial guidance, underscoring the value of our diverse and high-quality portfolio and our ability to continue providing relevant and mission-critical services to our clients. Q1 also marked EPAM's 37th consecutive quarter of 20%-plus organic growth, the rate of growth we plan to return to post-crisis. Starting from the end of Q1, and through the current quarter, the effect of the coronavirus on our customers has been significant and wide-ranging, with more than one-third of our portfolio experiencing some form of revenue impact. Some industries have encountered never-before-seen disruption in their end markets. Customers in our travel and consumer verticals have taken varied serious steps to protect their people and to ensure continued liquidity and viability of their businesses. We believe that we may see various impacts as the crisis continues to unfold across other market segments as well. It is important to note that across our portfolio, while discussions about managing costs during the crisis are taking place, many customers still continue to move forward with programs or, in some cases, have chosen to accelerate the pace of their digital transformation to support radically changed demands for how they engage and serve their clients. We have supported some of these changes in a remarkably short period, from virtually shutting down brick-and-mortar operations for a major retailer and the move to pure-play online commerce to the massive scaled infrastructure and demand required to support virtual entertainment events for a major gaming platform. Throughout the past several months, we have been certain that the pandemic's pace and scale have taken EPAM into new territory, from the challenges of shifting our own way of thinking and doing things to really key directions in our offerings, ranging from how we imagine new digital platforms to what it means to be cloud-first. To date, our success in managing the disruption has been due to our ability to leverage our product engineering heritage and expertise and to push ourselves to move and adapt even faster. Internally, this means a more serious push to break down silos towards increased investments into knowledge management and collaboration, productivity platforms, and establishing new, faster processes that enable our teams to address challenges more seamlessly and productively. Supported by all the investment in our network and security infrastructure, much of which has been stress-tested by our own hybrid delivery centers over the past years, we continue to develop new ways of working and helping our customers respond to the crisis now. All these demands for continued operations and faster, more reliable service offerings bring us back to our top priority as an organization: to be ready for the post-crisis time. That is to retain, find, attract and develop our top talent. By continuing to invest in our delivery, collaboration, education, and community platform and focusing on our people, we are fulfilling a critical aspect of current and future demand for what will be an increasingly digital world. Now I want to say a few words about the outlook for our industry segment and for EPAM, specifically. As most of you know, the digital service segment in which we operate was generally seen as a high-growth market, and it is. Unfortunately, in the current environment, it is nearly impossible to count on previous business-as-usual trends and prior period assumptions to establish near-term models. This is why today we are relying on very different and often real-time indicators and signals, first reviewing daily the changes occurring across our specific market and delivery geographies, industries, and individual accounts. We are also looking at market trends in general, competitors' disclosures, and industry and financial market analyst projections. For example, we looked into financial modeling across publicly traded companies and saw that the projected revenue ranges for many of them just for the current Q2 of 2020 could vary significantly, sometimes up to 20%. This is just another confirmation of how unpredictable the situation is. Just three to four weeks back, we didn't think we would be able to guide even for the second quarter. But today, we are more comfortable and ready to provide a range for our Q2 results and Jason will share those details shortly. At the same time, we still think it is extremely challenging to say with acceptable confidence what would be happening in Q3, as we are seeing high volatility in client behavior. At this point, we are open to all types of scenarios, including another sequential revenue decline. That's why we decided not to provide any guidance for the whole of 2020 at this time. Our key priorities right now are to continue to protect our people and our financial position as well as to invest continuously into our core capabilities and platforms to be better prepared for the comeback. While these actions may have a temporary impact on our profitability, we are confident in our ability to reclaim our leading position in the turnaround. In our view, now more than ever, the fundamental case for digital product and platform engineering services, combined with the ability to bring integrated consulting on the front end, is very much intact. Our proven ability to adapt ourselves and our company to a new operating environment in such a short time has given us the confidence to say that EPAM will emerge from this challenging time a more value- and result-driven company and continue growing in a post-pandemic environment, with our expected 20%-plus growth rate. With that, let me hand the call over to Jason.

Thank you, Ark, and good morning, everyone. I'll start with our first quarter financial highlights, follow with industry vertical performance, and then touch on a few operational metrics, ending with thoughts for Q2. Revenue for Q1 came in at $651.4 million, a year-over-year growth of 24.9% on a reported basis or 26% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.1%. Q1 revenue was higher than expected due to a greater-than-planned level of availability across our client teams, along with stronger performance from a few of our acquired companies. During the quarter, we delivered consistent growth across most industry verticals. Business information and media, which in Q1 became our largest industry vertical, posted growth of 46%. Life sciences and healthcare grew 26.4% in the quarter, reflecting a tougher year-over-year comparison given the strong performance in Q1 2019. Software and Hi-Tech grew 21.9% in the quarter. Financial services delivered 16.2% growth. Travel and consumer grew 14.6%. Our emerging vertical delivered 30.3% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 59.9% of our Q1 revenues, grew 23.1% year-over-year. Europe, representing 34.2% of our Q1 revenues, grew 28.6% year-over-year or 30% in constant currency. CIS, which represents 3.8% of our Q1 revenues, grew 36.8% year-over-year and 45.8% in constant currency. Finally, APAC grew 4.7% and now represents 2.1% of our revenues. In the first quarter, growth in our top 20 clients was 30.5%, and growth outside our top 20 clients was 21% compared to the same quarter last year. Now moving down the income statement, our GAAP gross margin for the quarter was 34.9% compared to 33.9% in Q1 of last year. Non-GAAP gross margin for the quarter was 35.5% compared to 36.3% for the same quarter last year. GAAP SG&A was 19.2% of revenue compared to 19.5% in Q1 of last year. Non-GAAP SG&A came in at 17.6% of revenue compared to 17.7% in the same period last year. GAAP income from operations was $87.5 million or 13.4% of revenue in the quarter compared to $64.7 million or 12.4% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 11.3%, which includes a lower-than-expected level of excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits, was 22.8%. Diluted earnings per share on a GAAP basis was $1.47. Non-GAAP EPS was $1.43, reflecting a 14.4% increase over the same quarter in 2019. In Q1, there were approximately 58.1 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q1 was $63.3 million compared to a negative $0.2 million in the same quarter for 2019. Free cash flow was $34.2 million compared to a negative $13.6 million in the same quarter last year, resulting in a 41.2% conversion of adjusted net income. As a reminder, our cash flow in Q1 is impacted by payments related to our annual variable compensation programs, a portion of which will be paid in Q2. EPAM ended the quarter with over $1 billion in cash and available borrowing capacity, made up of $916 million in cash and cash equivalents and $270 million of available credit. DSO was 76 days compared to 72 days at the end of Q4 2019 and 78 days in the same quarter last year. Moving on to a few operational metrics, we ended the quarter with more than 33,100 engineers, designers, and consultants, an 18.7% increase year-over-year and a net addition of 550 production professionals. Our total headcount for Q1 was more than 37,300 employees. Utilization was 79.5% compared to 79.9% in the same quarter last year and 77.9% in Q4 of 2019. Before moving to our outlook for the second quarter, I would like to spend a few minutes talking about the steps we've taken to improve EPAM's responsiveness to our rapidly changing business environment. By staying close to our customers and updating expected demand on a daily basis, we have developed a detailed real-time demand view for each customer around the world. This heightened view of demand has been used to drive a tighter connection between our supply and demand, allowing us to deliver revenues while dramatically reducing incremental hiring. In addition, we continue to evaluate our cost structure and reduce a substantial amount of discretionary spending while improving efficiency and retaining capacity to respond to future improvements in the demand environment. Now let's turn to the guidance. As we mentioned in our April 9 pre-announcement, due to heightened uncertainty related to the potential impacts of COVID-19 on our business results, we have suspended our full-year 2020 financial outlook. However, our current thinking is to provide guidance for Q2, adopting ranges that we think are more appropriate than our historical and latest guidance. Revenues will be in the range of $590 million to $605 million, producing a year-over-year growth rate of 8.3% at the midpoint of the range. For the second quarter, we expect GAAP income from operations to be in the range of 11% to 13% and non-GAAP income from operations to be in the range of 14% to 16%. We expect our GAAP effective tax rate to be approximately 13% and non-GAAP effective tax rate to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $0.93 to $1.12 for the quarter and non-GAAP EPS to be in the range of $1.12 to $1.31 for the quarter. We expect a weighted average share count of 58.4 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q2. Stock compensation expense is expected to be approximately $16.1 million. The impact of foreign exchange is expected to be approximately a $3 million loss for the quarter. Tax effect of non-GAAP adjustments is expected to be around $4.5 million. We expect excess tax benefits to be around $7.2 million. Lastly, one more assumption that is not part of our GAAP to non-GAAP measures. We expect interest and other income to be $1.4 million in Q2. While we have seen some stabilization in our portfolio, we believe that certain of our end markets will continue to absorb the effects of the global pandemic. At this time, we feel confident we have the right focus on the things that matter in our business, including taking the necessary steps to position EPAM for a future that will demand higher levels of consulting, digital engagement, and software engineering services.

I guess my first question is regarding expense flexibility. If you can kind of walk through the components. Jason, you mentioned some control over discretionary expenses. Can you quantify how we should think about it, how metrics such as utilization might trend? And also not just the flexibility you have, but also your willingness to use it versus keeping focused on growth?

Yes. So I mean maybe I'll start with the high-level point that our focus really is on controlling costs, including labor costs, while minimizing the impact on the employee base. We want to ensure that we have sufficient capacity and capabilities to respond robustly to what we expect in the improved demand environment in the future. So if I were to provide a little more descriptive color, late in Q1, we put significant cost controls in place related to discretionary spending, including hiring. As we saw a slowdown in demand that became more apparent, we dramatically reduced production hiring as well. We also began to evaluate whether or not we had the right staff in the right roles and took some performance-based actions. Clearly, relocation, travel events, and hiring-related expenses are well controlled just as a result of everything going on with COVID-19 and the related restrictions. As we move forward, we're going to ensure that we have minimal impact on employees but, at the same time, mindful of overall profitability. I think that's implicit in that 14% to 16% profitability range that we guided to for Q2.

Got it. Yes, no, that answers it. There was a specific question with regards to utilization trends in there. But let me loop my second question in as well regarding M&A in the current situation. Given that you have a lot of cash on the balance sheet, how do you think about M&A under the present conditions?

We are clearly trying to find any bright spots in any situations. There are multiple opportunities, including M&As. However, it’s probably too early to determine how attractive the market will be. We are watching this closely.

This is Damian on for Ramsey. I just wanted to ask a little bit more about sales productivity. It’s probably difficult, but can you provide some details on the sales opportunities now that everything is virtual? What’s your confidence level in your ability to refill that pipeline once current engagements start to end?

I think from the comfortability of remote operation, we are pretty comfortable. EPAM is a much more distributed company by design. The number of delivery centers and size of this is very different from many other companies. Distribution wasn't a real problem when we transitioned to a work-from-home model quickly. Also, people are working unexpectedly productively in this environment, even in our consulting engagements, which are now performed completely remotely.

We have been able to do business development remotely, particularly through daily war rooms in each of our business units discussing both the downsides and upsides to demand. New engagements with customers are still being considered during this environment. However, we are aware of ongoing challenges.

Right, and our work-from-home situation is functioning better than this call today. We are relying on an external agency for this.

Great. Yes. No, I apologize if I missed anything. I just had one follow-up regarding pricing. Historically, pricing has been an advantage for EPAM, but some peers have mentioned deterioration in the pricing environment. Are you seeing any changes in your ability to command premium prices for your services to secure engagements?

We don’t see a significant difference in our ability to command a premium. However, clients like those in the travel space are experiencing significant revenue declines. As such, pricing environments are not as favorable as before. We are responding to our customers' challenges, but it won't harm our long-term profitability.

The overall business environment is not usual, leading to variability in demand across different sectors. Some clients are preparing for what comes after the crisis, realizing this could be an opportunity to build for the future.

This is Kathy on for Jason. Just wanted to clarify a comment you made in your remarks about EPAM potentially seeing a quarter-over-quarter decline in Q3. Is this considered more of a base case or worst-case scenario? Have you seen any stabilization in any of the markets yet?

If we could estimate it better, we would share it. As soon as we know specifics, we will inform you. Right now, we see all scenarios are possible.

We just wanted to mention that a quarter-over-quarter decline is a possible scenario. There is some stability, but we recognize we are not out of the woods yet.

Got it. And just wanted to ask more about the verticals. Are there trends you expect in challenged sectors like travel, leisure, and retail? Are you seeing a reversal in trends so far?

Travel and hospitality remain challenged. For us, that includes both retailers and consumer goods. However, we continue to see strong demand in business information and media, and financial services remain mixed.

You mentioned that more than one-third of your portfolio has experienced some revenue impact. Can you provide more details, like are we seeing pushout of contracts, cancellations, or changes to payment terms?

Yes. It would probably be all of the above. Companies are tightening their belts, suspending programs, or in some cases, actually starting new ones. We are trying our best to balance responding to customers' needs with long-term business health. In terms of guidance for Q2, can you talk about the utilization projected? Utilization will directly correlate with revenue. If we’re at the low end of the revenue range, we'll have lower utilization, and if we reach the high end, utilization will be healthy. Ark may want to add in how productivity is holding.

We have operated in this work-from-home environment since late March. Most of our people are still working from home, and EPAM was prepared due to our previous distribution model. We are not seeing any operational impacts of this change; in fact, we've benefited from increased productivity, as noted by client feedback.

I wanted to ask about your top customers. Can you share your views and interactions with the top 10? You had a very strong Q1 with them, but is there a mix of them in pressured industries?

Our top 10 is a diverse group. While we have travel and hospitality clients, overall, they are performing relatively well.

We’re increasingly seeing more business information and media customers in the top 10, which is a sign of growth.

Looking ahead, what changes do you anticipate stemming from the pandemic for the service industry? Any insight on changes to your potential delivery model?

The level of acceptance for distributed talent and delivery models will shift. Clients who previously weren't interested may now be more open due to current circumstances.

Can you talk about the visibility differences between Q2 and Q3? How wide does a range of outcomes have to be for you not to provide guidance for Q2?

We have a robust pipeline process with daily updates to gauge pipeline changes. We've conducted daily stand-up meetings to discuss demand trends and remain connected to our clients. Our comfort level for guidance in Q2 stems from this solid process. However, we recognize macroeconomic factors can greatly influence future visibility.

If you can discuss the mechanics of the pipeline in terms of advance notice you receive if projects are delayed?

There was significant uncertainty across industries near the end of March. Some clients have changed their perspectives week by week, and demand dynamics across our client base create high volatility. Knowing that, we aim to prepare ourselves adequately for the future.

Just wanted to get a little more insight into the Q2 outlook. There is deceleration in growth; is it due to volumes on project work for existing clients or fewer expectations for new logo wins? Or perhaps pushing out price increases? Can you provide clarity on this?

Yes. It would encompass all of that. Customers in significantly impacted industries are making tough decisions. We may not have as much pricing power as before, but we are seeing some demand increases. Some clients facing vendor issues are seeking our support for both existing and new programs.

The most affected industries will likely demand our services even more in the future as they are confronted with a need to adapt quickly and innovate. There's a spectrum of situations happening right now.

Could you discuss any compliance and security challenges your clients are facing with your workforce now remote? Has this affected demand?

We have been preparing for scenarios like this for some time. We haven't faced any significant issues related to client compliance and security during this transition. In fact, we've noted that some opportunities have emerged from our ability to manage this situation effectively.

Do you have a large number of clients beyond the top 20? Are you seeing any cleaning of the clients in that demographic due to potential credit issues?

We are not experiencing a trend of firing clients. However, we remain cautious regarding credit risk. We did see some slowdown in non-top 20 clients, particularly those in the travel and hospitality sector.

Could you discuss the evolution of your working capital? Can we expect clients to delay payments or reduce advance payments?

Cash collections were pretty strong in Q1, and so far, in Q2, they look solid. We do expect some slowdown. As we mentioned earlier, some customers are looking for temporary extensions on payment terms.

I don’t think we're losing clients. However, we see some customers delaying decisions. It's a mixed environment, and we'll see how that adjusts in subsequent quarters.

Thank you, everybody. Again, sorry for the technical problems with our provider for the call. I think David will comment on this after me. It's a different time. We've been through multiple recessions, and while difficult to assess, this crisis has produced different demands on digital services. We’re preparing ourselves for a comeback, focusing on talent and financial stability.

As Ark mentioned, we did have some technical challenges with the initial replay of our call. The entire replay will be available on our Investors section within the next hour. I want to thank you for your patience and your time today.

Thank you.

Thank you.