EPAM Systems Inc (EPAM) — Q2 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 second quarter fiscal 2020 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy 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 will 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 at this time and thank you for joining us today. Before I go into the second quarter highlights, I would like to reflect on the overall environment in the context of EPAM business. First of all, since our last conversation in the beginning of May, the environment has definitely stabilized across our client portfolio, as our customers were responding to the many disruptions and, in some cases, permanent changes in the end markets. At the same time, in very much in line with what we shared during our Q1 earnings call, the impact we are seeing is very immediate, serious, and localized for each and every one of us and our customers. And more importantly, while it's not news anymore for anybody, we do understand that we are still far from the end of the event. A steady dynamic environment continues to be influenced daily by the global health crisis, social unrest, and economic anxieties. We also can state that there are many examples where the current situation is changing the way our clients are doing business, engaging their customers, and dealing with their end markets. As a result, this change has required them to accelerate digital programs and projects, or in some cases, new models of engagement. We ourselves have taken the challenge of COVID to drive much further our adaptive program by bringing EPAM leadership closer to the field and making the field operations across EPAM market locations collaborate at much higher levels. This closeness has taken our agility to the next level, enabling us to be more responsive to our clients' needs, new business opportunities as well as making faster money from our decisions. The enhanced view of demand also has been pivotal to helping us gain much more real-time insight, be able to better measure global supply to the clients' needs, and to optimize business efficiencies to drive results. As the remote working model has quickly become widely accepted and proven way to serve our clients, we believe this way of working will serve us well in the future as we continue to manage the downside risk, but also take advantage of expanded options when it comes to talent acquisition and retention. As a result, we are working very closely with our clients' teams to define and respond to demand in a much more condensed time frame. These new partners of engagement are supported by our increased investment in knowledge management, collaboration, and productivity platforms, enabling quicker access to information and improved business processes to empower our teams to connect faster, share information seamlessly, and be more productive when responding to a relentlessly fast-paced environment. Today, that is one of the most important areas of focus for us. Moving to our second quarter results, we delivered revenue of $632 million, representing 15.5% in constant currency growth, a non-GAAP EPS of $1.46, reflecting a 15% rounded year-over-year increase. Our Q2 results reflect an efficiency and execution on lower levels of demand, while focusing on driving higher levels of performance across the company. Within the quarter, there were a few highlights worth mentioning to bring better insight to what we already stated in general terms. As I shared previously, there is a level of stability in our end markets, which has allowed many of our customers to resume or move forward with the change programs. A number of our customers are focusing on streamlining their efforts as they reduce the number of service providers and consolidate across fewer key workers. In many of such cases, we are benefiting by being asked to do more in helping with critical business and transformational efforts. To balance this, there are some industries and specific customers, which remain significantly impacted by the global pandemic, and we don't know when they will return to business as usual activity levels. We know that there are some cases which are showing not stacking growth even in the current environment. For example, Epic Games achieved that no other gaming company has before, a digital ecosystem that provides infrastructure and services needed to power gaming in Fortnite measured scale for every developer to access across any platform, engine, and store. Combined with a healthy library of games through the Epic Games store as well as the Unreal Engine, the world's most open and advanced real-time 3D tool. We are proud to have been part of Epic Games story since before the creation of Fortnite. With our big data, software engineers, and AWS expertise, EPAM has collaborated with Epic Games to provide the flexibility, reliability, and scalability needed to continue to push the boundaries of online gaming and help Fortnite grow from one million players in 2017 to 350 million today. In Q2, we also began working for several large new customers who have undertaken a multiyear transformation of their business. EPAM has been engaged to help with application development and enhancement efforts across several key areas of the organization. And while it's still early days in the relationship, we believe there is potential to add one or two of them to the top 20 customers list over the next 12 to 24 months. We are also proud to share our recent partnership with UNICEF, which resulted in developing a multi-featured HealthBuddy COVID-19 information app, designed to protect children, families, and communities across Europe and Central Asia by dispelling the myths and rumors surrounding COVID-19. Lastly, probably as a result of everything we just shared, in the recent quarterly sector outlook for IT services webinar, Gartner provided a competitive assessment across 15 legislative service providers, highlighting EPAM as one of only two companies that are best positioned for COVID and after COVID types. With that, let me share how we are looking at the second half of our fiscal 2020. We expect some continued disruption in our end markets, which will result in lower growth in a few industries we serve. While some of the variability in our client behavior has reduced, we still believe it's challenging to talk about our business outlook beyond the next quarter, which Jason will cover right after. Similarly, as we shared with you during our previous earnings call, our key priorities remain unchanged. We will continue to protect our people and our financial position as well as to make continuous investment in our core capabilities and platform to be prepared for the eventual comeback. We strongly believe our position as a leading provider of digital product and platform engineering services, combined with our integrated and maturing consulting expertise, is our key differentiator. That is why we are very confident in our ability to come out of this challenging time, be an even more value and result-driven company, and continue growing in a post-pandemic environment with a growth rate of over 20%. Now let me hand the call over to Jason.

Thank you, Ark, and good morning, everyone. During the second quarter, EPAM focused on supporting our customers' needs and operating our organization efficiently in an uncertain demand environment. The result of this effort was a quarter where we delivered better-than-expected results across multiple financial and operational metrics. In the second quarter, revenue came in at $632.4 million, a year-over-year increase of 14.6% on a reported basis and 15.5% increase in constant currency terms, reflecting a negative foreign exchange impact of approximately 1%. Revenue for the quarter was higher than our previously guided range due to somewhat better-than-expected demand, combined with greater availability across our delivery organization and, therefore, higher billable utilization. Moving to our industry verticals, in Q2, we saw greater variability across the portfolio due to the impact of the pandemic on certain customers and their end markets. Business information and media, which delivered very strong results, posted 42.9% growth in the quarter and continues to be our largest industry vertical. Life Sciences and Health Care grew 16.4%, reflecting a lower level of growth for both industries. The vertical was impacted by a tougher year-over-year comparison. Software & Hi-Tech grew 13.2% in the quarter. Financial services grew 6.3% in Q2. Growth in the quarter was impacted in part by an expected ramp down of the European banking clients. Travel and Consumer was flat in the quarter. Growth in this vertical was impacted by a decline in travel and, to a lesser extent, retail, offset by growth across some consumer branded goods customers. And our Emerging vertical delivered 11.9% growth, driven primarily by clients in telecommunications, offset by a slowdown in the energy sector. From a geographic perspective, North America, our largest region representing 60.4% of our Q2 revenues, grew 14.1% year-over-year or 14.4% in constant currency. Europe, representing 33.4% of our Q2 revenues, grew 19% year-over-year or 19.8% in constant currency. CIS, representing 3.5% of our Q2 revenues, declined 12% year-over-year and 3.3% in constant currency. Finally, APAC grew 20.5% year-over-year or 21.9% in constant currency terms and now represents 2.7% of our revenues. In the second quarter, growth in our top 20 clients was 26% and growth outside our top 20 clients was 7% compared to the same quarter last year. We saw increased concentration among our top 20 customers as our larger clients appear to be more resilient during the quarter and continue to make investments in response to the changing business environment. COVID-19 appears to have had a greater impact on clients who are mid-sized. As the business environment improves, we anticipate the revenue contribution from these clients to increase. Now moving down the income statement, our GAAP gross margin for the quarter was 33.7% compared to 35.5% in Q2 of last year. Non-GAAP gross margin for the quarter was 35.1% compared to 36.8% for the same quarter last year. Gross margin in the quarter was impacted by COVID-19-related customer concessions that were provided on a limited and temporary basis. GAAP SG&A was 18.1% of revenue compared to 20.3% in Q2 of last year and non-GAAP SG&A came in at 16% of revenue compared to 18.5% in the same period last year. Our reduced SG&A levels in the quarter were substantially driven by a lower level of activity related to hiring, relocations, travel, and marketing events. GAAP income from operations was $83.4 million or 13.2% of revenue in the quarter compared to $72.9 million or 13.2% of revenue in Q2 of last year. Non-GAAP income from operations was $108.2 million or 17.1% of revenue in the quarter compared to $92.6 million or 16.8% of revenue in Q2 of last year. Our GAAP effective tax rate for the quarter came in at 12.4%, which includes a greater-than-expected level of excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits, was 22.3%. Diluted earnings per share on a GAAP basis was $1.14. Non-GAAP EPS was $1.46, reflecting a 14.1% increase over the same quarter in fiscal 2019. In Q2, there were approximately 58.2 million diluted shares outstanding. Now turning to our cash flow and balance sheet, cash flow from operations for Q2 was $146.2 million compared to $44 million in the same quarter for 2019. Free cash flow was $134.7 million compared to $32.4 million in the same quarter of last year, resulting in 158% conversion of adjusted net income. EPAM ended the quarter with more than $1.2 billion in cash and available borrowing capacity, made up of $993.7 million in cash and cash equivalents, $60 million in short-term investments, and $275 million available on our revolver. DSO was 73 days compared to 76 days at the end of Q1 2020 and 79 days in the same quarter last year. Now moving on to a few operational metrics. We ended the quarter with approximately 32,300 engineers, designers, and consultants, a 9.7% increase year-over-year and a sequential decline from Q1. Our total headcount for Q2 was 36,400 employees. Utilization was 83.9% compared to 78.4% in the same quarter last year and 79.5% in Q1 2020. The high level of utilization in Q2 was the result of the greater capacity across the delivery organization, given the stay-at-home restrictions and limitations on travel during the quarter. We expect utilization to return to levels in the high 70s during the second half of fiscal 2020. Now let's turn to guidance. With the continued uncertainty in the market due to the current pandemic, we will continue providing a quarterly business outlook while holding off on a full-year view. As Ark mentioned, we've seen a stable level of activity in our portfolio over the last 90 days as our customers are adjusting to changes in their end markets. Looking forward, we expect continued stability in Q3 with some improvement in the demand environment. Our capacity to generate revenue in Q3 will again be dependent on our ability to add headcount to meet improvements in demand while operating at more typical utilization levels. For Q3 of fiscal year '20, revenues will be in the range of $633 million to $643 million, producing a year-over-year growth rate of 8.5% at the midpoint of the range. For the third quarter, we expect GAAP income from operations to be in the range of 13% to 14% and non-GAAP income from operations to be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to be approximately 16% 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 $1.15 to $1.24 for the quarter and non-GAAP diluted EPS to be in the range of $1.40 to $1.49 for the quarter. We expect a weighted average share count of 58.6 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q3. Stock compensation expense is expected to be approximately $19 million. Amortization of acquired intangible assets is expected to be approximately $3 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 $5.6 million. We expect excess tax benefits to be around $5.9 million. All in all, we delivered a good quarter, successfully navigating a challenging business environment. I would like to thank our employees across the globe for their hard work and dedication to EPAM's success. Operator, let's open the call up for questions.

Hi, guys, and thanks for taking my question. I was wondering if you could comment on the competitive environment in the context of this pandemic. I mean, you mentioned the consolidation of vendors among clients and that could potentially be a tailwind for you guys. If you could just give us a little bit more color on that, particularly on that process in terms of vendor consolidation. How strong of a force do you think that is in the market? How could that change the competitive environment?

I wish it would be easy to answer the question because like, as we mentioned, the situation is not stable at all. But definitely, one of the reactions of the clients to this change was consolidation. And we've seen this clearly, specifically across large clients. So it's not something really new, but it was accelerated during the last two quarters, practically. And I don't know how exactly to quantify it. It's definitely happening at a number of large clients.

Okay. And then I wanted to ask about the – you'd mentioned kind of limited and temporary concessions. I'm just curious how much of an impact that might have had in the quarter and expectations there about – around that continuing into next quarter. Is that a headwind we should sort of expect again? Or is that really just sort of a one-and-done phenomenon this past quarter?

Yes. So in the quarter – in Q2, and then I'll talk about Q3 as well, we'd have had a modest impact on revenue, but it did show up in our gross margin number. And to be clear, if you think about clients, particularly, for instance, a midsized airline that is doing 10% of the revenue that they had expected to do and they have – asking their employees to work two days a week and take a 60% or greater sort of pay cut. When you have a discussion with that type of client, it's very hard to say, hey, look, we're not going to do something to support you. And so we had a series of those types of conversations, again, for definitely a minority of our customers, those who had very challenged kind of revenue models. The discounts are definitely sort of temporary, intended to sort of bridge through a COVID period. We expect that the impact will decline between Q2 and Q3 and then, again, in Q4. And again, it's temporary just to be a supportive partner of certain of our more challenged clients.

All right, terrific. Thanks so much. I appreciate it.

Sure.

Hey, good morning, guys. I just wanted to ask a question about the Q3 revenue guide. I know at the midpoint, you're looking for 8.5% constant currency growth versus the 15.5% we just saw in the second quarter. So understandably, you want to continue to be conservative in this environment. But I'm wondering if there's some specific call-outs that would drive the slowdown? How much of it is supply driven? And do you think that Q3 will be the trough for year-over-year top line growth?

Yes. So we feel clearly much better about the demand environment. What we saw in Q2, I think, consistent with what some of our peers have said is sort of stabilization kind of in the middle of the quarter. And then we've also seen some really interesting growth opportunities, both with existing clients. And actually, we've had some nice new logo wins even during the pandemic when we couldn't meet with clients and they couldn't come visit us in our delivery centers. So clearly, the demand environment is improving. At the same time, you'll note that we really didn't add any headcount. Actually, headcount declined between Q1 and Q2. And so we've turned back the recruiting engine. We've turned the recruiting engine back on, but we've kind of had a quarter where we didn't add headcount. And so that is going to have an impact on the growth rate as a percentage growth rate. We're clearly back hiring relatively aggressively at this time to support what we see as a solid improvement in the demand environment.

Okay. Yes. No, okay. I think I get it. So maybe...

I mean, you got to think about the fact that we usually would have hired, I don't know, 1,500-plus employees, and those employees aren't here right now, right. So that is going to have an impact on. So again, it is very much – or much more so supply-driven. Right now, we're back in a time where demand feels certainly improving. And now it's all about putting supply in place.

Right. Right. So a few months ago, obviously, things felt worse and you were less willing to keep the recruiting engine on, and now you've ramped it back up, I'd say. I guess as part of that, any issues finding the right talent in the right geographies?

Issues finding the right talent in the right geographies.

I'm smiling because even in this situation, like I can repeat what repeating for the last several years. So it's a very different environment in general. But for the talent, it's very similar because like with the situation, as you heard – as you see, the kind of competition for talent on a global level is only growing. So – and while revenue impact because of specifically all these budgets and all these uncertainties happen, it gave kind of relief for some period of time. It seems like in the future it will be very, very competitive. And it's feel and visible even right now.

Yes. So we feel comfortable with our ability to hire to support the demand. But as Ark said, the market continues to be somewhat challenging.

Right. Just a follow-up on margins. I guess, to the extent that those stabilize or even creep higher, would that more likely be driven by improved top line growth or SG&A leverage, recognizing that utilization is coming down in the second half of the year?

Yes, correct. So we had very high utilization in Q2. We expect that, that utilization level will decline between Q2 and Q3. At the same time, I expect you're going to see a solid improvement in gross margin between Q2 and Q3. And that's driven by a number of factors. One, as I said, the discounts are time-based and temporary. So the level of discount will decline between Q2 and Q3. We had some revenue recognition impact in Q2, largely related to Russian financial institutions. Again, it's something that we occasionally experience where we start work, but we don't have a signed contract, and so we're not able to recognize revenue. We'll have less of that impact in Q3. Then we usually – the usual impact of Q3 is there are more available workdays in Q3. So that has a positive. So those three positives will exceed the impact of lower utilization. And I expect a solid improvement in gross margin between Q2 and Q3. And that's part of the reason for the guide of 16.5% to 17.5% despite the fact we also expect an elevated SG&A as a percentage of revenue relative to the 16% we booked in Q2.

Got it. All right, thanks for the commentary.

Hi, good morning. Thank you. I wanted to ask about the 2Q outperformance, the bridge then to the 3Q view. So can you just talk about some of the drivers of the better 2Q results versus your expectation? Was there any shorter-term work benefits there that contributed any industries that pulled some things forward? So I'm trying to get a sense on pipeline tone that you have here and whether 3Q is the trough from growth, so to speak?

So Q2 situation just reflects how volatile the whole environment was at the beginning of Q2 and how it's ended up. So the level of uncertainty between clients and utility was very different at the end of the quarter. So – because I understand your question you're asking why Q2 results were so much higher than expected, right?

Yes. It was, obviously, solid outperformance relative to where we stood three months ago. And understanding you're giving a relatively, I guess, prudent view here for 3Q, given the uncertainty. So I'm just trying to understand whether there were things pulled forward that caused you to outperform here and that's why your 3Q is down.

No, no. This is just a very volatile environment where clients were making one assumption at the beginning of the quarter and changed it then. So – and that's exactly, I think, a reflection of how we were communicating at this point. And right now, as we mentioned already, the environment feels much more stable. So there are no daily changes or weekly changes in client behavior. It's much more predictable. That's why we feel that Q3 feels better. But as you know, it's still not business as usual, and that's why we're still not comfortable to predict what's going to happen in Q4.

Yes. So Ark kind of talked about the market and customers and the fact that we didn't pull anything in. I think I'll just answer simply from an algebraic standpoint. We had this, what I call, a slightly perverse impact of the pandemic. Demand was somewhat better than we expected, as Ark said. But we – people couldn't go on vacations. In many cases, those of us who were in major cities, you couldn't go outdoors to do anything other than to grocery shop and walk your dog. And so you had people who would have had booked vacations that did not take those vacations, and instead, they worked. And so we saw much higher levels of utilization, and that helped – in the T&M business that helped drive some of the revenue overage. And we expect that the utilization levels will return to normal, which again is high 70s. And so part of what you're seeing is arguably a supply constraint that's a result of people beginning to take vacations in Q3 when they didn't take vacations in Q2, if that's clear.

Okay. Yes. And then just a follow-up here. Just as revenue growth does recover, are there aspects of what you've done in the cost structure that will enable you to sustain margins at a higher level? Understanding utilization is going to come back down, but anything on the corporate side or anything like that, that helps you have a more confident view here on profitability going forward?

So I wanted to, first, I think, comment on the negative. So we ran at 16% SG&A, and we do expect that to head back towards the 18% to 19% range that I've guided to in the past. It will take some time, so I don't expect to end up in that range in Q3, but we probably would end up in the 17% to 18% range. I do think, though, that we clearly have learned during this process, right. And so we did a lot better job, to be honest, probably of matching supply and demand and being very nimble to respond to changes in individual clients. So for instance, you had a ramp down of one client and a ramp-up in another. Rather than hiring to support the ramp-up, we were very careful to try to match staff that were coming off one customer to – and then to put them on the ramping account. So I think we got more nimble there. So who knows what impact that could have on bench and utilization. And I think that what you'll continue to see now, particularly in both the SG&A and to a certain extent in the gross margin line is renewed investment to support that in excess of 20% growth rate that we expect to return to in the not overly distant future. But again, so I think there'll probably be things that will be kind of on the margin in terms of positive impact, including probably less travel and some of that. But I think I would still sort of articulate that our greater than 20% growth rate with a profitability range of 16% to 17% sort of consistent profitability is how we intend to land once we kind of get through the challenging economic times.

Okay, understood. Thank you.

Thank you.

Hey, this is Ted on for Maggie. Thanks for taking the question. Ark and Jason, could you talk a little bit about the hiring in this type of environment? And maybe how that differs from a year ago, just largely speaking, the work-from-home environment?

So I think it would be more proper to talk about it like next quarter because like if you understand what's happening dynamically in the market, Q2 wasn't exactly the quarter where people were hiring a lot. So that's why it's difficult to answer the question. It definitely was very different than last year. It was a milder labor market. But again, Q2 probably will be an exception. So I think that question would be interesting to kind of review next quarter when some stabilization happens and people will start to kind of hiring again in bigger numbers. I understand a little bit confusion because we're saying that it's still a very competitive market, and it is a very competitive market, okay. But Q2, again, was an exception and wasn't much hiring happening. So mostly the numbers were natural attrition, which is also lower. Involuntary attrition was higher than usual, okay? So that's all changes. Demand from clients was clearly lower than the previous quarter. Everybody understands Q2 still huge different versus Q1. But right now, since the market stabilizes, right now, the labor market is starting to be getting hotter as well. And I think next quarter will show the differences.

Yes. And we kind of ran the recruiting engine in kind of idle mode. We've turned that back on. As I think you've seen in the past, we've been able to add, in some cases, I think, in excess of 2,000 net additions. And so clearly, it will take us a little bit of time to go from idle to sort of fully running, but we're clearly doing work that we've always done with universities. We're beginning to do lateral hires. Again, our brand as a hirer continues to improve. And so I think you'll see us sort of turn it on and certainly push it harder as we go from Q3 to Q4.

Okay. That's helpful. And then as you mentioned, Ark, the demand for digital transformation has accelerated. So I guess coming out of COVID, do you believe, I guess, just qualitatively speaking that EPAM could see a period of time where growth kind of exceeded that historical, like, 20% organic growth, right? Not necessarily looking for specific guidance, just more in terms of kind of the growth trajectory and maybe if the floor for that revenue growth kind of in the medium term here has maybe moved up at all. Appreciate your thoughts on that.

I think I would rather confirm what we shared already today in our kind of general update that we would like to see how we return to 20-plus percent growth. And I think it's very, very visible because higher growth at this size is very difficult to accomplish because all of these components of the quality metrics which we need to provide and everything else which we talked about in the past many, many times. So, I think the goal right now is to return to normal for us, 20% growth. And I think the market definitely will support it. Higher than that, it's a different issue than just market demand.

Yes. And so as Ark said, generally, we've been operating at greater than 20% growth. So I think those types of growth rates which, I think, historically, have been more in the sort of 22% to 23% to even 25%.

Okay. And if I could quick follow-up question. What was the organic growth rate this quarter? And what's included in guidance for Q3?

Yes. So the organic growth rate, so I'm going to decompose. So we've got 14.6% reported, on a constant currency basis we've got 15.5%. And then we've got about 2% benefit from inorganic. And so that was a 13.6% organic constant currency growth rate. We expect to get less of a benefit from, let's say, M&A related or inorganic. So we think that, that contribution is going to go from 2% in both Q1 and Q2 to 1% or maybe slightly above in Q3. So again, the – I think we feel pretty good about the growth rate considering the market. And again, very little of that is acquisition driven.

Thank you very much.

Hi, good morning. Just visiting kind of the comments – some of the earlier comments about revenues and growth. If I was to parse your comments about supply constraints, are you suggesting that 3Q marks the bottom for revenue growth? How should we think about that?

Yes. I mean the challenge without my sort of doing the algebra on the phone call, which I'm going to avoid, is – but I'm going to maybe help you with that. You have to probably go back and look at how many – how much headcount we were adding, let's say, in 2019 on a quarterly basis and then look at what we added in Q2, which was net negative. And think that, that comes out of the revenue number for a while until we can sort of catch that back up. And so, naturally, I think, going to take you to a place where you realize that it's hard to get in excess of 20% growth rate in the near term because you've got a lot of hiring catch-up that you need to do. Again, solid demand environment, we're continuing to hire, but we have a quarter where we were appropriately responding to a very unclear and, as Ark said, sort of declining demand environment as we went from Q1 to Q2. Ark, do you have? Okay.

And then as a follow-up, can you help me understand the comment about the supply constraints and the fact that adding headcount still remains quite challenging, if I understood you correctly? Going back to last year, obviously, when you were growing above 20%, headcount was growing mid-teens. And so is there any reason you can't grow mid-teens plus or a lot faster than that at this point? Like what is – even at the...

Yes. I think we're missing the point of how the whole process working and what it means in terms of supply chain when you need to hire like thousands of people. So when something like was starting to happen in March and April, with predictions that everything will go down and clients' reactions as well. So you have to stop the whole engine of bringing people in, okay. And this engine, you cannot start just in one day or in one week, and that's what we're talking about. There is nothing systematic like a problem which we recall, but we need like probably another quarter to restore the whole engine to work properly.

So – and maybe I wasn't clear enough, is that in the case of Q2, we're running at very little bench, right. So when we entered the quarter and we gave guidance, we said that, hey, if demand slacked, we were going to maintain our workforce and maintain our capacity for a return. And we guided to $590 million to $605 million. And here, we ran at $632 million. And so you can – so there's not a lot of inventory left in the form of bench, and so we've got to build our inventory back up again. And again, it means that we feel good about the demand environment. It means that we expect ongoing revenue growth. But as Ark said, it just takes a while to hire the thousands of employees that you need to get back to an in excess of 20% revenue growth rate.

Understand. So...

Plus, it's still like there is like from the market point of view, it's not the market's clear from demand to support 20%. Let's not forget this as well. It's not like we are in a normal environment. We are not. And we all understand that volatility is very, very strong. And like even what happened in Q2 alone, it's stabilized. At the same time, many of us were thinking that the whole pandemic kind of situation is going to improve, and then the second wave started. And we still don't know how the second wave will come up like in another month or two and what it means actually for business. And business still hasn't got potentially second wave. That's why we're talking about it's, by far, not business as usual still. It's much more stable than three months ago when we were talking about what we see. In May, it's much more stable, but it's incomparable with last year.

I think I understand in the sense that given the uncertainty you have to – obviously, it takes time to ramp up, but you also have to be cautious in the sense that there may be a second wave or something...

That's absolutely true because we don't want to ramp up and then have again a situation like we were facing at the beginning of Q2 or end of Q1.

That's helpful. And then just one last thing. I mean, Jason, I think you indicated you didn't want to go through the algebra, which I understand. But just back of the envelope, if I just kind of look at historic headcount growth, it looks like the absence of growth in headcount kind of hurt you a bit, about 5%. If you assume that the pricing is offset by utilization, it looks like you're about a 500 basis point impact from the headcount issue. Does that sound about right to you?

Let me just look at it for a second here. Yes, I'm concerned about maybe what conclusion you might draw, but my rough math kind of, yes, would be somewhat consistent with that.

Thank you. Good morning. I'm wondering if you could just talk a little bit about what's the client's perspective as well as your own on the dynamic of work-from-home? How that – how you would expect that to evolve in the back half of the year? And whether the percentages you think stay at an elevated level, even when the pandemic has abated?

I think it's kind of the second – the most interesting outcome of the whole situation in addition to the acceleration of digital, like the acceptance of the working-from-home environment. And again, at some point, we expect that the clients will be much more demanding to return to a more normal setup. But again, the second wave, practically starting this, and it's turned into a much longer exercise working-from-home. I think we still will get lessons from this because one thing when people consider, okay, I need to do it like for three, six months and then another, like changing for almost permanent. But in short, I'm not going to say anything new here. Everybody understands that it was much, much better than anybody expected. And companies were able to turn to this environment and stay productive, much better than expected. And it's for sure that this environment is going to be with us for long term. The proportion of this is going to be 20/80 or 80/20 or 50/50, we will still have to see. Probably like in another six months, we will have a much better answer. But we definitely are rethinking the whole infrastructure right now and how it works. While, again, we were preparing for this, I probably mentioned before that we probably one of the most distributed company with a number of small offices in comparison to any of our competitors. So better prepared for this. Now we're going to improve the systems and operations and platforms to support even higher level of distribution. And I think we'll be benefiting from this. But again, the exact proportions, we'll still have to see.

And what is your preference? What is the best outcome for EPAM in your mind?

The best – it's definitely given additional level of flexibility in terms of finding the best talent independently of where its location and how it can work, from office or not from the office, from large city or small city. From this point of view, it's additional dimension for talent, but it's not going to benefit just EPAM. It can benefit anybody who will be able to provide the right infrastructure. We do believe that we have an advantage here.

I appreciate that.

Our M&A efforts. What the pipeline looks like? I assume you kind of put it on hold in the last few months. So you're back looking again. And then given your significant balance sheet capabilities, what areas are you looking?

From an M&A point of view, I don't think there are any changes. So it never was put on hold. So it's actually – I would say that it's probably even accelerated area of focus, very, very similar to what were in the past. So there is no change here. The thinking is as usual. So when it would be happening. So we will announce. But again, nothing changed in M&A.

Thank you for joining us. And again, I hope that everybody is safe in this interesting time. We're pretty positive about what's happening right now. It's much better than we thought it would be like three months ago. So again, the environment is stabilizing. Hopefully, it will continuously stabilize and let's see what we can share in three months. Thank you.