EPAM Systems Inc (EPAM) — Q3 2021 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 third quarter 2021 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. I would like to remind those listening 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 the comparable GAAP measures 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. Good morning, everyone, and thank you for joining us today. I think it would make sense to start today from the same reference point we used exactly 12 months ago, when we began to see the first positive turning signs after the pandemic hit us earlier in 2020. The difference point was our investor and analyst day, which took place in November 2019 in Boston, which was still done in the old-fashioned in-person setting. On that day, we were reminded about EPAM's history during our past few years, and our transformational journey from a software engineering services firm to a much more diverse digital and product consultancy with a strong engineering culture. Beginning in 2016, we set an aspirational goal to become one of the global leaders in product development services. Three years later, in 2019, we set out another goal to become one of the global leaders in product and platform engineering services. We have focused on our evolution as an organization with essential elements being pivotal to transforming the company. These undertakings enable us to innovate, remain relevant, and stay ahead in the ever-changing market since our initial post-IPO days. Each aspirational mission validates our external views, namely industry analysts' opinions and our ability to grow significantly faster than the market, doubling our company revenue practically every three years. As a result, during our Investor & Analyst Day in 2019, we shared our aspiration for the next three years and suggested we might be able to double the size of the company by the end of 2021. To achieve this goal, we will need to continue transforming EPAM into a different company, with a strong ability to adapt our people, platforms, and processes to quickly respond to changes, bringing to life the digital platform that connects our people to work seamlessly, allowing us to be efficient and effective in all we do. We are extending our leadership across integrated consulting and engineering services, which in turn opens opportunities for transformation through lead generation, educational, social, and innovative solutions. In short, our sights are set on becoming the transformation platform for our clients that want to become adaptive enterprises themselves. Last year, on our Q3 earnings call, we were reminded of all of this and shared a level of optimism and self-confidence regarding our return to a traditional 20% organic growth rate in a post-pandemic environment. However, we acknowledged then that doubling our 2018 revenue by the end of 2021 was no longer realistic, given our experiences in Q2 and Q3 of last year. As we sit here today, we see how naive our post-pandemic assumptions were, especially regarding the term 'post-pandemic' itself. Today, we realize that EPAM is at an exciting crossroads in its 28-year journey. We have a clear line of sight to what should be one of our fastest-growing revenue years in our post-IPO history. This also includes breaking through to our first million-dollar revenue quarter at the end of 2021. We expect to reach our aspirational goal of doubling the company for the third time since 2012. This result is due to many factors that have led us to our current state and the next phase of our journey. It has been about transforming EPAM as much as it has been about helping our clients transform themselves through our research and wisdom to excel in innovation, design, consulting, education, and social responsibility while lifting our engineering standards. Currently, EPAM is vastly different than it was six to eight years ago, forming a more diverse foundation to drive value for clients and our growth. We continue to tackle the challenges of scaling for growth, geographical expansion, and attracting diverse talent while complementing our technical engineering teams. In each conference, we identify and compare our capabilities that need strengthening or building to serve market needs. These efforts are pursued both organically and through acquisitions, which remain pivotal to our capabilities extension strategy.

Thank you, Ark. And good morning, everyone. In the third quarter, EPAM delivered very strong results, reflecting continued significant demand for the company's services across a wide range of industry verticals and geographies. During the quarter, EPAM generated revenues of $988.5 million, a year-over-year increase of 51.6% on a reported basis, and 50.7% in constant currency terms, reflecting a positive foreign exchange impact of 90 basis points. A continued robust demand environment, combined with our ability to recruit at record levels while retaining talent, drove a higher than expected revenue result for the quarter. Customers continue to turn to EPAM for help transforming their businesses. We continue to support our customers across a range of initiatives, including modernizing and transforming applications across the full range of industries we serve, creating new digital products and businesses and harnessing the resulting data to improve revenue growth, supply chain operations and customer experiences, and finally merging physical and digital to create superior retail experiences. Turning to the performance of our industry verticals, travel and consumer grew 79.3%, driven by significant growth from both our consumer and retail clients. Additionally, we saw renewed demand and a return to growth across our travel customers. Financial Services grew 68.9%, with broad-based strong growth coming from asset management, insurance, payments, and banking. Software and hi-tech grew 46.6% in the quarter. Life sciences and healthcare grew 29.5%. Business information and media delivered 23.6% growth in the quarter. Our emerging verticals delivered 61.5% growth driven by clients in telecommunications, energy, manufacturing, and automotive. From a geographic perspective, North America, our largest region representing 60% of Q3 revenues, grew 51.6% year-over-year, or 51.4% in constant currency. Europe, representing 33% of our Q3 revenues, grew 50.9% year-over-year, or 49.5% in constant currency. CIS, representing 4% of our Q3 revenues, grew 49.7% year-over-year, and 44.6% in constant currency. APAC grew 60.4% year-over-year, or 58% in constant currency terms, and now represents 3% of our revenues. In Q3, revenues from our top 20 customers grew 29%, while revenues from clients outside our top 20 grew 69%, resulting in greater diversification across our revenue base. Moving down the income statement, our GAAP gross margin for the quarter was 33.9% compared to 35.1% in Q3 of last year. Non-GAAP gross margin was 35.1% compared to 36.8% for the same quarter last year. The gross margin in Q3 2021 was impacted by higher levels of funding for our variable compensation programs, given the company’s outperformance against targets established at the beginning of the 2021 fiscal year. GAAP SG&A was 17.1% of revenue compared to 17.9% in Q3 of last year. Non-GAAP SG&A came in at 15.3% of revenue compared to 15.9% for the same period last year. Our GAAP income from operations was $144.1 million, or 14.6% of revenue in the quarter, compared to $96.4 million, or 14.8% of revenue in Q3 of last year. Non-GAAP income from operations was $179.6 million, or 18.2% of revenue in the quarter compared to $123.3 million, or 18.9% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 14.6% versus our Q3 guide of 13%, due to a lower than expected level of excess tax benefits related to stock-based compensation and a one-time benefit related to certain tax credits. Our non-GAAP effective tax rate, which excludes excess tax benefits and includes the one-time benefit from the tax credit, was 21%. Diluted earnings per share on a GAAP basis was $1.95. Our non-GAAP diluted EPS was $2.42, reflecting a $0.77 increase or 46.7% growth over the same quarter in 2020. In Q3, there were approximately 59.2 million diluted shares outstanding. Now turning to our cash flow and balance sheet, cash flow from operations for Q3 was $206.1 million compared to $175.6 million for the same quarter of 2020. Free cash flow of $184.9 million produced 129% conversion of adjusted net income, compared to free cash flow of $165.8 million in the same quarter last year. We ended the quarter with approximately $1.3 billion in cash and cash equivalents, which did not include the restricted cash related to the acquisition of the Emakina Group. Additionally, in October, we updated and expanded our unsecured credit facility, which will allow for up to $700 million in funding, plus an additional $300 million via Accordion, giving us access to a total of $1 billion in borrowing capacity. This new credit facility replaces the 2017 facility, which allowed for borrowing up to $300 million with an additional $100 million via Accordion. At the end of Q3, DSL was 70 days and compares to 70 days for both Q2 2021 and the same quarter last year. We expect to maintain DSL around the same level or somewhat lower in Q4. Moving on to a few operational metrics, we ended the quarter with more than 47,050 consultants, designers, and engineers, a year-over-year increase of 39.4%. Our total headcount for Q3 was more than 52,650 employees. In the first three quarters of 2021, we had approximately 11,500 net additions, a record number for EPAM over a nine-month period. Utilization was 77.1% compared to 78.2% in Q3 of last year and 82.2% in Q2 2021. Now let's turn to the guidance. Based on year-to-date results combined with a robust demand environment and continued confidence in our ability to scale production headcount, we are raising our business outlook for 2021. So starting with our full-year outlook, revenue growth will now be at least 40% on a reported basis, and in constant currency terms will now be at least 38% after factoring in an approximate 2% favorable foreign exchange impact. On an organic constant currency basis, revenue growth will be at least 34%. After excluding an approximate 400 basis points of revenue contribution from acquisitions we closed in the last 12 months, including Emakina. This compares to the previous full-year revenue growth outlook of 37% reported, 35% in constant currency and 32% in organic constant currency terms, which we provided during our Q2 earnings call. We expect GAAP income from operations to continue to be in the range of 13.5% to 14.5% and non-GAAP income from operations to continue to be in the range of 17% to 18%. We expect our GAAP effective tax rate to continue to be approximately 11%, which includes the benefit of certain tax credits I mentioned previously. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will now be 22%. For earnings per share, we expect the GAAP diluted EPS to now be in the range of $7.86 to $7.93 for the full year, and non-GAAP diluted EPS will now be in the range of $8.72 to $8.79 for the full year. We expect a weighted average share count of 59.1 million in fully diluted shares outstanding. For Q4 of 2021, we expect revenues to be in the range of $1.075 billion to $1.085 billion, producing a year-over-year growth rate of approximately 49% at the midpoint of the range, with the favorable impact of foreign exchanges on revenue growth expected to be minimal. Lastly, we expect approximately 800 basis points of revenue contribution to come from acquisitions closed over the last 12 months, including Emakina. For the fourth quarter, we expect GAAP income from operations to be in the range of 13.5% to 14.5%, and non-GAAP income from operations to be in the range of 17% to 18%. We expect our GAAP effective tax rate to be approximately 14%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will be approximately 22%. For earnings per share, we expect GAAP diluted EPS to be in the range of $2.11 to $2.18 for the quarter, and non-GAAP diluted EPS to be in the range of $2.44 to $2.51 for the quarter. We expect a weighted average share count of 59.3 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurement in the fourth quarter. Stock-based compensation expense is expected to be approximately $31.4 million. Amortization of intangibles is expected to be approximately $5.6 million. The impact of foreign exchange is expected to be approximately $1.5 million loss. Tax effective non-GAAP adjustments are expected to be around $8 million. Lastly, we expect excess tax benefits to be around $13 million in the quarter. In summary, we are pleased with the Q3 results and the record growth we are producing in our 2021 fiscal year. While it is too early to provide a detailed view of our business outlook for 2022, we believe that the demand environment continues to support an elevated annual growth rate in excess of our traditional guidance of greater than 20%. However, we also believe that it is important to establish and maintain a more sustainable growth rate in the coming year than that achieved in 2021. As we have done in the past, we will provide our detailed view of 2022 guidance in February during our Q4 earnings call.

Hi, good morning. I wanted to ask about the spread between your headcount growth versus revenue growth. It's really widened here, despite the utilization normalizing. Can you talk about some of the key drivers there as well as the sustainable level for that difference?

Yes, I think that we continue to see some improvement in pricing, as I think we've discussed over the last couple of calls. And then probably there's a little bit of shift from a geographic standpoint in different geographies, to have somewhat higher rates associated with them. And so I think you might continue to see some improvement over time. And as I think we've sort of talked about, we feel like we've definitely increased our capacity to add headcount and more specifically to retain headcount. We expect that we will continue to add headcount at greater than historic rates. But currently, we're guiding to a somewhat lower increase in headcount in Q4 relative to Q3, based on what we think will be a little bit of slowdown in people joining the company in the month of December.

Okay. And then just on the growth outlook, it really looks quite broad-based across the business. Just any thoughts on how 2022 growth may progress considering the level of comps you continue to put onboard here in 2021? And, more specifically, how do you feel about the headroom to grow in some of your largest clients?

The demand environment continues to be strong. We see quite a bit of growth from existing clients. We also have a number of engagements that we have entered into more recently that have a lot of growth potential. So that demand environment is obviously quite solid. We also feel that we have increased our ability to support organic growth rates. At the same time, I should say that we don't expect that 36% organic growth rate to become a normal sort of multi-year sustainable norm.

Okay. And the largest accounts, headroom and those, do you still feel strong there?

Yes, there's definitely potential in the larger accounts.

Hi, let me echo the congratulations. Two questions, I was I guess I'll ask them, maybe for Ark. In your prepared remarks Ark, you discussed experienced consultants, and you used that word experience. I was just wondering, how are you doing? What verticals especially are you drawing talent from with the experienced consultants? And then the second thing is Jason, is there any call out about Q4 seasonality or ideally 2022 budgets? Thank you.

So the equation I'm sorry, the question about where we take in people, where we kind of bring in people from or in what markets we are applying the paper? Because I especially…

Especially the second one Ark.

Oh, I simply… I don't think there is much difference with us and with other companies playing in the market right now. This is pretty much conventional. Most of the articles are clear. I think consumer goods, travel, retail, definitely leading this, what would be relevant for my journey toward financial services and definitely entertainment and publishing. So I think it's pretty much conventional, all of it.

Yes, I guess I'll answer the second question. So good morning. From the standpoint of budgets, budgets intact as we sort of execute for clients are looking to invest and continue to drive digital transformation. So right now it continues to be a market where probably supply constraint is the greater issue rather than demand. And we enter 2022, which looks with what looks like a pretty intact demand environment.

Got it. I'll drop back in the queue. Thank you.

Thank you.

Thank you. Congratulations on the quarter. I guess the question is, in the past, you guys have spoken about sort of the risk to corporate culture from growing too fast and the ability to grow too fast. So as you scale, has that ability changed? Or has your view changed?

Alright, so I think Ashwin it’s definitely a very relevant concern. And we are paying a lot of attention to this. At the same time, like things changed from the point of view of how we were thinking about general decoration, level of distribution, how people work in just two years ago. I'm just reminded exactly about kind of our late 80s sometimes, and we've put during the last couple of years and even started to do before a lot of efforts to make sure that we create an environment from a digital ecosystem perspective as well, to see how we can support the culture better in what we were thinking will be relevant, probably not during 2020, 2021 but later. It's all accelerated like we always talk about it. But at the same time, that's exactly what Jason already mentioned. We don't believe that it's sustainable to grow at the rate we're reaching, which is happening right now for a relatively long period of time. So I think it might be better than what we were expecting a couple of years ago when we were talking about our growth above 20%, maybe it will be better in the future. But it's definitely the rate which we brought in today, because in this case, we will have 50%, 60%, 70% of people who will be new to the company, which makes it very difficult to sustain culture and quality of the delivery. We are very much focusing on the quality levels.

Understood, no. So you focused on the right things as far as that that type of growth is concerned, which is good. I guess one separate question that goes with Emakina, which I guess that process has been ongoing since August. Just to clarify, is the acquisition now complete in terms of just the for public share repurchase and stuff like that? And is this an area where you would see yourself continuing to scale in terms of acquiring a lot of local talent in many different geographies?

Yes, so from I guess, the acquisition standpoint, over 98% of shareholders have agreed to tender their shares and cash has been transferred. We're still going through a little bit of a, I guess, what's called a squeeze out process here for the remainder of the shareholders. So for all practical purposes, we would control the company, as of I guess, yesterday. And I guess that’s kind of what I'd say about that.

And we are definitely focusing on expanding in the market and in making acquisitions that bring in 1,100 people to us, specifically in European markets. This is definitely improving our experience consultancy, digital consultancy, marketing-related consultancy skills, which is a little bit new to EPAM but very complementary to what we're doing. It's also a reasonable improvement of our presence across European and in some Middle Eastern organizations. We are planning to continuously do this, but again, with the right proportion, and with a consistent focus on delivery and engineering and quality.

And just to clarify, and I think I said that in my prepared remarks, but we've got two months of Emakina results built into the guidance that we communicated for the Q4 quarter.

Understood. Okay. Great, thank you.

Thank you.

Thank you. I'm wondering what is the level of seniority of the employees that you've been hiring so rapidly in the last couple of quarters here and has the pyramid of makeup shifted in the last couple of years?

I think we are definitely doing a very specific analysis on this part. While we are growing faster than we expected, we keep inching new at parameter infact right now. This is kind of short term. There’s clearly a singularity; we bring in more new people. And that's a little bit more challenging. That's related to the previous question Ashwin was asking; we are carefully doing this. But again, seniority parameter is supported, as needed for the type of services we deliver.

Thank you. And then in previous quarters, you've discussed putting through an additional number of price increases compared to prior years. How widespread is this across your client base? And what is the magnitude and how receptive have clients been to these conversations?

Yes, we continue to have discussions and negotiations with clients around rate increases. Some of those are coming in the second half of 2021. At the same time, we're also beginning to have discussions around rate increases for the beginning of 2022, which is kind of the more traditional period for rate increases. Obviously, nobody likes to absorb a rate increase, but I think that, based on everything that people are seeing from a wage inflation standpoint, from, I guess, a global inflation standpoint, and just the continued strong demand for resources, these are relatively easier conversations than we've had in the past. I expect that we will see better price increases or rate increases in 2022 than we've seen in previous years.

Is that pretty widespread across their client base, Jason?

Yes. So, every client is probably a little bit different. But, yes, I think that there will generally be greater increases across clients than we've seen in the past. Some clients will have higher rate increases than others depending on where they've been historically. We are trying to make certain that we are growing our business responsibly and able to maintain a stable level of profitability the way we've run the business over the last couple of years.

Thank you. Congratulations.

Thank you.

Hey, guys, this is Kathy on for Jason, great set of results here. I wanted to ask about margins. I mean, obviously, your margin performance has been very impressive year-to-date. I think you're already tracking to the upper end of your full year guidance range of 17% to 18%. Just curious, is there a reason you didn't take up the full year margin guidance? Is it just conservatism? Or are there other factors that we should be aware of?

Sure. So we believe that the 17% to 18% guidance that we maintained for adjusted income from operations is the appropriate guidance. Q3 was a quite strong quarter, which some of the profitability improvement was a result of the sort of the upside in revenue that was somewhat unexpected in the quarter. For Q4, we expect that SG&A will come up a little bit between Q3 and Q4 while we maintain gross margins in and around the range that we saw in Q3. Our recent acquisitions have somewhat lower levels of profit than our traditional EPAM business. So all of those things push you more towards a Q4 exit in the middle of that 17% to 18% range.

Great, very helpful. And just a quick follow-up. Just wanted to ask about utilization. Obviously, the Q3 number was mostly came in about two years now. So is that just due to timing of onboarding, this obviously had a very sharp hiring quarter or, obviously, demand remains very strong. So just wanted to know if there were any factors contributing to that?

So utilization in Q3 is traditionally the seasonal low quarter. If you think about a world pre-2020, it's a time when people go on vacation. If you're lucky enough to be in Europe, maybe it's a two or three-week vacation. Utilization is relatively low. Last year, when people couldn't leave their homes and countries, we saw higher utilization than is typical. The 77.1% that we saw in Q3 is actually pretty good and seasonally consistent. We expect utilization might come up a little bit in Q4 but not unhappy with the 77.1% that we had in Q3. We usually think about the business running in maybe a 77% to 79% utilization. And again, it is somewhat seasonal. There are quarters when we run at or above 80%. But we generally consider that on the hotter side.

Great, very helpful. Thanks, guys.

Thank you.

Hi, Jason. I was hoping for a bit more color on your commentary around when you mentioned looking towards a more sustainable growth rate, what you currently generated. Is that commentary around the scale at which EPAM is currently operating at or is that also some commentary on the industry growth that's occurring and maybe ultimately some expectations of slowdown as we look ahead?

I think it's difficult to comment about the industry as a whole at this point. We think there is a very strong demand and there is no real sign of demand going down. At the same time, from our internal assessment, we really would like to make sure that we bring value to our clients while supporting the reputation we've built over the previous couple of decades. We're talking about sustainability of our growth. Because if you're going to grow at 50% for a couple of years, it's our size. We don't believe that it's feasible to do given the complexity of the business, the engagements we're referring to. So we're referring to sustainability in the context of what’s realistically achievable while maintaining quality and culture within the company.

Understood. And then related to the commentary around expectations of strong demand outlook. As you look over the next X number of years, you made a comment earlier about the negativity of predicting demand about a year ago and where you thought things were. Can you maybe provide some color around what gives you confidence that the current level of demand from an industry perspective is sustainable at these levels? And then if we look at past cycles, it seems like demand, where it's spiked will persist for a couple of years. But then there's generally a quick drawdown. Any color you can provide there and your conflicts obviously?

I think our point was exactly how difficult it is to predict the future. Just a couple of years ago, we didn't understand the turnover that would happen. Even 12 months ago, we saw the pandemic’s impact as something different than it has turned out to be. We believe there will be strong demand during the next few years, but what happens after and how that wave will work is uncertain. It’s challenging to provide assurances for the next decade.

Thank you very much. And thanks for all the detail today. I'm wondering, you mentioned in prepared remarks that you're making some progress on standing up new delivery centers in different regions. Can you give a little more detail on that? How is hiring going in those regions? And how are you being able to build and, and the EPAM brand which seems to serve to really well to date in your existing geographies?

I think you will be very consistent with our comment to the sides. I don't remember in what quarter we were saying that it's easy to breed talent. And I'm pretty sure all of us were confirming that it's also very global. There is no practically space in the world today where you can come and start hiring talent without challenges. Each quarter is becoming more challenging. Our investments in education and our recruitment processes and automation have become more impactful allowing us to support what we're doing today. I don't know what else to say. I think the war for talent is being discussed everywhere; everyone is talking about it. We’re proud to sustain the level of net additions along with manageable attrition rates.

And certainly have good reason to be proud and impressed with what you've done to date on hiring. You also talked about I just want to talk a little bit about customer growth and contribution. It seemed like there was pretty material sequential growth across your top customers. But how much is that the result of their own demand versus you turning away, maybe other business and that's resulting in more concentration? And how should we think about that going forward? Do you think we can get far enough ahead of the hiring curve to be able to take on some of that work that maybe you've been turning away recently? Or is that going to be an ongoing challenge?

Yes, so I think that we're actually kind of de-concentrating. What I would say is that if you looked at the cohort, in the 11 to 20, you did have elevated growth rates in that cohort. Some of that speaks to trends we've seen in the market. You've got a few clients, one in the asset management space, who were probably somewhat unprepared for the new digital operating world, and the pandemic encouraged them to make investments. There’s significant investment around updating their infrastructure and how they connect with their end clients. We've seen strong growth in the 11 through 20 but also in the customers below 20. Probably existing customers with strong demand have a little bit more leverage at the table and are getting a larger share of resources than brand new customers. We continue to be constrained by supply and expect very solid net additions in Q4, but at a somewhat lower level than in Q3, which excludes the 1,100 additions from Emakina. Does that clarify?

Yes, that was perfect. Just one clarification that, to the lower net addition in the fourth quarter. Do you think that is that seasonal or is there some other aspects that are impacting that?

I think generally, what we're thinking is that December is a time when most people don't change jobs. So we'll have fewer joiners in December. But it might be a reflection that things could get a little bit harder over time. We've really improved our capability to attract talent. Our hiring brand continues to improve quarter after quarter, year after year. We've also improved our ability to staff projects and match supply and demand. So we’ve improved our capabilities surrounding organic growth rates. But again, we're expecting a somewhat slower level of net additions in Q4.

That's great, thank you.

Congratulations on a great quarter. I want to revisit a point Ark made in the prepared remarks about exploring new areas and capabilities. I have a couple of questions regarding this. How are you determining which areas to invest in, considering the wide range of technological innovations? What criteria are you using to decide where to concentrate your efforts and build capabilities before there is a commercial or revenue opportunity? Additionally, how are you deciding which areas to downplay? Are there specific areas where you don't anticipate much growth? What factors influence your decision to focus less on certain areas?

Yes, I appreciate your questions. It's really complex to figure out the future. One advantage is that around 30% or 40% of our business still involves working with software companies, technology companies, and platform companies. We do significant development of new products and platforms for these clients, which gives us exposure to various areas. We try to keep this proportion of such clients in our business portfolio to continuously drive value. This is not only about new technologies; it's also about an end-to-end story.

Another question, in the last few years, we have expanded our consulting capabilities, which makes more sense now that you're generating close to a billion dollars in revenue per quarter. Can you discuss the competitive environment? Who are you winning business from? Has the competitive landscape changed compared to three or four years ago?

I think you understand our competitive base very well. I think we've gained proportionally more as consultants have become crucial to starting business relationships. Our competitive landscape is largely the same because most of the large vendors had these capabilities before. We’re trying to bring different value through better integration with delivery and services.

Perfect, thank you, and good luck for the rest of the year.

Thank you.

Okay, great. Thanks for taking my question. I just wanted to talk a little bit more about the macro factors and where budgets are at this point. Good to see, I guess travel and consumer specifically recovering here. But are you still seeing some of that depressed funding levels from COVID across some of the verticals in your client base?

I don't believe we see any sign of partial depression still from the pandemic right now in our market. I've seen practically… it's not only about rolling consumers; it’s about all indices. We believe that everybody understands that preparation for something new or for the changes triggered by this pandemic is constant. The level of demand we’re seeing and our predictions for the longer term should remain, similar to before the pandemic. So, the direct answer to your question is, no, we don't see any signs of funds being depressed anymore in the market.

Okay perfect. I guess as a follow-up, just as you kind of think about the biggest challenges that you are now trying to solve for today, is still the biggest thing, the ability to bring in more talent? Are gross margins where they are today due to the inability to bring in talent and offset some of the costs? Or what's the biggest challenge here you're still trying to solve today?

In a simplistic way, the biggest challenge is brilliant talent. But that's a huge oversimplification of what's happening. Because 'talent' is broad; it's possible to hire many people. The point is, what type of people, how to orchestrate their complexity in the game, how to connect with the clients appropriately. The real challenge is orchestrating integrated teams to work together, especially when you're growing at 30%+ and onboarding many new people who need to adapt quickly, understand the types of engagements we're handling. Net acquisition is a vital enabling value, but the concern is about how we deliver quality.

And I'm going to step in and respond to that question regarding gross margin. So earlier, we stated we continue to see elevated wage inflation. We are getting better increases in rates, but probably not fully offsetting wage inflation. One important point is, this year, with our performances, you've seen how we've taken apart guidance, I think in every quarter. A variable compensation element that is expense is based on the company’s performance and revenue growth and profitability has impacted us this year. Next year, we expect that to normalize. That will positively impact gross margin. We may continue to experience some inflationary pressures, but hopefully, those two factors will offset each other. The variable compensation expense is recorded throughout the year, typically paid in the form of quarterly payouts at the beginning of Q2.

Perfect. Thanks for taking the question, very helpful.

Hello, congratulations on a very good number. And thank you for taking my question. I would like to ask you about your M&A pipeline and of the M&A market since Ark mentioned that this is a part of your strategy going forward and is an important aspect. Do you feel like the competition in this market is growing? Because there has been a lot of activity in the sector in general? Do you feel like that it is becoming more challenging to find the proper targets? Are valuations going up? Please provide some color. Thank you.

I think it's definitely known that the answer will be yes to all your questions. There are many companies on the market, but competition is growing and prices are rising as well. It's natural in the current market situation you described. We will continue searching for the right companies to bring on board and improve our capabilities; we are like everybody else trying to maximize opportunities.

Okay. Thank you very much.

Yes, absolutely. Thank you.

As always, thank you very much for attending the call today. You know that if you have any questions, data is available. See you in three months. Thank you very much.