EPAM Systems Inc (EPAM) — Q4 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 fourth quarter and full year 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 material located in the Investors section of our website. With that said, I’ll now turn the call over to Ark.

Thank you, David. Good day, everyone, and thank you for joining us today. Before turning to Jason to provide a detailed update on our fourth quarter overall 2021 results and our 2022 outlook, I would like to spend some time reflecting on last year's performance and share some thoughts on our positioning for 2022. But even before doing that, I would like to share a couple of other thoughts. Just last week, we celebrated the 10-year anniversary of our initial public offering on the New York Stock Exchange. So that is why this call is a bit special. Exactly 10 years ago, we provided our first guidance on our first earnings call. EPAM in Q1 2012 was a company with 7,000 people and about $335 million in revenue. We recall back then, which reflected a strong priority indeed. EPAM was very much an unknown start-up with a minimal presence in the United States and Western Europe and with development centers across just a few countries in Eastern Europe. And we were extremely nervous because of all of that. During our first call, we shared that our quarterly revenue grew 34% and our annual headcount increased by about 30%. And we guided that our 2012 revenue should go up around 23%, 25% from the prior year of 2011. Ten years later, we are a very different company. Since our IPO, EPAM has grown more than tenfold, expanded our global footprint across five continents and growing our team of professionals to more than 58,000 people and across 40 countries to become a recognized world leader in digital engineering and consulting services. So at this moment, I would like to personally thank all of our employees, customers, and shareholders who participated in achieving this notable milestone in EPAM's journey, which we celebrated last week on the New York Stock Exchange podium, unfortunately, in a very small team due to understandable quality restrictions. What is also important is that 10 years later, we still feel very much as a fast-growing, constantly changing, and learning start-up. As of today, we still can share that in our fourth quarter, we grew 53% and 44% organically, increased our annual headcount by 43% and plan to grow revenues by at least 37% in 2022. So in short, we are running today faster than we did back then during our first post IPO days. To be on a bit more formal side, for 2021, we generated almost $3.8 billion in revenues, reflecting greater than 40% year-over-year growth, which included a strong result across all dimensions of our portfolio. Non-GAAP earnings per share were $9.05, a 43% increase over fiscal 2020. And in 2021, we also generated $461 million of free cash flow. During our previous call three months ago, we shared the history of our transformational efforts while we were setting our 3-year mission plans. I will not go into the details again, but I would like to mention that 2021 was actually a special year for us. For the third time in a row since our IPO, we doubled the company in three years. 2021 was a year when we were aggressively building and expanding EPAM capabilities through our strong organic, especially across cloud data, and consulting credits. It was also a record year from an M&A point of view, which helped us to fuel some white spaces and also to mature our offerings in consulting, cybersecurity, digital marketing, digital platform delivery, as well as in data and analytics. It also allowed us to better diversify our global delivery organization. For sure, our 2021 results would not have been possible if not for our ability to attract and retain talent. To meet the extraordinary demand in 2021, we refined our employee value proposition, to elevate EPAM as a company with new-generation technologies where engineers, designers, architects, and consultants can embrace modern practices, cutting-edge tech, and a deep collaborative approach during our client engagement. We added more than 17,600 EPAMers, which is approximately 2.5x more employees than in our previous record year of 2019. 2021 was the second year in a row of having a very distributed workforce with a very high percentage of remote work, and with still very limited opportunities to meet in person with our team members and clients on a regular basis. So it was a year when we doubled our efforts to focus on talent engagement practices through understanding people’s capabilities, investing in their training and development and providing a wide array of opportunities to communicate and gather together as a team, as well as through finding the best suitable engagement from both professional and vocational standpoints. Additionally, we drove deeper connections across our global talent pool to each other and to the global community of people and partners through our digital platforms, all of which helped us to keep a high level of productivity and our attrition levels manageable in the current very challenging environment. In 2021, the majority of our clients were at the center of a significant amount of transformation. This has driven very strong demand for our services across all verticals. In travel and consumer, we absorbed a rebound as post-pandemic priorities once again moved to the forefront of the discretionary spending agenda. In financial services, we saw demand growth in both our existing customers and in several new and previously smaller clients. We'll continue the modernization and innovation of key business domains. Insurance, which was a relatively new focus area within our financial services last year, is today one of our fastest-growing subsegments. Telecommunications and automotive, all part of our emerging verticals, outpaced previous year performance as clients in these sectors turned to EPAM's expertise in innovation, design experience, and product and platform development. Life sciences & healthcare and software & hi-tech both continue to grow quickly while demonstrating the potential for rapid acceleration. While business information & media slowed down during the year, it returned to a 30-plus percent growth rate in Q4. 2021 was also a notable year from a market recognition perspective. Some of these we shared previously, but I would list those together to demonstrate the progress we achieved, moving beyond being just engineers to becoming integrated consulting and advanced engineering experts. EPAM was ranked as a top IT services company on Fortune’s 100 Fastest-Growing Companies list for the third consecutive year; also included in the list of Forbes Global 2000 companies; recognized by Ad Age as one of the top 25 largest agencies in the world; and Consulting Magazine named EPAM Continuum as one of the top 20 fastest-growing consultancies. EPAM Continuum was also included by Forrester in the list of eight largest customer experience strategy consulting practices, alongside Accenture, BCG, Deloitte, E&Y, IBM, McKinsey, and PwC; named in the top 50 most loved workplaces by Newsweek; recognized for our employee-centric work by Great Place to Work in a number of our key talent markets; and awarded Best Culture of Learning Talent by LinkedIn. Just last week, we were included in the top 100 Barron's Most Sustainable Companies list. And lastly, we were accepted into the S&P 500 Index in December. Just several quarters ago, back in May, we first talked about becoming a $5 billion to $10 billion company sometime in the future. Today, we are guiding to close the $5 billion mark already in 2022. So we feel much more confident to set our near-term sights on growing into a $10 billion company. We believe we are well-positioned to do so with our overall progress today, and we continue advancing on our key client markets and growing our fast-diversifying global delivery capabilities. I know it feels like I'm missing one hot topic at this point, and I am sure you are following the news about Ukraine and Russia as much as we do. That is why I would like to share the following before passing the microphone to Jason. 2021 was a very challenging year, especially for us, due to fast-growing geopolitical and social uncertainties across some of our key talent markets and the continued disruption of the global pandemic. That is exactly why we are very pleased with our standing in first quarter and overall performance we delivered in 2021. Despite all of that, our results demonstrate the level of maturity we have developed over the years and our ability to operate and perform well during difficult times. We also should remember that this conflict is not new for the region. We remember 2014 and 2015 and then 2020 as well. We have dealt well with those situations in the past, and we have learned a lot since then. So in 2021, to navigate the situation, we continued something which we started actively implementing since 2014: both organic and M&A-based efforts to enhance our geographic diversification without any degradation in the quality of our delivery. That was our key focus over those years, as well as significantly maturing our portfolio within the consulting industry and overall engineering capabilities. Today, we believe we are well-prepared to address the challenges ahead in 2022 by leveraging our broad global reach in addition to our deep regional insights, applying our strong engineering DNA, and, very importantly, maintaining our entrepreneurial spirit to continue making the future real for our clients, employees, and our global and local communities while keeping everyone as safe as possible as our key priority at the same time. With that, I would like to once again extend our gratitude to our employees, customers, and shareholders for their continued understanding and support. Now let me turn the call over to Jason.

Thank you, Ark, and good day to all. In the fourth quarter, EPAM delivered extremely strong results, reflecting continued high levels of demand for the company's services across a full range of industry verticals and geographies. During the quarter, EPAM generated revenues of $1.107 billion, a year-over-year increase of 53.1% on a reported basis and 54.1% in constant currency terms, reflecting a negative foreign exchange impact of 100 basis points. Q4 was the first quarter EPAM delivered quarterly revenues in excess of $1 billion, marking a notable milestone in the company's journey. Performance across the industry verticals in the quarter was consistent and very strong; long-standing trends which have driven significant growth continue to include the need to modernize and transform applications while transitioning them to the cloud. Human-centered innovation, the merging of physical and digital experiences, continues to spread across industries and creation of new digital products and businesses, while harnessing the resulting data to improve our customers' revenue growth, supply chain operations, and end customer experiences. Turning to the performance of our industry verticals, Travel & Consumer grew 91.3%, driven by very strong growth from both our consumer and retail clients. The accelerated growth in the quarter is partially the result of recent acquisitions. Financial Services grew 60.3% with very strong growth coming from payments, banking, asset management, and insurance. Larger consulting-led engagements are helping to drive higher levels of growth. Software & Hi-Tech grew 34.7% in the quarter. Life Sciences & Healthcare grew 33.9%. Business Information & Media delivered 32.9% growth in the quarter. And finally, our emerging verticals delivered 67.6% growth, driven by clients in manufacturing and automotive, energy, and telecommunications. Moving to our geographic performance. In Q4, we renamed our geographic regions to better reflect EPAM's ongoing geographic expansion. These changes are name only; the methodology used to report revenues remains unchanged. The Americas, our largest region, representing 58% of our Q4 revenues, grew 47.2% year-over-year or 47.4% in constant currency. EMEA, representing 35% of Q4 revenues, grew 66.6% year-over-year or 69.7% in constant currency. The accelerated growth in the quarter is partially the result of recent acquisitions. CEE, representing 5% of our Q4 revenues, grew 46.4% year-over-year and 43.9% in constant currency. Finally, APAC grew 38% year-over-year and 38% in constant currency terms and now represents 3% of our revenues. In Q4, revenues from our top 20 clients grew 29% while revenues from clients outside our top 20 grew 70% year-over-year, driving greater diversification across our revenue base. Growth in our clients outside of the top 20, most notably below the top 200, reflected a higher level of inorganic contribution during the quarter. Moving down the income statement, our GAAP gross margin for the quarter was 34.3% compared to 35.6% in Q4 of last year. Non-GAAP gross margin for the quarter was 35.9% compared to 36.9% for the same quarter last year. Gross margin in Q4 2021 was impacted by higher levels of funding for our variable compensation programs, given the company's outperformance versus financial targets established at the beginning of the 2021 fiscal year. GAAP SG&A was 17.2% of revenue compared to 17.8% in Q4 of last year, and non-GAAP SG&A came in at 15.6% of revenue compared to 16.2% in the same period last year. GAAP income from operations was $166 million or 15% of revenue in the quarter, compared to $112 million or 15.5% of revenue in Q4 of last year. Non-GAAP income from operations was $206 million or 18.6% of revenues in the quarter compared to $136 million or 18.8% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 11% versus our Q4 guide of 14%, due to a higher than expected level of excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits was 21.9%. Diluted earnings per share on a GAAP basis was $2.40. Our non-GAAP diluted EPS was $2.76, reflecting a 95% increase and 52.5% growth over the same quarter in 2020. In Q4, there were approximately $59.3 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q4 was $285 million compared to $159 million in the same quarter of 2020. Free cash flow of $228 million produced a 139% conversion of adjusted net income, compared to free cash flow of $141 million in the same quarter last year. The higher level of free cash flow in the quarter reflects a strong level of cash collections. We ended the quarter with approximately $1.4 billion in cash and cash equivalents, which is net of $366 million used in our acquisition efforts during 2021. At the end of Q4, DSO was 62 and compares to 70 days in Q3 2021 and 64 days in the same quarter last year. Looking ahead, we expect DSO will trend up in 2022. Moving on to a few operational metrics for the quarter. We ended Q4 with more than 52,600 consultants, designers, engineers, trainers, and architects, a year-over-year increase of 43.2%. Our total headcount for the quarter was more than 58,800 employees. In Q4, we had approximately 6,100 net additions, a record number of new additions for EPAM. Utilization was 76.8% compared to 77.9% in Q4 of last year and 77.1% in Q3 2021. Turning to our results for 2021. Revenues for the year were $3.758 billion, producing 41.3% reported growth and 39.9% on a constant currency basis when compared to 2020. During fiscal 2021, our acquisitions contributed approximately 4% to our growth. GAAP income from operations was $542 million, an increase of 43% year-over-year and representing 14.4% of revenues. Our non-GAAP income from operations was $678 million, an increase of 43.5% over the prior year and representing 18% of revenue. Our GAAP effective tax rate for the year was 9.7%. Our non-GAAP effective tax rate was 22%. Diluted earnings per share on a GAAP basis was $8.15. Non-GAAP EPS, which excludes adjustments for stock-based compensation, acquisition-related costs, and other certain one-time items, was $9.05, reflecting a 42.7% increase over fiscal 2020. In 2021, there were approximately 59.1 million weighted average diluted shares outstanding. Finally, cash flow from operations was $572 million compared to $544 million for 2020. Free cash flow was $461 million, reflecting an 86% adjusted net income conversion. We are very pleased with our 2021 results, which exceeded each of the guided metrics we set at the beginning of the year. Before I move on to our outlook, I'd like to provide a few highlights on our progress in the area of corporate responsibility and ESG. EPAM has a long-standing commitment to serve the communities in which our people and our customers operate. As we continue to expand, we recognize our responsibility to act according to our principles by operating ethically, protecting the environment and supporting our global and local communities. Our focus on sustainable growth today will be a catalyst to fuel continued expansion in the future. Over the last year, EPAMers have donated more than 30,000 hours of their time and skills across 27 EPAM sites and partner organization events, creating and conducting STEM-related courses, supporting social innovation platforms and environmental initiatives, and supporting events, including the British Interactive Media Association's Digital Day, the Raspberry Pi Foundation's Coolest Projects, and the global Scratch Conference. While we are working through specific long-term commitments to fight climate change, we have continued to challenge ourselves to significantly reduce the effects of our carbon emissions. We're also focused on innovating new sustainability concepts and developing digital solutions to support sustainability in our communities. Now let's turn to guidance. Starting with our full year outlook, revenue growth will be at least 37% on a reported basis, and in constant currency terms will be at least 38% after factoring in an approximate 1% negative foreign exchange impact. We expect inorganic revenue contribution to be approximately 6% from acquisitions we closed in the last 12 months. We expect GAAP income operations to be in the range of 13.5% to 14.5%, 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 15%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will be 22%. For earnings per share, we expect that GAAP diluted EPS will be in the range of $10.43 to $10.76 for the full year, and non-GAAP diluted EPS will be in the range of $11.36 to $11.69 for the full year. We expect a weighted average share count of 59.8 million fully diluted shares outstanding. For Q1 of 2022, we expect revenues to be in the range of $1.170 billion to $1.180 billion, producing a year-over-year growth rate of approximately 50% reported at the midpoint of the range. Our guidance reflects an unfavorable FX impact of 1%, and the year-over-year growth rate on a constant currency basis is expected to be 51%. Lastly, we expect approximately 9% of our growth to come from revenues contributed by acquisitions closed over the last 12 months. For the first quarter, we expect GAAP income from operations to be in the range of 14.5% to 15.5% 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 8% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 22%. For earnings per share, we expect GAAP diluted EPS to be in the range of $2.65 to $2.73 for the quarter, and non-GAAP diluted EPS to be in the range of $2.58 to $2.66 for the quarter. We expect a weighted average share count of 59.5 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements in 2022. Stock-based compensation expense is expected to be approximately $116 million with $19 million in Q1, $31 million in Q2, and $33 million in the remaining quarters. Amortization of intangibles is expected to be approximately $24 million for the year, evenly spread across each quarter. The impact of foreign exchange is expected to be approximately a $6 million loss for the year, evenly spread across each quarter. Tax effect of non-GAAP adjustments is expected to be around $27 million for the year, with $4 million in Q1, $7 million in Q2, and $8 million in each remaining quarter. Finally, we expect excess tax benefits to be around $67 million for the full year with approximately $27 million in Q1, $18 million in Q2, and $11 million in each remaining quarter. Our 2022 outlook reflects the strong demand environment we see across the business and end markets we serve. In addition to expected ongoing investments across our people, platforms, and processes, which will equip and position EPAM for future growth. As we've done in the past, we will adjust our business outlook each quarter to reflect changes in the demand environment and in our operations. Okay, operator, let's open the call for questions.

Hi, and thanks so much for taking my call. And congratulations on your anniversary. I wanted to ask about the situation in Ukraine, whether you could give us a little more color on your potential continuity plans in the event that the conflict there escalates, and also whether the post-pandemic remote work model has made it a bit easier to contemplate shifting workloads around?

Hello, this is Arkadiy. I think, number one, we continue to work in a normal environment, and there is no impact on day-to-day operations at this point. We talked about our experience starting from 2014. In 2015, there were actually active operations on the border with Ukraine, and there was a lot of military activity there. During all this time, it didn't have any impact on EPAM operations. What we can add, in addition to what you're reading, is that no one from EPAM right now is being drafted or requested for any type of military training or drills, etc. So that's probably kind of additional color, which we can add. The second point is that since 2014, we did a lot of special preparations. We are practically completely independent from local infrastructure for any project activities. And on top of your question about COVID and remote work, this means that from building any attributes of engagement, depending on the locale, it practically doesn't exist. I think we will likely have a lot of questions, so I will add a little more to it. There are no active relocations. Probably from the total number of people, we should have between 50 and 100 participating right now in some kind of pilots or testing of BCP activities.

Okay, I appreciate that. And I wanted to ask also on margin guidance in fiscal '22. It's down about 50 basis points from the fiscal '21 guide. I know you mentioned investing in people and operations. I was just wondering if you could give a little more color about the margin drivers and maybe the cadence we should model through this year.

Yes. What I'll do is I'll respond to the full year, and I'll also talk about Q1 specifically. What we continue to see is a business that is growing at a rapid rate with extremely strong demand. We've talked about our ongoing investment in people, processes, education, and also the ongoing diversification of the business globally as we grow into different centers around the world. These are somewhat less optimized at this time than our more mature traditional geographies. But if I were to really provide color that's probably easiest to understand, we continue to see elevated wage inflation, not significantly higher than 2021 but somewhat elevated as we go from 2021 to 2022. At the same time, we are also seeing a substantially better pricing environment, but the pricing does not fully offset the impact of the wage inflation. So one of the negatives here is that the ongoing impact. At the same time, I think that you'll see a little bit more normalization of activities related to travel and in-person interactions, which will lead to slightly higher SG&A over time. We've talked about the fact that variable compensation is expected to decrease between 2021 and 2022. But right now, between the somewhat ongoing impact of the wage inflation and pricing not fully compensating for that, along with somewhat elevated SG&A for the full year, we’ve guided to 16.5% to 17.5%, and I believe we'll probably operate at the midpoint or somewhat higher than the midpoint of that 16.5% to 17.5% guide.

Super helpful, thank you.

Hi, good morning. Thank you. First, I wanted to follow-up on Ukraine. Can you just talk about the nature of client conversations and whether there's any increased selectivity or preference by them for where new work will be delivered from? I see that Belarus and Ukraine, as a mix of headcount, declined year-over-year by a notable amount. Just based on your global expansion plans, how are you thinking about the mix of those two countries as you exit this year?

Okay. I think in general, the actions and conversations are very, very similar to what was happening eight years back. There are some clients who are very worried about the situation and are in a wait-and-see mode. There are some clients who continue as usual, and this is the majority of them. There are some clients who are preparing for more active BCP if certain specific triggers occur, which are difficult to define. The risk category is particularly important for those who are in a wait-and-see approach who prefer to start somewhere else. It was a very similar situation almost eight years ago. We have many more options today to work from alternatives because of the conditions in Belarus and Russia today. Those probably make up around 5% of our delivery capacity versus over 7% eight years ago.

Okay. And then as far as workforce goes, just another big addition this quarter sequentially; I think we estimate over 4,000 organically again. Can you just talk about your comfort levels in the pace of resource additions and what you're anticipating regarding attrition and utilization within that 2022 outlook?

Yes. Let me provide a little bit of color on that and also follow-up on one of the questions you had earlier. You're correct that we have seen significant growth in our productive capabilities outside of the traditional Ukraine, Belarus region. Specifically, Ukraine, Belarus, and Russia from a production standpoint grew by 22% on a year-over-year basis between 2020 and 2021. We had greater than 80%, almost 90% growth in the other regions, including India and Latin America, where we've seen particularly high growth. So we have moved from Ukraine, Belarus, and Russia. The idea here was that we're becoming an increasingly global company, requiring a broader labor pool. At the same time, it clearly has diversification benefits from a risk standpoint. We have moved from 68% of production capacity in Ukraine and Belarus in 2020 to 58%. We expect to continue to see accelerated growth, particularly in places like Latin America and Central Europe. As a result, I expect you'll continue to see that number decline. I don't know if it will approach 50% or something lower than it is today, but it should be lower than it was in 2020. From an attrition and utilization standpoint, I think we see utilization at about the same level as 2021. Regarding attrition, we are still below 20% with both voluntary and involuntary as we exit Q4. We generally would see a little benefit in Q1 as people wait to vest stocks and bonuses. So we will usually see a slight dip in attrition in Q1. For the full year, we think attrition might go up slightly but still expect that it will remain below 20%.

Thank you for the color.

Great. Just continuing to ask about operational flexibility. If we think about potential disruptions or the need to relocate from the Ukraine region, how flexible are you, and how quickly can operations move into other regions for delivery? Thinking about those contingency plans? Then separately on pricing, Jason, you mentioned that wage increases aren't keeping up with pricing. Is there a timeframe under which you can balance and fully recapture your wage inflation in pricing with customers?

On the first part of the question, there is no single rule on how to operate in this situation because we have multiple BCP plans, which are defined by engagements or accounts, and even specific engagements within these accounts, based on risk factors, team distribution, and client mix. We believe we're well-prepared for this. We also have our understanding from local insights, which is not necessarily in line with media reports. We have plans to move people as necessary, particularly from border areas if required. However, we believe that even those closer to the borders are still in a relatively safe zone. Timing for triggering operational changes is very specific to clients and engagements.

On the pricing question, we continue to focus on both rate increases with existing clients and taking new opportunities where the value of EPAM's quality delivery justifies the pricing. While it is hard to predict wage inflation for the end of 2022 right now, I believe you will continue to see both price improvements throughout the year and hopefully attain a better balance between pricing and wage inflation by 2023.

Good morning, guys. In 2021, you posted 36% revenue growth on an organic constant currency basis and are guiding for at least 32% on the same basis in 2022. The incredibly strong growth seems to be continuing. How do you think about your underlying organic revenue growth rate on a multi-year basis? We used to talk about 20%+, but there has been a surge in demand from the pandemic. How long do you think that could last, and how has your competitive positioning evolved?

Yes, to clarify what you said, in our guide for 2022, the organic constant currency growth would be about 32%. That compares to about 35.5% organic constant currency growth in 2021. You have seen in 2021 and also entering 2022, we’re tracking three quarters where we have 50% year-over-year revenue growth rates, which is extraordinary. Part of that has been due to significant headcount additions on an organic basis and some M&A activity. We don’t think these 50% year-over-year revenue growth rates are sustainable. I think if you break down the guidance, you will see a deceleration throughout the year. Even as you exit Q4, I think you will see a growth rate, including acquisitions, over 25%. In summary, I think you would expect a deceleration throughout the year. That is somewhat intentional as we believe it's appropriate to get to a more sustainable growth rate. Nevertheless, I believe you will exit Q4 at a growth rate higher than our typical above 20%.

Right, that all makes sense. If we think about your headcount growth targets for the year, obviously, you're going to have some pricing support for revenue. Should we think about headcount growth modestly lagging revenue growth in 2022?

I think the main lesson about growth is that while we used to talk about 20%+, the experience of the last year has led us to realize we can grow at much higher levels. We are confident we will be able to sustain these higher levels of growth, possibly ranging from 20% to 25% or even higher as we optimize our operations.

For the growth rates, in the last two quarters, we've had organic headcount growth of over 4,000. For Q1 and Q2, we are aiming for organic headcount growth above 3,000. This will result in strong growth rates of around 37% for full-year 2022.

Thank you. A question about the breadth of demand you are seeing. Obviously, even if we adjust for acquisitions, there is strong growth outside the top 20 in terms of clients. Can you talk about the pace at which you're adding new clients and the considerations when onboarding them? How selective are you in the current environment? Are these clients likely to grow to $5 million in revenues? What are the trade-offs when balancing breadth of clients versus deeper engagement with fewer clients?

We are definitely more selective than in the past, targeting clients with higher potential. We have about a dozen clients landed in the last 12 months bringing in at least one million per quarter and growing rapidly. We also continue to see traditional EPAM growth with existing customers. However, we are more strategic and selective about bringing in new clients. Demand remains strong, but clients are more budget-conscious, and there are still numerous opportunities across industry verticals.

We are looking for clients that allow us to work on cutting-edge technology and improve our engineering capabilities. At the same time, we are updated on our selection criteria based on factors including the size of operations and overall company strategy. The landscape is different than it was before, and we are focused on companies looking to speed up their transformation.

In terms of just following up on the geopolitical risks you mentioned, looking ahead, do you see any acceleration in investing towards building global delivery capabilities, or do you continue at the current pace?

Yes, we are accelerating our investment. However, we are not just doing this due to geopolitical risk, but rather due to the general globalization of services. We started this process ten years ago. A big acceleration occurred in 2014 and 2015 when we opened India and Latin America. These regions are currently growing faster than Eastern Europe, which is an essential aspect of our plan.

Thank you, and congratulations. Ark, you mentioned a $10 billion company, and I'm wondering what remains consistent about EPAM as you reach that level and what would operationally or strategically be significantly different?

First of all, we are focused on building an end-to-end solution provider, which is a significant goal. It's a continuous challenge to find and grow talent, and managing our presence as a cohesive team with various skills working together efficiently is key. Achieving the $10 billion mark is realistic but requires continuous effort to enhance our competitive positioning in this market.

And Jason, you mentioned that consulting was a driver behind growth in financial services. Is that trend widespread across the business, and has your consulting capability matured such that it impacts gross margins?

This trend is present in multiple sectors, not just financial services. While consulting has been well established across different organizational units, our pricing for consulting services remains integrated into the overall business framework.

Ark and Jason, good morning, congratulations on the quarter and the milestone. When I look at revenue across client cohorts that have grown, what is the serviceable market opportunity in front of you from the current set of clients?

While the growth rates are astonishing, especially in our largest customers in sectors like insurance, we see enormous growth potential in established areas as well as newer ones. There are significant opportunities for growth throughout our existing customers and among new customers as they recognize our value.

From our existing client base, we believe there is a huge opportunity, especially since many clients began to act differently than expected after COVID, making substantial investments in digital areas that they previously hesitated to pursue.

Understood. To follow up, as gross margins remain in the mid-30s, is this due to adding capabilities and how does that change? I also wonder how long the SG&A offsets to keep operating margins strong?

The company has achieved reasonable profitability given its historical context. While gross margins have compressed due to wage inflation and other factors, we expect stabilization in the future. We continue to expand capabilities and better geographic distribution. We expect SG&A to remain low, and thus we predict continued operational margins above 17%.

I have two quick follow-ups. For one, the growth outside the top 20 has accelerated, indicating a resource allocation decision during the pandemic. How do you view that dynamic?

Yes, your analysis is correct. The recent acquisitions have also contributed to the growth of clients outside the top 20. It has been a shift from focusing resources extensively on a few major clients, leading to an increase in business with smaller and newer clients.

Next, regarding the geopolitical risks, do you approach the current geopolitical tensions differently than prior incidents?

It's challenging to predict how client reactions will differ. While we have experience navigating these situations, the media may not cover aspects that we are managing internally. We remain adaptable and well-prepared based on our established protocols from past events.

Thank you again, everybody. I hope this call was informative, particularly with our recent 10-year IPO anniversary and the current challenges we face. We have a strong team and have navigated crises before; we believe this is a manageable situation as well. Thank you and talk to you in three months.

Thank you.