EPAM Systems Inc (EPAM) — Q1 2022 Earnings Call Transcript

Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company’s first quarter 2022 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’d 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 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 morning, everyone. Thank you for joining us today. During our previous earnings call, I finished my remarks with our assurance that the level of maturity that EPAM has reached over the last few years, along with our ability to operate and manage our performance during the difficult times in 2014 and 2015 in Ukraine and 2020 and 2021 in Belarus, allows us to say that we were well prepared to address the potential challenges of 2022 by leveraging our broad global reach and deep regional insight and by applying our strong engineering DNA and, most importantly, our never-ending entrepreneurial spirit to continue making the future real for our clients, our employees, and our global and local communities while keeping everybody as safe as possible. Like everyone, we didn’t expect the war. By any measurement, the quarter has been unlike any other quarter in our history. The Russian invasion of Ukraine has changed the world and impacted tens of millions of people, including tens of thousands of our employees, their families, friends, and neighbors in Ukraine and around the world. What we thought was unimaginable when we reported our Q4 earnings on February 17, all changed a week later. Now let me repeat a simple statement. EPAM, as a company, fully stands with Ukraine. During the last months since the beginning of the war that was started by the Russian government, our absolute top priority has been and continues to be the safety and well-being of our employees and their families in Ukraine. Today, our employees in the region and around the globe continue to support each other, donating time and resources to help their colleagues in Ukraine. Additionally, the company has provided significant financial and logistical support to help move our Ukrainian employees and their families to safe areas inside and outside of Ukraine. As we have previously announced, EPAM has committed $100 million in assistance to help with the broad range of needs for our people and their loved ones. Along with this financial assistance, there has been an outpouring of support from a great number of clients and partners responding with gestures and different types of aid. Thinking more broadly about the people of Ukraine, we established the EPAM Ukraine Assistance Fund to support charitable aid organizations that provide direct relief to those in vulnerable situations across Ukraine. This fund is separate from and in addition to the $100 million humanitarian commitment previously mentioned. And despite the very challenging and sometimes unimaginable conditions on the ground in Ukraine, our Ukrainian colleagues have been resilient and dedicated to their work and customer responsibilities, continuing to produce and deliver results. EPAM’s management team, together with our clients, are extremely impressed and grateful for those incredible efforts, and we see today increased interest from our customers to continue directing work to Ukraine. I personally want to thank each and every one on our Ukrainian team. However, where we guided wrong, we were also somehow right about our level of readiness to address the unknown. Because today, despite the broad and disruptive nature of the events unfolding daily, we find ourselves to be better prepared than we imagined just three months ago. Our investments in hardening our operational and logistical platforms, teams, and processes have enabled us to respond quickly and establish a framework for continued phased recovery procedures. Let us try to illustrate it in a bit more structured way by presenting several stages of our current journey or at least the way we are currently thinking about things. First, in addition to preserving the safety of our Ukrainian families and their members, while helping to move many thousands of people from east to west inside the country and abroad, our initial focus during the last few months has been on maintaining our customer relationships and continuing to deliver important initiatives, despite the war and interrelated geopolitical challenges. Those opportunities we define for ourselves as Phase 1, a period of safety and stabilization of our operations. It is very little attention to initiation beyond that. Under the current conditions, we believe this phase is largely completed, and we will call it out as a notable success. Jason will illustrate in more details with specific numbers regarding our Q1 results and our guidance for Q2 shortly. So while we are managing through the humanitarian crisis in Ukraine, we are also working with our customers to address their concerns and requests to reposition projects and teams to different geographies, which is very much guided with the business continuity plans we had previously established with clients, including multiple allocation alternatives for our employees. In April, we also made the decision to exit our operations in Russia, which is a step with the market and the broader global response to the actions of the Russian government. We are fully committed to our talent in Russia who share our values and our opposition. And for most of our employees in the region, we are working in multiple location alternatives to allow them to remain with the company and advance their careers at a firm. This statement brings us to what we consider to be Phase 2, which is our activities to accelerate the diversification or a balance if you will, of our global locations and continued growth of our delivery capabilities. We have already begun the second phase, which closely overlaps with the Phase 1. This acceleration includes rapidly scaling already existing locations in India, Latin America, and Central Asia, as well as establishing several newly created delivery hubs and expanding many existing ones across Europe. This expansion supports active repositioning for our current employees and simultaneously creates opportunities to develop the local talent market in those hot locations. This will allow us to maintain the experienced delivery talent we currently have, while also establishing new delivery footprints and allowing for significant increases in local value and better facilitating future growth in those locations. At this point, we can report that this development is in play already, and we are seeing early success; we will continue to update you on our progress on those efforts throughout the year. I would also point out that in large part, the diversification program was well underway even during the past several years. Before COVID, our allocation to non-Ukrainian, Belarusian, and Russian locations was close to 70% of our total production capacity. By the end of 2021, it was less than 16%. And we believe by the end of 2022, we will manage to reduce the allocation of our production staff in the region to about 30%. Additionally, we have a strong contention to maintain and potentially grow our talent pool in Ukraine, which we believe will continue to be a significant talent market post-war. While the size and scale of this disruption has been very significant and while we still should expect some very much unexpected things to happen, I think it's important to bring context that the rest of our business and customer portfolio continue to operate in a business-as-usual manner. The longer-term demand trends that have driven growth in our business before remain very much intact. We believe these trends, combined with our unique experience and differentiated DNA in market position, will place us in a good position for organic revenue growth sooner rather than later. And this brings us to what we call Phase 3: the period of focus on rising demand. This phase is also underway and will occur in parallel with the two phases we described above. What this means is that we are focusing on revenue growth for new and existing customers and starting to operate in a type of new normal environment for us. We believe that this new normal should elevate us well to sequential revenue growth during the second half of 2022. After that, we believe we will be able to enter Phase 4 of our recovery plan. We will be focusing on profitability with the objective to return to the profit levels consistent with our historical target ranges. This goes through an area of attention on our agenda already today. But we plan to have a stronger focus on profitability, as well as on improving rate structures and optimizing performance of our new delivery locations throughout the second half of 2022 to show visible performance improvements, while this phase will likely carry on into 2023. I think it’s very much understandable that all the phases I just outlined are not sequential. And while many elements of these efforts will overlap in time, they are also very much interrelated and bring a high level of operational complexity into our day-to-day activities. At the same time, it’s also important to underscore the first two phases are already very much underway and the next two phases are just getting started. All phases will continue to be present in our lives for some time. To summarize, while the cost of this disruption is beyond our control, we are responding at a scale and place to put our best effort together to contain as much as possible the impact of this war within 2022. Our new strategy is not really new but an acceleration of our previously stated strategy: adapt, grow, and deliver value across a broader, more engaged ecosystem of people, customers, and partners. Based on our revolving credit and the integration of innovation and consulting capabilities we were developing over the last year, we will return to industry-leading growth and a more improved profitability model. While still challenging, developing the company 2021 revenue in three years' time, as we have done previously three times since our IPO in 2012. I’m confident we will execute through this unimaginable challenge and emerge as a more diverse, more resilient, and more relevant company. I hope you’ll be able to join our Investor and Analyst Day event on May 19 in Boston, where we’ll share more insights into our plans and goals. Now, let me turn the call over to Jason, who will talk about our Q1 results and additional perspective as we look at Q2 and beyond.

Thank you, Ark, and good morning, everyone. In the first quarter, EPAM delivered strong results despite the impact of the company’s decision in March to discontinue services to customers based in Russia. In Q1, we also incurred some of the new initial costs resulting from Russia’s invasion of Ukraine, in the acceleration of our geographic diversification strategy. Certain of these costs, including expenditures related to EPAM’s humanitarian commitment to Ukraine, charges for impairment of Russian long-lived assets, and costs associated with accelerated employee relocation have been excluded from non-GAAP financial results. We have included additional disclosures specific to these and other related items in our Q1 earnings release. During the quarter, EPAM generated revenues of $1.17 billion, a year-over-year increase of 50.1% on a reported basis and 53% in constant current currency terms, reflecting a negative foreign exchange impact of 290 basis points. Looking at the performance of our industry verticals in the quarter, Travel and Consumer grew 90.9% driven by strong organic growth from both our retail and travel customers, as well as revenue contributions from recent acquisitions. Financial Services grew 54% with very strong broad-based growth coming from asset management, insurance, and banking. Life Sciences and Healthcare grew 35.9%; business information and media delivered 31.5% growth in the quarter. Software and Hi-Tech grew 28.8% in the quarter, and finally, our emerging verticals delivered 59.4% growth driven by clients in telecommunications, energy, manufacturing, and automotive. From a geographic perspective, America is our largest region representing 59% of our Q1 revenues, which grew 46% year-over-year or 46.5% in constant currency. EMEA, representing 36% of our Q1 revenues, grew 62.7% year-over-year or 68.1% in constant currency. EMEA performance was driven by stronger organic growth combined with an incremental contribution from recent acquisitions. CEE represented 3% of Q1 revenues and grew 10.5% year-over-year and 30.6% in constant currency. Growth in the quarter was reduced by the initial impact of the discontinuance of services to our customers located in Russia. Finally, APAC grew 41.2% year-over-year or 41.7% in constant currency terms, and now represents 3% of our revenues. In Q1, revenues from our top 20 clients grew 32% year-over-year, while revenues from clients outside our top 20 grew 63%. Moving down the income statement, our GAAP gross margin for the quarter was 33.4% compared to 33.5% in Q1 of last year. Non-GAAP gross margin for the quarter was 33.3% compared to 34.9% for the same quarter of last year. Gross margin for Q1 2022 was negatively impacted by the inability to recognize revenue resulting from work done for certain of our Russian customers, as well as lower utilization in Russia, Belarus, and Ukraine. GAAP SG&A was 20.3% of revenue compared to 17.5% in Q1 of last year, and non-GAAP SG&A came in at 15.6% of revenue compared to 15.5% in the same period last year. SG&A in the quarter reflected a higher level of bad debt, largely driven by a higher level of reserves associated with the customers located in Russia. GAAP income from operations was $129 million or 11% of revenue in the quarter compared to $107 million or 13.7% of revenue in Q1 of last year. Non-GAAP income from operations was $189 million or 16.1% of revenue in the quarter compared to $137 million or 17.5% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter was 15.6%. Our non-GAAP effective tax rate, which excludes excess tax benefits, was 23.9% and includes a one-time charge related to certain tax credits. Diluted earnings per share on a GAAP basis was $1.52, reflecting a $0.34 decline or 18.3% decrease year-over-year. GAAP EPS includes the impact of Ukrainian humanitarian expenditures, charges related to the impairment of Russian long lived assets, expenses related to accelerated staff relocation, and losses on Russian ruble forward contracts that were unwound in the quarter. Our non-GAAP diluted EPS was $2.49, reflecting a $0.68 increase or 37.6% growth over the same quarter in 2021. In Q1, there were approximately 58.9 million diluted shares outstanding. Now turning to our cash flow and balance sheet. Cash flow from operations for Q1 was a net cash outflow of $51.8 million compared to a net cash inflow of $13 million in the same quarter of 2021. Q1 cash flow was negatively impacted by expenditures related to our Ukrainian humanitarian support initiative and the payment of a higher level of company-wide variable compensation based on our 2021 performance. We also accelerated the timing of variable compensation payments with a higher proportion paid in Q1 than in prior years. Free cash flow was negative $75.1 million compared to positive free cash flow of $2 million in the same quarter last year. We ended the quarter with approximately $1.3 billion in cash and cash equivalents. At the end of Q1, DSO was 69 days compared to 62 days for Q4 2021 and 67 days for the same quarter last year. We expect to maintain DSO slightly above current levels throughout 2022. Now moving on to a few operational metrics. We entered the quarter with more than 55,050 consultants, designers, and engineers, a year-over-year increase of 41.8%. Our total headcount for Q1 was around 61,600 employees. In the quarter, we had approximately 2,800 net additions; production headcount growth was negatively impacted by lower than planned growth in Ukraine and an actual reduction in Russia-based production headcount. We continued to experience accelerated growth in production headcount in countries other than Ukraine, Russia, and Belarus. Utilization was 78.4% compared to 81.4% in Q1 of last year and 76.8% in Q4 2021. Our Q1 utilization includes those employees who have been assigned in a backup capacity to support projects substantially delivered from Ukraine. Although these employees were counted as utilized for the purpose of our utilization calculations, this work was largely unbilled. Utilization in Ukraine did decline somewhat on a year-over-year basis, but is being maintained at extremely high levels considering the current operating environment. Now let’s turn to our business outlook. On February 28, we withdrew our business outlook due to the uncertainties related to Russia’s invasion of Ukraine. For the remainder of this year, we plan to provide guidance for the next quarter only, with the expectation of resuming our full-year guidance at the beginning of the 2023 year. Additionally, to help align with our thinking around significant events, let me provide a few broad assumptions, which will help frame our guidance for Q2 and the remainder of 2022. Russian aggression continues to take a terrible toll on Ukraine, but most of the fighting is currently concentrated in the eastern portion of the country. We continue to see relatively high levels of productivity from our Ukrainian staff who are substantially located in safer portions of the country. Our Q2 guidance assumes that we will maintain Ukrainian utilization at slightly lower levels than those experienced in Q1. During the initial weeks of invasion, we were able to relocate approximately 2,000 employees out of the country where they’re safe and productive. EPAM has spent over $25 million so far as part of the company’s $100 million humanitarian commitment to Ukraine and to Ukrainian employees and their families. Further humanitarian expenditures will be made in Q2 and throughout the remainder of the year. To date, we have relocated significant numbers of our Russian employees to delivery locations outside of Russia, and we expect to relocate more of our Russian employees throughout Q2. Employees relocated outside of Russia are being moved to fill billable positions and are expected to be billable in their destination countries. However, during Q2, we expect that lower levels of demand for Russia-based resources will result in considerably lower utilization levels for those staff remaining in the country. At this time, we’re planning to maintain operations in Belarus; however, we expect a lower level of utilization as we execute business continuity plans for a defined number of clients who would like us to deliver from countries other than Belarus. In parallel with the repositioning of our people, we have begun the effort to align our cost and rate structures to reflect the prevailing economics in the geographies to which demand has been redirected. In many cases, the result will be increasing billing rates to reflect higher costs. Although, we expect some lag in the establishment of these higher bill rates. Additionally, we expect some short-term inefficiencies as we scale newer delivery locations. The combination of these factors will put downward pressure on our profitability in Q2. However, we expect to see ongoing improvement in profitability in the second half of 2022, with a return to something closer to our historical levels of profitability in the first half of 2023. Lastly, based on the continued strong demand, stability in our customer portfolio, and progress in accelerating our global diversification, we expect to return to positive sequential revenue growth in the second half of 2022. Now moving on to our Q2 2022 outlook. We expect revenues to be at least $1.14 billion, producing a year-over-year growth rate of at least 29%. In constant currency terms, revenue growth is expected to be at least 34%. Included in these growth rates is approximately 600 basis points of revenue contribution to come from acquisitions closed over the last 12 months. For the second quarter, we expect GAAP income from operations to be in the range of 3% to 5% and non-GAAP income from operations to be in the range of 10% to 12%. We expect our GAAP effective tax rate to be approximately 19%, and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be at least $0.73 for the quarter and non-GAAP diluted EPS to be at least $1.70 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 the second quarter. Stock-based compensation expense is expected to be approximately $27.5 million. Amortization of the tangibles is expected to be approximately $6 million. The impact of foreign exchange is expected to be approximately a $1.5 million loss. Tax effective non-GAAP adjustments are expected to be around $16.5 million. Finally, we expect excess tax benefits to be around $4 million in the quarter. In addition to these traditional GAAP to non-GAAP measurements, consistent with Q1, we will have additional non-GAAP adjustments in Q2 that are the result of Russia’s invasion of Ukraine. Please see our Q1 earnings release for a detailed reconciliation of our GAAP to non-GAAP guidance. In summary, despite a challenging March, we are pleased with Q1 results. In Q2 and for the remainder of the year, EPAM will continue to focus on the geographic repositioning of our company. Then in the second half of the year, we expect to see both improving profitability and a return to sequential growth. Now, I would like to take this opportunity to thank all EPAMers, but particularly those EPAMers working from Ukraine. It is hard to imagine living through all that you’re experiencing and still doing all that is necessary to meet delivery obligations and maintain EPAM operations in the country. My thoughts and prayers are with you and your families. I also have a huge amount of respect for all of you.

Hi, good morning. Thank you. And I hope all of your colleagues remain safe here. First question I have for you is around client retention. So obviously, you had very solid revenue results here. But can you just give us more color around client conversations? Have you experienced any client losses due to their choice for reductions and risk exposure? And how is the conversion of new work with the existing clients progressing relative to maybe historical pace?

So I think it’s pretty understandable that, much like us, clients also went through multiple sorts during the last first couple weeks of the invasion and then through a couple of months, and a lot of opinions and assumptions changed. So we do have several cases where clients decided to stop growing with us, but it’s very much exceptions. We have multiple cases where clients were engaged with us and then returned back in several weeks, starting to grow with us as well. I think I would describe it as much better than we would expect several months ago. And I think the level of comfort and confidence is practically growing each week. We have multiple clients who are talking to our people in Ukraine and expressing their appreciation and amazement at what they are producing, the same level of productivity that Jason and I have expressed today. So during the last week, we see new businesses starting to come, some clients specifically asking to accurately work in location, and we are starting again hiring in Ukraine as well. So I think that summarizes this.

Okay. Okay. That’s good to hear. And then just on the profitability outlook, I wanted to dig into some of the context you provided around this Phase 4. It sounds like you believe there’s the potential to achieve your prior levels of profitability here in the future. But are there any structural considerations in those future plans versus the prior operating model that you consider? So really just what are the risks you’re thinking about in getting back to that view and, I think you said, first half of 2023? Thank you.

Yes. So if we talk about Q2 and then talk about maybe the journey as we head back towards 2023, is that initially we’re going to have lower utilization, as I mentioned during the prepared remarks. Clearly, in Russia, as we’ve exited operations and particularly we have determined to stop doing work for Russian clients. We’ve got lower levels of utilization modeled for Ukraine just because the situation remains dynamic. We are also seeking some clients who are asking us to do delivery; as Ark said, stay with EPAM, but ask us to do delivery outside of Belarus. So you’ve got in that entire region probably somewhat lower utilization. And I think you’ll work through a lot of that here in Q2 with improving utilization in Q3. You do have obviously some stand-up costs associated with creating a whole series of new delivery centers and growing existing delivery centers while we’re ramping down and still maintaining some costs associated with our current delivery locations, particularly in Russia. And then, as we move people into the next geography, those next delivery countries are in some cases more expensive. We pretty immediately raise people’s compensation, which leads to an increase in compensation costs. There’s a discussion with clients about the associated rate increase. Those conversations are already underway and we’ll be working on that throughout the year. That’s probably the balancing act because, I think, you work through the utilization and then the SG&A efficiency. SG&A will go up as a percentage of revenue in Q2, but then I believe will begin to come back down in the second half. We just need to work through all those rate discussions.

Thanks, guys. First of all, really just hope everybody’s doing well and stays as safe as possible. Secondly, it’s very impressive to see you guys manage through this. And on that note, I really just want to understand when you think about looking forward for the next few quarters, the new balanced portfolio from a supply-side for your business. If you could help us understand if you’ve identified any specifically new centers of real differentiated talent development. The way that you would leverage Ukraine and Belarus in the past, are there other markets that you see becoming your go-to differentiated markets or maybe newer, whether it’s Turkey, I know there are areas you’re moving some of the Russian base too. So I’m wondering if some of those could be a source. And then just on top of that, is there any way you can help us understand the percentage breakdown of your employee base that you’d expect to be within a couple of quarters after these moves occur?

Yes. Thank you for the question. I think we directionally indicated already how much we think by the end of the year, we expect people between Ukraine and Belarus. Because in Russia we’re closing in the next few months. We are also hoping and I think we indicated this as well, and Jason mentioned this specifically, we’re considering a good number of our employees from Russia and some from Belarus will be relocated based on our BCP requirements from the clients. The relocation is happening right now to multiple countries, mostly in Europe and Western Asia, as well as Central Asia. So I don’t think we can provide exact details and percentages, but the idea is definitely to identify a number of specific countries where we think we can scale. We also want to bring the talent that exists at EPAM. We believe that in this configuration, we will be able to accelerate recruitment and maintain connectivity to EPAM culture, which we have been building for a long time. During the last 12 months, the fastest-growing market for us was actually India and Latin America. We were focusing on diversification, and that is actually working for us, and we will accelerate even more in those talent markets. So India and Latin America will be our focus, along with new development centers and existing ones in Europe, which will be complemented by talent reallocated from our traditional locations, creating stability and client comfort which will drive growth. Okay. I think that’s what we can share. I don’t think we can provide very specific numbers right now.

All right, Ark. And then just a very quick follow-up is you mentioned pricing discussions will obviously come after this. But can you just comment on the receptivity? We heard from one of your competitors yesterday and others in the industry that they’re seeing pretty understandable receptivity around the industry for inflation to be passed through in price. So especially in the context of what you have to do to move folks, what kind of reaction are customers having now to that price offset?

Yes. I think we’ve talked about over the last couple of quarters that the market, just because of the imbalance between supply of technical resources and tremendous demand, means that those conversations have been easier for a while. Our clients are also seeing the cost of their employees go up, so there’s some cognizance that there is inflation in the market. And so these discussions have been easier. The one thing I’ve been pleased by is just in conversations with clients; I think there’s an understanding that they do get a different level of productivity from EPAM. As we’ve had to make all these difficult transitions to different countries, what they get from EPAM from a delivery standpoint truly is differentiated. That has helped with the stability of maintaining customers, but it also supports the conversations we’ll be having about pricing.

Hey, thanks for taking my questions. And congrats on operating in a really tough environment. I just had a couple of questions. We have done some checks with folks on the ground, and we’re quite amazed with the resilience that we heard from Ukraine. Can you provide some more granular feedback on how you’re delivering these high levels of productivity from Ukraine? I know you provided the high-level sort of feedback, but can you provide more specific insight into how you’re able to deliver these levels of productivity from Ukraine?

So as you know, Ukraine is our largest location, and we had a pretty distributed delivery centers infrastructure in the country with several major data centers there. During the first weeks, the main focus was to bring as many people as possible to the western part of Ukraine, where we have our central office and establish a number of new data centers in smaller cities around the region. From an infrastructure point of view and activity point of view, we didn’t have any interruptions in Kyiv, which is our major city, major development center. Between these two, we were covering the majority of the necessary work happening. I don’t know what else we can share except praising our employees who were focusing and actually keeping their mind straight with this difficult situation for the work. That was on top of a couple of thousand people, specifically women, who were able to relocate to Poland and to Hungary and work from these locations as well.

Perfect. And then just as you transition your talent from Russia or Belarus or Ukraine, where are most of them being moved to? Right? Is this them being moved to Poland and Hungary, or are they moved to the U.S.? Where are most of these folks being moved to who are exiting there?

No, this is a pretty sophisticated operation right now. If I start to list all countries where people might be moved right now, it would probably be by the end of this call. But there are several specific areas. Poland, obviously, was one of the key destinations, but it’s not only Poland. It’s countries in Central Asia, it’s countries in Turkey, and Serbia. So these are all known names. But it’s not a one-phase exercise, because in some situations we have to move people very quickly and then find the final destination, which could be the U.S. or Canada, depending on the people and their skills profile. This is a very much longer-term operation for us.

Terrific. And last question for me; I just want to follow up on Bryan’s question earlier on existing and prospective clients. Clearly, existing clients are being supportive. But what is the feedback from new clients? Are you still selling to new logos and getting traction with newer clients?

Yes. As we’ve mentioned, the real focus was to stabilize operations with existing clients and address opportunities for growth in existing clients, which is still happening. Definitely, there are new logos coming to us, and there is a very trusted network of people in the industry who are bringing us to their new destinations because people are moving, and they’re comfortable working with us; it feels very normal. Some of those people truly believe in the differentiated level of service we provide. This is still happening. But as you can see, we’re practically flat right now between Q1 and Q2, which means that it’s a balance right now. We’re seeing stabilization, and we really believe that Q3 and Q4 should more accurately reflect what’s happening. But we cannot tell exactly; otherwise, we would be guiding for the year.

Thanks very much.

Thank you. Hi, Ark. Hi, Jason. First of all, much respect for what you and your employees achieved this quarter. It’s truly amazing. I guess my question is: can you accelerate some of the delivery diversification using M&A? Or is there just too much going on operationally that you would not add that to the list of things to do?

I think we’re looking at opportunities. Even in this very difficult period, I don’t think our M&A strategy has changed. We’re looking for additional skills and additional locations, but we’re not looking for very large ones because that’s a different level of integration. As you mentioned, it’s probably not exactly on our mind right now. But we’re looking for some small accelerators in different geographies so we can grow faster that would be necessary.

Yes. They might actually be entry points or beachheads in the countries in which we’re not currently operating. Those give us management experience in those countries and then we grow around them. They might start small but allow us to accelerate in different regions, including beyond the Balkans and Latin America.

Understood. Understood. And I think I did hear a comment regarding new business development having restarted. Could you provide more color around that? Is that perhaps an indicator that even your client conversations, as you mentioned previously, are transitioning from figuring out delivery with you to perhaps figuring out growth with you?

So I really didn’t get the question exactly.

The new business development...

New business development; we have a significant presence outside the region. We have built pretty good reputation during the last year from quality of delivery. We still have people coming to us, and some of them are actually looking for the type of talent we have in this difficult region. We have the opportunity to relocate and mix capabilities right now, and many clients are looking for this as well. It’s difficult in this situation to say there are a lot of new logos coming because people are cautious, but we see a very positive direction happening since the beginning of March.

Hi. Thank you for taking my questions today, and also amazing job that you guys are doing as we can all see. Can you describe how your balance—actually, what I meant to ask was, when you’re relocating people right away, is there a lag due to travel, et cetera? Or with those relocation efforts, are you able to make those people productive pretty quickly? And I guess the following question is, is there a backlog of people who are still waiting to be relocated? Or is the relocation process largely complete, at least as it stands today, understanding that the situation on the ground is fast moving in terms of the conflict?

I don’t think we would be sharing all logistical components of what’s happening because it’s difficult to describe, as there are multiple challenges there. What’s important instead of discussing the specifics is that we believe by the end of the year, our locations in Ukraine and Belarus would not be more than 30% of our capacity. I think that’s an important focus; the rest of this, I would rather skip right now.

Fair enough. Fair enough. And has there been any issues with attrition outside the conflict zone? In other words, are you having—are the staff who you’re having to lean on in order to keep things going experiencing burnout or morale issues, or are things okay on that side as well?

I’ll comment on attrition and put a few numbers out there. The attrition that has occurred has also been a very positive—I don’t want to call it a surprise, but certainly if we didn’t have any incremental voluntary attrition. We have had some incremental involuntary attrition primarily related to Russia. We are up around 20% from an attrition standpoint. But regarding voluntary attrition, the levels we are seeing are very similar to what we saw in Q4 and Q3. So at least at this time, there has been very little change in attrition, and EPAM employees are highly supportive of all the work that needs to be done, which is why we have executed as successfully as we have.

Thank you. Good morning. I was wondering if I could just go back to the supply side, and maybe you could speak to some of the key similarities and maybe even the differences in building supply outside of your historical strengths in Belarus and Ukraine, and perhaps share some lessons learned from the efforts years ago to start up in India, as that operation had some fits and starts. I’m just curious what lessons you've taken from there that may be helping you scale outside the region?

Thank you for the question. With you specifically, and some other analysts on the call who saw EPAM ten years ago and visited our locations back then. Ten years ago, we were operating practically in only four countries. In those countries at this time, nobody was thinking that it was possible to put together tens of thousands of people. We invested heavily in infrastructure, in our digital platforms, and in our locational ecosystem. When you ask what is similar or not, we are trying to bring all this experience into how to build relatively scalable centers, relatively scalable operations. You mentioned India; we started in India much later than anybody else really. 2014 was initiating for us to open productions and then in Latin America and Mexico as well. Through applying the lessons we learned during our complete failure to launch in Eastern Europe, we see India last year becoming one of the fastest-growing locations for us. But it wasn’t the fastest growth for the first three years; it was relatively flat or even declining. We changed operations, and while we still have the same management we acquired long ago, we have the support of this team to transition it to a very different company today. That’s why India will probably become by the end of the year Number 2 or Number 3 location for us. Similar things are happening in Latin America; we were selective in the management teams there to ensure they would impose high standards. We did a small acquisition last year, which we’re very happy with. Colombia is growing rapidly for us. We opened across Latin America as well, and Mexico is one of the fastest-growing locations for us. We’re bringing what we know to new locations. That’s why we’re confident—again, it’s difficult to claim confidence when there are so many unknowns—but with some assumptions on how it could happen, we do believe that by the end of this year we can grow back to our close to normal rates.

Got it. Great. Thank you for that. I just wanted to clarify one thing. I think you made maybe it was you, Jason, a comment about the bench included in utilization, and maybe I just misunderstood it. But perhaps you could clarify that. Are you maintaining a larger bench in Ukraine now just to back people up? Or did I just misunderstand that comment? Yes. No, that’s fair. Let me clarify that probably for everybody here. We’ve added individuals that were counted as utilized. As Ark said, the focus of Q1 was to ensure we maintained delivery and customers. We had a fairly significant number of employees added who are not billing at this time. They are potentially billable but are currently not being billed. They showed up in utilization because they’re technically in billable roles, but we’re not charging for them to customers. We did exclude the expense for the purpose of non-GAAP numbers we provided. The idea is that at some point in time, we are beginning to have discussions to ensure those positions become billable. Right now, they are there to ensure that if there was any concern about continuity in Ukraine, we’d have effectively backup resources available. Generally, those are in countries clearly outside of the affected region.

Right. Could you just give us a sense of the scale of that backup kind of work for us at this point?

I think you can see it in the press release; I think we’ve mentioned in terms of guidance. So you can actually see the percentage, the costs associated with it, and it’s there in the press release.

Great. Thank you very much.

Thank you. First of all, I would like to personally thank the entire EPAM team for their dedication, leadership, and commitment. We have been through a lot during the last couple of years, and we’re definitely dealing right now with something we never expected during the last months. I appreciate everybody staying with us and doing this with us, and to our clients and our partners. If you have questions, you know where to direct them. Hopefully, we will see you also in Boston in a couple of weeks. Thank you very much.