EPAM Systems Inc (EPAM) — Q3 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 third 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 materials located in the Investors section of our website. And now let’s turn the call over to Ark.

Thank you, David. Good morning, everyone. Thank you for joining us this morning. Let me begin today with a simple statement that we're very proud of everything EPAM achieved over our nearly three decades and that we are very thankful to the people who have contributed tremendously over those years. I would like also to add one more aspect, which feels very important to bring to the top of our conversation. As you all know, the war in Ukraine is still dominating global headlines. We are seeing this ripple effect across many sectors and geographies, including for us at EPAM and many people around us. This war continues to be a central part of our lives, deeply personal and a constant priority. With this, I would like to start with an update on our progress across our four-phased approach, which we shared with you six months ago, back in May, as well as an update on some adjustments we are making as a result of newly available information. Our first phase focuses on safety of our employees and stabilization of our operations in Ukraine. The war has been ongoing for eight months already. Last time we met, we indicated that we thought it was going to last longer than many anticipated when it began. We all understand the situation continues to be serious, and safety is a relative term for people who are near Ukraine's borders today. With this in mind, we are constantly and proactively helping our employees, their families, and the people of Ukraine as much as we can, providing a wide range of support, including regional allocations and all forms of local assistance, which allow our people, their families, and often industry colleagues to continue to live and work in Ukraine. We are also continually developing ways to address new and unpredictable challenges. Just yesterday, we were considering what we can do today to make it easier and safer for tomorrow. As a result of these efforts, we are working together across all locations to maintain the highest level of service possible for our customers across all of our delivery locations within Ukraine. Even with the recent level of infrastructure instability, the productivity of our teams in the country remains high, which makes us believe that we can count on this level of resilience in our delivery operations as we share our guidance with the market today. Thank you to our Ukrainian team and all the farmers for making this possible; it’s simply incredible. Moving to our second phase, the acceleration of our global diversification effort and continued growth of our diverse capabilities. Over the last eight months, we have accelerated key parts of our global strategy in many ways, accomplishing what we had planned to do over several years. Our delivery locations and geographies are becoming more balanced. Last quarter, we reported that impacted regions accounted for 40% of our team, while today this proportion has practically been reduced to 30% with approximately 30% of our talent remaining in the immediate regions. This is something we plan to achieve closer to the end of this year. So, our presence in Europe, outside of those regions, in Central and Western Asia, India, and Latin America are growing proportionally. In short, the adaptation of our business and the positioning of our delivery organizations is moving forward at an unprecedented pace. We are very thankful to the many thousands of farmers and their immediate families for their loyalty, trust, and their decision to move to new country locations while staying with and continuing to work at EPAM. While it has been a complex undertaking, we are encouraged by the overall levels of engagement and productivity we are seeing now across many new crops and satellite locations. Many of those employees bring years of experience, skills, and knowledge with them, and are key to our global expansion efforts. We have safely integrated and scaled a globally resilient workforce now operating in more than 50 countries. Please note that during this time, we practically doubled the number of locations, which should enable us to establish additional hubs, with the goal of employing over 5,000 people in these locations over the next few years. Some of these hubs did not even exist before February 2022. As you can see, we are passionate about creating technology hubs and expanding our investment in many geographies. As a result, our global delivery platform and new ways of working should position us to become one of the most geographically balanced and value-added services companies in the market. Moving to Phase 3: continuing to serve and expand the demand for our services for our growing global customer portfolio. And Phase 4: our focus on profitability, which are both very connected. We are working closely with our customers to reposition sizable portions of our program portfolio without disrupting or impacting employees. Our business continuity programs create the stability needed to plan for continued growth and enable uninterrupted service quality. Our customer portfolio is now better diversified and more resilient, considering the new level of engagement and new talent options. We have established a broader, more available partnership framework for us post-war. Today, we are staying close to our customers and working through different project plans and contingencies in what has become, for us, the new normal. That also includes our efforts around returning to project levels that align with our historic numbers. As you can see, we have already seen some intermediate success in this direction. While it is still too early to say that we have fully calmed the challenges to make it sustainable, on the topic of navigating the unpredictable, I would also like to share here that during the recent Gartner Symposium in October, EPAM was presented as a future case study on labor and global market resiliency, especially based on our efforts over the last eight months to adapt to provide safety to our people and assistance with relocations. So, we are continually investing in our capabilities and future growth while navigating the unpredictable. We believe that most of the efforts highlighted by Gartner have set us onto a new trajectory, establishing a strong foundation, which will position EPAM for continued growth and market differentiation. Here, I would like to mention three developments on top of what we have already shared. First, progress in EPAM's ongoing integrated consulting business, which opens new market entry points and extends the depth and breadth of our existing relationships with customers to cover even more strategic segments in our portfolio, also reflected by our increased onsite production, which is now 13.6%, the highest in our system. Second, furthering our ecosystem partnerships enabled by our product and platform resilient heritage, allowing us to bring relevant solutions to customers facing increasingly complex business and technology environments. Lastly, we are making significant investments in our educational platforms, which keep our employees at the cutting edge and allow us to attract, develop, and deploy global talent for EPAM, as well as offer composable education services to our customers. In simpler terms, through all these efforts, we are focused on maintaining our engineering and technology advantage and reputation across all our new and established locations. Yes, we do understand that this is a key question you as investors and all our clients are asking today about our ability to continue moving higher in the value chain, something we began 10 years ago and something we are eager to continue doing now and in the future, proving to the market that we can offer to our clients something rare: strategy and implementation simultaneously and at scale, and do it better than most of our competitors can. With that, let’s talk a bit about our Q3 results, while Jason will share, as always, the detailed write-up. In the third quarter, EPAM delivered $1,230 million in revenues, a 24% year-over-year growth and non-GAAP per share of $3.10, a 30% increase over Q3 2021. It’s important to note that in constant currency terms, with proper adjustments on discontinued revenue in Russia, that growth would have been approximately 35%. During this quarter, the company generated $234 million of free cash flow and now has approximately $1.5 billion of cash on hand. We are proud and grateful to all our teams for continuously managing the business at this level while responding to constant pressure to plan and execute a large number of tactical adjustments in an increasingly complex geopolitical and economic environment, especially thankful to our teams in Ukraine. As you may have heard during the last month, some of our partners and customers have been messaging expectations for a global slowdown in demand, leading to actions aimed at better aligning their businesses with this new environment. For us, while the demand environment continues to be active across several of our end markets— including planned second half transformational programs, products, platform development, and modernization efforts in addition to opportunities triggered from recent acquisitions— we are beginning to see an increased focus on programs aimed at driving short-term cost savings, operational efficiencies, and a range of optimization programs. EPAM is well-positioned for this. Still, even with all confidence in the relevance and demand for our services, we are beginning to see signs of a decline in growth levels. So, while we are taking steps to moderate our hiring expenditures in response, we are also reminded of previous downturns, during which we grew at an unprecedented rate. As such, we are working to carefully balance our supply and demand outlooks to capture the demand when it returns, as we have done in the past. As we wrap up 2022, we believe we will have contained the initial impact of the war within the fiscal year, including the discontinuation of our operations in Russia. But overall, we know that we are still in the middle of an ongoing crisis in Ukraine, and unfortunately, it doesn't seem possible to contain the full impact of the war just within 2022, as we previously discussed. What's changed over the past three quarters is that, when we say we can and will adjust our operations, we are confident that under these circumstances, we can do so reliably and quickly. This is a very important confirmation, that after almost 30 years of our existence, after 10 years of being a publicly traded company, and after becoming a member of the S&P 500, we can still demonstrate our strong entrepreneurial DNA and benefit from it by acting as a startup, ensuring our ability to adapt and grow further. While for now, we are still preparing for different types of mitigation scenarios in response to the ongoing war, events to protect EPAM and our employees who remain in the region. Nonetheless, we are confident that the steps we have taken to reposition and diversify the company have created an even stronger foundation for future growth, as we focus on EPAM as a $10 billion company, very much in line with what we shared with you in early 2022 before the war began. Now, let me turn the call over to Jason, who will discuss our Q3 results and provide additional perspective as we look at Q4 and beyond.

Thank you, Ark, and good morning, everyone. Before covering our Q3 results, I wanted to remind everyone that in addition to our customary non-GAAP adjustments, expenditures related to EPAM's humanitarian commitment to Ukraine, the exit of our Russian operations, and costs associated with accelerated employee relocations have been excluded from our non-GAAP financial results. We've included additional disclosures specific to these and other related items in our Q3 earnings release. In the third quarter, EPAM delivered another set of strong results across both top and bottom lines, in addition to strong cash flow generation. During Q3, EPAM generated revenues of $1.23 billion, a year-over-year increase of 24.1% on a reported basis and 29.8% in constant currency terms, reflecting a negative foreign exchange impact of 570 basis points. Additionally, the reduction in Russian customer revenues resulted from our decision to exit the market, which had a 470 basis point negative impact on revenue growth. Adjusting for the exit of our Russian operations, reported revenue growth would have been approximately 29%. Looking at the performance of our industry verticals in geographic regions for the quarter, growth was negatively impacted by the ongoing exit of our Russian operations, while effective foreign exchange on our U.S. dollar reported results was helpful. I'll provide an adjusted year-over-year comparison. Beginning with our industry verticals, travel and consumer grew 41.9%, driven by strong organic growth, primarily from our retail customers, as well as revenue contributions from recent acquisitions. Life Sciences and Healthcare grew 35% with strong growth coming from the healthcare industry, in addition to growth in Life Sciences. Financial Services grew 10.4%, with growth coming from asset management, banking, and to a lesser extent in insurance. Excluding our Russian customers, growth would have been 25.4% and 29.9% in constant currency. Business information and media delivered 20.8% growth in the quarter, driven primarily by clients in the business information industry. Software and high-tech grew 17.8% in the quarter, and finally, our emerging verticals delivered 26.6% growth, driven by clients in energy, manufacturing, and automotive. Excluding our Russian customers, growth was 29.5% or 39.4% in constant currency. From a geographic perspective, America, representing 61% of our Q3 revenues, grew 26.3% year-over-year or 27.7% in constant currency. EMEA, representing 36% of our Q3 revenues, grew 35.3% year-over-year or 50.3% in constant currency, driven by strong organic growth combined with an incremental contribution from recent acquisitions. CEE, representing 1% of our Q3 revenues, contracted 77.2% year-over-year or 80.2% in constant currency. Revenue in the quarter was further impacted by our decision to exit Russia and the resulting ramp-down of services to Russian customers. Lastly, APAC grew 10.5% year-over-year or 15.4% in constant currency terms and now represents 2% of our revenues. In Q3, revenues from our top 20 clients grew 22% year-over-year, while revenues from clients outside our top 20 grew 25%. Moving down the income statement, our GAAP gross margin for the quarter was 32.6%, compared to 33.9% in Q3 of last year. Non-GAAP gross margin for the quarter was 34.4%, compared to 35.1% for the same quarter last year. Compared to Q3 2021, gross margin in Q3 of 2022 reflects the negative impact of lower utilization, as well as the benefit from foreign exchange and the positive impact of a more normalized expense related to variable compensation. In Q3 2021, expenses related to variable compensation were unusually high, based on the strong bottom line and extremely strong top-line performance during that year. Q3 2022 was also negatively impacted by the timing difference associated with EPAM's ongoing efforts to align bill rates based on employee relocations. However, we have made better progress adjusting rates than originally anticipated. As a result, the negative impact on profitability was more limited than originally expected. GAAP SG&A was 16.1% of revenue, compared to 17.1% in Q3 of last year, and non-GAAP SG&A came in at 14.1% of revenue, compared to 15.3% in the same period last year. SG&A performance in the quarter reflected a lower level of cost related to both variable compensation and facilities, and also includes a positive benefit of foreign exchange. GAAP income from operations was $180 million, or 14.7% of revenue in the quarter, compared to $144 million, or 14.6% of revenue in Q3 of last year. Non-GAAP income from operations was $232 million, or 18.9% of revenue in the quarter, compared to $180 million, or 18.2% of revenue in Q3 of last year. Q3 non-GAAP income from operations reflects a lower level of variable compensation and a positive impact from foreign exchange, offset by a lower level of utilization. Our GAAP effective tax rate for the quarter was 18.4%, primarily driven by excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits, was 23.1%. Diluted earnings per share on a GAAP basis was $2.63, reflecting a $0.68 or 34.9% increase year-over-year. GAAP EPS includes the impact of the Ukrainian humanitarian expenditures, expenses related to accelerated staff relocation, and costs related to the planned exit of our Russian operations. Our non-GAAP diluted EPS was $3.10, reflecting a $0.68 increase or 28.1% growth over the same quarter in 2021. In Q3, there were approximately 59.4 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $252 million, compared to $206 million in the same quarter of 2021. Free cash flow was $234 million, compared to free cash flow of $185 million in the same quarter last year. We ended the quarter with approximately $1.5 billion in cash and cash equivalents. At the end of Q3, DSO was 69 days and compares to 71 days for Q2 2022 and 70 days for the same quarter last year. In Q4, we traditionally experience further improvement in DSO and expect a similar result this year. Moving on to a few operational metrics, we ended the quarter with more than 53,900 consultants, designers, and engineers, a year-over-year increase of 14.5%. Our total headcount for Q3 was more than 60,250 employees. Compared to Q2, we had a net decrease of approximately 1,000 in headcount. The net decrease in headcount is a result of the reduction in Russia-based headcount combined with a lower level of hiring across the organization, due to better than expected productivity in Ukraine, along with a focus on improving utilization. Utilization was 73.5%, compared to 77.1% in Q3 of last year and 78% in Q2 2022. Utilization continues to be impacted by the war in Ukraine. Now let’s turn to our business outlook. As in previous quarters, let me provide some context that informs our guidance for the fourth quarter. We expect a solid demand environment, including demand for programs that help clients drive additional revenue, modernization, and optimization. In a few cases in the retail and consumer space, we are seeing signs of moderation in demand due to delays in decision-making or additional scrutiny of program budgets. As a reminder, the exit of our Russian operations and the reduction in Russian customer revenues produces a tougher year-over-year revenue comparison, particularly in Q4, which has generally been a seasonally strong quarter in Russia. To date, our operations in Ukraine have not been materially impacted by the recent escalation of the war, and our teams remain highly focused on maintaining uninterrupted production. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers and maintain productivity levels at or somewhat lower than those achieved in Q3, consistent with our experience in the month of October. Through September 30, EPAM has spent more than $39 million as part of the company's $100 million humanitarian commitment to our Ukrainian employees and their families. We expect further humanitarian expenditures will be made in Q4 and during 2023. Now moving to our Q4 2022 outlook, we expect revenues to be in the range of $1.220 billion to $1.230 billion, producing a year-over-year growth rate of approximately 11% on a reported basis and 15% in constant currency terms, both at the midpoint of the range. Included in these growth rates is approximately 100 basis points of revenue attributed from acquisitions closed over the last 12 months. Additionally, the ramp down of Russian customer revenues due to our decision to exit this market has a negative impact, reducing our expected revenue growth rate by approximately 500 basis points. For the fourth quarter, we expect GAAP income from operations to be in the range of 12% to 13%, and non-GAAP income from operations to be in the range of 16% to 17%. We expect our GAAP effective tax rate to be approximately 21%, and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 23%. We expect GAAP diluted EPS to be in the range of $2.02 to $2.10 for the quarter and non-GAAP diluted EPS to be in the range of $2.62 to $2.70 for the quarter. We expect a weighted average share count of 59.6 million diluted shares outstanding. Finally, a few key assumptions have supported our GAAP to non-GAAP measurements in the fourth quarter. Stock-based compensation expense is expected to be approximately $33 million. Amortization of intangible assets is expected to be approximately $5.7 million. The impact of foreign exchange is expected to be negligible. Tax effective non-GAAP adjustments are expected to be around $9.6 million. Finally, we expect excess tax benefits to be around $4.3 million in the quarter. In addition to these customary GAAP to non-GAAP adjustments, consistent with prior quarters in 2022, we expect to have ongoing non-GAAP adjustments in Q4 resulting from Russia's invasion of Ukraine. Please see our Q3 earnings release for a detailed reconciliation of our GAAP to non-GAAP guidance. Our fourth quarter outlook reflects a solid demand environment combined with improving operating performance, allowing EPAM to return to its traditional 16%-17% adjusted income from operations range sooner than anticipated. Although we still face ongoing challenges, this is a significant achievement given the amount of disruption the company is managing through as a result of the war in Ukraine. We will continue to closely manage the operations of EPAM, while remaining attentive to any changes in the demand environment. Lastly, I’d like to thank our employees for their continued dedication and focus on our customers.

Hi, guys. Good morning. Thank you, I hope your colleagues remain safe here. Just first, I was hoping you could just dig into more on the detail on how you're forecasting that Q4 growth. Just as we consider a 30% adjusted rate of growth on a constant currency organic basis this past quarter, and we try to bridge that to the implied level in Q4. Can you just talk about some of the considerations? Is it really just a combination of lower utilization and some macro uncertainty on demand?

Yes. I mean, I think there are a few things. First, there is a decline in revenues associated with bill days, so it's just the natural algebra of there being fewer bill days in Q4 than there are in Q3. This would reduce revenue by about 2% between Q3 and Q4 if all else were held equal. At the same time, I think we continue to feel good about the growth that we’ve generated in Q3, and I think the other thing, Bryan, to point out is that we have the same impact on our growth rate from the exit from Russia. We had a $50 million Q4 last year, and we'll have mid to low single-digit Russian revenue contribution in Q4 of this year. So it's a combination of those two things. Again, we continue to see growth and continued spending and investments on the part of our clients, but it's probably at a somewhat lower growth rate than we've experienced earlier in the year.

Okay, okay. And then on the delivery footprint, understanding how the Russia exit this quarter really impacted that workforce level? Can you just comment on your comfort levels ramping in these other regions? Are there any notable changes in the delivery mix plan that you expect to exit this year at?

So Bryan, I think what we’re illustrating is our balance in our delivery capacity that we discussed a couple of quarters ago. We are actually right on plan or progressing slightly ahead. By the end of the year, we anticipate a couple more percentage points down from impacted regions, which means that we're continuously building our operations in Western and Central Asia, India, and North America as well. Right now, everything feels well balanced. Again, inside the company, we’re likely to go from the current 30%-31% down to 27%-28% trends in the positive direction.

All right. Thank you, guys.

Good morning and thank you. Just a couple of quick follow-up questions about some of the comments that you made about the dynamics. If you look at the quarter, you had a sequential decline in headcount. You beat the revenues modestly, yet margins performed with utilization down. You mentioned rates; is there anything else that helps to reconcile all those different variables with the outcome?

Yes, there are a couple of different ways to look at this. From a pricing standpoint associated with the realignment of pricing for the relocation of employees, we did better than we expected. So we had anticipated that to have a more negative impact on profitability in Q3 than it actually did. However, on a year-over-year basis, that wouldn't really show up as a benefit. What we did see was a couple of things; we benefited from foreign exchange, so while foreign exchange negatively impacted revenue growth rates, we have a number of countries from which we deliver where currencies have devalued more substantially than the euro or the pound, so that overall had a somewhat positive impact on profitability on a year-over-year basis. Lastly, as I mentioned in the script, last year's unusually strong performance driven higher variable compensation costs, and this year we are effectively booking a bonus at 100%. It's lower than it would have been last year. So I'm not sure if that fully addresses your question, but foreign exchange definitely played a role.

Right. And you had said, Jason, I think last quarter that you expect to get to more normalized margins in the first quarter next year, and you've exceeded that this quarter. As you think about next year, has anything changed in terms of sustaining those normalized margins?

Yes, if I recall correctly, I said we expect to get back toward that level; and I feel confident that we have achieved a phenomenal level of profitability in Q3 while guiding back to that 16%-17%. This was achieved through significant geographic transformation and realignment of rates, but at this point, it's early to talk about profitability in 2023 due to various moving pieces with the war and other factors. However, I am encouraged by the fact that we've generated such a strong level of profitability in Q3 and have confidence guiding to 16%-17% for Q4.

Right, and just one last one if I could. In the demand environment, you gave us insight into how that influenced your Q4 guidance. Are you seeing similar dynamics in other verticals, anticipating a slowdown?

David, you are reading the situation correctly. In general, there is enough messaging in the market suggesting many industries are cautious right now, and cost-saving priorities are becoming number one, versus transformation. That said, it's not necessarily apparent from specific actions across industries. That said, retail is usually quick to react and recover, as we saw in 2021. However, others may follow, and everyone seems more careful than just a few quarters ago.

Thanks, guys. When thinking about the transformation you wanted to achieve by this time of year regarding Russia sourcing and the labor side, could you provide an update on the progress remaining?

Thus far, we have shared detailed plans during our Investor Day, and we remain very much on track, although we must adapt to real-time conditions. Our focus has been maintaining balance in our delivery perspective while growing talent in new locations. We are confident that transitioning our delivery to more diversified regions will lead us to become the most balanced company in our sector.

We feel good about our ability to add headcount in the regions in which we're currently expanding in Latin America and India. Again, we can respond to future upticks in demand, and we believe we can still generate growth in excess of 20%, based on available demand. For now, we are focusing on improving utilization levels.

The answer is yes: we are confident that we can find the right talent in new locations. We are even more certain than we were a couple of quarters ago because we have gained experience in reapplying our successful strategies to new regions, similar to how we developed in our comfort regions in Eastern Europe.

Thank you. Just one last question: have you seen a notable shift to cost takeout plans or efficiencies by your clients yet? Or is it still very focused on transformation?

I would characterize the current environment as one where growth and digital transformation remain a priority, but now they are balanced by cost-saving measures. This change represents a shift in priorities, as we noted last year, but transformation is still a key priority for many.

Thank you. Good quarter, guys. As you consider the planning assumptions for next year, how are you thinking about the demand for digital transformation, particularly given that Q1 is a tough comp? Can you briefly walk through your thought process?

We are currently in the midst of planning, which includes an aspirational model and detailed account-level planning. We are getting feedback from business units regarding expectations on a per-account level. While I cannot provide specifics today, we do expect to return to a growth rate greater than 20% at some point in the future, likely in the second half of the fiscal year 2023.

Understood. And as we see results from others, there's a lot of weakness in the high-tech vertical. How does that affect your expectations, especially with your clients? Have you seen any specific impact?

As discussed, we have seen increased caution in the market about decision-making. It's been clear from the last few quarters that many companies are being more judicious in their investments. Retail has reacted the weakest, but other sectors are more stable; they're just slower in growth. That said, based on our historical response to downturns, we are confident that after slowdowns, growth typically returns.

We still see spending and investment from clients, albeit the growth rate appears to be slower, with some decision-making taking longer.

Thank you for taking my question. I have a question on the pricing environment. It seems like there are some opposing forces at play. On one hand, inflation might give you leverage to pass along pricing, but on the other hand, macro caution may also limit that. Can you discuss the pricing environment?

In recent months, we have executed well regarding pricing realignment for relocations to higher-cost geographies. We have successfully managed to realign about two-thirds of the positions and anticipate more price improvement going forward. However, it's difficult to predict the future environment, especially with potential 2023 uncertainty.

What are your thoughts on M&A in relation to the macro environment? Do you typically pull back on acquisitions during slower cycles, or might this be the opposite?

We generally do not adjust our M&A activity based on the economic climate specifically. We're always looking for the right additions, and if opportunities arise at better valuations due to changing conditions, we'll pursue them. As of now, we are focused on our current priorities but remain receptive to opportunities as they arise.

Thanks. A couple of follow-up questions. Jason, can you not only outline that return to 20% growth but explain what are your planning assumptions? Are you considering new capacity coming online or delivery capacity, or how do you see the current demand evolution?

You're correct that we would have generated significant revenues from Russia, especially in Q1, presenting a tougher comp. However, headcount increases over the last few quarters support future growth, providing a pathway for continued strong year-over-year growth. We can add headcount over time, and we have good operational experience in the newer geographies.

Thanks. Is it fair to assume that you're likely running higher utilizations in established geographies, and improvements in utilization are likely to come from newer regions?

Yes, that's accurate. We're definitely running with lower utilization in the impacted geographies, but there's also room for improvement in the newer geographies. The goal for Q4 is to achieve slightly better utilization, but we may still fall short of our targets. The focus will be on improving utilization as we move into early next year.

Your assumption is correct as we're seeing lower utilization in new locations due to the influx of new hires. By Q2, we expect to see stability and improvement in our new locations.

Thank you. I'd like to start with a question about your delivery footprint. Can you talk about how comfortable clients are with your exposure to the region? Are they expecting you to maintain backup plans in case of further disruptions? What balance do you need to maintain?

That's a very dynamic parameter. Clients are currently comfortable with the existing situation, but any increase in risk will alter their comfort. We have multiple new locations and a significant number of staff relocating successfully to ensure quality standards, which helps instill confidence in clients. We have a steady utilization rate right now.

Thank you. And as a follow-up, can you describe how visibility is looking with customers? Can you provide insight into the rate of delays or cancellations in projects relative to historical trends?

It’s too early to say definitively, as Q4 is still developing and we are not at a typical point in any year. The economic climate is volatile, but we cannot comment on specifics at this point due to the uncertainty. We’ve experienced volatility in previous quarters and know how to navigate it.

Ark, in your remarks, you mentioned the increase in on-site composition, the highest in company history. Can you provide context on why this is happening now?

Our growth as a brand has been a key factor; three years ago, we were less recognized in the consulting field. We have incrementally increased this to support the new types of engagements we anticipate and are currently undertaking. So, it is a result of our growth strategies rather than just a recent development.

Thank you. You commented about the $10 billion target. How are you thinking about that journey in light of the current situation?

While it may seem strange during these times, it is important to note that our experience through these challenges will help inform how we grow in the future. Although the economic slowdown adds complexity, our performance over past quarters would have been strong even without the war. Therefore, we view our $10 billion goal as realistic but aspirational. Thank you very much for joining us today and for your support. It's crucial to emphasize that EPAM, as a company, is fully committed to supporting Ukraine. We remain dedicated to our people in the country. Despite the difficulties, we see a very bright future for EPAM, and we’ll communicate again in three months.