EPAM Systems Inc (EPAM) — Q3 2023 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 2023 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Thank you, David, and good morning everyone. Before I get into the results of our third quarter, I would like to recap what was certain regarding our expectations for Q3 and full year outlook three months ago during our last call. We stated that while the current business environment is more focused on cost optimization versus our differentiated build and deploy capabilities, we do believe the demand for transformation services will come back under the services market. You'll be moving from core IT to accelerated digitization to reinvent your business models and ways of working with generative AI as the core of the transformation. And that we expect this new demand to be underpinned and even more driven exactly by our traditionally strong product platform engineering, data analytics and AI/ML capabilities. At the same time, we said we still expect the negative dynamic to continue into the second part of 2023. Here is when the outlook begins to normalize. We stated that we are focusing on pragmatic plans and action items, which will be applied to our business throughout the rest of 2023 and into 2024. These changes are transformational for us and already better position us in preparation for the return of stronger market demand. That was the first part of our premise. The second critical part was about our efforts to further globalize and stabilize our delivery ecosystem, propagate engineering quality standards and optimize our target allocations, while closely focusing on our gross margin improvement efforts. We will continue throughout the remainder of this year and I expect it to go throughout 2024. With that reminder, let's talk about three key topics to address our demand environment, global capabilities, and key investments. Demand, we believe that while the demand for new build platform applications remains lower than historic levels and the impact of ramp-downs in the quarters continue to work through specific client portfolios. Our Q3 results point to signs of stabilization in our business both in new logos and in retail and expanded programs in our existing portfolio. We are seeing signs of renewed interest, particularly in our life science and healthcare verticals, also in insurance and energy. What is important to highlight in today's business environment, we are putting all possible efforts to address our client’s current priorities including addressing the mix of engagement models, cost takeouts, and consolidation initiatives, while protecting our share of wallet and long-term relationships. While these factors are leading sometimes to likely lower short-term profitability metrics, we are seeing signs that clients are returning to balance between cost and quality. Also, it requires today an increased focus on demand-led sales and go-to-market motions, and investments in global partnerships, to win and quickly grow new business. Over the last quarters, our global field organizations and our specialized practice teams have been focused on developing new offerings in key verticals and horizontals, expanding into new engagement models and extending our client portfolio to include new logos across the broader spectrum of our brands, from large enterprises to mid-market players to new and exciting start-ups in key collaborations. More and more often we are engaging with clients at both IT and business functions levels. One of the examples of those relatively new ways to engage is strengthening our partnerships, which have taken on greater momentum recently with key collaborations driving new go-to-market propositions, new IP, and new client wins. Last quarter, we shared our global partnership with Google Cloud to help our clients fast track the development of artificial intelligence machine learning and data solutions to help them accelerate their transformations into AI-enabled businesses. Earlier this week, we announced a strategic collaboration agreement with AWS. This aims to accelerate modernization, adapt cloud-native architecture and leverage artificial intelligence and advanced analytics to create customer value in key industries such as healthcare, life sciences, financial services, insurance, energy, and gaming. Furthermore, we expanded our partnership with Microsoft, becoming a globally managed enterprise system integrator. The enhanced partner status and EPAM's advanced cloud, AI, and data expertise will enable us to help our clients modernize, transform, and simplify complex enterprise platform application and processes, to accelerate business growth powered by Azure OpenAI service. The current results of these efforts are showing up in an increasing number of conversations with clients and growing numbers of opportunities. While it's still too early to say when we can show significant revenue growth, our production load is starting to come back to levels comparable to Q1. We hope to see this trend take shape during the next quarters. Still, despite signs of improving demand conditions, the global macroeconomic environment remains volatile and we see certain trends reflecting our own builds notably in Europe, where the contraction in the third quarter is likely to take a few quarters to work through. Now, we are down to global capabilities. India and Latin America are key growth delivery regions for us, while Central Eastern Europe and Central Western Asia are areas of stabilization after our massive allocation efforts. We've seen future growth opportunities. Part of the effort regarding globalization and stabilization of delivery is rightsizing and cost optimization across multiple locations based on current and future demand outlook and specific location capabilities. Some identical efforts are also relevant in several locations in Western Europe and North America. While optimizing some locations, we continue to reinvest in new talent in key initiatives to expand our engineering G&A across all strategic global delivery locations with continuous harmonization and upskilling efforts, enabled by our own use of AI and EPAM productivity platforms. Those efforts are underway, as we speak. We are already seeing first results and expect additional benefits to materialize in 2024. This brings us to the topic of additional investments, which we have mentioned multiple times in the past. We are continuously investing in our strategic priorities such as expansion of differentiated consulting agency data ML AI, and cloud capabilities with a focus on vertical expertise. Development of go-to-market with cost-effective solutions, which now include propositions related to the use of responsible AI across a broad range of business and technology use cases. Our strong cloud engineering, data, and ML core services profile should position EPAM to benefit in the medium and long term from both current pent-up demand for modernization and the fundamental skills shortage in concrete technological transformations, which still persists today. The impact will become even more real in terms of the complexity of future applications and platforms by encapsulating not just currently available elements of AI but also by closely integrating with new classes of composite and adaptive AI platforms as well as foundational models and specific industry cloud platforms. One of the key propositions offered by EPAM is our ability to make real changes. As part of this focus, a number of our labs and centers of excellence have created IP that we are using to productize our learnings and share them with our clients through our own open-source initiatives. We mentioned our work with Dial, our AI orchestration workbench, in our previous call. Today, we see a number of extensions of this platform into specific use cases and specific industries based on real-life problems which we are addressing with a growing variety of integrated AI tools and data sources. One of our more significant investments related to AI is the development and internal rollout of EPAM's responsible AI framework, along with broad employee training to adapt it. Today, we are confident that EPAM has the necessary capabilities and talent to help our clients evolve in the general adoption of AI, and also in the modernization of applications and proper data engineering efforts to drive the value AI promises to bring. Conversations with our clients are evolving as it becomes clear that fundamental capabilities and readiness in cloud computing and data management are necessary prerequisites for success. The level of interest continues to indicate that demand for our related services will build momentum into 2024 and beyond. I believe that provides a good overview of our current state and key areas of focus. To summarize, I would like to say that with the exciting opportunities in front of us, we are still facing a challenging demand environment. We are working to invest for the future while balancing supply and demand for skills and capabilities across a much more diverse delivery footprint. This challenge continues as the war in Ukraine extends into its third year and new disruptions in the Middle East require us to continue adapting the company in an appropriate manner. I believe at this point, we feel well arranged to manage all of these challenges effectively. So with that, I would like to pass to Jason to share more details and numbers for Q3, along with an update for our business outlook for the remainder of 2023.

Thank you, Ark, and good morning everyone. In the third quarter, EPAM generated revenue of over $1.15 billion, a year-over-year decrease of 6.1% on a reported basis, or 8% in constant currency terms, reflecting a favorable foreign exchange impact of 190 basis points. Revenue in the quarter continued to be impacted by reduced program spending across a number of our clients, as well as ongoing client cost related to new project starts. The reduction in Russian customer revenues resulting from our exit from the market had an approximate 50 basis point negative impact on year-over-year revenue growth. Excluding Russia revenues, year-over-year revenue reported in constant currency would have decreased by 5.6% and 7.6% respectively. Beginning with our industry verticals, on a year-over-year basis, financial services decreased 3.3%, driven by declines predominantly in banking, partially offset by growth in asset management. Consumer decreased by 6.2%, primarily due to declines in consumer goods, partially offset by solid growth in travel and hospitality. Life sciences and healthcare declined 4.2%. The year-over-year growth rate was negatively impacted by the ramp down of a large transformational program in late 2022, which we mentioned during our previous earnings call. On a sequential basis, growth in life sciences and healthcare was a positive 8.6% and we expect to return to positive year-over-year growth next quarter. Business information and media declined 12% in the quarter. Revenue in the quarter was impacted by a reduction in spend across a number of large clients based on uncertainty in their end markets, particularly in the mortgage data space. Software and Hi-Tech contracted 15.1%. The year-over-year growth rate was negatively impacted by the reduction in revenue from a former top 20 customer we mentioned during our previous earnings calls and generally slower growth in revenue across a range of customers in the vertical. Finally, our emerging verticals delivered solid growth of 8.5%, driven by clients in energy, manufacturing, and automotive. From a geographic perspective, the Americas, our largest region, representing 59% of our Q3 revenues, declined 9.3% year-over-year or 9.5% in constant currency. On a sequential basis, growth in the Americas was relatively flat, an improvement from the declines in previous quarters in 2023. EMEA, representing 39% of our Q3 revenues, grew 1.8% year-over-year and decreased 3.5% in constant currency. CEE, representing less than 1% of our Q3 revenues, contracted 66.4% year-over-year or 58.8% in constant currency. Revenue in the quarter was impacted by EPAM's exit of its Russian operations. Finally, APAC declined 20.2% year-over-year or 19.8% in constant currency terms, and now represents 2% of our revenues. Revenue in the quarter was impacted primarily by the ramp down of work within our financial services vertical. In Q3, revenues from our top 20 clients declined 8.3% year-over-year, while revenues from clients outside our top 20 declined 4.9%. Moving down the income statement, our GAAP gross margin for the quarter was 31.1% compared to 32.6% in Q3 of last year. Non-GAAP gross margin for the quarter was 32.9% compared to 34.4% for the same quarter last year. Gross margin in Q3 2023 reflects the negative impact of pricing pressure and lower utilization, partially offset by a lower level of variable compensation expense. GAAP SG&A was 16.9% of revenue compared to 16.1% in Q3 of last year. Non-GAAP SG&A in Q3 2023 came in at 14.4% of revenue compared to 14.1% in the same period last year. GAAP income from operations was $114 million or 9.9% of revenue in the quarter compared to $180 million or 14.7% of revenue in Q3 of last year. Included in our GAAP results in the quarter is a $25.9 million loss on the sale of the company's remaining holdings in Russia and $8.4 million in severance as we take steps to reduce our cost structure to better align with demand. Non-GAAP income from operations was $196 million or 17% of revenue in the quarter compared to $232 million or 18.9% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 26.3%, which includes a one-time tax charge connected to the disposal of holdings in Russia and lower-than-expected excess tax benefits related to stock-based compensation. Non-GAAP effective tax rate was 23.2%. Diluted earnings per share on a GAAP basis was $1.65. Our non-GAAP diluted EPS was $2.73, reflecting a $0.37 decrease compared to the same quarter in 2022. In Q3 there were approximately 58.9 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $215 million compared to $252 million in the same quarter of 2022. Free cash flow was $211 million compared to free cash flow of $234 million in the same quarter last year. At the end of Q3, DSO was 73 days, which compares to 71 days for Q2 2023 and 69 days for the same quarter last year. The uptick in DSO reflects an increase in the time some clients are taking to review and approve payments combined with the last day of the quarter falling on a weekend. Share repurchases in the third quarter were approximately 318,000 shares for $78.5 million at an average price of $246.44 per share. As of September 30, we had approximately $372 million of share repurchase authority remaining. We ended the quarter with approximately $1.9 billion in cash and cash equivalents. Moving on to a few operational metrics. We ended Q3 with more than 48,500 consultants, designers, engineers, trainers, and architects. Including the impact of our exit from Russia, production headcount has declined 10% compared to Q3 2022. This is the result of lower levels of hiring combined with both voluntary and involuntary attrition as we continue to balance supply and demand. Our total headcount for the quarter was more than 54,600 employees. Utilization was 72.7% compared to 73.5% in Q3 of last year and 75.1% in Q2 2023. Now, let's turn to our business outlook. We are encouraged by the results of our demand generation efforts and new customer revenues resulting from these efforts. However, the level of new customer revenues being generated is still not enough to offset the impact from existing project ramp downs and reduced spending from our top 20 clients. We are beginning to see a degree of demand stability emerging in our North American portfolio, but we are also expecting an impact from planned ramp-downs at several of our European customers. Although, there are encouraging signs, demand remains somewhat uncertain. In addition to the negative impact the Q4 seasonality usually has on revenue, we have also had a large number of employees relocate to countries that celebrate December holidays. In Q4, we also expect unfavorable foreign exchange headwinds in comparison with Q3. These factors are producing a sequential decline in Q4 revenue, despite the stabilizing demand environment. Our Ukrainian delivery organization continues to operate efficiently, and our teams remain highly focused on maintaining uninterrupted production. Our guidance assumes that we will continue to deliver from Ukraine at productivity levels consistent with previous levels throughout 2023. During the third quarter, we elevated our focus on aligning our cost structure with the near-term demand environment, initiating a cost optimization program designed to reduce operating costs by 2.5% to 3%. This effort is clearly more intentional than our previous supply and demand balancing efforts. We think it is necessary to take this action in part to allow for further investment across our strategic initiatives, demand generation efforts, and people programs. As I mentioned earlier, we had $8.4 million in severance-related costs in Q3 of which $7.1 million related to the cost optimization program. In Q4, we expect to recognize a further $15 million in expenses as a result of this cost optimization program. We expect headcount to continue to decline in Q4 due to limited hiring and managed attrition, which will drive utilization slightly higher in the quarter. Moving to our full year outlook. We now expect revenue to be in the range of $4.663 billion to $4.673 billion reflecting a year-over-year decline of approximately 3%. On an organic constant currency basis, excluding the impact of the exit from Russia, we expect revenue to also decline by 3%. We expect GAAP income from operations to now be in the range of 10% to 11% and non-GAAP income from operations to continue to be in the range of 15% to 16%. We expect our GAAP effective tax rate to continue to be approximately 22%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation is expected to continue to be 23%. For earnings per share, we expect the GAAP diluted EPS to now be in the range of $7.07 to $7.15 for the full year and non-GAAP diluted EPS to now be in the range of $10.31 to $10.39 for the full year. We now expect a weighted average share count of 59.1 million fully diluted shares outstanding. Moving to our Q4 2023 outlook, we expect revenue to be in the range of $1.13 billion to $1.14 billion, producing a year-over-year decline of 8%. On an organic constant currency basis excluding the impact of the exit from Russia, we expect revenue to also decline by approximately 8%. For the fourth quarter, we expect GAAP income from operations to be in the range of 10% to 11% and non-GAAP income from operations to be in the range of 15% to 16%. We expect our GAAP effective tax rate to be approximately 24% and our non-GAAP effective tax rate to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.67 to $1.75 for the quarter and non-GAAP diluted EPS to be in the range of $2.47 to $2.55 for the quarter. We expect a weighted average share count of 58.8 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements in the fourth quarter. Stock-based compensation expense is expected to be approximately $36.3 million. Amortization of intangibles is expected to be approximately $5.7 million. The impact of foreign exchange is expected to be minimal. Tax effective non-GAAP adjustments are expected to be around $12 million. We expect excess tax benefits to be around $1.3 million and expect to recognize approximately $15 million in expenses related to our cost optimization program. In addition to these customary GAAP to non-GAAP adjustments and consistent with the prior quarters in 2023, 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. Finally, one more assumption outside of our GAAP to non-GAAP items. With our significant cash position, we are generating a healthy level of interest income and are now expecting interest and other income to be $14 million in the fourth quarter. Looking beyond 2023, we intend to provide our 2024 business outlook during our fourth quarter earnings call scheduled for February. However, I would like to provide some commentary at this time to help frame our initial thoughts. As Ark mentioned, the demand environment remains uneven and we believe this will persist at least into the first half of 2024. We have been pleased with the progress we're making on demand generation and will continue to prioritize revenue growth into 2024 which in some pursuits include some degree of discounting. Additionally, in 2024, we expect to incur incremental costs due to more normalized variable compensation as well as salary increases from our annual compensation cycle which typically occurs in Q2. Although the cost optimization program will better align our 2024 cost structure, we still expect wage pressure combined with the limited ability to improve client pricing to continue to put pressure on margins. While 2023 has been a challenging year for the IT sector in EPAM, we remain confident in our ability to drive historical levels of revenue growth and profitability in a more normalized demand environment. Operator, let's open the call up for questions.

Hi, good morning guys. Thank you. I guess let's start on the demand stabilization trends that you highlighted here again. I heard you mention production load coming back toward Q1 levels. Can you dig in a bit more there? Is that prevalent across industries? And is it consistent across the large client cohort? And just anything about how that informs early 2024 client tech budget discussions?

Let me clarify what we mean. We're trying to see the trend what's happening with our production. It's not about revenue; it's about how much work we are doing. Because there are a lot of different parameters influencing revenue from FX to number of days to race to discounts and everything else. But from the load point of view, the trend is that we're seeing we're coming back to a number of people who are doing production work getting comparable to what we saw in Q1. That's what it means. It means that, in general, we find ourselves stabilizing our share of the business even with some businesses declining with us but with some new opportunities growing and some clients actually coming back to us. So from the demand environment perspective, we've seen more conversations about programs and more opportunities. However, as we mentioned this morning, there is no clear timeline for realization. So, it's still difficult to say, but it seems like pressure on some clients to do work is getting bigger. We're starting to see realizations, but it's difficult to project especially with everything geopolitical moving as we see right now. So, there are more conversations and opportunities to discuss that are more tangible, but there is no clear strategy.

Okay. Understood. And then my follow-up on the cost optimization plan. So, Jason, what's the timeframe on achieving that savings target? And can you talk about how you're balancing efficiency here in the near term versus global diversification investments for future growth?

Yes. So, the program is designed to achieve somewhat over $100 million, or as we talked about in the prepared remarks, 2.5% to 3% of our cost structure. Most of the actions will be taken by the end of the year. There will be some residual actions that take place early in 2024 with the idea of giving us effectively $100-plus million in savings to allow us to further invest in 2024. This includes demand generation programs, partnership programs, capabilities, and generative AI further consulting. It will allow us to effectively fund a more normalized variable compensation and salary campaign next year. I expect most of the savings to be achieved by the end of this year, with probably some actions still taken in Q1. The costs we talk about in Q3 and Q4 are truly incremental costs related to either severance payouts in different countries, facilities, lease exits, other incremental costs that allow us to achieve some savings for 2024.

Thank you.

Hey. Thanks for taking my question. I want to focus a bit on your selling efforts and using India as one of those delivery centers to pitch new engagements. Maybe you can talk about some of your successes here. And on top of that, how does that differ in terms of your ability to generate profitability, compared to what you had pre-hostilities in Eastern Europe?

As we mentioned multiple times, India is growing fast. It is still an investment for us, especially to uplift the capabilities we have there because it's a relatively new location even if it has been the fastest growing for the last three years. We purposely built the same type of practices as we have globally from digital engagement to significant data practice and cloud practices. The stability question is difficult in general in this environment because there’s pressure everywhere from any locations that we have. However, we are seeing definite opportunities as market demand is starting to come back. We are accumulating a lot of experience. Now we have sizable programs there, and we understand that we can hire people with comparable quality through additional investments being made. So we are optimistic about this, and with everything that's happened as we mentioned several times, India will likely become a more significant part of EPAM deliveries.

I just want to follow up on the profitability. As we discussed in the last call, and again we’ll continue to discuss here today, we still have some characteristics of a heavier pyramid than we had traditionally operated with. Ongoing pricing pressures along with some wage inflation make it challenging to achieve typical profitability in the next handful of quarters or through most of 2024. However, I think, given time and particularly as demand increases, running that geography at levels of profitability consistent with what we did in Eastern Europe is certainly possible.

Understood. Can you remind us of your headcount mix by Eastern Europe, Latin America, and India? Where are we today, and what sort of mix do we want to get to down the road?

We're clearly less than 30% in Eastern Europe and heading towards kind of low 20s. India is currently...

We are about 26% to 27% between Ukraine and Belarus. Eastern Europe or Central Europe varies, as we have significant presence in Poland and Hungary. India is becoming our second-largest delivery location. It is currently the second largest after Ukraine.

All right. Thank you.

Okay. So, I guess, the question is when I look at your results either by geography or by vertical and on a sequential basis, and I compare the growth rates from Q2 versus Q3, almost everything is either decel or relatively unchanged—obviously the very idiosyncratic thing going on with life sciences. I'm trying to drive back with what I sense is a little bit more positivity in terms of commentary because of stabilization. Can you comment on how the environmental conversations with clients have evolved over the course of the quarter? Was September radically different than July? How are things evolving in October? A little bit more color of where we are going in terms of what seems to be stabilization in more areas.

I think, I've got the general numbers. The declining amount of work we're doing right now is definitely stabilizing. It's difficult to have an apples-to-apples comparison, but we have seen a lot of opportunities returning, particularly from some local fixed programs where clients are coming back to us. Important discussions are starting to happen while the realization of several larger programs is still ongoing. The level of conversations has improved significantly, which is a positive sign. However, potential delays remain due to geopolitical factors. More conversations and opportunities are certainly manageable but do not yet have a clear strategy.

On a year-over-year basis, the numbers still don't look sequential. Despite that, the decline in Q3 was less than the decline we faced in Q2. Looking ahead to Q4, we still anticipate a modest decline mainly from foreign exchange and the build ability. If you account for these factors, it does appear our demand is stabilizing—particularly in North America, as we mentioned in our prepared remarks.

Additionally, we are receiving more opportunities outside our traditional strengths in Eastern Europe. This stabilizing trend is positive as we scale outside traditional geographies, despite the complicated geopolitical environment.

That last point is really good to hear. In terms of pricing, does that imply a soft pricing environment? If you can break that down into how much of that is a geo-mix type of issue as opposed to pricing pressure. Over the last few quarters, you've mentioned that because of the war in Ukraine, you had to move resources to newer geographies, has that impact on client decision-making rectified?

Yes, on a year-over-year basis, you would have had the impact of those movements from Russia and Belarus, moving into higher-cost geographies. However, what we see in Q3 and what we expect in Q4 is a more diverse demand for India-based resources where rates are lower, contributing to the mix shift that you're referring to. The pricing environment remains somewhat challenging with some existing customers receiving concessions, while newer engagements are also starting at lower rates. You'll likely see these trends continue through Q4 and into the first half of 2024, affecting profitability.

Understood. Thank you.

Thank you. Just wondering if I could follow up on a couple of points made in the last question. I'm trying to reconcile your production, headwinds from customer losses, and other dynamics. Jason, you noted that when excluding FX and seasonal factors, it feels flattish. Does that mean newer work is offsetting those headwinds? Is that a reasonable way to view things moving into 2024?

Yes, that's reasonable. However, the world remains very complicated. We are seeing more stability in customer programs and budgets in North America. While there are still some ramp downs coming from a couple of European customers, it feels like we're witnessing fewer unexpected surprises that caused challenges in previous quarters. If adjustments are made to account for build impacts, you could have flat revenue from Q3 to Q4.

Similar question on margins. Utilization went down again sequentially, and with ongoing wage pricing dynamics extending into 2024, how do you see this affecting your return to historical margin ranges?

While we aim for better utilization in Q4, there will still be some margin compression due to lower build days. This is reflected in our guidance with projected margins between 15% to 16%. We do expect to return to normalized variable compensation, but with imbalances remaining between customer pricing and wage inflation, profitability may decline slightly moving into 2024. This year has been challenging for the IT sector, but we are confident in our capacity to achieve historical revenue growth and profitability in the future.

So, the wage pricing issue persists as the major headwind for gross margins next year?

Yes, it does continue to be the uncertain element affecting margins as we address the impact of wage inflation and customer pricing dynamics.

Thanks so much for taking my question. I wanted to ask about booking conversion trends. How is average portfolio duration trending or timeline to convert bookings to revenue or pipeline erosion trends? Are you seeing consistency and stability when it comes to conversion, or is it more of a moving target in this tough environment?

It is still very much a moving target. However, I think in terms of client relationships, things have stabilized. Conversations seem more manageable than before with increased transparency in the situation.

Thank you. A follow-up question on headcount numbers globally, particularly in Ukraine and Belarus. Should we think about those numbers as relatively stable at this point, or do you have plans for further reductions?

We believe that Ukraine will be more stable, while Belarus may be less stable based on supply-demand ratios. In terms of absolute numbers, Belarus has declined significantly over the last several years compared to Ukraine. This trend might continue depending on geopolitical factors and client reactions.

Thank you very much.

Good morning, guys. I wanted to come back to some of the commentary around quarter-over-quarter growth rates. Looking ahead to the first quarter of 2024, do you think we get back to positive quarter-over-quarter revenue growth then? The Street is looking for about 3% growth, so I'm interested in your take.

I think you should expect an assessment in three months. We’re seeing positivity right now, but we will confirm this in three months.

Okay. Just to follow-up on some margin commentary. It sounds like most of your cost optimization will get reinvested, so should we expect non-GAAP margins to be down versus 2023? And in 2025, are we kind of looking back at a 'normal range'?

Yes, that’s correct. We still haven’t fully worked through pricing dynamics, nor wage inflation, but I would say it is possible that we might see lower profitability in 2024 before returning to the traditional range of 16% to 17% in 2025.

Very helpful. Thank you.

Hi. Good morning. This is Jessie on for Maggie. Thanks for taking our questions. So first, how do you feel EPAM is performing compared to the market? Do you think that you're starting to take share?

I think we are starting to return to taking some share in existing clients. While there are some long-term client policies we are adhering to, there has been stabilization, and some clients have begun to return to collaborating with us.

Got it. Thanks, Ark. And then...

No, that's good.

Okay. To follow up on Europe, it appeared to be a bright spot, but Jason, you mentioned incremental ramp downs there. Have you seen changing behaviors or sentiment from clients in that geo, or are these mainly client-specific challenges causing those ramp downs?

We saw Europe decline somewhat sequentially between Q2 and Q3 and it is a little mixed. Generally, it has been positive compared to North America, but we have a couple of customers that we've been aware of for some time now, which we expect will ramp down. It's not broad-based; it's more customer-specific.

I believe that year-to-year comparisons are becoming less meaningful in this environment because there’s no big change between these two years. Right now, quarter-by-quarter comparison reveals more about what's happening than yearly trends.

You're right.

Hi, I had a longer-term question for Ark. I was wondering how you would compare the relevance and mind share of some of your key services, especially application development. Is application development more or less meaningful in today's technology architecture? How do you see that evolving?

I believe that application development and the build function will become even more important with all that's happening. It's easy to optimize and adapt in today's environment, but these changes are critical for the future. I believe that the applications we build and our strong capabilities will be crucial for success as technology architectures evolve.

Agreed. It remains a center of focus for us.

Thank you very much. I wanted to ask a couple of questions, first on pricing. Jason, you mentioned a little bit about discounting. Can you help us think through the longer-term implications? What would that process typically look like over the medium to long run?

Yes, Ark might be able to touch on some specifics, but generally it takes time to reset pricing based on demand which can lag behind market changes. Impacting pricing dynamics often doesn't happen overnight, and we will likely see limited pricing flexibility in 2024 while remaining locked into some contracts. Opportunities for adjustments may arise later in the year.

Great. I appreciate that, Jason. Then my second question was just regarding any potential changes you may have to make given a prolonged higher interest rate environment. How does that impact your acquisition strategy?

We will still continue to pursue acquisitions that expand our capabilities. We need to be cautious, but our focus will remain on smaller to midsize tuck-in acquisitions.

We possess a strong cash position which allows us to continue our previous strategy without relying heavily on external financing. Our smaller acquisitions are targeted to improve specific competencies or expand into specific geographies.

Great. I appreciate those comments.

Hi. Thanks for taking my question. I wanted to ask about financial services. Some of your peers have spoken about witnessing weakness in that area. You also mentioned banking within financial services as soft. Can you elaborate on what you're seeing there? Are the headwinds broad-based within banking or client-specific?

For us, we have seen a reduction related to one large client, but also declines in a number of other banks that we work with. So, it's somewhat broad for banking. However, other areas within financial services are performing well, particularly in asset management and insurance.

That’s helpful. Were the incremental work returns from the clients driven by modernization needs due to generative AI, or still more cost optimization-type deals?

Where the returns occurred, they’re generally from clients needing to optimize processes that can’t be done without us. This has triggered new opportunities with clients and we have several situations from the last quarters to show the impact. While gen AI hasn’t yet had a direct impact on revenues, the initiatives we are investing in are opening opportunities for us and creating interest among clients.

Got it. Thank you.

Yes. Thank you for joining today. We are feeling more positive about the situation than several quarters ago. Unfortunately, the world continues to be unpredictable, making it difficult to be very clear on our outlook. Let’s meet in three months and see what we can share then. Thank you very much.