EPAM Systems Inc (EPAM) — Q4 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 fourth quarter and full year 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. Good morning, everyone. Thank you for joining us today. As usual in Q1, it's time for us to reflect on the past 12 months and share what we think about the next 12. Before I do that, I want to thank our team around the world for their dedication to our clients and hard work throughout last year and for staying committed and engaged in the work ahead of us in 2024. Looking back to 2023, I will start from a short summary very much in line with what we shared in today's press release. We believe that EPAM performance in 2023 reflects our ability to navigate volatile demand growth simultaneously, and simultaneously is the key word here, influenced by both geopolitical and macroeconomic conditions. After rebalancing most of our delivery talent footprint across Europe, Western and Central Asia, India and Latin America, and refining our go-to-market approach to meet current demand, we are now focused primarily on harmonizing our delivery quality, optimizing cost effectiveness, and proactively leveraging our extensive advanced technology and growing consulting capabilities to capitalize on GenAI and AI-driven opportunities of the future. In that context, first a few notes on 2023 and their relevance to 2024, and then I can move on to aspects of our 2024 outlook. Let me start from geopolitical and economic impacts on the EPAM operations. In February of 2022, the Russian invasion of Ukraine made it necessary for us to relocate over 13,000 people plus families to new geographies. While most of these relocations completed back in 2022, many adjustments did happen last year. And still today in 2024, we will continue to work on some downstream factors, including seniority pyramid, team composition and cost effectiveness across our traditional and new locations. I want to also especially recognize our team in Ukraine who prove that despite the level of challenges, they are a reliable partner for our clients, both existing and new ones. A few additional notes on repositioning and stabilization of our talent delivery platform. As mentioned already, 2023 was a year of significant rebalancing for most of our global delivery. We worked on scaling India and LatAm, and at the same time, preparing for future growth in development centers across Europe and Western and Central Asia, our key destination for the majority of our relocated talents. In 2023, India continued to be our fastest-growing location, practically since 2021. While we were growing our capabilities there with accelerated speed, we also worked to ensure that our delivery culture remains focused on quality and client value. India will likely become our largest location by the end of 2024 or at least on par with our current scale in Ukraine. Latin America, specifically our locations in Colombia and Mexico, have been maturing significantly as we scaled out our cloud and data capabilities there to be prepared to meet rising demand from North American clients. Therefore, we are starting 2024 from a significantly refactored geographic delivery platform, much more balanced than ever to bring together the practices, methods, and collaborative ways of working, and to focus on harmonizing our engineering competencies and critical capabilities in cloud, data, and now in AI, to be present now in each of our strategic locations. In 2024, this is one of our key priorities and we expect these programs to be continuous areas of investment and differentiation for EPAM. As we mentioned in previous calls, there is a growing number of clients who, after slowing their spending with us due to the war, have started to grow their engagements with us again by utilizing our much more diverse geographic footprint and advanced delivery capabilities. Supporting this trend will be another key priority, as we continue during 2024 to build up our capabilities both geographically and from our services mix perspective. To illustrate some relevant specific efforts, I will share several ongoing investments in engineering excellence AI learning juniors for all EPAMers covering standard copilots and other AI-assisted engineering productivity tools for all key delivery roles with specific adoption targets being set up for all locations. This tool was released in 2023 with upgrades coming in Q1 and beyond. New upgrades to our digital delivery platform, now being AI enabled and leveraging a set of composable assets that include EPAM proprietary together with open source components and tools to connect to a variety of large language models for supporting the most critical capabilities, protecting private data, and prompting cost-effective and reliable consumption for external LLMs, EPAM DIAL platform. Finally, a productivity measurement framework, allowing tailoring of engineering and agile best practices for continuous improvements of individual and team productivity in an AI-assisted development environment. All those efforts should make it possible for us to become the most geographically diverse and broadly AI-assisted delivery talent platform in the industry. Now, about cost effectiveness. It became obvious at the end of 2022, throughout 2023, that to navigate the current economic environment, we must continuously consider cost optimization efforts to react properly to all changes around us. Some targeted optimization efforts were ongoing in 2023 across both in-market and global delivery locations. This has improved our utilization in the short term and allows us to fund several initiatives in 2023 and 2024. We will be considering similar efforts as appropriate in the future to ensure our adaptability needs. We are also actively working on rebalancing our seniority pyramid by engaging and training junior talent while improving overall seniority in market and across our key global practices. About AI and GenAI efforts. For years, we have been investing and scaling our data, machine learning, and predictive AI capabilities. Today, many of our clients are engaging us to do the foundational engineering and data ML work required to help them operate their current businesses but also to enable them to start their work with generative AI. Since mid of last year, our majority of these are relatively small. We engage in over 400 GenAI-related projects. Our coverage of use cases is broad, from knowledge management to human capital management, from product management to supply chain and service optimization, from advanced business process redesign to new interactive agent development, from engineering productivity enhancements by using GenAI tools to improving speed and quality of code generation and testing. Last year, we launched DIAL, our enterprise-level orchestration platform, to accelerate development of GenAI-empowered business solutions. Recently, we released it for open source. We are encouraged by seeing a high level of interest from our clients expressed in over 60 pursuits with 15 active projects in progress right now. Some already in production implementations across the tech, insurance, retail, automotive, life sciences and business information vertical segments. One of the most interesting deployments was done for major global economic data institutions and one of the most rewarding has been our work in Ukraine on the well-known Diya, a government platform, which now includes GenAI and AI capabilities as well. Now, let's talk about the demand environment. In 2023, we've managed to safeguard many of our programs and clients' portfolios. We also saw some pullback in spending last year and expect that this may continue to be a factor into 2024 as our clients execute vendor consolidation exercises to manage their costs. While this trend continues, and in some cases to our benefit, we are seeing encouraging signals of a general rebound for build-based solutions and for traditionally strong advanced technology, data experience, consulting, and AI capabilities. To capitalize on potential new demand, we are expanding our new business initiative by enhancing our sales strategies and go-to-market partnerships, dedicating resources to create new accelerators, establishing new engagement models and innovating our customer interaction method. In 2023, it was also evident that we brought new clients at a rate higher than in previous years, and we plan to do it again in 2024. Still, overall, we believe at this point the 2024 environment will be, at least for the first half of the year, a continuation of the second part of 2023 trends, with potential demand increasing toward the second half. While we have made significant progress in evolving our operations and despite the challenges we faced in 2023, our work with clients has been increasingly recognized by leading analysts and provided in turn some independent support for the stories we shared. All the reports are very recent, from the last two to three months, and present the up-to-date views on EPAM. About some new capabilities. In November 2023, EPAM was featured by Gartner in the Competitive Landscape of IT service providers to the Global Insurance Industry Report. This is probably one of the first recognitions by Gartner of our industry expertise and a result of our efforts to bring insurance consultancy and implementation services simultaneously for the clients' benefits. Putting together an insurance consulting advisory practice was one of the key efforts for us during the last few years. Similar efforts today are underway in healthcare and life sciences, retail and distribution, and oil and gas. In Q4 2023, EPAM was featured in the Forrester report, the Cybersecurity Consulting Services Landscape Q4 2023. EPAM was highlighted as one of the top 33 cybersecurity consulting services providers, which is probably the first recognition of a critical capability we have been developing for the last few years. Now, about some established capabilities, which were confirmed recently. In November 2023, EPAM was recognized as one of the top 3 companies in the Magic Quadrant for Critical Capabilities for Customer Software Development Services Worldwide by Gartner. EPAM leadership and strengths were specifically highlighted in leveraging generative AI, pioneering DevOps and providing superior customer support and unique user experience. In November and December 2023, IDC named EPAM as a leader in three reports: IDC MarketScape for Worldwide Experienced Design Services Vendor Assessment; IDC MarketScape for Worldwide Experienced Built Services Vendor Assessment; and IDC MarketScape for Worldwide Software Engineering Services Vendor Assessment. Finally, Ad Age recognized EPAM as the number six largest agency in the United States and number 18 in the world's largest agency companies categories. In just seven years, EPAM has moved from number 130 to number six among US agencies. Before I hand over the call to Jason, I would like to take a moment to share a couple of points on some aspects of our results for 2023 and our outlook for 2024. In 2023, we generated $4.69 billion in revenues, reflecting a correction of 2.8% year-over-year. Excluding the impact of exiting our Russian operations, revenue declined 1.8%. Adjusted income from operations was 16.3% of revenue and above the midpoint of our initial guided range. Also, the current market conditions don't represent at all an ideal demand environment for EPAM. Our 2023 results highlight our commitment to adapting the company to suit the current circumstances while continuously preparing for a more beneficial demand environment in the future. What I want to point out as well is that our Q4 results show sequential revenue growth, the first time after three previous quarters of sequential declines. About the 2024 outlook: Because of our ability to adapt to new client demands and market conditions, we are optimistic about the opportunities ahead of us toward the end of 2024. Demand to build postponed during the last two years should rebound, driven by long-term pressures for legacy modernizations, needs for advanced customer-centric solutions, and massive interest in understanding how to apply GenAI and general AI capabilities to build new platforms and solutions. Even while we continue to navigate the current economic and geopolitical environment carefully, we will invest in strategic initiatives organically and with the support of expanded M&A activities, demand generation efforts, and people programs. This will have some effect on our profitability in 2024, but we believe these are the right actions to ensure long-term growth and stronger market positions. Let me turn the call over to Jason to provide more details on our fourth quarter and full year results in addition to our initial view of 2024 expectations.

Thank you, Ark, and good morning, everyone. In the fourth quarter, EPAM generated revenues of $1.16 billion, a year-over-year decrease of 6% on a reported basis and a 7.3% decrease in constant currency terms, reflecting a positive foreign exchange impact of 130 basis points. The reduction in Russian customer revenues, resulting from our decision to exit the market, had a 70 basis point negative impact on year-over-year revenue growth. The modest sequential growth in the quarter was the result of stabilizing demand. Revenues in Q4 were higher than we expected when we set Q4 guidance, due to both stronger client demand and significant benefits from favorable foreign exchange. Beginning with our industry verticals. Life sciences and healthcare grew 11.6%. Growth in the quarter was driven primarily by clients in life sciences. Travel and consumer decreased 4.4%, with solid growth in travel and hospitality offset by declines in revenues derived from consumer goods and retail customers. Financial services contracted 7.1%, driven by declines in banking, partially offset by work performed from marketplace exchange and finance information and analytics clients. Excluding the impact of the exit of our Russian operations, revenue on a year-over-year basis declined 5.5%. Business information and media declined 14.8% in the quarter. Revenues in the quarter continued to be impacted primarily by a reduction in spend across several large clients, due to uncertainty in their end markets, particularly in the mortgage data space. Software and hi-tech declined 16.8% in the quarter. The year-over-year growth rate was negatively impacted by the reduction in revenue from our former top 20 client we mentioned during our previous earnings calls and generally slower growth in revenues across the range of customers in the vertical. And finally, our emerging verticals delivered growth of 4.2%, driven by clients in energy, manufacturing and education. From a geographic perspective, the Americas, our largest region representing 58% of our Q4 revenues, declined 7.6% year-over-year or 7.7% in constant currency. On a sequential basis, growth remained relatively flat, consistent with the previous quarter. EMEA, representing 39% of our Q4 revenues, was flat year-over-year and declined 3.5% in constant currency. APAC declined 10.9% in both reported and constant currency terms and now represents 2% of our revenues. Finally, CEE, representing 0.1% of our Q4 revenues, contracted 91.6% year-over-year or 91.3% in constant currency. Revenue in the quarter was impacted by the exit of our operations in Russia. Going forward, I will no longer comment on the CEE region in our quarterly prepared remarks, given that its revenue contribution is immaterial relative to our total revenues. In Q4, revenues from our top 20 clients declined 5% year-over-year, while revenues from clients outside our top 20 contracted 7%. Moving down the income statement. Our GAAP gross margin for the quarter was 31.1% compared to 32.4% in Q4 of last year. Non-GAAP gross margin for the quarter was 33% compared to 34.1% for the same quarter last year. Gross margin in Q4 2022 was positively impacted by the timing of year-end revenue recognition. GAAP SG&A was 18.5% of revenue compared to 16.6% in Q4 of last year. GAAP SG&A in the quarter was impacted by one-time charges, including expenses associated with the company's cost optimization program. Non-GAAP SG&A came in at 14.2% of revenue compared to 14.8% in the same period last year. SG&A expense for Q4 2023 reflects some cost efficiencies achieved in the quarter, as well as lower variable compensation compared to Q4 2022. GAAP income from operations was $122 million or 10.6% of revenue in the quarter compared to $170 million or 13.8% of revenue in Q4 of last year. Non-GAAP income from operations was $200 million or 17.3% of revenue in the quarter compared to $220 million or 17.8% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 23.4% versus our Q4 guide of 24%, due to greater-than-expected excess tax benefits related to stock-based compensation, partially offset by higher state taxes and the impact of losses in certain non-US acquired subsidiaries. Our non-GAAP effective tax rate, which includes the impact of state taxes and subsidiary losses and excludes excess tax benefits, was 25.1%. Diluted earnings per share on a GAAP basis was $1.66. Our non-GAAP diluted EPS was $2.75, reflecting a decrease of $0.18 or 6.1% compared to the same quarter in 2022. In Q4, there were approximately 58.9 million diluted shares outstanding. Turning to cash flow and our balance sheet. Cash flow from operations for Q4 was $171 million compared to $186 million in the same quarter of 2022. Free cash flow was $161 million compared to free cash flow of $165 million in the same quarter last year. We ended the quarter with approximately $2 billion in cash and cash equivalents. At the end of Q4, DSO was 71 days and compares to 73 days in Q3 2023, and 70 days in the same quarter last year. Share repurchases in the fourth quarter were approximately 143,000 shares for $36.5 million, at an average price of $255.96 per share. As of December 31, we had approximately $335 million of share repurchase authority remaining. Now, moving on to a few operational metrics for the quarter. We ended Q4 with more than 47,350 consultants, designers, engineers, trainers and architects, a decline of 10.4% compared to Q4 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 53,150 employees. Utilization was 74.4% compared to 73.6% in Q4 of last year and 72.7% in Q3 2023. Turning to our full year results for 2023. Revenues for the year were $4.69 billion, producing a decline of 2.8% reported, and a decline of 3.4% in constant currency terms compared to 2022. Excluding Russia revenues, the reported year-over-year growth rate would have been negative 1.8% reported and negative 2.4% in constant currency terms. GAAP income from operations was $501 million, a decrease of 12.5% year-over-year and represented 10.7% of revenue. Our non-GAAP income from operations was $765 million, a decrease of 6.5% compared to the prior year and represented 16.3% of revenue. Our GAAP effective tax rate for the year was 22.3%. Our non-GAAP effective tax rate was 23.7%. Diluted earnings per share on a GAAP basis was $7.06. Non-GAAP EPS, which excludes adjustments for stock-based compensation, acquisition-related costs and certain other one-time items, including costs associated with our cost optimization program, was $10.59, reflecting a 2.8% decrease over fiscal 2022. In 2023, there were approximately 59.1 million weighted average diluted shares outstanding. Cash flow from operations was $563 million compared to $464 million for 2022. Free cash flow was $534 million, reflecting an 85.4% adjusted net income conversion. Finally, share repurchases in 2023 were approximately 686,000 shares for $164.9 million at an average price of $240.49 per share. Our 2023 results reflect EPAM's ability to manage the business through challenging macro conditions while positioning the company for the return to a more normalized demand environment. Now, let's turn to guidance. Before moving to the specifics of our 2024 and Q1 outlook, I would like to provide some thoughts to help frame our guidance. As Ark mentioned, the demand environment remains uneven, and we believe this will persist at least in the first half of 2024. We have been pleased with the progress we are making on demand generation, and we'll continue to prioritize revenue growth into 2024, which, in some pursuits, include some degree of discounting. In 2024, we expect to incur incremental costs due to more normalized variable compensation levels, in addition to wage inflation in certain geographies. This higher level of compensation, combined with the limited ability to improve client pricing in the near term, will continue to put pressures on margins in 2024. Finally, despite the war, our operations in Ukraine have not been materially impacted, 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 at productivity levels similar to those achieved in 2023. Now, starting with the full year outlook. Revenue growth will be in the range of 1% to 4%, on both a reported and constant currency basis. The impact of foreign exchange is expected to be negligible. At this time, we expect a nominal revenue contribution from inorganic revenue for 2024. Lastly, we are seeing some improvement in demand, but the visibility for the year is still limited. Although we are guiding to modest sequential growth in Q1, increases in demand may not sufficiently offset revenue impacts resulting from seasonality in all quarters in 2024. We expect GAAP income from operations to be in the range of 9.5% to 10.5% and non-GAAP income from operations to be in the range of 14.5% to 15.5%. We expect our GAAP effective tax rate to be approximately 21%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will be 24%. For earnings per share, we expect the GAAP diluted EPS will be in the range of $7.20 to $7.60 for the full year, and non-GAAP diluted EPS will be in the range of $10 to $10.40 for the full year. We expect a weighted average share count of 59.3 million fully diluted shares outstanding. For Q1 of 2024, we expect revenues to be in the range of $1.155 billion to $1.165 billion, producing a year-over-year decline of approximately 4%, with the expected impact of FX to be minimal. For the first quarter, we expect GAAP income from operations to be in the range of 9% to 10%, and non-GAAP income from operations to be in the range of 13.5% to 14.5%. Our Q1 income from operations guide reflects the impact of the resetting of social security caps, normalized variable compensation and somewhat higher bench levels, where we expect to see improvement throughout the year. We expect our GAAP effective tax rate to be approximately 11% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation to be approximately 24%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.79 to $1.87 for the quarter, and non-GAAP diluted EPS to be in the range of $2.26 to $2.34 for the quarter. We expect a weighted average share count of 59.1 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for 2024. Stock-based compensation expense is expected to be approximately $198 million, with $44 million in Q1, $48 million in Q2, and $53 million in each remaining quarter. Amortization of intangibles is expected to be approximately $26 million for the year, evenly spread across each quarter. The impact of foreign exchange is expected to be a $1 million loss for each of the quarters. Tax effective non-GAAP adjustments is expected to be approximately $46 million for the year, with $11 million in Q1, $11 million in Q2, and $12 million in each remaining quarter. We expect excess tax benefits to be around $28 million for the full year, with approximately $17 million in Q1, $5 million in Q2, and $3 million in each remaining quarter. Finally, one more assumption outside of our GAAP to non-GAAP items. Our growing cash reserves are generating interest income, and EPAM is receiving governmental incentives from several countries in which we established delivery operations. As a result, in 2024, we are anticipating an increased level of other income. We expect interest and other income to be around $66 million for the full year, with $16 million in Q1, $20 million in Q2, and $15 million in each remaining quarter. My thanks to all the EPAMers who made 2023 a successful year and will help us drive growth throughout 2024.

Hi. Thank you for taking my question this morning. I wanted to ask about your view on the second half of '24 sort of inflection. You sounded incrementally confident, I think, that the demand environment might pivot into a positive direction at that point. Can you just comment further on what's giving you confidence in this visibility? Are client conversations changing? Are you seeing a backlog of delayed projects build up? What has changed in your forward view that's supporting this sort of incrementally positive sense that the second half is where things may inflect?

I think it's exactly what you said. We were undertaking a lot of activities in Q4 and a lot of conversations still happening today, but decisions are going to delay still. In our view, how these activities were increased, we do believe that future delays would be very difficult to hold, because companies will need to address mounting pressures. We've taken, at least, we're thinking right now, a pretty responsible view of what might be occurring at this type of increase based on discussions on many programs and desires we've had during the last months that should come to some realization. We are planning and shaping our activities around it.

Hi, good morning. Thank you. I wanted to start on margin here. So, good result in the 4Q AOM. Can you talk about maybe what costs and investments now are most notable that come back in for '24 and the cadence considerations? I heard some investments in demand generation and go-to-market, I think. Can you flush that a bit more? And I guess the root of the question is, what do you consider more transitory versus potentially structural cost differences as you go forward?

Yes. We have been very thoughtful around what our cost structure would look like this year and are mindful of the guide here around profitability. The decision we made, Bryan, was that we did want to return to a more typical variable compensation. We thought a lot about the pricing environment and the wage environment, and decided that we would move forward with our traditional sort of salary increases or promotions in Q2 of this year. We've got very low voluntary attrition. We want to keep it that way because we do have confidence in return to growth later in the year. I would say the people programs are probably most significant, but we do have significant investments in AI, and again we thought about whether or not we would want to scale those back, and we thought that wasn't appropriate considering some of the traction we believe we're gaining in AI at this point. And as you talked about, the programs that are primarily focused on demand generation, some of our partnership programs and then continuing to enhance our domain capabilities.

As everybody says, it's still a lot of experimentation, but we highlighted something which we do. There is a quest to implementations happening as we speak. Though the program is not very sizable, we see a lot of proof of concepts actually proving to the point that it will trigger additional data engineering programs a lot, because while experimentation is going well and proofs of concept look good, usually the data for these types of activities is not well enough managed, and as soon as you go into production activities in many cases, it triggers a visible need to invest in data engineering and different activities. Therefore, we believe this trigger will happen and the amount of work for these types of activities will bear some fruits for us as well.

Yes. We think there'll clearly be a return on the AI investment. We will be working on utilization and our seniority pyramids throughout the year. I think you'll see an improvement in gross margin in the second half of 2024, hopefully setting us up for more better profitability in 2025.

Okay. Thanks. And then a follow-up just as it relates to kind of your larger client cohort expectations, are the ramp downs that you had thought as you entered '24 progressing as you had expected? And is the second-half improvement consistent across your larger clients? I'm thinking about your top 10, your top 20 base.

Yeah. We had talked about a known and expected ramp down in Q1 that is upon us and it is obviously part of our Q1 guide. Other than that, you don't see significant incremental kind of ramp downs, and we are feeling like demand is stabilizing. From a customer standpoint, we are seeing good strong traction in life sciences. We clearly are seeing a lot of opportunities and energy, and I expect that we'll probably return to sequential growth in a number of our industry verticals here in Q1. So, I would say, yeah, demand is generally a little broader from at least the industry vertical and customer standpoint.

Good morning. Thank you. I’m analyzing the changes in headcount, and it appears that on a year-over-year basis, most regions are seeing a decline, except perhaps for India. I’m trying to understand how this situation aligns with the expectation for accelerated growth in the latter half of the year, especially if you're aiming for a higher utilization rate than in 2023 or if there are other factors involved. Could you provide more clarity on this? Additionally, how should we view the changing geographic mix and its effect on growth, considering the differences in billing rates between regions like India and Ukraine or Eastern Europe?

Yes. The first thing I would say is as you look at the fact sheet where you can see us with the headcount declines across a range of geographies, if we align that with Ark's comments here during the discussion today, we had to increase headcount across a broad range of countries as a contingency in case things didn't go as well as they ended up going in Ukraine. We then afterwards tuned headcount somewhat just because we did some access hiring across a broad range of geographies, just as a contingency in case we weren't able to deliver successfully from Ukraine. At this point, you're clearly seeing growth in India. You'll continue to see growth in Latin America. We do expect that the incremental growth in India is going to put some pressure on revenue per headcount. This is part of the reason for the guidance of the 1% to 4% that we've got in there.

I think I would add to the follow-up. Like, if you remember our original guidance one year ago, at the beginning of 2023, it was a way kind of optimistic, and revenue was higher than we guided today for 2024. This means that we prepared for the growth and the number of people we had back then were corresponding to our sources. Then, 2023 in this case became for us an adjustment period when we had to bring relative numbers to this kind of to reality. On top of this, as we've adjusted, we were changing our thinking about the market from a cost perspective as well. So, 2023 was actually 12 months when we were bringing ourselves back to shape to changing condition. From this point of view, it is very much in line with our guidance for this year. We're still keeping the series of investments to be able to start hiring back to trade in big quantities, so we feel about this number as pretty comfortable and actually reflects the reality.

So, if I take those comments and the comments you made in a previous question about the margin dynamic for the year, does that imply that the cadence of margins should improve or if we think about margin improvement as '24 progresses, that we'll get back to kind of more of a historical level as we exit '24?

Certainly, I expect lower gross margins in the first half, that's both Q1 and Q2, and then a fairly significant improvement in the second half. This would be due to the available bill days as well as improvements in utilization and seniority pyramid. So, I don't know whether or not that's the same as where we've been historically, but I do expect us to head back towards more typical profitability as we get closer to the end of the year and enter 2025.

Hey, thanks for taking my question, and good quarter. So, Ark, you mentioned that there is some adjustment of seniority of employees ahead of you, probably something you'll do this year. Could you share if your average experience is running above normal due to maybe low attrition, low hiring right now? And what should we expect for revenue per employee as average experience deteriorates a little bit?

I believe this adjustment is occurring. However, I don't think revenue per employee accurately represents the reality since it heavily relies on how we optimize our delivery locations. For instance, India is experiencing growth, achieving a 20% increase last year, which was even higher the previous year at over 50%. This has affected revenue per employee. The same applies to transitions from Eastern Europe to Central Europe or growth in Latin America, which should be considered. Therefore, we don't view this metric as critical for our analysis.

Yeah. I mean, our goal would be to go back towards more typical utilization levels above the higher 70%s. So, I don't think that the distribution is going to have a significant impact on our targeted utilization levels.

Hi, thank you. Jason, can you be a little bit more explicit on your commentary about seasonality versus demand offsets on a quarter-by-quarter basis, and maybe just remind us which quarters are going to be more difficult to overcome seasonal pressures given that might be different from historical given your changing geographic footprint and holiday schedules, etc.?

Okay, great. Thanks for giving me the chance to clarify that. So, Q2 is generally a quarter with less capacity or less available bill days. Q3 is usually a very strong quarter. We typically see quite significant sequential growth from Q2 to Q3. The comment I made in my prepared remarks was really that we are seeing what feels like a better demand environment, more stability, a large number of conversations with clients and some kind of larger deal size opportunities, but Q1 to Q2 definitely has a negative seasonal impact. Therefore, I wanted to call out that there was some potential that seasonality could cause us to be sequentially flat to maybe even possibly down, but generally the expectations are that we'd see sequential growth from Q1 to Q2, but again, it will take an improving demand environment to get us there.

Okay. Thank you. And then, you've mentioned pricing for a couple of different quarters now and sharpening your pencils. Are you doing anything that you feel will help protect your ability to raise pricing in future quarters and years? And how do you get comfortable with the level that you're setting your rate cards to now versus your ability to increase in the future?

There are likely several factors at play. We're focused on avoiding multi-year commitments that could constrain us. Even when we do enter into such agreements, we can still approach clients for adjustments. Typically, our traditional contracts last about a year. Additionally, we are increasingly engaging in fixed fee arrangements, which not only emphasize consulting but also allow us to take on more responsibility for delivery. This shift provides us with a chance to enhance our profitability.

Thank you. In terms of just as we look at the year ahead, how much of a reshaping of the pyramid do you think you need at this point in terms of having the appropriate skillset for the demand environment as it evolves? And then, related to that, how quickly are you able to hire at this point if there was an increase in demand in terms of how much bench do you need to keep, and how quickly can you hire against that?

I believe it's an important question to consider. There is considerable uncertainty regarding how quickly productivity will increase, and we are closely observing this, particularly in terms of the types of new roles that will be necessary in the market. We have made substantial investments in these efforts. This requires us to track productivity improvements regularly, as well as how our clients will engage in this process, since there are many legal questions surrounding code generation and AI-assisted development. Thus, we need to understand what will actually be required about a year from now or later. Regarding our hiring capabilities, we are actively investing and monitoring the situation. We are confident that we can accelerate hiring when necessary, especially given the current market conditions. In recent years, a lot of talent has emerged at the junior level, which isn't always crucial for job placements. We believe this talent pool is growing, and when the market rebounds, we feel prepared to increase our capacity.

Yes, we continue to be flexible. We have been investing to ensure that we can add capacity across a broad range of geographies. We feel good about our ability to respond to demand.

Hey, thanks. Congrats on strong execution. Ark, when you started the call, you indicated the clients that moderated spending with EPAM last year are coming back. Can you talk a bit more about that? Is it that they went to some of your competitors and are coming back? Are they changing their plans? What's prompting that?

I think we were talking about it many times during the last year, but at the beginning of the year when we were much more optimistic, we didn't realize that the impact of the war raised the risk profile for EPAM and the uncertainty that we would be able to navigate the war. A lot of calls clients were making in the middle of 2022 were delaying decisions with us or actually going to start replacing us rather than putting in new requests. Unfortunately, we only realized the impact of this at the end of Q1 2023. Some of these actions have a pretty long-term impact. We still have clients who are declining because when decisions are made and they sign with somebody else, it evidently leaves a visible impact on 2023. The simultaneous impact of these two factors were critical for us, really setting us aside from our competitors who were only part of the challenges. When the economy started to slow down, competition for rates, cost and everything else picked up. The positive part of this story is that there are some clients coming back to us, and some of them are growing as well. However, definitely this part of 2023 and partially will be for us part of 2024. We have been bringing in new business to compensate for this, which is a positive aspect. The decline in 2024 will definitely be smaller than the decline in 2023.

We continue to see clients who may have experimented with other vendors reengaging with us, having both discussions and, in some cases, actually transferring work back to us, just based on the fact that they didn't get as much done with those other vendors.

Yeah, guys. I want to follow up a bit on the competitive landscape for a minute. And the main question is really just circling back. You said you're seeing some customers come back to you. You also talked about adding a ton of new, I think, more than usual new customers over the past year, and you're seeing that progressing into this year. So, putting that all into context, just there's been a lot of discussion of competitors trying to be more aggressive, taking advantage of what happened in the war in Ukraine. What are you seeing competitively? I mean, has anything truly changed? And then, maybe dovetailing that into the potential we could see for this year. You said you added a bunch of new customers at a stronger pace than in the past; have you been adding customers at a run rate? I guess that informs your decision on what you're seeing regarding guidance for the second half of the year. Why not a little bit more in the first half since it was being added last year? Thanks, guys.

So, I think when we're talking about increasing our client numbers, it's true. The difference with the previous year is that these are smaller clients, smaller engagements. Still, we feel a lot of pressure from increased competitiveness. This comes back to our statement that we adjusted our behavior during 2023 and started to use different approaches to protect our client base. A much more audible transition was evident from the first half to the second half of 2023. We're seeing that something similar will continue for this and the next quarter. When we're seeing clients starting the programs, we participated in larger programs than they considered in the first half of 2023. Therefore, we think this acceleration will be happening, and the second half will provide us an opportunity to demonstrate it.

If we do everything right, we'll have clearly stronger new logo activity and stronger new customer revenues. Don't forget we do have the ramp down in Q1 from one customer. As Ark said, there is some slower decision making, but again, generally the demand environment feels like it's stabilizing and potentially improving.

In short, our usual remark is that until we reach full speed, what we expect from margins and from real growth is still contingent upon the right demands. This right demand is something we consider will start to be realized in the second half. At what level? We maintain a conservative estimate right now, which we think is realistic.

So, we'll do one last quick call or question, and then wrap up?

Hi, everyone. Good morning, and thank you for taking my question. So, I understand it's still very early on GenAI, but what specific types of GenAI capabilities are your clients most excited about currently, and do you expect those to change as the technology matures?

There are, at this point, many experiments and more straightforward thinking about GenAI, as it's available practically for end consumers and how this can change interfaces. Very straightforwardly, everybody is thinking about how to have the right access to the hybrid data between general sales and specific ones, with most companies experimenting in this area and creating some type of copilots. I'm talking about applications of areas and just utilizing GenAI as an activity tool for individuals. The difficulties of this will be changing quarter by quarter. Some exciting things we see right now could become very quickly commodity and much more sophisticated within 12 months from now. Very early, as you said.

Thank you very much for your questions. I think we're feeling, in general, that stabilization is happening. At the same time, we recognize that there are many unknowns ahead of us and some trends that were driving the market and our performance in 2023 remain critical for 2024. However, we feel much better after showing that we can stabilize revenue and our client base, and even achieve a little growth compared to the continuous decline we experienced in the prior four quarters. Thank you very much, and we will talk to you in three months.

Thank you.