EPAM Systems Inc (EPAM) — Q1 2025 Earnings Call Transcript

Good morning, everyone, and thank you for joining us today on our first quarter 2025 earnings announcement. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. We hope you've had an opportunity to review the two news releases we shared earlier today. If you have not, copies are 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 Investor section of our website. With that said, I will now turn the call over to Ark.

Thank you, Mike. Good morning, everyone. Thank you for joining us today. As you may have seen in our additional press release this quarter, we have one more update to share today that goes beyond our usual business performance. Alongside our strong Q1 results despite a tough macro environment, we also announced our planned leadership succession. So before we get into the details of our performance and growth momentum, I want to take a moment to share a few thoughts on my planned transition from CEO role. After 32 years since starting in EPAM serving as the Chairman, CEO, and President, I decided to transition into the role of Executive Chairman. This move has been thoughtfully planned over the past several years, and I believe that the right moment is now both for me personally and for the future of the company. But I'm not leaving EPAM as Executive Chairman; I plan to continue providing strategic guidance, combining my years of experience to hold the relationships and Board leadership, and ensuring that the CEO transition is smooth and effective, and that EPAM continues advancing our mission, culture, and values. Beyond the transition period, I will be actively engaged as an employee of the company, and helping to shape EPAM's long-term strategic direction, maintaining key relationships with clients, partners, and investors, providing guidance on critical strategic initiatives and programs, and promoting the company brand worldwide. I will be closely collaborating with CEO and the leadership team to help ensure that the values, relationships, and strategic focus that have defined EPAM for decades continue to guide the company's future. With that said, I am pleased to announce today that Balazs Fejes will become our new Chief Executive Officer and President on September 1, 2025. Balazs, better known as FB, joined the company over 20 years ago and has been a critical part of our growth story. His leadership has been instrumental to EPAM's development, serving as our first CTO, building our financial services business globally, leading our European and APAC markets, and most recently serving as the President of Global Business and Chief Revenue Officer. FB is uniquely positioned to provide both strategic and operational leadership during our next phase of revolution. I am confident that his rare combination of business and technical acumen will enable him to continue driving EPAM forward. FB brings not only deep operational experience but also a strong sense of energy and vision for EPAM's continuous evolution into the world-leading AI native transformation company, with a reputation for quality, execution, and excellence, commitment to our customers, employees, and communities. In terms of timing and priorities, we remain focused on Q2 and full 2025 execution, working hard to extend our sequential momentum by driving and winning more wallet share. The CEO transition plan should be completed on September 1, 2025, at which point we will provide a more comprehensive update, with an opportunity to hear directly from FB. I look forward to working closely with him, our entire executive team, and the Board, to support the continuous growth and long-term success of the company as EPAM enters the next phase of its evolution. Now let's turn to our Q1 results. I am pleased to share today that our first quarter results came in better than expected, despite a more challenging macroeconomic environment than most would have predicted 90 days ago. This marks our third consecutive quarter of outperformance, and we are pleased to see sequential momentum, which we hope will continue throughout the remainder of this year. In a climate where costs continue to be top of mind, our clients' conversations have been broadly positive, and we are encouraged to see EPAM benefit from supplier consolidation activity in our core portfolio. It continues to be our view that the pivot to reliability and quality is slowly progressing. EPAM's proven track record and reputation for high-quality execution put us in a sweet spot and is driving increased levels of new deal activity, which is enabling us to maintain and grow our organic footprint with existing clients. Outside the volatility of the broader geopolitical economic environment, most of the growth themes we have been discussing over the past few quarters, especially AI-related, have continued through Q1, and we expect will carry throughout the remainder of this year. During Q1, we returned to double-digit revenue growth year-over-year, and while our inorganic contribution was driving a large portion of that, we are notably delivering year-over-year organic growth as well, which was significantly above our initial Q1 expectations of being flat at the midpoint of our guidance. This marks our second quarter in a row of delivering positive year-over-year organic growth since 2022, and illustrates continuous improvement in the core business. Overall in Q1, client sentiment and engagement remained strong across most of our verticals and geographies, with particularly high interest in our rapidly expanding AI-related capabilities. Our performance this quarter was driven by meaningful progress and strengthening client engagement, enhancing cross-selling efforts, and continuing to deliver advanced complex solutions. Our global footprint, supported by robust platforms, tools, and diversified talent hubs, is enabling us to effectively meet the evolving needs of our clients in a rapidly changing business environment. Now turning to demand, despite the notable changes over the past 90 days, we remain cautiously optimistic given our strong Q1 results and the Q2 momentum we have built. The February and March project ramp-up dynamics that we signaled last quarter played better than expected, with client sentiment continuing to improve. Further, we are encouraged by the incremental demand we continue to see for our AI capabilities, as focus on productivity and efficiency gains turns into more comprehensive AI native transformation programs and encompass multiple types of AI-centered solutions. In short, our baseline client demand in H1 is improving faster than anticipated. While we remain mindful of external pressures caused by challenges in our clients and markets, as well as isolated instances of increased caution and shifts in decision-making due to microeconomic uncertainty, we have not seen any material impact on our business to date. Overall, we feel good about the resilience of our performance so far this year. It's also important to emphasize that we are doing everything we can to stay closely aligned with our clients, taking proactive, disciplined steps to effectively manage our operations, ensuring we are well prepared to respond to any potential impacts as we head into the second half of 2025. In addition, reflecting our recent client conversations, one thing has become clear during the past few years of greater volatility. Some clients who had prioritized cost above all else in selecting partners are now returning to EPAM. Their experience with underperforming programs has reinforced the critical value of deep expertise, consistent delivery quality, and the trusted ability to execute at scale. That is why even as we expect 2025 to remain a year of transition, with the potential for increased uncertainty in the second half, we believe clients will continue to focus on the most strategic priorities, which should translate into stronger growth for us compared to 2024. Our credibility and growing reputation as a leading partner in AI and AI native transformation are already driving greater market awareness and demand, a trend we expect to continue throughout the remainder of this year. Now moving into our four global delivery hubs, which now work together in some new ways, and with rapidly growing access to our advanced AI-enabled productivity platforms. In Q1, we saw another quarter of sequential increase in net organic headcount across India, Europe, and Western Central Asia. Central Eastern Europe continues to be a cornerstone geography for us and serves as a backbone for many long-term clients with growing global location strategies. We saw modest growth in Hungary, Poland, Croatia, and Serbia, and stability across the rest of the region. Ukraine remains stable in terms of scale and core capabilities as our nearly 9,000 people remain highly productive and continue to support both new and current clients across a diverse range of programs. In India, we continue to see strong demand for differentiated product engineering offerings alongside our core capabilities in platforms, cloud, data, and AI. The momentum we built last quarter carried into Q1, with additional net headcount growth. We are also deepening our relationships with Global Capability Centers or GCCs, reinforcing our role as a trusted transformation partner. In Western and Central Asia, we continue to invest and expand our delivery presence, with modest net additions across several locations. As we shared in the past, these locations allow us to have even greater adaptability when it comes to serving our clients by balancing cost, quality, and execution, and in some cases the proximity to client locations. Finally, in Latin America, we continue to progress with our significantly expanding client and talent footprint with the addition of NEORIS. Now shifting to AI. As highlighted in our recently published AI report, while improved productivity and operational efficiency remain universal goals, scaling AI adoption across the enterprise continues to be a challenge. In fact, only 30% of even the most advanced companies surveyed reported success in implementing AI at scale. Given that AI at scale remains a relatively new concept today, we believe the broader transformation required including modernizing platforms, data, organizational structures, skills, and business processes represents a significant opportunity for EPAM. Our unique combination of deep engineering and consulting expertise backed by our advanced suite of IP tools and accelerators positions us well to lead in this space. While the AI landscape is evolving rapidly, one thing is undeniable: AI continues to drive new demand for us, even in the context of traditional modernization programs. AI plays a central role in the majority of client discussions. We are currently engaged in a wide range of AI initiatives with the vast majority of our top 100 clients. Our early-stage AI engagements are maturing visibly with strong year-over-year growth, with more of them evolving into mid-sized projects with clearly defined outcomes and measurable ROIs. As we expand into larger-scale AI factories, these programs are becoming increasingly comprehensive, now incorporating Agentic AI in government frameworks, while also scaling in volume and complexity. In Q1, our AI native revenues grew strong double digits quarter-over-quarter, continuing the strong momentum from the previous quarter, as we continue to mature our AI consulting and engineering offerings. We are also strengthening our overall value proposition by partnering with strategic players in cloud, data, and platforms to deliver innovative commercially attractive software assets focused on industry-specific transformation and productivity gains. One illustrative example of our progress is in the oil and gas manufacturing vertical, where we develop breakthrough innovation in AI-powered geospatial data visualization and insights. Built in partnership with Google Cloud Industry Solutions, this work led to EPAM being named Google 2025 Partner of the Year for Oil and Gas. The solution, which integrates with Google Gemini models, can also apply to broader data challenges across manufacturing and supply chain use cases, demonstrating our deep domain expertise, our ability to handle large and complex data sets, and our proven track record in delivering native cloud-based applications at scale. Another strong example is our ongoing effort to advance global engineering productivity through AI. Our focus extends beyond individual code generation to full lifecycle transformation in team environments. In Q3 of last year, we introduced EPAM AI/Run, our AI native SDLC framework and toolkit, and we are now well positioned to build on this foundation through a strategic collaboration agreement with AWS. By leveraging advanced generative AI services including Amazon Bedrock, we will empower clients to develop specialized AI agents in native solutions that address SDLC productivity challenges for large teams. This collaboration creates a robust platform for accelerating cloud and data modernization through AI-driven workflow and tooling automation. Finally, to illustrate our continuous innovation with the EPAM DIAL platform, we continue to integrate advanced AI technologies into custom-tailored business strategies, which is driving significant impact across the industry and open source community. DIAL has evolved through several advancements and iterations since we started building it. Today, DIAL is a complete GenAI platform with orchestration including Agentic marketplace, Mind Maps, and DIAL Expressive Logic and so much more. DIAL is evolving into a complete AI platform for enterprises. To conclude, we are pleased with our stronger-than-expected Q1 results, the improvement in organic growth, and the sequential momentum we continue to build. Our increasingly diversified and agile global delivery hubs combined with advanced AI native capabilities and deepening strategic partnerships are having real impact. As we shared in last quarter, we expected 2025 to be a transformative year and that outlook is proving true, perhaps even more visibly than we anticipated three months ago. We are encouraged by the opportunities ahead and remain cautiously optimistic about the second half of 2025 even as macro uncertainty persists. Our focus and disciplined execution remain our top priority. Let me now turn the call over to Jason who will provide additional details on our Q1 results in 2025 outlook.

Thank you, Ark, and good morning everyone. In the first quarter, EPAM generated revenue of $1.3 billion, a year-over-year increase of 11.7% on a reported basis. On an organic constant currency basis, revenue grew 1.4% compared to the first quarter of 2024, exceeding our expectations of flat organic growth anticipated at the midpoint of our Q1 guidance. We are pleased to deliver another quarter of year-over-year organic growth in constant currency, reflecting ongoing demand for EPAM services and strong execution across our global portfolio of clients. As Ark mentioned, we believe the outperformance is in part driven by client recognition of EPAM's superior delivery quality and momentum across our AI offerings. Moving to our Q1 vertical performance, four out of six industry verticals delivered strong to very strong revenue growth. Revenues from our FD and NEORIS acquisitions had the most impact on our financial services and emerging verticals, so I will break out the organic and inorganic contribution within these two verticals. Financial services delivered very strong growth of 29.3% year-over-year, reflecting 4.5% organic growth in constant currency driven by continued strength in insurance, banking, and payments. Software and Hi-Tech grew 9.6% year-over-year, driven by strong execution and broad improvement across our existing portfolio as well as new logo activity. Life sciences and healthcare increased 10.5% on a year-over-year basis. Growth in the quarter was driven primarily by clients in life sciences and med-tech. Generic goods, retail, and travel decreased 1.4% year-over-year, largely due to declines in consumer products and retail, partially offset by growth in travel. Business, information, and media, decreased 2.2% year-over-year. Our emerging verticals delivered very strong growth of 22.8%. Growth was positively impacted by NEORIS industrial materials customers. Emerging verticals organic revenue in constant currency contracted by 3.5% and was negatively impacted by softness across manufacturing and telecom clients. From a geographic perspective, America is our largest region, representing 60% of our Q1 revenues, grew 12.6% year-over-year. EMEA, representing 38% of our Q1 revenues, increased 10.7% year-over-year. Finally, APAC, representing 2% of our revenues, increased 4.3% year-over-year. Each of our geographies delivered year-over-year organic constant currency revenue growth in the quarter. Lastly, in Q1, revenues from our top 20 clients grew 6.1% year-over-year, while revenues from clients outside our Top 20 increased 14.6%. Moving down the income statement, our GAAP gross margin for the quarter was 26.9% compared to 28.4% in Q1 of last year. Non-GAAP gross margin for the quarter was 28.7% compared to 30.4% for the same quarter last year. Relative to Q1 2024, gross margin in Q1 2025 was negatively impacted by 2024 compensation increases which were only partially offset through pricing. Additionally, lower profitability from recent acquisitions negatively impacted gross margin. The negative impacts from compensation and lower profitability from acquisitions exceeded the benefits of improved utilization and the positive impact from the Polish R&D incentive. The company will be focused on improving gross margin throughout the remainder of the year. GAAP SG&A was 16.8% of revenue compared to 17% in Q1 of last year. Non-GAAP SG&A in Q1 2025 came in at 14.2% of revenue compared to 14.1% in the same period last year. GAAP income from operations was $99 million or 7.6% of revenue in the quarter compared to $111 million or 9.5% of revenues in Q1 of last year. Non-GAAP income from operations was $176 million or 13.5% of revenue in the quarter compared to $174 million or 14.9% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 22.2% and our non-GAAP effective tax rate was 23.1%. Diluted earnings per share on a GAAP basis was $1.28. Our non-GAAP diluted EPS was $2.41 compared to $2.46 in Q1 of last year, reflecting a $0.05 decrease year-over-year. In Q1, there were approximately 57.3 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q1 was $24 million compared to $130 million in the same quarter of 2024. Higher bonus payments in Q1 2025 and a higher DSO resulting from the impact of an increasing share of fixed fee revenues with associated milestone billing both contributed to the year-over-year decline in operating cash flows. Free cash flow was $15 million compared to free cash flow of $123 million in the same quarter last year. Cash and cash equivalents were $1.2 billion as with the end of the quarter. At the end of Q1, DSO was 75 days and compares to 70 days for Q4 2024 and 73 days for the same quarter last year. Share repurchases in the first quarter were approximately 796,000 shares for $160 million at an average price of $201.07 per share. Moving on to a few operational metrics, we ended the Q1 with more than 55,600 consultants, designers, engineers, and architects, reflecting total growth of 18.2% and organic growth of 6.4% compared to Q1 2024. In the quarter, we added over 500 professionals. Our total headcount for the quarter was more than 61,700 employees. Utilization was 77.5% compared to 76.8% in Q1 of last year and 76.2% in Q4 2024. Now let's turn to Guidance. Before moving to the specifics of our 2025 and Q2 outlook, I'd like to provide some thoughts to help frame our guidance. While the macroeconomic environment remains highly dynamic, we are pleased with our strong Q1 performance with year-over-year organic constant currency revenue growth exceeding our expectations. This has resulted in three consecutive quarters of sequential organic revenue growth. With good visibility into Q2, we expect ongoing improvement in our organic revenues with both year-over-year and sequential growth in the quarter. We continue to experience improving demand for our highly differentiated services and client budgets appear to remain substantially intact, with a few pockets of caution which we are closely monitoring. Clients are turning to EPAM for trusted quality of execution and our advanced AI offerings. To date, we have not seen a material slowdown in client spending as evidenced by our stronger-than-expected Q1 performance and sequential momentum we have seen thus far in Q2. That said, we acknowledge the elevated uncertainty in macroeconomic risks considering our stronger-than-expected first half balanced with a thoughtful assessment of client demand in our second half. We are raising the lower end of our organic full-year revenue guidance while leaving the upper end of the range unchanged. There are several additional factors impacting our view of revenue growth during the remainder of the year. Since we issued guidance last quarter, certain currencies have strengthened considerably relative to the U.S. dollar. At the same time, due to the elevated uncertainties resulting from tariffs and impacts on the manufacturing and materials industries, we are seeing a reduction in demand from a top customer acquired as part of our NEORIS acquisition. With our improved organic revenue contribution and the expected benefit from foreign exchange, partially offset by a modest reduction in expected inorganic revenues, we are raising both the upper and lower end of our reported revenue guidance. Our guidance continues to assume that we will be able to deliver out of our Ukraine delivery centers at productivity levels similar to those achieved in 2024. So moving on to the full-year outlook, revenue growth will now be in the range of 11.5% to 14.5% with an inorganic contribution of approximately 9% for 2025. Based on today's spot exchange rates coupled with an assumption of modest strengthening in the U.S. dollar in the second half, foreign exchange is now expected to have a positive impact on revenue growth of 0.4%. We expect year-over-year revenue growth on an organic constant currency basis to now be in the range of 2% to 5%. We expect GAAP income from operations to continue to be in the range of 9% to 10% and non-GAAP income from operations to continue to be in the range of 14.5% to 15.5%. We expect our GAAP effective tax rate to now be 25%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will continue to be 24%. For earnings per share, we expect that GAAP diluted EPS will now be in the range of $6.78 to $7.03 for the full year and non-GAAP diluted EPS will now be in the range of $10.70 to $10.95 for the full year. The increase in non-GAAP diluted EPS is in part driven by our assumption of a reduced share count resulting from our plan to increase share repurchases within the constraints of the current share repurchase authorization. We now expect a weighted average share count of 56.5 million fully diluted shares outstanding. Moving to our Q2 2025 outlook, we expect revenue to be in the range of $1.325 to $1.340 billion, producing year-over-year growth of 16.2% at the midpoint of the range. Our guidance reflects an inorganic contribution of 10.6% with a 1.8% positive foreign exchange impact during the quarter. For the second 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 14% to 15%. We expect our GAAP effective tax rate to be approximately 26% and our non-GAAP effective tax rate to be approximately 24%. 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 $2.56 to $2.64 for the quarter. With increases in share repurchases during the year, we expect a weighted average share count of 56.7 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q2 and the full year. Stock-based compensation expense is expected to be approximately $40 million for Q2, $45 million for Q3, and $46 million for Q4. Amortization of intangibles is expected to be approximately $17 million for each of the remaining quarters. The impact of foreign exchange is expected to be negligible for each of the remaining quarters. Tax effective non-GAAP adjustments are expected to be around $13 million for Q2 and $15 million for Q3 and $14 million for Q4. We expect excess tax shortfall to be around $1 million for Q2 with minimal excess tax benefits or shortfalls in the remaining quarters. Severance driven by our cost optimization programs is expected to be around $2 million in Q2 and $3 million for each of the remaining quarters. Finally, one more assumption outside of our GAAP to non-GAAP items, with the increased share repurchases we will have a lower level of interest-generating cash. Therefore, we now expect interest and other income to be $2 million in both Q2 and Q3 and $3 million in Q4. We remain committed to continuing to drive sequential momentum and are confident in our positioning entering Q2. Despite the dynamic environment, we will continue to run EPAM efficiently while remaining focused on strong execution and profitability throughout the year. Lastly, my continued thanks to all our employees for their dedication and focus on serving our clients and driving results for EPAM.

Hi good morning. Thank you. Ark, first just congrats on all the success you've built here and congrats to FB for his promotion. My first question is the '25 growth guide. You've raised your organic view here on the low end by a point; looks to be good 1Q and 2Q view. Can you give more color on that second half confidence? What are you seeing in underlying macro, and how did you think about what you have contracted versus what you need to still go get?

So we still continue our kind of look-forward views in line with what we were doing for the last couple of quarters. So our view for the year didn't change much, but we definitely saw the first half of the year better than we expected. So our again projection for the second part is practically in line with what we communicated during the last quarter. And as soon as we see better visibility later on, we will address this. But right now it's what we've seen and basically we didn't see any specifics which is changing this view, outside of normal.

Yes. To go back to the last earnings call, we talked about the fact that we'd seen a soft January, and then we expect to see improvement in February and March. We absolutely saw that. We're still seeing improvement in demand in April and May. It's difficult obviously to forecast during the remainder of the year, but we are looking into Q3, still feeling like the book of business looks quite solid. And then the guide would reflect the fact that things could be soft in Q4. But again, we're not seeing any change in client purchasing behavior at this time. And generally, what we are seeing is some amount of return to EPAM for quality of execution, which we think has probably been helpful for us, and maybe explains the difference in our results relative to some of our peers.

Okay. Makes sense. And then follow-up, it's just around the bookings dynamics. Any detail you can just give us around bookings to help convey the magnitude of the positive directionality that's forming here. And you're attributing better performance and optimism, partly from a pickup in AI-related work. Just any numbers you can put around these?

Yes. I think the only specific that we would have is on the AI native portfolio that we talked about last quarter. As we look from Q1 to Q2, we would say that we probably have double-digit, let's say, strong double-digit sort of growth in AI related revenues between Q1 and Q2. So again, nice improvement in those revenues.

Okay. Thank you.

Hi, thank you very much for taking my question. Congratulations for me as well to both Ark and FB. I wanted to ask about free cash flow, and I know you called out some of the drivers of the lower free cash flow result this quarter on a year-over-year basis. How should we expect that to trend as we move through the year? Are some of these drivers more persistent, or do you expect things to normalize soon?

Yes, I think you always have seasonality with us, right? So Q1 is usually low. Q1 was a lot better last year. And again, some of it has to do with all the payments we have associated with bonuses and things that happen in Q1. I still would say that we expect kind of 80% to 90% kind of cash flow conversion, which is consistent. The only thing that I would say is maybe a little bit of a change is I do think DSO is probably going to stay a little bit elevated. I think in the past we would have talked maybe around 73 or so. I think it is likely to stay a few days higher. And as we see more fixed fee revenues, we do see some milestone billings and some of that stuff, which usually means the invoices go out a little bit later. And we are seeing a little bit of an impact on DSO related to that.

Okay. A follow-up from me is on the pricing environment, and as you're seeing organic demand now pick up. Are you starting to sense now that you might be able to, you know, deploy a little bit of pricing later in the year, or is that still too early to call?

I think it's too early to call, and we indicated last time that I think it is going to be and it is a gap between this. It would be some lagging changes. So it's not going to happen too quickly. That's what we show and I think I would like to put in perspective also. Yes, we see improvements, but this improvement still relatively small. So it should be a bigger change, and should start to impact the situation.

Thank you very much.

Thank you.

Hi. Thank you. Can you talk a little bit more in specifics about plans to improve gross margin over the remainder of the year particularly in light of, mentioning that the guidance allows for some softening in the fourth quarter?

Yes. I think there's always some benefit that results in the second half just due to kind of seasonal factors, and pushing past social security sort of spend caps and some of that type of stuff. And so to be fair, usually you would have a stronger Q3 because of more bill days and some other factors. At the same time, we are focused on improving utilization. And so we continue to sort of focus on taking some amount of actions and obviously working to drive revenue growth, but with a commitment to kind of getting utilization back to sort of 77%, and then over time probably in 2026 kind of better. And so we've just got kind of a renewed focus on improving utilization.

Okay. Thank you. And can you size partnership revenue within the business, or give an idea of how it's trended in the last couple of years, and is this an important growth driver for the business going forward?

I can answer the last question, which would be yes. Unfortunately, I don't think I can give you a specific kind of impact, but yes, it's been obviously very helpful, both the co-funding and the introductions to clients. And it is definitely part of what has driven revenue growth over time. Our commitment to the partnerships and certainly investment in the partnerships has certainly been helpful.

Good morning. Thank you. I wonder if you just speak a little bit more about the growth dynamics within the customer cohorts. I think the growth outside the top 20 is obviously reaccelerated, and maybe in the context of that question, maybe speak a little bit about when the customer losses comp out, and if it remains a headwind in the second quarter. I think you said in your prepared remarks that certain customers are coming back to you, and maybe if you could just flush out that dynamic a little bit more?

I think there is. That's what we were mentioning for some time, and each quarter we see a little bit more of this. Clearly, it's not compensated and it's not like all coming back, but the trend is very visible. And I think partially why we see these improvements is because this trend is repeating and kind of accumulating quarter-after-quarter.

And maybe explain that dynamic, Ark, outside the Top 20, why that growth rate is kind of accelerating versus the Top 20?

Yes, I think sometimes when you have M&A and particularly larger scale M&A like we have, there are a larger number of sort of small customers introduced. And I think it's a little hard to do an apples-to-apples comparison just because of the magnitude of the M&A introduced in Q4. I think some of what you're seeing is probably M&A driven. But we are seeing improvements in kind of new logos and the introduction of kind of new customers that are clearly helping relationships. One of the things we've talked about a little bit is growth in the Middle East where we see a number of new engagements. So yes, that's probably what I would say at this point.

Got it. Can you discuss the current state of India in relation to your most developed regions, especially regarding recruiting dynamics, relationships, and your ability to meet resource demand at your desired price points? I'm curious about how India compares today to your established recruiting infrastructure in Ukraine, considering you've been operating there since 2015 or 2016 and made significant adjustments to your model.

I believe it will be a challenging comparison due to the very different dynamics involved. If you were to ask me about locations that are now considered mature, the situation 20 years ago would have shown similarities in terms of the ratio of senior to junior personnel. Currently, India is experiencing rapid growth, and there is a high level of maturity at the senior level that is comparable to other locations. However, there is still a larger number of junior personnel that meet our requirements compared to more mature locations like Ukraine, which has not seen growth in recent years. I think this gap is narrowing, and the quality is improving, influenced by longstanding perceptions over the decades. We aim to manage this effectively. Furthermore, India is a crucial part of our operation, currently accounting for about 20% of our capacity, and it is expanding quickly.

Guys, thanks. And Ark congrats on everything. Guys, your headcount showed notable year-over-year growth even after accounting for the employees added from the two recent acquisitions. So maybe just a little bit more color on your overall headcount strategy for this year, where you're really sourcing talent from on a relative basis, versus - let's just say a couple of years back, and really what roles you're hiring for would be helpful for now?

So I think we, in general, clearly much more careful with, even with this result and with better than we expected first half of the year. We're very cautious and careful about what would be happening. So and we are trying to maintain better bench from this point of view. And when we bring in people, we bring in people in locations where we expect in this type of environment more demand, until again to confirm that situation really changes. Because again, I would like to still keep a balance between the positive results of H1 and the reality of H2 is very difficult to predict. So basically India still is the fastest growing, and we are bringing people from the market with a very specific skill set and juniors as well, because we believe that we can train better with all advances of AI impacting the SDLC process.

Okay. Ark, where are we in terms of the size of average engagement on AI deals now? And just maybe a little more color on how that's trended and where you see that going. Just kind of curious for any kind of quantitative update to the best you can provide on AI?

I think here we can repeat what we were saying during the last quarter, and this is happening and this trend continues. The size is increasing and going to more production type of situations, with more number of use cases and functionality. So the size of the deals definitely increases. Another thing that we verify is AI what type of applications is dynamically changing as well. That's why sometimes it's very difficult to have real apples-to-apples comparisons with what we're doing and can do this internally, because it's much easier to do than external announcement and some competition. The size of the deals definitely increases - number of the deals increasing. When we were talking about a few deals like $10 million plus, then this number is bigger as well.

Operator, we have time for one more question, please.

Good morning, thanks for taking my question, and Ark, congrats on a well-deserved transition. Two if I may. One is your commentary on client conversations and outlook appears significantly better at least from my perception relative to some of your peers. So you mentioned that some clients are returning, but can you attribute that to any other sort of specific kinds of project work or other client specific factors that you're seeing in terms of the better client outlook. And then maybe in terms of your visibility into the second half, any way of sort of quantifying your second half backlog coverage perhaps being better, worse, or the same as in a typical time after Q1? Thank you.

So I think you would expect, and I think this is exactly what's happening, that when clients come back to us, sometimes we get in exactly the same work that we were doing before. Sometimes it's a very new engagement. So that spreads around these things. If we're talking about the second half of the year, I can only repeat what we've said already. So with all kind of better environment visibility still relatively difficult, and what we're seeing for the second part of the year is approximately what we were seeing a quarter ago. So decisions are still being made more in real-time. That's what we benefited in Q1 and Q2, so predicting Q3, Q4 better than we predicted so far is difficult, including the size of the deals as well. So I think we can share more next quarter. Again, thank you. Thank you very much. I think hopefully it was a little bit better message from us than before. So at the same time, with all this encouragement about opportunities ahead of us, we think about the future with cautious optimism based on everything that's happening and everything which is relatively uncertain from the macro environment. I would like to make sure that we are balancing the good message with a very difficult environment. Thank you and still talking to you next quarter. Thank you very much.