EPAM Systems Inc (EPAM) — Q3 2025 Earnings Call Transcript

Good morning, everyone, and thank you for joining us today on our third 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 our earnings release we issued earlier today. If you have not, copies are available on epam.com in the Investors section. With me on today's call are Balazs Fejes, 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 will now turn the call over to FB.

Thank you, Mike, and good morning, everyone. It's a pleasure to be here with you on my very first earnings call as a CEO. Please just call me FB, as Hungarian names are notoriously difficult to pronounce; thus, FB because in my native language, the family name comes first. This quarterly call arrived faster than even my standard double espresso shot in the morning, and that's really the theme for the day. Things have been moving quickly since we last spoke, and today, we have positive news to share. Our third quarter results came in better than expected, marking another quarter of broad outperformance and strong delivery execution. We continue to benefit from AI and AI-native led demand. Our thesis that data and modern cloud architecture are critical for AI adoption and utilization is broadly being confirmed by what we are seeing. Our clients are prioritizing their AI build-outs, turning to EPAM to help them accelerate their investments and innovation in AI. The unique combination of our deeply rooted engineering DNA and our globally recognized best-in-class AI-native expertise continues to differentiate our offerings and help us further expand wallet share within our existing client portfolio and targeted new logo segments. At the same time, we are more focused than ever on upgrading our engineering skills advantage and investing for the future with new advanced AI playbooks and accelerators. Serving as client zero for adoption, we believe innovation starts from inside, which is why we continue to relentlessly push our AI literacy and AI adoption rates. Looking at our progress year-to-date, more than 90% of EPAMers have completed their mandatory AI literacy education, and approximately 95% of our engineers have completed foundational AI education. Additionally, our internal business processes are increasingly benefiting from AI-driven efficiencies. As you can see with the recent launch of EPAM AI/RUN Transform, which includes next-generation AI managed services, and EPAM Agentic QA, we are programmatically expanding new offerings and highly specialized capabilities, often in conjunction with our clients and strategic partners, to help clients transform themselves into AI native organizations. Our efforts are being recognized by our partners as well as industry analysts such as IDC Marketscape, who have positioned EPAM as a leader across experienced engineering, custom build, and AI consultancy capabilities. Further, Glassdoor ranked EPAM #7 on their 2025 best led companies list along with Forbes, who recognized EPAM as one of the world's best employers, marking our first time being recognized across both. We will dive into the details a bit later in the call, but first, I would like to provide a quick update from my early days as CEO and my recently completed onboarding. Over the past quarter, I met in person with many senior client executives, ecosystem partners, and of course, many EPAMers from all around the world. I experienced firsthand the high level of optimism and appetite for EPAM's proven quality of execution across our global, deeply specialized talent base. I am pleased with our continued and growing ability to ensure higher levels of performance across a much more globally diversified footprint than ever before. But our work is not done. AI presents a permanent fleet change in our industry and across our clients' businesses, driving the need for investment in modernization, data and cloud foundations, and critical AI native skills. EPAM is positioned to lead both the foundational and transformational programs demanded by AI, as clients need support from trusted partners who can reliably deliver through the need to simultaneously balance costs and productivity with an increasing need to reinvest, innovate, and keep pace with change. In line with Amara's Law, we believe that as productivity grows and as the cost to develop software declines, complexity will significantly accelerate, pushing the bleeding edge and resetting the boundaries of what is possible and triggering a flywheel effect of demand for EPAM's unique breed of capabilities and global scale. We believe that as complexity rises, so does enterprise risk, raising the importance of highly advanced engineering with proven, enterprise-grade quality execution. While we have seen flashy video shorts and headlines, in our view, the absolute need for true engineering expertise, risk management, fault tolerance, and reliability are overlooked and underestimated. Now let's turn to some Q3 highlights. In Q3, we delivered another quarter of double-digit revenue growth, including very strong year-over-year organic constant currency revenue growth of 7.1%, exceeding our expectations set a quarter ago. This marks our fourth consecutive quarter of positive year-over-year organic constant currency growth, reflecting a steady build of improvement and strong execution in our core business as we continue to ramp our AI native services. Our broad-based growth momentum carried forward in Q3 with 5 out of 6 verticals growing year-over-year. Notable standouts included emerging verticals, financial services, and software and hi-tech. We also saw solid improvement in life sciences and healthcare, along with consumer goods, retail, and travel, while business information and media remains steady. Geographically, all 3 regions delivered strong year-over-year growth. We continue to add net organic headcount across key locations, such as India, Central Eastern Europe, and South America, with increases partially offset by ongoing optimization in select pockets that we have discussed previously. Now turning to the demand environment. AI continues to trigger incremental demand and is driving positives in our pipeline globally. The majority of our top 100 clients remains highly engaged in AI-native initiatives. Clients engage EPAM to build out their data platforms and modernize their cloud, often redirecting work from other partners who successfully sold advanced capability but failed to deliver it. Overall, we continue to see improvement in the demand environment as we see a continued upshift in investment towards everything that supports AI adoption and its deployment to production. This is where our reputation for trusted quality and execution remains a significant competitive advantage and a key enabler for us to continue to maintain our pricing integrity. We gained traction with our ongoing client-centric initiatives while at the same time continuously strengthening and optimizing our global delivery footprint, which is enabling us to better meet market demand. When you look across the AI project life cycle from proof of concepts to medium-sized use cases and the large-scale project in production, we're seeing a continued shift in the volume of projects towards medium and large-sized projects, with many making use of our own IP, such as DIAL, AI/RUN, and other components, both open source and proprietary. Of the hundreds of individual AI-native projects we had active in Q3, between 60% to 70% have expanded into larger programs from their origination as proof of concepts, illustrating our ability to scale and deliver AI native solutions in production. We are also seeing positive signs at the top of the funnel, enabling us to replenish our pipeline as some projects come to a natural close. Our hard work and continuous effort to further position EPAM as a leader in AI native services is serving us well as our pure AI-native revenues continue to grow nicely, with a third consecutive quarter of double-digit sequential growth. And of course, as we have discussed before, the foundational services necessary to meet AI work are core fundamentals of our business. In both our data and cloud practices, we saw outsized growth in Q3 compared to the rest of the business, which is incremental and highly connected to the momentum we are seeing with our pure AI native revenues. Now turning to our AI/RUN Transform and Agentic QA announcements. First, a couple of core beliefs to frame our evolving AI approach. Number one, AI is not just a technology. It's a transformative force that is already redefining how enterprises innovate, operate, and create value in the future. In this context, advanced engineering, bleeding-edge AI technology and toolsets along with deep knowledge across the software development industry, and new product life cycle are the core competencies that will drive the most tangible AI outcomes. This will become even more evident as we see further rise of AI in the global and regional lineups of players in both Western markets and broadly across APAC, LatAm, and the Middle East. Number two, we believe in building AI responsibly, with trust, transparency, governance, and measuring outcomes at the core. AI must deliver real outcomes with proper traceability and risk management. Number three, we believe we are creating a new AI native engineering profile, or North Star, when it comes to talent development strategy, embedding AI intelligence and orchestration of agents directly into the development process. Over time, this role becomes the architect of AI native products and experiences augmented by agents to expand the scope of what teams can achieve in the future. Finally, AI investments are in an intense race. Our approach is to invest in accelerators, tooling, and people who help us deliver reliable outcomes on the promise of AI. We do not sell foundational AI in a silo. Instead, we use our expertise and advanced IP to sell and deliver with AI, with proven quality and execution that guarantees outcome and volume realization. This is true across our entire IP portfolio and is shaping into a structural blueprint we are calling AI/RUN. AI/RUN Transform represents our unified AI strategy that harmonizes our go-to-market notions with better activation across strategy and consulting, frameworks and methodologies, talent and advanced toolsets. We have two key offerings: AI innovation business transformation and AI native engineering transformation. The first offering is focused on optimizing and expanding run across AI industry solutions, AI horizontal solutions, and AI product design and experience. The second offering is focused on mastering the software development life cycle (SDLC), advancing the Agentic delivery life cycle known as ADLC, and preparing for the product development life cycle known as PDLC. This encompasses AI-native delivery, AI-driven modernization, and PDLC agentic solutions. We will be talking more about these offerings in the quarters to come. Our AI/RUN blueprint encompasses our AI frameworks and includes our AI 360, AI factory, AI SDLC, and AI adoption and education frameworks, which are agnostic and provide critical flexibility, helping EPAM deliver more enterprise-grade AI solutions at scale for our clients. Our AI/RUN talent houses our verticalized industry teams, ontologies, and accelerators, which includes strategic advisory, data models, process modeling, and solutions built with partners. Most importantly, this is the scaffolding we are using to define the forward skills of the future and the parts for upskilling people and organizations. Our AI/RUN tools combine our best-in-breed IP assets, such as EPAM DIAL and the AI/RUN platform, with our strong AI, data, and cloud ecosystem partner solutions, many of which are currently available on our partner marketplaces. You may have seen we also recently announced one of these tools, Agentic QA, which bridges the gap between automated and manual testing, enabling clients to move faster by reducing lead times and costs. What’s impressive is that Agentic QA has shown to be 10 times more efficient than manual testing, driving a 50% reduction in manual efforts and a 30% reduction in testing costs, covering 90% of the manual checks performed on standard releases while ensuring a high degree of quality and precision. Now turning to some client examples to illustrate our progress. This past quarter, we announced several collaborations with both new and existing clients, which illustrate not only the evolution of our client proposition, but also how EPAM is able to systematically address innovative needs while offering real volume. A few notable examples include: 1. AI customer service breakthroughs with a major provider for telecommunications, cloud, and Internet services in Germany. By deploying EPAM's AI/RUN Transform Blueprint and leveraging Microsoft Azure, this client launched AI voice agents that handle over 100,000 calls weekly, with the first agents going live within three months into production. 2. Our collaboration with Hugo Boss and our Empathy Lab studio is reimagining what it means to be a sports fan in the age of spatial computing. This innovation is shaping the next generation of motorsport fandom while lifting the bar on how luxury fashion, sports, and technology intersect. We are blending our deep expertise in groundbreaking user experiences with gaming, fan engagement, advanced data and analytics, and working with our clients to help package a 2025 TV award-winning solution for the AI-native age. 3. Finally, we are putting EPAM and NEORIS together in a way that goes beyond simple synergies. For a U.K.-headquartered global biopharmaceutical company, EPAM, with the addition of NEORIS, recently became a global strategic supplier across a broad range of transformation pillars. A key joint win for us is in helping the client to build out a modern data and AI center of excellence, which spans across multiple programs and new locations, including Ibero-America. To close, our operating momentum is strong. We are pleased with our performance throughout the year and continue to work on improving profitability. We are confident in the upward trajectory we have been working hard to build and sustain over the past several quarters and feel good about our Q4 positioning, which has improved over the past 90 days. We are focused on what's right in front of us and finishing 2025 strong, which we believe should set up a solid foundation to build upon in 2026 as we continue to work on expanding our organic constant currency growth rate. We are prioritizing client-centric, disciplined execution while bringing a new level of intentionality to building verticalized and differentiated horizontal go-to-market offerings. Looking ahead, we see our investments in upskilling, differentiated AI playbooks, IP partnerships, and new lines of services such as Agentic business process outsourcing helping us to further capture new demand. Jason, over to you.

Thank you, FB, and good morning, everyone. In the third quarter, EPAM generated revenue of $1.394 billion, a year-over-year increase of 19.4% on a reported basis, exceeding the high end of our Q3 revenue guidance. On an organic constant currency basis, revenues grew 7.1% compared to the third quarter of 2024. We delivered another consecutive quarter of solid year-over-year organic constant currency growth, reflecting ongoing steady execution. Our growth in the quarter was driven by a continued shift to quality and accelerating momentum across our AI native, data, cloud, and AI foundational initiatives. We're making early headway with the launch of our AI/RUN Transform strategy, which complements our underlying growth momentum, positioning us well to continue to capture demand. Our outperformance in the quarter was broad-based. We also recently announced a new $1 billion share repurchase program. The underlying strength of our business and continued momentum, coupled with our efficient free cash flow generation and a strong balance sheet, enables us to take advantage of the current market dynamic while returning cash to shareholders. Moving to our Q3 vertical performance, five of our six industry verticals posted year-over-year growth, with four of the six growing double digits. NEORIS and First Derivative continue to contribute substantially to our financial services and emerging verticals. Financial Services once again delivered very strong growth, up 32.7% year-over-year on a reported basis, with 6% organic growth in constant currency. Growth came from banking, asset management, and insurance clients. Software and Hi-Tech grew 19.1% year-over-year, driven by strong execution and broad improvement across large clients. Life Sciences and Healthcare increased 11.8% on a year-over-year basis. Revenue growth in the vertical continues to be driven primarily by clients in Life Sciences and MedTech. Consumer goods, retail, and travel delivered 9.9% year-over-year growth, marking a notable rebound relative to prior quarters. The vertical also delivered solid sequential growth, which was driven by growth in consumer products and retail. Business Information & Media was steady and delivered flat year-over-year revenue performance. Our emerging verticals delivered another quarter of very strong year-over-year growth of 38.9%, with NEORIS continuing to contribute to the vertical's performance. On an organic constant currency basis, growth was 15.1%, primarily driven by ongoing strength in energy and materials. From a geographic perspective, the Americas, our largest region, representing 58% of our Q3 revenues, grew 16% year-over-year on a reported basis and 3.9% in organic constant currency. EMEA, comprising 40% of our Q3 revenues, increased 24.9% year-over-year and 11.8% in organic constant currency. Finally, APAC, making up 2% of our revenues, increased 17.7% year-over-year and 14.2% in organic constant currency. Lastly, in Q3, revenues from our top 20 clients grew 10.2% year-over-year while revenues from clients outside our top 20 increased 24.4%. Moving down the income statement, our GAAP gross margin for the quarter was 29.5% compared to 34.6% in Q3 of last year. Non-GAAP gross margin for the quarter was 31% compared to 34.3% for the same period a year ago. As a reminder, the prior year period benefited from a cumulative catch-up related to the Poland R&D credit. The third quarter of 2025 includes a single quarter's benefit of $13.2 million. Additionally, for Q3 2025, we recognized higher variable compensation driven by expected stronger second-half performance combined with ongoing lower profitability associated with recent acquisitions, which both contributed to the lower gross margin level. Our GAAP SG&A was 16.8% of revenue compared to 17.7% in Q3 of last year. Non-GAAP SG&A in Q3 2025 came in at 14.1% of revenue compared to 14% in the same period last year. Our GAAP income from operations was $145 million, or 10.4% of revenue in the quarter compared to $177 million, or 15.2% of revenue in Q3 of last year. Non-GAAP income from operations was $222.8 million, or 16% of revenue in the quarter compared to $222.9 million, or 19.1% of revenue in Q3 of the previous year. Our GAAP effective tax rate for the quarter was 25.6%, and our non-GAAP effective tax rate was 24.1%. Diluted earnings per share on a GAAP basis was $1.91. Our non-GAAP diluted EPS was $3.08 compared to $3.12 in Q3 of last year, reflecting a $0.04 decrease year-over-year. In Q3, there were approximately 55.8 million diluted weighted average shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $295 million compared to $242 million in the same quarter of 2024. Although seasonality always has a positive impact from Q3 cash flow, cash flow from operations in the quarter exceeded the impact of typical seasonality, resulting in the highest level of quarterly cash flow from operations in EPAM's history. Free cash flow was $286 million compared to free cash flow of $237 million in the same quarter last year, and also represented an all-time high. Cash and cash equivalents were just over $1.2 billion as of the end of the quarter. At the end of Q3, DSO was 75 days compared to 78 days for Q2 2025 and 74 days for the same quarter last year. Share repurchases in the third quarter were approximately 493,000 shares for $82 million at an average price of $167 per share. Moving on to operational metrics. We ended Q3 with more than 56,100 consultants, designers, engineers, and architects, reflecting total growth of 17.5% and organic growth of 6.4% compared to Q3 2024. In the quarter, we added approximately 300 net delivery professionals. Our total headcount at quarter end was 62,350 employees. Utilization was 76.5% compared to 76.4% in Q3 of last year and 78.1% in Q2 2025. Now let's turn to guidance. Before moving to the specifics of our 2025 and Q4 outlook, I would like to provide some thoughts to help frame our guidance. Based on the strength of our Q3 and solid Q4 visibility, we are expecting a strong Q4 exit, ending the year with higher organic constant currency growth rates than we forecasted just 90 days ago. At the same time, we are not expecting to see a significant release of excess client budgets, and typical seasonality will also have an impact. Compared to Q3, Q4 is negatively impacted by a higher number of holidays, vacations, and potential furloughs. As a reminder, we acquired NEORIS and First Derivative in Q4 2024 in November and December, respectively. As per our usual reporting practice, revenues from these acquisitions were moved from inorganic to organic in Q4 2025 as contemplated in our previous guidance. Based on better-than-expected performance in the second half and improving visibility into Q4, we are raising the bottom end of the range for 2025 full-year organic constant currency revenue growth and now expect the midpoint of the range to be 4.6%, an increase from the guidance given 90 days ago, which was 4% at the midpoint of the range. While driving top-line revenue growth, we also remain focused on improving profitability. Although there is still work to be done, we've been pleased with the results of our ongoing focus on improving account profitability, which is evident in our improved profitability outlook for Q4 and full year 2025. Lastly, we continue to work on improving utilization, and we are continuing to reduce isolated pockets of bench while adding headcount to support growth. Our guidance continues to assume that we will be able to deliver from our Ukraine delivery centers at productivity levels similar to those achieved in 2024. Moving to our full-year outlook. We now expect revenue to be in the range of $5.430 billion to $5.445 billion, reflecting a year-over-year growth of 15% at the midpoint, with inorganic continuing to contribute approximately 9.1% for 2025. Based on current spot rates, foreign exchange is now expected to have a positive impact on revenue growth of 1.3%. We expect year-over-year revenue growth on an organic constant currency basis to now be 4.6% at the midpoint. We expect GAAP income from operations to now be in the range of 9.4% to 9.7%, and non-GAAP income from operations to now be in the range of 15% to 15.3%. We expect our GAAP effective tax rate to now be 25%. Our non-GAAP effective tax rate, which excludes the impact of benefits and shortfalls related to stock-based compensation, will continue to be 24%. For earnings per share, we expect the GAAP diluted EPS to now be in the range of $6.75 to $6.83 for the full year, with non-GAAP diluted EPS now expected to be in the range of $11.36 to $11.44 for the full year. We now expect a weighted average share count of 56.2 million fully diluted shares outstanding. Moving to our Q4 2025 outlook. We expect revenue to be in the range of $1.380 billion to $1.395 billion, producing a year-over-year growth of 11.1% at the midpoint of the range. Our guidance reflects an inorganic contribution of 4.3%, with a 2.4% positive FX impact during the quarter producing a 4.4% organic constant currency growth rate at the midpoint of the range. 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 15.5% to 16.5%. 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 $2.00 to $2.08 for the quarter and non-GAAP diluted EPS to be in the range of $3.10 to $3.18 for the quarter. We expect a weighted average share count of 55.1 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q4. Stock-based compensation expense is expected to be $44 million. Amortization of intangibles is expected to be approximately $18 million. The impact of foreign exchange is expected to be $1 million. Tax effective non-GAAP adjustments are expected to be around $16 million. We expect a tax shortfall related to stock-based compensation of around $1 million. Severance driven by our cost optimization program is expected to be around $10 million. And one more assumption outside of our GAAP to non-GAAP items, we now expect interest and other income to be $3 million for the remaining quarter. We remain focused on driving revenue growth and enhancing profitability. We are confident in our strong positioning as we enter Q4. We will continue to run EPAM efficiently while maintaining our focus on both growth and profitability throughout the remainder of the year.

So I wanted to start with the push that you mentioned into Agentic BPO. Do you intend to enter that space with proprietary products? Or can you talk about maybe build versus buy decisions from clients for processes? And then just like the ability to automate this, how that may be or may not be any different from the robotic process automation wave that we saw several years ago that ended up being sort of difficult to accomplish given the variability of processes.

Good morning, Maggie. Thank you for the question. It's actually a really interesting subject. It's early days for us. As you know, we made two acquisitions in this space. The first was First Derivative, where we had a line of business which was in business services; that's where we really went after that acquisition with the pieces that we could automate with Agentic AI, the KYC and fin crime elements of their business. The second acquisition was LYNXUS, which was this year, and it was a small BPO to really understand the space itself. Going back to what we are seeing, we are seeing our clients are keen to try out, but it's early days. We are using the EPAM build platform itself in order to really deliver the automation, but it's very different than RPA in the past. What we are trying to do is experiment on simple and more complex agentic flows, which requires a high level of engineering going beyond simple RPA capabilities. We don't know yet where the market will go, and we don't know where it's leading. Right now, we are seeing a build momentum from the clients we are talking to, but it's a very small sample.

I wanted to ask about your Q4 exit rate considerations. Beyond that, as we move forward to 2026, how should we be thinking about growth potential? Specifically, if you can comment on the impact of bill days and furloughs and things like that as you go through Q3 and Q4 and into Q1, along with any other important factors such as how growth in NEORIS and FD may affect your organic growth rate as you fold those in going forward?

Yes. Bryan, this is Jason. As I think most people know, there’s a negative impact from a seasonality standpoint if you look at sequential Q3 to Q4. And so that impact is caused by three things: fewer bill days, more vacation, and a higher degree of furloughs. All of these produce some tens of millions of kind of headwind on sequential growth Q3 to Q4. However, when I look at the performance of our business throughout 2025, from Q1 to Q2, Q2 to Q3 and Q3 to Q4, if you adjust for foreign exchange and you account for sequential factors, our sequential growth rate has been consistently surprising. Additionally, there’s probably a little bit of headwind on foreign exchange sequentially from Q3 to Q4. Just so I might answer a question that you haven't asked, our guidance at the midpoint of the range contemplates about 4.4% organic constant currency growth. If we operate at the high end of Q4 guidance, we’d be at about 5% organic constant currency growth.

The organic constant currency in the quarter, at 7%, is obviously best-in-class among your peer group. Could you break down the sources of what looks to be some deceleration in Q4 on a year-over-year basis? You just walked us through the sequentials. I want to ensure we have the puts and takes right there and how we should be thinking about where organic growth can go in 2026, versus a 4.5% exit rate for this year.

From a year-over-year standpoint, the biggest difference is we see clients continue to make investments and move forward on programs. What we're not seeing is the release of excess budgets at the end of the year the way we saw last year. That is likely the biggest difference. While clients are continuing to invest, they are not opening their wallets at the end of the year as they did previously. From a demand standpoint, it still feels broad-based and continues to be valid, as we are seeing growth in financial services, hi-tech, and the emerging energy portion of the portfolio. As for 2026, we believe that organic growth rates will be higher than this year, driven by AI fundamental build-outs. We see positive signals in the pipeline for 2026.

FB, welcome to the first, hopefully many earnings calls as CEO. It's interesting to hear that clients are redirecting work from partners who failed to deliver effectively, highlighting that you're winning share from peers. Can you help size that contribution and unpack your competitive advantage here versus your peers? How do you expect to maintain that gap going forward?

Jonathan, thank you very much for the kind words. I don't think we can size it yet. We are seeing that in major programs, competitors who failed to deliver are now having their work redirected to us. The reason for this is that delivering solutions in enterprises is much more difficult than what it seems in a short video or headline. It requires deep engineering skill set capabilities across foundational elements like data, data platforms, cloud, or modernizing enterprise platforms. You also need to consider the cost; engineers can be quite expensive, along with the risk elements, actual reliability and performance. All of these require deep engineering skill set. To maintain our advantage, we are investing in our people, engineering talent, methodologies, and playbooks while experimenting on ourselves. Being client zero is vital for our future.

In your public commentary and interviews recently, you've struck a chord about focusing on costs. Can you give us a sense of how this focus on cost is being manifest across the company and how that might materialize in terms of SG&A or other kinds of cost savings or margins over time?

Thank you very much. In recent months, I've discussed our focus on pyramids. We aim to balance the pyramid effectively. Throughout our diversification of the delivery engine, we’ve gone into certain geographies where we weren’t able to create the ideal pyramid structure. Now we’re working on rebalancing the pyramid itself, which will help reduce costs. As CEO, I’m emphasizing profitability on deals, the capability to deliver profitable projects, and selecting the right clients. We can be more selective with projects due to changing demand.

I’ll add that, as FB indicated, our focus is improving account margin in the second half of the fiscal year. Throughout the year, we've been discussing a 15% midpoint profitability range, and at this time, we feel strongly that we will operate in the upper half of the 14.5% to 15.5% range, expecting around 15% to 15.3%. This is driven by various factors, including improved account margins as we progress through the fiscal year.

Regarding AI projects, we see an evolution from proof of concepts to medium- to large-scale engagements. We have hundreds of engagements ongoing and most start on the smaller side. As they scale, some reach into the tens of millions of dollars range. Many of our top 100 clients engage in significant AI initiatives, indicating a trend where future revenue will likely come from AI transformation and foundational elements for AI deployment, which is a main driver for our business.

Some of your comments were considerably more technical than what some of us are accustomed to, and we appreciate that because that's where the industry is going. I wanted to ask specifically about agentic delivery and life cycle management. In terms of the vectors or phases that the customers need to proceed with agentic delivery, how would you describe the chronology and the relative size of that in the delivery lifecycle compared to others?

So we need to consider that when clients were just delivering software products, they still had to master the SDLC cycles. Many clients and much of the industry haven’t truly mastered the SDLC itself. Introducing agentic AI capabilities to automate large-scale processes demands a thorough understanding of agentic life cycle management. This is complex and requires mastering far beyond traditional SDLC processes; it necessitates upskilling teams and introducing right tooling in organizations. Companies will need to partner with organizations such as EPAM to achieve benefits, establishing foundational components and implementing procedures necessary for agentic automation.

At a high level, revenue per head is up for the first time in three quarters even with flat utilization. There’s a lot of, what I would call, noise in the data. Utilization is one factor affecting this, along with foreign exchange. This number has noise that most people might not realize. As we look at our number and adjust for those factors, we're seeing slightly better pricing than we have in the past, which is part of the consistent account margin improvement earlier in the call.

When did contract profitability inflect? Is this the first quarter that it's visible, or has it been inflecting and just not noticeable?

We've been focusing on this throughout the year, as we've communicated in previous quarters. Factors affecting profitability include our approaches to pyramid structures and improving account margins. This is now showing up in the discussion, evident in our solid profitability for Q3 and an improved outlook for Q4 compared to previous projections.

What does that mean for headcount growth going forward in this model and possibly for revenue per head? How should we think about that as we move into Q4 and next year? Additionally, any comments on the organic growth of FD and NEORIS? Could you provide insights on that?

You’d expect us to add headcount in Q4, similar to what we've been doing throughout the year. We will continue to see net additions globally as we reduce excess bench. Regarding FD and NEORIS, we’ve experienced a decline with the lead customer at NEORIS due to U.S. tariffs and political and economic instability in Mexico. So, it has a modestly negative impact on third quarter growth. However, both businesses have stabilized, and we see strategic advantages despite the challenges.

I have a follow-up on the AI projects. I appreciate it’s still early, but how does the AI work differ from EPAM's non-AI projects in terms of duration and profitability? How do you foresee this evolving in the future? Are certain clients in terms of size and industry more engaged in AI projects than others?

The AI projects are not fundamentally different from non-AI projects; both require senior engineering and discipline. However, AI projects demand more data-related skills and understanding of industry specifics. Profitability is currently similar to non-AI, but there is potential for higher profitability in the future with alternative business models. Client engagement indicates that large AI initiatives are emerging, and we expect this sector to drive significant revenue moving forward.

I wanted to ask about your build versus buy strategy. What is the growth of your GenAI-like revenue?

It’s somewhat challenging to quantify precisely, but we have seen strong sequential improvement in revenues for GenAI native services, continuing to grow by double digits. As FB indicated, we're also witnessing strong growth in the foundational side—cloud modernization and data.

We continue to see significant demand for AI solutions. As Jason noted, our AI-native revenue is impressive, with double-digit sequential growth. Clients are engaging more with our solutions, and as functional capabilities improve, we anticipate a greater inclination to build rather than buy, indicating a shift in market dynamics.

We have several large clients in the Software and Hi-Tech vertical driving substantial sequential growth. We expect to maintain ongoing revenue from this segment but acknowledge that growth rates may normalize over time.

Thank you very much for attending my first earnings call. I would like to thank all EPAM employees for their dedication, which has delivered us a successful quarter. We look forward to speaking again in approximately 90 days. Thank you.