EPAM Systems Inc (EPAM) — Q1 2026 Earnings Call Transcript

Good morning, everyone, and thank you for joining us today on our first quarter 2026 earnings call. As the operator just mentioned, I'm Mike Shandel, 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 Balazs Fejes.

Thank you, Mike, and good morning, everyone. It's a pleasure to be here with all of you. We delivered a solid first quarter with revenue growth at the high end of our outlook range, year-over-year improvement in adjusted profitability and gross margins and strong adjusted earnings per share. Pure AI revenues exceeded $125 million in Q1, up nearly 20% sequentially from Q4. This momentum gives us a strong line of sight to our $600 million target for the full year, even with the broader macro variability we have factored into our outlook. We also just announced a strategic multiyear applied AI partnership with Ontic to accelerate the delivery of safe, reliable, enterprise-grade AI for our clients. As an Anthropic services partner, EPAM is building a dedicated practice for more than 10,000 cloud-certified architects, including a specialized cadre of 250 forward-deployed engineering Black Belts. To date, over 20,000 EPAMers have completed training via Anthropic training programs and more than 1,300 are already Claude certified. We expect to reach 5,000 certifications by the end of Q3 with 10,000 by year-end. This is further proof of our engineering expertise in adaptability, advanced learning and education programs, and readiness for Claude within the enterprise. As we outlined at our recent Investor Day, we have a clear multiyear strategy to drive our next phase of profitable growth and further capitalize on the global AI transformation opportunities. Our aspiration is to become the go-to partner for enterprise AI transformation with a focus on three strategic pillars, which are helping reshape the company. These pillars include establishing ourselves as a leading AI delivery software engineering services provider, transforming ourselves into an AI-native organization and capitalizing on our AI transformation structure to expand go-to-market offerings. For 30-plus years of engineering DNA and heritage, expanding domain and vertical expertise, advanced IP and platforms and deepening strategic partnerships continue to differentiate us and provide a durable advantage. Our mission is to win the build opportunity of our lifetime. The gap between the rapidly developing foundational AI capabilities and the ability of enterprises and societies to adopt AI safely, reliably and with sustainable growing volume will drive some of the largest technological investments humanity has ever made. This view was recently validated by our new partner Anthropic and also by NVIDIA's CEO, Jensen Huang, during his interview with Vorkesh Patel. Today, we are moving beyond traditional IT services with a sharp focus on AI-native engineering and AI-native business transformation, which both continue to gain traction. At the same time, EPAM is fundamentally rethinking how the company operates, which goes beyond scaling AI adoption across 60,000 people. With our Client Zero mentality, we are engineering an entirely new operating model — one that dynamically blends human talent, AI capabilities and advanced agentic systems to run the business more efficiently and at lower cost across all geographies. The early stage of this new blend is reflected in the number and the shape of AI-native projects that we are starting with clients. AI/Run is moving from being an SDLC transformation playbook to powering a series of AI/Run transform motions that bring significant structure and volume to our clients' own adoption apertures. Our ROI-driven playbook uniquely brings together our engineering excellence with AI-native delivery, coupled with strategic consulting and advisory teams, deep technical expertise and partner ecosystem technologies. Unlike traditional consulting roadmaps and deployments, EPAM's AI/Run transform integrates blueprints, talent and tools into a single proven, repeatable and scalable transformation platform for our clients. We continue to create global go-to-market playbooks using proven methods across the globe. As more of our AI programs are scaled into deployments, the financial implications for our engagements are becoming more significant. This is a generally new and consequential commercial construct and presents both challenges and opportunities for us and services companies in general. As the industry works through model evolution, we intend to be ahead of the curve as we continue to evolve our approach to AI investment pricing, client engagement and delivery models for some quarters to come. One additional element of our strategy worth highlighting is the fact that we are now accelerating our deliberate go-to-market investments in our largest market in North America. These investments are modeled on what has proven to be successful in EMEA, evidenced by their industry-leading growth rate in Q1. Now let's turn to some quick Q1 highlights. In Q1, revenues grew 7.6% year-over-year with constant currency organic revenue growth of 3.7%. Five of our six verticals grew year-over-year, led by Financial Services and Software and Hi‑Tech, followed by Consumer Goods, Retail and Travel, emerging verticals, and Life Sciences and Health Care. Across geographies, growth was led by EMEA, which delivered strong double-digit year-over-year growth. We are continually balancing our delivery locations and scale mix, adding new certifications, domain specialization and additional roles across our global footprint. We also continue to proactively manage our commercial engagement types, driving new fixed-price and other service deals while proactively managing our localized bench. Now turning to the demand environment. Overall, client sentiment remained stable through the end of Q1 with a continued shift in spend towards AI-native and strategic deployments. Clients continue to turn to EPAM for help in addressing the widening adoption gap. The need to modernize and build out foundation readiness remains critically important. Technical debt continues to mount and the latest AI capabilities are making the backlog of required work evident, further underscoring our confidence that the build opportunity is a long-term win. As we look ahead, there's more macro uncertainty today compared to 90 days ago, and our outlook reflects the broader variability we are seeing in client decision-making. We are particularly seeing some underperformance in North America, and this is contributing to lower visibility in the second half. At the same time, our underlying momentum, particularly across our AI-native business, continues to build. However, macro volatility has introduced some additional caution in client decision-making, particularly on certain larger discretionary programs. While Q1 was not impacted, we are expecting some impact in Q2. Importantly, our client pipeline of AI programs and funding remains strong. What we see is a temporary shift in timing and direction as clients respond with caution and reprioritize short-term actions against the bigger transformation opportunity. Now turning to AI. As we have all seen in the news, AI capabilities continue to advance extremely fast. The pace of technological change and adoption is unprecedented for enterprises as they face the challenge of balancing cost optimization and productivity with real business outcomes at scale. Token usage and the associated economics are only becoming a more integral part of the investment thesis and business case. All this just increases complexity, which, as we stated at our Investor Day, results in new sets of requirements across all dimensions of enterprise AI. EPAM remains in the sweet spot of helping enterprises close the AI adoption gap, solve their most complex challenges and deliver quality AI-native, enterprise-grade solutions at scale. We are working hard to further build and create high-velocity performance teams within our AI-native delivery engine to take advantage of larger growth opportunities. By design, our teams will bridge strategy to execution with a more consultative approach, all with deep domain and vertical expertise. Looking across our top 100 clients, traction remains strong as more than 80% are engaged in AI initiatives. Our AI frameworks and tools continue to support hundreds of active AI-native projects. Note, we had more than 100 new AI-native projects launched in Q1, illustrating our active pipeline and healthy replenishment of new opportunities. In terms of new deals since our AI Day, EPAM is seeing an escalating large-deal pipeline focused on AI-enabled vendor consolidations, where EPAM has significant opportunity to gain market share. These multiyear deals are larger than our historical norm, are expected to scale over time and include a range of commercial models. The trajectory of this pipeline marks a meaningful step in EPAM's evolution as a strategic partner to enterprise clients. However, the full potential of these deals is not yet reflected in our outlook. Across our pure AI-native revenues, our momentum continues and fundamentals remain intact with another quarter of double-digit sequential growth. Demand across our AI foundational services remains solid with faster growth in both our data and cloud practices as compared to the rest of the business. Importantly, we believe we can further accelerate capturing AI foundation demand with the deployment of more domain capabilities and forward-deployed engineers to engagements. This motion will take some time to scale, but we see this as a critical unlock to being able to deliver true business transformation to clients. Beyond transforming EPAM's business and go-to-market approach towards more outcome-based models, we are building not just an engineering moat, but a domain and context-based model and playbook built on successful engagements over time. Capturing expertise at the source of these engagements further develops our playbooks into differentiated IP and ways of working. Here are some client examples to illustrate the shift. One, PDLC transformation for Nelnet, a global company specializing in consumer finance, student loan servicing, telecommunications and education, to explore the potential of GenAI tools to boost PDLC efficiency. To do that, EPAM developed a program to identify baselines and performance productivity benchmarks based on EPAM's AI/Run transform. Nelnet achieved a 31% productivity increase, accelerated back-end development by nearly 2x and empowered its teams to scale AI-driven innovation across the organization. We continue working with Nelnet to expand the PDLC program across the organization and continue building an enterprise governance model that scales. Two, modernize and upgrade global streaming infrastructure for a leading streaming platform client within media and entertainment, serving 10-plus million concurrent users across 50-plus countries. With our partner AWS, we successfully transformed a fragile single-region platform into a self-healing global system sustaining 99% uptime without manual interaction. The solution deployed active-active architecture across more than six regions with automated IaC governance and standardized site reliability engineering practices. Together, we helped our client achieve 70% less configuration drift and zero-downtime deployments. Three, bring the right AI and GenAI programs from use-case concepts to full-scale production deployment for a large global insurance company. Here, our DI platforms serve as both domain playbooks and significant accelerators, integrating both upstream and downstream systems to ensure seamless end-to-end automation to assist the reinsurance claims department in first-order loss processing. EPAM automated billing reconciliation and streamlined reinsurance treaty analysis, proving the real-world potential of AI in a highly regulated industry. After implementation, time to process first-order loss events decreased by 75%. Our efforts continue to be recognized, validating our strategy and the quality of our execution. So far, in 2026, we have been honored to receive several key leadership distinctions. We earned two 2026 Google Cloud Partner of the Year awards for helping clients achieve measurable business outcomes through advanced AI and cloud technologies. The sustainability award highlighted our use of AI and geospatial technology to address environmental challenges, while the databases and ML awards celebrated our scalable methodologies for enterprise cloud migrations, including our work with Deutsche Bank. EPAM was included in the Forrester Customer Experience strategy consulting services landscape, featuring providers that support end-to-end CX transformation from vision through execution. EPAM was named a leader in the IDC Marketscape worldwide data modernization services provider for retail and restaurants. And finally, EPAM was ranked among the top three companies in Glassdoor's inaugural Best Companies in Tech and AI 2026 list, recognized for its culture of belonging, innovation and leadership. These recognitions continue to reflect the hard work and dedication of global teams and our commitment to delivering tangible, high-volume outcomes for our clients. In summary, we are pleased with our first quarter results, which delivered the high end of our revenue outlook despite a more uncertain macro environment — a solid foundation we intend to build upon throughout the year. We remain confident in our long-term strategy and vision in transforming ourselves into a global leader in AI transformation services, working to further capitalize on faster-growing parts of the total IT and AI services market. Our underlying AI-native and AI foundational readiness momentum remains strong and continues to resonate with our existing client portfolio. As we transform our go-to-market motions over the coming quarters to further expand our client portfolio, the economic environment has impacted visibility and added some vulnerability. We feel good about our pipeline, including the larger strategic opportunities I described earlier, which represent a meaningful step in our evolution. Lastly, I want to thank you all for your continued commitment, trust and support. Jason, over to you.

Thank you, Balazs, and good morning, everyone. In the first quarter, EPAM generated revenue of $1.4 billion at the high end of the Q1 revenue outlook, delivering year-over-year growth of 7.6%. On an organic constant-currency basis, revenue grew 3.7% compared to the first quarter of 2025. We delivered improved year-over-year profitability in the quarter. GAAP income from operations grew by approximately 18% and non-GAAP income from operations grew by over 14%. AI-native and AI foundational revenues continued to contribute to year-over-year growth with more than $125 million of AI-native revenues in the quarter. This is the fifth consecutive quarter of sequential double-digit growth. Moving to our Q1 industry performance, we delivered broad-based year-over-year growth across the majority of our verticals. Financial Services delivered strong growth, up 11.5% year-over-year, driven by asset management and insurance clients. Software and Hi-Tech grew 10.9% year-over-year, driven by strong execution across existing clients and contributions from new logos. Consumer Goods, Retail and Travel delivered 7.2% year-over-year growth, notably driven by retail and consumer goods. Life Sciences and Health Care increased 5.9% year-over-year, driven primarily by clients in life sciences and med tech. Business Information Media decreased 0.7% year-over-year, and our emerging verticals delivered year-over-year growth of 6% and 8%, primarily driven by ongoing strength in energy and government. From a geographic perspective, the Americas, our largest region, represented 57% of our Q1 revenues and grew 2.5% year-over-year. EMEA comprised 41% of our Q1 revenues, grew 15.9% year-over-year and 8.4% in constant currency. APAC, making up 2% of our revenues, grew 1.2% year-over-year. Lastly, in Q1, revenues from our top 20 clients grew 4.4% year-over-year, while revenues from clients outside our top 20 increased 9.1%. Moving down the income statement, our GAAP gross margin for the quarter was 27.7% compared to 26.9% in Q1 of last year. Non-GAAP gross margin for the quarter was 29.4%, compared to 28.7% for the same period a year ago, demonstrating our commitment to improving profitability and gross margin during the fiscal year. GAAP SG&A was 17.1% of revenue compared to 16.8% in Q1 of last year. Non-GAAP SG&A in Q1 2026 came in at 14.1% of revenue, compared to 14.2% in the same period last year. GAAP income from operations was $117 million, or 8.3% of revenue, compared to $99 million, or 7.6% of revenue, in Q1 of last year, and grew by 18% year-over-year. Non-GAAP income from operations was $201 million, or 14.3% of revenue, compared to $176 million, or 13.5% of revenue in Q1 of the previous year, and grew over 14% year-over-year. Our GAAP effective tax rate, which includes a higher level of tax shortfalls related to stock-based compensation, came in at 31.6%. Our non-GAAP effective tax rate was 23.6%. Diluted earnings per share on a GAAP basis was $1.52 compared to $1.28 in Q1 of last year, a $0.24 increase year-over-year, reflecting growth of 18.8%. Our non-GAAP diluted EPS was $2.86 compared to $2.41 in Q1 of last year, a $0.45 increase year-over-year, reflecting growth of 18.7%. In Q1, there were approximately 54.2 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q1 was negative $36 million compared to $24 million in the same quarter of 2025. Q1 cash flow was negatively impacted in the quarter by higher variable compensation payments related to 2025 performance as well as timing of certain vendor payments. Free cash flow was negative $54 million, compared to free cash flow of $15 million in the same quarter last year. Cash and cash equivalents were just over $1 billion as of the end of the quarter. At the end of Q1, DSO was 76 days and compares to 72 days for Q4 2025 and 75 days for the same quarter last year. Share repurchases in the first quarter were approximately 1.8 million shares for $264 million at an average price of $143.84 per share. To date, since the initiation of our share repurchase program, we've returned approximately $1.5 billion in cash to shareholders. Moving on to operational metrics, we ended Q1 with more than 56,500 delivery professionals, reflecting total growth of 1.6% compared to Q1 2025. Our total head count at quarter end was more than 62,750 employees. During the quarter, the company reduced head count in Mexico. Additionally, there were targeted reductions in certain geographies as part of our cost optimization program. These actions produced a modest sequential decline in production head count during the quarter. Utilization was 77% compared to 77.5% in Q1 of last year, and 75.4% in Q4 2025. Q1 2026 utilization was impacted by the ongoing introduction of juniors, who initially operate at lower levels of utilization. The addition of juniors is intended to improve our seniority index over time. Now let's turn to guidance. I'd like to note that clients are beginning to modestly delay decisions. This behavior became more apparent early in the quarter. Some clients are deferring larger discretionary opportunities and are looking to close these in Q3 and Q4, driving higher levels of growth in the second half of the year. At the same time, we are now expecting that higher energy prices and global economic uncertainty will have an impact on our revenue growth rate for the year. As a result, we are lowering our full-year revenue growth outlook. We remain committed to improving overall profitability and gross margins. As usual, our guidance assumes that we'll be able to continue to deliver from our Ukraine delivery centers at productivity levels similar to those achieved in 2025. Moving to our full-year outlook, revenue growth will now be in the range of 4% to 6.5%. Foreign exchange is expected to have a positive impact of approximately 1.5%. Therefore, organic constant-currency growth is now expected to be in the range of 2.5% to 5%. We expect GAAP income from operations to be in the range of 10% to 11% and non-GAAP income from operations to be in the range of 15% to 16%. We expect our GAAP effective tax rate to be 27%, and 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 GAAP diluted EPS will now be in the range of $8.29 to $8.59 for the full year, and non-GAAP diluted EPS will now be in the range of $12.98 to $13.28 for the full year. We now expect a weighted average share count of 52.7 million fully diluted shares outstanding. Moving on to our Q2 2026 outlook, we expect revenue to be in the range of $1.4 billion to $1.415 billion, producing year-over-year growth of 4% at the midpoint of the range. Our guidance reflects a 1.3% positive foreign exchange impact during the quarter, producing organic constant-currency growth of 2.7% at the midpoint of the range. 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 15% to 16%. We expect our GAAP effective tax rate to be approximately 27% 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 $1.79 to $1.87 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 52.4 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP-to-non-GAAP measurements for Q2 and the remainder of the year. Stock-based compensation expense is expected to be approximately $50 million for Q2 and $44 million for each of the remaining quarters. Amortization of intangibles is expected to be approximately $70 million for each of the remaining quarters. The impact of foreign exchange is expected to be an approximate $3 million loss each quarter. The tax effect of non-GAAP adjustments is expected to be around $19 million for Q2 and $14 million for each of the remaining quarters. We expect a $2 million excess tax shortfall in Q2, negligible in Q3, and $1 million in Q4. Expenses associated with the 2025 cost optimization program are expected to be $13 million in Q2. One more assumption outside of our GAAP-to-non-GAAP items: we now expect interest and other income to be $1 million in Q2, $2 million in Q3 and $4 million in Q4. Lastly, my continued thanks to all our EPAMers for their dedication and focus on serving our clients and driving results throughout 2026. Operator, let's open the call for questions.

On the 2026 guide and the organic growth revision, is this a handful of large engagements that are just moving slower or a broader portfolio dynamic, and what gives you the confidence on the second-half implied sequential growth, just given where the Q2 number is? Are you assuming geopolitical volatility moderates to hit that revised target? Do you have things in hand? Maybe a little detail on that.

Yes. I'll talk a little bit about the impact that we're seeing as we look at Q2. I would say it's probably more of a handful of customers where decision-making does seem to be somewhat delayed. We began to see that more so in April and May. We have a pipeline of larger deal opportunities in the second half, and we're focused on converting those. We are seeing timing shifts but we still see clear opportunities to drive growth in the second half.

In our estimate, we are not assuming a significant change in the geopolitical environment. So we are guiding as we see it right now and are not assuming any major shifts. That said, as I noted in the prepared remarks, we have a number of unusually large opportunities that we're targeting. We are not yet certain how fast they will ramp or close, but our AI-native and AI/Run capabilities opened us up to a part of the market that was previously closed to us — specifically large vendor consolidation and large transformation deals. Those are included in our current guide to the extent we believe they are likely to convert.

And then my follow-up on the Anthropic relationship. Good to see that come through. Can you talk about how different that model is relative to your heritage delivery approach? I'm trying to understand how difficult of a pivot that may be for you. And do you see that relationship potentially driving an inflection in your AI-native revenue growth mix?

I think Anthropic is going to be a very important relationship for us. We are following a playbook we've used before: we prepare engineers internally as products become available and then certify them quickly. I checked this morning, and we are over 1,400 certified cloud architects as of this moment, so it's ramping nicely. We will go to market together with Anthropic and bring applied AI solutions to clients. I think it will be similar to prior go-to-market movements but clearly this is in the AI era. We will focus on AI-native transformation to bring safe AI capabilities to the enterprise. I don't see this as a pivot so much as an expansion, and we expect to see acceleration from this partnership.

Maybe to follow up on that subset of clients that are seeing a little bit of weakness. Does the full year guidance range consider any broadening of this weakness beyond that subset of clients that are currently affected, and maybe can you help us understand if that's a specific vertical or why or why not you wouldn't see that broadening?

The lowering of the bottom end of the range reflects potential broadening of delayed decision-making. We took a top-down view because we are expecting a less rapid entry into the second half. We still feel good, as Balazs said, about larger opportunities that we're targeting for the second half, but the bottom end of the range reflects the possibility of broader delay in client decisions.

To add context, we are already seeing some impacts coming from travel and consumer sectors, which is well understood. At the same time, Financial Services and Hi-Tech continue to show strong demand.

Okay. And then Jason, can you sort of bridge the gap for us between the non-GAAP operating margin that you saw in the quarter, at 14.3%, to the full-year target range in the 15% to 16% range?

Probably the best way to look at profitability is year-over-year. You have seasonal factors where Q1 is typically lower from a profitability standpoint due to payment timing and a slower January. That results in lower profitability in Q1. I feel positive comparing Q1 to Q1 because we achieved gross margin improvement, which we haven't seen in quite some time. You should see improved gross margin as we go from Q1 to Q2, some of which is seasonal. We will continue to focus on profit improvement while trying to drive top-line revenue growth, and we believe we're making progress with our transformation opportunities.

Just wanted to see if we can put a finer point on quarter-over-quarter revenue growth expectations for Q3 and Q4. We know typical seasonal patterns, but what does your base case look like given the moving parts in the macro?

I'll talk to what my model looks like, and I'll let Balazs provide more color on client opportunities. Usually we see stronger sequential growth between Q2 and Q3 driven by seasonal factors such as additional available bill days. We're also factoring in some subset of the deals we're working on that would begin to ramp. We clearly expect higher growth in the second half than the first half, driven by opportunities that are in our line of sight today.

What gives us confidence is that we have quite a few deals that we already know will start in Q3. We also have a pipeline of large opportunities we are working to close and ramp in Q3 and Q4.

So those large opportunities — there's vendor consolidation deals. It sounds like it's not just two or three. Can you clarify how many and what the nature of the work is that comprises those large pipeline opportunities for the second half?

It's no longer just three or four. We're talking about close to 10 significant opportunities at this point. These opportunities are outsized relative to our historical range. Many are not time & materials; they involve different commercial models and often combine AI capabilities and token economics. They are variations of business transformation and vendor consolidation, and their size is outside EPAM's historical norm.

From a risk-adjusted standpoint, we're not assuming we will win all of those opportunities. We're capturing a small subset in our models, and that subset contributes to the expected growth in the second half.

I'll ask my two together in the interest of time. Jason, I want to get your perspective on the outlook you provided longer term at the Analyst Day for 2027 and 2028, specifically the assumptions about improvement in gross margins and SG&A efficiency. I think you had a 16% objective in operating margin. And Balazs, in your prepared remarks you mentioned opportunities in AI-enabled vendor consolidation. Could you elaborate on what that's about?

On profitability, we did see price improvement in Q1. We're focused on utilization, and our cost optimization program is getting us into better shape. The cost of our bench is somewhat lower, and we're improving the seniority index over time. These actions contributed to the gross margin improvement Q1 2026 versus Q1 2025. I expect to see better gross margin in Q2 2026 versus Q2 2025 as well. SG&A optimization will be more pronounced in the out years; this year we'll do more go-to-market investments as discussed at the AI Day. I'll turn it over to Balazs for the consolidation commentary.

At our AI Day, we discussed our AI capabilities and SDLC maturity levels. In these larger vendor consolidation deals and enterprise AI transformations, we're deploying the EPAM AI/Run Transform playbook. This combines our global capabilities augmented with AI and brings a differentiated, challenging proposition to clients that upends the status quo among vendors. That's what is resonating with larger clients today.

Historically you've done a good job framing the low versus high end of guidance and what needs to happen. Can you put some of the data points you shared into the context of the range — what happens at the low end, midpoint, and high end?

We're not assuming an improvement in the economic environment. On the lower end of the range, you could see further worsening or more clients delaying decisions, which would mean incremental uncertainty and delays. On the higher end, you'd have solid execution in the traditional book plus a higher share of wins in the larger deals Balazs referenced. We've expected stronger second-half growth all along, in part driven by these larger deals we've been developing.

Can you still hit the midpoint if these larger deals continue to be pushed out?

For the midpoint, we do not need to win many of those large deals. The midpoint is driven more by steady execution and typical EPAM conversion of opportunities. If the macro continues to deteriorate further, that would challenge the midpoint, but it's not heavily dependent on those outsized deals.

I think you said North America was where you were seeing the most incremental weakness and also where you're focusing go-to-market investments. Is that right, and can you provide clarity around that dynamic and where those investments are going?

Yes, that's right. At the AI Day we called out go-to-market investments and noted that the market moved from a seller's market to more of a buyer's market. We brought in a new Chief Marketing Officer focused on performance marketing. We are applying learnings from EMEA to North America and will invest in personnel, process changes and go-to-market motion transformation in North America.

You highlighted large multiyear deals in the pipeline that are larger in scale than what EPAM has historically pursued. What gives you confidence in your ability to close and execute on those? Do you have the sales muscle, governance frameworks and delivery infrastructure to manage programs of that magnitude? How should we think about the profile of these deals regarding competitive dynamics, deal size and margin profiles relative to what you currently see?

Great question. We were somewhat surprised at how successful our offering resonated and how quickly the pipeline built. We have the sales muscle to get into these opportunities, and our offering is differentiated because it brings AI-native capabilities that challenge the status quo. We are risk-adjusting the pipeline; we're not assuming full conversion or immediate ramp. EPAM has experience running large programs historically, though those were typically aggregates of many smaller engagements rather than single outsized deals. In terms of profitability, our current AI-native portfolio, which is over $125 million per quarter, runs at higher profitability than the EPAM average.

As a follow-up, where do we stand on the large network client? Did revenue stabilize in Q1 as expected, or are you seeing incremental deterioration there, and what does that imply for the remainder of the year?

Yes, the client did stabilize revenue as expected. We may see a very modest sequential decline over the next quarter or two, but overall it remains stable. Outside of that, we're seeing solid growth in their book of business in the Iberian Peninsula and growth throughout South America. We feel generally good about that book of business, with the exception of some slowness in Mexico with that large customer.

I was wondering if you could comment on the extent that the large deals convert into revenue beginning in the back half and heading into 2027. What would be the impact on margins? Would they come in at or below your corporate average?

We are still focused on improved gross margin year-over-year. There are seasonal impacts — Q3 generally has higher profitability due to more billable days. Sometimes when you bring in large deals you have a modest impact during transition and knowledge transfer, but with our focus on reducing bench costs, improving utilization and improving fixed-fee profitability, I feel comfortable we can continue to improve profitability.

And as a follow-up on capital allocation, given what the stock has done, can you give us a refresher on the relative uses of cash between buybacks and incremental M&A for new capabilities?

We did an accelerated share repurchase and there's a true-up that will show up in Q2. We'll probably do incremental repurchases when the market opens. Looking ahead to the second half, you may see us prioritize M&A-related investments again. But given the share price level, you will continue to see some open market purchases of stock.

Balazs, can you talk a little about contract pricing and how those dynamics have changed over the last year or so? In particular, with the Anthropic partnership, how will you recognize revenues in that contract? Is it any different than the model you've used in recent years?

Pricing dynamics are a moving target and token economics continues to be an area of discussion. Today, in most client relationships clients are bearing the cost of tokens. We're exploring different commercial models, including when EPAM might charge for tokens, when clients pay directly, and how to structure security and compliance concerns. Anthropic is not fundamentally different in construct — we'll develop software using the Anthropic stack and explore appropriate commercial models with clients and Anthropic. Regarding pricing, Jason and I were pleased to see rate increases in Q1; we are not seeing broad rate compression at this time and have been successful negotiating rate increases with a minority of clients.

As a follow-up, I saw head count sequentially was down and revenue per head was up in Q1. How should we think about head count cadence and revenue per head for the rest of the year to hit guidance?

In Q1 we reduced head count in Mexico and made other location adjustments to improve utilization and lower bench cost. I do think you'll see head count additions for the remainder of the year to support growth, but you'll also see adjustments in contract structures. Revenue per head is not a metric we focus on as a primary indicator, and FX also plays a role. We did get rate increases in Q1 which helped profitability. We'll revisit productivity and revenue-per-head calculations later in the year as the business evolves.

It looks like you lowered the guidance due to existing customer weakness, and some of the pipeline needs to convert to hit the full-year numbers. How are you getting confidence that prospects will convert to revenue on time for you to hit guidance?

First, unexpected geopolitical events have impacted client behavior. From a deal perspective, there are a significant number of opportunities, and we are planning on converting a modest share of them. That's why we've set guidance where we have — we believe it is appropriate given both the known dynamics and the potential upside of converting a subset of the pipeline.

On AI traction, are you seeing any revenue cannibalization or displacement of legacy work as AI ramps up?

There is some impact as clients shift IT budgets toward AI spending and automate parts of the SDLC, for example testing. Clients are also diverting investments away from some digital platform or e-commerce builds toward new AI-native products or platforms. That's the shift we are seeing.

With recent model advancements from Anthropic and others, are you proactively approaching clients about using these improvements to lower head count on certain projects? Are you offering that to clients?

Yes, we are proactively engaging clients with advanced engagement models. As highlighted at AI Day, we demonstrated 'dark factory' capabilities and are talking to clients about autonomous maintenance and support, automating testing flows and other automations. This is part of the go-to-market motion we launched earlier this year.

A couple quick follow-ups. On margins, especially for longer-duration projects and factoring in token costs, what levers do you need to control — model usage, sourcing, pricing — and what relationships do you need to develop? And second, I heard interest in revisiting M&A later this year — can you give us a view on what you'd be looking for and what valuations look like?

Great question. To control economics you need to control multiple aspects: model usage (which model is used for which task and how frequently), the right blend of models to balance capability and cost, and multi-sourcing capability so you can buy the same model service from multiple providers when appropriate. We need to build trading-desk-like capabilities to manage pricing, availability and consumption limits. If you correctly control sourcing and usage of models, you can achieve differentiation in pricing and profitability. In terms of M&A, I'll turn to Jason for more color.

We continue to focus on domain capabilities, data assets, and potential geographic expansion, most likely in Asia Pacific. Similar to what we've discussed in the past, we don't expect anything immediate but potentially later in the year. From a valuation standpoint, there's still some disconnect between private-market expectations and public-market valuations, but we remain engaged with potential targets.

Thank you for joining us this morning, and we'll see you again in three months. Thank you.