Mike Rowshandel:

Good morning, everyone and thank you for joining us today. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. By now, you should have received your copy of the earnings release for the company's second quarter 2024 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I will now turn the call over to Ark.

Jason Peterson:

Thank you, Ark and good morning, everyone. In the second quarter, EPAM generated revenue of $1.147 billion, a year-over-year decrease of 2% on a reported basis or 1.7% in constant currency terms, reflecting a negative foreign exchange impact of 30 basis points. Due to our exit from the Russian market, we no longer generate revenue from Russian clients. The impact of this exit had an approximate 50 basis point negative impact on year-over-year revenue growth. Excluding Russia revenues, year-over-year revenue for reported and constant currency would have decreased by 1.5% and 1.2%, respectively. Moving to our vertical performance. Life sciences & healthcare delivered very strong year-over-year growth of 22.4%. Growth in the quarter was driven by clients in both life sciences & healthcare. Consumer goods, retail and travel decreased 7.7% on a year-over-year basis, largely due to the declines in retail, partially offset by solid growth in travel. Financial services decreased 5.6% year-over-year, driven by softness in asset management, banking and payments. In the quarter, the vertical delivered slight sequential growth, indicating stabilizing demand. Software and hi-tech contracted 3.7% year-over-year. Business information and media declined 12.6% compared to Q2 2023. Revenue in the quarter was substantially impacted by the previously discussed ramp down of a top 20 client. And finally, our emerging verticals delivered solid year-over-year growth of 10.6%, driven by clients in energy and telecom. From a geographic perspective, Americas, our largest region, representing 60% of our Q2 revenues, grew 1.8% year-over-year on a reported basis and 2% in constant currency terms. EMEA representing 38% of our Q2 revenues, contracted 6% year-over-year and 5.6% in constant currency. And finally, APAC declined 0.6% year-over-year or 0.2% in constant currency terms and now represents 2% of our revenues. In Q2 revenues from our Top 20 clients declined 3.7% year-over-year, while revenues from clients outside our top 20 declined 1.1%. The relatively stronger performance of this latter group was driven by both new client and inorganic revenue contributions. Moving down the income statement. Our GAAP gross margin for the quarter was 29.3% compared to 30.9% in Q2 of last year. Non-GAAP gross margin for the quarter was 30.8% compared to 32.6% for the same quarter last year. Relative to Q2 2023, gross margin in Q2 2024 was negatively impacted by the strengthening of currencies associated with certain delivery locations as well as the impact of compensation increases, including those resulting from our recent promotion campaign which we were not able to offset through pricing. The negative impact of foreign exchange and compensation increases exceeded the benefit of improved utilization. GAAP SG&A was 16.9% of revenue compared to 16.7% in Q2 of last year. Non-GAAP SG&A in Q2 2024 came in at 14.3% of revenue compared to 14.8% in the same period last year. SG&A improvement in the quarter is the result of our ongoing focus on managing our cost base and increased efficiency in our spend. GAAP income from operations was $121 million or 10.5% of revenue in the quarter compared to $144 million or 12.3% of revenue in Q2 of last year. Non-GAAP income from operations was $175 million or 15.2% of revenue in the quarter compared to $191 million or 16.3% of revenue in Q2 of last year. Our GAAP effective tax rate for the quarter came in at 26.3% and our non-GAAP effective tax rate was 24.3%. Diluted earnings per share on a GAAP basis was $1.70. Our non-GAAP diluted EPS was $2.45 compared to $2.64 in Q2 of last year, reflecting a $0.19 decrease year-over-year. EPS was positively impacted by a Serbian government investment incentive received and recognized in the quarter which improved Q2 diluted EPS by $0.06. Although the benefit from this incentive was contemplated in the full year guidance communicated during our Q1 earnings call, at that time, we had expected to receive the incentive and recognize the benefit in Q3. In Q2, there were approximately 58.1 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q2 was $57 million compared to $89 million in the same quarter of 2023. Free cash flow was $52 million compared to free cash flow of $82 million in the same quarter last year. At the end of Q2, DSO was 76 days and compares to 73 days for Q1 2024 and 71 days for the same quarter last year. The uptick in DSO reflects an increase in the time some clients are taking in the review and approval of payments, combined with the last few days of the quarter falling on a weekend. Share repurchases in the second quarter were approximately 1.16 million shares for $214 million at an average price of $184.97 per share. In June 2024, EPAM completed the share repurchase program authorized on February 13, 2023. Over a period of 16 months, 2.24 million shares were repurchased at an average share price of $222.90. On August 1, 2024, the Board of Directors approved a new share repurchase program with authorization to purchase up to another $500 million of EPAM common stock over a term of 24 months. We ended the quarter with approximately $1.8 billion in cash and cash equivalents. Moving on to a few operational metrics. We ended Q2 with more than 47,000 consultants, designers, engineers and architects, a decline of 4.8% compared to Q2 2023. Sequentially, production head count remained unchanged as the company reduced head count in certain on-site locations, while continuing to hire in India. Our total head count for the quarter was more than 52,650 employees. Utilization was 77.5% compared to 75.1% in Q2 of last year and 76.8% in Q1 2024. However, on-site utilization remains below targeted levels and the company will continue to take actions to optimize on-site resource levels to improve utilization. Now let's turn to our business outlook. Although client demand has stabilized, we continue to see very little improvement in the near-term demand environment. We are experiencing growth in certain verticals, seeing relatively high levels of new logo activity and working with clients to bring GenAI programs into production. We are also beginning to see some constructive improvement in client discussions with regards to future programs. But decision-making continues to be relatively cautious as some clients continue to have challenges with their own end markets and revenue generated by individual new logo accounts is on average, less than that generated in prior years. Although we believe clients are beginning to more actively engage around new initiatives, our guidance assumes macroeconomic stability with no improvement in the aggregate demand environment for the remainder of the year. We are hopeful that change in the tone of client conversations will result in an improved demand environment in 2025. For the remainder of 2024, we are expecting a slight increase in Q3 revenue relative to Q2 driven by greater build-outs in the quarter, substantially offset by higher vacation levels. We are expecting a modest sequential decline in Q4 revenues, driven largely by some of the seasonal factors mentioned previously. We are maintaining our focus on demand generation and we'll continue to prioritize revenue growth for the remainder of 2024. At the same time, we are taking steps to improve cost efficiency and on-site utilization and now expect to operate at a higher level of profitability in the fiscal year. Finally, our operations in Ukraine continue to run at high levels of utilization, a testament to our team's dedication and focus on maintaining uninterrupted quality of delivery. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers at the productivity levels similar to levels achieved in 2023. Moving to our full year outlook. Revenue is now expected to be in the range of $4.590 to $4.625 billion, a negative growth rate of 1.8% at the midpoint of the range. The impact of foreign exchange rate growth is expected to have a positive impact of approximately 10 basis points. At this time, we expect approximately 1% of revenue contribution from already completed acquisitions. We expect GAAP income operations to now be in the range of 10.5% to 11% and non-GAAP income from operations to now be in the range of 15.5% to 16%. We expect our GAAP effective tax rate to now be 21%. 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 the GAAP diluted EPS will now be in the range of $7.18 to $7.38 for the full year; and non-GAAP diluted EPS will now be in the range of $10.20 to $10.40 for the full year. We now expect weighted average share count of 57.9 million fully diluted shares outstanding. Moving to our Q3 2024 outlook. We expect revenue to be in the range of $1.145 billion to $1.155 billion, producing a year-over-year decline of 0.2% at the midpoint of the range. And on a constant currency basis, we expect Q3 revenue to be flat year-over-year. For the third 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 16% to 17%. We expect our GAAP effective tax rate to be approximately 24% 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 $1.75 to $1.83 for the quarter and non-GAAP diluted EPS to be in the range of $2.65 to $2.73 for the quarter. We expect a weighted average share count of 57.4 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for the remainder of the year. Stock-based compensation expense is expected to be approximately $45 million for each of the next 2 quarters. Amortization of intangibles is expected to be approximately $6 million for each of the remaining quarters. The impact of foreign exchange is expected to be a $1 million loss for each of the remaining quarters. Tax effective non-GAAP adjustments is expected to be around $13 million for each of the remaining quarters. We expect excess tax benefits to be around $1 million for each of the remaining quarters. Severance driven by our cost optimization program is expected to be around $10 million for each of the remaining quarters. Finally, one more assumption outside of our GAAP to non-GAAP items. With our significant cash position, we are generating a healthy level of interest income and are now expecting interest and other income to be approximately $13 million for each of the remaining quarters. While we work our way through this cycle of lower demand, we will continue to run EPAM efficiently, positioning the company to capitalize on a more normalized demand environment. Lastly, my continued thanks to all our employees for their dedication and focus on serving our clients and driving results for EPAM. Operator, let's open the call up for questions.

Margaret Nolan:

I wanted to dig into the utilization and the dynamics between on-site and offshore. So first of all, what percentage of the workforce is considered to be on site this quarter? And then is offshore utilization running higher than what you view as sustainable to offset some of that weakness on on-site because you're not too far off from your historical range here?

Margaret Nolan:

Got it. And then somewhat related, just building on that, the improvement in the margin outlook, is that primarily related to those actions that you want to take on utilization? Are there other levers you're pulling? And have you already seen some progress here in the third quarter to fuel that optimism in the increased number that you gave?

Operator:

Your next question comes from the line of Bryan Bergin from TD Cowen.

Arkadiy Dobkin:

So I think despite of the opticality of the clients for the top 5, there is only one client which is declining and this is basically a continuation of the trend which we saw before. And even this client decline, kind of getting less and getting to a more stable environment right now. So but in general, it's exactly like we commented before. It is pretty stable.

Bryan Bergin:

Okay. All right. That's helpful. And then just on the GenAI front, can you dig in a little bit more on the progression of GenAI-related work as far as just maybe any rough quantification on the size of some of these programs and the mix of really the POCs that are moving into production?

Bryan Bergin:

Okay. Understood.

Operator:

Your next question comes from the line of Darrin Peller from Wolfe Research.

Jason Peterson:

Yes. So I'll just start with the more technical, I guess and I'll leave Ark to answer maybe the harder questions. And so from a Q2 to Q3, you'd have higher vacation and more build days. And so you get a -- you should see a somewhat modest improvement but you should see some improvement in revenues just based on what you can call kind of technical or seasonal factors. And then in Q4, it will depend on what type of vacation levels we see. But usually, you would see even a little bit higher levels of vacation in Q4, lower build days. And then, of course, the question is going to be what type of furlough activity we see. So generally, there is a somewhat significant impact just due to seasonality. And so that's kind of what we're modeling at this time, again, is that generally, a very modest improvement up from Q2 to Q3 based on seasonal factors. And then some degree, a decline unless, as you said, we see some type of budget flush or again, we're able to influence the level of vacations that employees take. Ark, do you want to talk a little bit about overall demand or where we're seeing [ph].

Jason Peterson:

And I would just add that we're working to change the trajectory in Europe and we are beginning to see some better conversations and opportunities kind of appear there. Again, so that's an area where we're looking to sort of, let's say, change the picture. The other thing I think you see in our fixed fee which continues to go up, we're continuing to sort of explore and work with clients to have more of a committed kind of model around what we'll deliver for a fixed fee or a fixed monthly fee and that's a reflection of what we're trying to do to respond to customer needs and win more business.

Jason Peterson:

There's certainly some programs where we're clearly working to include AI productivity improvements. But no, we would continue to hire and I think you'll continue to see hiring in the types of geographies we've been talking about which is more kind of offshore certainly with someone [ph] in Latin America.

Jim Schneider:

First of all, on the discretionary demand environment, it's not surprising to hear of the constraints given what the environment is out there. But what are your clients telling you about the conditions under which they would start to release more spending or more aggressive with new projects in 2025? Is that tied to macro? Is that tied to more certainty around their AI strategy or other priorities they have internally in terms of IT spending?

Jim Schneider:

And then maybe just in terms of the margins, obviously you delivered good growth and operating margin leverage in the quarter. That was good to see. Was that mostly driven by the mix of head count shifting to India? Or are there other factors there besides the SG&A line? And then, I guess, going into '25, as we exit this year, what kind of further gross margin leverage do you expect to deliver or is this sustainable from here?

Jim Schneider:

And in terms of the forward improvement there?

Operator:

Your next question comes from the line of Jonathan Lee from Guggenheim Securities.

Jason Peterson:

Yes. So I'll let Ark talk a little bit more about the type of work in progress. What I would say is that from the last time we spoke with you, Jonathan, is that India is likely to make a somewhat -- a very slightly greater percentage of head count by the end of the year. So last time, Ark and I were talking about something approaching 20%. We now think that India will be slightly above 20% by the end of the year. And what you are seeing is a modest pressure on average bill rates as a result. And that probably is also sort of shaping how we look at the second half. So it's not super significant. But I think last time -- sometimes we would utter the word, 19.5% and right now, we think that India is going to account for just over 20% of our head count by the end of the year. So we continue to see a modest gradual shift there, while at the same time, we are seeing improved utilization in our other areas of operation, in Europe and Western and Central Asia. So it's not as if all the demand is shifting to India but we are seeing ongoing kind of increment in India. Ark do you want to talk about type of work or...

Jonathan Lee:

Thanks for the detail there. Can you unpack your comments on the lack of improvement contemplated in the outlook? I want to understand what that means for deals that have been signed but perhaps not yet launched or ramped. How much go-get or pipeline conversion is still required to achieve your outlook at both the high end and the low end?

Operator:

Your next question comes from the line of Ramsey El-Assal from Barclays.

Jason Peterson:

Yes. So you're correct that it has been trending up and probably will continue to trend up somewhat. And so it's a mix of what would we call percentage of completion and what is sort of a fixed monthly fee. And so it probably does reflect the fact that we're beginning to try to address clients' needs in a way that's a little bit on traditional prepay where we have traditionally been kind of more bleeding-edge complex projects where it was difficult to estimate. We clearly have that type of work but we are trying to be able to sit with our clients and say we can do this for a fixed amount of money or fixed amount of money on a monthly basis. The other thing I think you are probably seeing is some opportunity with GenAI to introduce not only traditional sort of productivity improvement or productivity improvement from GenAI and commit to a series of savings over a period of time. And so you are seeing us also enter into engagements with clients. It may be more a multi-quarter or in some cases, even multiyear that do reflect what we believe is a productivity improvement that we can achieve over time. And that could go either way, right? It can be net positive to margins. If obviously, we've misestimated or sort of delivered poorly, it could be negative. But generally, with fixed fee, you do have the opportunity to improve profitability relative to time and materials because it just gives you more flexibility in how you deliver.

Arkadiy Dobkin:

I think nothing is off the table. So as always in the past, we constantly have conversations and opportunities for different sizes of acquisitions. And -- by insurance back is actually very much functions of if it's going to happen or not. So it's not must condition, it's a direction which we will be executing only if we think that we will ramp up with any other aspects of the business. So if the M&As will be happening, we will be adjusting the numbers, if necessary.

Operator:

Your next question comes from line of Surinder Thind of Jefferies.

Arkadiy Dobkin:

When you say it will be stable, what do you mean? So...

Arkadiy Dobkin:

I think -- let me try to answer slightly differently. First of all, we definitely move into global diversification from indications of stability and 24/7 on the growing global climate. And from this point of view, we will be much more diversified than in the past. And right now, it's also -- as we mentioned, probably will be the most balanced global direct company. That's a direction. What exactly proportion of this, it's much more difficult question to answer because it would be a function of general demand. When you say like, for example, the assurance in Europe is not so much in demand, it's in many ways, subject to the type of work, number one and the cost pressure, number two. As soon as the market will start to come back to kind of fix the technical debt which we're talking about, that modernization cloud and data program will accelerate to again, make the progress of GenAI transformation much more real. The demand will come back for practically any region. And because of complexity and creativity of these type of engagements proximity will become much more important and pricing component will become less important. So it would influence the structure as well. So again, number one, we will be much more diversified in India and LatAm, it will be a bit the proportion of the total but exactly proportion, we identify it right now.

Arkadiy Dobkin:

So if we're talking about India specifically, I think a couple of factors need to be acknowledged. We have an image of different type of services company, we have an image of much more quality engineering companies and much more closer to what people would think about software tech companies. And from some talent point of view, we compete with these type of companies, the same like with some captives which are trying to build a high-end tech purchases in India. So the image is there already. So at the same time, we are also kind of an underdog in India which means that we have opportunity to play differently and in specific parts of the market, including like bringing our training capabilities and different type of work. I think while there are very large companies, it's -- for us, it's relatively clear how to differentiate us for the labor market, for the type of market. And if you say that we're growing much, much -- like how -- you see it like how India is growing pretty strongly in this situation.

Unidentified Analyst:

Just quick -- a couple of quick follow-ups. If I recall, you said the headwind from India, the mix shift in India was going to be about 200 basis points this year on revenue. Is that still a fair assumption? And do you have any initial thoughts on whether -- or the magnitude of the headwinds would be in 2025?

Unidentified Analyst:

And that's just because of the ramp of headcount? Is that why it's higher in '25?

Unidentified Analyst:

Got it. And similarly, I know you've talked quite a bit about the lost clients, I think one was M&A and one was something else. And I'm just trying to remember whether you quantified that headwind this year and next and when we come out against that headwind?

Unidentified Analyst:

Got it. And just one last thing. Just on the DSO, Jason, I know it was up last quarter and it was up again sequentially. Should we see that or do that as maybe a macro dynamic that's affecting all your accounts? Or is this another way of providing better terms to remain more competitive? Or is there something else going on?

Mike Rowshandel:

Operator, we have time for one more question.

James Friedman:

So with regard to your last answer, Jason, that was really interesting about the fixed price to DSO. I'm just wondering also just related to that, is fixed -- is the growth in fixed price related to generative AI or outcomes-based pricing? That's my first one. And then my second one, I'll just ask it upfront, is Ark, could you call out what's going on in life science? I know Jason mentioned it's a combination of both healthcare and life sciences in his prepared remarks. It was a featured topic at the Analyst Day a couple of years ago. It seems like it's working now. So any high-level stuff, first, on fixed price; and second, on life science?

Arkadiy Dobkin:

Yes. I think we were talking about it. We were talking about building more industry expertise in this area. And in general, from our conversation several years back, it was positive growth, while it was a couple of things when client situation was actually changed. Right now, it's pretty positive. I think concentration of data programs in our life sciences & healthcare business is actually very high which is still in demand today. And again, combination of industry expertise which we invested in some level of consultancy and again data program proportion makes this a benefit for us. And that's with how we look into some other industries, how we can change the trend similar to what is happening here. I think time is over. And as usual, thank you for joining us today. So I think we're trying to communicate that while situation as it is right now, we do believe that EPAM is all focused on cloud data engineering and with GenAI, pretty well positioned for the future growth when markets come back. So I know we repeated this each time but it's actually -- we very much believe it. And we will be ready for a comeback and anticipation. We'll see how many quarters we will have to still wait for this. But again, thank you and let's talk in 3 months.

Arkadiy Dobkin:

Thank you, David. Good morning, everyone. Thank you for joining us today. First, about our guidance change. As you saw from our press release, we are seeing some continuing volatility in our global demand environment. And while there are encouraging signs of new deals in new types of very different domain-specific demands, then even in cyclical nature of 2023 follow as well in 2024, which now leads us to adjust our thinking for both Q2 and for all -- full year outlook.

Jason Peterson:

Thank you, Ark, and good morning, everyone. In the first quarter, EPAM generated revenue of $1.165 billion, a year-over-year decrease of 3.8% on a reported basis or 4.3% in constant currency terms, reflecting a favorable foreign exchange impact of 50 basis points. Due to our exit from the Russian market, we will longer generate revenue from Russian clients. The impact of this exit had an approximate 50 basis point negative impact on year-over-year revenue growth. Excluding Russia revenues, year-over-year revenue for reported and constant currency would have decreased by 3.3% and 3.8%, respectively.

Bryan Bergin:

Wanted to start with some more detail on the change in the growth outlook here and ultimately trying to unpack attribution here to macro market-driven slowness versus more idiosyncratic factors to your turnaround and your exposure. Can you talk about whether this is really broad-based across the portfolio or more so due to a handful of larger client-specific slowdowns? And is there any attribution to a change in clients' reception to Ukraine or Belarus delivery?

Jason Peterson:

Yes, Bryan, the -- I think what Ark said is that we're -- at this point rather than trying to predict that there's going to be an improvement in demand, we're just taking kind of what we see today, which is still client decision-making is slow, budgets are being partially released, some programs are being descoped. And so we're just not seeing quite improvement that obviously, we had hoped for. So obviously, it was a miss on our part.

Yu Lee:

Given the way you positioned the demand environment in your prepared remarks, what, in your customer conversation, gives you confidence that you're able to achieve sequential growth in 3Q and potentially flat 4Q? And is the 3Q dynamic more of a function of bill days?

Jason Peterson:

Yes, Jonathan. So just to -- the question about whether or not we see sequential growth in Q3. The way we have laid out the guidance, okay, really is the seasonal factors are going to drive. And so the Q2 to Q3 growth would substantially be driven by seasonality, which is more available bill days in Q3.

Jason Peterson:

I think we feel quite good about the quality of our India delivery, and we think it's differentiated, okay, our India versus, let's say, our peers or competitors' India. We still feel very good about the quality of our Eastern European delivery. And we clearly have a number of clients who still prefer Eastern Europe, but we feel good about the work that we've done in India to differentiate. And again, we've got good ability to continue to scale the geography, and we have relatively low levels of attrition.

Margaret Nolan:

I understand the commentary about the rate cards in India and how that's impacting your top line, but it also sounded like there were some delays, some pushouts of projects. It didn't sound like much in the way of cancellations, which is encouraging. But I'm trying to understand were there particular types of projects, particular verticals in that vein that drove your change in expectations?

Arkadiy Dobkin:

I think we just kind of repeat the [indiscernible]. In general, there is no any kind of dramatic changes. Mostly, it's attributed to delayed decisions and very specific things like if we're talking about Q2, which we have already shared. Billable hours, it's FX, it's multiple parameters, which is calculated one. So the rest of this is in line with what we were seeing before. But again, decisions slow down, and now we try to project exactly what we see versus what we kind of thinking might happen.

Operator:

The next question comes from the line of Surinder Thind with Jefferies.

Jason Peterson:

Yes. Maybe what I'll do is unpack, I guess, is the word I'll use, what happened in Q1. So we entered Q1 with the guide that we had, and we expected that we probably could get to the top or maybe a little bit above the high end of the range and had come in with a range that we wanted to make sure that we could make.

Jason Peterson:

Yes. And so let me talk about the top 20. So the top 20 does have a significant number of business information and media clients in it. That is a more challenged portion of the portfolio, I would say, due to their end markets, in addition to the client that we talked about over the last couple of quarters that had ramped down in Q1 and again in Q2 as they kind of exit. We -- and again, this is all known, and we've talked about -- okay? But we are seeing some reduction in spend in another business information and media client in Europe, and that is the top 20-client. So those things kind of show up.

Operator:

The next question comes from the line of Jason Kupferberg with Bank of America.

Jason Kupferberg:

Okay. And I think in response to an earlier question, you said that your win rate on new logos is intact, which is good to hear. I'm just curious whether you've seen any material change in your wallet share within, say, your top-20 existing clients?

Operator:

Your next question comes from the line of Moshe Katri with Wedbush Securities.

Arkadiy Dobkin:

That's exactly what we say -- we said already, we don't want to predict anymore. So we try to be more kind of pragmatic in this situation. Historically, whether or not -- volatility can change, and demand could be very fast. I'm not sure that it will be very fast in this current environment. But I only can repeat what we were saying before that the whole point for us starting from all this thing during the last couple of years to prepare ourselves well when environment will change.

Moshe Katri:

Okay. That's fair. And then just a follow-up. Last quarter, you spoke about some clients that were coming back to EPAM. Originally, EPAM clients, when they expanded scope, they went somewhere else, and they came back. Are you continuing to see the same trend throughout this quarter?

Ramsey El-Assal:

Could you provide some additional color on margins and the margin cadence as we progress through the year? And if you could help us with that, that would be appreciated.

Jason Peterson:

Yes. I guess it all depends on how you define that. We've never have -- as I think we all know, we had a large portfolio of multiyear maintenance, multiyear BPO or that type of thing. So a lot of our work generally is kind of newer build, digital. And as we talked about, the modernization programs, which we still believe are generally intact but are slow to ramp, in some cases, as Ark indicated, is that people have kind of descoped some of those programs. So we still think that demand is in the future. But arguably, when it comes to discretion, you can certainly delay those programs and expenditures.

Ryan Potter:

I wanted to start on pricing. Have you seen any changes to the pricing environment since last earnings? And are you still offering some discounting to when business in certain areas like you were in the past? Just trying to figure out if you're finding a greater presence from certainly lower cost locations like India that's leading maybe to some client pushback on current arrangements or if the pricing pressure is more on net new engagements?

Jason Peterson:

So it's not incrementally worse, but it continues to be challenging. It's one of the reasons why there is kind of a bias towards India at the lower bill rates. And the market is -- yes, with, what I would call kind of an imbalance in supply and demand, it continues to be a less-friendly market when it comes to trying to get rate increases for certain.

James Friedman:

Jason, in your prepared remarks, you called out some of the trends in billing and on the DSO. I remember when you first started there, that was a big conversation. You improved that immeasurably. I'm just wondering is what's going on in the DSO? Is this something that we need to watch for like billability and collections?

Jason Peterson:

Well, so we had this -- the BIM customer that we talked about where a competitor has sort of taken over their IT function. And that obviously had a step down on a year-over-year basis as well as a quarterly -- a sequential impact, Q4 to Q1. There'll be another slightly sequential impact associated with that same client between Q1 and Q2.

Arkadiy Dobkin:

Just to kind of -- there is no any real impact from ramp downs, which kind of new to us. There is a redistribution of delivery, and we talked about it when there is a switch to lower-cost locations. There are new business, which are faster growing there as well, and this is all related again to pricing environment. So -- but, no, ramp downs, right now, not as a real factor. It's more like a normal -- like it's always would happen. It's happening as well, but in a very normal way.

James Faucette:

Wanted to ask just in terms of your planning assumptions and kind of given the experiences of the last few quarters, how are you thinking about -- or how are you changing your planning assumptions in terms of pipeline, conversion rates or timing, et cetera, not just in terms of like what you're seeing right now, but are you building in more conservatism from that perspective? And how does that impact your planning from a hiring perspective, et cetera, right now?

Jason Peterson:

Let me comment, and then Ark will probably say something much smarter and more insightful. How I think about it is going to be a trend that we're going to see throughout 2024, but I don't see it as a forever trend. At some point, I think it kind of stabilizes. And I think that we've done a good job of sort of creating a balanced delivery with options or optionality for our clients. And at the same time, I still believe that there's demand for Central and Eastern Europe so far.

Arvind Ramnani:

I just wanted sort of really better understand when you kind of consider guidance, do you look at like -- do you go account by account? Like just trying to get an understanding of kind of the procedure to basically come up with guidance because kind of clearly things have -- are we just in an environment where things that are just so fluid and the velocity of change is something that's difficult to predict?

Jason Peterson:

Arvind, I'm going to be a little short of my response just because we're kind of at the end of the call or past the time. But I would say yes to both. So you will see us continue to do more and more acquisitions that again, are all strategic and do allow us to continue to expand our position, both end markets and in delivery locations. And you will also clearly see us do more buybacks in the coming quarters.

Arkadiy Dobkin:

As always, thank you, everybody for joining today. I think we're looking forward for the next call. And I think we're not going to bring surprises next time, at least similar to today. So let's look pragmatically to everything. So fortunately, we didn't have any questions today about genAI and how we're doing there because we're doing pretty good and feel very good about this area, but probably we can spend more time on this topic next time. Thank you very much.

David Straube:

Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's fourth quarter and full year 2023 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President, and Jason Peterson, Chief Financial Officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Jason Peterson:

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

Ramsey El Assal:

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

Ramsey El Assal:

Got it. Okay. Thank you.

Bryan Bergin:

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

Arkadiy Dobkin:

Yeah. As everybody say, it's still a lot of experimentation, but we highlighted something which we do. And there is a quest to implementations happening as we speak. Still the program is not very sizable, but what we also see is that a lot of proof of concepts actually proven to the point that it will trigger additional tail of data engineering programs a lot, because while experimentation going well and proof of concept looking good, usually the data for this type of activities is [massaged] (ph) well enough, and as soon as you go into production activities in many cases, it's triggered visibly need to invest in data engineering and different activities to at scale provide the data. And that's why also we believe that this trigger will happen and the amount of work for these type of activities will bear some fruits to us as well.

Bryan Bergin:

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

Bryan Bergin:

Okay. Thank you.

David Grossman:

Good morning. Thank you. I'm just looking at the headcount adds, and it looks like you're, on a year-over-year basis, pretty much down in most geographies, I think, with the exception of a couple or maybe just India. And I guess I'm just trying to understand and juxtapose that dynamic against expectation of accelerating growth in the back half of the year, and perhaps you're targeting a higher utilization rate than you experienced in '23 or other factors at play. And just wondering if you could help flush that out for us. And whether or not the kind of changing -- how we should think about the changing geographic mix and its impact on growth given the bill rate differential between India, for example, and Ukraine and Eastern Europe?

Arkadiy Dobkin:

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

Jason Peterson:

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

Operator:

Thank you. Our next question comes from the line of Puneet Jain from JPMorgan. Please go ahead.

Arkadiy Dobkin:

I think this adjustment is happening. What I don't believe is the revenue per employee exactly the kind of the metric which reflects the reality because it depends very much how we kind of optimizing our delivery locations. India is growing, and India, for example, growing not little, I think it's 20% last year. I think it was much higher a year before, like more than 50%, okay? So, which has actually definitely impacted revenue per employee. It's the same like switch between people moving from Eastern Europe to Central Europe, or growing in Latin America, that should be taken into account, not talking about [indiscernible]. So, simply not looking to this metric as a critical metric for us.

Jason Peterson:

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

Operator:

Thank you. Our next question comes from the line of Maggie Nolan of William Blair. Please go ahead.

Jason Peterson:

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

Jason Peterson:

There's probably a few things going on. I think we're trying to make certain that we don't have multi-year commitments that kind of lock us in. Even when you do, you do have opportunities to come back to clients. So, generally, Maggie, I would say traditional [indiscernible] structures for us are about a year in length. The other thing that we are continuing to do and I think you would see it in the mix of our commercials is that you're seeing more fixed fee engagements, where there's a more -- not only is it more sort of consulting led, but also there's a little bit more opportunity for us to take responsibility for delivery, and that gives us an opportunity to improve profitability as well.

Jason Peterson:

Thank you.

Surinder Thind:

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

Jason Peterson:

Yeah. We continue to have -- we're flexible. We clearly have been investing to make certain that we can add capacity across a broad range of geographies. So, we feel good about our ability to respond to demand.

Jason Peterson:

Yeah, I think, that would be fair. We've got obviously utilization opportunities, first and foremost, but then, yeah, a quarter window would probably be appropriate.

Surinder Thind:

Thank you.

Surinder Thind:

That's very helpful. Thank you.

Moshe Katri:

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

Jason Peterson:

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

Arkadiy Dobkin:

It's -- yeah. It's multiple factors. Some of them become much more comfortable with Ukraine because it was any impact of the quality of interruption. So, some were thinking we'll be leaving and now staying there. So it's also, we prove that we can deliver from different locations. India was probably one of the kind of major critical components here. And third one, I think that when you're removing some order works to some competitors, the results were not satisfactory as they started to come back to us or waiting when their commitments with new vendors will be kind of expired, and it will be possible to come back. So, I think it's between all these lines.

Operator:

Thank you. Our next question comes from the line of Darrin Peller of Wolfe Research. Please go ahead.

Arkadiy Dobkin:

So, I think when we're talking about increasing the client number, it's true the difference with previous year that this is smaller clients, smaller --- clients maybe not smaller, but smaller engagements. And overall, it still feel a lot of pressure from all, more competitiveness. And it's all coming back to our statement that we actually adjusted our behavior during the 2023, okay, and started to use different approaches to kind of protect client base as well. But it was much more visible all the transition between first half and second half of 2023. We're still seeing that something similar will be continuous for this and next quarter. And that exactly explain all these dynamics and competitive situation. We see that clients starting the programs, we participated in this bigger programs than they were considering in the first half of 2023. So, we think this acceleration will be happening and second half will give us opportunity to demonstrate it. One word I just -- okay. I lost the point which I was bringing. Maybe later, I'll add.

Jason Peterson:

If we do all right, definitely stronger new logo activity, stronger new customer revenues. Don't forget that we do have the ramp down in Q1 from the one customer. And as Ark said, some kind of slower kind of decision making, but again generally the demand environment at least feels like it's stabilizing and potentially improving.

Arkadiy Dobkin:

Well, what I wanted to say is actually my -- our usual remark. Until the full speed, what we kind of all expecting from margins and from the real growth, it's still function of right demands. And this right demand, we consider it will start to be realized on second part, okay? At what level? So, we put it conservative right now. At least we think that it's conservative or realistic right now. Yeah. So, what would be happening still this year, definitely less predictable than kind of before war years. We all know that it's not about us, it's about the whole the IT segment.

Operator:

Thank you. Our final question comes from the line of Sean Kennedy of Mizuho. Please go ahead.

Arkadiy Dobkin:

So, I think, still there are, at this point, a lot of experimentation and a lot of kind of more straightforward thinking about GenAI, as it's available practically for the end consumers and how this can change interfaces. And again, very straightforward that everybody is thinking how to have a right access to the hybrid data between general sales, the specific ones and most of the companies experimenting in this area and created some type of copilots. And I'm talking about application of areas and just utilizing GenAI as a activity tools for individuals and [we work as subs] (ph). I'm talking about, like, client-facing capabilities, new insight. The difficulties of this is it will be changing quarter by quarter. And, I think some exciting things which we see right now would become very quickly commodity and much more sophisticated since it'll be happening like 12 months from now.

Arkadiy Dobkin:

Very early, like you said.

Operator:

Thank you. I will now turn the call back over to Arkadiy Dobkin, Chief Executive Officer and President, for concluding remarks.

Jason Peterson:

Thank you.

David Straube:

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

Jason Peterson:

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

Bryan Bergin:

Hi, good morning guys. Thank you. I guess let's start on the demand stabilization trends that you highlighted here again. I heard you mentioned production load I think coming back toward 1Q levels. Can you dig in a bit more there? Is that prevalent across industries? And is it consistent across the large client cohort? And just anything how that informs early 2024 client tech budget discussions?

Bryan Bergin:

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

Bryan Bergin:

Thank you.

Moshe Katri:

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

Jason Peterson:

Yeah. And I just follow in on the profitability. So as we talked about in the last call and again we'll continue to talk about here today is that, we continue to have some characteristics with heavier pyramid than we had traditionally operated with the ongoing kind of pressures on pricing and then some amount of wage inflation. And so, it's hard to sort of return for typical profitability, as we enter the next handful of quarters or maybe through most of 2024. But when we look at India, given some time and particularly more demand we think the ability to sort of run that geography at levels of profitability consistent with what we did in Eastern Europe is certainly possible and more than possible, I'd say likely. So it's just right now we're still working through as Ark said, some of the imbalances on pricing and again a heavier delivery pyramid.

Jason Peterson:

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

Moshe Katri:

All right. Thank you.

Ashwin Shirvaikar:

Can you hear me now?

Ashwin Shirvaikar:

Okay. So, I guess, the question is when I look at your -- when I look at the results either by geography or by vertical and on a sequential basis, and I kind of compare the growth rates what they were 2Q versus the growth rate in 3Q, almost everything is either decel or relatively unchanged, you have obviously the very idiosyncratic thing going on with life sciences. And I'm wondering does that -- I'm trying to drive back with the -- with what I sense is a little bit more positivity in terms of commentary, because of stabilization. So can you comment on how the environmental conversations with clients have evolved over the course of the quarter was September radically different than July? How are things evolving in October? A little bit more color of where we are going in terms of what seems to be stabilization in more areas. That would be useful.

Jason Peterson:

Yeah. I think Ashwin also if you look clearly on a year-over-year basis, the numbers still don't look sequentially despite the fact we still saw a decline between Q2 and Q3. That decline was less than the decline we had in Q2. And when looking ahead to Q4, we still have a modest decline, but I would say that's largely sort of foreign exchange and to a certain extent as we talk about the build ability or the available build as in Q4. And so, if you adjust for that it does feel like our demand is stabilizing, particularly in North America as we talked about during our prepared remarks.

Ashwin Shirvaikar:

That last point is really good to hear. In terms of pricing, because when you kind of talk about transaction loan volume versus results, does that imply a soft pricing environment. And if you can break that down into how much of that is a geo-mix type of issue as opposed to apples-to-apples price crunching. And then, over the last few quarters, you have mentioned obviously that because of the war in Ukraine, you had to move equal to newer geographies and there was a pricing impact that clients needed to absorb because of that. Are we past the impact of that on client decision-making?

Ashwin Shirvaikar:

Understood. And that’s what you’re adjusting for them. Okay. I got it. Thanks.

David Grossman:

Thank you. Just wondering if I could just follow-up a couple of points that were just made in the last question. I guess I'm just trying to reconcile. You've given us a lot of good information about production about headwinds from customer losses, some of the larger customers that you've been talking about over the last several quarters and other dynamics. So I guess, I'm just trying to reconcile all of that, because I think Jason you said that when you back out FX and seasonal kind of workdays or work hours that it feels flattish. So it sounds like the newer work that's coming on is offsetting those headwinds. Is that a reasonable way to think about things as we kind of move into 2024? I know you don't want to give guidance, but does it feel like those headwinds that you've been experiencing in the last couple of quarters that have been driving sequential declines in revenues should pretty much abate by the end of this year.

David Grossman:

And maybe a similar question on the margins in terms of – it looks like your utilization went down again sequentially. And you've got again the wage pricing dynamic which sounds like the timing may be extending into calendar 2024. So – and then you're factoring you've taken some cost-cutting actions. So when you roll up all those different elements, is it reasonable to think that you're still targeting your historical range as we go into 2024 that's kind of what the objective is based on the actions you've taken thus far in 2023?

David Grossman:

Great. Thanks for that. Just one quick follow-up. So the kind of wage pricing dynamic, is that the biggest headwind to gross margins as we go into next year is just letting that play out.

David Grossman:

Got it. Great. Thanks very much. Appreciate that.

Ramsey El-Assal:

Thanks so much for taking my question. I wanted to ask about booking conversion trends. And if you could just comment on things like how average portfolio duration is trending or time line to convert bookings to revenue or pipeline erosion trends? I'm just kind of curious are you seeing consistency and stability when it comes to conversion? Or is it more of a moving target still kind of in this tough environment?

Ramsey El-Assal:

Okay. Thank you. And a quick follow-up for me. I wanted to ask about – a follow-up on a prior question about the headcount numbers globally. And in particular, I'm just curious, the absolute headcount numbers in Ukraine and Belarus, should we think about those as relatively stable at this point? Or do you have plans to further draw down? I'm thinking particularly in Belarus, especially, given kind of the way Russia kind of ended this quarter officially. I'm just curious whether we should think about the absolute numbers as the sort of watermark that's going to be persistent or whether we could see more declines on an absolute basis in the region?

Ramsey El-Assal:

Okay. Thank you very much.

Jason Kupferberg:

Good morning, guys. I just wanted to come back to some of the commentary around quarter-over-quarter growth rates. I know that's what you guys have been watching most closely just to assess demand and you've talked about the stabilization here. Just looking ahead to the first quarter of 2024, do you think we get back to positive quarter-over-quarter revenue growth then? I think -- the Street is looking for about 3% growth. So I just wanted to get your take on that. I mean putting any potential moves in FX on the side given some of the stabilization in parts of the business do you think we're back in positive territory in the first quarter?

Jason Kupferberg:

Right. Okay. And just a follow-up Jason on some of your margin commentary I want to make sure we've got the messaging right there because it sounds like most of the cost optimization is going to get reinvested. So it sounds like what you're suggesting is in 2024 non-GAAP margins or perhaps down versus 2023 and then 2025 you're kind of back to a "normal range" like 16% or 17%. Is that directionally the...

Jason Kupferberg:

Very helpful. Thank you.

Unidentified Analyst:

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

Unidentified Analyst:

Got it. Thanks, Ark. And then -- were you going to say something else?

Unidentified Analyst:

Okay. And then for my follow-up Europe appeared to be a bright spot. But Jason you mentioned the incremental ramp downs there. Have you seen any changing behaviors or sentiment from clients in that geo? Or are there just some client-specific challenges that caused those ramp downs?

Arkadiy Dobkin:

I think we are looking at this, almost year-to-year comparison becoming less meaningful, at this environment because there is no big change between these two years. So, right now, the quarter-by-quarter comparison really showing what's happened. And from this point, actually [indiscernible]

Jason Peterson:

You’re welcome. Thank you.

Jamie Friedman:

Hi, I had a slightly longer-term question Ark. I was wondering, how would you compare the relevance of -- and the mind share of some of the key services that you're known for especially application development? In terms of the tech stack is application development more or less meaningful relevant in today's technology architecture? How do you see that evolving if at all?

Jamie Friedman:

Got it. Thanks for that. I’ll drop back in the queue give someone else the chance.

James Faucette:

Great. Thank you very much. I wanted to ask quickly a couple of questions. First on pricing Jason you mentioned, a little bit of discounting et cetera. Can you help us think through kind of the longer-term implications? I know you've alluded to it in terms of, at some point, being able to recover that. But can you just help us think through what that mechanism typically would look like? And what would make sense over the medium to long run?

James Faucette:

Great. I appreciate that Jason. Then my second question was just, how do you think about and this is for Ark and/or Jason obviously. But how do you think about any changes that you need to adjust to long term, if we're in a higher interest rate for longer environment. I guess, I'm just thinking that historically, EPAM has been really good at doing acquisitions and acquiring new technologies to stay at kind of leading edge. But with the cost of capital now being higher, do you have to adjust how you think about the importance and the role of acquisitions and future strategy and capability development? Thanks.

Arkadiy Dobkin:

And I guess, that's an advantage we have from our financial position. We have a very strong cash position to not rely on the outside market to do exactly what we were doing in the past, because it was relatively small acquisitions targeted for specific competencies or very specific geographies, we had a very good shape to continue doing this. I think that's not much change.

Arkadiy Dobkin:

Thank you.

Puneet Jain:

Hi. Thanks for taking my question. I wanted to ask on financial services. Some of your peers have talked about seeing some weakness there. And you also mentioned banking within financial services as weak. So can you double-click on what you are seeing there? Like are the headwinds broad-based within banking? Or are they client-specific?

Puneet Jain:

That's correct. And then, like it was nice to hear that some of the programs some of the projects clients are coming back. Is that incremental work driven by clients need to modernize their core systems maybe because of generative AI? Or are these still more cost optimization type of deals?

Puneet Jain:

Got it. Thank you.

Arkadiy Dobkin:

Yes. Thank you for joining today. So I think with all kind of numbers which we said and we still looking more positive to the situation that several quarters ago. Unfortunately, the world is still continues to be a very unpredictable place. And that's why it's difficult to make more clear statement sometimes. So let's meet in three months and see what we will be able to share then. Thank you very much.

David Straube:

Thank you, Operator. Good morning, everyone. By now you should have received your copy of the earnings release for the company’s second quarter 2023 results. If you have not, the copy is available on epam.com in the Investors section. With me on today’s call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I’d like to remind those listening that some of our 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 Ark.

Jason Peterson:

Thank you, Ark, and good morning, everyone. Before covering our Q2 results, I wanted to remind you that in addition to our customary non-GAAP adjustments, expenditures resulting from Russia’s invasion of Ukraine, including EPAM’s humanitarian commitment to Ukraine, business continuity resources and accelerated employee relocations have been excluded from non-GAAP financial results. We have included additional disclosures specific to these and other related items in our Q2 earnings release. In the second quarter, EPAM generated revenue of $1.17 billion, a year-over-year decrease of 2.1% on a reported basis and a decrease of 2.4% in constant currency terms, reflecting a favorable foreign exchange impact of 30 basis points. Revenue in the quarter was impacted by reductions in program spending across a number of our clients, as well as ongoing client caution related to new project starts. The reduction in Russian customer revenues resulting from our decision to exit the market had 100-basis-point negative impact on year-over-year revenue growth. Excluding the Russia revenues, year-over-year revenue for reported and constant currency would have decreased by 1.1% and 1.7%, respectively. Beginning with our industry verticals. On a year-over-year basis, travel and consumer declined 1%, primarily due to declines in retail, partially offset by solid growth in travel and hospitality. Financial services grew 3.2%, with growth coming from asset management and insurance services. Business information and media decreased 4.1% in the quarter. Revenue in the quarter was impacted by a reduction in spend at a number of large clients based on uncertainty in their end markets, particularly in the mortgage data space. Software and Hi-tech contracted 10.3%. The decline in the quarter reflected a reduction in revenue from the former top 20 customer we mentioned during our previous earnings call and generally slower growth in revenue across a range of customers in the vertical. Life Sciences and Healthcare declined 10.9%. Revenue in the quarter was impacted by the ramp down of a large transformational program mentioned during our previous earnings calls. On a sequential basis, growth in Life Sciences and Healthcare actually was a positive 2.9%, driven by new work at both existing and new logos. And finally, our emerging verticals delivered solid growth of 8.6%, driven by clients in energy, manufacturing and automotive. From a geographic perspective, Americas, our largest region representing 58% of Q2 revenues, declined 5.9% year-over-year or 5.7% in constant currency. The growth rate in the quarter was impacted in part by the ramp down of life sciences and healthcare customer we mentioned during our previous earnings call. EMEA, representing 39% of our Q2 revenues grew 8.5% year-over-year or 6.5% in constant currency. CEE represented 1% of our Q2 revenues contracted 61.1% year-over-year or 45.8% in constant currency. Revenue in the quarter was impacted by our decision to exit our Russia operations and the resulting ramp-down in services to Russia customers. And finally, APAC declined 19.7% year-over-year or 18.6% in constant currency terms and now represents 2% of our revenues. Revenue in the quarter was impacted primarily by the ramp-down of work within our financial services vertical. In Q2, revenues from our top 20 customers declined 2.4% year-over-year, while revenues from clients outside our top 20 declined 1.9%. Moving down the income statement. Our GAAP gross margin for the quarter was 30.9%, compared to 29.2% in Q2 of last year. Non-GAAP gross margin for the quarter was 32.6%, compared to 31.5% for the same quarter last year. Gross margin in Q2 2023 reflects a lower level of variable compensation expense, partially offset by the negative impact of lower utilization. GAAP SG&A was 16.7% of revenue, compared to 19.5% in Q2 of last year. SG&A in Q2 2022 included a more significant level of expenses resulting from Russia’s invasion in Ukraine. Non-GAAP SG&A in Q2 2023 came in at 14.8% of revenue, compared to 15.2% in the same period last year. Reductions in both cost of revenue and SG&A during the quarter reflect the company’s ongoing focus on managing its cost base, as well as reduced variable compensation expense due to the lower level of financial performance expected for the year. In Q2, EPAM incurred $5 million in severance-related expense included in both GAAP and non-GAAP SG&A, as the company works to better align its cost structure with the current demand environment. GAAP income from operations was $144 million or 12.3% of revenue in the quarter, compared to $93 million or 7.8% of revenue in Q2 of last year. Non-GAAP income from operations was $191 million or 16.3% of revenue in the quarter, compared to $177 million or 14.9% of revenue in Q2 of last year. Our GAAP effective tax rate for the quarter came in at 20%. Non-GAAP effective tax rate was 23.3%. Diluted earnings per share on a GAAP basis was $2.03. Our non-GAAP diluted EPS was $2.64, reflecting a $0.26 increase compared to the same quarter in 2022. In Q2, there were approximately 59.2 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q2 was $89 million, compared to $78 million in the same quarter of 2022. Free cash flow was $82 million, compared to free cash flow of $59 million in the same quarter last year. At the end of Q2, DSO was 71 days and compares to 69 days for Q1 2023 and 71 days for the same quarter last year. Looking ahead, we expect DSO will remain steady throughout 2023. Share repurchases in the second quarter were approximately 195,000 shares for $41.4 million at an average price of $212.77 per share. As of June 30th, we had approximately $450 million of share repurchase authority remaining. We ended the quarter with approximately $1.8 billion in cash and cash equivalents. Moving on to a few operational metrics. We ended Q2 with more than 49,350 consultants, designers, engineers, trainers and architects. Production headcount declined 10% compared to Q2 2022, the result of lower levels of hiring, combined with voluntary and involuntary attrition as we continue to balance supply and demand. Our total headcount for the quarter was more than 55,600 employees. Utilization was 75.1%, compared to 78% in Q2 of last year and 74.9% in Q1 2023. Now let’s turn to our business outlook. As Ark mentioned, we have seen a higher level of new logo acquisitions and revenue from our focused efforts on demand generation. While this progress is encouraging, the level of revenue generated is not enough to offset further expected reductions in client budgets, ramp-downs and delays in new program starts. With the range of outcomes, we outlined on our June 5th call, we are maintaining our expectations for a muted demand environment, with sequential decline in Q3 and further sequential or flat revenue growth in Q4. Our Ukrainian delivery organization continues to operate efficiently and our teams remain highly focused on maintaining uninterrupted production. Our guidance assumes that we will continue to be able to deliver from Ukraine in productivity levels at or somewhat lower than those achieved in 2022. Consistent with previous cycles, we will continue to thoughtfully calibrate our expense levels, while investing in our capabilities and focusing on the preservation of our talent in preparation for a return to higher levels of demand. We expect headcount will continue to decline modestly in Q3 due to limited hiring and more typical attrition and we will continue to limit hiring until we see improving demand. We expect utilization to decline slightly in the second half of the year, primarily driven by a higher level of expected vacations. Lastly, at the end of July, we completed the sale of our Russian business, which will result in a decline in Russian revenues from Q2 to Q3. But we will also recognize an estimated loss on sale of $18.4 million, which will impact our Q3 and full year GAAP results. Additionally, this will drive a further modest reduction in headcount. Moving on to our full year outlook. We now expect revenue to be in the range of $4.65 billion to $4.70 billion, reflecting a year-over-year decline of approximately 3%. On an organic constant currency basis, excluding the impact of the exit in Russia, we expect revenue decline to also be approximately 3%, both at the midpoint of the range. We expect GAAP income from operations to now be in the range of 10.5% to 11.5%, which includes the loss associated with the sale of our Russian business. The non-GAAP income from operations to continue to be in the range of 15% to 16%. We expect our GAAP effective tax rate to continue to be approximately 22%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation is expected to continue to be 23%. For earnings per share, we expect that GAAP diluted EPS will now be in the range of $7 to $7.20 for the full year and non-GAAP diluted EPS will now be in the range of $9.90 to $10.10 for the full year. We now expect weighted average share count of 59.1 million fully diluted shares outstanding. Moving to our Q3 2023 outlook. We expect revenues to be in the range of $1.14 billion to $1.15 billion, producing a year-over-year decline of 6% to 7%. On an organic constant currency basis, excluding the impact of the exit in Russia, we expect revenue to decline by 8.5% to 9.5%. For the third 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, which excludes excess tax benefits related to stock-based compensation to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.62 to $1.70 for the quarter and non-GAAP diluted EPS to be in the range of $2.52 to $2.60 for the quarter. We expect a weighted average share count of 59.1 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements in the third quarter and the remainder of the year. Stock-based compensation expense is expected to be approximately $39 million for each of the remaining quarters. Amortization of intangibles is expected to be approximately $5.5 million for each of the remaining quarters. The impact of foreign exchange is expected to be a $1.5 million gain for each of the remaining quarters. Tax effect of non-GAAP adjustments is expected to be around $11.7 million for Q3 and $9.3 million for Q4. We expect excess tax benefits to be around $2.7 million for Q3 and $1.8 million for Q4. In addition to these customer GAAP to non-GAAP adjustments and consistent with the prior quarters in 2023, we expect to have ongoing non-GAAP adjustments in 2023 resulting from the Russian invasion of Ukraine. Please see our Q2 earnings release for a detailed reconciliation of our GAAP to non-GAAP guidance. Finally, one more assumption outside of our GAAP to non-GAAP items. With our significant cash position, we are now generating a healthy level of interest income and are now expecting interest and other income to be $11.7 million for each of the remaining quarters. Lastly, I’d like to thank our employees for their continued dedication and focus on our customers. Operator, let’s open the call up for questions.

Bryan Bergin:

Hi. Good morning, guys. Thank you. I wanted to just kick off with large client visibility, and I guess, existing base stability. Can you talk about the conversations you are having among your top 10 or top 20 clients? Are you getting closer to stability in this space, and I am curious, just as we look at the implied sequential decline in 3Q and perhaps 4Q, just trying to understand the attribution to the decline among the large clients still in that base versus the intake of new work coming in at lower dollar levels versus like conversion delays and slower ramps of work?

Bryan Bergin:

Okay. And a follow-up just on the workforce diversification, can you give us a sense on how the current operating footprint is comprised as of the close of the June quarter, just roughly a mix between billable in Ukraine, Belarus versus Central Europe versus LatAm and APAC? Thanks.

Bryan Bergin:

Okay. Thank you.

Tyler DuPont:

Hi. Good morning, Ark and Jason. This is Tyler DuPont on for Jason. Thanks for taking the question. I just wanted to start by asking about operating margins. During the quarter, they have seen some pretty strong, 130 bps greater than the top end of the guidance range. Can you just spend a minute or two parsing out sort of what led to that outperformance and sort of how you are thinking about margins through the back half of the year, where there is any sort of incremental investment opportunities available, or any color there?

Tyler DuPont:

Okay. Great. I appreciate that, Jason. Thanks. And then for my follow-up, I just wanted to sort of double click on the demand story here as we look towards the back half of the year, specifically your expectations on the evolution of the demand environment across your total client base, the balance between if you are assuming macro stability or any sort of additional softness in any of the verticals or geographies you are operating in? I know Bryan sort of alluded to the sequential declines and the last question in regard to 3Q and potentially 4Q. So just sort of any clarity there helping us frame the demand environment would be appreciated?

Arkadiy Dobkin:

Yeah. I think that’s right with what I shared at the beginning of the first question. It’s still soft. It’s still unpredictable. It’s still slightly going down. At the same time, we see different conversations starting to happen. There are more activities with new logos and that’s what we shared during our thought at the beginning. But also existing clients, different sort of conversations that we saw a couple of months, a couple of quarters ago. Again, it’s still difficult to predict, we reacted and we forecasted based on what we really kind of see right now.

Arkadiy Dobkin:

Thank you.

David Grossman:

Thank you. Good morning. I wonder if I could just -- a couple of quick follow-ups to some of the questions that have been asked. I mean, the first is just getting back to the customer dynamics and their own desire to kind of diversify risk geographically. If things stabilize from here, when would the sequential revenue headwinds begin to diminish if things just stabilized from here going forward?

David Grossman:

Right. So excluding…

David Grossman:

No. I just wanted to clarify, so excluding seasonality, right? If things stabilize from here, things would be flattish sequentially, right, excluding the seasonal dynamic.

David Grossman:

Got it. All right. Thanks. I appreciate that. And then just back to your own internal efforts to geographically diversify. And without getting too far into the details, are there some high level dashboard items that you can share that would provide some insight into recruiting kind of yield utilization, attrition? Anything that would give us a sense of kind of how these new geographies are ramping?

David Grossman:

Correct.

David Grossman:

Correct.

David Grossman:

Got it. Thanks very much. Really appreciate that color.

Operator:

Thank you. And one moment please for our next question. The next question will come from Maggie Nolan of William Blair. Your line is open.

Jason Peterson:

Yeah. I think I will step in. And we are probably not quite ready to talk about the 2024 in terms of, let’s say, specifics or even ranges. But Ark explained, as we moved into the different delivery locations, obviously, we did so quickly. In some cases, we probably have a little bit more balance in the higher cost geographies, including traditional kind of on-site markets. We would look to kind of rebalance that somewhat. And then the other thing as we have talked about over the last couple of quarters is that, as we move into new geographies, and particularly, as we sort of either relocated or stood up new geographies quickly, we ended up with a somewhat more sort of senior delivery organization and delivery pyramid and we are working to begin to introduce more juniors later in the year that would then give us a more balanced pyramid and therefore also improve margins. And so that, obviously, combined with utilization improvement, would be the things that we are looking to do to sort of stabilize and improve gross margins over time

Arkadiy Dobkin:

So, I think, I will comment on new logo and new business is kind of illustrated that while sales force is also some dynamics. So I think, directionally, it’s working through positively right now. I think after our comments like several quarters ago, when we were in the middle of all these allocations points and we have to deal with thousands of people, so it will slow down. Right now, it’s all coming…

Maggie Nolan:

Thank you.

Ramsey El-Assal:

Hi. Good morning. Thanks for taking my question. I wanted to follow-up with your mentioning kind of tighter integrations and partnerships with the hyperscalers. Can you talk about the strategy, how these relationships might act or expand your capabilities or your addressable market, and then also just comment on whether this is part of positioning EPAM for growth once the demand environment picks up again?

Ramsey El-Assal:

All right. Thank you. And a follow-up for me. Can you contrast the demand environment in Europe versus North America? It looks like the growth rates are different in those geographies, although admittedly, they don’t -- necessarily have not tabulated the constant currency number. But is it a different environment you are seeing in different geographies or is it very similar trends across the business regardless of geography?

Ramsey El-Assal:

Fantastic. Thanks a lot.

Arkadiy Dobkin:

In general, it’s still benefitting, but it is still, all I assume [ph], what we are talking about several specific client situations. Mostly it’s happened in…

Arkadiy Dobkin:

…in North America and those situations were independent from general economic environment.

Moshe Katri:

Hey. Thanks. Good morning. A couple of follow-ups here. So do you -- looking at the new logos, can you confirm that you are actually getting the same bill rates as you are selling via some of the other delivery centers, including India, as you have been getting in Eastern Europe? So are we talking about comparable billability?

Moshe Katri:

Okay. So would you say that the new logos that are coming on board are more dilutive to margins versus what you were accustomed to or is there any way to mitigate that?

Moshe Katri:

All right. That makes sense. And last…

Moshe Katri:

Sorry. Last one here. So we visited your center in Hyderabad. And I remember, you have a significant capacity to kind of expand there. Can you talk a bit about your future plans in terms of how important India or critical India is going to be able to continue to get those new logos onboard and actually to be able to accelerate growth down the road? Thanks.

Moshe Katri:

Thanks.

Puneet Jain:

Hi. Thanks for taking my question. I also wanted to ask about demand. Do you expect like clients to spend on CapEx investments to modernize or re-platform their core systems sometime this year, maybe in 4Q or is that type of work is something that could come through on their next year’s budget, meaning that it might not come in anytime this year?

Arkadiy Dobkin:

It’s difficult to answer that. I think we answered this question already in another way a couple of times. We don’t know right now. There is not so much visibility. That’s difficult. Some of them, who knows, it’s sometimes unexpected happening in Q4 will be the quarter when clients will really start spending. But let’s see, so.

Jason Peterson:

The pricing pressure on a like-for-like basis, so I think Ark obviously picked it up in a more pronounced way than I did earlier. So this is definitely an environment where you need to sharpen your pencil. And so really, we are being thoughtful, but it is in an environment where clients are particularly cost sensitive and that is showing up in pricing. And to Moshe’s question earlier, is that traditionally in certain newer engagements, it’s an opportunity to sort of improve price and that’s less the case in this fiscal year.

Operator:

Thank you. And one moment please for our next question. Next question will come from Arvind Ramnani of Piper Sandler. Your line is open.

Arkadiy Dobkin:

I think at this specific time, again, there are some industries like, let’s say, oil and gas, which is in pretty good shape, okay? But this is more an exception today. The rest of the new clients, in our view, happens from two kind of categories. Some clients who actually try to utilize this time as an opportunity and decided to go and invest instead of like and get some competitive advantage and that’s exactly what you recall before say, as soon as these type of clients will demonstrate some results, it will trigger a faster recovery of the market for build and kind of transformative programs, okay? And the second category, I think, it’s a client which is, at this point, not trying just to do transformative programs, but trying to utilize this time to build relations with stronger vendors for the future return and be prepared for this. Because, in our view, demand for talent when market will rebound will be very, very strong with everything what’s happening right now in technology, in technical debt and since which we have not done or not finished and with everything was triggered by, it seems like everybody is trying to talk about generative AI on the operations, but it’s still there and it will change actually the landscape. So that will put pressure on the talent demand as well. Well, a lot of people speculation that it would replace companies like EPAM very soon [ph], okay.

Arkadiy Dobkin:

So there are a few example on -- we kind of give, I think, five, six examples across different vendors. There are few of them, which is pretty large and that’s why we mentioned that it might be that they will be driving our growth to the next years. There are some of them, which is more framework contracts, which we won and just started and there is a specific place how it’s happening. So it might start to bring results like closer to the end of the year, maybe beginning of the next year, visible results. And there are some which is very, very specific programs, but not big, but very interesting from the new technology standpoint. So it’s kind of a variety of this. If we will see better trends, that would mean that it’s actually the market change.

Arkadiy Dobkin:

I think I have answered for kind of Ukraine and Belarus here. I think with Ukraine clients who stayed with Ukraine are much more comfortable right now. We see some clients coming back. Again, it proves that nothing was happening from the quality of delivery or kind of impact on any production activities during the last 18 months, making clients more comfortable. Yes, it’s kind of new normal, but the normal is a key part of this. With Belarus, it’s a slowdown. We still have clients which operate there and we have some clients who are exiting there. So, Belarus is, from headcount point of view, kind of slightly faster than as of anything else.

Operator:

Thank you. I am seeing no further questions in the queue. I would now like to turn the conference back to Arkadiy Dobkin for closing remarks.

Operator:

This conclude today’s conference call. Thank you all for participating. You may now disconnect and have a pleasant day.

David Straube:

Thank you, operator and good morning, everyone. By now you should have received your copy of the earnings release for the company's first quarter 2023 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I'd like to remind those listening that some of our 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 measure and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Jason Peterson:

Thank you, Ark, and good morning, everyone. Before covering our Q1 results, I wanted to remind you that in addition to our customary non-GAAP adjustments, expenses related EPAM’s manager and commitment to Ukraine and costs associated with the exit of our Russian operations business continuity resources and accelerated employee relocations have been excluded from non-GAAP financial results. We've included additional disclosures specific to these and other related items in our Q1 earnings release. In the first quarter, EPAM delivered solid results. The company generated revenue of $1.21 billion, a year-over-year increase of 3.4% on a reported basis and 4.9% in constant currency terms, reflecting a negative foreign exchange impact of 150 basis points. Additionally, the reduction in Russian customer revenues resulting from our decision to exit the market had a 220 basis point negative impact on revenue growth. Excluding Russia revenues year-over-year revenue growth would have been 5.6% reported and over 7% on a constant currency basis. Beginning with our industry verticals, travel and consumer grew 4.9% driven by solid growth in travel and hospitality and muted growth in retail. The ongoing exit of Russia operations also impacted growth in this vertical. Absent the impact, growth would have been 6.7%. Financial services grew 4.1% with strong growth coming from Asset Management and Insurance Services. Excluding Russia customer revenues, growth would have been 12.5%. Business information and media delivered 4.2% growth in the quarter. Software and Hi-tech produced no growth. The lack of growth in the quarter reflected a reduction in revenue from a former top 20 customer we mentioned in our Q4 earnings call and generally slower growth in revenues across a range of customers in the vertical. Life Sciences and Healthcare declined 10.1%. Growth in the quarter was impacted by the ramp down of a large transformational program mentioned during our Q4 earnings call. And finally, our emerging verticals delivered strong growth of 14.7%, driven by clients in manufacturing, automotive and energy. From a geographic perspective, Americas, our largest region representing 59% of our Q1 revenues grew 3.4% year-over-year or 4% in constant currency. EMEA representing 38% of our Q1 revenues grew 10% year-over-year or 13.3% in constant currency. CEE representing 1% of our Q1 revenues contracted 68.8% year-over-year or 70.8% in constant currency. Revenue in the quarter was impacted by our decision to exit our Russian operations and the resulting ramp down of services to Russia customers. And finally, APAC declined 9.4% year-over-year or 6.7% in constant currency terms and now represents 2% of our revenues. Revenue in the quarter was impacted primarily by the ramp down of work at a financial services client. In Q1, revenues from our top 20 clients grew 5.3% year-over-year, while revenues from clients outside our top 20 grew 2.3%. And moving down the income statement, our GAAP gross margin for the quarter was 29.3% compared to 33.4% in Q1 of last year. Non-GAAP gross margin for the quarter was 31.5% compared to 33.3% for the same quarter last year. Gross margin in Q1 2023 reflects a negative impact of lower utilization and some year-over-year compression in account margins. GAAP SG&A was 17.5% of revenues compared to 20.3% in Q1 of last year. Non GAAP SG&A came in at 15.3% of revenues compared to 15.6% in the same period last year. Both GAAP and non GAAP SG&A expense in Q1 2023 include $9.5 million in severance related expense incurred as the company works to better align its cost structure with the current demand environment. GAAP income from operations was $120 million or 9.9% of revenue in the quarter compared to $129 million or 11% of revenue in Q1 of last year. Non-GAAP income from operations was $178 million or 14.7% of revenue in the quarter compared to $189 million or 16.1% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 19.6% versus our Q1 guide of 18%, primarily due to lower excess tax benefits related to stock based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefit was 22.9%. Diluted earnings per share on a GAAP basis was $1.73. Our non-GAAP diluted EPS was $2.47, reflecting as $0.02 decrease compared to the same quarter in 2022. In Q1, there were approximately 59.3 million diluted shares outstanding. Turning to cash flow and our balance sheet, cash flow from operations for Q1 was a positive $87 million compared to a negative $52 million in the same quarter of 2022. Q1 2022 cash flow was negatively impacted by an increase in DSO and the payment of a higher level of company-wide variable compensation based on our 2021 performance. Free cash flow was $79 million compared to a negative free cash flow of $75 million in the same quarter last year. We ended the quarter with over $1.7 billion in cash and cash equivalents. At the end of Q1, DSO was 69 days and compares to 70 days for Q4 2022 and 69 days for the same quarter last year. Looking ahead, we expect DSO will remain steady throughout 2023. Now moving on to a few operational metrics. We ended Q1 with more than 51,100 consultants, designers, engineers, trainers and architects. Production headcount declined 7.1% compared to Q1 2022. The net decrease in headcount is a result of the reduction in Russia based headcount, a lower level of hiring across the organization and a largely completed program designed to produce modest levels of encouraged attrition. Our total headcount for the quarter was more than 57,415 employees. Utilization was 74.9% compared to 78.4% in Q1 of last year and 73.6% in Q4 2022. Now let's turn to our business outlook. We are beginning to see the results of our focus on generating demand from new programs and customers. However, we are also seeing a continuation in the uneven demand environment that began in Q4 2022. And the global economic environment has not yet stabilized sufficiently to support client confidence. The demand environment continues to be characterized by slower decision making, caution around spending and program ramp downs due to uncertainty in certain client end markets. As a result, our overall level of demand is not improving sufficiently to support our initial revenue outlook. As highlighted during our Q4 earnings call, our operations in Ukraine have not been materially impacted and our teams remain highly focused on maintaining uninterested production. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers at productivity levels at or somewhat lower than those achieved in 2022. Consistent with previous cycles, we will continue to thoughtfully calibrate our expense levels, while investing in our capabilities and focusing on the preservation of our talent in preparation for a return of demand. We expect headcount will continue to decline somewhat in Q2 due to limited hiring and more typical attrition and we will limit hiring in the second half until we see improving demand. We expect utilization in the mid-70s throughout the remainder of the year. As a reminder, the exit of our Russian operations and the reduction in Russia customer revenues, produces a tougher year-over-year revenue comparison primarily in the first half of 2023. Moving to our full year outlook. We now expect revenue will be in the range of $4.95 billion to $5 billion reflecting a year-over-year growth rate of approximately 3%. On an organic constant currency basis, excluding the impact of the exit from Russia, we expect revenue growth to be just over 3% both at the midpoint of the range. We're currently expecting sequential growth in both Q3 and Q4. However, we no longer expect to be able to generate double digit year-over-year growth in either quarter. We expect GAAP income from operations to continue to be in the range of 11.5% to 12.5% and non GAAP income from operations to continue to be in the range of 15.5% to 16.5%. We expect our GAAP effective tax rate to continue to be approximately 21%, our non GAAP effective tax rate, which excludes excess tax benefits related to stock based compensation will also continue to be 23%. Earnings per share, we expect the GAAP diluted EPS will now be in the range of $8.11 to $8.31 dollars for the full year and non GAAP diluted EPS will now be in the range of $10.60 to $10.80 dollars for the full year. We now expect weighted average share count of 59.4 million fully diluted shares outstanding. Now moving to our Q2 2023 outlook, we expect revenues to be in the range of $1.195 billion to $1.205 billion, producing year-over-year growth rate of less than 1%. On an organic constant currency basis excluding the impact of the exit from Russia, we expect revenue growth to also be less than 1% both at the midpoint of the range. For the second 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 14% to 15%. We expect our GAAP effective tax rate to be approximately 20% and our non GAAP effective tax rate, which excludes excess tax benefits related to stock based compensation to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.82 to $1.90 for the quarter. And non GAAP diluted EPS to be in the range of $2.38 to $2.46 for the quarter. We expect a weighted average share count of 59.4 million diluted shares outstanding. Finally, a few key assumption that support our GAAP to non GAAP measurements in the second quarter and remainder of the year. Stock based compensation expense is expected to be approximately $33 million for Q2, and $38 million for each of the remaining quarters. Amortization of intangibles is expected to be approximately $6 million for each of the remaining quarters. The impact of foreign exchange is expected to be negligible for the remainder of the year. Tax effect of non-GAAP adjustments is expected to be $9.5 million for Q2 and $9 million for each of the remaining quarters. We expect excess tax benefits to be around $6 million for Q2 $4 million for Q3 and $2 million for Q4. In addition to these customary GAAP to non GAAP adjustments and consistent with the prior quarter in 2022, we expect to have ongoing non-GAAP adjustments in 2023 resulting from Russia's invasion of Ukraine. Please see our Q1 earnings release for a detailed reconciliation of our GAAP to non GAAP guidance. Finally, one more assumption outside of our GAAP to non-GAAP items. With our significant cash position we are generating a healthy level of interest income. We had expected an elevated level of interest income relative to past years when we developed our original full year guidance. However, due to the larger positive impact on EPS in 20 23, we are updating our assumptions regarding interest income and making them explicit. For the remainder of the year, we expect interest income to be $8 million for Q2 and $7 million for each of the remaining quarters. Lastly, I'd like to thank our employees for their continued dedication and focus on our customers. Operator, let's open the call for questions.

James Faucette:

Great. Thank you very much. Appreciate all the color and details so far this morning. It sounds like most of your revision and view for the rest of the year is attributable to macroeconomic environment. Just wondering if you can kind of give more detail on the underlying assumptions there. And I know back in the previous quarter you had talked about that there was some engagement and reengagement that you need to do with clients. I'm just wondering how that has gone and if that engagement and those kinds of conversations are impacting your outlook at all right now.

James Faucette:

Got it. Thank you for that, Ark. And then, I guess, from the ramp downs and softness, any sense of how much of that. It sounds like you feel like that that is probably broad based, but any clarity on those ramp downs? And is that -- how much of that maybe idiosyncratic to EPAM, given delivery challenges or it sounds like you think it's more really macro driven. I just want to make sure I understand that.

James Faucette:

Great. Thanks for that Ark.

Darrin Peller:

Hey, thanks guys. If you could help just by maybe dissecting a little bit more around the demand environment versus what you're seeing that's more specific to some of the regions you're in now, some of the newer regions. And what I mean by that is really just whether or not there's been anything that is tougher to execute from some of the new regions you've built into post Russia, post Ukraine or is that really not a factor? And instead, it's really just demand and at the end of the day you have all the talent you need executing the way you should. And then I guess a quick follow on related to that is just pricing dynamics to pass through. What's the latest on the wage environment in those newer regions and how you are executing on that and your ability to pass through on pricing around that?

Jason Peterson:

So, no real challenges in terms of delivery or the ability to add headcount or to get work done. But as Ark said, it's really an issue of kind of the uncertain macro environment and clearly more uncertain than we expected by the time we kind of get to summer. And we think that's having an impact on customers investment decisions. From a wage standpoint, we did do our promo campaign here in Q2. And as we talked about, we clearly were seeing wage inflation over the last year, but I think you're going to see a more muted wage inflation environment through the remainder of the year. And then just the pricing environment is clearly not one that is super supportive of price increases and we're finding both clients are cautious in terms of spend and in terms of rates. And even sort of new engagements or requiring that we sort of sharpen our pencils a little bit.

Arkadiy Dobkin:

Listen, we understand what you're asking, but I think we reflect on exactly what we're seeing right now. And unfortunately, last quarter, we were seeing this differently.

Arkadiy Dobkin:

And the stability right now is very different, like this is a pretty new environment. I don't think we can compare this with second quarter of 2020, it was a different reaction of the clients much more sharpened. So right now, it's different, but yes, that's what we see. And I think everybody needs to think about quarter-by-quarter adjustments because that was what we will be the next quarter.

Operator:

Please standby for our next question. The next question comes from Bryan Bergin with TD Cowen. Your line is open.

Arkadiy Dobkin:

I think we also try to educate how we're thinking about it. And based on what we saw in our previous slide based on what we think happened with technology right now. We mentioned that we're thinking in terms of quarters, but that's a question how many quarters two, three, four quarters. Not in terms of [indiscernible] the market will restore. That's our belief, we're making mistakes as everybody else. But in this case, still the same quarters versus years.

Arkadiy Dobkin:

And it's definitely combination across all of the different environment. When somebody telling you that we will delay for one quarter, we will start next quarter and the next quarter, we said we have to do it for another quarter and what is happening for several then. Okay, that's not a cancellation, but it's definitely not allowing us to count on this.

Jason Peterson:

Yes. So I think with the updated guidance is that, we're probably thinking that utilization is going to remain more in the mid-70s rather than the high 70s in the second half. However, we do have characteristics in the second half, with generally the higher bill date in Q3, social security caps and a little bit of trend up in utilization. So I am expecting that gross margin will be maybe somewhere around the 33% for the second half. SG&A and other areas of variable expense, we're definitely working to control. And so, SG&A will likely be below 15% as a percentage of revenue. And then what we're looking to do is still run the business at sort of close to 16% for the full year. But what that means is the second half will probably be closer to our -- the top end of our traditional 16% to 17% range.

Operator:

Please standby for the next question. The next question comes from David Grossman with Stifel. Your line is now open.

Arkadiy Dobkin:

I think we see programs which started to show up in conversations and based on this, we seek for moderate increase in demand. Especially like if you think about how much technology is potentially changing; as we speak, a lot of experimentation starting and we've seen a lot of conversation across practically all industry components. So that's how we'll get right now for the H2, but it would be moderate increase.

David Grossman:

Got it. And just to go back to your comments, I guess, 90 days ago when you -- I think you talked about client that shifted a workload to another vendor and you just really didn't get notification, I guess, until late last year. Have you seen any other major clients shift workloads to other vendors over the course of the last 90 days or any activity that would suggest that's still a possibility this year?

David Grossman:

So just to be clear, I can...

David Grossman:

All right. I think I got it. Thanks very much.

Margaret Nolan:

Thanks you. Jason, you started to get into this a little bit, but you've mentioned in past quarters that new client additions were kind of a big focus area for the sales force for 2023 after focusing more on delivery in 2022. Is that still an area that you're really focused on investing into for 2023? Or is that sort of changing alongside the demand environment?

Margaret Nolan:

Okay. And then can you comment on how much of a priority M&A is right now or share repurchase?

Arkadiy Dobkin:

And on M&A, I would -- as it -- it's pretty much same approach we have before. We're looking for things, which is longer term or strategic, and there is no any specific efforts to make situation better for the short term. So, it's all about longer term what would be happening in the [indiscernible]

Operator:

Please stand by for our next question. The next question comes from Ramsey El-Assal with Barclays. Your line is now open.

Arkadiy Dobkin:

So we do believe we have -- again, as you know, as we communicated, it's not a primary focus of our services lines. But at the same time, we have the skills we were building on [indiscernible] we have people who understand what to do in this area. And from technology skills in some situations we have definitely capabilities to apply this for cost-out engagements. So we put in our efforts around it. I don't think it's about specific risk [indiscernible]. It's still, even with this effort, it's relatively a small portion of what we do it in general, and there is no goal to repurpose company for this type of cases. So this is much more tactical effort for us those quarters, which we believe this type of trend will be before the market will come back. So we still invest in the very specific area for the future growth.

Jason Peterson:

I mean there are still a handful of large deals that are out there, they were expected to generate revenues in the second half that are significant mainframe to cloud type engagements that will have significant revenues. And I think we talked about this in the last conference call as well, which is that, most of the new work that we're seeing is generally smaller in size. There are relatively fewer clients who are kicking off large-scale transformation programs. At this time, they're looking for kind of near-term return on their investment. They're looking for modifications updates to existing platforms rather than sort of creating new platforms. And again, it's back to the, let's say, the instability in the macroeconomic view is long as people aren't certain whether the bottoms are going to be in Q3 or Q4 or Q1 of 2024, it just makes it more difficult for people to make investments in large-scale transformation programs.

Operator:

Please standby for the next question. The next question comes from Ashwin Shirvaikar with Citi. Your line is now open.

Jason Peterson:

Yes. Our focus continues to be on a return to stronger demand over some period of time as Ark talked about, whether that's two or three or four quarters. And to make sure that we're making investments in the business that will allow us to continue to advance our capabilities and be successful in the market. And at the same time, we are being very careful in terms of spending really addressing discretionary costs, controlling anything that's more variable in nature. And Ashwin, trying to drive the business at least to the do it around a 16% or maybe slightly below that range. So trying to maintain profitability throughout the year at 16%. And what you'll find then is that the second half will have stronger profitability just because there are characteristics that make gross margin stronger. And then with continued focus on SG&A efficiency, I expect that SG&A will go below 15%. So again, it will be a focus on the longer term, so we don't want to do anything that hinders ourselves to return to growth. And at the same time, we want to be careful about our discretionary spending.

Arkadiy Dobkin:

So this is what we do as we speak. At the same time -- okay, let's -- from the beginning. First of all, absolutely, clients understand that we have a different delivery kind of structure today. So that's what also I was talking this more about that we bringing new clients and existing clients coming to new geographies, which they didn't experience with the bank before. And we have pretty good progress because it's not already like one or two quarters. It's already almost like 18 months. And we have a new client, which is very typical clients as for engineering differentiation. And technology services, which come into new locations with us as well and appreciate the differentiation which we them because again, as I mentioned, the direction was taken even before war started for globalization of our services and investments were done in different regions for some time. First of all in India, but then very actively in Latin America as well. Other degrees for us like Central Western Asia, which is benefiting strongly from the Italian from our traditional historical locations as well. So, which is a little bit more predictable from this point of view for clients, too, because some projects move in there because of the talent well. So from this point of view, there is everybody that is direction. So from the portfolio of the business, definitely, we do more new saw experiencing with our staff. We also were growing over the years application management component as well, but it's still a relatively smaller portion of what we do. And it's addition user addition to transformational work, which we do it as soon as we do it big modernization, we have taken on increasing components of application management as well, but still focused on transformation program, as I mentioned. What we see right now is that the delayed and we do believe that while Q2 definitely was impacted I think some of that will start to be realizing in H2, and that's why we believe that it would be some growth there because there are too many programs and we don't believe that clients will be able to afford to delay the full load. They already delayed them for multiple quarters. So I think it's -- it will start with H2.

Operator:

Please standby for the next question. The next question comes from Jason Kupferberg with Bank of America. Your line is open.

Arkadiy Dobkin:

All right. I think we do believe that the news of the market was impacted a lot of decisions. And it's not necessarily impacting just banking or financial services, but most of the other industries put a lot of programs on hold. And you can see with company like this announcement of other technology-driven companies due to the last couple of months. So this is the sole part of the same very kind of sharp reaction of the situation. For transformational aspect of all the services which we provide. And as a reminder, that this is majority, big majority of what we do.

Jason Peterson:

Yes. So quickly, on the Life sciences and health care, it's largely a significant sort of ramp down. And specifically, they put a program. They effectively sort of ended a program kind of restarted some work, but not specific to that program, and there's been a very significant difference in the revenues we generated last year from that client from the revenues we expect we'll generate this year. And then, from a high tech standpoint, again, you've got the one client, but then you also just have a generalized kind of slowdown in spend and I think we all see in the news from the high-tech sector.

Tyler DuPont:

Okay. Thanks.

Arkadiy Dobkin:

Thank you again for joining us. And, yes, it's unusual period in our kind of life after a significant growth and now seeing a little bit different well, but again, our belief that technology will be derived in the future. We didn't talk too much about all this nice conversation about open AI, et cetera. But we do believe that a lot of engagement, digital ecosystem will have to be rebuilt very, very soon and it will be inclined for competition and those who would like to drive the future will come to us for help as well. So thank you, and talk to you in three months.

David Straube:

Thank you, operator, and good morning, everyone. By now you should have received your copy of the earnings release for the company's fourth quarter and full year 2022 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I'd like to remind those listening that some of our 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 measure and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Jason Peterson:

Thank you, Ark, and good morning, everyone. Before covering our Q4 results, I wanted to remind everyone that in addition to our customary non-GAAP adjustments, expenditures related to EPAM's humanitarian commitment to Ukraine, the exit of our Russian operations and costs associated with accelerated the employee relocations had been excluded from non-GAAP financial results. We have included additional disclosures specific to these and other related items in our Q4 earnings release. In the fourth quarter, EPAM delivered solid results. The company generated revenues of $1.23 billion, a year-over-year increase of 11.2% on a reported basis and 14.4% in constant currency terms, reflecting a negative foreign exchange impact of 320 basis points. Additionally, the reduction in Russian customer revenues resulting from our decision to exit the Russian market had a 440 basis point negative impact on revenue growth. Excluding Russia revenues, reported year-over-year revenue growth would have been 15.6% and constant currency growth would have been almost 19%. Beginning with our industry verticals, travel and consumer grew 16%, driven by strong growth in travel and hospitality with some moderation in retail and consumer goods, as customers exhibited incremental caution in the last few months of 2022. The ongoing exit of the Russian market also impacted the growth in this vertical. Absent the impact, growth would have been 19% or 25.4% in constant currency. Financial services grew 2.4% with very strong growth coming from asset management and insurance. Excluding our Russia customer revenues, growth would have been 17.8% and 20.8% in constant currency. Software and Hi-Tech grew 10.3% in the quarter. Growth in the quarter reflected a reduction in revenue from a customer that was previously in our top 20, in addition to slower generalized growth in customer revenues across the vertical. Life sciences and healthcare grew 11.5%. Growth in the quarter was partially impacted by the unexpected ramp-down of a large transformation program at a customer that was previously EPAM's top 10. We currently anticipate further ramp-downs in this customer spending in Q1 of 2023. Business Information and Media delivered 10.9% growth in the quarter. And finally, our emerging verticals delivered strong growth of 20.8%, driven by clients in manufacturing and automotive, as well as energy. From a geographic perspective, the Americas, our largest region, representing 59% of our Q4 revenues, grew 14.7% year-over-year or 15.6% in constant currency. EMEA, representing 37% of our Q4 revenues, grew 18% year-over-year, or 25.7% in constant currency. The accelerated growth in the quarter is partially the result of recent acquisitions. CEE, representing 1% of our Q4 revenues, contracted 71.8% year-over-year, or 72.6% in constant currency. Revenue in the quarter was impacted by our decision to exit the Russian market and the resulting ramp-down of services to Russian customers. And finally, APAC was flat year-over-year, but actually grew 3.8% in constant currency terms and now represents 2% of our revenues. In Q4, revenues from our top 20 clients grew 8% year-over-year, while revenues from clients outside our top 20 grew 13%. Moving down the income statement. Our GAAP gross margin for the quarter was 32.4% compared to 34.3% in Q4 of last year. Non-GAAP gross margin for the quarter was 34.1% compared to 35.9% for the same quarter last year. Gross margin in Q4 2022 reflects the negative impact of lower utilization and the positive impact of a more normalized variable compensation expense compared to Q4 2021. Gross margin in the quarter was also negatively impacted by the timing difference associated with EPAM's ongoing efforts to align bill rates based on employee relocations, most of which have been accomplished in 2022. GAAP SG&A was 16.6% of revenues compared to 17.2% in Q4 of last year. And non-GAAP SG&A came in at 14.8% of revenue compared to 15.6% in the same period last year. The SG&A results for Q4 reflected efficiencies made primarily in our facilities footprint and lower variable compensation compared to Q4 2021. GAAP income from operations was $170 million or 13.8% of revenue in the quarter, compared to $166 million or 15% of revenue in Q4 of last year. Non-GAAP income from operations was $220 million or 17.8% of revenue in the quarter compared to $206 million or 18.6% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 22.9% versus our Q4 guide of 21%, due primarily to lower excess tax benefits related to stock-based compensation, as well as the impact of the change in certain tax regulations. Our non-GAAP effective tax rate, which excludes excess tax benefits and includes the impact of the change in certain tax regulations was 23.5%. Diluted earnings per share on a GAAP basis was $2.61. Our non-GAAP diluted EPS was $2.93, reflecting a $0.17 increase and a 6.2% growth over the same quarter in 2021. In Q4, there were approximately 59.3 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q4 was $186 million compared to $285 million in the same quarter of 2021. Free cash flow was $165 million compared to free cash flow of $228 million in the same quarter last year. We ended the quarter with approximately $1.7 billion in cash and cash equivalents. At the end of Q4, DSO was 70 days and compares to 69 days in Q3, 2022, and 62 days in the same quarter last year. Looking ahead, we expect DSO will remain steady in 2023. Moving on to a few operational metrics for the quarter. We ended Q4 with more than 52,850 consultants, designers, engineers, trainers and architects. Production headcount growth was relatively flat compared to Q4 2021. Our total headcount for the quarter was more than 59,250 employees. Utilization was 73.6% compared to 76.8% in Q4 of last year and 73.5% in Q3 of 2022. Turning to our full year results for 2022. Revenues for the year were $4,825 million, producing 28.4% reported growth and 32.4% on a constant-currency basis when compared to 2021. During 2022, our acquisitions contributed approximately 5% to our growth. Excluding Russia revenues, reported year-over-year revenue growth would have been approximately 32.1%, and constant currency growth would have been approximately 36.3%. GAAP income from operations was $573 million, an increase of 5.7% year-over-year and represented 11.9% of revenue. Our non-GAAP income from operations was $818 million, an increase of 20.6% over the prior year and represented 17% of revenue. Our GAAP effective tax rate for the year was 17.3%, our non-GAAP effective tax rate was 23.4%. Diluted earnings per share on a GAAP basis was $7.09. Non-GAAP diluted EPS, which excludes adjustments for stock-based compensation, acquisition-related costs and other certain one-time items was $10.90, reflecting a 20.4% increase over fiscal 2021. In 2022, there were approximately 59.2 million weighted average diluted shares outstanding. And finally, cash flow from operations was $464 million compared to $572 million for 2021. And free cash flow was $382 million, reflecting a 59.3% adjusted net income conversion. Cash flow in 2022 reflected expenses associated with our ongoing humanitarian efforts in supporting our Ukrainian employees and certain cash impacts related to the exit of our Russian operations. We're very pleased with our 2020 results given the significant amount of disruption in transformation which we navigated throughout the year. Now let's turn to guidance. For 2023, we will resume providing a full year outlook, in addition to guidance for the next quarter. To date, our operations in Ukraine have not been materially impacted and our teams remain highly focused on maintaining uninterrupted production. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers, productivity levels at or somewhat lower than those achieved in 2022. As we mentioned during our Q3 earnings call, we began to see signs of moderation in demand, including delays in decision-making and additional scrutiny on program budgets early in Q4. At that time, this was isolated to a few customers in the retail and consumer goods industries. Since then we've seen further evidence of slower decision-making and caution around spending, including some program ramp-downs. For most clients, caution around budgets has only resulted in a slowdown in growth. But for some clients, we experienced actual reductions in spend in Q4, combined with continued cautious spending entering Q1. For two customers that were in our top 20 in 2022, we've seen ramp-downs in programs, which will negatively impact Q1 revenues. We expect neither of these customers to be in our top 20 in Q1, but we already see one of those customers once again requesting incremental project teams. At this time, we are expecting a lower level of revenue in Q1, producing a slower start to our 2023 fiscal year. Consistent with previous cycles, where we managed through a temporary softening in demand, we will continue to thoughtfully calibrate our expense levels, while focusing on the preservation of our talent in preparation for expected stronger 2023 second-half demand. In the first half of 2023, we expect headcount will continue to decline as a result of reduction in hiring, combined with normal levels of attrition. We are planning on returning growth and production in headcount in the second half of 2023. We expect utilization in the mid-70s in the first half of the year as demand and supply normalize with utilization in the second half of the year expected to return to our more traditional 77% to 79% range. As a reminder, the exit of the Russian market and the reduction in Russia customer revenues produces a tougher year-over-year revenue comparison, primarily in the first half of 2023. Starting with our full year outlook. Revenue growth will be at least 9% on both a reported and constant currency basis. The impact of foreign exchange is expected to be negligible on a full-year basis. Additionally, at this time, there is no inorganic revenue contribution for 2023. So our guide includes organic revenue growth only. Excluding the impact of the exit of the Russian market, reported revenue growth is expected to be approximately 11%. We expect first half revenue growth to be in the single digits, returning to double-digit revenue growth in the second half of the year. In Q4 2023, we expect revenue growth in the high teens. We expect GAAP income from operations to be in the range of 11.5% to 12.5% 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 21%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation will be 23%. For earnings per share, we expect the GAAP-diluted EPS will be in the range of $8.64 to $8.84 for the full year and non-GAAP diluted EPS will be in the range of $11.15 to $11.35 for the full year. We expect a weighted average share count of 59.6 million fully diluted shares outstanding. For Q1 of 2023, we expect revenues to be in the range of $1.200 billion to $1.210 billion, producing a year-over-year growth rate of approximately 3%. Our guidance reflects an unfavorable FX impact of 2% and the year-over-year growth rate on a constant currency basis is expected to be approximately 5%. We expect negligible contribution to revenue growth from acquisitions. Adjusted for the impact of our decision to exit the Russian market, constant currency revenue growth would be approximately 8%. For the first quarter, we expect GAAP income from operations to be in the range of 9.5% to 10.5% and non-GAAP income from operations to be in the range of 14% to 15%. Income from operations reflects the impact of the resetting of social security caps and lower utilization, which we expect to improve throughout the year. We expect our GAAP effective tax rate to be approximately 18% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.66 to $1.74 for the quarter and non-GAAP diluted EPS to be in the range of $2.30 to $2.38 for the quarter. We expect a weighted average share count of 59.5 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements in 2023. Stock based compensation expenses is expected to be approximately $152 million with $35 million in Q1, $36 million in Q2 and $81 million in the remaining quarters. Amortization of intangibles is expected to be approximately $22 million for the year, evenly spread across each quarter. The impact of foreign exchange is expected to be nominal for the year. Tax-effective non-GAAP adjustments is expected to be around $44 million for the year, with $12 million in Q1, $10 million in Q2 and $11 million in each remaining quarter. And finally, we expect excess tax benefits to be around $23 million for the full year with approximately $8 million in Q1, $6 million in Q2 and $9 million in the remaining quarters. Related to the support of our Ukrainian employees, through December 31, 2022, EPAM has spent approximately $45 million as part of the company's $100 million humanitarian commitment to our Ukrainian employees and their families. We expect further humanitarian expenditures will be made during 2023. Lastly, our Board of Directors recently approved a share repurchase program, authorizing the company to purchase up to $500 million of the company's common stock over the next 24 months. This program will allow the company to substantially offset dilution associated with the issuance of employee equity. We expect to continue to generate solid free cash flows in 2023 and even stronger free cash flows in 2024. With our significant cash position and our confidence in EPAM's ability to generate strong free cash flows, we believe the company can both continue to pursue significant strategic acquisitions while evolving our capital allocation strategy to include a share buyback program. Again, my thanks to all the EPAMers who made 2022 a successful year and will help us drive growth throughout 2023. Operator, let's open the call for questions.

Ramsey El-Assal:

Hi, thanks so much for taking my question this morning. I wanted to ask about Ark's comments on some clients preemptively making the decision to move some workloads sort of off of EPAM and that sort of playing out as we speak. I guess the question is, is that dynamic already largely complete, or is that something that's sort of ongoing into -- deeper into the year? And then maybe you could speak to how do you -- if you can and how you can go about winning those workloads back?

Ramsey El-Assal:

Okay, thank you. And one quick follow-up from me. Maybe Jason, could you comment on the margin cadence this year? Should we expect margins to sort of step up along with revenue in somewhat of a straight line as we move deeper into the year and all the way to the fourth quarter, or is there any other color on just the cadence in margins that you might need to share?

Ramsey El-Assal:

Very helpful. Thanks so much.

Bryan Bergin:

Hi, thank you. I wanted to ask on the outlook here. So as you built the 1Q and the 2023 growth outlook, is that a baseline from 4Q and really the December client activity you saw, or is that more sort of a real-time view of client contract into the last few weeks? I'm trying to understand the underlying assumptions there in that full-year guide. And maybe whether you have a different level of visibility to the full year target versus what you would normally have at this point in the year, just given all the moving parts.

Arkadiy Dobkin:

Yeah, I would say, our assumptions -- because [indiscernible] you've got a general economic slowdown [indiscernible] And given the very specific trends in the case of EPAM, it's also in some way a reflection of this slowdown as well, because clients got comparably less work out, as they also got more optionality vis-a-vis others as well. So our assumptions right now, as we mentioned that probably this difficult situation would be for several quarters, and then demand will start to pick up and then we will measure this approximately in the terms which we consider pre-pandemic and in this situation [indiscernible] growth as we do. And with this, we think that again high-teens should be happen closer to the end of the year and potentially we will go to normal somewhere in the beginning of next year.

Jason Peterson:

Yeah. So I think the first thing is that, it's a little bit of a tale of two halves, where the first half is definitely lower profitability due to the unexpected lower level of demand. And so, you do just have lower utilization in the first half. And then as we said, we'll make certain that [indiscernible] appropriately matching cost to demand in the second half. Then I think the other piece, just on a year-over-year basis is, I do think that -- the pricing power that I think probably all of us saw over the last couple of years is going to be not quite as pronounced in 2023. And so price is going to be a little bit harder to come by. And at the same time, you have an awful lot of cost inflation around the world that is driving relatively high wage inflation. And so, I do think this year is going to be a different year where I think we've benefited from obviously strong price and, let's say, appropriate sort of wage inflation. I think this year, you're going to see still relatively high wage inflation and a little less opportunity on the price side. Structurally, Bryan, we've talked a lot about [indiscernible] into these new geographies, that over time we will sort of scale and optimize and that will improve profitability. I think, with the slowdown in demand, it's a little bit hard to make some of those changes to bring in more junior staff to improve off the relations that improve scale. And so I do think that as you move throughout the year, particularly as you enter 2024, there's greater opportunities, and generally I feel comfortable on our ability to continue to improve our profitability when we enter 2024.

Operator:

Thank you. And our next question comes from Maggie Nolan with William Blair. Your line is now open.

Jason Peterson:

What we are doing to revive the pipeline.

Maggie Nolan:

Okay. And then [Multiple Speakers]

Maggie Nolan:

Okay. And then you mentioned a top 10 customer -- top 20 customer that was slowing. Outside of those two, can you talk about the rest of the top client portfolio, how you see growth materializing with that base, or is there a level of caution there into 2023? And then any patterns emerging amongst those top customers in terms of where they'd like you to deliver from a geographic perspective?

Maggie Nolan:

Thank you.

James Faucette:

Great. Thank you so much. I wanted to dig in just quickly a little bit on some of the comments Ark you and Jason have made around the relationships with your customers and the like. I'm wondering what levers right now you're looking to pull or can pull to reengage and maybe rebuild some of the relationships, and more specifically, the work streams? And should we expect any changes to pricing or delivery strategy in response to kind of those client dynamics?

Jason Peterson:

Yes. And I'll just comment on the pricing. And so, as I said, the environment is probably a little less -- there's little less opportunity for price improvement. And clearly, we're going to go off and make certain that we're able to sort of win opportunities, but at the same time, we're still working on pricing and we're certainly going to make certain that we don't do anything that would impair profitability over the long term.

Jason Peterson:

Sure. So similar to the comments that Ark made around where our priorities were in 2022, that would also be consistent for our acquisition activity. We had other priorities. And so the aggressive pursuit of acquisitions was somewhat de-prioritized. At the same time, we have continued to be active through due-diligence. Sometimes we've sort of disqualified potential opportunities. And so, what I said in my prepared script really is consistent with, we believe that we can do pretty active acquisitions and also pursue a share buyback. And so, we do expect to be active throughout 2023, certainly a lot more active than we were in 2022. And I would say that generally the same sort of focus. So things that are probably somewhat more sort of consulting kind of oriented, maybe things that have a platform flavor to them. And we're tending to see a fair bit of growth in Continental Europe. And so, we'll clearly continue to look for opportunities to drive growth in that region as well.

Operator:

Thank you. And our next question comes from the line of Surinder Thind with Jefferies. Your line is now open.

Jason Peterson:

I'll start at the front end of that, because I was the one who introduced the green shoot language, and that was in response to an earlier question. And so, David and I do sort of our own channel checks internally with the business units. And so that commentary, Surinder, was based on a number of conversations that we've had with business unit heads. And so you see, even in consumer goods, hopefully, retail will also return with a little bit of strength in the retail sector. So we are seeing clients begin to come back and look for work. I specifically said in my prepared remarks that even the client who sort of had to ramp down between Q3 and Q4 is beginning to ask for new teams. And so, there's just a whole series of kind of anecdotes, or more than one or two. And then maybe Ark, you want to talk about what we're seeing in terms of larger deal opportunities and RFPs and that sort of thing.

Surinder Thind:

That's helpful. And as a follow-up here, can we maybe talk about the delivery footprint cost? Obviously, your global deliveries changed over the past year, the average cost of delivery has gone up. How should we think about that from a structural perspective? It seems like some of the competitive edge that you may be had in the past from maybe lower-cost talent in Eastern Europe, has that gone at this point, or how should we think about that from a competitive standpoint, the cost of your new delivery footprint and what clients think of it?

Surinder Thind:

Thank you.

David Grossman:

Thank you. Good morning. I'm wondering if you could -- looking at the 2023 guide, perhaps you could break it down in terms of the headwinds that you're experiencing from geographic diversification concerns among your clients' demand and lower benefit from rates.

David Grossman:

Yeah, Jason, revenue growth, just the revenue growth headwind from each of those three things, if you could break it down.

David Grossman:

So on a year-over-year basis, the revenue growth headwind. I think we identified kind of three buckets, right? One was some clients concerns earlier in 2022 about geographic diversification, who initiated a process for that. There is a demand issue on a year-over-year basis, as result of slowing economic growth. And then third, the environment is creating less opportunity to get rates than what you would typically get. So I'm just wondering if you could help us understand the size of the headwind of each of those three dynamics on a year-over-year basis.

Jason Peterson:

Yeah, a little bit complicated, David, because we still have probably some benefit in rate from the rate changes that we did as people moved geographies in the second half of 2022. And then, of course, that shows up in a full-year impact in 2023. But we think we'll see less, what I would call, traditional kind of pure rate in 2023. We moved into a lot of new geographies, as Ark talked about, Central and West Asia, which we think is an attractive location longer term. We probably still need to make certain that our clients are comfortable with the region in the same way that decades ago we had to get clients comfortable with Belarus. And so this is probably just some -- let's say, some timing lag [indiscernible] very comfortable with growing there.

Jason Peterson:

And then I just think I'll just sort of close David with, these are things that, obviously, we're working to address throughout 2023, and as Ark said, already the ability to sort of deliver from these new geographies, we feel that clients are comfortable -- clearly comfortable with our ability to generate -- to deliver from geographies that have been impacted in Eastern Europe. And then, as Ark talked about, we continue to sort of grow geographies that offer our clients very cost-competitive solutions. And, of course, we've got the high level of talent in geographies, might be a little bit more expensive, but are appropriate for specific clients need.

Arkadiy Dobkin:

Yeah. So it will be a question to go in details. So, yes, as I mentioned, 2022 was a big growth in India and Latin America. And so I'll start actually in those locations. It was a significant growth in 2021 as well. As you know, 2021 was a reasonably good year. And what -- so it was already proved in 2021. So it was like -- India was growing like -- I don't remember, 70%, 80%. And Latin America, probably in the same terms. Now it's 30%, 40% in India and even more in Latin America as well. So these regions, we are pretty comfortable. And yes, it's different from traditional, but we bring in there a lot of experience or expertise, how to build and grow within our status. And I think it's working. So this is one bucket. Another bucket, it's a number of locations where we have simultaneously bring in local talent and bring in experienced talent from other locations. And we started to -- knew it, as already mentioned previously, not only after the war started. It started actually in 2021. And we also feel comfortable that this has been in the quality results in line with what we experienced in kind of traditional EPAM locations as well. So now, definitely second part of 2022 was a very different trend than before. That's why when you were asking about practices, how are we hiring, what's the speed, how the Group is working? I think we are very comfortable that we will be able to speed it up, but we didn't need to speed it up. And I think we are much more diversified, and we have many more kind of tools right now, how to grow as soon as the growth will be there, demanded as before.

Operator:

Thank you. And our last question comes from the line of Jason Kupferberg with Bank of America. Your line is now open.

Jason Peterson:

Yeah. I think what we clearly saw in the month of January was slower demand, and specifically, obviously, further ramp-downs with a couple of clients that we had talked about in our prepared script. And so, just probably the entry point, Q1 2023, is kind of what changed, and in a couple of cases, it was specific to a few large customers. At the same time, we've stripped those two customers out. The dialog with our BUs is they sort of drive revenues and carefully evaluate their pipelines. But actually, there were some positive tonalities associated with it. And so the guide really does incorporate kind of the lower starting point, but obviously, four quarters is -- it's 12 months. So it's hard to predict exactly where you are going to end up in Q4, but it does already suggest that we're beginning to see an improvement in potential demand relative to that we saw in November, December and January and that's kind of what gives us the confidence in the guide. But at the same time, of course, we want to make certain that we'll be able to achieve the revenue guidance for the full year. So hopefully that answers that question.

Arkadiy Dobkin:

Thank you as always for attending today's call. As you know, any questions, David is available to help. And talk to you in three months. Thank you.

David Straube:

Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company’s third quarter 2022 results. If you have not, a copy is available on epam.com in the Investors section. With me on today’s call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I’d 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 comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. And now let’s turn the call over to Ark.

Jason Peterson:

Thank you, Ark, and good morning, everyone. Before covering our Q3 results, I wanted to remind everyone that in addition to our customary non-GAAP adjustments, expenditures-related to EPAM's humanitarian commitment to Ukraine, the exit of our Russian operations and costs associated with accelerated employee relocations have been excluded from non-GAAP financial results. We've included additional disclosures specific to these and other related items in our Q3 earnings release. In the third quarter EPAM delivered another set of strong results across both top and bottom line, in addition to strong cash flow generation. During Q3, EPAM generated revenues of $1.23 billion, a year-over-year increase of 24.1% on a reported basis and 29.8% in constant currency terms, reflecting a negative foreign exchange impact of 570 basis points. Additionally, the reduction in Russian customer revenues resulting from our decision to exit the market had a 470 basis point negative impact on revenue growth. Adjusting for the exit of our Russian operations, reported revenue growth would have been approximately 29%. Looking at the performance of our industry verticals in geographic regions in the quarter, growth was negatively impacted by the ongoing exit of our Russia operations and the effective foreign exchange on our U.S. dollar reported results were helpful, I'll provide an adjusted year-over-year comparison. Beginning with our industry verticals, travel and consumer grew 41.9%, driven by strong organic growth, primarily from our retail customers, as well as revenue contributions from recent acquisitions. Life Sciences and Healthcare grew 35% with strong growth coming from the healthcare industry in addition to growth in Life Sciences. Financial Services grew 10.4% with growth coming from asset management, banking and to a lesser extent in insurance. Excluding our Russia customers, growth would have been 25.4% and 29.9% in constant currency. Business information and media delivered 20.8% growth in the quarter, driven primarily by customers in the business information industry. Software and high-tech grew 17.8% in the quarter, and finally, our emerging verticals delivered 26.6% growth, driven by clients in energy, manufacturing and automotive. Excluding our Russia customers, growth was 29.5% or 39.4% in constant currency. From a geographic perspective, America is our largest region representing 61% of our Q3 revenues grew 26.3% year-over-year or 27.7% in constant currency. EMEA, representing 36% of our Q3 revenues grew 35.3% year-over-year or 50.3% in constant currency. EMEA performance was driven by strong organic growth combined with an incremental contribution from recent acquisitions. CEE representing 1% of our Q3 revenues contracted 77.2% year-over-year or 80.2% in constant currency. Revenue in the quarter was impacted by our decision to exit Russia and the resulting ramp down of services to Russia customers. And finally, APAC grew 10.5% year-over-year or 15.4% in constant currency terms and now represents 2% of our revenues. In Q3, revenues from our top 20 clients grew 22% year-over-year, while revenues from clients outside our top 20 grew 25%. Moving down the income statement, our GAAP gross margin for the quarter was 32.6%, compared to 33.9% in Q3 of last year. Non-GAAP gross margin for the quarter was 34.4%, compared to 35.1% for the same quarter last year. Compared to Q3 2021, gross margin in Q3 of 2022 reflects the negative impact of lower utilization, as well as the benefit from foreign exchange and the positive impact of a more normalized expense related to variable compensation. In Q3 2021, expense related to variable compensation was unusually high, based on the strong bottom line and extremely strong top line performance during that year. Q3 2022 was also negatively impacted by the timing difference associated with EPAM's ongoing efforts to align bill rates based on employee relocations. However, we have made better progress adjusting rates than originally anticipated. As a result, the negative impact on profitability was more limited than originally expected. GAAP SG&A was 16.1% of revenue, compared to 17.1% in Q3 of last year and non-GAAP SG&A came in at 14.1% of revenue, compared to 15.3% in the same period last year. SG&A performance in the quarter reflected a lower level of cost related to both variable compensation and facilities and also includes a positive benefit of foreign exchange. GAAP income from operations was $180 million or 14.7% of revenue in the quarter, compared to $144 million or 14.6% of revenue in Q3 of last year. Non-GAAP income from operations was $232 million or 18.9% of revenue in the quarter, compared to $180 million or 18.2% of revenue in Q3 of last year. Q3 non-GAAP income from operations reflects a lower level of variable compensation and a positive impact from foreign exchange, offset by a lower level of utilization. Our GAAP effective tax rate for the quarter was 18.4%, primarily driven by excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits was 23.1%. Diluted earnings per share on a GAAP basis was $2.63, reflecting a $0.68 or 34.9% increase year-over-year. GAAP EPS includes the impact of the Ukrainian humanitarian expenditures, expenses related to accelerated staff relocation and costs related to the planned exit of our Russian operations. Our non-GAAP diluted EPS was $3.10, reflecting a $0.68 increase or 28.1% growth over the same quarter in 2021. In Q3, there were approximately $59.4 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $252 million, compared to $206 million in the same quarter of 2021. Free cash flow was $234 million, compared to free cash flow of $185 million in the same quarter last year. We ended the quarter with approximately $1.5 billion in cash and cash equivalents. At the end of Q3, DSO was 69-days and compares to 71-days for Q2 2022 and 70-days for the same quarter last year. In Q4, we traditionally experienced a further improvement in DSO and expect a similar result this year. Moving on to few operational metrics we ended the quarter with more than 53,900 consultants, designers and engineers, a year-over-year increase of 14.5%. Our total headcount for Q3 was more than 60,250 employees, compared to Q2, we saw a net decrease of approximately 1,000 thousand headcount. The net decrease in headcount is a result of the reduction in Russia based headcount combined with a lower level of hiring across the organization, due to better than expected productivity in Ukraine and with a focus on moving utilization towards higher levels. Utilization was 73.5%, compared to 77.1% in Q3 of last year and 78% in Q2 2022. Utilization continues to be impacted by the war in Ukraine. Now let's turn to our business outlook. As we've done in previous quarters, let me provide some context that is informing our guidance for the fourth quarter. We expect a solid demand environment, including demand for programs, helping clients drive additional revenue, modernization and optimization. In a few cases in the retail and consumer space, we are seeing signs of moderation in demand due to delays in decision-making or additional screwed neon program budgets. As certain customers become more cautious regarding shifts -- shifting demand in their end markets. As a reminder, the exit of our Russian operations and the reduction in Russia customer revenues produces a tougher year-over-year revenue comparison, particularly in Q4, which has generally been a seasonally strong quarter in Russia. To-date, our operations in Ukraine have not been materially impacted by the recent escalation of the tax, and our teams remain highly focused on maintaining uninterrupted production. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers and productivity levels at or somewhat lower than those achieved in Q3 and consistent with our experience in the month of October. Through September 30, EPAM has spent more than $39 million as part of the company's $100 million humanitarian commitment to our Ukranian employs and the families. We expect further humanitarian expenditures will be made in Q4 and during 2023. Now moving to our Q4 2022 outlook, we expect revenues to be in the range of $1.220 billion to $1.230 billion, producing a year-over-year growth rate of approximately 11% on a reported basis and 15% in constant currency terms, both at the midpoint of the range. Included in these growth rates is approximately 100 basis points of revenue attributed from acquisitions closed over the last 12-months. Additionally, the ramp down of Russian customer revenues due to our decision to exit this market has a negative impact reducing our expected revenue growth rate by approximately 500 basis points. For the fourth quarter, we expect GAAP income from operations to be in the range of 12% to 13% and non-GAAP income from operations to be in the range of 16% to 17%. We expect our GAAP effective tax rate to be approximately 21% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation to be approximately 23%. Earnings per share, we expect GAAP diluted EPS to be in the range of $2.02 to $2.10 for the quarter. And non-GAAP diluted EPS to be in the range of $2.62 to $2.70 for the quarter. We expect a weighted average share count of $59.6 million diluted shares outstanding. Finally, a few key assumptions have supported our GAAP to non-GAAP measurements in the fourth quarter. Stock-based compensation expense is expected to be approximately $33 million. Amortization of intangible sales is expected to be approximately $5.7 million. The impact of foreign exchange is expected to be negligible. Tax effective non-GAAP adjustments is expected to be around $9.6 million. And finally, we expect excess tax benefits to be around $4.3 million in the quarter. In addition to these customary GAAP to non-GAAP adjustments inconsistent with the prior quarters in 2022, we expect to have ongoing non-GAAP adjustments Q4, resulting from Russia's invasion of Ukraine. Please see our Q3 earnings release for a detailed reconciliation of our GAAP to non-GAAP guidance. Our fourth quarter outlook reflects a solid demand environment combined with improving operating performance allowing EPAM to return to its traditional 16% to 17% adjusted IFO range sooner than anticipated. Although we still face ongoing challenges, this is a significant achievement given the amount of descriptions that company is managing through as a result of the war in Ukraine. We will continue to closely manage the operations of EPAM, while remaining a tenant to any changes in the demand environment. Lastly, I'd like to thank our employees for their continued dedication and focus on our customers. Operator, let's open the call up for questions.

Bryan Bergin:

Hi, guys. Good morning. Thank you, I hope your colleagues remain safe here. Just first, I was hoping you could just dig into more on the detail on how you're forecasting that 4Q growth. Just as we consider a 30% adjusted rate of growth on a constant currency organic basis this past quarter and we try to bridge that to the implied level in 4Q. Can you just talk about some of the puts and takes you factor there? Is it really just a combo of lower utilization and some macro uncertainty on demand?

Bryan Bergin:

Okay, okay. And then on the delivery footprint on understanding how the Russia exit this quarter that really impacted that workforce level? Can you just comment on your comfort levels ramping in these other regions? And are there any notable changes in the delivery mix plan that you expect to exit this year at?

Bryan Bergin:

All right. Thank you, guys.

Operator:

Thank you. Our next question comes from the line of David Grossman with Stifel. Your line is now open.

Jason Peterson:

Yes, there's a couple of different ways to look at this. From a pricing standpoint associated with the realignment of pricing for the relocation of employees, we did better than we expected. So we had expected that to have a more negative impact on profitability in Q3 than it actually did. However, on a year-over-year basis, that wouldn't really show up as a benefit. What we saw was a couple of things, we are getting some benefit from foreign exchange, so foreign exchange is obviously having a negative impact on revenue growth rate. But we have a number of countries in which we deliver from where the currencies obviously have devalued more substantially than the devaluation of the euro or the pound. And so, that's had a somewhat positive impact on profitability on a year-over-year basis. Then the other thing, which I tried to call out in the script is that we had an enormously successful year last year relative to expectations, which drove a higher variable compensation cost. And this year where we're effectively, sort of, booking a bonus, if you will, at 100%. It's lower than it would have been last year. And so, last year, I guess, you could say we would have been even more profitable. And this year, we're sort of booking at a more consistent level of variable compensation based on our performance. So I'm not certain if that gets to the part of it, but foreign exchange would definitely be one of the things that's a positive.

Jason Peterson:

Yes, so I think that if I remind, I said, we get -- we expect to get back towards, right, which is -- and right now, I feel actually that the company has done a phenomenal job with not only the profitability in Q3, but also the guide getting back to the 16% to 17% in Q4. And part of that has to do with all the work we've done on the geographic transformation and the realignment of rates. But I think it's too early right now to talk about what profitability could be in 2023, just because there's still a lot of moving pieces with what's going on in -- with the war and some other things. But I definitely am encouraged by the fact that we've generated such a strong level of profitability in Q3, and again our confidence in being able to guide to 16% to 17% in Q4.

Arkadiy Dobkin:

David, your wishing and reading exactly what we do. And in general, I think, I don't know if you use noise as kind of qualifier, but there are enough messagings on the market that many industries are very careful right now and seems like, of course, saving priority becoming number one versus transformation. That's at least what we've seen. It's not necessarily seen in the market from specific actions across the industries. But I think it would be fair to assume that retail probably usually reacting much faster, sometimes much faster recoveries as well, that's what we saw in 2021. But some other you’ll fall and I think it wouldn't be surprised. So I think everybody much more careful, obviously, in compared to just several quarters ago.

Operator:

Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Your line is now open.

Arkadiy Dobkin:

So I think in terms of plans, we kind of shared pretty detailed plans during our Investor Day. I think, we're very much on target with this plan, at the same time, as you understand, each month, not even talking about quarter, but sometimes each week making some adjustments to this. So at this point, we do believe that we do in a recent possible based on the real-time information happening and at large our plans still stays the same. So we're going to become probably the most balanced from delivery perspective company in our sectors. And we’re very strongly looking how we grow it and going to develop talent market across new for us [indiscernible]. So it's all in plan, and that's very much moving forward. So what else we will be necessary -- we'll be doing if different type of scenario will be developed, we have answers for this, I don't think we will be saying in all details, but we have plans for this. But I guess, right now, we're going practically with the same plan, which we shared and we're very much on target for this, which we shared on Investor's Day.

Arkadiy Dobkin:

Yes. So the question was, you will feel comfortable that we will be able to find the right talent in new locations. Then the short answer, yes. Right now, we even more comfortable that we were a couple of quarters ago, because now we have much more experience in terms of how to do it as we understand how to reapply the experience, which we developed during our growth in our kind of comfortable zone in Eastern Europe, that is very much applicable to new locations as well.

Arkadiy Dobkin:

I would characterize this like if two, three quarters ago, the growth and so as always, I think, collectively, whatever people mean by digital transformation and growth sense of this. It was absolutely number one priority. I think, right now, it's very much balanced with cost savings and what will be tomorrow, I think, it's visible. So it's pretty balanced from our point of view. Digital transformation is still there and its still one of the two priorities, but it's now one of the two.

Arkadiy Dobkin:

Thank you.

Ashwin Shirvaikar:

Thank you. And good quarter, guys. I wanted to just kind of take a peek at the planning assumptions as you're going through that process for next year? And as we think in terms of granular modeling. Again, not asking for guidance, but how are you thinking of the setup for next year in terms of the underlying demand for digital transformation? Obviously, Q1 is a tough comp for things like that. Could you just walk through your thought process as you do your own budgeting?

Ashwin Shirvaikar:

Understood. Got it and thank you for that. The other question I had was, obviously, as we see everybody else's results coming through, a lot of weakness in the high-tech vertical? How does that affect, sort of, your thinking in terms of -- thinking or expectations in terms of your own client base and the work you're doing? And are you beginning to see any specific impact in that or other verticals?

Jason Peterson:

So we still see spending, we still see investment on the part of clients. Just the rate of growth appears to be somewhat slower and some of the decision-making is a little bit slower.

Ashwin Shirvaikar:

Thank you. Appreciate that. Thanks.

Ramsey El-Assal:

Thank you for taking my question this morning. I had a question on the pricing environment. And it seems like there's some puts and takes. On the one hand, you have a lot of inflation, which might give you some air cover to pass pricing through? On the other hand, you're talking about some softening macro, maybe some caution on the side of your clients. Can you talk about the puts and takes in pricing and whether you're seeing any changes in the environment?

Ramsey El-Assal:

Okay, great. And one last one for me, a question on M&A and similar overlay with the sort of macro cycle. In past cycles, do you guys pull back on deal activity as the macro environment gets a little choppier? Or instead is it the opposite where you maybe see some opportunities that weren't around when times were better? How do you think about M&A in that context?

Ramsey El-Assal:

Got it. All right. Thanks so much. Appreciate it.

Operator:

Thank you. Our next question comes from the line of James Faucette with Morgan Stanley. Your line is now open.

Jason Peterson:

Yes, you're right that we would have still generated significant revenues from Russia, particularly in Q1 of 2022. So that will be a tougher comp. We still think foreign exchange is going to have some headwind associated with it. And then, I think there's -- right now, we continue to sort of evaluate the demand environment as we've talked about. But I just think the other thing is that, if you look at our headcount additions over the last couple of quarters is that, oftentimes you need to have, sort of, ongoing sequential growth to them continue to sort of produce strong year-over-year growth two or three quarters out. And so, we feel very comfortable with our ability to add headcount over time. And again, as Ark talked about, we feel that we've got increasing, sort of, operational experience in the newer geographies. And right now, I just think as I kind of look at the numbers and the likely headcount adds this quarter, it just appears that your trajectory would, sort of, give you the opportunity for a greater than 20% growth in the second half rather than in the first half. And I think, you guys probably do the same types of math that we do, and you likely could see that as well.

Jason Peterson:

Yes, it would be mix. So we're definitely running with lower utilization and what I'll call the impacted sort of geographies. But there's also some opportunity for us to tighten up utilization in some of the newer geographies that we've expanded into. And so, again, the goal in Q4 would be somewhat improved utilization, but still maybe a little below our target. And then, as we enter the first half of next year is to make certain that we're continuing to focus on improved utilization.

James Faucette:

That's great. Thanks, Ark. Thanks, Jason.

Operator:

Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Your line is now open.

Arkadiy Dobkin:

Surinder, basically question -- how well the making happening between what locations, clients leading to consider and where we're growing right now from talent point of view, correct?

Arkadiy Dobkin:

I think that's a very dynamic parameter. And I think clients -- because the risk is a very dynamic parameter. And in general clients comfortable with it, but as soon as the risk will elevate then this distribution will be happening, that’s the main challenge that's what we're living through. And at this specific point, I think there is a kind of status quo is some concerns and what will be one month from now or two months from now, it's a little bit different things. Again, that's exactly the challenge on hand. But another side, we have multiple new locations and we have, as we mentioned a significant number of EPAMers, who move from one location to another and came to new locations, which kind of seems to accelerate the EPAM knowledge and quality standards and growing new locations. And also make clients comfortable in these new locations, because some good concentration of people they already know moved there. So from this we’re managing the whole as a rebalancing of the talent. But right now, we have 30%, and it's people with pretty good level of utilization right now.

Arkadiy Dobkin:

I think, our typical answer at this stage, it's too early to say, because it's kind of not even middle of Q4 and this is very, very true in any very normal year. With a kind of not what is a normal year, probably when I look into our revenue trends or the results of normal year the last time we saw probably at the end of 2019, which was a long time before COVID and before, then it was like being slowdown and a huge acceleration. Then in our case was started, but then the whole general economic trend like going different than we saw just six months ago probably, okay. So that's why like you're asking question, but even in normal year, we're not commenting on this. And this specific year, I don't think we can say like, it is very dynamic.

Operator:

Thank you. Our last question comes from the line of Jamie Friedman with Susquehanna. Your line is now open.

Arkadiy Dobkin:

I think we're talking about EPAM continuing development as a brand. It practically didn't exist three years ago. Now that's in -- may which started to be recognized on the market and consultant field. So -- and with everything, specifically acquisition during 2019 or sorry, 2021, during the 2021, end of 2021, we were increasing this. And to support the new type of engagements, which we anticipate in and which we are doing already. So we actively were hiring in the market, so it's not specifically why now, it's just continuation of what's happening.

Arkadiy Dobkin:

So it's -- probably it is -- maybe sounds a little bit strange, especially taken exactly in account what's going on right now. But at the same time, while this is a very, very special situation and we will understand it, so all our experience from the past towards it is going to ramp in one quarter and in three quarters. On top of this, there is a potential economic slowdown I'm initially talking about it. If you think about our numbers during the last several quarters, based on economic environment, based on our competitors, if war wouldn't happen, these numbers might be consider it even normal. Not very much different from what others are showing, that I'm just bringing all this colors just to confirm that we're definitely looking into what's going to be with the next couple of quarters, so six months. But we're definitely looking at what we'll be here in two years or three years. And from this point of view $10 billion looks like a very realistic goal for us, still aspirational but realistic. Three years ago, probably $10 billion would be sounded very much aspirational. Right now, it's just a pragmatic target for us, that's all.

Operator:

Thank you. I’d now like to hand the conference back over to Arkadiy Dobkin for closing remarks.

Operator:

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Arkadiy Dobkin:

Thank you, David. Good morning, everyone. Thank you for joining us today. I want to start by reminding you of our earnings call three months ago and then our Investors and Analyst Day on May 19, when we shared our approach and higher-level plan for the following months. At that time, we said that we didn't expect the war to end quickly. And as a result, our plans for adapting the company were developing based on a series of overlapping efforts or phases. Today, we are still very much in the war time, and we don't fully see a definitive conclusion for it in the near term. That means that, as we expected, we are continually adjusting our operations, our delivery organization and ways of working to what is our new normal now. So let's go quickly by the progress we are making across those phases. The first phase is the focus of the safety of our employees and stabilization of our operations in Ukraine. At this time, all our employees are in safe locations, either within the country or in neighboring countries. And our teams continue to work supporting our customers at levels of productivity very much in line with what we experienced before the war or during war. In addition, in this new normal, we continue to support our Ukrainian employees and their families as well as the Ukrainian people. We are providing various forms of humanitarian relief with EPAM Ukraine Assistance Fund and our $100 million assistance commitment, which we have now done in March. I would just add that we are constantly moved by the resilience and morale of our Ukrainian employees, and we want to take one more opportunity to thank them for their incredible commitment and level of purpose they demonstrate. The second phase of our framework is acceleration of our global digitization efforts and continued growth of our diverse capabilities. And yes, this includes first of all geographical diversification of our delivery platform. But it also includes many other critical aspects of our operations and several key investments efforts, which ensures the quality of delivery while we are expanded rapidly across multiple tiers. We are located in already digital delivery locations in India, Latin America and Central Asia, as well as establishing several newly-created delivery hubs and expected many existing sites across Central and Eastern Europe and Western and Central Asia as well. This is also supported by the active redeployment of many of our current employees. We decided to explore opportunities outside of their home countries and simultaneously establishing a strong EPAM cultural foundation in those locations to further develop the local talent market and fastly grow its EPAM hubs. Looking at our global footprint. EPAM now serves customers from more than 50 countries around the world, which means we just doubled our country count in the last three years. And as a result, replenished our delivery platform across now four major geographies, which includes Central and Eastern Europe, India, Western and Central Asia and Latin America. Today's reach also didn't exist for us just a few years back. Today, with those efforts and accelerated growth outside of impacted regions, we have reduced our delivery capacity there from roughly 60% in February of 2022 to 40% now. And we expect to reach a level of close to 30% in to the second half of 2022. Part of this process, we are well underway in our commitment of our exiting our operations in Russia, where we moved quickly and anticipate completing the process shortly. We are still working through a number of regulatory requirements in the country, which means that the timing of full transition is still difficult to predict precisely. With that said, we can share that our local footprint went from over 9,000 people at the end of Q1 to just under 1,000 today. With that, I would like to say a big thank you to many people within EPAM global delivery and talent management and the financial organizations at very different seniority levels, who are enabling this massive talent transformation efforts across dozens of countries simultaneously and under very challenging timelines. Thank you. Moving to also phase in the framework. Continuing to serve and expand demand for our services for our growing global customer portfolio. Over the last five months, we have repositioned absolute majority of all client projects who requested their work to be relocated based on their sense of risk mitigation factors. As we also know, that such requests will continue to happen in the future depending on the different fast developing external factors. We just feel at this point, that we are much better prepared now to address such future needs. With this, I would like to state that while we continue to be extremely open and responsive to our customer needs and their preferences, we are seeing today some new incoming demand into the region and expect a significant proportion of our client portfolio, even with increased global diversification, to be continuously serviced from Ukraine and Belarus. Another indication of our success in our third phase could be expressed by the growth of our top 20 and top 50 client portfolio. Most of them have been with us and stayed with us through multiple phases of change and growth. And thanks to their support today during such a huge and terrible disruption due to current war in Ukraine. Finally, the last element of our framework is a focus on profitability, or Phase 4. As work has been repositioned to new geographies, we have begun the effort to align rate structures and optimize the performance of new delivery locations. This will continue throughout this year and into 2023. While still too early to provide specifics on our progress on this phase, we believe we will return to profit levels approaching EPAM's historical ranges during the first half of 2023. In addition to all of that, we continue to progress our investment agenda across several key areas. EPAM Continuum is now the consulting brand recognized by leading analysts and strongly supporting our growing focus on more complex and advisory led engagements. Our cloud and data offerings are progressing fast into large modernization programs, enabled by our strengthening relations with key partners in this space. And we continue to see traction with EPAM's efforts in our IP and educational initiatives as well as our advanced remote supply model, enabled by our continuously invented digital platforms. In short, we feel good right now about our progress to date, of rebalancing our global delivery and moving forward with all other additional initiatives. This should allow us to maintain the sequential constant currency revenue growth rate, despite the massive disruption we have encountered. With that, I would like to provide some comments on the current demand environment, or at least how we see it from our side. While we really are doing better today than we expected, we, like our competitors and all of you, see a growing number of mixed economic indicators and caution in the market. At the same time, we still believe the near-term demand environment remains intact. We also believe the medium-term broad-based demand trends, which have driven activity in our industry in the past will continue to support our ability to drive strong organic growth at or above our old normal 20% target. So while we are not immune to the impact of the global economic events, we shall being much better positioned today than in the past to address any future shifts. And we also believe EPAM remains well positioned for long-term growth and value creation opportunities, for our people, for our clients and for our investors. To summarize, our priority remains to contain, as much as possible, the impact of the current disruption of the war during 2022. We have made significant progress in this area over the last five months. And in addition, we are significantly accelerating key elements of our overall strategy. Because to big extent, other than the closing of our operation in Russia, what is happening right now and what we now call our new normal is very much the accelerated effort towards certain strategic directions, which have been part of our medium to longer-term plans. The resilience of our people, customers and operations have effectively created accepting this new normal for EPAM, an entirely different level of diversification, productivity and agility of the business to ensure future growth in this constantly changing market environment. So overall, these challenging times are helping us to build better and more adaptive EPAM, and faster. And in closing, as I mentioned on our Q1 earnings call, and it's worth repeating, EPAM as a company fully stands with Ukraine. Since the beginning of the war, our absolute top priority has been and continues to be the safety and well-being of our employees and their families. One more time, thank you to all of our employees for this effort and their loyalty during these not at all easy times. Now let me turn the call over to Jason, who will talk about our Q2 results and additional perspective as we look at Q3 and beyond.

Operator:

Our question comes from Bryan Bergin of Cowen.

Jason Peterson :

Bryan, so this is Jason, and thanks for the question. From a demand standpoint and revenue growth, we continue to see solid growth in the existing customers and probably with a little bit of a slowdown in new customers in Q2, because I think you'll remember that our focus, certainly in March, probably April and May was really focused more on retaining existing customers. So we continue to grow significantly with the existing customers, as you can see by our revenue beat. And then probably by the time we got to the second half of Q2, we began to focus again on new logo activity. And so right now, you've got quite a bit of new logo-driven demand that we expect to come in the second half. But again, I think that probably just as a top line, I'd say that we continue to see growth in both our new and our existing customers.

Jason Peterson :

I'm going to let Ark talk about headcount, but let me just mention attrition. So if we exclude Russia, where we've had higher both voluntary and involuntary attrition, our attrition rates have remained very consistent in Q4, Q1 and Q2. Ark, do you want to talk about headcount?

Operator:

Our next question comes from Darrin Peller of Wolfe Research.

Arkadiy Dobkin :

So our increase was between 1,200 and 1,300 people in Q2. And all of this clearly was outside of Ukraine, Belarus and Russia. So we share -- if you think and compare it with the past, exactly explain why we feel comfortable right now that we will be able to continuously grow in the future as well with similar rates which we experienced before.

Jason Peterson :

Yes. So from a utilization standpoint, if I talk about Q2, what we saw, as you would expect, is quite low utilization in Russia. But one of the reasons why you had the revenue beat that we had is our utilization was quite a bit higher in the rest of the world than we had originally expected. So utilization levels have remained pretty solid and particularly quite solid in Ukraine, considering everything that's going on there. We are expecting as we go from Q2 to Q3 that we may see somewhat lower levels of utilization. Because as you transition work from one country to another, you might end up with a somewhat larger bench in, let's say, the donating country and then we're building up capacity in these newer countries. And again, you have a little bit more bench there. But as Ark said, I think we feel really good about our ability to add headcount to support demand. We've made really good progress in both transitioning resources to some of these new geographies and adding resources in these geographies. And as Ark said, we're around sort of 40% of our delivery capacity in the traditional sort of CIS region. So I think we feel good about not only our execution in Q2, but our ability to support ongoing demand in Q3 and Q4.

Margaret Nolan :

I wanted to check in on how the conversations regarding those -- adjusting those rate cards to the new delivery locations you're going as well as, obviously, wage inflation is probably complicating this. And then on the kind of new delivery locations aspect of it, do you expect a resolution by 2023? Or will there be an impact of that kind of adjustment phase that persists into the next year?

Arkadiy Dobkin :

I think, exactly like Jason said, we're still in the process. And right now, the feel is pretty optimistic from the result of this process. We know a significant number of clients already agreed on rate adjustments. Some of it is delayed for the next month, two or three. So as that's what we mentioned already today, that we expect approaching the profitability rate similar to pre-war conditions in 2023. Again, approaching this there are too many moving parts. Some of them not even related to these events, because if we think about what's happening, foreign exchange, for example, and sometimes, it's the market situation as well within euro and U.S. dollars and then what currencies we pay compensation in the future. So it's a more difficult conversation. But rates are right on the way, and we are optimistic on this, in this sense.

Jason Peterson :

Yes. I would say that cash flow was pretty good. I think we tried to hold DSO to 70, and it did end up at 71. And to them may have had a modestly negative impact. And we're trying to sort of keep DSO in and around or maybe slightly lower than 71 on a go-forward basis. We do expect cash flow conversion to be over 100% in Q3, which is kind of more consistent with sort of historical patterns. And right now, both our cash position and our ability to generate cash is pretty encouraging.

Tyler DuPont:

This is Tyler DuPont on for Jason. Last quarter, you had suggested that you could be back to pre-war normalized growth in margins by the first part '23. But based on the 2Q results and the 3Q guidance so far, do you feel this could happen even sooner? And can you just like quantify what your benchmarks are for those pre-war levels?

Tyler DuPont:

Okay. Perfect. And just one more. As you continue on your path for headcount diversification, can you maybe discuss some of the regions that have been relatively easier to build out versus the ones that have been a bit more challenging? And on that line, do you feel that you are past the riskiest phase of your headcount diversification efforts?

Operator:

Our next question comes from James Faucette of Morgan Stanley.

Arkadiy Dobkin :

I think it's a very right question. And I think there is no simple answer in which it would be addressed in. Everybody kind of approach -- there are some groups of clients which are really trying to mitigate risk and move out of the region in danger. There are some clients which is continuously working almost in kind of pre-war scenarios. And there are some new clients come in there as well. So -- but again, as you probably understand, too, it's all a little bit moving target. We're working month by month, day by day, and sometimes, seeing something unexpected. But in general, I think we shared exactly the numbers which we kind of aggregate in what we understand going to have. We're clearly not in business as usual in general situation. So when we have to move thousands of people and rest of our business continue to approach apparently outside, a lot of delivery capacity, it's nothing as business as usual. But if you think that we're still growing and especially if you think how growth happening without Russia, because this is where we disconnected, our organic constant currency growth outside of Russia in Q2 was like 37%. So which means that there is normal demand if you take in account that we exiting there. So I know I've not given you a precise answer, but there is no precise answer. There are clients which is trying to completely change, approaching the right clients which are picking up on this capacity which released from them. And in some respect, a little bit similar to what we were experiencing in 2014, second time.

Arkadiy Dobkin :

Are you relating to situation in Eastern Europe or you...

Arkadiy Dobkin :

Okay. I think, first of all, for us sometimes it's difficult to distinguish one to another because it's not necessary clients said exactly why this conversation might happen. So these conversations are happening. But again, they were happening like 12 months ago, they were happening 24 months ago. If it's a little bit more often, maybe. But it's still difficult because it's even volatile by quarter by quarter. And the reasoning for this could be that the situation where majority of our resources are or economy. So it's very difficult to distinguish for us.

Surinder Thind :

Following up on the earlier question about just clients' desire for the delivery model. Are those -- are the client conversations continuing to evolve in the sense that there were clients last quarter that requested a change in their -- where delivery is from, and this quarter, there's new sets of clients that are asking for delivery changes? Or how should we think about the potential for your year-end targets to kind of evolve? Like I realize you kind of said that it's fluid. But I just wanted to make sure I understand all the push-pull factors here.

Surinder Thind :

Understood. And then in terms of just a clarification on Russia, it sounds like all of the individuals that you wanted to relocate or have requested relocation are done. So what is left in Russia at this point? And is it assumed that all of that work will be transitioned within the next quarter or 2? Any color there or any additional color there?

Operator:

Our next question comes from Ramsey El-Assal of Barclays.

Arkadiy Dobkin :

I think approach for M&A didn't change for us much. Very similar like in the past M&A for us, it's additional capabilities. Sometimes, beginning of the growth in some region. But from the point of the current delivery platform and the delivery locations, we already feel pretty comfortable, these all foundations which we have. I don't think M&A will be specifically important for this part. So we are sourcing in traditional agent capabilities in consultant market and industry expertise and maybe sometimes, in new locations, but again, it's not critical for us because we already established a pretty good footprint with growth.

Arkadiy Dobkin :

So I think we do have experience in the past. It's always difficult to predict how experience from the past is applicable for the future and how different the next recession going to be. But in the past, we usually were practically left for two, three quarters and then started to grow again. I think in general, that's what we are mentioning as well. In our industry, with all what's happening, I think we will be able to kind of tune headcount for a couple of quarters, and all kind of challenges in 2020, 2021. And specifically, 2022 make us actually much more resilient and much more adaptive to address potentially necessary adjustments. So I think, and again, we already talked about it today about that we feel ourselves much more comfortable, much more prepared for some elements of unknown. And we probably during these last couple of years, we talked about it in Investor Days, not only about this war, it's about situation in Belarus during the last couple of years, trained and prepared better than anybody else on the market right now, for recession as well, if it would be happening.

Puneet Jain :

Good quarter, guys. I have like a question on gross margins. Given that your delivery profile is changing, can gross margins go back to the prior pre-war 35%, 36% levels? Or maybe like the new locations, the pricing dynamics, labor dynamics there might result in like a different gross margin profile over the medium term compared to what it used to be before this invasion?

Puneet Jain :

Understood. And then, obviously, you mentioned macro remains healthy and all the good comments there. Has there been any change in client priority in terms of the type of projects they execute? Like have you seen any changes in type of projects or any changes in sales cycles or the speed at which they award new projects at all?

Operator:

Our next question comes from Arvind Ramnani of Piper Sandler.

Arkadiy Dobkin :

I think it's difficult to add something substantial in a couple of minutes answer versus what we shared already during our Analyst Day in May. And I think when we went actually to some level of details. And I can only repeat that, for example, what's happening during the last six months, in some respects, was prepared during the previous like years. We were specifically talking about how we were growing in India. And during the last couple of years, it's become one of the fastest talent growing market for us, and we continue to do this. We were starting to focus in on Latin America before war happened. And we are pretty impressed with the level of talent there. And a number of countries across Western, Central Asia, which we started to focus in 2020, 2021. And some of them like after the war, we seeing as a good potential as well. That's why again already was answering several times today. We're pretty comfortable that we will be able to scale with the talent outside of our traditional locations. And don't forget that we're still growing pretty significantly in Central and Eastern Europe, which we have very strong experience and complement all of these locations with people who decided to relocate. And this is abysmal number of people too. So basically, we have advantage of being an EPAM DNA and EPAM experience in new ups for us.