Reminder: this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Straube, Senior Director, Investor Relations. Thank you, Mr. Straube. You may begin.
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 fiscal 2016 results. If you have not, a copy is available at EPAM.com in the Investor section. With me on today's call are Arkadiy Dobkin, CEO and President, and Anthony Conte, Chief Financial Officer. Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward-looking statements.
These statements are subject to risk and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP numbers have been reconciled to GAAP and are available in our Investor Relations materials in the Investor section of our website. With that said, I will now turn the call over to Ark.
Thank you, David, and good morning, everyone. Thanks for joining us. I would like to start from a simple reminder that last week we had an exciting opportunity to come back to New York Stock Exchange to celebrate the fifth anniversary of our IPO and to ring the closing bell. We are proud to see today, five years later, that we have been able to navigate successfully many challenges during that period.
Moreover, to bring continuously significant value to our clients and, in result, to demonstrate year after year strong growth despite geopolitical uncertainties, economic instabilities, and massive global competitors. Who just started to notice EPAM brand recently? EPAM changed a lot during the past five years. We have more than tripled the company size, significantly expanded our horizontal and vertical capabilities, and started global diversification of our delivery locations.
We also invested into developing many needed corporate functions that practically didn't exist back then. So at this point, I would like to state that today, five years later, we are very confident EPAM is in a much better position to continue growing than we ever been before. With such brief excursion into the past, we feel especially happy to report that during the last year, we reached quite a milestone we could only dream about in 2012.
Our annual 2016 revenue crossed the $1 billion mark and reached $1.16 billion, which corresponds to 26.9% year-over-year growth, or 29.4% in constant currency terms, and in addition, which we think is even more important, represents 24% organic growth in constant currency. Let us look in more details at what was happening with EPAM in 2016, and let's start from delivery capabilities.
First, in 2016, while traditionally benefiting from our strong software engineering expertise, we continuously focused on investing into the quality of our technology practices, engineering productivity, industry accelerators, maturity of our delivery processes and tools. The overall goal was not only to maintain our advantage in that area but also to differentiate EPAM further along against growing competitors with our ability to engineer and to deliver successfully complex products and solutions which are in high demand across our strategically targeted markets.
During 2016, we continued to mature our digital and data capabilities as well. We specifically were focusing on integrating those capabilities with our core engineering and advanced technology practices. That allowed us to deliver to our customers much more diverse programs in comparison with the past, ranging from our commercial software product development to digital end-to-end platforms and now to business and digital strategy executions.
In confirmation of that, I would like to share that during the last year, we have won six customer innovation awards in partnership with several of our top clients, two Red Dot Design Awards, and have been listed as one of the top digital agencies in Europe. EPAM has also been recognized in over 60 industry analyst reports for our increasingly comprehensive capabilities in driving agile digital transformation across all of our key verticals. In fact, we were named the leader in digital platform engineering services in the Forrester Wave Digital Platform Engineering Services in Q2 2016.
Lastly, in 2016, we continued to expand our global delivery footprint, which brought very important hands-on experience in several new geographies and allowed us to much better understand how to integrate and develop from one side and position and benefit from another such new global delivery locations within EPAM and within our clients.
Now moving to our vertical performance. For 2016, we had very strong growth across three of our six industry verticals, including media and entertainment, life science and healthcare, and emerging verticals, which all grew over 40% in the year. We see very promising opportunities across all of those segments, where we are present already at a good number of Fortune 1000 companies but still only at the initial stages of potentially significant growth journeys there. Financial services finished the year with 17% growth, which reflected a Q4 growth of 4.6%.
It's important to note that without the effect of UBS, our growth in Q4 would be 21.2% and over 30% for the full year in reported currency, which represents a very healthy growth of that segment across Europe, North America, and Asia. Travel and consumer finished the year at 20.5%, which reflected a Q4 growth rate of 10.8%.
We attribute this temporary slowdown to currency impact in Eurozone, approximately 5% global impact, pressure on traditional retailers and consumer brands to show positive returns on investment in digital, and in addition to the completion of significant milestones in multi-year projects at two of our clients. As we expand our capabilities in that segment, we expect to be able proactively to deliver innovative solutions not only in platforms but also in business models, including helping our customers address digital disruption and to support our over 20% growth here in the long run.
Lastly, our traditionally strong software and high-tech portfolio grew respectively 23% for the year, which allowed us to keep this important segment at a strategic target of 20% of EPAM total revenue. Overall, in 2016, the diversification of our clients' concentration continues along the positive trend.
For the year, our growth rate outside the top 20 accounts was 44.3%. Growth in the top 20 was 12.5%. Turning to our people and talent development. We very well recognize the simple fact that we have to continuously invest in our people to stay relevant on the market. Simply put, the commitment to talent being the single biggest factor in our sustained growth. In the end of 2016, we brought on board a very senior HR and talent leadership team to elevate our workforce planning, management, and engagement functions to new levels.
That also should allow us to turn EPAM into a much more welcoming environment for diverse, multicultural talent and, in turn, well-position the company to hire and build highly skilled, multidisciplinary, hybrid teams capable of solving the most complex technology challenges and delivering the most innovative industry solutions.
In addition, we were continually investing in our internal employee engagement software ecosystem as well as in engineering productivity tools and practices. We also invested significantly in 2016 in very robust internal training initiatives through a network of collaborative global events as well as in-person and online courses. As a result of all of these efforts, we believe that EPAM today is much better positioned to continue hiring and developing our global talent.
Specific to headcount in Q4, we ended with over 19,600 IT professionals, which is a 22% increase year-over-year. Before I hand the call to Anthony for the update on our financials and 2017 outlook, let me cover a few other topics which were in focus during our previous update three months ago. First of all, UBS concern.
In January, we announced a strategic agreement with UBS which extends our nine-year relationship with them for the next three years. This agreement, which is valued at more than $300 million, allows EPAM to continue focusing on innovative end-to-end solutions and should help our client to reduce time to market and improve ROI on technology investments. Utilization concerns. We have made significant progress in improving our utilization since last quarter, finishing Q4 at 75.9%, which is almost a 4% improvement in comparison with Q3 metric.
It's still not at the level where we would like to be, but we are very confident in our ability to bring it to a more normalized level in the first half of 2017. With that, let me turn it over to Anthony for a detailed financial update for 2016 and our fiscal 2017 guidance.
Thank you, Ark, and good morning, everyone. I'll start with some financial highlights, talk about profitability, cash flow, and end-on guidance. As Ark mentioned, we are pleased with the quarter having delivered strong top-line performance, generated significant free cash flow, and improved our utilization. Here are a few key highlights from the quarter. Revenue closed at $313.5 million, 20.5% over fourth quarter of last year, and 5.1% sequential, which represents a year-over-year constant currency growth of 22.8% and organic constant currency growth of 20%.
From a geographic perspective, North America, our largest region, representing 58.7% of our Q4 revenues, grew 26.8% year-over-year. Europe, representing 33.9% of our Q4 revenue, grew 12.3% year-over-year, or 19.3% in constant currency. CIS grew 14.4% year-over-year and now represents 4.2% of revenue. And finally, APAC decreased 2.8% and now represents 2% of our revenue.
Moving down the income statement, gross margin for the quarter was 36.8% compared to 39.2% for the same quarter last year. The primary driver for this decrease was utilization, which ended at 75.9% compared to 78.8% in the same quarter last year but was an improvement from the 72% in Q3 of this fiscal year. Utilization this quarter reflects our continued efforts in balancing supply and demand across our business.
Non-GAAP SG&A, which excludes stock compensation expense and certain other items, came in at 20.2% compared to 21.3% in the same period last year. We continue to leverage our SG&A spend strategically, focusing on talent acquisition, workforce planning, balancing the bench, and hiring functional management who can bring value to our long-term sustainable growth strategy. GAAP income from operations increased 17.7% year-over-year to represent 11.9% of revenue in the quarter.
Non-GAAP income from operations for the quarter increased 9.7% over prior year to $51.5 million, representing 16.4% of revenue. Our effective tax rate for the quarter came in at 22.7%, driven by a shift in geographic mix of revenues. For the quarter, we generated $0.46 of GAAP EPS and $0.77 of non-GAAP EPS, which reflects the tax effect on non-GAAP adjustments and is based on approximately 53.4 million diluted shares outstanding.
Turning to our cash flow and balance sheet. Cash from operations for Q4 was $53.7 million compared to $11.8 million in the same quarter last year. Free cash flow came in at $44.3 million, resulting in an adjusted net income conversion ratio of 108%. Our strong quarterly performance and ongoing DSO improvements were the primary factors in the strong free cash flow performance.
This quarter, our IR DSO was 59 days, and our unbilled DSO was 18 days for a total of 77 days compared to a total of 95 days in the same quarter last year, which is driving most of the cash flow improvements. We continue to be pleased with the improvements in this area and would expect DSO to normalize in the low 80s during fiscal 2017. Let me sum up where we finished the fiscal year.
Revenues for the fiscal year closed at $1.16 billion, or 26.9% growth over 2015, which represented a constant currency growth rate of 29.4% and makes fiscal 2016 a milestone year for EPAM, having crossed the $1 billion revenue mark. Organic constant currency growth for the full year is 24%, further demonstrating our ability to drive growth through an ongoing challenging marketplace.
GAAP income from operations increased 26.2% year-over-year to represent 11.5% of revenue for the year. Our non-GAAP income from operations increased 20.9% over prior year to $191.8 million, representing 16.5% of revenue. Our effective tax rate for the year came in at 21.5%, and we generated $1.87 of GAAP EPS and $2.90 of non-GAAP EPS, which reflects the tax effect on non-GAAP adjustments and is based on approximately 53.2 million diluted shares outstanding.
Cash from operations was $164.8 million compared to $76.4 million for fiscal 2015, and free cash flow came in at $135.5 million, or 88% adjusted net income conversion. Turning now to the guidance. Revenue growth for fiscal 2017 will be at least 20% after factoring in about 3% estimated currency headwinds, meaning we expect constant currency growth will be at least 23%.
We expect GAAP income from operations to be in the range of 12%-14%, and non-GAAP income from operations to be in the range of 16%-18%. We expect our effective tax rate to be at least 19%. This reflects the adoption of the stock-based compensation pronouncement, ASU 2016-09, which will be effective January 1st, 2017. For earnings per share, we expect GAAP diluted EPS will be at least $2.45 for the full year, and non-GAAP EPS will be at least $3.38 for the full year.
We expect weighted average share count of 54.8 million, fully diluted shares outstanding. For Q1 of fiscal 2017, revenues will be at least $315 million, reflecting a growth rate of at least 19% after 3% currency headwinds, meaning we expect constant currency growth will be at least 22%.
For the first quarter, we expect GAAP income from operations to be in the range of 10%-11%, and non-GAAP income from operations to be in the range of 15%-16%. We expect our effective tax rate to be at least 20%. For earnings per share, we expect GAAP diluted EPS will be at least $0.49 for the quarter, and non-GAAP EPS will be at least $0.72 for the quarter. We expect a weighted average share count of 53.9 million fully diluted shares outstanding.
Finally, a few key assumptions which support our GAAP to non-GAAP measurements. Stock compensation expense is expected to be around $55.4 million, with $13.4 million in Q1 and $14 million in each remaining quarter. Amortization of intangibles will be about $7.5 million, or about $1.9 million per quarter.
FX assumptions is expected to be around -$7 million for the year, with -$1.6 million in Q1 and -$1.8 million in each remaining quarter. The tax effect of Non-GAAP adjustments is expected to be $18.8 million for the year, with $4.2 million in Q1 and $4.9 million in each remaining quarter. With that, let me turn the call back to Ark.
Thank you, Anthony. A few points before we turn to Q&A. Our 2017 outlook reflects a continued strong demand for our services. We should expect the market that we serve to be disrupted and go through the natural cycles.
At the same time, we are very confident that our strategy of combining our traditional technology and engineering advantage with proven capabilities in digital transformation, design, and emerging consultancy should enable EPAM to navigate those events responsibly and to drive results from a business which has very solid fundamentals in our view at industry-leading growth rates. With that, let me turn the call back to our operator for Q&A.
Thank you. At this time, we'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Darren Peller with Barclays. Please proceed with your question.
Darren, are you on mute?
Our next question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.
Hi. I was wondering, Ark, if you could provide an update on what you had talked about with regards to the supply-demand mismatch on the 3Q call. From your guidance, it seems like it will still have some impact into 1Q, and then it should be life as normal. So part of the question is to get that update. Part of it is, what can you do in the future so that this sort of thing may not happen?
Okay. Thank you, Ashwin, for the question. So I'll remind what we were sharing last quarter. The mismatch was mostly driven by two components. One of them was UBS changing plans for the future growth and our preparedness to provide services and basically hiring people in specific locations for this client. The second was our integration processes in the US and kind of our new experience operating in a new geography. Between these two, basically, it was a mismatch.
We decided not to do any reduction in headcount because we know that we continue growing. There is pretty strong demand, and we will need to hire people one quarter later anyway. We decided to stay as this and continue investing in the talent. That was a mismatch which is starting to happen, actually, not even last quarter but second part of the last year.
As we mentioned already today, versus Q3, Q4 actually was performing practically 4% better on utilization. At the same time, it would take probably another quarter to get to normal or maybe even two quarters. It's very difficult to predict. But definitely, there is a right progress. How to eliminate these kinds of things in the future, that's a much more difficult question because sometimes not necessarily completely depends on us.
And there is some level of unpredictability in client situation, in the market. And being honest, these type of things were happening in the past as well. There is a relatively volatile kind of history in utilization depending on some clients. When it's the biggest clients, it's more noticeable. But on another side, as we mentioned, we're paying much more attention to this. This is another lesson for us.
We also brought additional experienced people from outside who were dealing with this in the past on bigger scales. We hope that we will be managing this much more closely right now. That's all I can share.
No, that's good. That's good. Thank you. And then the other question I had actually won the numbers question. So let me quickly ask it with regards to free cash flow. Should we expect roughly a 90% conversion rate again this year? But with regards to a specific vertical, I've noticed that there is a lot of healthcare-related product and hiring and capability improvement in your base at EPAM. Through some of my checks, I was wondering if you can give us an update on a particular vertical.
You meaning life science and healthcare?
Correct. Yes.
Yeah, we were pretty optimistic about this when we started two years ago. As we share it today, it's growing pretty strongly right now in excess of 40%. At the same time, it's a relatively small base because life science and healthcare are only 10% of our business today. We're definitely very interested in this sector and planning to invest further. We're building additional expertise. We're considering to build some consultancy around it. All I can say, we think it's one of the growth areas for us.
Your question on cash flow at the beginning, we don't give specific guidance at this point around cash flow or cash flow conversion. Clearly, 2016 saw improvement. Some of that improvement was driven by or most of that improvement was driven by the improvements in the DSO. So we had some pickup in 2016. That was recovery from a kind of light 2015. We're working to stabilize and normalize DSO. And maybe at some point in the future, we can talk about guidance around that number.
But at this point, we're just issuing kind of a DSO guide, which is kind of to be in the low 80s, is where we expect. And we're filling out cash flow. And possibly sometime in the future, we could talk about guidance around free cash flows and conversion.
Got it. Thank you, guys.
Thank you. Our next question comes from the line of Jason Kupferberg with Jefferies. Please proceed with your question.
Good morning, guys. I just wanted to start with a question around some of the underlying assumptions in the 2017 guidance, specifically for pricing, utilization, and revenue growth at UBS.
Sure. We are anticipating pricing to be low single digits. I think 2%-3% is roughly what we're putting in. And that's in constant currency. In reported, it will most likely be zero or possibly less than zero based on what we see as far as the currency assumptions. As far as utilization, our guidance is the same. We're looking to get us back in range between 76%-78%. So we need to get ourselves back into that range for the year. And we don't provide specific guidance on customers. So for UBS, we're not giving any specific guidance there.
We only had this within our public deals, clearly.
Right. Are you anticipating any share loss within the UBS account?
Again, all we can share is that we have this deal which actually brings stability and predictability for us. And actually, the floor, how much it would go up, it's very difficult to predict. Right now, it looks pretty stable, and we're optimistic.
Okay. And then just on the margin front, I mean, I think the EPS in Q4 came up just a hair below what you were targeting. It sounded like utilization came in about with where you were expecting because you did have that nice quarter-over-quarter improvement. Anything else you would call out in margin that fell short of your expectations in Q4?
No. I mean, margins came in pretty close to what we were talking about last quarter. So nothing else within there.
Okay. Just last very quick for me. How much movement in the top 10 accounts was there during 2016? And what might you anticipate on that front in 2017, just given the way that the client concentration is decreasing here?
In movement, you mean what?
Well, in other words, if you looked at your top 10 accounts in 2015, how many were still top 10 in 2016? And how many of those top 10 in 2016 are expected to still be top 10 in 2017? Or will there be some new high-growth accounts that will take the place of others in the top 10?
So there is relatively small volatility there. So basically, we might expect that 2 or 3 accounts from the second dozen will go to the top 10, which is very normal. And we didn't lose any accounts from this combination, so. But clearly, there is some replacement. It's always happening. The kind of bottom 2, 3, 4 accounts, they're kind of moving between top 20.
Nothing outside of the normal course. Every year, we have movement. We don't expect anything different in 2017.
I would just comment because I think it would be multiple questions on concentration and top client. I just, again, would like to remind that we kind of were going back five years in 2012 when, practically, each call, we were talking about Thomson Reuters. And just to remind that Thomson Reuters, at this time, was probably as big proportionally as UBS or maybe even bigger. And then the second largest client was probably two-plus times smaller than that.
And Thomson Reuters actually went out of our top five within the next several years. And we still were growing and balancing. And again, just to remind that Thomson Reuters is now number three client back and much bigger than it was in 2012. What I mean is that we have pretty good client concentration and balancing this.
With all this volatility, it's not kind of the key worry for us.
Okay. Thank you. It's very helpful.
Thank you. Our next question comes from James Friedman with Susquehanna Financial Group. Please proceed with your question.
Hi. Thank you for the incremental disclosures, Anthony, with some of the financials. I just wanted to ask, Ark, in some of your prepared remarks, I mean, you were going kind of fast, but I think that you mentioned that you completed some milestones at two clients, I thought, in the consumer vertical. Did I get that right? Or could you repeat what you said about that? Use the word milestones if you could revisit that for me.
Yeah. What I mentioned is that, in our view, a very temporary slowdown in the retail and consumer vertical was as a result of multiple reasons. One of them was that we have two big programs which were finished.
Okay. So would you anticipate that projects return from those customers? Or are you moving on? How should we be thinking about that?
This project actually continues. Just kind of the increase was slowed down and kind of plotted for these two programs, which we potentially might start a new program there or a new client. That's why we're considering this pretty temporary.
Got it. Then just maybe one more. I thought in your prepared remarks, you called out media and entertainment, life science, and emerging. If I could just ask, if we were to overlay those verticals because you had a big surge. This is on page 19, the slides. You don't have to look at it. But it's the one where the $10 million-$20 million accounts, you had a big surge in that category. My question is, how much of the opportunity in media and entertainment, life science, and emerging would we find in, say, the top 10 or 20 accounts at the company? I don't know, top 10 or 20 accounts at the company?
So we already have a number of accounts, several accounts which, in our categorization, belong to emerging or to life science which is among top 10. We have several of them. In our view, we verify from penetration of these accounts. There is a pretty good opportunity to grow there. The same across many life science accounts which are very large firms where our budget share is very, very small still. So I think there are very, very strong opportunities across both segments.
Thank you.
Thank you. Our next question comes from the line of Darren Peller with Barclays. Please proceed with your question.
Thanks, guys. Just a question first on the organic assumption versus inorganic in 2017. And I guess a bigger picture question around the deal activity around tuck-in, specifically around digital capabilities you've always done. It's been a little slower on that front. So if you can touch on that high level, what you're looking for, other things in the pipeline on that front as well. And then just a follow-up question as well, please.
Okay. First of all, our guidance for 2017, it is an organic guidance. So we expect to organically grow at least 20%. And in constant currency, it's 23%. So it's, in our view, pretty strong organic growth. So we're not assuming any acquisitions in these numbers. The second, I'm not sure I heard the comment. You mentioned that our digital is not growing fast enough. Acquisition.
It was acquisition strategy around digital.
Yeah. I mean, I guess on that note, yeah. Look, I mean, now that you bring it up, you guys have called out there being something like 70%+ digital of your revenues before. Maybe if you could just confirm if that's about right, if you've really ever talked about that. And I guess just how much, in terms of new acquisitions, we could expect going forward, given, to your point, organic is the guidance is organic. It's been a little while since we've seen a pretty good flurry of tuck-in deals. You guys did a bunch over the last two years. But really, I think the last year, it's been a little slower. So where are you on that now?
Yeah. I mean, our M&A strategy hasn't changed. 2016 was a light year, not for lack of looking. I mean, we have a pretty robust pipeline. We went through a number of diligence processes through 2016. Nothing just really came to fruition and closed for a variety of different reasons. So we are still looking pretty aggressively. We have a pretty healthy pipeline looking for, again, capabilities-focused and looking for that tuck-in-type deal. So nothing has changed there. Ark, you want to add?
Again, this is normal. So as Anthony mentioned, the strategy is the same. When we asked about acquisitions plan and M&A, this is very binary. It's going to happen or not. And very difficult to talk about probabilities here. So we're looking for good opportunities. And we have a pipeline, so.
All right. And then I appreciate that. And just a quick follow-up. On the topic of immigration reform, which obviously has been coming up a lot lately, you guys have touched on it being not as material for you or more manageable, given the size of your numbers of H-1Bs. Again, can you just refresh us on where you stand on that if, let's say, hypothetically, the wage amount were to go up dramatically? Or anyway, any other changes you could think of that's worth mentioning now would be helpful.
So first of all, we still think that it's too early to understand exactly the parameters of these changes. It's kind of very speculative assumptions in any case. But in our case, we have a little bit over 100 people who are in H-1B from our probably 1,300 billable engineers and consultants in the United States or 1,000 people. So basically, it's less than 10%.
Okay. I guess you could always manage that. In other words, whether it's through a mixed shift if you needed to or other changes if need be.
That's right.
Okay. All right. I'll leave it at that and go back to the queue. Thanks, guys.
Thank you. Our next question comes from the line of David Grossman with Stifel. Please proceed with your question.
Thank you. Good morning. I'm wondering if you could just help us understand the composition of the growth guidance for 2017. What I mean by that, just look at the relative contribution of growth from the top 5, top 10, top 20, and beyond, and how that compares to prior years. I realize that the UBS dynamic may be impacting that significantly. Beyond UBS, is there any other things we should think about in terms of where the source of growth will be in 2017?
Hi, David. Yeah. Clearly, UBS growth is going to be different than it was in previous years. So this is probably not a surprise to anybody right now. So at the same time, it would be very difficult to talk in parameters like top 10, top 20, top 30 because there are multiple dynamics between different clients. Okay. Let me rephrase it. We have a very strong client base in our top 100 clients with multiple Fortune 1,000 or Fortune 2,000 clients where we have revenue from $2 million to $20-$30 million.
And penetration of this client base in comparison with our competitors is very, very low. So we have dozens of clients which could be double or triple in revenue from their budgeting kind of capabilities and from capabilities of EPAM right now with the services which we can provide.
I think we're pretty confident that we can grow 20%+ organically during the next year.
Right. So historically, when you've mixed shifted away from the top clients, you've had a favorable margin impact. Should we expect the same thing as we migrate through the course of 2017?
I'm not sure that the margin impact is directly related to shifting from the top clients. Again, I just mentioned a couple of minutes ago the history which was with us practically 4 years ago when we were replacing Thomson Reuters which was growing practically, again, proportionally from the share of our total revenue and from a growth perspective. And it was a good account from a margins point of view. When the shift happened, we were able to navigate it. Yes. Right now, we're practically 2.5-3 times bigger than that. But proportions are similar. And with our $1 billion revenue which we proudly kind of were talking today, we're still a pretty small company in this services market.
Right. So your margin assumption or your assumption of improving margin next year is primarily driven by the utilization number then?
Well, utilization will contribute definitely. It was unusually low in 2016. We'll get some pickup from utilization which will help margins. But we also have to balance that against continued investments into the business and where we need to continue to support the growth.
And David, the main difference in margins impact versus today and 3-4 years ago, it's still going to be currency. Because if you think about what was happening with pounds and euro versus several years ago and currency-based for our delivery locations, there is a challenge here. So this is the main impact which we're seeing right now and very low kind of predictability how these currencies will be playing.
Okay. Got it. Thanks for that. And then just quickly back to this whole kind of visa thing. Even though you're not heavily dependent on visas - and I think we all understand that - there are strategic arguments for increasing US. staffing levels. I think this is a topic you have thought a lot about in the past, Ark. How is your thinking evolving on the topic? And what should we expect to see from you in the US over the next 12-24 months, if anything?
I think I also mentioned yeah. Thanks, David. I think we also mentioned already today in our prepared notes that we're really focusing on how to bring EPAM to a more welcoming home for different types of people coming from different locations, from different cultures. And again, our investment in talent management and talent acquisition across North America and Europe, this is exactly the answer to your concern.
We put a much stronger team for talent acquisition from a local perspective. We're going to focus on this to kind of address and manage these potential risks. At the same time, we also need to EPAM, for example, historically, always had a pretty low proportion of on-site versus offshore resources. We're strategically increasing this.
But we're still very well positioned how to work in this global distributed world and still deliver very complex solutions without necessity to have massively staffed on-site positions.
All right. Very good. Thank you for that.
Thank you. Our next question comes from Anil Doradla with William Blair. Please proceed with your question.
Hey, guys. A couple of questions. So a lot of questions and focus around the 2017 guidance. So if I rephrase the question, Ark and Anthony, what would you say would be the top one or two challenges in achieving the 20% guidance?
So I think we have, again, in general, the business model in services is relatively simple. There are no miracles here. There is no something unusual happening. At the same time, there are too many variables and too many parameters you have kind of balanced together. So I still do believe that all fundamentals are pretty strong.
And the challenge in 2017 would be the same challenge which you have had in 2016 and '15s and before and mainly in the future too, balancing between clients' demand and right talent in the right places in the right time. So this is the main challenge. And everything else, it's variations of this. So clearly, currency and geopolitical issues. But we're living through this already for the last three years as a minimum.
If you think about it, where EPAM was originally coming from, so that was a challenge for the last 20 years. I think nothing really new. We're really kind of responsibly and carefully managing what's happening, what we can manage, and trying to address things very quickly when it's more a surprise for us and less predictable. I don't know what other answer I can give to you.
Well, I was hoping that there's something more specific. What you're saying is that it's just business as usual. The same issues are going to play out in 2017.
So we do think that with our size of the company today and configuration of our capabilities and client demand which we're seeing, there is a pretty good opportunity for us to grow. That's what we're very confident about.
Right. As a follow-up, when I look at the 2027 outlook, obviously, hiring is going to be a big component. Any particular geographies that you're going to focus on as you build out the year?
It's also pretty much in line with our previous performance. We're still pretty optimistic about capabilities and the ability to grow in Eastern Europe. We're improving our capabilities in India right now. China for us is still mostly in-market capabilities. But we started to do some delivery for global clients. And clearly, North America and Western Europe would be a focus for us. We're still planning to increase the proportion of in-market resources. That would be a focus area. Again, we're already commenting on this.
Very good. Best of luck in 2017, guys.
Thank you.
Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.
Hi. Can you provide an update on spending and financial services, that particular vertical, any impact or change given some of the political changes in either Europe or the US?
I think we provided some comments in our remark earlier today where we gave a number, a percentage of growth for the vertical without UBS. And this is a pretty strong number taken into account that it's not even accounted for FX headwinds because without UBS, I think it was 22% growth without currency impact. We think it's still pretty strong with all, as you mentioned, geopolitical impacts and some things which we cannot predict. We're optimistic about it.
We also invest in a lot in special competency, including payments and blockchain and experimenting with this and having the first projects. And actually, some of them are pretty large. So we're optimistic that we will find the opportunity to grow in line with our total expectations.
Okay. And then on UBS, I know you're not giving client-specific guidance. But any concessions that were given when you signed the three-year deal? I guess I'm concerned maybe more on the pricing side where there are discounts given for minimum volume commitments, things like that that you could provide us with?
Again, I can say that our expectations are pretty balanced with our historical metrics around this account. Okay? So clearly, there are more complex deals there. But I think it's given flexibility to both parts. And we're very optimistic from the point of view that with the level and quality of the services we provide, the flexibility which we have now would benefit us in the future.
Okay. And then last one from me on the labor side. Any trouble finding talent at this point? I think you remain fairly concentrated in Eastern Europe. And how do wage increases and attrition look like in that region at this point? Thanks.
I think, and again, this is exactly a fundamental question for our business. We're probably answering this on each call. My traditional answer would be that there is nothing new in challenging to bring talent to the company. This is a growing challenge for the last probably 20 years, starting from before the dot-com situation. It's a global challenge. So it's not just about Eastern Europe. It's about Silicon Valley and East Coast, the US, and London. But we're investing heavily in trainings.
We're investing heavily in education, internal people. We expanded during the last several years our geographical footprint. So we're addressing these challenges, as you can see, during the last five years.
We're pretty comfortable with our current base of only 20,000 people, comfortable in comparison with many of our bigger competitors that we would be able to handle this challenge.
Thank you.
Thank you. Our next question comes from the line of Steve Milunovich with UBS. Please proceed with your question.
Thank you. You mentioned that your pricing will be fairly flat this year. What's going on with wages? And are you going to see some margin pressure if wages have to go up?
Yeah. Actually, wage inflation is targeted around the same range we're looking at right now, just under 3% wage inflation globally. And that's in constant currency. So we do expect to see some benefit from currency. So right now, it's looking, at least based on our planning, pricing and wage inflation are fairly balanced.
And any update on the CFO search?
We're in the midst of the search. We're making some progress. We're seeing a number of candidates. And we're just vetting the candidates in the pipeline. So nothing more to update at this point. All right. And then finally, on the marketing side, this used to be almost a word-of-mouth business.
Kind of, what's evolved in terms of maturing your sales and marketing effort?
First of all, I do believe that word-of-mouth in services business is not a bad thing. Because we need to have 1,000 clients, we need to have 3,400 very good ones. On the other side, clearly, I hope it's visible for those who are following us for some time how marketing functions changed, how our kind of analyst recognition changed during the last several years.
Now, our brand is pretty well-known. The same is happening with business development function as well. The combination of referrals and actually marketing reports from Forrester and Gartner, this is all probably a very strong sign of change happening.
Thank you.
Thank you. Our next question comes from Georgios Kertsos with Berenberg. Please proceed with your question.
Yes. Hi, guys. Thanks for taking the question. Most of my questions have been answered. But I have three very quick ones, hopefully. And so first one.
Can you speak up, please?
Yes.
Again, here you go.
Can you hear me now?
Yes.
Sorry. Okay. So a couple of quick ones from me, if I may. So first one, apologies if I missed this. How much of the UBS contract is actually factored in into the FY17 guidance? Is this something you can share? How much?
I mean, we have full contract factored into the guidance and our expectations for the clients. It's all baked into the guidance. Not sure I understand the question.
Yes. Yes. Yes. So basically, I'm trying to get a feel of what part of the FY17 guidance comes from UBS and what part comes from outside the UBS account.
We don't separate that. Okay. Okay. Okay. Clear. I was hoping to get your thoughts around the pricing environment. And I know that this has been sort of touched upon throughout the call from a couple of other guys.
But if we sort of X out utilization and normalize it, would you expect the gross margins to be relatively stable? Or do you see any sort of underlying pricing/salary inflation dynamics playing out? So the question is, excluding staff utilization, ups and downs, normalizing for that, would you expect gross margin to be relatively flat year-on-year?
The answer is yes. I would expect to see stability. Right now, based on the pricing environment and wage inflation, we're seeing those two being fairly balanced and allowing us to keep our gross margin stable absent utilization moves.
Okay. Clear. And last one from me. I was hoping if you could comment a little bit around the potential impact to EPAM's effective tax rate if we were to see a change in the US. corporate tax rate. So how would that basically likely affect your group effective tax rate?
I know it's very much a guesstimate at the moment. But people are talking about trimming the corporate tax rate from 35% to 20% or even 15%. I'm just trying to get a feel of what that would do to your numbers. It's very hard to say. I mean, everything right now is completely speculative. So it's really hard to assess or predict what that impact would be on our business at this point. We're watching the topic. We've seen a number of the proposals. And all I can say is, at this stage, it's much too early to really assess what that impact would be.
Okay. Clear. That's all from me.
Operator, I think we have time for one more question.
Thank you. Our final question comes from the line of Avishai Kantor with Cowen. Please proceed with your question.
Yes. Hi. Good morning. My first question is, how much of your scope in financial services is related to regulatory and compliance work? And what could be the effect from a potential deregulation? And then my second question, will the rate of shifting billable employees between delivery locations change in 2017?
On the regulatory piece, about 20% is regulatory. We're not anticipating really any dramatic shift based on the visibility we have right now in that aspect of the business. I'm sorry. Can you repeat the second part of the question?
Will the rate of shifting existing billable employees between delivery locations change in 2017?
You mean how aggressive any type of relocation program for people from one country to another or something like that?
Exactly.
No. There is no any shift. It wasn't aggressive in any points in the history as well, in our case.
That answers my question. Thank you so much.
Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Dobkin for closing remarks.
So first of all, we look forward to seeing you at our annual investor and analyst day on March 14th in New York City. So I just would like to confirm, in general, that we're pretty confident. And I think we addressed concerns and questions. And thanks for attending today's call. And if you have any questions, David should be able to help. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.