Earnings Call: Q3 2020

Nov 5, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the EPAM Systems Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations. Thank you. Thank you, operator and good morning everyone. By now, you should have received your copy of the earnings release for the company's Q3 fiscal 2020 results. If you have not, a copy is available in the Investors section epam.com. With me on today's call are Coddy Dobkin, CEO and President and Jason Peterson, Chief Financial Officer. Before we begin, I would like to remind you 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 GAAP 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. Thank you, David. Good morning, everyone, and thank you for joining us today. For Q3, we delivered solid results with revenue of $352,000,000 an approximate 11% year over year growth in reported terms and non GAAP earnings per share of $1.65 which represents almost 19% growth from the same quarter in 2019. Before providing more specific color on our Q3 performance, I would like to return to November 2019 when we had our Investor Day in Boston and shared our aspirational goals for EPAM 2021. It seems like it was many lives in the past, but I thought it was to remind that the goal we shared back then was to continuously transfer EPAM into an adaptive enterprise with ability to adapt people, platforms and processes into those that quickly respond to change, build and bring to life the digital platforms that connect our people to work seamlessly and enable us to be efficient and effective in all what we do. Extend our leadership across integrated consulting and engineering open opportunities for transformation for everybody, anywhere through net delivery, educational, social and innovation programs. Obviously, we started the journey of corporate adaptability long before our meeting in Boston. But in March of this year, we found ourselves very unexpectedly in completely new situation, which first forced us to forget about our aspirations and then very quickly to apply all we could to address the very urgent and significant changes and realities in business for us and for our clients. This circumstances later become even more challenging with the increase of social and political turbulence across the multiple geographies we operate in. During that time, to our surprise, we recognized that we were better prepared than we initially thought and at the same time we realized that many of the things we had planned to do before the global crisis still needed to be done but at much faster pace. So, with that reminder, let me come back to our Q3 results and highlight several things. At this point, we can say that the total demand for our services in Q3 is more in line with Q1 of this year, our last pre COVID quarter, While the structure of the revenue is visibly changed, some industries and specific companies are very much damaged from demand standpoint and most likely will continue to be under pressure for relatively long time in the future. Some might not survive. On another hand, other industries and companies are motivated to significantly accelerate their own drive to become adaptive enterprises itself and to be better prepared for the next unexpected change whatever it is. We see such trends strongly enough within our current client portfolio and across new clients who started to work with us during the last several months and most in very much urgent manner. So in result, we continue to invest strategically in our key priorities. We shared in November 2019, which include integrated consulting co opam continuum direction, cloud enabled business transformation efforts and data and dev test SAC ops capabilities, in other words, strengthen our traditional engineering DNA direction. And all that while rethinking the practical capability of more flexible and much more distributed ways to deliver or in more traditional terms the future of our work and talent approach, empowered by our digital talent productivity, knowledge and educational platforms, which we are also extending into direct offering to our clients or what we call inclusively our EPAM anyway direction. In addition, we are investing in broader diversified and more balanced delivery allocation strategy across the globe to make sure we have many quality growth hubs for the future. We believe that these investments along with overall expanding R and D programs will continue to positively differentiate us further and continue evolving in competitive environment in which we not only compete with global technology services companies and Light Global System Integrators, but also with leading all brand name consultancies. Our focus on becoming an adaptive organization has made it critical requirement for us to review the majority of our engagements and identify ways in which we can become much more customer centric. We believe that our efforts to 0 in on our customer value have created some new opportunities to expand our traditional engagement model and to help our customers to accelerate their digital programs or in some cases the adoption of new models of working and new models of engagement. Couple of examples to illustrate. 1 of our largest privately held family owned spirit company in the world. EPAM helped transform their digital marketing platform, allowing them the ability to expand their digital footprint and deliver innovative connected experiences to consumers while keeping cost under control. With more than 150 websites and 2,500 web domains, we improved brand consistency and perception while accelerating time to market and delivering significant operational cost saving. And we really could not have done this without a clear collaboration model around the customer, especially given the massive shift to work from home while still expected overall market growth in this segment. Another interesting example is the work we started just several months ago for a global leader of health information technology services, devices and hardware whose products are used at tens of thousands of medical facilities around the world. Their goal was to radically reimagine the role they plan evolving from providing the system of records to supporting actual health outcomes. Our efforts there are underway and we are exercising our new capabilities in consulting around domain technology and cloud architecture, delivering scale and productivity and creating a new template for how we engage with customers from 0 to full transformational program at a different speed. With that, our expectation for Q4 indicates that we will have a sizable sequential step up in our revenue growth, which could be one of our eyes during the last several years. We plan to focus on the sustainability of this rate of growth as well as doing the always hard work of globally managing demand and supply in balanced and measured way and at our high levels of delivered quality. All while keeping an eye on the very dynamic environment, which continues to be impacted daily with the global health crisis, social unrest and economic anxieties. So we understand too well that while the second half of 2020 is shaping up to be better than our initial expectation, we are not at all out of the woods at this point and 2021 is still difficult to predict. As we look forward, we continue to navigate the current challenges while protecting our people, guarding our financial position and investing in our core capabilities, platforms and energy efforts, all that to support our adaptive attributes at Shake. We strongly believe our positioning as a leading provider of digital product and platform engineering services combined with our maturing consulting experience is our key differentiator. We are confident in our ability to come out of this challenging time and more value based and result driven company that will continue growing in post pandemic environment at 20 plus percent growth rate. And I think it's the right moment to mention that just a few days ago Fortune Magazine published their 100 fastest growing companies list for 2020 and included 2 palm in it for the 3rd time and second consecutive with 21st overall ranking and is number 1 in the information technology service category. Now let me hand the call over to Jason. Thank you, Mark, and good morning, everyone. We delivered very solid results in Q3 with better than expected revenue growth combined with strong profitability and cash flow generation. In the 3rd quarter, revenue came in at 652,200,000 dollars a year over year increase of 10.9% on a reported basis and 10% in constant currency terms, reflecting a positive foreign exchange impact of approximately 1%. Revenue for the quarter was higher than our previously guided range due to the solid demand environment, combined with stronger hiring, as well as greater than expected availability across our delivery organization, resulting in higher billable utilization. As Arik mentioned, the broad drivers of activity in our end markets remain unchanged. Our customers are modernizing and moving their applications to the cloud, advancing their digital transformation agendas, and in many cases, building the frameworks and tools needed to drive deeper insights from the volume of data they generate, allowing for better business decision making. Looking at Q3 industry vertical performance, Business Information and Media delivered very strong results, 32.3% growth in the quarter and continues to be our largest industry vertical. Life Sciences and Healthcare grew 11.1%. Software and High-tech grew 9.7% in the quarter. Financial Services grew 4.9% in Q3. Growth in the quarter was impacted in part by the expected ramp down of the European Banking client. Excluding this client, growth in financial services was 12.3%. Travel and consumer declined 2% in the quarter. Growth in this vertical was impacted by a decline in travel and to a lesser extent retail, partially offset by growth across a number of consumer branded goods customers. And our emerging vertical delivered 12.12% growth, driven by clients in telecommunications, automotive and manufacturing, offset by a slowdown in the energy sector. The variability in growth across industry verticals is driven in part by certain of our customers working through end market disruptions related to COVID-nineteen. However, we are encouraged by the early signs of improved demand from many of our customers as they make investments in response to the changing business environment. From a geographic perspective, North America, our largest region representing 59.8 percent of our Q3 revenues grew 8.8% year over year or 8.6% in constant currency. Europe, representing 32.9% of our Q3 revenues, grew 13.3% year over year or 8.6% in constant currency. CIS representing 4.6% of our Q3 revenues grew 13.4% year over year and 30.9% in constant currency. Growth in the CIS region was driven primarily by clients in Financial Services and Mining. And finally, APAC grew 27.4% year over year or 25.6% in constant currency terms and now represents 2.7% of our revenues. In the Q3, growth in our top 20 clients was 17.8% and growth outside our top 20 clients was 6.2% year over year. Sequential growth outside of our top 20 was 4.9%, substantially higher than sequential growth achieved by our top 20 clients. We were pleased to see a higher level of contribution in the quarter coming from new logos and the number of clients outside our top 20. Moving down the income statement. I should first note, we continue to run the business with a cost basis that is lower than our usual levels. While the lower cost basis is driven by operational efficiencies we have delivered across the business, there are also temporary contributors, including reduced travel, relocations and certain administrative expenses, producing lower levels of SG and A spend over the last two quarters. Looking forward, we expect a higher level of cost in a post pandemic environment, but anticipate that some of the efficiency benefits could be maintained longer term. Our GAAP gross margin for the quarter was 35.1% compared to 35.8% in Q3 of last year. Non GAAP gross margin for the quarter was 36.8% compared to 37.1% for the same quarter last year. Gross margin in the quarter was impacted by the continued effect of COVID-nineteen concessions, partially offset by higher utilization and benefit from foreign exchange. GAAP SG and A was 17.9 percent of revenue compared to 20.2% in Q3 of last year. And non GAAP SG and A came in at 15.9% of revenue compared to 18.7% in the same period last year. Similar to last quarter, the reduced SG and A levels in the quarter were substantially driven by lower level of activity related to relocations, travel and marketing events and other administrative related expenses. GAAP income from operations was $96,400,000 or 14.8 percent of revenue in the quarter, compared to $80,600,000 or 13.7 percent of revenue in Q3 of last year. Non GAAP income from operations was $123,300,000 or 18.9 percent of revenue in the quarter compared to $99,700,000 or 17% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 14%, which includes a greater than expected level of excess tax benefits related to stock based compensation. Our non GAAP effective tax rate, which excludes excess tax benefits, was 22.6%. Diluted earnings per share on a GAAP basis was $1.53 Non GAAP EPS was $1.65 reflecting an 18.7% increase over the same quarter in fiscal 2019. In Q3, there were approximately 58,600,000 diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $175,600,000 compared to $119,000,000 in the same quarter for 2019. Free cash flow was $165,800,000 compared to $91,800,000 in the same quarter last year, resulting in a 171.5 percent conversion of adjusted net income. Our continued focus on operational efficiency around invoicing and cash collection, in addition to lower CapEx spending given the current environment produced strong cash generation in the quarter. EVAM ended the quarter with approximately $1,500,000,000 in cash and available borrowing capacity, made up of $1,160,000,000 in cash and cash equivalents, dollars 60,000,000 in short term investments and $275,000,000 available on our revolver. DSO was a record 70 days compared to 73 days at the end of Q2 2020 and 75 days in the same quarter last year. Moving on to a few operational metrics. With a low level of attrition combined with active hiring, we're able to add more than 1500 eBAMbers to the company. The amount of new hires in Q3 is only slightly below our fiscal 2019 quarterly average. We continue to run our recruiting engine at high levels of efficiency as we ramp up our hiring efforts. We ended the quarter with approximately 33,750 engineers, designers and consultants, a 7.4% increase year over year. Our total headcount for Q3 was more than 38,000 employees. Utilization was 78.2% compared to 76.1% in the same quarter last year and down from 83.9% in Q2 2020. Now let's turn to guidance. As we mentioned earlier in the call, as companies continue to focus on modernization and respond to changes in the economic environment, this drives demand for our business. In response to this demand, we are increasing hiring, but continue to expect EPAM to run with lower than normal SG and A expenditures. As a result, we expect Q4 to deliver strong sequential revenue growth at elevated levels of profitability. For Q4, we expect revenues to be in the range of $695,000,000 to $705,000,000 producing a year over year growth rate of 10.6% at the midpoint of the range. In Q4, we expect the impact of FX on revenue growth to be negligible. For the Q4, we expect GAAP income from operations to be in the range of 14% to 15% and non GAAP income from operations to be in the range of 17.5% percent to 18.5 percent. We expect our GAAP effective tax rate to be approximately 15% and non GAAP effective tax rate to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.44 to $1.54 for the quarter and non GAAP diluted EPS to be in the range of $1.63 to $1.73 for the quarter. We expect a weighted average share count of 58,900,000 diluted shares outstanding. Finally, a few key assumptions that spark GAAP to non GAAP measurements for Q4. Stock compensation expense is expected to be approximately $19,500,000 amortization of acquired intangible assets is expected to be approximately 3,100,000 dollars The impact of foreign exchange is expected to be approximately a $3,000,000 loss for the quarter. Tax effect to non GAAP adjustments is expected to be around $5,400,000 and we expect excess tax benefits to be around $8,400,000 dollars We are pleased with the outcome of our Q3 results and are encouraged by what is shaping up to be a strong finish to fiscal 2020. I would like to thank our employees across the globe for their hard work and dedication to EPAM's continued success. Operator, let's open the call for questions. Our first question comes from Bryan Bergin with Cowen. Your line is open. Good morning. Thank you. Hope you're all well. Just wanted to gauge a bit here on outlook as we move past '20. Is there any color you can give on growth recovery trajectory? And specific to some of the industries you mentioned, the large European financial service client, Is that wind down complete? And are the travel and consumer clients, are they at the base level of what you think you could start growing again? Yes. Let me start with, I guess, maybe the more tactical questions. So, in terms of the, I guess, the wind down of the European Banking client, that substantially happened in Q2, it shows up in Q3, which means it will also show up in Q4 and Q1 in a negative impact on financial services growth rates. From a demand standpoint, I don't think we would comment on beyond 2020. But what I would is comment on demand overall. And what we do continue to see is obviously travel is quite negatively impacted. Energy is still negative with the low energy prices in the market. And then if you're in the large physical audience kind of event space, all those businesses are also impacted. Other than that though, what we feel we're seeing is very strong demand across a broad range of industries and even some of the retail and consumer goods companies who may have paused investment in Q2 clearly are beginning to sort of accelerate investments to respond to the changing business conditions. And so, who knows what will happen if there's another round of COVID economic shutdowns and everything, But right now, the demand is quite strong. Okay. That's good to hear. And then just as far as the civil unrest in Belarus, can you just give us an update on the operational contingencies you have? Anything you can provide from the ground there on how you're mitigating risks And anything we need to consider as far as client risk associated with the situation? In the very short, for the last 3 months, we have probably less than half of day some interruption in connectivity and it was already more than 2 months ago. Since then, infrastructure and general working conditions environment were pretty much stable in line with norm and we definitely have a lot of experience of monitoring and kind of seeing what's happening based on experience of 2014 when situation escalated between Ukraine and Russia. So we built very detailed BCP plans then. We were using them, adjusting them to a specific situation in Belarus and again, monitoring this daily. And so far, practically zero impact on our operations. Okay. Thanks guys. Thank you. Our next question comes from David Grossman with Stifel. Your line is open. Thank you. Good morning. I wonder if I could just go back to the question that was just asked just about kind of how the business is trending. And Jason, you gave a good description of where you're seeing relative strength versus areas of relative weakness. If we look at the guidance for the Q4, on a year over year basis, it's very similar to what you saw in the September quarter. But like again, sequentially, I think you're back to more normalized levels of sequential growth that you would experience in the December quarter. So is it fair to say when you kind of balance the issues with demand as well as capacity, if you will, and that we should return everything else being equal to more normalized sequential patterns of growth as we enter next year or is it just too early to call something like that? Yes. I guess the one thing I would say is that, as we talked about, we've got a subsection of the industry verticals that are continuing to be impacted. When I first when we talked about in Q2, we said about a third of our customer revenues were in industries that were impacted by end customer demand. And I would say at this time in Q3, it's more like 20%. And so you're clearly seeing an improving environment. The one thing I think is important, David, is usually we would be having net additions of between 1,000 and 2,000 employees per quarter. And in Q2, we didn't hire that much and we had attrition. And so we actually had a decline in productive headcount of 800 people. And so we're still kind of behind on the availability of talent. And right now, we're back in a scenario where demand certainly exceeds supply. And it takes a few quarters for us to kind of get back to the point where we can sort of match up supply fully with available demand. We did hire faster than we expected in Q3 and that contributed with so 1500 net production headcount additions. And then from a Q4 standpoint, based on the demand that we're seeing, we're expecting to add over 2,000 productive staff and that would be the highest rate of headcount growth that we've seen in the history of the company. So I think it just takes us a little bit of time to sort of build back up the productive capacity to allow for those higher rates of annualized growth. But David, I will say that still 2021 is not very clear. And as you're saying, like we like the first so the first time COVID hit everybody who knows what will be happening with the sort of whatever ways and still pretty unknown. So, you have to keep this in mind. Right. But it sounds like at least for the moment, you're still operating in an environment where the demand the rebound in demand is exceeding supply right now or you're still at your revenue growth, at least for the moment, is still constrained by supply. Is that a fair statement? That's nothing new here. So we're also balancing between these 2, so as you know. Right, right. So this is again, yes, that look more like normal, but with couple of signs, which Jason mentioned that when you have to hold the machines and you need like to take time to go back and we're coming back pretty fast right now. Right. And just I think you also made a comment in your prepared remarks about some of the efficiencies on the expense side, while some are temporary as a result of travel and all these other things going on in the business right now. Can you help us maybe unpack a little bit what how we should interpret that about some of these efficiencies being more enduring? And in that response, maybe you could weave in how your clients are thinking about a more sustained work from home model even if it's not 100% of your business, but how are they thinking about work from home going forward how is that getting priced in to these relationships going forward? Yes. I'll try to do the tax on the SG and A costs and I'll let Art sort of talk more around what we're seeing from a client standpoint. So the last two quarters, we've been around 16% of SG and A as a percentage of revenue. You'll remember probably I guess last year I was talking about SG and A in the range of 18% to 19%. I don't think that I will be talking about 19% anytime soon, but I do think that 16% is obviously too low. And even as we look ahead to Q4, I would expect that Esterline would head towards 17% of revenue. You clearly continue to have limited travel, pretty much no travel in the estrogen A side. We haven't added facilities as rapidly as we would have under usual conditions. We've got some administrative benefits. We're not doing marketing events. Investor conferences are done virtually. And so I don't know what happens in the future, right? But I do suspect that there will continue to be savings as long as we're in this sort of deep COVID, no travel, no physical coming together environment. So for as long as you think that goes on, I think you continue to see some pretty solid SG and A savings. And then in the future, I think that we are definitely seeing that there's opportunities that, let's say, around the margin to run somewhat more efficiently, maybe from a supply and demand matching and then in a few areas in terms of our corporate functions. And so it's too early for me to sort of say what profitability could look like in the future, But I'm somewhat hopeful that there's some opportunities for efficiency. And I know, Art? Yes. I would say, in general, work from home or this new way of working, I think it's very difficult to add anything new to everybody talking about it. Clearly, the COVID put everybody kind of really forward, I don't know for how many years from acceptance what it could be. And I don't think it would go back completely to what it was just 9 months ago. So I'm pretty sure that acceptance is different than if it would be like for a couple of months, testing, but it's already closed for the year and probably will be much more than a year. I'm pretty sure it's going to stay for long and the models will be changing. The level of distribution for on the project would be much more accepted and different approaches to securities will be there as well. So contract terms and conditions from a pricing standpoint haven't really been approached yet as it relates to kind of how much work is being done from home sales force? No, not at this time, David. All right. Great. All right, guys. Thanks very much. Okay. Thank you. Our next question comes from Ashwin Shirvaikar with Citigroup. Your line is open. Thanks. Congratulations guys. Good quarter and the commentary seems positive. I want to delve deeper into the when you say demand is very strong, I believe Jason used those words. The attributes of that, if you can talk about is this conversations and pipeline, the conversion to projects, the decision making pace, contract size, overall pricing, things like that, if you can get a bit more granular and talk about those things as it sets up for the future? I think we tried to bring some color already to this. And there are a number of clients, which is new logos, which are moving pretty fast and there are some new programs. But it's actually all over the spectrum right now. There is some weather consolidations. There are some slowdowns. I think in general, the field that it's much, much closer in overall to what we felt like in normal time. Okay. So I don't know if I can say that it's completely changed, but you feel more pressure and more speed from some clients. Clearly, there seems to be, as Art just said, increased sort of an acceleration of kind of focus on modernization. And so you do have a series of customers that really do seem to have accelerated the pace of their journey. I think Ark in his prepared remarks talked about the high-tech IT software company focused on the healthcare space. And that was one of the companies that we had talked about, I believe, in Q2, where the relationship had been established actually during the COVID times when we couldn't meet face to face and they couldn't visit our delivery centers. And that relationship is developing very nicely. And they're likely to hedge towards our top 20 very quickly. And the server relationships are establishing and accelerating very, very quickly. And then again, other clients just continue to sort of move along on their agendas. But yes, I think you've seen the industry vertical. We continue to have strong growth in the BIM space. Insurance continues to be an area where we see accelerated demand. We expect to see strong growth in Healthcare and Life Sciences in Q4 and beyond, and then solid growth in the high-tech and IT or high-tech software portion of our portfolio. I think the difference is like normal from our standpoint that everybody understands it. Like before it was much more longer term, right now like you feel that it could change based on what's happening. And like when we thought like 3 months of COVID probably going to be down now we think that is going up and what would be reaction on this? So there is some question in there all the time. Understood. Yes. The other question was on cash flow and your balance sheet, obviously, a good solid quarter with regards to cash flow performance. Were there any pull forwards or any quirkiness just because of the environment? And then with the balance sheet, I believe this may be the first time you have over $1,000,000,000 in cash. What's the cash usage or capital allocation strategy you're thinking of? Are you more likely to look for bigger acquisitions, something more transformational or just continue with your current philosophy? Yes. So, the only one time ish item that I can think of is that we obviously, your CapEx has slowed down somewhat as you're not building out facilities and then some of those things to support headcount growth. And so, you've had a slowdown in your CapEx, but really it's driven by the strong profitability and the significant improvement in DSO, which is down to 70 days. And so that's what's driven most of the cash generation. From a standpoint of kind of what we're going to do with the cash or how we're thinking about it, we're still focused on the inorganic strategy. Our evaluation of opportunities continues to be active and I do expect you'll see us announce some things over the next couple of quarters. And again, generally on the smaller side, but I think there's definitely some opportunity to do something somewhat larger than we've done in the past. Again, it will always be carefully evaluated and will be prudent in our decision making, but could be somewhat larger than deals than you've seen in the past years. Got it. Thank you, guys. Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open. Hey, this is Jonathan on for James. Thanks for taking my question. How are you thinking about the recent shutdowns across Europe? Have clients expressed concern or delays around decision making because of it? And does 4Q guidance contemplate any impact? Yes. So, impact of potential shutdowns or shutdowns in Europe on demand and client. We didn't see any specific correlation yet. So again, clearly, like I just mentioned a couple of minutes ago, the question since there at the same time, it's very different than it was March, April when nobody knew how it's going to work. Right now, it's everybody much more comfortable. So no impact which we see. So it's everything similar to what we saw like a month ago, 2 months ago, the direction is there. But again, the question, what impact will be in another month or 2? Like seeing yesterday, U. S. Numbers were 100 and 8,000 people in, exit in, what would be the next, who knows. Yes. No impact so far. I would say that our guidance has tried to be thoughtful in terms of potential furloughs on the part of clients maybe in the month of December that we might not know about at time and also whether or not we could have any sort of productive decline due to some of the flu flow issues. So we tried to take that into consideration. But as Ark said, we haven't seen any impact on decision making in Europe at this time. Just in general, from work environment, like everybody really comfortable and working from home and distributors through like again, I know that I'm saying what everybody else says, so that's nothing different here. Got it. That's helpful. And we continue to hear about vendor consolidation across the broader IT services space. Can you I think you mentioned that in some of your prepared remarks. Can you elaborate on some of the competitive environment and dynamics, particularly against some of the larger systems integrators and consultancies? So, we don't have any specific numbers to share. But generally, that's been happening because like when the hit happened in Q2, a lot of companies were reviewing their vendor list and some of the vendors were definitely benefiting from this. We were benefiting in multiple clients as well. So that's happening and continue to happen. And I would say that not only has our brand been improving, but also just the reliability of our delivery in Q2 and Q3 during the more challenging at times in COVID. We definitely had some wins from a better consolidation in that standpoint. So some of our competitors and size clients had more trouble or let's say more challenges and that gave us some opportunity to pick up some business in those accounts. Very helpful. Congrats on the quarter guys. Our next question comes from Ramsey El Assal with Barclays. Your line is open. Hi, thanks so much for taking my question today. I wanted to ask about the relative contribution to growth of kind of cross sell versus new logo signings and where that balance today stands maybe relative to before the pandemic And also which one is more critical as we head into next year? So the simple answer would be as always like both of them very important. And so traditionally, we were benefiting from growing with existing clients. And I think the level of kind of the structure of our client portfolio still allows to grow a lot from existing brands and cross sell. At the same time, we mentioned one case already today a couple of times when we have new logo growing extremely fast with us. And we've seen this as a real opportunity to diversify more. But cross sell is extremely important. And when we're talking about digital consulting, our traditional engineering, we've seen more and more clients where we enter door from one side and basically very quickly bringing additional service features into our triggering another side of the capabilities again. So, that's happening much more than before. That's happening more than before. Okay. And then I also wanted to ask, just in general, can you update us on the sort of talent environment in the context of the pandemic? Are things normalizing a bit? How is attrition and some of the key metrics that you track? And just your general comments there would be appreciated. Sure. And our general comment also not changing in this to answer in this question because it's pretty consistent for the last 8 years. Thailand is very critical. There is huge competition for this. And I think with all what's happened even in Q2 when it seems like credit started, it really didn't impact the pressure for pressure on availability of the target. Because if you think about the pressure was going like to more distribution, to more work from home, to more pushing outside of the place where you are. And in general, like a lot of companies had to reach out to additional vendors or expanding their locations globally. So it will become easier. At the same time, we talked for last year many times about educational, about trainings and all of this and this is becoming even more important part of our operation. And we try to bring like our memory work to November 2019 when we met in Boston and it was a big part of our presentation as well. And actually very serious advances in this area in the last 12 months for us as well. So we're trying to have much more control in this area. Our comment on the, I guess, the demand for talent, I'll just comment on some of the internal metrics. So the attrition within the company has continued to climb, at the clearly focused on the safety and well-being of employees, but also focused on making certain that employees remain kind of committed to the journey here at EPAM. So we actually completed our annual promotion campaign. So for the whole company, we've already done that this year. That impact of annual compensation increases is actually fully embedded in the Q3 results. So we try to make certain that as we see improving demand that we're making certain that we're supporting our employee base. And I think a number of the other things we've done, including ARC and others' leadership has contributed to actually a decline in attrition rather than an increase. Great. I appreciate your answers. Thank you. Our next question comes from James Friedman with Susquehanna. Your line is open. Ark, in your prepared remarks, you talked about changes in engagement. You gave the example of the Spirit Company and the healthcare clients. I was wondering though if you could elaborate on that a bit. Is that the way that you're engaging the customer, the way that the customer engages their customers, both, any perspective on that would be helpful? I think perspective in general, very simple. And again, don't think it's eye opening. But if you think what's happened 6, 9 months ago, this call is that some companies which we are thinking that they are very much on the right place with their digital transformation programs starting to find out that actually what was done during the previous couple of years should be very quickly redone. And some companies which were postponing their programs realized very quickly that they have to actually jump as well if, again, business allowed, if finance allowed to do it. From this point of view, both examples exactly illustrating this point. For the first one, they put a lot there already, but then realize that the whole digital ecosystem should be very different with this, I don't know, 5, 10 years jump in the future. And the second one really probably felt a pressure to do it immediately and probably we're waiting for maybe a year, maybe 2, maybe 3 before and now jumping kind of very quickly to this trend. And I think that's true across different vendors. While again, the general picture, the whole demand is still impacted by some industries and companies, which is in a very unfortunate situation right now. Argh, you also said that you felt that the Q I thought you said that the Q4 could be among your highest growth. I apologize if I misheard that, but that seemed important to what's that. What we meant that sequential growth Q4 versus Q3, looks right now is one of the highest during the last probably 2, 3 years. This is sequential growth, okay. But we also need to understand the whole dynamic because you cannot compare this to normal year because you went down and then we're going up from different situation. And then last thing, you also said that some companies may not survive. So that's unimportant too. What do you think? What's that about? I think it's again pretty general knowledge and some companies already know surviving and some companies in very specific markets definitely under huge, huge pressure. Like, if you're talking about some companies which are very tied to the physical space, Who knows how long they will be able to handle the kind of COVID situation. And again, our understanding about timing 6 months ago and now very different again. I'm pretty sure 6 months ago what number of predictions that it will be much longer, but we as a human being, we are hoping for the best. And now we're in this reality that nobody can say it's another 6 months or another 18 months. Our next question comes from Jason Koffelberg with Bank of America. I wanted to follow-up with I wanted to follow-up with another margin question. I thought the SG and A commentary you gave was very helpful, Jason. So I'm just wondering about the puts and takes gross margins going forward. I know there's been some elevated utilization this year, but obviously you've had some client concessions too. So how should we be thinking about the moving parts as we try and put a finer point on our expectations for gross margin next year? Yes. So maybe I'll first focus on just kind of Q4. So generally what you have in Q3 is you've got higher levels of available working days or bill days. And so generally that has a positive impact on gross margin. And then you have lesser days in Q4, which has a negative. But we are beginning to see declines in the COVID related concessions that have impacted both revenue growth and profit to a certain extent. Utilization continues to run a little bit higher and probably will be somewhat higher in Q4. And so I think you'll see the gross margin kind of remain around the level that it was in Q3. And on a go forward basis, I probably shouldn't be talking about 2021 until we get to our Q4 call and add a little bit more thoughtfulness around it. But if I just talk about moving pieces, there's quite a bit, right? We'll clearly see a reduction in the COVID concessions as we enter the fiscal year. At the same time, some of the questions that were asked earlier around what happens with pricing and everything, the pricing environment is not exactly the way it used to be. In some areas, we clearly have there's some opportunity because demand is so strong. But until there's a global improvement in the overall macro economy, I don't think you'll see same types of pricing that you might may have seen in past years. Okay. What's your initial sense of how COVID is impacting client budgeting process for 2021 just in terms of the timing and the overall approach to those processes? I think we already kind of answered this question. There is a lot of acceleration in movement. You're asking about internal processes or program, decision on the program execution or what exactly? No, just the clients as they start to think about their budgets for next year, how are their budgeting processes changing just in terms of timing, or just the overall approach in light of COVID? I think this is the time of year when they would start to shape those plans for next year. So as you're talking to your customers, are you getting any sense for whether or not budgeting processes are going to be pushed out or they're going to look different this year than in prior years? I think it's a little bit early this time. Even the normal year, it will be a little bit early this time. But definitely, we feel that this conversation starts and still can happen, but And everybody kind of still in their annual cycles traditionally, but at the same time, I think everybody understands that the cycles will be much more quarterly or even monthly and whatever decision would be made in the next several months, it could change very quickly. And I think everybody now in this long planning cycles thinking a little bit differently. So but in any case, it's too early in the beginning of November to comment. Okay. That's a nice void situation. Makes sense. All right. Thank you, guys. Thank you. Next question comes from Maggie Nolan with William Blair. Your line is open. Thank you. Hi. How much are you seeing clients ask for pricing concessions versus maybe the March timeframe? And should we expect any changes to pricing structure fixed versus time and materials, etcetera? We've had a subtle shift towards fixed fee. I think you'd see it in our fact sheet, but I don't think you'll it may continue to drift a little bit with a slightly higher fixed fee component, but again, we're still going to substantially be the T and M from a revenue generation standpoint. And it's definitely very different environment that was in March. So I think while we not expecting exactly coming back to the rate, can you say it increases like it was 12 months ago, it's a very different environment right now. And when we're talking about growing demand, it's very visible, at least for us. And we're seeing pretty interesting kind of competition for right capabilities to execute on the programs and much faster. So in some situations, there are again very different fields than it was March April. Okay. And then are there any specific goals or a timeline for your efforts to create a more kind of diverse global workforce, whether that be in terms of geographic distribution or embracing remote work arrangements in a more meaningful way? Yes, this is like pretty yes, I understand. This is pretty long conversation. But in general, you probably see what we're doing for the last 8 years and how we diversified our global delivery strategy coming just from pure Eastern Europe going to China, India, Latin America and this is happening as we speak as well. So this diversification is happening as well. On top of this, we're thinking about and we mentioned what it means work of the future for us as well. And I think the next level of just globalization, but actually distribution of the work would be happening. And again, it's coming back to our efforts to have right platform support for this, right talent management practices, again, supported by platforms. We think that COVID just pushes this strongly to the future quickly. And again, just on kind of more tactical metrics. So the fastest growing geographies for us in Q3 in Mexico, India, Europe, So we continue to kind of diversify and become increasingly global within the CIS region. We're growing most rapidly in the Ukraine, But you continue to see us sort of expand our geographic footprint. Thank you. Our next question comes from Vladimir Bespalov with BTV Capital. Your line is open. Hello. Congratulations on the number and thank you for taking my questions. I want to ask you about utilization. The Q3 is usually a period of vacations, but this time it was very different. So is there any risk for the future that a lot of vacation time has been accumulated by employees and this might affect the supply side sometime going forward? And I would also ask and want to ask on the comments which you made during the call that in your guidance, you built in some potential issues, I would say, with clients in December and things like this, which are not materializing yet. So maybe from the supply side, what kind of growth, if everything is good in terms of attrition, hiring, utilization and things like this, what kind of growth you could support in the 4th quarter if everything is good? Thank you. All right. So let me just clarify a little bit on the comment. The furloughs still can come, right? So we just try to be thoughtful around the impact on what you described, either vacation or furloughs or potentially any other types of disruption. And so again, there's just a thoughtfulness. Again, at this point, we'll still see what happens here in the remainder of November December. I think from the standpoint of clearly demand exceeds supply, but it would be hard to sort of it'd be hard to sort of size. Again, there's too many kind of puts and takes in the numbers to sort of size what upside could be. I think we feel that the $695,000,000 to $705,000,000 is a well reasoned number based on the environment. I should comment that we don't expect to see much FX benefit in the quarter and we also have a much lower level of acquisition or inorganic. So that 10.6% it's in the midpoint is pretty much truly at 10% plus inorganic constant currency growth rates. And as Ark said, it's kind of one of the highest sequential growth rates that we've seen year over year. So I assume it's sequential growth rates that we've seen over time. And so I think it's that again, it's a good solid sort of revenue guidance. The question was about Q4 or in general for the future? It was mostly about Q4, but if you could comment on the future, it would be great. I think our traditional answer would be we would like to come back to our 20 plus. And again, that's a balance between demand and supply and it's about the quality of the supply. So that's why we are still targeting our 30, 20 plus for the future. Thank you very much. And on the accumulated vacations and things like this, maybe you could comment a little bit how do you see this or there is no problem with that? Yes, I don't think there's any I mean, again, our guidance, both in terms of revenue and profitability incorporates, let's say, an appropriate estimate and we're pretty focused on what that looks like and what the productive capacity looks like. So I wouldn't expect anything unusual to occur there. Okay. Thank you very much. Thank you. Our last question is from Arvind Ramnani with Piper Sandler. Your line is open. Hi. Thanks for taking my question. Most of my questions have been answered, but just if you could talk about your enterprise sales in a remote working environment. You're certainly not able to visit your clients at the offices or at industry conferences, but have continued to grow quite nicely. Can you talk a little bit about how you're generating your leads, how you're closing continuing to close large deals, be that new clients or even at existing clients? I don't know how exactly to answer this question. So basically, through Microsoft Teams and Zooms now. So other than that, I don't think much changes. Yes, we thought it would be huge impact and everybody else as well, but I think people finding the way how to communicate. Great. And then just related to this question, if you kind of look at 2020, are there some lessons you have learned from an operational perspective that you expect to use in a post pandemic world? Are there things that have that you're looking to change from operational perspective as you kind of look ahead for the next 2 years? I think we probably got somewhat nimbler, particularly in the area of sort of supply and demand matching. And there's a number of things that we've done to, I would say, sort of accelerate processes of getting resources onto accounts. And then I think one of the other areas just from a financial standpoint is I think we have made some real changes in our invoicing and cash collection processes and that's part of what has contributed to that decline in DSO and the real improvement in cash collection and our cash and our cash balances. All right. Thanks and good luck for the remainder of the year. Thank you so much. Thank you. I'd now like to turn the call back over to Arkadiy Thapkin for closing remarks. Thank you again for attending the call today. I hope everybody will stay healthy during this time. And if you have any questions, Dave is available to help us all of us. Thank you and talk to you in 3 months. Ladies and gentlemen, this concludes today's conference call. 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