Earnings Call: Q3 2019

Nov 7, 2019

Greetings, and welcome to the EPAM Systems Third Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Straube, Head of Investor Relations for EPAM Systems. Thank you. You may begin. Thank you, operator, and welcome, everyone. By now, you should have received your copy of the earnings release for the company's Q3 2019 results. If you have not, a copy is available at epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President and Jason Peterson, 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 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 Investor section of our website. With that said, I would now like to turn the call over to Ark. Thank you, David, and good morning, everyone. Thanks for joining us. We delivered revenue of $588,000,000 reflecting an approximate 26% year over year growth or 27% in constant currency terms. Additionally, non GAAP earnings per share was $1.39 which represents approximately 19% growth from Q3 of 2018. As we have discussed in the past, the challenges facing our clients continue to be complex and multidimensional. The digital ecosystem where everything is coming together, including people, suppliers, consumers and businesses into a scalable and flexible environment brings with it a completely different level of sophistication in designing, building and delivering dynamic experiences, platforms and systems. And while many companies are investing in digital technologies across a very diverse landscape of system of record, engagement and insights, the use of technology to solve currently visible problems doesn't ensure a future success. Instead, organizations must think steps ahead and turn themselves into constantly changing adaptive enterprises by empowering these capabilities in properly designed and well built digital ecosystems. This means that our clients must think about how to meet the challenges addressing their market threats and opportunities as well as how to adapt to both technology and constant organizational changes and do so with a high degree of agility that continues to be very critical. As a result, during the last several years and season Q3, we have seen inconsistent demand environment that continues to present us with opportunities to expand from our traditional product engineering and technology led lines of businesses into adjacent business and experience driven areas of customer needs. That in turn has forced us not only to advance our consulting offerings, but to bring those capabilities much earlier in the engagement cycles in comparison to what we did just several years ago. This evolution is also challenging us to think about how to properly orchestrate all aspects of our consulting capabilities together, including business experience and technology, all of which we have been carefully advancing during the last few years, both organically and through a number of targeted acquisitions. Adding this on top of our traditional strength and ability to build high quality solutions, platforms and experiences at speed and scale gives upon the ability to extend further across the demand landscape and allow us to serve our clients with more complex requirements in both vertical and horizontal domains. So today, we feel the time is right to position ourselves more firmly in a way that reflects the new diversity of our business. That is why in September, we launched EPAM Continuum, the integrated brand which links together our capabilities in business consulting, technology consulting, experience and innovation consulting. EPAM Continuum is part of the EPAM organization and along with our core product engineering capabilities brings to the market integrated senior team of practitioners that can respond to complex client needs at pace and across multiple points in our clients' organizations to help them address the challenges of adaptive enterprises with speed and agility. Similar to our emphasis on talent development and education, driving higher levels of quality through our engineering excellence and evolving our market facing and ecosystem partner models. The launch of a pump continuum is another example of our never ending journey to change the pump and stay relevant to our clients and the market. As just mentioned, our acquisition efforts continue to be one of the sources of such change. On Tuesday, we announced the acquisition of Naya Technologies, a data and cloud migration consultancy based in Israel and San Jose, California. This acquisition complements EPAM existing capabilities and also expands our geographic footprint into new Before I hand the call over to Jason, I would like to highlight just one of the many recognitions EPAM has received since our last earnings call. In August, EPAM was included in the list of Fortune 100 fastest growing companies for 2019, the ranking of the world's best performers over the last 3 years in revenues, profits and stock returns. It's interesting to note also that EPAM was the only information technology services company featured on 2018 list. So to summarize, despite some of the macro level uncertainties, which has been resolved for multiple quarters, We are pleased with our 3rd quarter results, which reflect broad based consistent high quality earnings that underscore our ability to execute and grow in the market that continues to demand high end expertise and ever changing capabilities. I will now hand the call to Jason to give more details on our Q3 results as well as to share our Q4 and annual guidance. Jason? Thank you, Ark, and good morning, everyone. In the Q3, we produced strong results in both revenue and profitability, while delivering across several key operational metrics. Here are a few highlights from the quarter. Revenue came in at $588,100,000 a year over year growth of 25.6 percent on a reported basis and 27.2% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.6%. Revenues from acquisitions contributed approximately 1.5% to revenue growth in the quarter. Our demand patterns for this quarter were relatively consistent with those of previous quarters. We saw strong broad based growth across most industry verticals. Looking at Q3 revenue growth across our industry verticals, financial services delivered 24.4% year over year growth with demand substantially driven by offerings in asset management, payment processing and insurance. Additionally, growth in the quarter was positively impacted by the timing of revenue Software and high-tech grew 22.9% in the quarter, driven by demand for product Software and high-tech grew 22.9% in the quarter, driven by demand for product engineering services. Travel and consumer grew 11.2% in the Q3, reflecting increasing demand for e commerce, replatforming and data engineering in retail, offset by the continued ramp down of a few consumer clients. Rounding out our vertical performance, we saw very strong growth in Business Information and Media, which posted 29.3% growth in Q3, driven by demand for data and analytics services. Life Sciences and Healthcare grew 49.7%, reflecting strong growth across both industries with demand for services and R and D IT in addition to customer facing solutions and applications. Emerging Verticals delivered 35.1% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region representing 60.9% of our Q3 revenues, grew 26.2% year over year or 26.5% in constant currency. Europe, representing 30 2.2% of our Q3 revenues, grew 24.4% year over year or 28.4% in constant currency. CIS representing 4.5 percent of our Q3 revenues grew 43% or 42.9% in constant currency. And finally, APAC grew 4.1% or 5.5% in constant currency and now represents 2.4% of our revenue. Our revenue results for the quarter are underpinned by a diverse set of growth drivers across the portfolio of clients we serve. In the 3rd quarter, growth in our top 20 clients was 17% and our clients outside our top 20, which represent approximately 60% of revenue, grew 32% compared to the same quarter last year. Moving down the income statement. Our GAAP gross margin for the quarter was 35.8% compared to 35.7% in Q3 of last year. Non GAAP gross margin for the quarter was 37.1% compared to 37.3 percent for the same quarter last year. GAAP SG and A was 20.2 percent of revenue compared to 19.9 percent in Q3 of last year, and non GAAP SG and A came in at 18.7 percent of revenue compared to 18.2% in the same period last year, in line with our expectations. Our SG and A priorities remain focused on building capacity and capabilities to support our longer term growth plans. GAAP income from operations was $80,600,000 or 13.7 percent of revenue in the quarter compared to 64.6 percent or 13.8 percent of revenue in Q3 of last year. Non GAAP income from operations was 99,700,000 or 17 percent of revenue in the quarter compared to $82,100,000 or 17.5 percent of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 16.2%, which includes a $4,200,000 excess tax benefit related to stock option exercises investing of restricted stock units. Our non GAAP effective tax rate, which excludes the excess tax benefit and includes the tax effect on non GAAP adjustments was 21.5%. Our non GAAP tax rate reflects a $1,200,000 discrete benefit in connection with our 2018 tax return filing. Diluted earnings per share on a GAAP basis was $1.16 which reflects the impact of foreign exchange and a lower than expected excess tax benefit in the quarter. Non GAAP EPS was $1.39 an 18.8% increase over the same quarter in fiscal 2018. In Q3, there were approximately 57,800,000 of diluted shares outstanding. Now turning to our cash flow and balance sheet. Cash flow from operations in Q3 was $119,000,000 compared to $102,300,000 in the same quarter last year. And free cash flow was $91,800,000 compared to $94,100,000 in the same quarter last year. DSO was 75 days compared to 79 days at the end of Q2 and 81 days in Q3 of last year. The lower than average DSO this quarter was the result of our ongoing operational focus in this area. And moving on to a few operational metrics, our total headcount for the quarter ended at more than 35,400 employees, which includes approximately 31,004 delivery professionals, a 24.7% increase year over year. During the quarter, there were more than 2,000 delivery professionals who joined EPAM primarily in our global delivery locations. Utilization was 76.1% compared to 76.4% in the same quarter last year 78.4% in Q2. Now let's turn to our business outlook. Starting with fiscal 2019, based on continued strong demand, revenue growth will continue to be at least 23% reported and at least 24% in constant currency terms, factoring in a 1% estimated unfavorable foreign exchange impact. We expect GAAP income from operations continue to be in the range of 12.5 percent to 13.5 percent and non GAAP income from operations to now be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to now be approximately 15%, which includes an updated assumption for a lower level of excess tax benefit and our non GAAP effective tax rate can now be approximately 22%. Earnings per share, we now expect GAAP diluted EPS to be at least $4.43 for the full year, which reflects the impact of the higher GAAP effective tax rate. Non GAAP diluted EPS will now be at least $5.35 reflecting a modest improvement in expected profitability for the full year. We continue to expect weighted average share count of 57,700,000 fully diluted shares outstanding. For Q4 of FY 2019, revenues will be at least $616,000,000 for the Q4, producing a growth rate of 22% in both reported and constant currency terms. So we anticipate there will be an insignificant foreign exchange impact. We expect GAAP income from operations to be in the range of 13.5% to 14.5% and non GAAP income from operations to be in the range of 16.5 percent to 17.5%. We expect our GAAP effective tax rate to be approximately 21 percent and non GAAP effective tax rate will be approximately 23%. Earnings per share, we expect GAAP diluted EPS will be at least $1.19 for the quarter and non GAAP EPS will be at least $1.43 for the quarter. And lastly, we expect a weighted average share count of 57 point 9 million fully diluted shares outstanding. Finally, a few key assumptions that support our Q4 GAAP to non GAAP measurements. Stock compensation expense is expected to be $14,800,000 amortization of intangibles is expected to be $2,700,000 The impact of foreign exchange is expected to be approximately $2,000,000 loss. Tax effective non GAAP adjustments is expected to be $4,500,000 We expect excess tax benefit to be $1,800,000 And lastly, one more assumption that is not part of our GAAP to non GAAP assumptions. We expect interest and other income to be $2,400,000 in Q4. In summary, we are quite pleased with our 3rd quarter results, which reflect continued strong demand for our services, underpinned by a diverse mix of projects and offerings across the industries we serve. With that, let's open up the call for questions. Before we open the call for Q and A, I do want to mention that Ark and Jason are in different locations for today's call and we could experience a slight delay in responding to questions. With that, operator, can you please give instructions for the Q and A? Thank you. At this time, we'll be conducting a question and answer session. This is Damian on for Ramsey. I wanted to ask about your revenue growth expectations here and any potential conservatism that's in your guidance. I know you have a tough comp coming up here in Q4, but I would have thought that after the acceleration this quarter that you raised full year. So maybe what's stopping you there and how much conservatism is baked into your expectations? And then maybe as we move into 2020, is there any reason to believe that the nice growth that you've seen this year is set to decelerate, seems like all the segments are chugging along nicely. Is there any reason that we can't use this year's exit rate as that sort of baseline for 2020? Yes. So I think your points are good ones. So we continue to experience strong demand for our services, but the compare in the Q4 2018 is a challenging one. I think you'll remember that the growth in that quarter on a constant currency basis was 29% 26.5% if you strip out the inorganic piece. So that's the highest growth rate since I've been here. We also generated 70% growth rate in the Life Science and Healthcare business, and that business actually grew 26% sequentially in Q4. So that is just it's a tough reference point. In addition, what we saw this year is a slightly different pattern in our CIS revenue recognition. Usually, we'd see a higher than we would than we would expect based on traditional patterns. So that $3,000,000 recognized in Q3 of 2019, I think earlier in the year, we would have expected that would probably show up in Q4 of 2019. So again, I think that the guide from a revenue standpoint is a fair guide. And then from a growth rate standpoint, in 2020, we continue to see strong demand for our services. The demand environment that we see is unchanged from the last conference call. And right now, we're expecting to continue to see a growth rate in excess of 20% in our fiscal 2020. Yes, that's great. And maybe I'll just 0 in here on my follow-up on the APAC region, saw a slowdown there. Is there anything to do with maybe like the U. S.-China trade war or Hong Kong? Or is it just simply tougher comps? Any broader commentary on the demand environment in the Asia Pac region? Thanks guys. Yes. I would say that's probably specific to EPAM is that as you would know, most of our growth has come out of Western Europe and North America. APAC, historically, we went to because our clients in North America and Europe had asked us support their operations there. It hasn't been a huge area of focus for us because we've been driving demand and said or supporting demand out of our North American and European customers. And so, I think over time, it will be an area of focus for us and you will see greater growth. But at this point, I think what we're doing is we're prioritizing resourcing to support our large and rapidly growing customers in North America and Europe. All right. Great. Thanks so much. Thank you. Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch. Please proceed with your question. Good morning, guys. Thanks. I just want to start with a couple of questions on the NEA acquisition. What kind of contribution to revenue are we thinking there for Q4 as well as 2020? And just any color on the number of employees they have and Israel really the main new geography they help bring you into? Yes. As we mentioned, it's data related and migration to the cloud consultancy. It's a small company, so the contribution from all our acquisition is a little bit over 1%. So there is no much impact on numbers. But from capabilities point of view, it's a nice addition to our technology consulting group. And we do believe that it would improve our offering mostly in U. S. And Western Europe and also giving us kind of additional benefits to have office in Israel and be able to source some specific talent available there, which we all know. So just to clarify, all acquisitions including Naya would make up about 1% of the growth rate in Q4 of 2019. So it's a we think an interesting acquisition, but again, it's more of a capability in play than it is a substantial increment in terms of revenue. Okay. Okay. Understood. And then, can you comment on employee attrition in the quarter? I'd like to keep checking in on that, just obviously given the war for digital talent. And maybe as part of that, any color you can provide just in terms of the hit rate you're seeing these days on campus offers? So it's mostly in line with what we were sharing during the last quarter, so maybe even last several years. So it's all a tough environment. Our attrition rates better than last year. So we're putting a lot of efforts to make sure that retention working, training activities from our side and focus on education and internal learning is very high. So we put in a lot of efforts to make sure that it's not impacting our growth. But again, in general, it's always challenging, but I don't think there is any news specifically this quarter. Okay. If I can just sneak in one more real quick. It just looks like the growth rate in fixed price revenue, that seems to be accelerating. And I was wondering if that's reflective of a broader trend in terms of client preferences or any certain project types that you see lending themselves more to the fixed price model? Yes, not really. So you certainly see it show up in the numbers, but let me kind of explain to you what you're seeing is some of the acquisitions that we have do have these small sort of fixed fee arrangements that might be projects that last a couple of months. But what you're really seeing in terms of the change in the percentage of fixed fee in this quarter is we have a large customer that has been growing rapidly that has our pricing arrangement with them involves sort of pricing per team. And so it's based on the component of the team, the size of the team, the skill sets of the team. And so it's very time and materials like. But because the pricing is done on a per team basis, it turns out that it was classified as a fixed fee. But again, it's traditional kind of agile kind of build new development type work. So it doesn't represent anything really different. Just the pricing is like, let's say, a vague variant on time and materials that does show up in a fixed fee classification. Okay. Very helpful. Thank you, guys. Sure. Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Hi. As we think about getting into more consulting type engagements earlier in the cycle, happening. We're not providing any specific KPIs or measurement on this, but I think it's working in line with our expectations. And that's why we're also announcing the pump continuum brand now to make sure that we can do right go to market approach and explain to the client that that's the capabilities which we now can offer and be kind of much earlier in the game to compete for larger deals from end to end. It is happening. Okay, great. And then as you think about the company continuing to scale up, what is really the optimal structure for EPAM in terms of how that employee pyramid is balanced? How many reporting levels are necessary versus what would bloat the company and make you less agile? I'm trying to understand whether or not EPAM prefers a horizontal structure or if there's a little bit more hierarchy that needs to be introduced into the model. We do not believe that we need more hierarchy than we have. We do believe that we probably need even less And that's one of the key points in our efforts all the time. And at the same time, it's very dynamically changing based on the need. So we don't know what's the optimal. We're trying to find the right configuration and kind of evolving. I think we will talk maybe a little bit more about it during our Investors Day like in couple of weeks. Understood. Thank you. Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question. Hey, guys. Thanks. I just want to touch first, just given where we are in the year right now on what kind of conversations you're having with your clients as they start thinking about 2020, from a demand standpoint and from a specific, you know, more and more granularity of where they're actually looking to spend, maybe even on a vertical basis, if you can? Listen, we understand this item to know what will be in the future. And at the same time, conversation at this period of year, still more focused how to finish the year. So not too much clients willing to go in conversation about next year really. And probably very boring answer, but we don't expect any significant changes in the tone from last year. And there is demand for people, for companies which can deliver and complexity growing. So we do believe that the demand would be good. Anything can happen, anything can happen as we all know from economies standpoint. So let's wait. Yes. So from a demand environment, we're not seeing any change from really any change from the last quarter. We've done an early prelim look at our numbers for 2020 and do believe we'll continue to grow at a rate above 20%. And the only thing to sort of call out I have just in terms of overall demand and this is very consistent with what we said throughout this fiscal year. So this is not new commentary. But we continue to see kind of some pro and some con in retail in Europe, where you've got some clients who continue to make investments and continue to grow with EPAM, other clients who are beginning to slow down their investment levels and those clients are actually having some modest decline. And so you've got some mix in what I call kind of retail in Europe and particularly in the U. K. And then the other area of and we've talked about this throughout the fiscal year is that just the European banking demand is less certain at this time. And that's unchanged from I think we talked about this even in Q1 of 2019. I mean, it looks like your Financial segment continues to do very well, in fact accelerate. I know some of could have been timing, but nonetheless, I mean with Europe being a little bit slower perhaps, I guess it speaks to the North American side doing better than maybe earlier in the year. Is that fair? Yes. In some ways, I think our portfolio might be different than many of our clients. And so, we've got very strong growth in asset management, we've got very strong growth in asset management, in insurance, in FinTech. And there's a whole series of different in payment processing. And so I think there's probably less exposure to us to large banks. And while you're seeing the high growth is you're seeing growth in these other areas of our portfolio. And plus, as Yitai pointed out a little bit of that Russian revenue recognition, which is largely financial services. And that's why you're seeing the high levels of growth in our financial services portfolio. That's great to hear. Just one last quick one is just on cash on hand has gone up nicely and your balance sheet looks really good. So just when we're thinking about priorities now, I mean, you've done a number of smaller tuck ins, just anything in the larger size that's in your pipeline or discussions right now from an M and A? I assume it's all going to be used either for just keeping cash on hand or M and A rather than Yes. So I think you've seen us do more acquisitions this year. As you point out, they've been small sort of tuck in acquisitions. I think you'll continue to see us do a fair number of acquisitions in the coming year. And I think it's likely that the acquisitions or at least one or more of them could be larger and that would be somewhat consumptive of cash. And then the other place where we are using cash is continue to build out our physical infrastructure and our delivery centers. And so those are probably the two places where you'll see cash used in the coming year. Got it. Got it. Our next question comes from the line of Mayank Tandon with Needham and Company. This is actually Kyle Peterson on for Mayank. Thanks for taking the questions. Just wanted to start on margins, the profitability has obviously looked very good the last several quarters kind of towards the top end of that kind of 16% to 17% And the 4Q guide implies that to continue. So how should we think about margins moving forward? Is 2016, 2017 still the right band to look at? Or should they be more kind of on the upper end of that? Or just want to see your thoughts on the profitability outlook? Yes. So as you point out, we run-in the top half of the range in all quarters in 2019. At the same time, though, we continue to believe that operating in the 16% to 17% range is appropriate for the business. So, I probably wouldn't have a different guide than what we've talked about throughout this fiscal year. Great. That's helpful. And then just one quick follow-up. On the software and high-tech vertical, at least on a sequential basis, seem to be a little softer relative to all the other verticals, which were quite strong. Is there any seasonality there that we should pay attention to or anything particular kind of happening under the hood? Just want to get a little more color on that. I don't think we have any specific comment on this. It's some quarters we're getting a number of new accounts and it's getting a little bit flatter than there are spikes. I don't think you will find any specific trends if you start to analyze backward. But there is nothing to highlight there. All right. Great. Thanks guys. Nice quarter. Thank you. Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question. Hi. My first question is just around the governors to growth. As you look at the business model today, obviously, there's pockets of weakness. But is how is the human capital element potentially a governor to growth and how could it impact margins? There's a couple of different players in the space and other public company that's obviously focused on the Ukraine. Is really the human resources the one governor to growth that you worry about the most? And how does that shake out today versus 2, 3 years ago? It is definitely one of the major components of the growth, not just clearly number of people, but the quality of this effort. And that's a topic which we kind of touching practically each quarter. And we specifically were talking about our investments in training, education, selection, retention. So it's a very big topic, which almost impossible to address here. If you're asking compared to last couple of years, I think it was pretty tough 3, 4 years ago. And we advancing or kind of ecosystem, internal ecosystem, how to deal with this. And that's why I don't think it's still much different than couple of years ago, but it's still pretty tough. And again, I think also it would be one of the more advanced topics which we're going to cover during the Investor Day. Got it. Okay. Then just my last kind of 2 part question. Can you just give us an update on attrition rates and wage inflation in perhaps your more dominant regions? And then margins seem to want to continue to move upwards. I know I've asked a couple of times on the call about the kind of upward push on the margins. Maybe you could give us sort of your long term view on where you think margins can go and what the puts and takes are there? Thanks. Yes. So from an attrition standpoint, attrition is lower in Q3 of 2019 than it was in Q3 of 2018. Attrition continues to run-in the low teens for us. So again, we've focused a lot of energy on that and making certain that we're providing an appropriate sort of career experience for our delivery personnel so that they really do feel that they've got a career and a long term home at EPAM. From a wage inflation standpoint, the wage inflation really hasn't changed throughout the year. So really no change there versus what I've talked about in the past. And then from a margin standpoint, I think we're going to continue to focus on running, let's say, the gross margin at about the level that we've been running it at. So and then from an SG and A standpoint, I think we've talked about this sort of 18% to 19% range. And so, yes, I don't see a I wouldn't be talking about a different range for 2020. Certainly, you can see that we've been able to run at the top end of the range in 2019. But I think what we'd still talk about is a 16% to 17% adjusted IFO target range as we enter the 2020 fiscal year. Thank you. Thank you. Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question. Thank you. Good morning, hi, Jason. Good quarter. Hey. Hey. So I guess my question is, last time we spoke in September, you guys said the demand exceeds supply, which for generally has been true for some time. But the question that I have is, if that continues, does it make sense at any point for you guys to make sort of a scale based acquisition as opposed to what you've generally been doing is capability based acquisitions just to kind of tap into more of the demand spectrum? It might make sense if it would allow us to after this to expand organically more as well and the quality of this acquisition would be in line with our expectation, which is very kind of long shot. So but we're looking for this. And if this opportunity will come, definitely, we'll be considering. But again, sizable acquisition with high quality resources and ability to grow at least 20% after this. So this type of companies probably cost a lot and have their own strategy. Understood. Now that makes sense. The other thing was just really a clarification with regards to the stock based compensation and accruals, the impact of all of that, I'm thinking that's already in the number for 4Q margins already, right? Yes, correct. Got it. So the what I'll call the variable compensation, certainly the accrual is in for that based on our expectations for the performance in the fiscal year. And then the stock based comp, yes, we would be recognizing the expense associated with that throughout the year. As a percent of revenue, would you expect that to start to be trending upward as we look in the future? Having thought about what that specific element would be, and so let me think about that and we can talk about that later. Yes, I guess maybe I'll just leave it at that. Okay, got it. Thank you guys. Okay, thank you. Good quarter again. Thanks. Bye. Thank you. Our next question comes from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question. Hello, congratulations on the number and thank you for taking my questions. My first question is like a kind of broad one. Maybe you could talk a little bit about your conversation with clients. For example, if the clients need to cut spending because of the macro uncertainties and things like this, where would IT spending stand in this in their priorities right now, whether this is the last kind of expense item they're going to cut or you see risks on this side? And probably a couple of technical questions on the numbers. First, I see some acceleration in hiring. So maybe you could provide some color on this acceleration in the last reported quarter. And also there is a change in the trend of your client concentration, the top 5 clients started to increase and this is the first time for the past several quarters. So is this a kind of quarterly volatility or maybe you see some changes on this side as well? Thank you. Arce, do you want to talk about the demand? Yes. Can you like the first question about demand, you said if we feel that there is some softness on some clients and then I didn't understand exactly what was the question, then would our reaction should be 1 or 1? Can you clarify a little bit? Yes, yes, yes. Sorry if it was not very clear. So my question was basically if we see some macro uncertainties, some recession in the global economy and things like this and companies, your clients in particular will have to cut spending. So in terms of cutting spending, where IT spending stands for your clients, whether it's going to be the number one item which they're going to cut or since this is so important for sustainability of their business, this will be probably the last one. How in general you feel that your clients think about this? So it's a very tough question taken in account how many clients and how many different situations could be there. So and also taking in account how to predict the level of impact, how big recession or how big like economic downturn could be. There is different pockets of clients. For some of them, it might be critical. For a lot of clients, it would be probably opportunity to invest continuously in digital part of the business. So I can give you from our experience like 10 years ago when pretty tough one happened, we had couple clients who stopped completely, and we have a bunch of clients who actually continue to grow since then some jump to opportunity for utilizing the good capability in engineering. But at that time, for example, the farm was flat for a year and then starting to grow 50%. Okay? So maybe not what's expected, but I don't think there is really clear answer to this. Okay. Thank you very much. And just on the headcount, so the headcount additions in Q3 just are suggestive of what we're seeing from a demand environment. We continue to see a strong demand environment. We grew headcount rapidly in places like India and Mexico in addition to rapid growth rates in our traditional geographies like Ukraine and Belarus. We're also beginning to stand up a few additional sort of smaller centers and so you'd see some growth there. And then the Compitatum acquisition came with over 200 headcount primarily in Russia. And so for the most part, the headcount growth is really being driven substantially by what we're seeing from a demand standpoint. Thank you. Our next question comes from the line of Moshe Katre with Wedbush Securities. Please proceed with your question. Hey, thanks. A couple of things here. It seems that there is a different dynamics looking at the growth rates between the top 20 and the rest of the business in terms of client base. So should we assume that there are a number of large top 5 or top 10 clients that are kind of dragging growth much lower unproportionately. Maybe you can give us some color on that. And then maybe some color also on what are we seeing on pricing? I think historically we've seen some pricing uptick in terms of a couple of 100 basis points. Is that still the case? And then, any change in the dynamics looking at weight inflation, specifically in some of the geographies in Eastern Europe, that will be helpful? Thanks a lot. So from a I guess a concentration and I think that would also was a question that was asked in that from by the prior caller is that the I would say that the little bit of an uptick that you've seen between Q2 and Q3 in terms of concentration is not something that we expect over a longer period of time. I think it's just a bit of a subtle kind of uptick. And we have seen some good growth in some of our larger customers. But at the same time, we're seeing extremely high growth rates in customers outside our top 20 as well. So I think it's fairly typical. And again, I think it speaks to the diversification of the business that we've got rapid growth in our large customers and we also have growth and even greater growth in our customers outside the top 20. From a wage inflation standpoint, at least at this time, it's pretty similar to what we've seen in past years. Hard to predict what it could look like in the future, but at this point in time, it's been very consistent. And from a pricing environment standpoint, also quite similar. So we continue to get rate increases across a subset of our large longstanding customers. And then with newer engagements, those generally have somewhat stronger pricing just based on the overall kind of demand for resourcing in a market that is resource constrained. Understood. And just if I can just sneak in one last one. Looking at obviously, you gave us some color in Q4. Is there anything that we should kind of keep in mind terms of how the Q1 will start in terms of budgets and funding for projects and seasonality? Is there anything unusual looking into Q1 at this point? Yes. We've done a prelim look for the full fiscal year. And again, it's very preliminary and it does again speak to a growth rate in excess of 20% in the coming year. Hard for me to provide color on Q1 at this time. Understood. Thanks a lot. Thank you. Thank you. Our next question comes from the line of Bryan Bergin with Cowen and Company. Please proceed with your question. Hi, good morning. Thanks. I wanted to ask on the sales force. Can you provide an update on the sales strategy as you look to 2020? Any color around more proactive development of a larger direct sales team? And if so, any particular service lines or areas of focus? So I don't think we have big changes like with exception like we're talking about more consultative approach And consulting approach is definitely part of our go to market and business development strategy, how to approach clients with smarter ways of recognizing the opportunities and challenges they have and offer the solutions. But in general, the market which we operate is pretty interesting from growth point of view. I don't think we're opening kind of new lines of business or new sectors to go after. And today, we already we're growing our headcount in direct sales over the last couple of years. So I think we're in general in good place here. Okay. Does the build out or broadening of that consulting practice, does that do anything from your profitability profile? Or is it consistent with where you are in the company average? We will see what will be happening and that is probably everybody remember was our answer for some time because it's about growth, it's not about profitability for us to support the growth we have right now and to be more impactful on client results. But we bring in some additional people. Profitability here probably depends on the cost of the resources and wages for consultants also high. So I think it was balanced. So it's revenue growth going forward is the main goal here. Yes. So significantly larger engagements, kind of a consulting combined with the delivery. And so don't expect a material impact in profitability at least in the near term or the coming year. Okay. That makes sense. And Jason, just a follow-up on the delivery regions. You mentioned some smaller centers you're standing up. Are those in new regions for EPAM? Yes. They're in somewhat newish regions for us, kind of, let's say, tangential to some of the places that we've done business over the years. Okay. Thank you. Thank you. Our next question comes from the line of James Friedman with Susquehanna. This is Jamie. I'll just ask 2 upfront. Jason, with regard to the I hate to start here, but with regard to the tax rate, that was a little confusing because you had a divergence between your non GAAP tax commentary and your tax commentary. So I just want to make sure I heard that right. So that's for Jason. And then, Ark, I don't know if you are aren't aware of it. There is a fair amount of controversy about the outsourcing trends, product development trends in the software and high-tech vertical. 1 of your competitors has some has called out some challenges. They're exiting some verticals. They're exiting some customers where you guys actually are present. So I heard your answer to the previous one. There's a little deceleration, nothing to call out. But we're just trying to get a sense from R. C. Is there something more profound going on here? Or do you feel like you're still adding the value and your roadmap looks positive? So the first on tax and the second on software and high-tech. Thank you. So I guess I'll talk first about the tax rate. And so I think one of the statements that I made was that the excess tax benefit was somewhat less than we had expected inside the quarter, and so that would have impacted the GAAP tax rate. And then just the other statement we made is that we had a discrete benefit associated with our 2018 return And that discrete benefit would have impacted both the GAAP and the non GAAP rate. But what I was trying to clarify is that's why the GAAP tax rate was quite a bit lower than the approaching 23% that we've sort of talked about as our expected non GAAP tax rate. Thank you. Okay. And second question, your question is like if we feel that there is something special happening in high-tech and software sector from kind of product engineering services point of view? Yes. That's what I'm trying to ask. So, I don't know what to whom you refer that there are some specific problems or whatever. We actually do believe that it's a strong component for us and it's a strategic component for us. We would like to stay there and we do think that we bring a lot of value to some small software companies and wrap kind of mature software houses. And what we're saying is the high-tech, which is all digital platform born companies. And I think it's we're expanding pretty well there. So and it's definitely nothing specific in this quarter. Got it. I mean, the numbers were good. It's just that I was trying to get some context about the overall demand trajectory. Thanks. I appreciate the color. Thank you. Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Dobkin for any final comments. Thank you. Thank you, everybody, for the time this morning. I would like also to thank all our employees and their dedication to provide services and to help us to grow. And management team and myself looking forward to Investor Day on November 21 in Boston. So always please contact David if you have any questions and hopefully see you face to face pretty soon. Thanks. Bye. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. 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