Earnings Call: Q2 2019

Aug 8, 2019

Greetings. Welcome to EPAM Systems Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I will turn the conference over to David Strombie, Head of Investor Relations. You may begin. Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's Q2 2019 results. If you have not, a copy is available at epam.com in the Investors section. With me on today's call are Akhadi 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'll now turn the call over to Ark. Thank you, David, and good morning, everyone. Thanks for joining us. I would like to start with a few financial highlights from our Q2. We delivered revenues of $552,000,000 reflecting an approximate 24% year over year growth or 25% in constant currency terms. Additionally, we delivered strong non GAAP earnings per share of 1 point $0.28 which represents approximately 27% growth from Q2 of 2018. Our growth during the first half twenty nineteen reflects our positioning in the market we serve, which continue to transform at extremely fast pace. Disruption is occurring across every industry, driven by the impact of new technologies from one side and very dynamic changes in the competitive landscape led by digitally native companies operating at different speed levels from another. We do believe that these trends have and will continue to create opportunities for EPAM, and we feel we are well positioned to continue to serve our clients and offer solutions to solve the increasingly complex business challenges. All that as long as we are able to challenge ourselves to adapt our offerings and our own organization to new market needs. So, our journey to drive our own relevancy in the market is nonstop as we push across the pond to challenge and change the ways in which we operate and serve clients. That involves all aspects of our operations, including our talent acquisition strategy, expansions in new geographies and additions to our offerings and capabilities. Everything is done to increase value by bringing our core product engineering, digital engagement and consulting services to the next level. Our recent acquisition of CompuTentum, which we announced in July, is a good illustration of our direction. While it is a small company in terms of revenue and employee base, CompuTentum allow us to extend Yipan education and learning capabilities as part of our digital proposition across both our clients' portfolios and our internal needs. We believe professional development in the digital transformation space is becoming just as important as a strategy which guides as the platforms that power the enterprise. New organizations should become highly adaptive in nature and will require cross functional teams to master each step of the digital product lifecycle, having enterprise wide digital first mindset and a real hunger for constant skill and capabilities upgrades. This approach is critical for successful transformative efforts and another example of how EPAM continues to evolve itself while help our clients across different parts of the organization to evolve too. Before I hand the call over to Jason, I would like to highlight a few recognitions EPAM had received in the first half of twenty nineteen, which are good illustrations of what types of changes are happening to us. As we shared many times in the past, EPAM historically has differentiated itself by its strong engineering practices. We do believe it's still a critical area of focus for us to be able to keep it this way, while still growing into other high value directions. In Edge 2019 annual agency report, EPAM was recognized among the top 50 largest agencies in the United States, up from our position of 1 30th just several years ago. In the UK, we're already among the top 10 for some time. Plus, Forrester placed a pump among the top largest digital experience agencies based on our demonstrated market presence and capabilities across customer marketing, commerce and product service offerings. Agencies also have a different definition in that context. Selected vendors to reference Forrester should have over 10,000 relevant to skilled employees and be able to demonstrate the delivery of experienced architectures that combine packaged software and custom code, truckloads of data and content, hooks to commerce and transactional systems and insights and all that and to integrate all these parts and infuse them with creative thought and execution to expose, differentiate and elevate brand values. Or in short, to analyze, create, design, build and manage your digital customer experience in the context of your digital business transformation. And on another side of the spectrum, EPAR was recognized by Forrester as one of the most significant application modernization and migration service providers capable of addressing the diverse set of needs in both legacy and cloud native architectures. We think it's important to point out that of all those large companies listed, they are usually the smallest and also the fastest growing player because of our much higher proportion of those in demand services offerings. I also would like to remind everyone about 2 key points we talked about during previous calls, which remain very important for us to support our growth story. We continue to build our consulting offering to blend together industry experience and technology capabilities and to enable our global engineering services to deliver smarter and in turn to bring real value to our clients. And we continue investing in our internal digital platforms to make our operations not only agile but also truly adaptive, allowing us to better apply the talents we have as well to attract new talent and to grow and retain it smartly. And that is also a continuous effort. So to summarize, despite some of the market level uncertainties, which we talked about it before, and seems like they are here to stay with us for an undefined time. We delivered another quarter of consistent, high quality results, which underscores our ability to execute and grow in the market that continues to demand high end expertise and ever changing Q2 results. Jason? Thank you, Ark, and good morning, everyone. In the Q2, we produced strong results in both revenues and profitability, while delivering across several key operational metrics. Here are a few highlights from the quarter. Revenue came in at $551,600,000 a year over year growth of 23.8 percent on a reported basis and 25.1% growth in constant currency, reflecting a negative foreign exchange impact of 1.3%. Our demand patterns this quarter were relatively consistent with those of previous quarters. We saw strong broad based growth across most industry verticals, balanced by slower growth in a few specific industries. Looking at Q2 revenue across our industry verticals, Financial Services, our largest vertical, delivered 16.9% year over year growth. We continue to see increasing demand for offerings in asset management and payment processing. In addition, insurance, which currently accounts for a modest share of along with lower growth in North America. Software and High-tech grew 24.1% in the quarter, and Business Information and Media posted 26.4% growth in Q2. Rounding out our vertical performance, we saw very strong growth in both life sciences and healthcare, which grew 53.7%, reflecting broad based growth across both industries and in existing and new client programs, as well as emerging verticals, which delivered 51.3% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 60.7% of our Q2 revenues, grew 26.6 percent year over year or 26.9% in constant currency. Europe, representing 32.2% of our Q2 revenues, grew 18.4% year over year or 21.1% in constant currency. CIS, representing 4.5 percent of our Q2 revenues, grew 29.3% or 32.4% in constant currency. And finally, APAC grew 19.9 percent or 23.3 percent in constant currency and now represents 2.6% of our revenues. In the Q2, growth in our top 20 clients was 14.8%, and growth outside our top 20 clients was approximately 31% compared to the same quarter last year. Our revenue results from the quarter are underpinned by a diverse set of growth drivers across the portfolio of clients we serve. Moving down the income statement. Our GAAP gross margin for the quarter was 35.5% compared to 35.1% in Q2 of last year. Non GAAP gross margin for the quarter was 36.8% compared to 36.7% for the same quarter last year. GAAP SG and A was 20.3 percent of revenue compared to 20.9% in Q2 of last year, and non GAAP SG and A came in at 18.5 percent of revenue compared to 18.9% in the same period last year. Our SG and A spend in Q2 was focused primarily in facilities and our employees and is intended to support our longer term growth. GAAP income from operations was $72,900,000 or 13.2 percent of revenue in the quarter compared to $54,200,000 or 12.2 percent of revenue in Q2 of last year. Non GAAP income from operations was $92,600,000 or 16.8 percent of revenue in the quarter compared to $72,300,000 or 16.2 percent of revenue in Q2 of last year. Our GAAP effective tax rate for the quarter came in at 16.6%, which includes a $4,700,000 excess tax benefit related to stock option exercises investing in restricted stock units. The actual benefit was lower than the $10,000,000 forecasted at the beginning of the quarter, which was the result of a substantially lower number of stock options exercised in the quarter. Our non GAAP effective tax rate, which excludes the excess tax benefit and includes the tax effect of non GAAP adjustments, was 22.5%. Diluted earnings per share on a GAAP basis was $1.02 which reflects a lower than expected tax benefit in the quarter. Non GAAP EPS was $1.28 reflecting a 26.7% increase over the same quarter in fiscal 2018. In Q2, there were approximately 57,600,000 diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations in Q2 was $44,000,000 compared to $59,500,000 in the same quarter last year, and free cash flow was $32,400,000 compared to $50,900,000 in the same quarter last year. Reflected in our cash flow this quarter were payments related to our annual variable compensation program and the ongoing support of our inorganic growth strategy. DSO was 79 days compared to 78 days at the end of Q1 fiscal 2019 and 83 days in Q2 of last year. We remain focused on managing our DSO at these levels. Moving on to a few operational metrics. We ended the quarter with over 29,400 delivery professionals, a 21% increase year over year and a net addition of more than 1500 production professionals, driven primarily by new hires in our global delivery locations and low attrition in the quarter. Our total headcount ended at more than 33,100 employees. Utilization was 78.4% compared to 78% in the same quarter last year and 79.9% in Q1. Now let's turn to our business outlook. Starting with fiscal 2019, based on continued strong demand, revenue growth will now 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 to continue to be in the range of 12.5% to 13.5% and non GAAP income from operations to continue to be in the range of 16% to 17%. We expect our GAAP effective tax rate to now be approximately 14%, which includes an updated assumption for a lower level of excess tax benefit. And our non GAAP effective tax rate will continue to be approximately 23%. For 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 $5.25 reflecting a modest improvement in expected profitability for the full year. We now expect weighted average share count of 57,700,000 fully diluted shares outstanding. For Q3 FY 'nineteen, revenues will be at least $579,000,000 for the Q3 producing a growth rate of at least 23% reported and at least 24% in constant currency terms, factoring a 1% estimated unfavorable foreign exchange impact. We expect GAAP income from operations to be in the range of 12.5% to 13.5% and non GAAP income from operations to be in the range of 16% to 17%. We expect our GAAP effective tax rate to be approximately 15% and non GAAP effective tax rate will be approximately 23%. Earnings per share, we expect GAAP diluted EPS will be at least $1.14 for the quarter and non GAAP EPS will be at least $1.32 for the quarter. And lastly, we expect a weighted average share count of 57 point 9,000,000 fully diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non GAAP measurements. Stock compensation expense is expected to be approximately $16,200,000 in Q3 $15,500,000 in Q4. Amortization of intangibles is expected to be approximately $2,800,000 for each of the remaining quarters. The impact of foreign exchange is expected to be approximately $2,000,000 loss for the second half with a $1,000,000 loss in each of the remaining quarters. The tax effect of non GAAP adjustments is expected to be around $4,500,000 in Q3 and approximately $4,400,000 in Q4. We expect excess tax benefit to be around $6,000,000 in Q3 $4,000,000 in Q4. And lastly, one more assumption that is not part of our GAAP to non GAAP assumptions. We expect interest and other income to be $2,600,000 for each of the remaining quarters. In summary, we are pleased with our 2nd quarter results, which reflect continued strong demand for our services, underpinned by a diverse mix of projects and offerings across the industries we serve. Our first half of twenty nineteen positions EPAM well for continued success in the second half of the fiscal year. With that, let's open the call up for questions. Thank you. We'll now be conducting a question and answer Thank you. Our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Good morning. I wanted to talk about the digital transformation skills that you touched on Arkady. How much of the employee base do you feel like is adequately trained in those types of digital transformation skills? And then can you talk about how you're defining that internally? What skill sets are truly considered digital? Or maybe asking in a different way, what's more in focus now than what have perhaps been roughly 3 or so years ago? Hi, Megan. Yes, it is actually a very difficult question because you noticed we're not sharing or reporting what is our digital revenue versus not digital because it's a very difficult classification. And I can refer back to Forrester profile, which saying, okay, we're at least in category where we have more than 10,000 employees versus even if it's just 10,000, it's already at least 30% of our people versus some other companies on the list, which probably much less. But we think that majority of our work actually is this category because our core or our legacy in product software product engineering, which is most of the what I'm reading from other qualifications attributes this type of services to digital as well. Inside of modernization, for example, or a lot of other activities like RPA, which is like sometimes could be put in different categories, could be considered there too. Again, in short, I would say that we consider it as digital. It's majority of what we do today. And similar on training, so majority of our people train on this and it was another key point for what we were sharing. We're very and we're building pretty strong educational service, not only focused internally, but also helping our clients to go through the same level of transformation. And as I said, might be a little bit fuzzy answer, but it is a difficult question. Okay. Thank you. And then, you've talked about kind of the efforts to continue to drive relevancy in the market, and you've been a little bit more acquisitive in the last 2 years. So should we start thinking about a more consistent acquisition engine going forward? And then does the current M and A funnel support that? And then also, Jason, just what was the organic growth in the quarter and now the expected organic contribution for the full year with the recent acquisition that you did? Thank you. So, I think from consistency point, the only consistency is that we're constantly looking for the right fit and looking how to improve our capabilities. There is no any kind of plans to do 2 acquisitions per quarter or 4 acquisitions like per quarter next year. That's not part of what how we're thinking about. But we're constantly looking for opportunities. In terms of the how it's impacting our growth, I think it's very minimal because we're looking for small competency led companies, not kind of a roll up approach, which not excluding that we might hit some big ones as well in the future, but so far that was the focus. And Jason can comment on numbers. Yes. No, Arq, it's absolutely correct. So when we guided at the beginning of the year, we had included an assumption that we'd get up to or approximately 1% of revenue from inorganic contribution. That has not changed at all. These are relatively modest sized acquisitions. If I were to just answer the question on Q2, so the reported growth rate was 23.8%. If you adjust for foreign exchange, we had about a 1.3% impact, so the constant currency growth rate would be 25.1% and the inorganic contribution was actually just below 1% for the quarter. So, from a constant currency organic growth rate, we would be at 24.2% for Q2 of 2019. All right. Thank you, both. Thank you. The next question is from the line of Ashwin Shirvaikar with Citigroup. Please proceed with your question. Thank you. Hi, Ark. Hi, Jason. Good quarter here. Congratulations. Thank you. The question I have is, you spent obviously a lot of time and effort investments here in creating a much better diversified business than it used to be across many verticals. As we go past that phase and it becomes more about continuing to just scale what you have built, should we expect some operating leverage to creep into the financial model in the next year or 2? Yes. So here's how I would think about the business. I think I'll talk more about what's happening this year and maybe we'll have some maybe vague discussion around next year. We're very focused on continuing to make investments that allow us to grow the business in excess of 20% annually. And so what we've been looking at is a range of 16% to 17%. We think we're clearly going to operate very firmly in that range. And I think if you've looked at your model, it probably shows that we're going to operate in the upper half of that range in 2019. And we're going to continue to focus on the 16% to 17%. What you will see in the second half is we're going to continue to make investments. Some of the investments that are talked about in learning platforms and professional development. And so, again, I think you probably should continue to think about the business more in the 16% to 17% range. Understood. And then the travel vertical, can you remind us when the wind down of the European clients ends? And another sort of numbers question unrelated is, can you remind us if 3Q and 4Q have any ups and downs as it relates to billing days? Yes. So, I didn't hear the first part of the question. The first part of the question was with regards to the travel vertical. You're facing the wind down of some European clients. Could you remind when that ends? Yes. I'm not certain I understand the wind down. I know that we've seen some degree of, let's say, softness with the European sort of consumer. Yes. So I don't know it's a specific wind down as much as it's kind of a mixed performance where we've got some growing accounts and we've got some accounts that are either sort of flat to declining and that's producing a lower than a lower rate than you've seen in that area in the past. But I think what you see is that in any given quarter, we were able to drive the high levels of growth because of the diversified sort of demand portfolio. From a Q3, Q4, it's a little bit complicated, but I'm sure you follow this, which is that we have more generally bill days in Q3, but we also have more holidays, more summer vacation, if you will. And so, generally, what you see is maybe a little bit of improvement in gross margin in that time period. And then Q4 is usually a strong quarter for us. But we've been operating at a quite high level of profitability here in the first half. So I don't expect a big uptick in gross margin or profitability in the second half. What I do what you would normally see though is some positives in the gross margin because of the additional build days in Q3. So basically, Ashwin, in short, all this volatility more in line with usual volatility for us for different verticals in the past. And yes, there are some softness and specifically on UK retailers. But again, even that we can attribute to more regular stuff than something special. Okay. The regular ups and downs. Okay, got it. Understood. Thank you, guys. Sure. Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed with your questions. Thanks. Good morning, guys. I actually just wanted to follow-up on Ashwin's question just to clarify on travel and consumer. Are you expecting any reacceleration in the second half? I mean, I think your comps get easier, but obviously there's maybe some lingering macro headwinds. So I just wanted to make sure we've got the right framework for how to think about the second half there. Do we move up from the 8% constant currency there or should we assume kind of stable ish? And then maybe just while you're on the topic of verticals, any incremental commentary on financial services had a nice rebound and reacceleration in quarter. Is that sustainable in the back half? Yes. So, I think to kind of echo what Ark said in the last comment is that the business has got a it's broadly diversified both in terms of industry verticals, in terms of customers, both new and longer term EPAM customers. And so, in any given quarter, you're going to see one vertical might drive more of the growth than another. A couple of years ago, we were talking about single digit growth in Healthcare and Life Sciences and here in this year, you've been over 50% from a growth rate standpoint. Last quarter, as you point out, financial services was single digit. In this quarter, we're back firmly in a high teens growth rate. And so, we continue to see strong demand overall. If I were to talk about travel and consumer, I think potentially the demand could increase a little bit in the second half, but again, I think we are seeing a little bit of mixed result in that portfolio. From a financial services standpoint, we're seeing very strong growth in cards and payment processing, in asset management. And insurance is still small for us, but it's growing quite rapidly. And so, I'm hopeful around financial services and overall, we feel good about the demand in the market. Okay. How does the composition of your top 10 client list look today versus, say, 12 to 18 months ago? And would you expect material changes in that list, let's say over the next 12 to 18 months as some newer clients continue to scale their work with EPAM because obviously the growth in the non top twenty continues to be very strong? We've seen a little bit of movement here in maybe the last couple of quarters as companies maybe slightly change position. One thing that's noteworthy, and I think I talked about this in the last call, is one of our top five customers split to 2 customers. And so what used to be 10 customers in our top 10 is really effectively 9. And so that probably changes a little bit some of those comparisons as you look at our concentration over time. But again, I would say a little bit of movement, but reasonably consistent. Okay. Thank you. The next question comes from the line of Bryan Bergin with Cowen. Please proceed with your question. Hi, good morning. Thank you. Wanted to ask on the acquisition of Competenum. Talk about what this does for you internally as far as the strategy goes? And is there a function of any internal savings or benefits worth quantifying? And then just more broadly, how should we think about software and platforms as an offering? Does this signal a move toward more of that as we go forward? Yes, any educational capabilities making some impact internally as well, but we invest in this area constantly. So, we don't think it would be any specific SG and A savings and especially the company is pretty small. So it's adding some capabilities, which we would be would have to build ourselves. But again, it's pretty small. So from generally software platforms, we're more considering them as accelerators because in our business, we do believe the differentiation coming from right integration, customer extension and build up. So, we're not really considering that it would be very strong separate line of business with license revenue or subscription revenue. We have this today and it's pretty small and we do think that it would be a very modest percentage of our work. But at the same time, it's giving us a good jump start in many large implementations. And that's the goal, how to build the right portfolio of accelerators to start faster. But then because of technology changing, how to upgrade these accelerators very fast as well, instead of being stuck with some more standard software, which would become legacy very, very quickly. Okay. That's helpful. And then I wanted to ask on the healthcare verticals, obviously, very strong. Can you comment on the mix of the work that is in that vertical currently? And then you believe you're taking share in that market? So, we plan on this for some time. Initially, it was mostly around R and D, life science. Now, I think we expanded to commercial life science component and we expanded to healthcare insurance component as well. So basically, if 4 or 5 years ago, it was practically one kind of concentration point for growth. Right now, it's at least 3. Yes. We're also seeing more consulting business in the healthcare space as well. And I think there is good complementation between them because R and D becoming so integral part of general commercial life science and also there are a lot of overlap with healthcare providers from both sides, from payers and providers, where it's all becoming much more real time and understanding of bioinformatics and specific data sets. So, it's very important. So, I think it's helping us to grow. The next question is from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question. Hi. Your growth seems to be fairly well balanced and I think historically within IT Services, I mean, well balanced across all your verticals. I think historically in IT Services, that's fairly rare. So my first question is, can you just describe for us the strategy in some of your newer verticals and maybe why you think your acceleration in those verticals has been above what we've seen sort of historically in other areas and from other companies? I think it's that goes to our history as well, and we repeated this many times. So, we started as a product engineering extension to our clients, like a lot of top technology companies were our clients initially. And 10 years ago, it was a major source of our revenue. And through this, we also were we started to understand the industries, but specifically from what people would call today digital transformation point of view, companies were adopting new software platforms and they need to be extended very quickly and with a good quality. And we're building on the skills and when we come into new verticals today, we're clearly bringing the understanding how to build right products, but we also during the last 6, 7 years, and that's what we pointed out today, built pretty strong digital strategy, consultative components and integrating this very closely with our engineering services kind of to not just to advise, but to deliver on our advice well with again, with the ability to put it in production with the right scalability and performance component. And I think this engineering heritage, which we now blend in with consultative approach, probably helping us to be a little bit more consistent than some others. Got it. And then just as a follow-up, on the margin outlook, obviously, you gave guidance for this year, but maybe you could talk about your thoughts about margins over the long term and some of the levers that you have in place that could drive them up or down. How should we be thinking about any margin opportunity over the long run? Thanks. I think we're we've proven that we can run, I would say, kind of anywhere in that 16% to 17% range. I think a couple of years ago, we were sort of closer to the bottom end of that range. And here you see us in these quarters running near the top or sometimes just over that range. And I think that probably the thing about us able to comfortably sort of run-in the 16% to 17% range and there will be volatility by quarter based in part on utilization and build days and some of that. But I think probably just to continue to think of us as a 16% to 17% adjusted income from operations is really what we're looking to drive and in part because we are going to continue making the investments that Arkadiy has been talking about to continue to drive the greater than 20% annual revenue growth. Got it. Thank you. Our next question comes from the line of Andrew Baugh with Wolfe Research. Please proceed with your question. Hey, good morning guys. Just wanted to touch on the segments once again. Europe showed some pretty solid growth in the quarter, despite you guys calling out in the past some uncertainty in clients around Brexit and such. So maybe you guys could just give an update on what you're seeing in the market there and your expectations for the rest of the year? So I think and this is probably very much in line with what we've shared before, that there is some certain level of volatility across different verticals and even geographies here as well because we're working also with global accounts and sometimes these global accounts growing faster in one region versus another region. So it's really extremely difficult for us to predict volatility in specific segment, while in general, like we're giving the guidance like on the total numbers. So, I think it's getting better than last quarter. We clearly but it's still very unclear what would be in Q4, for example, in results of Brexit, which nobody knows what how companies will react. What we more comfortable to share and how we're thinking about is that if we have some softness in some subset of our markets, there is enough demand for the type of services which we provide that we will be able to balance and deliver for the kind of aggregated numbers. Got it. Thanks. And then I guess my follow-up, digging into the gross margin numbers, they seem to be pretty consistent here. And you guys have called out before the strategy to implement more near shoring capabilities, which from our perspective could eventually weigh on margin. But maybe you guys could just update us on your strategy towards near shoring and how you kind of expect that to weigh on the gross margin side? So the strategy is still there. We are going to improve our when you say in offshore, you mean in market? Meaning, North America more in market. Yes. Okay. Because nearshore, it's a little bit yes, if we're talking in market presence, then we definitely will expand there because with the complexity of the services, which we delivering and we need like more local presence from expertise and dynamics of the engagements point of view and consultative point of view. So we will be increasing. So how it's going to impact gross margin? Again, it's we need to like to wait and see exactly because there are different series here. The TES might be profitability in general lower in the market. At the same time, we think that we would be able to improve increase the total value to the clients. We will be able to balance this as well. And we do believe that we will be able to do it. And so we're very focused on margin at the account level and sort of maintaining profitability in the gross margin area. And so, as we've talked about in the past, we clearly are focused on pricing and sort of maintaining our improving account profitability given the opportunity. Great. Thanks guys. Congrats on the quarter. Thank you. Thank you. Our next question is from the line of Moshe Katri with Wedbush. Please proceed with your question. Hey, thanks. Good morning. Good quarter. Two follow-up questions and I guess they're all kind of related also to margin trends. Maybe we can talk a bit about wage inflation trends and the various regions that you're focusing on in Eastern Europe. Anything out of the ordinary there that we should kind of focus on? And then maybe talk in general about pricing trends for some of the new deals that are coming on board? Thanks. Yes. From a headcount growth standpoint, we've seen growth obviously in our traditional regions. We've also seen further growth in our India operations. From a wage inflation standpoint, I would say that it's a little changed from the past. Actually, we've seen a decline in utilization as it would be in attrition year over year. So, we feel quite good about that. I don't know, Ark, do you want to talk about new deals and pricing or? I think it's again, it's more sure it's very much in line with what we were seeing before. I don't think I can call anything that something very new or extraordinary happening. So, at our level, at our size of the company and our subset of the market which we're focusing, I think it's still pretty consistent. Okay. Yes, there are some voids again. We can repeat all these scary stories about Brexit and all of this. And yes, it's making some softness here and there. But as I mentioned before, we do believe that we would be able to navigate it through refocusing our focus across different geos and segments. Okay, great. And just a follow-up, some of the looking at some of the legacy vendors that made some strategic moves to get into the space. Is there anything different competitively or is it still kind of a handful of companies that are able to do this kind of work? And that obviously gives you guys a pretty big competitive advantage? In general, market is pretty competitive and tough. So, at the same time, it is big and the subset of the market which we focus in growing much faster than global IT market. So, I don't think much change from our standpoint in this. Clearly, big guys focusing more on this, smaller guys more excited to see how we're progressing, for example. But again, market is growing very fast and demand is there. So, the challenge how to build right capabilities and how to upgrade ourselves kind of pretty dynamically. That's why when all these questions, what do you expect about future gross margin? Can you like with the size to benefit from this? I'll answer like, and since pretty trivial. So we will have to reinvest to constantly kind of upgrade ourselves. Understood. Thanks. The next question is from the line of Vladimir Vespalov with VTB Capital. Please proceed with your question. Hello. Thank you for taking my question and congratulations on good results. I have a pretty specific one on your guidance. Now we can decompose your full year guidance into quarters. And when I look, for example, at non GAAP EPS guidance, I see a clear slowdown somewhere to 13% year on year growth in the 3rd quarter and 10% year on year growth in the 4th quarter. There is also a pretty significant slowdown implied by your non GAAP operating margins. So maybe you could provide some color on what is behind this, the high base effect, your reinvestments into developing the business. And I also see that some of the hiring has accelerated, maybe you are hiring more people and this also affects your margins. This is the first question. And the second question I have for maybe you could still provide us some color. If you talk to your clients right now and probably shaping up the profile for growth for the next year, what are the key risks? What are the key concerns from your clients that you see right now? Thank you. Okay. So, I'll take the second half profitability questions. So, really no change from what we've been thinking about the second half since we began providing guidance in terms of overall levels of profitability. We've seen seen a little bit better profitability in the first half. And for those of you doing models and probably it's all of you, we're clearly expecting to operate in the top half of our 16% to 17% range. If you'll remember Q4 Q4 of 2018, we actually ran at 18.4% non GAAP adjusted or adjusted IFO. That was at a time when we actually were over 80% from a utilization standpoint. So, it was some outsized demand that popped in the quarter. And so, we do not expect to be running at 18.4% adjusted IFO in Q4. So probably that's what you see when you see the change in, let's say, growth rate of EPS. But again, we continue to expect that we'll run-in the high end of our 16% to 17% range for the full year. And again, we feel quite good about profitability in the second half. And about next year and demand or risk or? Yes. From client concerns, I think they're very much in line with industry concerns. So, where to find the right capabilities and not just right capabilities, but scalable ones. And scalability and changing skills profiles. It's an ability to put right teams together. It's one concern. The second concern actually to and this is again, shared concern between clients and vendors including EPAM. And for us, it's very important how to actually build what should bring value versus just deliver engineering services. And a lot of clients are actually looking at us and asking us for sort of leadership components to bring to the equation to help them actually to find the right solution, not just to build the right solution. And I think we have kind of these 3 main points. This one and again, more trivial and historically repeatable scalability and capabilities one. Okay. Thank you very much. The next question is from the line of Arvind Raman with KeyBanc. Please proceed with your question. Hi, thanks for taking my question. I really wanted to ask you about your recent acquisition of Compaterum, which certainly seems like a good strategic acquisition. How much of the value do you expect to extract based on using it internally for your own talent versus selling it to clients? So, the main focus is improve our capabilities in educational and publishing segments. These guys have some competencies which very complement into what we have and we're hoping that we will be able to penetrate this market much more aggressively than before. And again, we had already good watering in this area, but again, that would really help. Plus, this company has content development capabilities and learning platform development capabilities, which we potentially will enhance our internal offering. And internal here, you can think in the broader sense, internal for our employees and kind of internal, external for potential candidates of which we train externally to bring to the company as well. So that should impact this as well. But again, the primary goal was to go to market. Great. And how does that how are you looking to kind of sell it with will it be sold as a distinct offering or will it be packaged with something else? And second part of the question is, how does the firm actually generate its content? Is it all internally developed? Or are they kind of using external authors to develop the content? So, I would think about it as improving our competencies in educational and publishing space because now we have added capabilities to go and build solution quicker because now we have extended the like, if you will, external expert in this field who build platform in this space, and that's what we're going to offer to the clients. With content, there is some again, think about it more in the competency sense. Now you have people who will be able to orchestrate some internal effort, but when you build content, you can utilize number of external capabilities as well through the special network. So we just would be able to orchestrate it better and more scalable environments. Great. And just last question on this is, did you also evaluate some external folks or some competitors such as Pluralsight or Skillsoft? Or was this mostly just you really haven't looked at some of the other vendors? So, 1st of all, these guys not compete with the companies which you mentioned. This company is providing specifically engineering services when I'm talking about external focus, external focus and education in general around different areas. For example, one of the offerings which we now have is around risk and compliance. When you're talking about these companies, which you mentioned, then we have our internal offerings to the market kind of comparable with them because we already train thousands of people to create additional talent source for ourselves. And we were looking at them and sometimes we utilize in well, pretty often utilizing external content as well. When you're talking about specifically software engineering classes and so on. Great. Thank you and good luck for the remainder of the year. Thank you. Thank you. Our next question is coming from the line of David Grossman with Stifel. Please proceed with your questions. Thank you. Good morning. Just a couple of very quick follow ups here. Just on the utilization rate, I know you're running hot in the back half of last year. You're back down a couple of 100 bps. Is this about where you're comfortable or are you looking to bring it down even further? Yes. I think utilization is going to vary based on quarter to a certain extent. And so, again, we've got a quarter with more vacations, which is coming up. I think we've shown that we can kind of run around 77% to 78% pretty comfortably. There may be quarters more above that. As you'll remember that Q4 at 80% is a pretty hot number and probably takes a quarter where you get some unexpected demand. I'm not expecting that utilization would decline. And again, I think probably this range in the 77 to 78 generally is probably a good way to think about the business. All right, great. Thanks for that. And then just on the headcount adds, just on a percentage basis, it just looks like over the last 12 months, adding more in the Ukraine and Russia, just I don't know if there's anything to call out there or this is just the natural ebb and flow of just client demand and where there's available resources? Yes. So it's a good question. So we would have been growing in the CIS and Ukraine region. We also would be growing in India, where we're seeing good traction. And so, this was a quarter where we didn't see so much of a shift towards in market kind of talent. It was a more balanced kind of growth for us. And actually, I'm quite pleased by the additions that we were able to make here in the quarter because I think it does show that we can continue to sort of produce the supply that we need to drive the business and to meet the demands of the marketplace. So you're pretty satisfied with the current geographies, no need to add anything soon in terms of new supply centers in the global I think you'll see us continue to evolve the business as Ark always talks about and that could include incremental geographies, but I don't think you'll see any substantial or let's say radical change anytime in the near future. So pretty consistent. We are seeing substantial growth in Mexico as we talked about. We've got a delivery center in Spain that's growing. Both of those are still relatively small, but we're seeing good uptake of resources in those centers. Great. Thanks. And then just lastly, Ark, you made some comments about consulting, I think, in your prepared remarks. I'm sorry, I missed some of that. So is there is this just the natural evolution of the business where you're integrating consulting into the offering as opposed to running it as a separate business line? Or is there more to it than that? No, it's consistent with what we shared before. We're building these capabilities, but we're still mostly focusing on how to bring integrated solution to our clients, not a separate not a kind of completely separate line of business. There are always some projects which focusing on specific area, but again, the goal how to bring complete end to end story. Okay, got it. That's it for me. Thank you. Thank you. Our next question is from Mayank Thad with Needham and Company. Congrats on the results. Really a couple of quick ones here. Jason, you may have already mentioned this, but I just wanted to ask about the shift on the T and M side. Is that just a trend we should look for as the work becomes maybe more sorry, the shift towards fixed price as the work becomes more iterative with the digital type work? And then I'd like to also ask just about the on-site offshore mix over time, given the nature of the work. Is that going to result in more on-site centric effort or is this a model stay pretty much put where you have it today? Okay. Yes, good questions. So from the standpoint of, I guess, the shift towards on-site, as we continue to be increasingly relevant to clients, as we take responsibility for larger programs, as we have larger, more strategic engagements, I think that necessitates higher end market presence. And so, I think you won't see it shift dramatically in any given quarter, but I think you're going to see a constant sort of uptick in the end market headcount. We talked a little bit about what we think that looks like. We think that probably that's positive for us in terms of the relationships we have with our clients. But maybe remains to be seen in terms of the overall impact on the P and L. But again, it's a very gradual shift. So I wouldn't expect anything to sort of pop up in the next couple of quarters or anything. It will just kind of an ongoing March. And then from a fixed fee versus TNM, most of the acquisitions that we've done have generally been companies that are more consultative in nature. Fee. It might be a project with 3 months or 6 months or maybe up to fee. It might be a project with 3 months or 6 months or maybe up to a year. And so a lot of what you've seen over the last maybe six quarters has been just the layering in of revenues from Continuum and Think and some of these companies. From time to time, we do have a client that might ask us to adjust some of the business from T and M to fixed fee, but that's not a significant trend for us. So, it's mostly driven by the inorganic. Got it. And one last one on pricing. I don't know if you already commented, but what type of pricing tailwind are you building into your revenue guide for the year? I don't think there's any change into what we've talked about in the past. So, we've continued to sort of, I think, do a good job of sort of price versus wage inflation. And so, we haven't seen any significant changes in the last 90 days in that. And we continue to be quite focused on account margin. So it's a focus of the entire company and certainly of the executive leadership team. Great. Thank you for taking my questions. Thank you. Thank you. We have reached the end of the question and answer session. And I will now turn the call over to Arkady Dobkin for closing remarks. Thank you, everyone, for joining us today. We're pretty pleased with Q2 results, and we hope that we will continue doing this. And again, the challenge, as we mentioned, how to keep our in shape and challenge ourselves to run fast. And thanks to all of our 30 plus thousand people around the globe to help with this and talk to you next time. And as usual, David is here to help with any additional inquiries. Thank you. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.