Greetings. Welcome to EPAM Systems' second quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to David Straube, 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 second quarter 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 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 second quarter. We delivered revenues of $552 million, reflecting an approximate 24% year-over-year growth, or 25% in constant currency terms. Additionally, we delivered strong non-GAAP earnings per share of $1.28, which represents approximately 27% growth from Q2 of 2018. Our growth during the first half 2019 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 their 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. Our journey to drive our own relevancy in the market is nonstop as we push across EPAM 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 Competentum, 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, Competentum allow us to extend EPAM 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 who master each step of the digital product lifecycle, have an 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 has received in the first half of 2018, 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 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 Ad Age 2019 Annual Agency Report, EPAM was recognized among the top 50 largest agencies in the United States, up from our position of 130th just several years ago. In the U.K., we're already among the top 10 for some time. Plus, Forrester placed EPAM 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 relevantly skilled employees and be able to demonstrate the delivery of experience architectures that combine packaged software and custom code, truckloads of data and content-hooks to commerce and transactional systems, and insights and algorithms. To integrate all these parts and infuse them with creative thought and execution to expose, differentiate, and elevate brand values. In short, to analyze, create, design, build, and manage your digital customer experience in the context of your digital business transformation. On another side of the spectrum, EPAM 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, we 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 two 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. 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 talent we have, as well to attract new talent and to grow and retain it smartly. That is also a continuous effort.
To summarize, despite some of the macro-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 capabilities. With that said, I will now hand the call over to Jason to give more details on our second quarter results. Jason?
Thank you, Ark. Good morning, everyone. In the second quarter, 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 $551.6 million, a year-over-year growth of 23.8% 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 revenues, represents a rapidly growing part of our financial services portfolio.
Consumer grew 6% reported and 8.2% in constant currency terms. Growth in Q2 reflected the continued ramp-down of projects at a few consumer clients in Europe, 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% 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% of our Q2 revenues, grew 29.3%, or 32.4% in constant currency. Finally, APAC grew 19.9%, or 23.3% in constant currency, and now represents 2.6% of our revenues. In the second quarter, 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&A was 20.3% of revenue, compared to 20.9% in Q2 of last year.
Non-GAAP SG&A came in at 18.5% of revenue, compared to 18.9% in the same period last year. Our SG&A spend in Q2 was focused primarily on investments in facilities and our employees and is intended to support our longer-term growth. GAAP income from operations was $72.9 million, or 13.2% of revenue in the quarter, compared to $54.2 million, or 12.2% of revenue in Q2 of last year. Non-GAAP income from operations was $92.6 million, or 16.8% of revenue in the quarter, compared to $72.3 million, or 16.2% of revenue in Q2 of last year. Our GAAP effective tax rate for the quarter came in at 16.6%, which includes a $4.7 million excess tax benefit related to stock option exercises and vesting of restricted stock units.
The actual benefit was lower than the $10 million 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 57.6 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations in Q2 was $44 million, compared to $59.5 million in the same quarter last year, and free cash flow was $32.4 million, compared to $50.9 million 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 1,500 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 on a 1% estimated unfavorable foreign exchange impact. We expect GAAP income from operations to continue to be in the range of 12.5%-13.5% and non-GAAP income from operations to continue to be in the range of 16%-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. 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 least $5.25, reflecting a modest improvement in expected profitability for the full year. We now expect weighted average share count of 57.7 million fully diluted shares outstanding. For Q3 FY 2019, revenues will be at least $579 million for the third quarter, producing a growth rate of at least 23% reported and at least 24% in constant currency terms, factoring on a 1% estimated unfavorable foreign exchange impact. We expect GAAP income from operations to be in the range of 12.5%-13.5% and non-GAAP income from operations to be in the range of 16%-17%. We expect our GAAP effective tax rate to be approximately 15%, and non-GAAP effective tax rate will be approximately 23%.
For 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. Lastly, we expect a weighted average share count of 57.9 million fully diluted shares outstanding. A few key assumptions that support our GAAP to non-GAAP measurements. Stock compensation expense is expected to be approximately $16.2 million in Q3 and $15.5 million in Q4. Amortization of intangibles is expected to be approximately $2.8 million for each of the remaining quarters. The impact of foreign exchange is expected to be approximately $2 million loss for the second half, with a $1 million loss in each of the remaining quarters. The tax effect in non-GAAP adjustments is expected to be around $4.5 million in Q3 and approximately $4.4 million in Q4.
We expect excess tax benefit to be around $6 million in Q3 and $4 million in Q4. Lastly, one more assumption that is not part of our GAAP to non-GAAP assumptions, we expect interest in other income to be $2.6 million for each of the remaining quarters. In summary, we are pleased with our second 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 2019 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 session. If you'd like to ask a question, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. 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, Arkadiy. How much of the employee base do you feel like is adequately trained in those types of digital transformation skills? Can you talk about how you're defining that internally? What skill sets are truly considered digital? Maybe asking in a different way, what's more in focus now than would've perhaps been roughly three or so years ago?
Hi, Maggie. It is actually a very difficult question because you notice we're not sharing or reporting what is our digital revenue versus not digital because it's a very difficult classification. I can refer back to Forrester profile, which saying, okay, we 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. We think that majority of our work actually in this category because our core or our legacy in software product engineering, which is most of what I'm reading from other classifications, attribute this type of services to digital as well. Inside of EPAM, we definitely focusing on engaging platform and analytics platform as a very core digital.
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 the digital, it's a majority of what we do today. Similar on training, majority of our people train on this, and it was another key point for what we were sharing. We very key on education, and we building pretty strong educational service, not only focused internally, but also helping our clients to go through the same level of transformation. As I said, might be a little bit fuzzy answer, but it is a difficult question.
Okay, thank you. You've talked about the efforts to continue to drive relevancy in the market, and you've been a little bit more acquisitive in the last two years. Should we start thinking about a more consistent acquisition engine going forward? Does the current M&A funnel support that? 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.
I think from consistency point, the only consistency is that we constantly looking for the right fit and looking how to improve our capabilities. There is no any kind of plans to do two acquisitions per quarter or four acquisitions per quarter next year. That's not part of how we're thinking about it. We're constantly looking for opportunities. In terms of how it's impacting our growth, I think it's very minimal because we're looking for small competency-led companies, not 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. Jason can comment on numbers.
Yeah. No, Ark's absolutely correct. 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%. The inorganic contribution was actually just below 1% for the quarter. 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.
Hey.
Good quarterly here. Congratulations.
Thank you.
The question I have is, you've 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 two?
Yeah. Here's how I would think about the business, and I think I'll talk more about what's happening this year. 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. What we've been looking at is a range of 16%-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 showed that we're going to operate in the upper half of that range. In 2019, we're going to continue to focus on the 16%-17%. What you will see in the second half is we're going to continue to make investments, some of the investments that Ark talked about in learning platforms and professional development.
Again, I think you probably should continue to think about the business more in the 16%-17% range.
Understood. The travel vertical, can you remind us when the wind down of the European clients ends? 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?
Yeah. 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. Can you remind when that ends?
Yeah. I'm not certain I understand the wind down. I know that we've seen some degree of, let's say, softness.
Yeah. All of European
with the European consumer. Yeah. 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 growth rate than you've seen in that area in the past. I think what you see is that, in any given quarter, we're 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'll 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. generally what you see is maybe a little bit of improvement in gross margin in that time period.
Q4 is usually a strong quarter for us. We've been operating at a quite high level of profitability here in the first half. I don't expect a big uptick in gross margin or profitability in the second half. What you would normally see, though, is some positives in the gross margin because of the additional bill days in Q3.
Basically, Ashwin, in short, all this volatility more in line with usual volatility for us for different verticals in the past. Yeah, there are some softness and specifically on U.K. retailers, but again, even that we can attribute to more regular stuff than something special.
Okay. 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 re-acceleration in the second half? I think your comps get easier, but obviously there's maybe some lingering macro headwinds. 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? Then maybe just while you're on the topic of verticals, any incremental commentary on financial services, had a nice rebound and re-acceleration in the quarter. Is that sustainable in the back half?
Yeah. I think to echo what Ark said in the last comment is that the business, it's broadly diversified, both in terms of industry verticals, in terms of customers, both new and longer-term EPAM customers. 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. 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. 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.
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 and asset management, and insurance is still small for us, but it's growing quite rapidly. 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? 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? Obviously the growth in the non-top 20 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 into two customers. What used to be 10 customers in our top 10 is really effectively nine. That probably changes a little bit some of those comparisons as you look at our concentration over time. 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. I wanted to ask on the acquisition, Competentum. Talk about what this does for you internally as far as the strategy goes in. Is there a function of any internal savings or benefits worth quantifying? 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?
Any educational capabilities are making some impact internally as well, but we investing in this area constantly, we don't think it would be any specific as G&A savings, and especially the company is pretty small. It's adding some capabilities which we would have to build ourselves. Again, it's pretty small. From generally software platforms, we more considering them as accelerators, because in our business, we do believe the differentiation coming from right integration, custom extension, and build up. 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 very modest percentage of our work. At the same time, it's giving us a good jump start in many large implementations.
That's the goal, how to build the right portfolio of accelerators to start faster. 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 quickly.
Okay, that's helpful. I want to ask on healthcare. Vertical is 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?
We playing in this for some time. Initially, it was mostly around R&D life science. Now I think we expand it to commercial life science component, and we expand it to healthcare insurance component as well. Basically, if four or five years ago it was practically one kind of concentration point for growth, right now it's at least three.
Yeah, we're also seeing more consulting business in the healthcare space as well.
I think there is good complementation between them because R&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 datasets. It's very important. I think it's helping us to grow.
Okay, great. Thanks, guys.
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. 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 goes to our history as well, and we repeated this many times. We started as a product engineering extension to our clients, like a lot of top technology companies were our clients initially. 10 years ago, it was a major source of our revenue. Through this, 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 good quality. We were building on the skills. When we come into new verticals today, we clearly bring in the understanding how to build right products.
We also, during the last six, seven years, and that's what we pointed out today, build 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 right scalability and performance components. I think this engineering heritage, which we now blending with consultative approach probably helping us to be a little bit more consistent than.
Got it. Okay
some others.
Just as a follow-up, on the margin outlook, obviously you gave guidance for this year, maybe you could talk about your thoughts about margins over the long term. 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've proven that we can run, I would say anywhere in that 16%-17% range. I think a couple of years ago, we were sort of closer to the bottom end of that range. Here you see us in these quarters running near the top or sometimes just over that range. I think that probably to think about us able to comfortably sort of run in the 16%-17% range. There will be volatility by quarter based in part on utilization and bill days and some of that. I think probably just to continue to think of us as a 16%-17% adjusted income from operations is really what we're looking to drive. In part because we are going to continue making the investments that Arkadiy's 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 Voth with Wolfe Research. Please proceed with your questions.
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. 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.
I think, and this is probably very much in line with what we 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. It's really extremely difficult for us to predict volatility in specific segment, while in general, like we're giving the guidance on the total numbers.
Yeah.
I think it's getting better than last quarter, clearly. It's still very unclear what would be in Q4, for example, in the results of Brexit, which nobody knows how companies will react. What we more comfortable to share and how we 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. Then I guess my follow-up, digging into the gross margin numbers, they seem to be pretty consistent here. You guys have called out before, the strategy to implement more nearshoring capabilities, which from our perspective could eventually weigh on margin. Maybe you guys could just update us on your strategy towards nearshoring and how you kind of expect that to weigh on the gross margin side.
The strategy is still there. When you say nearshoring, you mean in market?
Meaning make North America more in market.
Yes. Okay.
Yeah.
Okay, because nearshoring, it's a little bit Yeah, if we're talking in-market presence, then we definitely will expand that because with the complexity of the services which we delivering, we need more local presence from expertise and dynamics of the engagements point of view and consultative point of view. We will be increasing this. How it's going to impact gross margin? Again, we need to wait and see exactly because there are different theories here that, yes, maybe profitability in general lower in the market. At the same time, we think that if we would be able to increase the total value to the clients, we will be able to balance this as well. We do believe that we would be able to do it.
Yeah. We're very focused on margin at the account level and sort of maintaining profitability in the gross margin area. As we've talked about in the past, we clearly are focused on pricing and sort of maintaining or 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? Then maybe talk in general about pricing trends for some of the new deals that are coming on board. Thanks.
Yeah. 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 attrition year-over-year, so we feel quite good about that. I don't know, Ark, you want to talk about new deals and pricing or?
I think it's, again, Moshe, 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. 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. There are some voices again. We can repeat all these scary stories about Brexit and all of this. 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. Just to follow up, looking at some of the legacy vendors that made some strategic moves to get into this 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?
Well, in general, market is pretty competitive and tough. At the same time, it is big and the subset of the market which we focus in growing much faster than global IT market. 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. Again, market is growing very fast and demand is there. 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 our future gross margin? Can you like with the size to benefit from this? Our answer like, and since pretty trivial, so we will have to reinvest to constantly upgrade ourselves.
Understood. Thanks.
The next question is from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question.
Hello. Thank you for taking my question, congratulations on this result. I have a pretty specific one on your guidance. We can decompose your full year guidance into quarters. When I look, for example, at non-GAAP EPS guidance, I see a clear slowdown somewhere to 13% year-on-year growth in the third quarter and 10% year-on-year growth in the fourth quarter. There is also a pretty significant slowdown implied by your non-GAAP operating margins. Maybe you could provide some color on what is behind this, the high base effect, your reinvestments into developing the business. I also see that the hiring has accelerated. Maybe you are hiring more people, and this also affects your margins. This is the first question. The second question I have, 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. I'll take the second half profitability questions. 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 a little bit better profitability in the first half. 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%-17% range. If you'll remember Q4 of 2018, we actually ran at 18.4%, non-GAAP adjusted IFO. That was at a time when we actually were over 80% from a utilization standpoint. It was some outsized demand that popped in the quarter. We do not expect to be running at 18.4% adjusted IFO in Q4. Probably that's what you see when you see the change in, let's say, growth rate of EPS.
Again, we continue to expect that we'll run in the high end of our 16%-17% range for the full year. Again, we feel quite good about profitability in the second half. I don't know about next year on demand or risk or.
Yeah. From client concerns, I think they're very much in line with industry concerns. Way to find the right capabilities, and not just right capabilities, but scalable ones. Scalability and change in skills profiles. It's an ability to put right teams together. It's one concern. The second concern actually. This is again, shared concern between clients and vendors, including EPAM. For us, it's very important how to actually build what should bring value versus just deliver engineering services. A lot of clients are actually looking at us and asking us for such leadership components to bring to the equation to help them actually to find the right solution, not just to build the right solution. I think we have kind of these three 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 Ramnani with KeyBanc. Please proceed with your question.
Hi. Thanks for taking my question. I really wanted to ask you about your recent acquisition of Competentum, 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?
The main focus is to improve our capabilities in educational and publishing segments. These guys have some competencies which very complementary to what we have, and we're hoping that we will be able to penetrate this market much more aggressively than before. We had already good offering in this area, but again, that would really help. This company has content development capabilities and learning platform development capabilities, which we potentially will enhance our internal offering. Internal here, you can think in the broader sense, internal for our employees and internal-external for potential candidates of which we train externally to bring to the company as well. That should impact this as well. Again, the primary goal was to go to market.
Great. How are you looking to sell it? Will it be sold as a distinct offering, or will it be packaged with something else? Second part of the question is, how does the firm actually generate its content? Is it all internally developed, or are they using external authors to develop the content?
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, 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, again, think about it more in the competency sense. Now we 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. We just would be able to orchestrate it better and more scalable environments.
Great. 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?
First 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 ourself. We were looking at them and sometimes we utilize, 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. As a reminder to ask a question today, you may press star one from your telephone keypad. Our next question is coming from the line of David Grossman with Stifel. Please proceed with your questions.
Thank you. Good morning. A couple of very quick follow-ups here. On the utilization rate, I know you were running hot in the back half of last year. You're back down a couple of hundred basis points. Is this about where you're comfortable, or are you looking to bring it down even further?
Yes, I think you know utilization is going to vary based on quarter to a certain extent. Again, when you've got a quarter with more vacations, which is coming up, I think we've shown that we can run around 77%-78% pretty comfortably. There may be quarters in or above that. As you'll remember that Q4 at 80% is a pretty hot number, and it probably takes a quarter where you get some unexpected demand. I'm not expecting that utilization would decline. Again, I think probably this range in the 77%-78% generally is probably a good way to think about the business.
All right, great. Thanks for that. Then just on the headcount adds, just on a percentage basis, it just looks like over the last 12 months, adding more in Ukraine and Russia. 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.
Yeah, it's a good question. We would've been growing in the CIS and Ukraine region. We also would be growing in India, where we're seeing good traction. 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. 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.
You're pretty satisfied with the current geographies, no need to add anything soon in terms of new supply centers in the global network?
I think you'll see us continue to evolve the business as Ark always talks about, and that could include incremental geographies. I don't think you'll see any substantial or, let's say, radical change anytime in the near future. 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. Then just lastly, Ark, you made some comments about consulting, I think, in your prepared remarks, sorry, I missed some of that. 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 still mostly focus on how to bring integrated solution to our clients, not as kind of completely separate line of business. There are always some projects which is 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 Tandon with Needham & Company. Please proceed with your questions.
Thank you. Good morning. 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&M side. Is that just a trend we should look for as the work becomes maybe sorry, the shift towards fixed price as the work becomes more iterative with the digital type work? I'd like to also ask just about the onsite/offshore mix over time, given the nature of the work. Is that gonna result in more onsite-centric effort, or does the model stay pretty much put where you have it today?
Okay. Yeah, good questions. From the standpoint of the shift towards onsite, 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 in-market presence. I think you won't see it shift dramatically in any given quarter, but I think you're gonna see a constant sort of uptick in the in-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. Maybe remains to be seen in terms of the overall impact on the P&L. 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'll just kind of an ongoing march. From a fixed fee versus T&M, most of the acquisitions that we've done have generally been companies that are more consultative in nature, and most of their engagements are fixed fee, but they're generally very short-term projects, right? It's not a multi-year kind of fixed fee. It might be a project with three months or six months or maybe up to a year. A lot of what you've seen over the last maybe six quarters has been just the layering in of revenues from Continuum and TH_NK 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&M to fixed fee, but that's not a significant trend for us. It's mostly driven by the inorganic.
Got it. 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. We've continued to sort of, I think, do a good job of sort of price versus wage inflation. We haven't seen any significant changes in the last 90 days in that. We continue to be quite focused on account margin. It's a focus of the entire company and certainly of the executive leadership team.
Great. Thank you for taking my questions.
Bet, thank you.
Thank you. We have reached the end of the question and answer session. Now I'll turn the call over to Arkadiy Dobkin for closing remarks.
Thank you everyone for joining us today. We're pretty pleased with Q2 results. We hope that we will continue doing this. Again, the challenge is, we mentioned how to keep ourselves in shape and challenge ourselves to run fast. Thanks to all of our 30-plus thousand people around the globe to help with this. Talk to you next time. 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.