Earnings Call: Q1 2019

May 9, 2019

To the EPAM Systems First Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Straube, Head of Investor Relations for EPAM Systems. Thank you. You may begin. Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's Q1 2019 results. If you have not, a copy is available at epam.com in the Investors section. With me on today's call are Coddy Dobkin, CEO and President and Jason Peterson, Chief Financial Officer. Before I begin, I'd like to remind you that some of the comments made on today's call may contain forward looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non GAAP measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the 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 of our Q4. We delivered revenues of US521 million dollars reflecting 23% year over year growth or 26% in constant currency terms. In addition, we delivered strong non GAAP earnings per share of $1.25 which represents 34% growth from Q1 of 2018. We believe our Q1 results have given us a solid start to the fiscal year and underscore our continued new relevance in the market. We think it is especially important taking into account our remarks just 3 months back when we mentioned macro level uncertainties, which everyone worried about it then and seems like still do now, at least based on the recently reported performance of some leading market players. So at this point, we think our relevance has been owned through our nonstop focus on investing across the business, broadening our set of offerings, developing our talent further and overall constantly disrupting ourselves to improve our chances as a company to be better prepared for the future. While it isn't possible to share something significantly new in regards to what we did in Q1 versus previous periods. I think a short summary could help serve as a reminder of what our focus is. So we are continuously shaping our consulting coaching by strengthening our in market teams and blending in new capabilities, which we added to EPAM during 2018 organically and by acquisitions. As we indicated before, our goal is to build well integrated consulting offering across business, experience and technology expertise, which should allow us to empower our historically strong product engineering capabilities and bring real value to our clients with the solutions we are delivering. During the last quarter, we saw a good level of progress in this direction. Also, we are continuously improving our product engineering capabilities across all global locations and constantly improving productivity, expertise and quality as well as a way of working and collaborating within our and clients' teams by investing in our own digital platforms to support it. And we are continuously thinking about and testing in practice new services, new solutions and the alternative approaches to problem solving, which we didn't consider before or didn't work in the past for us for one or another reason. And Q1 brought some new challenges forcing us to act outside of comfort zone and making us think differently. And we are excited to address those because it shows us a glimpse of the future. Finally, and the result of all of that, we are changing the company constantly and experimenting with different models of how we work internally and how we interact with clients and partners to address the challenges we are together encouraging and to improve the overall speed of everything we do. One good example of our non stop evolution could be our digital factory concept, which allows EPAM to connect across all our capabilities in consulting, design, architecture and engineering and optimize overall delivery, giving our clients a partner that can help them with the total engagement cycle from ideation to production run. Yes, we know, most likely you heard that before from others in the industry, both in terms of the approach itself and probably even in brands and similarities. And it is true, it's very difficult to differentiate yourself just on the message. The difference clearly is in execution where speed and quality of deliverables are critical. And those are the function of thousands of small details, including the ability to orchestrate multifunctional and multilocational teams, while constantly improving productivity and eliminating waste. And also the difference is an unstoppable desire to put forth the extra effort to overcome a constantly growing number of new obstacles. Proving such differentiation points in practice over and over again is the only way to move forward. And that's the reason we are very excited to hear positive remarks from many of our clients about the impact of our efforts on their businesses. While they are also sharing how different and sometimes difficult because of that we are to work with. That are the reasons we are continuing to be optimistic about our future in the maybe broadly overused term digital ecosystem, where everything including clients, consumers, partners, suppliers and their employees all blended together into scalable and flexible platform environment. So our goal is simple. We want to enable our customers to be competitive and disruptive in the marketplace through such innovative solution while helping them navigate successfully through multiple waves of technology changes. And today, we continue to see consistent demand across our main verticals and in our emerging verticals for our uniquely blended capabilities. To do pragmatic consulting around digital platforms, data and analytics, automation and engineering agility and to put that together with the full depth and breadth of EPAM global delivery machine, which we're building over the years. So at this point, I think we can repeat again as we did 3 months ago. Despite some of the macro level uncertainties, we are constantly watching and reading about. We are looking at 2019 optimistically. We are confident that we can continue to remain relevant to our diverse and global client base through our ability to execute large scale digital transformation programs and to help them to make some very ambitious innovations programs very real. With that said, let me turn the call over to Jason for more details on our Q1 results and update on our business outlook. Thank you, Ark. Good morning, everyone. I'll start with Q1 financial highlights, then talk about profitability, cash flow and end on guidance for the 2019 fiscal year and Q2. In the Q1, we delivered solid top line performance, exceeded our profitability expectations and grew earnings per share. Here are a few key highlights from the quarter. Revenue came in at $521,300,000 a year over year growth of 22.9 percent on a reported basis or 26.3% growth in constant currency, reflecting a negative foreign exchange impact of 3.4%. Looking at our Q1 revenue growth across our industry verticals, the drivers of growth remain very consistent and include digital transformation and increased focus on customer engagement, product development and driving efficiencies and deeper insights through artificial intelligence, machine learning and analytics. Financial Services, our largest vertical, delivered 9.1% reported 13.3% constant currency growth year over year. Growth in Q1 was impacted by timing of revenue recognition for several financial services clients in Russia, in addition to the expected ramp down of activity at a few clients predominantly based in Europe. We continue to see increasing demand for our offerings in the payment processing and insurance space, which currently account for a modest share of revenues, but represent a rapidly growing services portfolio. Travel and consumer grew 13.6% reported and 18.1% in constant currency terms. Growth in Q1 was impacted by the ramp down of project revenue for a few consumer clients in Europe along with muted growth for a few clients based in North America. Software and high-tech grew 22.4% in the quarter. Business Information and Media posted 24.7% growth in Q1. Life Sciences and Healthcare grew 69.6%, reflecting broad based growth across both industries and in existing and new client programs. And lastly, our emerging verticals delivered 40.7% growth driven primarily by clients in energy, telecommunications and automotive. From a geographic perspective, North America, our largest region representing 60.7% of our Q1 revenues grew 32.2% year over year or 33% in constant currency. Europe, representing 33.3 percent of our Q1 revenues, grew 13.3% year over year or 19.3% in constant currency. CIS, representing 3.5 percent of our Q1 revenues, contracted year over year on both a reported and a constant currency basis, declining 16.6% and 4.1% respectively. Growth in this geography was impacted primarily by the timing of revenue recognition at several financial services clients. And finally, APAC grew 32.1% or 37.3% in constant currency and now represents 2.5 percent of our revenues. In the Q1, growth in our top 20 clients was 15.5% and growth outside our top 20 clients was approximately 29% compared to the same quarter last year. Moving down the income statement, our GAAP gross margin for the quarter was 33.9% compared to 34.5% in Q1 of last year. Non GAAP gross margin for the quarter was 36.3% compared to 36.5% for the same quarter last year. GAAP SG and A was 19.5 percent of revenue compared to 21.1% in Q1 of last year. And non GAAP SG and A came in at 17.7 percent of revenue compared to 19% in the same period last year, somewhat below the bottom end of the range that we target. GAAP income from operations was $64,700,000 or 12.4 percent of revenue in the quarter compared to $48,700,000 or 11.5 percent of revenue in Q1 of last year. Non GAAP income from operations was $89,200,000 or 17.1 percent of revenue in the quarter compared to $67,700,000 or 16 percent of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 5.4%, which includes $11,500,000 excess tax benefit related to stock option exercises, investing in restricted stock units. Our non GAAP effective tax rate, which excludes the excess tax benefit and certain one time items was 22.5%. Diluted earnings per share on a GAAP basis was $1.06 and non GAAP EPS was $1.25 reflecting a 34.4% increase over the same quarter in fiscal 2018. In Q1, there were approximately 57,200,000 diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q1 was negative $200,000 compared to a positive $7,300,000 in the same quarter last year. And free cash flow was negative $13,600,000 compared to a negative $3,400,000 in the same quarter last year. Cash flows this quarter were impacted by payments related to our annual variable compensation programs, which paid out at a higher level based on our 2018 performance and to a lesser extent an increase in DSO between Q4 and Q1. DSO was 78 days compared to 73 days at the end of Q4 fiscal 2018 and 83 days in the same quarter last year. We continue to be pleased with our DSO performance. Moving on to a few operational metrics. We ended the quarter with over 27,800 delivery professionals, a 17.6% increase year over year and a net addition of more than 1100 production professionals during Q1. Our total headcount ended at more than 31,400 employees. Utilization was 79.9% compared to 77.6% in the same quarter last year and 80.2% in Q4. Now let's turn to guidance. Starting with fiscal 2019, revenue growth will continue to be at least 22% reported and at least 23% in constant currency terms after factoring a 1% estimated unfavorable foreign exchange impact. We expect GAAP income from operations to continue to be in the range of 12.5 percent to 13.5 percent 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 12% and our non GAAP effective tax rate to continue to be approximately 23%. Earnings per share, we now expect GAAP diluted EPS to be at least $4.61 for the full year and non GAAP diluted EPS will now be at least $5.19 reflecting a modest improvement in expected profitability for the full year. We now expect weighted average share count of 58,000,000 fully diluted shares outstanding. For Q2 of fiscal year 2019, revenues will be at least $549,000,000 for the Q2 producing a growth rate of at least 23% reported and at least 24% in constant currency terms. After factoring in a 1% estimated unfavorable foreign exchange impact. We expect GAAP income from operations to be in the range of 12% to 13% and non GAAP income from operations to be in the range of 15.5% to 16.5%, reflecting a higher level of holidays in the CIS region and the impact of our annual compensation increases. We expect our GAAP effective tax rate to be approximately 9% and non GAAP effective tax rate will be approximately 23%. Earnings per share, we expect GAAP diluted EPS will be at least $1.12 for the quarter and non GAAP EPS will be at least $1.21 for the quarter. And lastly, we expect a weighted average share count of 57,900,000 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 Q2, dollars 15,200,000 in Q3 and $15,600,000 in Q4. Amortization of intangibles is expected to be approximately $2,400,000 for each of the remaining quarters. The impact of foreign exchange is expected to be approximately a $2,000,000 loss for the remainder of the year, with $1,000,000 in Q2 $500,000 in each of the remaining quarters. Tax effective non GAAP adjustments is expected to be around $4,300,000 in Q2 and approximately $4,000,000 in each remaining quarter. We expect excess tax benefits to be around $10,000,000 in Q2, dollars 6,800,000 in Q3 and $4,200,000 in Q4. And lastly, given the amount of interest income we expect for fiscal 2019, we are adding an assumption related to interest and other income for the remainder of the year. We expect interest and other income to be $2,700,000 for each of the remaining quarters. In summary, our Q1 results reflect solid demand for our services, underpinned by a diverse mix of projects and offerings across the industries we serve. We remain confident that our strategy of combining our core engineering heritage with consulting, advanced technology and digital business services positions EPAM well for the future. With that, let's open the call up for questions. Thank you. At this time, we'll be conducting a question and answer Our first question comes from the line of Ashwin Shirva with Citi. Please proceed with your question. Hi, Ark. Hi, Jason. Good start to the year. I guess my Thank you. Let me start with the obvious question. I guess, your first half growth is about 25% constant currency. The low end of your full year outlook remains 23%. I think the Russia reference not a full year factor given it's all about timing. Not sure about the European client ramp downs you mentioned, any further detail would be great there. But more importantly, if you're expressing optimism on a full year basis, what keeps you from bringing up the low end of your outlook? So fair We feel good about how we've started Q1 and clearly based on our guidance for Q2 feel good about the demand environment. What we are seeing is a couple of things, which is one is that we are seeing a little bit of a pullback in spending on European Banking clients. And that informs our guidance for the full year. And in addition, we're seeing a little bit of unevenness in demand associated with consumer and retail, primarily in Europe. And again, what you're seeing is some good strong growth across certain of our customers there. And then what you're seeing is a few customers where whose business models somewhat challenged and probably further challenged by uncertainty associated with Brexit, who are pulling back a little bit on spending. And so, the guidance, I would say, is thoughtful. And again, what we continue to see is strong demand overall across the business. You can see the growth rates in life sciences and healthcare. You can see the growth rates in high-tech, in our emerging verticals. And so, we feel very good about the demand environment, but we just want to be a little bit thoughtful as we enter Q2 about the remainder of the fiscal year. And I would add that, Ashwin, you know traditionally that we are projecting what we're seeing right now. So what would happen in Q3, Q4, it's will be happening. But at this point, we see this visibility. So and Q2 become better projected, so we increase the guidance. We don't feel we can increase the guidance right now for the whole year yet. Got it. Understood. No, that's good detail. I guess the second question is based on at least our checks, digital transformation type contract sizes are increasing. That work, it continues to incorporate middle and back office, not just front office type work. 1st, would you agree with that? And so if so, can you talk about some of the changes that you continue to make internally with tools and so on to get a good level of incremental share from those bigger deals? Yes, definitely transformation impacting not just front office, but the whole stack of technologies and business processes and business platforms. And while kind of simplistic understanding of digital always was focusing on front end, In our experience, we all always were very strongly engineering driven, as you know. And it means that we traditionally were working on development of the many core platform for large product companies helping them with this and then getting experience how to do implementation and customization of this. From this point of view, we have the skills. And during the last couple of years, we actually went down with solutions for end corporations and it's changing us. And we're investing a lot in advancing in modernization technologies for legacy systems and we have some progress and visible progress there as well. So now we actually can optimize from end to end and that's becoming bigger portion of our business. But still on development and very highly engineering customization points of view, not on managing or maintaining the legacy style or legacy style. Got it. Thank you, guys. Good quarter. Thank you. Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch. Please proceed with your question. Hi, guys. This is actually Amit Singh. Great quarter overall. Just wanted to start off on a question related to the last question on financial services. So the pullback that you talk about among European clients, I wanted to get a sense of is this something new or has this been going on for a while given your financial services revenue growth has been decelerating over the last few quarters? And also if you could update us on the health of the financial services clients in North America? And then how should we look at your overall vertical growth going forward? Should we expect the growth to further decelerate from here? Right. So, Dave, thanks for that question. So, the first thing I want to focus on is just the overall demand environment for the company. So, we've always talked about the company having a broad series of sort of what I would refer to as growth engines. That's both new and existing clients. And then, what you can see is that we're able to deliver growth across a broad range of 22% of revenue and that would be financial services. We're 22% of revenue and that would be financial services. We're actually seeing very strong growth in FinTech, in asset management, in card payment and processing. And we're beginning to see some very exciting growth and actually with our insurance customers, which today make up a small part of our business, but we expect to grow relatively rapidly in both the near and the midterm. So, we've got a lot of sources of growth inside financial services. And what we're just seeing in a handful of banking clients, we just want to acknowledge that there has been a little bit of pullback there and that's what informs our guidance. As Ark said, what we want to do is guide for the full year to what we can see today. And again, the somewhat of a reduction that we saw in Q1 forms the guidance for the remainder of the year. Okay, perfect. And then if you could provide a little bit more, you talked about consulting and I believe your overall And then related to that, as And then related to that, as you're adding more of these consulting capabilities and people, should it have an impact on your long term margins? Because based on your current guidance, it seems like this year, you'll likely be towards the upper end of that during the previous calls, we kind of touched on this and our message was that we're not trying to create a separate line of business, which is consulting rather than create integrated solutioning from advising to delivering and optimizing actually the end result. And this is still the goal. So it's very difficult. We don't have even like specific headcount on consulting as a pure consulting services, because it's more like attribute of multiple professionals in the palm, which play in specific roles and specific engagements. So very difficult to answer questions with metrics and so on because we're measuring and trying to measure this on the end results. The number of people in the market increasing, but and we're planning to increase. How this will impact the margin? So, in general, in general, profitability on in market margins on in market people, a little bit lower than our global delivery centers from one point of view. At the same time, the consultative behavior and consultative type of engagement growing and we're seeing that some of this bringing us different marginality on the clients because we're getting earlier in the engagements, we can advise and we can actually work with clients in a very different manner. So, we do think that it's not going to impact our margin in a long time, but investments necessary in our kind of IFRS guidance is what we're communicating right now. All right, perfect. Thank you very much. Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Good morning. So Ark, in your prepared remarks, you talked about some new challenges that you faced in Q1. Is this some of the vertical specific challenges that you all outlined on the call? Are there other challenges that were happening during the Q1? Can you elaborate a little bit on those? And then also, you kind of tie that into the ability to create new solutions or services. Is there anything there in particular that stands out as something that could be an interesting development for the business or a growth driver for the business? Okay. I think it's kind of 2 questions. In reality, it is exactly overlapping and one thing for us because the challenge is coming from and clearly, there is multiple challenges and Q1 just confirmation of this trend over different quarters because we have it constantly. But what I was talking about, it's about some challenges coming from the new type of services which we bring in from our internal disruption going to some areas where we not necessarily know all answers. And as almost as a rule when clients don't know the answers as well, otherwise they wouldn't be coming to us with it. So it creates challenges how to do new type of projects, new type of engagement with new type of capabilities. And with our organic kind of internal disruption and bringing new capabilities through acquisitions, we're creating opportunities to go to these unknown situations and test new type of ideas and solutions and services. And that's what I was kind of referring to earlier today. Okay, I understand. And then as you think about kind of these new engagements and more of these transformational types of engagements, Of the business that you've been winning, how much of that would you characterize as transformational? And then on the pipeline as well, are you seeing an increase in the transformational deals in the pipeline? And any quantification of that would be appreciated. Thanks. I cannot give you like specific numbers, but it's definitely increasing pretty rapidly the type of the deals coming to us where it's a critical transformational efforts or initiatives on the client base. Like 3, 4 years ago, it was single. Now probably we're participating in dozens of this type engagement. Thank you. Our next question comes from the line of Bryan Bergin with Cowen and Company. Please proceed with your question. Hi, thank you. A follow-up here on the consulting and design services. Can you give us a sense of the base of clients that you've penetrated with those offerings? Are you having success winning new engagements by leading with these offerings? I'm curious if there are relationships you're starting that are that have different counterparts than your traditional target in a client? I'm sorry, can you repeat? Yes, sure. So with respect to the consulting and design services, how much of the base of your existing clients have you penetrated with those services? And then with respect to if you're leading with this offering, are you dealing with different people and different counterparts at the client than you traditionally would be? Yes. We're probably penetration with this type of service is pretty deep. So it's again, we're not giving specific numbers, but it's way over 50% of our businesses, like probably closer to 70%, 80%. And type of people we interact broadening, but it's still a lot of interaction with IT people because actually the companies we're serious about is involving IT operation in cooperation with business and with digital leadership working together. So I think we're seeing more and more different characters on client side, but IT is still driving big portion of this because complex platforms without technology practically impossible to deliver. Okay. That makes sense. All right. And then just on talent sourcing, you continue to show a nice separation between the headcount and the revenue growth. Do you think this is sustainable? Can you talk about the hiring ramp there and then the competition also for talent, any changes? I think on separation, there is nothing new here. So we indicated multiple times what the structure of this and I think it continues to be the same. It's slightly increasing in our case onshore presence. New contracts coming with better rates. So there is promotion inside of the existing contracts because of accumulated experience of our people. And that's practically the same growth per person from revenue which we've seen. And the second question was about challenges in sourcing. As far as the competition for talent, any changes there still tight? Yes. We don't have any easier way to do it. So, we still it's still very tough market and investments in training, investment in people, in retention, in education, very important. Plus, clearly, the type of interesting deals which we run-in bringing us opportunity to attract more talented components of the workforce. Okay. Thank you. But challenge is there, so it's absolutely. Thank you. Our next question comes from the line of Mayank Tandon with Needham and Company. Please proceed with your question. Thank you. Good morning. Good quarter again. Jason, maybe you could parse through the revenue profile going forward in terms of your headcount plans, Any potential for further improvement in utilization? And also what type of pricing tailwinds you're building into your expectations for the rest of the year? Yes, that's a fair question. So from a pricing standpoint, as Ark indicated, is that if you're doing a revenue per head count is there is an ongoing gradual shift towards somewhat more talent in market. So that will have a positive uplift. Okay. As Ark also indicated, we just did our promotion cycle. Certain amount of rate alignment after that. And then we continue to get price increases at existing customers and with newer customers and other opportunities, there's potential for pricing as well. So, what we're looking at right now is an environment that probably is somewhat similar to what we've seen in past time periods and probably a similar level of wage inflation, certainly not an elevated level of wage inflation. And so I think that that sort of bodes for fairly consistent sort of pricing and wage inflation environment. From a utilization standpoint, and I do need to make clear around sort of the quarterization or seasonality of our business, what we usually see is that first half of our fiscal year has got lower available what we call capacity or what other companies call bill days. And so in our environment, we've got significant holidays associated with Orthodox Christmas. In Q1, we've got significant holidays associated with May in the CIS region in Q2. So we have fewer available working days. And as a result, that usually has a somewhat negative impact on profitability. And in the second half, we've got more available working days. And then you see a general improvement in profitability. And you'll see that in our patterns throughout the last couple of years. And so right now, we're running at a relatively high level of utilization. We think we'll run at a higher level than maybe we have in past years, but I would expect a modest decline in utilization as we go from Q1 to Q2 in part because of the elevated vacations associated with May. Great. That's helpful color. And then if I can just follow-up on the verticals. Could you provide any more details on what the emerging verticals comprise? And also how are you thinking about expanding into new areas either through M and A or organically? Okay. That's fair. And so from the emerging standpoint, there's a series of customers in there, but we generally sort of focus on energy, which has been strong growth here in Q1. We're seeing good growth in automotive and then we're seeing some interesting activity and growth in telecommunications. From an M and A standpoint, a lot of the focus has been on developing incremental sort of in market consulting capability. And then there's also probably some opportunities to get some additional sort of skills and talent. But probably the focus from an M and A strategy standpoint has not changed dramatically. We're still focused more on sort of consulting capabilities in market. Great. Thank you. Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question. Hi. I want to get a sense of demand and I wanted to ask the question this way. How much of the engagements that are coming in or the new engagements or the new work that's coming in are new engagements versus takeaways? And have you seen any shift in network? I know it's traditionally been brand new engagements. You mean that even new engagements in existing clients? Yes. Is that still primarily new work or is that more takeaways and have you seen any shift there? I think it's approximate you know, it's very difficult sometimes to qualify what is new engagement or not, especially in the modern this platform build up because it's usually extension of something which we were doing before. But I don't think there is any shift in this. There is new initiatives still and there is a continuation of kind of large sub components of the platform development and most of this all connected as well. And so that our consistent trend has been that if you look at the incremental revenue dollars on a year over year basis, that 60% of the incremental revenue dollar comes from existing clients and 40% of the incremental revenue dollar comes from new clients. And so that trend stays pretty consistent. Again, we continue to grow quite rapidly at many of our largest and longest standing customers and we continue to get quite a bit of incremental revenue from new customer engagements. That's very helpful. Yes. And then my second one, I guess I'll ask about guidance again and I'll ask it differently on the margin side. They seem to want to continue to go up. What are the levers there? Why not take a look at the guidance for the full year on the margin side? And what keeps you conservative on that side? Thanks. Okay. And so our guidance does indicate that we have somewhat more confidence that we can run the business at a somewhat higher level of profitability than what we thought when we began the fiscal year. So that take up in EPS reflects some of that sense that we can incrementally improve profitability. But I think as we look at the business, we want to make certain that we continue to invest in the business that does have some amount of SG and A related investment. And I think gross margin will be sort of relatively consistent with what we saw last year. And so, I think it's kind of informed by the desire to continue to invest in the business. And as Ark talked about, the notion of, let's say, challenges with customers is that we are bringing additional capabilities to market. We're filling in with capabilities that maybe we haven't historically had. Okay, we're learning from that. Our clients are learning from that. We think it makes us more relevant to clients. And then it supports our growth long term, which is expected to continue to be in excess of 20% per year. Great. Thank you. Thank you. Our next question comes from the line of Moshe Katri with Wedbush Securities. Is there a way to quantify the impact from the ramp downs on revenue growth for the quarter? And then as a follow-up, you mentioned that Fintech and Insurance are both offsetting the weakness in your traditional banking business in Europe. Can you give us a maybe some color on which percentage of the overall financial services vertical these 2 emerging growth areas account for? Thanks a lot. Yes. I think I probably wouldn't spend a lot of time at this moment sort of dissecting kind of different components of the financial services practice, okay? What I can say is that we've got a significant series of growth opportunities in FinTech. We've talked about insurance, which is small and we think rapidly growing. But then I'm going to pull back and just kind of talk about the business overall is that EPAM has always had a broad source of growth opportunities across industry verticals, across both new and existing clients. And so I think how I would speak about both the quarter and the full fiscal year is despite some softness in spending with banks, the company is continuing to grow our business in excess of 20% per year, in part because we're not dependent on financial services as a source of growth for the company. I think when I look long term, I think the other thing that I would say is that historically and today would be no different as we continue to be relatively more supply constrained than we've ever been demand constrained. So, even if there is a modest reduction in demand across a couple of customers, oftentimes what you'll find in more than often almost always is there's an opportunity to deploy resources in other accounts. Thanks. So, in short, we're very kind of happy with our client concentration and we don't think there is any danger that even if one client will go down, we wouldn't be able to handle it or a couple of clients. And historically, that's exactly what's happening multiple times during the last 5, 6 years. So never impacted our overall growth. So unless the broader economic changes somewhere, we feel pretty confident. Helpful. Thanks. Thank you. Our next question comes from the line of Arvind Ramnani with KeyBanc Capital Markets. Please proceed with your question. Hi. Thanks for taking my question. Yes, I just had a question regarding your earlier commentary on some of the software spend at some of the specific banks in Europe. Is it mostly related to Brexit or is there some of the banks going through some in sourcing as well? So, it might be a combination of this. So, because some banks are going through in sourcing can wait. So, and we're hearing about it for very long time. At the same time, even our big banks, while not necessarily very optimistic part of the story, It is pretty kind of control story for us at this point. Okay? But what exactly driving this, It's very difficult to answer because we don't have direct answers as well when we're asking this question. Great. And as it pertains to Brexit, clearly there's some uncertainty now and maybe some slowdown in spending. But do you think that the slowdown as it pertains to Brexit is temporary and once there's clarity and if things kind of separate things could the next 12 to 18 months spending could actually accelerate? Listen, my answer probably would be a little bit funny, but if you think it's everything is temporary and we saw so many changes like during the last year. So, it's always was going some clients were going down and then going up. I'm pretty sure that Brexit is not a permanent thing. Life will make some changes, replacement and demand will come back. Is it going to be slowed down for 6 months or 18 months? That's what I don't know. Or maybe not at all impact. Great. And just kind of on the recruiting environment, given that Luxoft is now being absorbed by DXC, has it made the recruiting environment easier or has that continued to be difficult to recruit? With all respect to EPAM and to Luxoft, I don't think that create any impact on the overall recruitment situation across Europe. So because it's a much bigger ecosystem. I think in general, it's still challenging and we planning all our actions about where we're going, where we recruit, how we're doing this. We're planning in kind of assumptions that it would be a real challenge. So and I don't think situation with Luxoft changes the labor market in any way. Great. Thank you. We look forward to seeing We're definitely not simplifying market. Right. Yes. Sounds good. Thank you. Good luck for remainder of the year. Thank you. Thank you. Our next My first question will be on revenues per delivery professionals. If my calculations are correct, I see some decrease in revenues per delivery professional in the Q1. Even though the utilization rate was pretty high and close to what you saw in the Q4, could you comment a little bit what is behind this and how this should cash on your balance sheet. So are you thinking about any other ways of using this cash, for example, share buybacks or dividend distributions or whatever? Thank you. Yes. And so, on the first question, when we do the calculation that I think you're doing, what we would see is that revenue per headcount actually is increasing. Maybe what you're saying is that the growth in revenue per headcount is not at exactly the same level as we've seen in, let's say, the last couple of quarters. And the one thing that is an important factor is foreign exchange. And so, when we do that calculation just so we can kind of understand your perspective is that both you have to look at foreign exchange and utilization. And from a growth in revenue per headcount, if you adjust for those two factors, the growth in revenue per headcount is pretty consistent with what we've seen in past quarters. In constant currency, right? Yes. So you got to adjust for foreign exchanges, etcetera, constant currency and then utilization. And then from the standpoint capital. And we're evaluating opportunities for, let's say, for our capital allocation strategy over time, but nothing that we would announce and wouldn't announce a change at this time. Okay. Thank you very much. Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question. Thanks guys. A couple of quick questions. One higher level question is just a question about competition and RFPs. I mean, we're hearing from different competitors or is that are reporting different kind of trends. And honestly, it sounds like the backdrop in the demand environment is very strong, but we see certain kinds of competitors that seem to be struggling based on their kinds of tax. So I guess, first of all, are you seeing different players go head to head with you for the same kinds of deals that you're drop standpoint drop standpoint and end market, is consolidation, whether it's in healthcare or financial services, has that been impacting you guys as well as your clients, not shown as much of let's call it like a March budget release versus what you've seen in past? I've just heard something like that from other of your competitors as well. So I'd love to hear a little more color on that, please. I think there are some movements in type of services which different companies providing. But in general, I think it's pretty consistent group of competitors which we've seen. While I'm saying it's quite consistent, it's still very broad from very big multinational system integrators and some local companies focused on very specific competencies. So that was for us was the case like 5, 6 years ago, and I think it's very similar right now with exceptions that while we're going for the bigger deals, we're seeing big guys more often than before. So the second question, I didn't it was a little bit breaking on you. Can you repeat the second question? The second question, Yes. I was trying to figure out if you guys there's been consolidation among the client base. So if certain healthcare clients are merging or financial banks are merging, Are you seeing that impact the demand environment at all? And to some degree, it was that we also heard that there was less of a budget release in March, where some of these some of your clients might actually finalize their budget for the year than prior years. It doesn't sound like you saw that, but I'm curious. Yeah. I mean, we're clearly seeing extremely strong demand in healthcare and life sciences and on both sides of that. And so we're not seeing a slowdown associated with a budget release or lack of budget release. So and also the risk consolidation and there are splits as well. So some big companies like getting in different groups and that's happening with us as well, which is creating potentially several clients with different strategy growing on us. But I don't think consolidation was an issue for us so far. All right. And then just one quick financial question, Jason. I mean, when I look at the free cash flow numbers, it came in a little below what we expected. Just curious to hear what I think you touched on it a bit in the prepared remarks on what happened in the quarter, but if you could give us a little more color on what to expect for the year from your free cash flow? And what did M and A contribute in the quarter? And maybe what just remind us what you expect again for the year? Thanks guys. Sure. So I'll take the last question first. So M and A contributed about 200 basis points of growth in Q1. For the full year, we'd expect that M and A would contribute about 100 basis points of growth. And then in terms of the coming in low versus your model, your model, are you referring to cash flow or profitability or revenue or what specifically are you referring to? The free cash flow number I'm talking about. Yes. So, I mean, quite honestly, there's 2 major factors there. 1 would be the variable compensation element, and we had a very strong twenty 18 and as a result there was a relatively higher level of variable compensation paid out. So that's one. And then DSO increased again from 73% to 78%, but 78% is still very good DSO for us. You'll note that we've run-in the 80% s in the past and so I'm still quite happy with the DSO. But it's really the somewhat elevated level of variable compensation payout due to the high level performance we had in 2018. And to a lesser extent the impact of the increase in DSO. So I guess if I were to add one more thing, we're quite seasonal from a cash generation standpoint. And so in Q1, you would have the variable compensation element. You have a little bit of variable compensation in Q2, and our strongest cash generation quarters are usually again in the second half of the year. Got it. All right. Thanks again. Thank you. Ladies and gentlemen, that does conclude our question and answer session. I'll turn the floor back to Mr. Dobkin for any final comments. Thank you for joining us today. So just to summarize, I think should be clear from this call that we with all the noises happening around us, which is nothing new and practically constant, We do feel pretty strong about the year and I think Q1 confirming this. And see you next quarter. Thank you. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.