Reminder: this conference is being recorded. It is now my pleasure to introduce your host, Ms. Lilya Chernova. Thank you. Please go ahead.
Thank you, and good morning, everyone. By now, you should have received your copy of the earnings release for the Company's Third Quarter 2016 Results. If you have not, a copy is available in the investor section on our website at epam.com. The speakers on today's call are Arkadiy Dobkin, CEO and President, and Anthony Conte, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made in today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and other filings with the SEC. Arkadiy?
Thank you, Lilya, and good morning, everyone. Thanks for joining us. Today, we are pleased to share our results for Q3, coming in with $298.3 million in revenue, which is up 26.4% over third quarter last year and 28.7% growth in constant currency, and 6.2% sequentially. Last time, we talked about some demand and pricing changes in the market and our anticipation of some level of downstream effect with several BFSI accounts and even few consumer-oriented clients. Today, we can say that along with our industry peers, we continue to experience some level of unpredictability due to Brexit situation, with just in Q3 impacted our revenue by 2.3% due to currency headwinds, on top of continued questions around its longer-term impacts. On another side, despite these general challenges everybody talking about, we at EPAM have seen continued demand for our services.
The demand which we see for complex technology solutions and business transformative services delivered via well-balanced consulting, design, engineering, integration, and managed services gives us further confidence in our long-term strategy and our ability to bring anticipated value to our clients, and in turn, to continually support our industry-leading revenue growth of over 20%. Soon, Anthony will provide more detailed financial updates, but I want to share several important Q3 highlights, which also would apply at large extent to our forecast for Q4 and for the whole year. First, we continue to see more diversification in our client concentration, both through new logo acquisition but also through increased expansion in our existing clients based outside of our top 20 accounts, where we saw a 43% growth rate which is consistently higher than the overall company growth rate.
Because of this, our top 10 concentration dropped by 5% - 37.6% from last year, and our top 20 is down almost 6%- 48%. Turning to verticals. Media and Entertainment delivered over 40% growth and has, for the past four quarters, primarily fueled by continued expansion with existing clients. Our Emerging vertical, which includes a variety of clients, continues its strong growth as well, up 56% year-over-year. Also, as part of this Emerging story, we're excited to partner with several leading private equity firms, which selected EPAM as a preferred vendor in helping their portfolio companies to drive large-scale transformation programs, as well as to enable high-potential digital startups to scale. We believe that these partnerships have good potential to grow as we demonstrate our value and expand across a higher proportion of these portfolios.
As you can see, all of our verticals grew over 20% year-over-year, with the exception of Travel and Consumer, which came in just under as a result of deceleration of growth in two large and highly penetrated accounts, plus the currency impact driven by several large retail accounts in the U.K.. Currency aside, we do see continued strong growth upside in our Travel and Consumer vertical globally, with a number of strategic accounts growing over 40% year-over-year. Overall, we look at this as a positive trend toward better diversification, which is in line with our longer-term strategy of keeping a fair balance across our verticals, which should allow us to continue generating top-line growth while mitigating the risk of being impacted by overconcentration in one or two specific markets. Looking to our global operations.
We continue to invest significant resources in developing the right mix of delivery capabilities by hiring global teams of experts with the hybrid skills needed to address demand for that specific subset of the market which, in the industry analyst view and in our view as well, will continue to grow faster than the rest. During Q3, our headcount came in at over 19,000 IT professionals, which is a 36.2% year-over-year increase. There are several reasons for that. First of all, early in the year, plans were made for the accelerating ramp-up of several large-scale clients, including UBS, in several newer locations. When we started to get indications that the demand was going to be delayed, we had already committed to hiring and, in most cases, hired a significant number of staff in anticipation of that ramp-up. That ramp-up eventually did not happen.
In addition, we had to continue hiring locations committed to other growing accounts. In addition, during last quarters, we saw weaknesses in the growth prospect of some key AGS accounts, leading to lower-than-anticipated utilization and revenue in the still new-for-us part of EPAM business. So we have to compensate partially this gap in revenue in our already established locations, where we have to continue hiring the personnel. While in some cases, we worked to proactively address this lag by redeploying people to different new client programs, in others, we elected to maintain this excess capacity in anticipation of new demand over the next several quarters and focus on training. All that led to an imbalance in our utilization. In summary, overall utilization rate came in at 72% in Q3, which was lower than we saw early in the year.
At this point, we expect to see continued utilization softness into Q4 in some delivery location as we work to clear the bench and redeploy available capacity. All that, clearly, a key reason for our EPAM EPS guidance adjustment, and Anthony will provide more details on that topic. As part of our approach to address such situations better in the future, especially with our continuous commitment to build a true global company with expanded presence in over 25 countries, we recently strengthened our people and HR operations by bringing several new senior leaders to focus on our employee workforce planning and management and a number of people management programs and platforms. Larry Solomon will be leading this team as a Chief People Officer and a very new role at EPAM.
Larry came to us after many years at Accenture, where he served a number of people in HR senior management positions, with the last three years being Chief Operations Officer of Accenture North America. As I have said before, this is where investments in delivery capability and quality personnel are critical to ensure that we are well-positioned to deliver on our commitment we've made to our employees and our customers. These are also the strategic differentiators, which, despite the current difficult business environment, will best position us to take advantage of the opportunities that will certainly reveal themselves over the course of the next few quarters. In closing, we are proactively managing our utilization, and we are also seeing good progress on other key operational metrics, including improvements in operating cash flow, working capital, DSO, and low attrition numbers.
This, as well as our continued program on focused investment in building our global delivery teams and platforms, should enable us to continue to deliver 20+% growth and to do so at what is now significant scale. With this, I turn it over to Anthony for detailed financial update.
Thank you, Ark, and good morning, everyone. I'll start with some financial highlights, then profitability and cash flow, and end on guidance. As you heard in Ark's comments, our growth strategy is engineered to deliver consistent, sustainable results, and we have turned in another strong performance in the third quarter. Here are a few key highlights. Revenue closed at $298.3 million, 26.4% over third quarter of last year and 6.2% sequentially, which represents a constant currency growth rate of 28.7%. Geographically, North America represents our largest region, representing 56.4% of our Q3 revenues, up 34.8% year-over-year. Europe was up 19.3% year-over-year and 25.6% in constant currency, representing 37% of Q3 revenue. APAC grew slightly and now represents 2.3% of our revenue, and CIS is flat year-over-year.
Turning to profitability, GAAP income from operations increased 22.1% year-over-year to represent 11.4% of revenue in the quarter. Our non-GAAP income from operations for the quarter increased 19.9% over prior year to $49.7 million, representing 16.7% of revenue. Our effective tax rate for the quarter came in at 21.3%. For the quarter, we generated $0.49 GAAP EPS and $0.76 non-GAAP EPS, which includes the tax effect on non-GAAP adjustments and is based on approximately 53.9 million diluted shares outstanding. The utilization challenges continue to create pressures on our income from operations and ultimately EPS. Utilization ended lower than anticipated at 72%. Our non-GAAP SG&A, which excludes all stock comp expense, came in at 19.5%, which is slightly lower than last year.
We continue to focus on leveraging our SG&A spend and executing our strategy to focus on talent acquisition, workforce planning, balancing the bench, and hiring functional management who can bring value to our long-term sustainable growth strategy. Our attrition remains low at 10.4%. Turning to our cash flow and balance sheet. Cash from operations for Q3 was $61.8 million, an 11% year-over-year increase. Free cash flows came in at $55 million, or 136% of adjusted net income conversion. In addition to strong quarterly performance, the cash flow improvement can also be attributed to our decrease in our DSO. This quarter, our AR DSO is 58 days, and our unbilled DSO is 25 days for a total of 83 days, compared to Q2 2016 total of 88 days. As we mentioned in past quarters, we would implement changes to improve our processes, which we clearly have.
Our efforts have reduced unbilled DSO by 19% sequentially. We have a better process in place now but can't predict if the Q3 levels will be sustainable. As we continue to work through additional enhancements, we'll keep you updated. Turning now to guidance. Following Ark's comments about macro demand pressures in the industry, our current outlook for Q4 revenue is expected to be at least $310 million, which would result in a full-year revenue of $1.156 billion, an increase of 26.5% over prior year, and constant currency growth of 29%. GAAP diluted EPS will be at least $0.54 for the quarter and $1.94 for the full year. Non-GAAP EPS will be at least $0.78 for the quarter and $2.90 for the full year and is based on a weighted average share count of 54.3 million fully diluted shares outstanding.
The $0.11 GAAP EPS drop in guidance is attributed to the compounded effect of lower utilization across multiple quarters, combined with FX losses on assets held in foreign jurisdictions. The $0.07 non-GAAP EPS drop in guidance is related exclusively to the utilization challenges. Now, I'll turn it back over to Arkadiy for some additional comments.
One more important comment. As we said it in our press release, Anthony, while we'll be staying with us through the third quarter of 2017, submitted notice that he plans to resign as a company Senior Vice President, Chief Financial Officer, and Treasurer at the end of that period. Anthony has been a key part of our growth and success over his 10 years with us. We are very thankful for that and wish Anthony the best in the future after EPAM. But just to make sure we're all on the same page, during the next quarters, Anthony will continue to work in his current capacity, assist us in our search for his successor, and then help to ensure a smooth transition. Now we can turn to Q&A part.
Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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 pull for questions. Our first question comes from the line of Anil Doradla with William Blair. Please proceed with your question.
Hi, guys. This is Maggie Nolan in for Anil. I was hoping that you could give us a little bit more color on the two travel clients that you're seeing some softness at, as well as address some of your other top clients and the dynamics there.
I think we shared it at our notes this morning that, first of all, there is impact on some financial services clients, which we talked before, and some traveling consumer, which is not really noticeable. So I think, softness coming from, again, just a few accounts, but it's a big account, which we mentioned during the last call. And,
We can't really mention the clients if that's what you're looking for. I mean, there are two of our larger Travel and Consumer clients that, you know, are very fully penetrated, and, you know, we're starting to see just a little bit of slowdown in the growth rates for those two big accounts. But, you know, there's nothing concerning there except that, you know, they've reached kind of a scale and a size where the growth is starting to slow down there. They are still growing, just at a slower rate. And then when you look at the rest of the vertical, there are a number of up-and-coming accounts within the vertical, but they are still relatively new, and they're not, you know, material enough at this stage to offset the slowdown we're seeing in the two fully penetrated accounts.
So that dynamic is what's hitting us now. We're still very confident around this vertical, and as these newer accounts start to really gain and, you know, build some traction, we should see growth continue and get back up to the levels what we've seen in the past.
Okay. Great. That's helpful.
Does that help?
Yeah. That's very helpful. Thank you. And then the other question I had is, how are you planning to address the utilization challenges moving forward, and how is this going to impact your hiring plans over the next couple of quarters, keeping in mind that you obviously have spoken to the fact that you want to keep the long-term growth plan intact? Thanks, guys.
I think we also mentioned this topic already, but in general, we have some long-term planning for a couple of accounts, which didn't realize. We have excessive capacity in very specific locations, which we cannot utilize immediately. We made a decision that we're not going to rush but actually invest in additional training while still continue hiring in locations where we plan to grow farther accounts. So in result of this, we got to a situation where our utilization were lower than we expected before. So at this point, we're planning to make right assignments for this extra capacity and bring this to levels which is in much more normal range for us, which is probably 3%-4% up. So when it's exactly going to happen, it's difficult to say.
It probably will take us a couple of quarters, but that's what we're planning right now. The good part of this is that it's a pretty manageable process. It's not like very specific situations, which we cannot control. It just was our choice to invest in people during this period.
Okay.
Thank you. Our next question comes from the line of Steve Milunovich with UBS. Please proceed with your question.
Thank you. Could you tell us what the organic revenue growth was in the quarter and expectations for organic growth in the fourth quarter? The Alliance acquisition is lapping in November, I believe. Is there anything else that's lapping?
Nothing else lapping. So just AGS in Q3.N on-GAAP organic was 21%. Organic constant currency was about 23%.
Okay. And I think Ark commented on expecting 20%+ growth going forward. Is that still a reasonable expectation looking out for 12 to 24 months based on the pipeline that you see?
Yes. We believe it's a pretty reasonable explanation. And again, even this, these numbers impacted by the same reasons, which we shared already today, including our utilization situation and some capacity in locations, which we couldn't immediately, immediately realize. So but we, we believe that we will be able to continue growing 20%+.
Is there anything changing significantly competitively? I'm sometimes asked about the Indian vendors and whether they're able to kind of move up the stack and acquire better software development skills and compete with you.
I think we feel the same way like we feel before. So market is too big, specifically in this subset of the market where we play. I'm pretty sure everybody's improving, but I don't think it's impacting in general the opportunity for growth.
Understood. Thank you.
Thank you. Our next question comes from the line of Jason Kupferberg with Jefferies. Please proceed with your question.
Hi, guys. This is Amit Singh for Jason. Sorry to, you know, get back on this question again. But the utilization part, the long-term plans for certain clients that you're saying didn't realize, were these clients primarily in banking financial services sector? And, you know, what does that mean for your revenue growth sort of next year? Is this sort of the revenue that you were expecting to come next year that you're not gonna realize now?
So, so yes. It was mostly in financial services, and that's exactly what we, we're trying to communicate. Yes. It might be impacting us for the next several quarters, but we do believe that the market's strong enough, specifically in the area which we play, and that would allow us to grow 20%+. That's exactly our message. So how specific clients will behave during the next quarter or two or next 12 months, it's very difficult to predict. We're not relying on specific clients. That's why we're talking about diversification from client balancing, concentration, specific verticals, which we plan. We're, we're very comfortable with our combined kind of structure of the revenue and portfolio right now to, to continue growing 20%+.
Great. And then just one quick question, Anthony. Sorry to see you resigned. But talking about your non-compete, how long is that? What is the duration of the non-compete that you have?
Can I say?
It will be 12 months from the time that I actually leave will be the actual non-compete period.
Okay. Great.
But I have no intentions of going to a competitor or competing with EPAM in any way. I actually intend to remain a shareholder of EPAM. And so, you know, most of the reason I'm leaving is more for personal business interests outside of EPAM.
All right. Thank you very much.
Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citigroup. Please proceed with your question.
Hi. Thanks. So, the question I have is with regards to, is the standard 16%-18% non-GAAP EBIT margin still achievable over the next couple of quarters and, you know, next, next two to four quarters, let's just say, given what's going on with, with the utilization issue? And if not, what's a good range?
At this point, we are staying with that 16%-18% range. But as you have seen this year, and I would expect it to continue in the next several quarters, we're feeling pressure, and it's gonna keep us to the lower end of that range.
Ashwin, like, right now, our feeling that we're at the bottom of utilization, so and it will be improving. And clearly, utilization is probably the strongest impact on this number as well. So we're still thinking that unless market change drastically for one or another reason, we should be able to be in this corridor in the future as well.
Got it. Got it. And I mean, in terms of just to try to understand specifically what is going on because you do have a fairly robust increase in headcount that's going on. What you're basically saying is you are hiring in certain locations. Your clients don't necessarily want talent to be based in those locations. Is that what you're saying?
No. What we're saying and there are multiple reasons. Again, it's a much more difficult analysis. But on the high level, what we're saying right now is that we were planning to staff client engagement, specific client engagement in specific locations and prepare for this. And it was delayed a couple of times, and then it was postponed. And we have extra capacity in these locations. So at the same time, we did commit it to grow with other part of the clients in different locations and continue to hire simultaneously in different locations to satisfy our initial commitment. And then we have already partial teams there, so it wasn't possible to change. That's why we run to extra capacity. So that's one of the biggest reasons.
But it's again, it's a more complex question, and we, we have our operation in India, which we mentioned, didn't play exactly as we expected early in the year, so which was an additional point. And combination of this broad situation to where it is right now. But again, in our view, all of this is very fixable and manageable.
Okay. Basically, you have enough demand that the people you have hired can get sort of utilized, used up, and put on projects in the next couple of quarters, it seems like.
Yeah. We're comfortable that in locations where we have extra capacity, which was prepared for specific clients, it's a qualified capacity. It's just taken several quarters to reassign these resources.
Got it. My, my last question really is with regards to can you comment a little bit on the nature of what is causing the delay in, in these couple of locations? Is it primarily macro demand?
Well, that's what we talked before. That's what we were sharing last quarter about financial services. And last quarter, we said that we don't know exactly how it's going to play out, but we know that something's happening. So it's become much more clear right now. But even right now, it could happen that with the next couple of quarters, the same clients will come back to us. So it's still pretty fuzzy.
Got it. Thank you.
Thank you. Our next question comes from the line of Avishai Kantor with Cowen. Please proceed with your question.
Hi. Good morning. Thank you very much for taking my question. I think at the beginning of the year, you were talking about factoring 3% pricing increases for this year, for 2016. Do you have any early indication what we should expect in early, you know, in 2017, let's say for the next 12 months? Are we still talking about 3%?
Well, I think we will share this probably next quarter, so it's too early for us right now to say it.
Okay. In the last conference call, you were talking a little bit about pricing pressure. I mean, is this, are you still seeing the same environment?
At this point, you know, pricing, pricing is usually locked down in the first half of the year when you talk about, you know, renewals from existing accounts. And then as new, new accounts come in, it's varied, and there's negotiations. So that hasn't changed dramatically from what we discussed last quarter. We're still feeling from a kind of an organic, you know, constant currency perspective, we're still at just under 3% from a pricing perspective.
Thank you so much.
Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.
Hi, guys. This is Mike Reid on for Joseph Foresi. Thanks for taking our question. I just saw that the euro ticked up, pretty good as a percentage of revenues this period. Could you go into a little detail on, maybe what some of the causes of this were as the percentage of the revenues?
The euro, it didn't move that dramatically this quarter, so I'd wanna actually kinda talk to you about what you're looking at. You know, the euro has been running pretty consistently as a percentage of revenue for, you know, the past several quarters. So what, what statistics are you looking at that show it spiking?
Is it not on the stat sheet? It was up to 12% from about 9%.
It's, yeah. But it's been pretty consistently in that 10%, 11%, 12% for a number of quarters. That's why, I don't see that as a significant increase.
Okay. All right.
There's nothing special that's moving the Euro concentration, just normal, you know, contracting. Nothing dramatic has shifted.
Okay. Thanks. And then with the DSOs, it's down again. It was better. Also, is that something you see that level will still be sustainable?
At this point, we're not comfortable saying that the Q3 DSO is sustainable. It took a big drop. A lot of this is the additional efforts we've really been focusing, over the past couple of quarters. So I think that has brought it down significantly. Not willing to commit to these levels at this point as a go forward. We're gonna take a couple of quarters and see how it trends, and then we could talk about what's a consistent level.
All right. Thanks, guys.
Thank you. Our next question comes from the line of James Friedman with Susquehanna International Group. Please proceed with your question.
Hi, yeah. If I could too, Anthony, we're going kinda quick there. When you were discussing the as-reported versus constant currency performance in Europe, could I trouble you to repeat that?
As-reported versus constant currency. Yes. Sorry. So the organic growth was 21%. The organic constant currency was 23%. Is that what you were referring to?
I got that one. I appreciate you saying that one. I was asking specifically about Europe, what the as-reported versus constant currency Europe number was.
As-reported versus it for just European revenues, or are you talking euro revenues?
You know, when you say.
No, I'm not 100% sure. I'm not 100% sure what the question is that you're asking.
In the language where you say North America go it was 56.4% of revenue, up 38%. Then you hit Asia. Then you hit CIS is flat. What was in the script that you said about Europe?
Oh, I'm sorry. I thought you were referring to the last question. My apologies. Europe constant currency was 25.6%.
Got it.
Versus 19.3% reported.
Yep. That's what I was looking for. And then,
Sorry. Apologies. I thought you were referring to the last question.
Yeah. And then with regard to the tax rate, Anthony, as we're going forward, I'm doing this from distant memory, but my recollection is you had some special economic zones. That's too fancy a word. In some parts of CIS, what do you see as the tax rate from that region going forward? Anything to call out?
The only place we have a special tax benefit from an income tax perspective is in Belarus, where we're enjoying a tax holiday through 2021. That's the only current special tax regime that we have. Really, we don't comment on regional tax structures, but we expect to stay in this, you know, 21% for the foreseeable future, 21% or low 20s is what I would expect until clearly, in 2021, that could change. But that's a number of years out.
Okay. Last thing for me, if I could. Yeah. I realize you're not projecting the improvement in the DSO and unbilled to continue, but could you just remind us, is there any seasonality I seem to recall there was that occurs in the Q4 related to DSOs?
There has been in the past some Q4 seasonality where individuals, you know, companies try and clear budgets and get payments closed out before the end of the year. That's part of why I don't want to, you know, confirm any trends around the DSO until we have a few more consistent quarters. So there is a possibility of some additional, you know, benefits in Q4 if that trend continues, but we need to see how things play out for the next couple of quarters. So I'm not really committing to any specific levels.
Got it. Thank you.
Thank you. Our next question comes from the line of Georgios Kertsos with Berenberg. Please proceed with your question.
Yes. Hi. Thanks for taking the question, guys. A couple for me, very hopefully, very quick ones. First of all, it's on the pricing environment. So if I'm looking basically at non-GAAP operating profit, it's broadly about 1 percentage points down year-over-year. Is that entirely due to staff utilization, or is it at least partly attributed also to some sort of adverse pricing movements? And then I have a follow-up question.
Utilization is the biggest impact that you're seeing on the profit margins for this year. There are some other dynamics that play into that. We have been staffing up more over the past year in offshore locations, so that creates a little bit of a dynamic shift as well, because offshore, obviously, are going out at a lower price point than the onsite. So as you see our offshore concentration increase, that impacts it. And then, obviously, the inclusion of India and China, which are at lower price points than our organic resources, that creates additional pressure. So I would say utilization is the top impact, and then some shifting to lower price point locations adds additional impact there as well.
Gotcha. A quick follow-up on that. Basically, if I'm looking at it from a sort of, is it the offshore penetration at present broadly at steady-state level, i.e., should we expect this sort of year-on-year price deflationary impact that I think you just highlighted to remain for the following quarters, or basically, it's already in the numbers?
I can. Can you repeat that? Can you repeat the question?
Yes. So basically, if we're thinking about offshoring and if I heard Anthony correctly, it's effectively we're seeing increase in offshore penetration creates a price deflationary impact. So you have constant volumes. The pricing, basically, might become incrementally lower for offshore staff. Now, that top-line headwind will probably is likely to remain for as long as we increase offshore penetration, i.e., it will go away for when the offshore penetration hits a steady-state level. So effectively, are we already at that steady-state level, or do we expect increasing offshore in the following quarters as well?
Okay. Let me let me let me take on this. First of all, and this is related to this question to make sure we're on the same page, we were thinking about 3% pricing increase. And if you try to analyze our organic numbers, then we exactly at the 3% so far during these nine months. So the second, our increase in offshore proportion clearly impacting the total total pricing number. That's what Anthony mentioned. But in our plans, we're going to it's not like we were planning. This is like acquisition of AGS and some increase in headcount we had in China impacting impacted this. So basically, we slowed down with onshore growth in relative numbers. What we're planning to do, we're definitely planning to increase our onshore presence in country presence, and we're going to to grow in this areas in in the next 12 months.
That's, that's the plan. We're still very committed to increase our presence in the countries where we're getting revenue from and kind of client-facing capabilities, so.
Okay. Does it answer your question? Okay. Yes, it does. And a quick follow-up from me. Can you just, perhaps, share a few high-level thoughts about basically the UBS account? How are you seeing basically demand shaping up on that front? Thank you.
So I think we shared everything we knew. And again, very, very difficult right now to make projections in this area. So we rather will see what will be happening on the market. But clearly, clearly, account slowed down. You can see it from top-line performance, so. But picture is, again, we might go back, might grow back, might stay flat at this point. We don't know.
Okay. Okay. Clear. Thank you.
Thank you. Our next question comes from the line of Peter Christiansen with Citigroup. Please proceed with your question.
Good morning. Thanks for taking my question. I think last week, Thomson Reuters made a pretty interesting announcement, accelerating its restructuring. They were reducing headcount quite a bit. But they also said that they're going to pick up the pace of their transformational efforts, which sounds like it's a positive for EPAM. Can you just give us any sense if there's any changes in the relationship there or perhaps the opportunities that you see with this large client of yours?
Yeah. EPAM was, was selected as 1 of the 5 preferred vendors. So and, with those of you who kind of watching us for a long time, you remember that, at some point, it was the largest account for us and then go down. Today, the account is 1 of the top 3, basically, much bigger than it was when it was the largest one, so. But again, similar like with, UBS or any other accounts, it's extremely difficult to predict, predict the future. That's why we're really focusing on right balance of accounts and diversification across industries as well, so.
Okay. And then, and as it relates to the new executive appointment that you announced today, with Larry Solomon, it's interesting that you're hiring somebody who has extensive North American experience. Does that tell us anything about your strategy of perhaps building up delivery here in the U.S. or North America or just increasing your onshore ratio going forward?
I think you need to understand, Larry spends significant time in with his previous employer. He was responsible for operation of a global HR, which was covering all locations and the growth across several hundred thousand people globally. His last three years was focusing on North America, which is clearly beneficial for us. Larry very well understands the global picture as well.
Okay. Fair enough. Thank you.
Thank you. Our next question comes from the line of Arvind Ramnani with Pacific Crest Securities. Please proceed with your question.
Hi, guys. This is Jason Washburn in for Arvind. I guess we wanted to touch a little bit on kind of Anthony leaving. And you know, we feel it's certainly a surprise, and we were just wondering if there'd be a transition time for when you hire a new CFO. And basically, is the deadline extendable if no CFO is hired by then?
Well, the transition timeframe is about nine months. I mean, I've committed through Q3 of 2017. We are going to begin the search immediately. Quite frankly, we're fairly optimistic that we can find somebody within that timeframe and still have an adequate transition, to ensure that there's, you know, a smooth, smooth transition. So that's, you know, we haven't really discussed extending beyond Q3 of 2017 at this point 'cause we felt that that was, nine months is more than sufficient. But we, I think, will discuss that soon.
I think if we see any difficulties to fulfill this position externally or internally, then we can come back to conversation. But.
Okay.
That's all we can share right now.
Okay. Thanks, guys. That's it for me.
Thank you. Our next question comes from the line of David Grossman with Stifel. Please proceed with your question.
Thank you. And sorry if this has been asked. I jumped on a few minutes late. We can take this offline. But I'm just wondering, is there a way to look at, you know, the mechanics to get to 20% growth going forward? And by mechanics, I mean, is there a way to look at, for example, how the top 20 may be growing vis-à-vis how, you know, the balance of the portfolio may be growing? 'Cause it sounds like we're gonna have a more diversified mix going forward than we've had historically. And I'm just curious if you have some thoughts on how that may play out between those two buckets.
Well, I think as you can see, even historically, the vast majority of our growth is coming from outside of the top 20, where we're seeing growth in excess of 40% year-over-year. The top 20, you know, clearly, as they become much larger clients, you see the growth rates, you know, being more in line with that 20%, and so in some cases, a little bit lower depending on the size of the account. I think we still feel that the majority of our growth is going to be coming from deeper penetration into those existing accounts, many of which are currently outside of the top 20. As we continue to expand, that's where we get confidence in our over 20% growth looking at the availability of the penetration in those particular accounts.
I'm sorry, Anthony. What was the growth outside the top or outside the top 20 this quarter versus where it's been?
For this quarter, the growth outside the top 20 was actually 43%. And historically, it's been, you know, this year, we were at 45% last quarter. We had a 50% growth. It's always been in the high 20s, 30s. And, you know, it's been trending up over 40% for at least the past year.
Okay. Okay. And then just looking, you know, going back to the utilization, you know, kind of challenge that you're facing right now. And I think I understand the dynamic when you're running a global model here. So what are the mechanics of how you get back to a normalized level when you think about rebalancing, you know, the workforce to achieve higher utilization? Is there an opportunity to keep people in the same locations and redeploy them in other work? Or is it a lot more complicated than that as you try to work through this particular issue?
The reality is always more complicated than regions which we're running. And that's, kind of what it is. But we do believe that in locations where we have more capacity than we needed, like, during the last quarters, it's a very good quality of the people, and we will be able to bring new clients there. So we clearly, clearly on the path to deploy these people during the next several quarters.
So, should we think your quota then of going forward, at least the next couple of quarters, that we would expect headcount growth to moderate over the next couple of quarters as you absorb the capacity? Or is that hard to do based on the geographic mix?
We do believe that again, we don't know if it's one quarter or two, three quarters exactly. But we do believe that with the next several quarters, we will bring the blended utilization to the norm across EPAM.
Right. So but just in terms of what we should expect to see on a reported basis going forward over the next couple of quarters, should we expect headcount growth overall just to moderate to reflect the absorption?
Yeah. Account, yes. The headcount, clearly, that means that headcount growth will slow down versus cutting rates.
Right. Right.
So that's.
Right. Right. Okay. And then, as I looked at, I saw the attrition rate ticked up a little bit, and it has been ticking up over the last three quarters. I think you were running in the 78% range last year. And now you started the year at 8%, and you're now at 10.5%. So is, is that dynamic reflecting what we're seeing in the slowing demand in some of these larger customers? Or is there a different dynamic that's driving that?
as I said again, I think voluntary dismissals probably exactly at the level as it during the last couple of quarters. So 1% or 2% volatility, it's probably specific, specific junior bench which was built up and become unnecessary, so. But it's very very small.
I'll, you know, just come back, David. I mean, when we were down at the 7%-8%, I mean, we were saying at that point, we didn't think that was a sustainable level. That was unusually low. We saw attrition, you know, drop quite a bit over the past couple of years. So we, we expected it to tick up a little bit, you know, as we move forward.
Okay. Great. Thanks for that. And then just, you know, Anthony, is there any way, you know, at current spot rates, you can give us a sense of what that, that FX impact would look like in the fourth quarter, if assuming the current spot rates just held steady?
Haven't really done it on a current spot rate. What we actually do when we're doing our forecasting is we actually get revenue sorry, currency forecasts from a couple of different banks. We use a kind of a blended forecast, as opposed to just carrying the spot forward. We're still thinking, you know, in Q4 that the headwinds year-over-year headwinds are gonna be about 2%, 1%-2%. That's what we're building kinda into our models for right now based on forecast, not just spot, so.
Got it. All right, guys. Thanks very much.
Thank you. Our next question comes from the line of Ariel Hughes with Wedbush Securities. Please proceed with your question.
Hi. This is Ariel Hughes on for Moshe Katri. Thanks for answering my question. Apologies if this has been, you know, hit a few times already. But could you please clarify, you know, what's going on with the utilization rate and what kind of challenges you guys are facing in utilization? Thank you.
don't know what we can add. Again, we can just repeat ourselves. Again, we have some commitment from clients to grow in specific locations. We prepared for this. Then this was slowed down. And then it was, actually postponed for some unclear time period. So basically, we have got extra capacity in very specific locations which we are protecting from assigning to other accounts because of our commitment. At the same time, we continue to hire in other locations because we need to continually grow. And also, when postponement kind of happened, we try to compensate for this revenue in other locations as well, continue to grow where we could, so because the reassignment of resources is not immediate. That brings some disconnect, number one. Number two, our expectation with India wasn't exactly in line. And we got lower utilizations than we expected initially.
Again, this is integration new for us locations. We're learning a lot of new. We are absolutely committed to to grow in this area. But we have some slowdown there, too. Between these two factors, actually, the all disconnect on utilization. But in our view, it's very, very much fixable. And that's what would be our focus during the next couple of quarters.
Sounds great. Thank you.
Thank you.
Thank you. Our final question comes from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question.
Hello. Thank you for taking my questions. Could you comment probably a little bit on the financial services beyond just your client base and the UBS? Do you see any bright spots? Do you see any stabilization of the situation, maybe not over the next couple of quarters but in the longer term? Do you see opportunities for you to grow here? My second question is on your strategy. You know, you have a pretty big cash pile on one hand. On the other hand, you have some extra capacity in some locations, as you mentioned. How do you see strategically you're growing? Are you going to make any new acquisitions and grow maybe new verticals, new areas, and things like this? Thank you.
So we do believe there are many opportunities in financial sector. Everybody knows about the whole Fintech revolution. And it means that clients will have to adapt it. And we're preparing ourselves for this, too. So we investing a lot in training in new technologies and new areas. At the same time, I don't think we can comment anything in longer term right now and specifically about our expectation, in 2017. We will be talking next time. So in regards to M&A, nothing changed here, too. We definitely slowed down during the 2016. But it's not because lack of opportunities. It just due diligence just didn't happen. And we still considering different different options how to bring expertise to EPAM. So we probably not going to go with specific new verticals. I think we have a good balance right now.
It might happen that we will increase some focus on Emerging areas. We have good ways to go there. But I don't think we're going to expand dramatically from the areas where we are right now.
Yeah. Thank you.
Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Dobkin for any closing remarks.
As usual, thank you, everybody, for joining. I think we addressed questions. In summary, we have challenging, challenging quarter based on utilization. But we're pretty confident in our ability to continue growing. I hope to update you on this during the next call. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.