Welcome to the EPAM Systems Q2 2016 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Lilia Chernova of Investor Relations. 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 second quarter 2016 results. If you have not, the 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, Lilia, and thanks everyone for joining us today. We had a strong quarter turning in a solid first half of 2016 with Q2 revenue of $283.8 million. This represents 30.3% year-over-year growth and 33.9% constant currency growth. Important to note that our organic growth for Q2 was 24% and in constant currency 27%. Our quarterly performance is above guidance as driven by continuous growth in our existing strategic accounts spanning across all verticals and geographies. Adding to growth on base, we've seen a good pipeline of new logos being added in each of our key geographies. Anthony will provide a more detailed update on our financial performance, but for now I would want to spend a few minutes on how we see demand and pricing going into the later half of the year.
Let's start with the most talked-about challenge in the market: the issue related to the UK's decision to exit the European Union and its impact on the overall economic environment. First of all, I don't think it would be a surprise to anybody that at this point we do anticipate some downstream effect both on overall pricing and demand elasticity with several large key accounts in the BFSI vertical. In the case of UBS, our largest account overall and by far the largest in our financial vertical, we have seen already indications of demand compression started in Q3 and expect those to continue in the last quarter of the year. At the same time, across the broader BFSI European business, while we have some indications to be conservative for the immediate demand, we also have new business opportunities across every major account.
Additionally, we are seeing the general volatility affect sectors beyond financial services as even some consumer-oriented companies in Europe are experiencing reduced visibility in their demand, which could cause some delays in the decision process and increased scrutiny of discretionary budgets. As a result, because of the current level of visibility, it becomes more obvious that in some pockets of our targeted markets, our clients' business environment is becoming less stable and less predictable than we experienced before. It's rather difficult at this point to quantify the nature of or the exact impact on demand and, by extension, on revenue numbers for the second part of the year. Practically, we anticipate that the general environment might cause some delays in upward pricing adjustment, project starts, and in some already contracted ramp-ups across specific clients in the near future.
On another side, in North America, we anticipate strong growth in all key verticals unless some uncertainty related to the election cycle would slow change the business programs. In Europe, we're also seeing increased demand across a number of verticals. So, for example, in life science and healthcare, we increased global revenue by 78% year-over-year. And in our media and entertainment vertical, we turn in a 47% year-over-year growth. We are also seeing significant growth in our emerging verticals with telco and energy clients. And as always, we continue to focus on our traditionally strong area by expanding our foundation in software and high-tech vertical.
So, taking all those different drivers into account, and as we look at our current book of business for the second half of 2016, we are optimistic that with our continuous help to transfer our client organizations into digital-connected businesses, and with demand for such services, and with our unique combination of business acumen, digital insights, and engineering delivery excellence, we should be able to navigate well over the current period of uncertainty and still achieve our annual growth target, which we set at the beginning of the year with year-over-year revenue increase of at least 26%. Now, to what hasn't changed at all in our view? We want to underscore that even with the overall volatility in the business environment, we are continually investing in our talent productivity platforms, IP development, delivery locations, and service lines.
These investments, we believe, are critical to ensure that we are well positioned to deliver on the commitment we've made to our employees and our customers, and 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. You also will recall from previous calls that we have taken a number of initiatives to both build out and increase the visibility of our key go-to-market offerings. I am pleased to say that we were once again prominently featured in 38 industry analyst reports through Q1 and Q2, including coverage from Gartner, Forrester, and other key leadership differentiators in areas of digital platform, commerce, cloud, agile, social, testing services, IoT, digital labs and innovation as a service, and analytics and security.
In closing, I want to mention that this quarter is an important milestone for our company as our trailing 12 months revenue has crossed $1 billion mark. So, overall, we are confident that in the long term we will be able to demonstrate continuous organic growth in excess of 20%. With this, turning over to Anthony.
Thank you, Arkadiy. Good morning, everyone. As you heard in Arkadiy's comments, we've turned in another strong performance in the second quarter. Looking at our results from a high level, here are a few key highlights. First, this is our 22nd consecutive quarter of over 20% organic growth, which demonstrates our effectiveness at delivering against our strategic plan, executing our diversification strategy, and helping our clients continue to successfully navigate their challenges in the marketplace. Revenue closed at $283.8 million, 30.3% over the second quarter of last year, and constant currency growth of 33.9% and 7.3% over Q1 2016. Geographically, North America remains our largest region, representing 56.7% of our Q2 revenues, up 45.8% year-over-year. Europe was up 17.4% year-over-year, representing 36.1% of Q2 revenue.
In constant currency terms, EU would have been up 21.4% year over year, reflecting the impact of both the euro and sterling volatility over the past year. APAC, which only represents 2% of our revenue, is slightly down, and CIS is flat year over year. Further reinforcing our strong diversification story, which is one of the key underpinnings to our consistent growth, Q2 again demonstrated this broad-based growth story. As you heard from Arkadiy, all of our verticals continue to grow, and our client concentrations continue to improve, which emphasizes the growth we are experiencing from clients outside of our top 20. The addition of Navigation Arts and AGS both contributed to clients that mainly fell outside of the top 20, plus our concentrated sales efforts in winning new logos helped drive 44%-45% year-over-year growth on all accounts outside of the top 20.
Turning to profitability, GAAP income from operations increased 35.9% year-over-year to represent 11.3% of revenue in the quarter. Our non-GAAP income from operations for the quarter after non-GAAP adjustments increased 29.1% over prior-year to $47.6 million, representing 16.8% of revenue. Our effective tax rate for the quarter came in at 21%. For the quarter, we generated $0.46 of GAAP EPS, $0.71 of non-GAAP EPS, which includes the tax effect on non-GAAP adjustments that is based on 53.3 million diluted shares outstanding. As Arkadiy mentioned, while we continue to invest in expanding key capabilities, the market volatility is impacting our ability to balance our resources against projected book and deployed demand. This lag is visible in the 2.6% drop in our overall utilization numbers for this quarter, ending at 74%.
To address the shifting demand and to rebalance our investments, we continue to improve our operations related to workforce planning and utilization and believe the utilization impacts are short-term. As you know, historically, Q3 utilization drops due to heavy summer vacations, so Q3 will be another quarter of relatively low utilization with improvements coming in Q4. We finished this quarter with 18,206 IT professionals, representing a 6.2% increase from Q1 2016 and 27% over prior year excluding acquisitions. Turning to our cash flow and balance sheet, cash from operations for Q2 was $38.5 million, significantly above Q2 of 2015, which was $2.2 million. The increase in Q2 cash flows can be attributed to our decrease in our total AR and unbilled DSO and less expenditures in the quarter. This quarter, our AR DSO is 57 days, and our unbilled DSO is 31 days for a total of 88 days.
Compared to Q1 2016, AR DSO of 54 days and unbilled DSO of 40 days for a total of 94 days. Arkadiy already discussed UBS at a high level, but I would like to specifically address the UBS issue, which you all had questions about in Q1. UBS DSO has improved dramatically. It's down to 85 days in total from 114 days in Q1. So, based on the processes we've implemented last quarter to improve total DSO, we have made substantial progress. The AR DSO is still a bit high, but this is mainly due to the efforts to reduce the unbilled DSO, which resulted in increased invoicing that remains uncollected. We have a good process in place, and we anticipate continued improvement. Turning now to guidance, we are reaffirming our year-over-year guidance of 26% revenue growth.
Given the various macroeconomic and geopolitical uncertainties, our normal visibility has been impaired, and we could experience unexpected volatility over the next several quarters. We remain very confident about the continued long-term growth outlook for the business and overall markets. We still anticipate currency headwinds of approximately 3%, resulting in constant currency growth of 29%. You may wonder why this has not increased due to the recent fall of the British pound. But while the pound has fallen compared to our expectations earlier in the year, we have seen improvements in the Russian ruble and Canadian dollar that have offset, keeping full-year currency headwinds approximately in the same range. The full-year GAAP diluted EPS will be at least $2.05 with an effective tax rate of approximately 21%. Non-GAAP diluted EPS will be at least $2.97, which includes the tax effect on non-GAAP adjustments.
The full-year weighted average share count is expected to be approximately 53.4 million diluted shares outstanding. Now for the third quarter. Revenue is expected to be at least $295 million, 25% above third quarter of last year, and includes about 3% currency headwinds, resulting in constant currency growth of 28%. GAAP diluted EPS will be at least $0.52. Non-GAAP EPS will be at least $0.73, which includes the tax effect on non-GAAP adjustments and is based on a weighted average share count of 53.6 million fully diluted shares outstanding. With that, I'll now turn it back to the operator for Q&A. Operator?
We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a telephone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question today is from Ashwin Shirvaikar of Citi. Please go ahead.
Thank you. Good morning, Arkadiy. Good morning, Anthony. So, good quarter, first of all, and thank you for the call with regards to what's going on in the environment. I have clarification to start. So, when you say that you expect some projected start delays, some pricing pressure in some pockets, is that explicitly incorporated in your outlook? So, for example, have you assumed UBS set, let's call it $30 million quarterly instead of what they did this time, which is $36 million? I just want to make sure that it is explicitly there in your guidance with offsets on the other side.
Hi, Ashwin. I think it's incorporated in the quarter in terms of our current visibility. So, that's what we're seeing right now. So, that's why we're clearly communicating that the environment is softer than we used to and that predictability is a little bit less than before. So, but what we're seeing right now, that's definitely incorporated, right?
Got it. And then, should these things pan out in terms of revenue weakness, pricing weakness, is there anything you can do on the cost side in the short term to have some sort of an offset? I know you're not spending less on strategic initiatives, and I would personally argue neither should you, but is there anything else you can do maybe on the G&A side or anything like that that helps?
So, we're definitely considering different options there, and Anthony was pointing out on utilization, which is probably not optimal right now, and we definitely will be focusing on this part. At the same time, at this point, we'll continue to invest in the areas which we plan to invest and not going to cut there. Again, utilization and staffing is probably one of the areas, and because of all what was happening during the last couple of months, so we have, as mentioned, several points higher than we anticipated. So, but clearly we're looking at this.
Okay. And last quick clarification on DSOs. It's a good trend that's begun to get it back down to where it should be, but what is your long-term target?
We want to keep bringing it down, but I think overall general targets is to get the overall DSO to kind of back to the mid- to low 80s combined would be where I'd like to see it, and then the AR DSO to be somewhere in the mid-50s is probably what we're going to see there.
Got it. Okay. Great. Thank you.
The next question is from Jason Kupferberg of Jefferies. Please go ahead.
Thanks. Good morning, guys. So, just to maybe build on some of those comments that you just made, I mean, should we think about this as just kind of taking away some upside potential to the year? I mean, I know you still have kind of an at-least label on your revenue outlook, but given some of the cross-currents out there, are we just thinking about more like this is an in-line kind of year as opposed to having much in the way of upside given some of the challenges in Europe?
I think we can just repeat what we said already. So, at the beginning of the year, when we were giving guidance, we were giving guidance with what we saw, and it was much more known. Right now, to the end of the year, in general, supposed to be lesser known, but volatility increased. So, what we're doing right now, again, we're sharing with you exactly what we see. So, and we're also sharing with you that you were asking practically each quarter how we see in the market, how we compare this with what you're hearing from other companies, and the usual answer was that we don't see the market changes. This time, our message is different. We're seeing some concerns. We're seeing companies who have reacted on Brexit, or maybe they have reacted after Brexit on something they saw before.
Right now, we're again sharing exactly what we see.
Okay. I mean, I guess if we were to try.
In our guide, yeah, go ahead.
Sorry. I was just going to say, so if we think about visibility in percentage terms, I mean, what would your visibility typically be at this point in the year on the full-year outlook, and what is that visibility now? I'm just trying to capture that.
Visibility to the final annual guidance, which we provided, is very similar to our previous years. But again, the market, in our view, is softer, and that's why we're kind of very openly sharing this. But visibility in percentage and how we see in pipeline, it's, at this point, similar to what we saw during the previous years.
I think the key addition is what we're trying to say, is that there's a lot more cloudiness around that visibility. While the guidance we gave is based on what we see right now, there's a lot of changing events over the next six months, and the economy, things change almost on a daily basis, so we can't predict what that volatility is going to be. Based on what we see today, that's what our guidance is based upon, and our visibility is comparable to prior years.
I'm pretty sure you realize that our kind of position is a reflection from what we're seeing as a client. Some of the clients, which were much more confident before, right now are not giving clear answers, which means that they're struggling to understand what's going to happen. Again, I'm pretty sure I'm not saying anything new to you.
Right. Right. Okay. No, that's helpful. Just one more. Are you changing your second-half hiring plans at all, just given your desire to bring the utilization rate back up and given some of this uncertainty in the demand environment?
Yeah. We're definitely adjusting this, but it's also nothing new here. We're doing this practically real-time during the last years. If you think about it, in the past, some events happening, we're doing the adjustment of our hiring plans between different locations and number of people, and clearly, we're doing this right now. We mentioned our utilization is higher than we expected.
Okay. Thank you.
Lower than expected.
Lower than expected.
It's from Darrin Peller of Barclays. Please go ahead.
Thanks, guys. I just want to start off with helping segment the growth rates by your client base. I'm trying to get a little sense as to whether you're seeing a little less certainty from certain types of clients versus others. I mean, last quarter, you had about a high-teens growth rate from your top clients and 30%+ growth from your, let's call it, tail 80% of your client base. Is that trend similar now? I mean, are you seeing any specific large clients, maybe the top 5 or so, that are pulling back because of Brexit, saying, "We're going to hang tight and give you a decision later"? Can you just give us a sense as to the mix in terms of growth profile?
Yeah. I mean, I think I mentioned it in my commentary as well, that the accounts outside of our top 20 are growing at a much faster rate than those within our top 20. Now, I don't know that that's a reflection that the top 20 are not growing. They are still, if you look, my top 20 are still growing at a high teens rate. It was a little over 18%. It's just that those outside the top 20 are growing at about a 45% rate. So, it's more a reflection of the diversification of our client base. Our top 20, some of them are getting to be quite sizable, so some large, big numbers, they start to slow down a little bit in the growth rate. We're still very confident. We're still getting strong growth from a lot of those in our top 20.
We do have some that are flattening out. We talk about Barclays every so often being a little bit flat over the past several years, so that obviously impacts those overall top growth rates. And then we have a couple other accounts within our top 20. Every year, we have it. We have some that flatten out, drop out, change, so that's just the normal dynamic. Nothing unusual in it this year.
Is there anything of, let's call it, the top 5, 10 that's new that this quarter, given Brexit or any other uncertainties in the macro, have decided to say that used to be driving growth for you guys that are now deciding not to, and that's contributing to your decision on guidance for the second half?
Well, I think clearly, UBS has made their own statements around concerns around Brexit, and we know that European banks, in general, are struggling. So, UBS growth rate, I'm sure you've seen it, this quarter was about 14% year-over-year, which is below the growth rate we've seen historically in that account. And as far as others, nothing specific to call out. Nobody else that's specifically pulling things down. I think there's just a general sense across the client base of unease and uncertainty with where the markets are going.
And then lastly, is there anything in the second half that's sort of anniversary from an organic or inorganic? From some of the acquisitions you may have made, is there any impact there that you're growing over deals that might be contributing as well? Just because obviously, the second half implied growth rates in more like a mid-20s versus a mid-30s. You're running out in the first half of the year on a constant currency basis, so just trying to understand that.
You asked about the growth rate in the second half versus the first half.
Well, what was organic growth during the quarter, if you could help us with that? And then what in the second half is there anything that you've bought that's anniversary that's contributing to this?
Organic growth was 24%, 27-ish in constant currency.
Okay.
That's it. As far as in the second half, let me think about that. Well, yeah. I mean, last year, Navigation Arts was a second-half acquisition. AGS was a second-half acquisition, so we picked those up. One was in Q3. One was in Q4.
AGS was practically on the border with the new year, so I think.
It was mid Q4, November. What was that?
So, does that answer your question there, and I'm not sure if I'm getting.
Yeah. So there's certainly some of the growth profile that's embedded in you guys that you're going to grow over as well.
Yes. Yes.
Yeah. Okay. All right, guys. Thanks very much.
Sure. No problem.
The next question is from Anil Doradla of William Blair. Please go ahead.
Hey, guys. A couple of questions. So you talked about Europe. You talked about some of the banking guys. When I dig into perhaps UBS, over the last 4-6 months, there've been some changes. You've had a chief information officer coming on board in February, March. I think they got a new CIO literally within the last month. So from that account point of view, how much would you attribute it to structural changes, organizational changes? And first of all, did it impact you guys on that front?
Listen, it is a question which we don't have an answer to split what's the organizational changes and what's the economy and what's the Brexit. I don't think I can comment on this. So I don't know how to put priority on any of these components.
Okay. And when you look at some of the functions, you talked about some softness from that region. In the BFSI area, were there some particular functions where you were seeing perhaps a little bit more pullback, more softness versus some other, whether it's wealth management, whether it is application development? Can you give us some color around whether you could break it down by functions, or it was kind of across the board?
It was maybe a little bit in specific region in IPAC for us, but for the future, even for Q3 or Q4, we're very much under impression that if clients are considering some cuts, they're still struggling internally in what areas it's going to be, or slightly across multiple areas. So I think with the exception of IPAC right now, I don't think we can name anything.
Okay. From a share point of view, you're not worried about your market share, right? There is no concern about you losing share to competitors. This is purely a macro-driven kind of issue that's going on. Is that fair to say?
Based on what we know, it's correct.
Okay. Thank you.
The next question is from David Grossman of Stifel Financial. Please go ahead.
Thank you. So our company, historically, when you've seen this deceleration among some of your larger clients, for whatever reason, that has been absorbed by other clients that have kind of stepped in and not only absorbed that but also kind of drove growth. And it sounds like, to the extent that that's happening with UBS and maybe others in the back half of the year, that that may be happening again. So you reiterated your 20% organic growth target. So should we kind of take from that that the backlog of opportunity in the rest of the base should be sufficient for you to kind of continue to grow at 20%+ organically, assuming the environment doesn't fall out of bed from where we are right now?
I think we would like, again, to repeat ourselves. So yes, in the past, it was kind of a similar situation, but each time, it's a little bit different. I think right now, at this specific point, maybe in two weeks or four weeks from now, we will be in a different position. At this specific point, the level of unpredictability is higher than we used to, at least in this segment which we highlighted. Okay? So we still think that our initial target could be reached, and again, we'll update later. In the past, yes, there was a similar situation, but each of them were a little bit different. Sometimes, we were getting pretty specific notifications with specific plans. Right now, everything is a little bit fuzzier, at least again in this specific segment of the market which we concern about.
Okay. Just to make sure I understood you correctly, your specific concern is the financials in Europe. That's where the specific concern is right now.
This is number 1. Number 2, that it might be impacting some other sectors in the region as well.
Right. Okay. And then I'm wondering if you could just clarify your commentary about pricing. Perhaps you could help us better understand why you're seeing incremental pressure on pricing now.
Because of all of these reasons, and there is more difficult negotiation for potential increases. We explained before what components contribute to pricing increases from reviewing the seniority of the position, from annual increases, which is not necessarily matching the calendar year, right? So all these components. We just anticipate that it probably would be more difficult than before.
Okay. So just to be clear, the pricing part.
Or even for new contracts, it could be more difficult as well.
I see. Okay. Very good. Thank you very much.
The next question is from Avishai Kantor of Cowen and Company. Please go ahead.
Yes. Hi. Good morning, everyone, and thank you very much for taking my question. Can you describe the nature of the interactions that you're having with those large European financial services clients which you mentioned compared to your conversations with clients in other verticals? Are those different conversations?
Yes. It's a different conversation because there are discussions about the future, and these discussions change from what it was one quarter ago or two quarters ago. There is a change in plans. The problem is that these plans are not defined, and I think these specific clients are still struggling with their decisions. That's why we had to translate to the same level of unpredictability which we have. But again, at the same time, we do think that we would be able to achieve our guidance which we provided at the beginning of the year.
Okay. And then I know it's too early, but given increased costs associated with Brexit for some of those clients, longer-term, do you see any increased willingness to engage in additional projects?
Listen, again, it's much more complicated from different angles. Too many variables and unknowns. From one point of view, definitely, they're trying to figure it out how it would influence them. On another side, there are also a lot of movements at these big clients to optimize their vendors' infrastructure. So there is a chance that it would be an increase of our share would increase as well, taking into account the type of work we are doing. So what's going to be there two quarters from now, I don't think anybody knows. But it was a previous question. If we do think that we're losing share of the budget there proportionally, we don't believe so. I think our share is probably still going to be increased.
Thank you so much for the detailed answer.
The next question is from Steve Milunovich . Please go ahead.
This is Ben in for Steve this morning. Anthony, could you comment on your long-term expectations for margins and revenue per engineer? Are we kind of at a new normal here, or do you expect an improvement going forward? Thanks.
Well, no. Our operating margin guidance holds. We've always said it will be between 16%-18% in the adjusted operating margin. That guidance has not changed, and as you can see, we're somewhere right in the middle or almost at the middle of that guidance range. And we don't provide guidance on revenue per engineer. Okay. All right. Thank you.
The next question is from James Friedman of Susquehanna Financial. Please go ahead.
Hi. Congratulations on the improvement in the cash flow and the unbilled. Anthony, what should we anticipate the trajectory on those metrics going forward?
As I said earlier, DSOs, longer-term, we're focusing on getting them down even more. So we're down to about 88 total, pulled about 6 days out this quarter. Most of those 6 days were from the two big accounts we talked about last period, UBS being one and one other large client. So we fixed those issues, and a few other steps to improve DSO brought down to 88. We want to continue to push that down to kind of mid- to low 80s overall is the target. That'll probably take at least a few more quarters to cycle through. So that's the overall guidance there.
Okay. And can you remind us, is there seasonality in that metric? Should we be thinking about it that way?
Seasonality in the DSO metric?
Yes. Yep.
Maybe a little bit towards the end of the year and the beginning of the year, around holiday time and things of that nature, people tend to try and clean out budgets at the end of the year. So we always see a little bit of a pop at the end of the year as people make and accelerate payments. And then there's typically a slowdown at the beginning of the year as kind of people are starting out the new year, budgets are being set. But I don't think it's dramatic.
Got it. All right. Thank you for the comment.
Yep.
The next question is from Ashwin Shirvaikar of Citi. Please go ahead.
Hi. I just wanted to hop back in the queue. Your answer to a previous question, I think it's from David, on pricing, you implied because when you first said pricing, I thought you were talking about price decreases being contemplated, but your answer implied more or less a lack of pricing increase. So I just want to clarify. Are both those things on the table, basically?
No. We weren't talking about pricing decreases. I mean, year to date, we're still seeing right around just under 3% as far as pricing increases. What Ark was alluding to was that we just aren't expecting to see any additional expansion of pricing. We expect to continue to see pressure on getting price increases into the future, not necessarily decreases. That wasn't really part of the message.
Okay. We were talking about, again, a more difficult environment in our regular incremental increases which happened during the year as well.
Yeah. Understood. Understood. I just wanted to clarify that. Thank you very much.
Yep.
The next question is from Arvind Ramnani of Pacific Crest. Please go ahead. Mr. Ramnani, your line is open.
Hi. Can you hear me?
Yes. Yes.
Great. Impressive performance at your non-top 20 accounts. If you can provide some kind of how does this compare to growth of non-top 20 accounts compared to last year? Is this growth accelerating?
It's comparable. It's comparable. I mean, last year, the accounts outside the top 20 were growing in excess of 40%. We're seeing the same this year. So I think the consistent message that we talk about is the diversification of our client base and the amount of growth that we get across that client base, both within our top 20 and, more importantly, outside the top 20, as we have new accounts growing and becoming those future top 20s is very important to us. And that's how we grow through all these years, is that we see a constant flow of new clients into our pipeline and accelerated growth outside the top 20 as these accounts ramp up. So I think it's a consistent message from past years.
Great. Are there any specific accounts or industries you can call out in this particular group?
It's really across the board as far as industries. I mean, there's no accounts that I can mention, but it is pretty broad-based across our industry segments. I think you can see that when you look at the growth across the industries because they are all growing in excess of 20% as well. Obviously, I called out or Ark called out three key segments which are growing a little bit faster than the others this time around, being life sciences, healthcare, little media and entertainment is doing well. And then within the emerging vertical, we have a number that are contributing as well. So for right now, we're seeing a lot of growth from those, but really seeing over 20% growth from everybody, which is what we want to see.
Excellent. Just a quick question on Dextrys. Are you able to provide some metrics on how large Dextrys is and what kind of contribution will be for the second half of the year from this acquisition?
No. Dextrys is really a very immaterial acquisition. It was primarily focused on bringing in a few extra employees in China. I'm sorry, a few hundred extra employees in China in a new location up near Shanghai. It's a lower-cost location, provides us access to the Shanghai market. The revenue was really not material. There's nothing to disclose there that's going to have any significant impact on our performance.
Excellent. A good job on improving DSOs. Good luck for the remainder of the year.
Thank you.
The next question is from Joseph Foresi of Cantor. Please go ahead.
Hi. Just to go back to the softness you're seeing, is this because clients are under stress, or is it more associated with just concerns over what Brexit is going to look like? And I'm wondering, are they delaying the start of new projects but still continuing present work, or are they cutting present work?
I think it's a very related question. I think they have a more difficult time because of Brexit in general, and that's why they are uncertain about some future. I don't know what else to add to what you shared already. At this point, we're seeing, again, less certainty in some pockets of our market and some specific clients. That's all we can share. I don't know what to add.
Okay. And then, I guess, from a utilization standpoint, obviously, it ticked down, and then you're talking about seasonality in the summer. That utilization movement, are you taking people off of projects that are being cut and moving them onto new work, or is it just that you didn't have that extra work in the quarter? I'm just trying to understand where they're going and when we can expect sort of the rebound in that metric.
So we do believe, again, Q3, usually, it's a time of vacations, and that's why season plays a role here. That's what we experienced during the last year. It's always bringing a couple of additional points to our bench. So we do think that it would rebound in Q4.
Okay. And then as you look at your full kind of client base, and I know you've talked about areas of growth kind of compensating for some of the areas where you're seeing some softness, and that's why you're confident in the guidance, maybe you can just walk us through those potential areas like North America and why you feel like they're kind of hot pockets and won't be affected by what's going on globally.
So that's what we're seeing on the market. So again, all our message is just a reflection of understanding of our specific portfolio of clients. And from this, we're still optimistic that we would be able to achieve the guidance. And North America, from this point of view, is more stable than Europe. And that's all we can see. So if any changes would be happening, we will be communicating them as soon as possible.
Okay. Thank you.
The next question is from Georgios Kertsos of Berenberg. Please go ahead.
Yes. Hi, guys. Thanks for taking the question. As you can probably imagine, most of my questions have basically been answered, but I'd just like to sort of follow up on the pricing pressure point that seems to be one of the key points that you're raising. I noticed a bit of a gross margin contraction year-over-year, so Q2 versus Q2 2016/2015. And we're just wondering whether this is due to this sort of wider pricing pressure that you're referring to or whether this is due to some contract-specific issues. And what are your sort of FY2016 and beyond, if possible, gross margin expectations? Thank you.
Yeah. The gross margin is really specifically tied to the utilization. So the drop in utilization is what creates having more people on the bench is what creates that compression on the gross margin. So as we address the utilization issue, the gross margin should take care of itself.
Okay. So sorry for the technical follow-up. Just to confirm, so the bench, basically, people that are not utilized, you book the cost for those people in cost of goods sold rather than SG&A? That's what seems to suggest.
Correct. Yeah. Anybody that is labeled considered a production or billable employee is classified as cost of revenue and goes to that line.
Okay. So basically, capturing all that point together is that you're not really expecting any significant gross margin contraction for the full year and beyond based on the visibility that you have now. Is that correct?
That is correct. Yeah. We're not expecting any significant compression.
Thank you.
The next question is from Moshe Katri of Williams Trading. Please go ahead.
Hey. Thanks. Let me add my congrats on the DSO improvements at UBS. Just going back to the discussion on pricing compression, are there any major contract renewals coming up which could include some of this kind of pricing pressure that you're talking about that we should be aware of? And then just in terms of how these contracts are structured with existing engagements, I guess, can the client come in and ask for a pricing reset on an agreement that's been signed a year ago or a few years ago? Thanks.
There is nothing specific about any renewals right now. On another side, Moshe, I'm pretty sure you know that any client can come and ask for any discount and any point depending on their situation or the market situation. So it always could be happening even with any existing contract. So that's always on the table. The same, if market is different, we can do the opposite as well, but then it's negotiation or all-related circumstances.
Okay. That's fine. That makes sense. And then some color on some of the growth rates we've seen in media and then on life sciences, these are pretty strong numbers for the quarter. And then also in that respect, maybe we can also talk about some of the new strategic wins that you had during the quarter and year to date, maybe in terms of verticals and the activity that you're seeing there. Thanks.
I think, in general, nothing special happening or going to happen during these last and next quarters. I think we have good performance in these two verticals: healthcare, also life sciences, affected by some acquisitions. Acquisitions happened with Alliance Global, but it's also a reflection of some organic growth and new clients in this sector as well. So it's a combination of this. From a specific focus, it's all in line with what we communicated during the last quarter. So we think that each of our segments is pretty interesting and prospective for us, including clearly financial services too. We're still very optimistic about long-term futures there. So it's a lot of changes going to happen, a lot of potential work for us too, especially with our focused areas of expertise and capabilities and buildups we should do.
Okay. And then strategic wins, is there a way to kind of quantify how many of these did you have during the quarter, maybe year to date, and then where do you see the most activity in terms of verticals?
Strategic in terms of?
Clients.
You're asking about number of clients in specific areas, or what exactly you?
I'm asking how many strategic client wins did you have during the quarter, where are we year to date, and maybe there's a way to kind of segment it by vertical?
You mean new clients, or what?
Yes. I think.
Okay. Okay.
So I think the quantification is probably 3 or 4 new real strategic accounts beyond kind of Ark mentioned a few last quarter. There's probably a couple more that came in this quarter, but I don't think there's any huge stories. A couple new strategic accounts that we see real opportunity for growth. But Moshe, as you know, our story is always we get into these clients. We do a few projects, and then they grow from there. So it's the same basic trend that we have experienced in the past. So 2 or 3 that we see real opportunity to grow and deep penetration.
So basically, from the point of new logos which we acquired last quarter or we're kind of in presales right now, it's pretty much in line with our historical numbers.
Right, guys. Thank you.
We don't see any bad messages in this area.
This concludes the time allocated for questions on today's call. I would now like to turn the conference back over to Arkadiy Dobkin for closing remarks.
As usual, thank you very much for joining us today. I would like just to confirm that despite the softness which we're seeing on the market, we're pretty confident about the long-term story. I think our message, from this point of view, is very consistent for the last four years starting from our IPO days that we're still thinking that 20%-plus organic growth is possible for us and going to happen, and that our operational margins will be still between 16%-18% like we shared several years ago. We're still pretty confident in this long-term story. Again, thank you very much, and see you in three months or talk to you in three months. Bye.