Greetings and welcome to the EPAM Systems First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Lilya Chernova, Investor Relations for EPAM Systems. Thank you. You may begin.
Thank you, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's first 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 on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Arkadiy?
Thank you, Lily, and thanks everyone for joining us today. We had a strong quarter and a solid start for 2016 with Q1 revenue of $264 million. This represents 32% year-over-year growth and 34.5% constant currency growth, and puts us well on our path to achieving our financial performance goals for 2016. In addition, it's important to note that our organic growth for the quarter was 24% and 26% in constant currency. Our quarterly results are above guidance, and we do believe are driven by our ability to address strong demands for new advanced technologies and digital services across all our key markets.
During our call last quarter and then during the investor day, when many of you joined us in New York City, we shared the main market drivers and our key challenges and the ways we're addressing or plan to address those. So today, while Anthony will provide a detailed update on our financial performance, I would like just to summarize one more time the main trends in clients' demands and how we are shaping our services to take advantage of significant opportunities that we see in the markets for the firms like EPAM. So let's start from markets, customer spending, new clients. First of all, and very simply, we see continuous emphasis from existing and prospective customers on partners who can help them delivering differentiated business solutions which allow better competing in their respective markets.
Which doesn't mean competing just with the traditional or historical competitors, but in many cases with new type of technology-driven players, sometimes very well established like Googles of the world, and sometimes with completely unknown just yesterday startups. In many cases, this need for differentiated product is driven by large digital transformation programs. But in many cases as well, the demand might be coming from the downstream necessity to modernize core technology platforms in response to competitive disruption or sometimes regulatory or compliance mandates. As a result, the broader set of services include traditional application, but in addition, digital touchpoint creation, digital business strategy, process and service design engagements, backend refactoring, a number of related as a service offerings, and finally, an aggregation of all of the above.
Platform buildups and the implementations including heavy-duty custom development complex integration and overall orchestration efforts across many sophisticated and best-in-class components of those platforms. In addition, we also see customers beginning their first initiatives involving such key emerging trends like Internet of Things, virtual and augmented reality, and smart software components and platforms. In most of those areas, our natural product engineering heritage gives us an advantage over traditional sourcing providers, especially in organizations where there is a desire to eliminate or significantly reduce the reliance on legacy systems or when heavy legacy modernization is required. All of this translates into the opportunity for us to serve significantly broader markets than we were capturing even a few years ago with a more diverse portfolio of services that are very tightly integrated into what we call hybrid type of engagements.
Overall, we are benefiting from upward trend on size of programs we are engaging. While there is pricing pressure evident as a result of overall global low inflationary environment, we are pleased to see that we are navigating over those challenges well. We believe that for those of you who were able to join our investor day in March, all above trends were well illustrated by three client stories presented during the event. Think about it. Wolters Kluwer is a client which we started to serve more than 10 years ago. That was our traditional outsource product development client back then. Today, the information and publishing business is in the center of the digital transformation story, and they feel a lot of competitive pressure. We really started to change ourselves three, four years ago to help them to address those new challenges.
We brought different EPAM capabilities together and added strong innovative thinking on top of to help solving some very critical problems, and in result, differentiated EPAM significantly from the majority of other vendors serving Wolters Kluwer today. Another client presenting was Liberty Global, the largest global company in the world with which we worked just a bit over three years. Working for them, we have been able to combine agency and engineering capabilities and deliver a number of innovative applications, and in result, also to differentiate ourselves strongly from competitors. Finally, Human Longevity Inc. Only about a year in relationship and probably too early to claim any overall success yet.
But still, we put together a team of designers, life science and healthcare subject matter experts, VR and AR developers, and in addition to strong software engineering capabilities, and proved that we can make it all work together and delivered the first version of product in record time. So the old, practically legacy or EPAM traditional client, the three years old, and the one which practically just started with us, all Minnesota clients today, and all driven by the same market pressure to engage with their own client faster, better, and stronger, and we are growing with them just because we demonstrated in a very practical way those hybrid capabilities. Capabilities in which we invested heavily during the last several years and in which we plan to continue investing in the future.
That is probably why, despite overall market pressure in financial services, this is stable demand for our services in this vertical. We're also seeing significant acceleration in demands for digital services in traditional banks and also the rising demand for the next generation payment models and related technologies, both from customer expectations as well as the regulatory requirements points of view. In support of these trends, we have seen increased traction with the key new and existing customers in the financial services market, sometimes with a need to accelerate onboarding for some engagement from zero to 100 engineers just in one quarter. Yes, sharing that to address specifically concern in regards to financial services business based on the kind of remarks we're getting from you.
Beyond financial services, across our main geographies in Europe and North America, Q1 for us was marked by significant uptick in the number of new digital engagements, seven in total, with some of those being very promising to turn into potentially large multi-year relationships, specifically around new commerce and digital marketing platform, as for example, for Everything Everywhere in UK and for Amway across the continents. In terms of our go-to-market positioning, we are pleased to see the increased visibility our growing capabilities are driving. Our recognition among market-leading independent research agencies, including Forrester, Gartner, Zinnov, and some others, has increased significantly with positioning us in a new type of service provider. In Q1, we were covered in 11 industry analyst reports focusing on a range of areas from business intelligence to SAP core technologies to service design and customer experience and to B2B commerce services.
We're also seeing recognition of our unique value proposition for companies looking to take engineering into the age of digital transformation. Just in April 2016, EPAM was recognized by Forrester as a leader in the digital product and platform engineering wave, which cited us as being a company which exhibited the strongest grasp and execution of digital platform engineering services of all the vendors evaluated. In these reports, we included all key service providers with traditionally strong software product engineering capabilities. All that is translating to increased pipeline of opportunities, and we hope to see these new deals as well as the larger-sized deals to accelerate as we move into the year.
At the same time, to keep the level of expectation intact, I would like to state that even with increased recognition and number of recent awards, we are still very much in the beginning of our journey. Our focus continues to be on building and deploying hybrid capabilities and integrated teams better, and on making sure that our strong customer delivery track record continues to be our main driver of value. Which brings us to another key area we try to cover during Investor Day: talent, scale, hiring. From an in-market perspective, we continue to face a very competitive global environment as we position EPAM as an employer of choice in all EPAM key locations across the globe. While this challenging competitive talent environment, we believe that EPAM is well positioned to not only hire but also to train and deploy multidisciplinary teams.
To this end, we continue our focused investment program in training, events, and professional development for our entire global employee base. Previously and during investor day, we have shared some examples of these investments in training and global collaboration platforms we developed internally. Interesting to mention that just recently we hosted, utilizing such investments, our global information technology week event that engaged over half of EPAM total employee base and featured 400 strategy technology and people development sessions shared across 23 countries and 75 cities. In regards to this quarter, I'm happy to share that we are performing well across the board on talent acquisition targets with total delivery personnel reaching 17,150 employees at the end of Q1.
We continue to see strong hiring metrics in key for us European Markets, and this translates into better support for faster engagement from PAFs and giving us the scale needed to bring larger nearshore engagements. With that, I will turn to Anthony to provide more details on our financial results and Q2 guidance.
Thank you, Ark, and good morning, everyone. We turned in a strong performance in the first quarter, and our key highlight is still revenue growth. Revenue closed at $264.5 million, 32.2% over first quarter of last year, and 1.6% over Q4 2015. As a reminder, Q1 is typically our slowest quarter from a sequential growth perspective due to CIS holidays in January, short month of February, and the beginning of a new budget season for most customers causing a slow ramp-up in Q1. Currency still remains a part of our story.
We saw about $4.5 million of year-over-year headwinds, making our constant currency growth rate 34.5%. Organically, revenue grew year over year 24.2% and 26.5% in constant currency. Growth remains very well distributed across all verticals, with all verticals turning in over 25% growth year over year. Geographically, North America grew 45% and 29% organically. Europe was up 19% and APAC up 14%. We are encouraged by the return of double-digit growth in CIS, which has struggled the past several years and currently represents only 3.4% of revenue. It has grown 15% over Q1 2015 and 36% in constant currency. Turning now to profitability, GAAP income from operations increased 32.9% year over year to represent 11.5% of revenue in the quarter. Our non-GAAP income from operations for the quarter after all adjustments increased 28.6% over prior year to $3 million, representing 16.3% of revenue.
Our effective tax rate for the quarter came in at 21%. For the quarter, we generated $0.72 of non-GAAP EPS, $0.02 above the top end of our guidance, and $0.45 of GAAP EPS based on approximately 52.9 million diluted shares outstanding. I want to take some time to dive a bit deeper into our non-GAAP net income and EPS figures. As many of you know and have discussed with me in the past, the adjustments between GAAP and non-GAAP are not tax-affected. Based on these discussions and the growth that we've seen in those adjustments over the past several years, we've elected to make a change in our reporting and begin reflecting the tax impact.
For Q1 2016, the tax effect was $3.1 million on non-GAAP net income and $0.06 on non-GAAP diluted EPS, making Q1 2016 tax-affected non-GAAP net income $34.7 million and non-GAAP diluted EPS of $0.66. This compares to Q1 2015 tax effect of $4.6 million, resulting in non-GAAP net income of $26.5 million and non-GAAP diluted EPS of $0.52. The two main components of non-GAAP adjustments are, first, stock compensation, which has increased over the past several years due to stock price appreciation, headcount growth, stock use in M&A, which is also tied to employment. The second main adjustment to our GAAP figures is amortization of intangibles and other related acquisition costs. We completed eight acquisitions over the past four years, which has caused a spike in this figure.
If you would like to see the historical impact of the tax-affected numbers, you can find the quarterly and annual details in our fact sheet on the website. Turning to our cash flow and balance sheet. Cash from operations for Q1 was $10.9 million, 58% above Q1 2015 of $6.9 million and $1 million below Q4 2015. Overall, Q1 cash flows were strong. Uncollected revenue, the combination of AR and unbilled did continue, a slight drag but not significant and not anything we are concerned about. However, since there has been a consistent area of questions from investors and analysts, I'll dive a bit deeper into a few key components of the cash flow. Let's start with our DSO. As you know, we've experienced consistent growth over 20% since IPO.
So as we become larger, we become a more significant expense to our customers, which makes us a larger part of their procurement and cash flow strategy, which equals longer payment terms. This quarter, our DSO is 58 and our unbilled DSO is 94, higher than in the past. We are aware of the impact and have already taken steps to address this by adding more of a focus on our collections group and restaffing some of the key financial personnel. A few other key points I would like to further highlight around our billing cycle, which directly impact the DSO, and how you compare those to our peers. You need to remember that the majority of our revenue are T&M, significantly higher than many of our peers, meaning that 85% roughly of the last month's revenue will be in unbilled at the end of any month.
This is a short-term impact and usually resolves itself by the end of the year. Lastly, working capital continues to grow, ending 41% above Q1 2015 and 11% above Q4 2015. So while I understand there are some concerns in the marketplace around our balance sheet and DSO, our cash position, operating cash flows, and working capital all continue to grow and strengthen. Turning now to our guidance. We are reiterating our full year 2016 guidance of year-over-year revenue growth of at least 26%, net of currency headwinds estimated at 3%, meaning constant currency growth of 29%. The full year GAAP diluted EPS will be at least $2.05 with an effective tax rate of approximately 21%. Under our old method, the full year non-GAAP diluted EPS was estimated to be at least $3.20.
But once adjusted for the full year tax effect, which we expect to be $12.6 million, non-GAAP diluted EPS will be at least $2.97. The full year weighted average share count is expected to be approximately 53.6 million diluted shares outstanding. And now for the second quarter. Revenues for the second quarter will be at least $280 million, representing a growth rate of at least 28.6% over second quarter 2015 revenue. This includes 3% anticipated currency headwinds, meaning constant currency growth of at least 31%. Second quarter 2016 GAAP diluted EPS will be at least $0.46. Second quarter 2016 non-GAAP diluted EPS is expected to be at least $0.70 after adjusted for the tax effect and based on estimated second quarter 2016 weighted average of 53.2 million diluted shares. With that, I would like to turn the call back to the operator for Q&A. Operator?
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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Jason Kupferberg with Jefferies. Please proceed with your question.
Good morning, guys. I wanted to ask a question about the seven new digital engagements that you mentioned in the prepared remarks. It sounded like at least some number of those could become sizable. I wanted to get a sense of whether these engagements are with new or existing clients, and could some of these end up creating a new top 10 client for you guys?
Those seven engagements we mentioned, this is all new clients. So how it's going to translate to really large relationships is too early to say. As I mentioned, a couple of them definitely have a very potential. And no, this engagement not impacting our top 10. Yes.
Not yet. Okay. Understood. And then just on the pricing front, I know you mentioned that there is some pricing pressure just given macro conditions around the world, but have you changed any of the pricing expectations that are baked into your full year guidance? Because from what I recall, I think you baked in a little bit less pricing expectation for 2016 versus what your actual experience had been the last couple of years.
Yes. At this point, we're having the same assumptions as last time in projecting our numbers.
Okay. And then just last for me on the margin front, I think you were 16.3% on the non-GAAP operating margins for the quarter. Obviously, it's still within your range, but kind of the lower part of your range. Do you think this will be a trough level for the year? Were there any factors that impacted that metric a bit, and do you expect it to tick up a little bit during the balance of 2016?
Yeah. We always expect to see some uptick as we move through the year. You remember Q1 is our tightest quarter on margins. Revenue is usually not sequentially up very much from Q4. Utilization, as you probably can see in the fact sheet, did drop a little bit versus Q1 of last year and versus Q4, mainly due to you have a short February. You have holidays in January. So we always feel our margin squeeze in Q1, and this year it was about 0.4%, a little bit more of a squeeze, but nothing dramatic or that we're concerned about. We'll see uptick as we move through the year.
Okay. Sounds good. We'll see you guys next week. Thank you.
Great. Take care.
Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citigroup. Please proceed with your question.
Hey, guys. Good morning. Good job on the top line growth. And Anthony, I appreciate the incremental explanations on balance sheet cash flow. One thing I wanted to confirm on 2Q guidance is the 2Q guidance for EPS does already exclude the tax effect. Does it not? So that would be roughly $0.06?
Correct. Yes. It's looking like $0.06-$0.07 of impact in Q2, so it's already baked into my guidance number.
Okay. Okay. So when I look at that versus the consensus that's out there that did not have that impact, you're basically guiding inline-ish. Got it.
Inline-ish. Yes. Exactly.
Yep. Okay. Got it. So question on this client concentration. I know from time to time we do get a lot of questions about your top two clients and how they're doing, particularly being financial services focused. Could you dive in deeper, to the extent possible, into sort of the growth potential of those?
Well, first off, top two are no longer financial services. I mean, UBS remains our top, but Barclays is actually not number two any longer. So they've kind of stayed level as other people have grown around them. So that has changed. As far as outlook around financial services, we don't really have any new information to share with you. It's a consistent story with what we shared last time. I know that the market, there's been a lot of news around financial services, but at this point, we're not seeing it. We're not hearing it. We're not feeling it within our numbers. So we remain.
Ashwin, I would say that we have three other large banks which become clients during the last 18-24 months, and we're growing with all of them at this point. So basically, we're starting from pretty low point, but at this point, but at this specific time, all of them growing for us.
Yeah. I guess the question where it comes from is really, particularly in financial services, there is sort of an expectation of, let's call it, same-store sales not being well. Now, you're starting from a low base, so that's good. But pricing pressure, things like that that you can feel maybe more acutely, vendor consolidation, any incremental commentary on that might help.
I don't think we can add additional colors on what you're asking. So at this point, we continue to grow in the sector. I think for a significant portion of what we're doing there, it's driven by this digital type of engagements which we see very good level of demand. So again, we clearly cannot guarantee that any hiccup's not going to happen in the future, but at this point, we cannot share the same sentiments as some other players.
Okay. Understood. Last real quick question. Anthony, cash flow expectation for FY16, I might have missed that. Could you provide the range or number?
Cash flow for operations, it's consistent with what I shared at the last call. Basically, I'm expecting cash flow from operations to be at the levels it was at in 2014. We took a little bit of a dip last year down to about $75 million. I expect to get it up over $100 million for fiscal 2016.
Got it. Thank you very much.
Yep.
Thank you. Our next question comes from the line of David Grossman with Stifel. Please proceed with your question.
Thanks. Just two quick questions. First, just on the mechanics of the adjustments, Anthony, to get to the new methodology on the stock comp or excuse me, on the non-GAAP adjustments, should we just merely take the 21% and for simplicity apply it to the entire adjustment?
You could do that roughly. David, I mean, unfortunately, not all of the adjustments get a tax benefit. So the way I've calculated this is actually going in and reflecting the true tax deduction that we get, and it does change, and it has changed over the years. I think the net benefit for the current year was actually more like 22%-23% benefit off the adjustments. And as you go back through history, it'll change, and as it goes forward, we're hoping to get more and more benefit. So I'll have to kind of update you as we move forward. But I gave you for the full year, it's about $12.6 million is the benefit for the full year, and it should be about $2.5 million-$2.7 million per quarter of tax effect through 2016.
Okay. Thanks. Has there been any change to the stock comp for the year or the acquisition amortization cost?
The stock comp charge will fluctuate because we do have liability treatment for a few of the acquisitions. Plus, this year's grant included some cash-settled RSUs which also have a liability treatment. So there will be a little bit of volatility, but that was baked into my stock comp guidance. So we've made some estimations on where the stock price will go and how that would be reflected. So if you use the guidance I gave you for stock comp at the beginning of the year, we're still holding to that guidance.
Is that about $53 million-ish? Does that sound about right?
It was $55 million. It was about $14 million per quarter for Q2, Q3, and Q4. We saw a little bit of a break in Q1. It came in about $1.6 million lower than we expected in Q1, primarily because of where the stock price went in the mark-to-market. I'm not changing my forward look simply because I want to maintain some of that in there for future volatility. I'm optimistic on our stock price, obviously. So I'm going to keep the $14 million per quarter going out. So it will probably still be $53-$55 million is where I'd put it right now.
Got it. And then, just, I know you addressed this a moment ago in your prepared remarks about the unbilled. Is the vast majority because obviously, the billed receivables came down quite a bit sequentially, but the unbilled went up, so you're basically flat in total. Is there some dynamic? Is that just merely the cutoff of the quarter and the amount of T&M that you carried forward into the month of April, or was there some other dynamic in the March quarter that drove that increase?
Well, the T&M is definitely a piece of it. It did spike. If you look at my DSO, it did spike a little bit. There are a couple kind of longer payment cycles in some of our customers at the beginning of the year that are dragging out and are kind of pushed on my unbilled and my AR for the quarter. We're working to actively bring those down. So really, I'm not overly concerned, but we've kind of readdressed our efforts around collections and within the finance staff to manage that DSO back down and take care of these couple issues that have caused the spike in this quarter.
Got it. And does any of this have to do? It seems to coincide with the acquisition of Alliance. Yeah. Are there billing cycles and collection cycles different than your own?
No. Alliance really didn't have too much of an impact. It's relatively small compared to our AR and unbilled. So it was really just some longer payment cycles kind of as I discussed last time and us trying to get kind of our hands around that and manage those payment cycles down a little bit, and then a couple just clients who had some administrative delays and caused a little bit of a drag on my unbilled this quarter.
Got it. And then just one for you, Arkadiy, if you could maybe just speak a little bit to now that you do have a bigger infrastructure in India with the Alliance acquisition, are you seeing any shifts in terms of kind of sourcing content out of India for the EPAM client base? Any thoughts you have on that and how that's evolving?
It's still very, very early. It's kind of practically only one quarter in play. At the same time, we have several engagements where EPAM India is starting to serve EPAM clients. So there is already cooperation. There are opportunities in presales state right now. So it started to happen as we expected, but again, it's very, very early to mention. But the reason why we brought India to EPAM map was why I very clearly indicated as global clients need different type of services and different time zones, and this is starting to benefit us.
Very good. Thank you.
Thank you. Our next question comes from the line of Steve Milunovich with UBS. Please proceed with your question.
Hey, guys. This is Ben in for Steve this morning. Thanks for taking my question. I was wondering if you could make kind of a general comment on what you're seeing from the more traditional IT vendors trying to move into kind of higher-level digital offerings and just how much success they're having. Thanks.
I think let me turn this more yeah. And this is probably what you're asking about, competition growing from not our head-to-head traditional competitors. And if answering this question broadly, then yes, we're seeing competition coming from all possible corners like people who didn't participate in these more complex deals after some acquisitions and investments trying to play there. But again, at this level of generalization, I would say that the market is so big and the demand is so big and quality requirements, it's pretty high for delivering this. I don't think we can say that markets drastically change for us. Specifically, that a lot of this, in many cases, approaches is, "Okay.
We're bringing this agency type of capabilities to traditional system integrators, integration company, or bringing some type of technology to traditional agency and trying to compete for the complex deals which require not just creativity but very, very strong engineering component." And from this point of view, at least how we feel, we still have advantage, and it's very difficult to do it through a couple acquisitions by bringing creative together with generally IT services, not software development services, not software engineering services. So everybody trying to play there, and everybody moving in this direction. But again, don't think it's impacting market yet.
Okay. One more question on financial services. Relatively speaking, how much growth is coming from kind of the new digital initiatives versus legacy work and compliance as well?
As we mentioned, it is a significant growth, but we're not providing split and specific numbers, so I don't think I can answer precisely the question. Specifically, and this is very difficult to answer precisely because it's some type of engagement which is triggering other type of engagement, and the separation line is very blurry. Some companies are very clearly separating this. It's interesting to know how it's happening, but we are not ready yet for that.
Okay. Great. Thanks, guys.
Thank you. Our next question comes from the line of Anil Doradla with William Blair. Please proceed with your question.
Hey, guys. Hi, Arkadiy and Anthony. Couple of questions. Arkadiy, you talked about Alliance, why you acquired them, locations, diversifications, and all that stuff. Can you chat a little bit and tell us how that integration is coming by, and how do you plan to position Alliance from kind of the quality of work and the nature of work in the bigger context of EPAM?
Yeah. I thought I chatted already, but I don't think we're going to position EPAM India very differently from EPAM in general. There are some specific areas of expertise, like we mentioned when we announced the deal about very strong test capabilities and specifically test automation capabilities. Clearly, that's improving our competency in this area. But in general, also, we were sharing that we were looking for kind of a company which would be in line with the type of services EPAM provided. And from this point of view, we're not going to separate it too much from the type of offering. What separation could be, yes, there is convenience from time zones, from locations, and again, a couple of specialization areas, but it would be very much an integrated part of EPAM global delivery.
Now, in the past, Arkadiy, you talked about converging the billing rates of Alliance with EPAM. What is your latest thoughts on that? Do you feel comfortable seeing Alliance billing rates pretty much in line with the EPAM?
Clearly, we're talking about three months, four months working together. It is too early, so you understand that it's impossible to change rates for existing clients. We're working together on changing kind of these assumptions and bringing different capabilities together, but I don't think it's going to show up within one or two or three quarters.
Very good. And Anthony, you talked about a lot of work that you're doing on the DSO front. You gave a very good explanation of the puts and takes. But when we step back and look at the big picture, 12 months from now, 24 months from now, are we talking about a new norm at these levels, or are we talking about a trend which is going to be downward moving or slightly upward moving? How should we be looking at it kind of big picture over the next couple of years?
Well, absolutely. The Q1 numbers are not going to be a new trend. The Q1 numbers are too high. As I said, we have a couple specific instances that are dragging my DSO and Q1 up higher than I want it to be. I think that I am still targeting as kind of a new norm to keep my AR DSO kind of in the mid-50s, call it 55-ish. From a long-term perspective on the unbilled DSO, I'd like to get that down to kind of the mid-80s is where I'd like to see it. Right now, we closed at 94 DSO. That's much too high. We are definitely seeing a new norm in the function of kind of extended terms where our customers are pushing us for longer payment cycles as we become a bigger part of their expense budget and working through their procurement channels.
They're pushing us a lot more on that where they haven't in the past. So basically, it's becoming more of a balancing act for myself, which is why we're putting more efforts around kind of collection processes and finance processes to manage that to make sure it stays in line, but we can also make sure we work with our customers accordingly.
Great. Congrats on the continued execution.
Thank you. Our next question comes from the line of James Friedman with Susquehanna International Group. Please proceed with your question.
Hi. I had two questions. I'll just ask them both upfront. The first one is on the trends in the top customers. So when I look at the fact sheet going back for a while now, it looks like the customers outside of the top 10 are actually growing faster than the rest. So I guess my question is because you don't actually break that out. I guess you could kind of solve for it mathematically. But what is the growth outside of the top 10, and how sustainable is that? When do you expect some refresh in the top 10 customers? That's the first question. And then on the cash flow, Anthony, I was just wondering if there's any opportunity to go to intra-quarter billing. I know that's tough because your explanation, your prepared remarks were about the T&M waterfall each month.
Can you accelerate the billing at all to bring down the unbilled DSO? Those are my two about the top 10 trajectory and then the unbilled. Thank you.
Sure. So I mean, the top 10 dynamics, Jamie, it's interesting because quite frankly, every year, those top 10, one or two move out, one or two move in. So every year, those top 10 is a slightly different mix of customers. And this year, if you look at Q1, you'll notice all of my concentrations came down. What that really reflects is we did two acquisitions last year that brought us some good names, but only a couple of actually, none of them made it into our top 10. And I think one of them made it into our top 20. So basically, the Alliance acquisition and then NavigationArts acquisition brought us some good revenue, but most of that fell outside of the top 10 and top 20 accounts. So that's why you see our concentrations get smaller for the top five and top 10 but larger outside.
So you have that dynamic going on. Additionally, if you think historically about EPAM, a lot of our growth has always been driven outside of that top 20 as we bring on new customers that are ramping year-over-year. So it's a very balanced growth that we have. Our top accounts continue to grow. Our outside grows even faster because they're typically new logos coming in and doing a faster ramp than, say, what the top 10 are going to get. So you have that dynamic all mixed into Q1 this year. Does that kind of address that question, Jamie, before I go to the next one?
Thank you.
So on the second one, as far as billing, it's something I've thought about. I assume you mean inter-month, not inter-quarter. We do monthly billing right now. And with T&M, to break it down into multiple bills in one month, quite frankly, I think would fall flat with our customers. Most of our customers actually push us for one single consolidated bill each month for, in a lot of cases, covering most of the projects except for some of the bigger accounts where you have multiple divisions. So I think if I went to them and said, "I need to break it, and I'm now going to send you two bills a month," that would fall a little bit flat.
I'm not sure it would help a whole lot because it would actually create two separate billing cycles a month, whereas right now, we're doing one process, and we're getting it out. If we break it into two, that could actually create additional problems and probably not keep our customers very happy because they have to deal with it on their side.
Got it. Thank you for the call.
Sure.
Thank you. Our next question comes from the line of Avishai Kantor with Cowen & Company. Please proceed with your question.
Yes. Hi. Good morning. Just one quick question. Can you please talk about your plans for the healthcare vertical in 2016 and beyond, if you can share some details on that?
It's a fairly open-ended question. I mean, our plans, is there something specific you'd like us to dive into? I mean, obviously, we're looking to continue to grow and expand in that segment, but is there some specific area that you want us to dive into?
I mean, do you looking to grow more into the payer and the service providers area? Which areas would be your focus, basically?
The total size of the life science healthcare right now is close to around $100 million. A bigger portion of this is sitting inside of life science segments with large pharma companies where we have very interesting differentiating expertise around R&D, IT. And what we're trying to do, we're trying to benefit from this expertise but extend across more general markets and in marketing sales operations of pharma companies with our offerings, but also trying to find a good overlap between life sciences and healthcare providers on both providers and payer sides with all growing demands for engagement of patients and engagement of the doctors, which, in our belief, create interesting opportunity how to utilize our skills in portals and digital engagement platforms which we build up working with consumer media and business information companies and how we reapply this to this industry segment.
So that's what we're trying to do.
My second question, any updates on your plans to slowly grow your sales capabilities?
We're growing slowly our sales capabilities. I think, again, we talked about it right now. We probably have already a big enough group. Plus, it's very tightly overlapping with client management, account management, and industry expert groups. So I think we're having good progress in this.
Thank you very much.
Thank you. Our next question comes from the line of Mayank Tandon with Needham & Company. Please proceed with your question.
Thank you. Good morning. Anthony, just going back to the topic about utilization and pricing, could you quantify the utilization in the quarter and also the pricing improvement you saw? And then also looking into the guidance for fiscal 2016, how does the revenue breakdown between headcount growth expectations and the impact of utilization and pricing?
So utilization came in at about 76.7%. So it was a little bit down from Q4 and also down from where we were this time last year. Less than 1% down but still down. Pricing, as we said, we're kind of sticking with we guesstimated last time at about 4%-5% pricing. We're pretty much staying right in that range. We're not seeing anything to indicate it's going to move dramatically off of that estimate. So pricing is remaining where we estimated it last time. And I'm sorry, could you repeat the last half of the question?
I was trying to figure out the revenue breakdown between these three variables. I think you already answered the pricing question. In terms of utilization improvement and headcount growth, how is that going to play into the fiscal 2016 guidance?
Well, I mean, utilization, we try and keep in that 76%-78% band. So I would expect to see it come up a little bit from where it is right now as we move through the year. And as far as headcount growth, we were still saying headcount was going to grow somewhere in the 20%-25% range for the year. We haven't really moved off of that guidance.
That's helpful. And then just to segue into the headcount and recruiting topic, which Arkadiy mentioned as one of the challenges for everyone really involved, but what are some of the key markets or geographies that you are scaling in? And would you explore other markets where you aren't present today to expand your global footprint from a delivery perspective?
I think by this point, we're already practically in all reasonable markets. Yes, in some of them, we have very insignificant footprint in comparison to total EPAM and in comparison specifically to some of the competitors. But we're really growing practically across all our development centers. We're still growing in Eastern Europe, and we consider growing in the APAC region specifically because some revenue opportunities there, and we need to have much more sizable development pool right in the region. As I mentioned, with India operation, we're still kind of learning and seeing how to do it better. But we're definitely planning to grow in this region too. So it's across all regions.
Sure. And then two final questions. One on wage level impact, the timing, and if you could quantify it as well, both onsite and offshore. And then how are the attrition rates trending in your business?
Attrition right now for Q1 was actually down a little bit, about 8% versus 10% that we saw last year. Wage inflation is looking like it's going to be in that 4%-5% range as well. Most of that will hit us in Q2 from a timing perspective. That's when we'll see the big uptick.
Anthony, is that a blended number? If you could break it down between onsite and offshore, that would be very helpful.
No. We don't typically break down kind of wage inflation between the two locations. We look at it really at a blended rate as well.
Sure. Thank you.
Sure.
Thank you. Our next question comes from the line of Moshe Katri with Sterne Agee. Please proceed with your question.
Hey, thanks. Good morning. Going back to the questions about top five clients, maybe top 10 clients, and obviously, you've seen a slowdown, was the deceleration in Barclays and UBS expected? Just to put it in another way, could this actually impact your ability to beat expectations this year given the fact that you've had a massive, pretty big deceleration here? Thanks.
Well, actually, I didn't say there was a deceleration in the top accounts. I just said the accounts outside of the top 10 and top 20 are growing at a faster clip. So we're not seeing any deceleration in our top accounts. UBS is not necessarily decelerating. Barclays is flat, but Barclays has been flat now for two years. So really, that's not much of a change. So I don't think we were saying that we're seeing deceleration in our top accounts. I think we're just saying that the accounts outside are growing at just a much faster clip, mainly because there are new customers coming in, and they're ramping faster. It's more of a function of size dynamic than whether or not traction is there.
Should we expect UBS to grow in line with what we've seen in Q1 this year, or are we going to see, again, numbers below that in terms of growth? Again, this is a question that we've been getting from investors this morning, whether the slowdown that we're seeing versus the rest of the business was expected or not.
Well, I mean, Moshe, we don't provide specific customer guidance. UBS is growing. We're still working with them quite extensively, and we're seeing continued traction with that account. To a certain extent, UBS now, given the size of the account, has a little bit of a law of large numbers. So we've grown over several years quite aggressively with them. So the trend is to see them continue to grow with us kind of in line with company expectations. But I don't have specific growth guidance to provide on UBS.
All right. And then Ark, you mentioned three new accounts in financial services that you kind of picked up, and they're ramping. Can we get some more color on that? Are they U.S.-based? Are they European-based, etc.?
I mentioned that it's during the last 24 months, we have three potentially large clients. It's European banks, but some of them with very large global footprints as well.
Okay. Last question about CIS. Can you talk a bit about what's driving some of that growth? Is it new accounts? Is it more a function of stabilization of what you're seeing there? Thanks.
I think it's went to pretty low base. So it is stabilization from this point of view. I think ruble situation a little bit helping as well. And between these two, it's kind of showing. But again, it's very proportionally small footprint right now. So even one or two mid-size deals can influence right now the growth in the region. So I wouldn't read too much to this at this point.
Yeah. Thank you.
Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.
Hi. I was wondering, would you say that demand has actually accelerated given the seven new deals that you talked about? And are all those clients new to the digital engagements?
We're pretty often repeating that we're still a small player in this market, even with our practically over $1 billion run rate. Definitely, it's working for us, but I don't think we can justify any statement of acceleration for the whole market with these specifics. That would be my answer. It was the second question.
Are all the clients new to digital?
Not all of them new. Okay. Can you specify more? You're asking if these clients never did digital projects, or all of them kind of coming to us because of digital offering?
Yeah. More like, had they been working with a different provider in digital and moved over to you, or are they new to sort of doing digital?
It's a combination of all of this. Some of them moving to us from competitors. For some of them, it's new initiative. For some of them, it's very new initiative. Some of them have already good experience of successes and not successes. So it's all over the place.
Okay. Regarding Europe in general, maybe you could just talk about your growth expectations for some of your European clients, particularly given some of the macro climate things that we've seen in the news.
I mean, our expectations, we don't really give, again, guidance by region, but we expect kind of all regions to grow in line with the guidance that we've given. So we don't really provide any specific geographic guidance, but we remain optimistic on Europe as well as North America.
Got it. Okay. And then.
And then it's difficult to say that it's more easily to predict what's happening in Europe versus North America right now, especially that North America is also U.S. and Canada. And nothing perfect right now anywhere.
Got it. Okay. And then the pricing pressure that was kind of cited earlier in the call, where is that pricing pressure coming from exactly?
I don't think we alluded to any pricing pressure. I think we were just saying we're not seeing price upticks as we've seen in the past year. So we're still seeing some improvement in our pricing. It's just not as optimistic as possibly in past.
I think I mentioned something between these lines, mostly on the general statement which you were asking before. There are general concerns that there are potential macroeconomic pressure across Europe and North America and with all things which happening.
Got it. So I mean, just.
You know, as we know what's happening in Europe and what's election campaign in the U.S. So it all can put an additional pressure practically on all clients. What we're saying is that despite all of this, with our focus on specific subset on the market, it's not really impacting us. That was what I wanted to express. So I'm sorry if it was confusing.
I got it. So basically, what you're saying is that you are getting the price increases. You're just not getting anything above what you had expected, I guess, is part of that?
At least navigating this without impact on our pricing situation.
Got it. Okay. Thank you.
Thank you. Ladies and gentlemen, we have come to the end of our time allowed for questions this morning. I'll now turn the floor over to Mr. Dobkin for any final remarks.
Thank you, everybody, for participating today. Again, it was a good quarter in our view, so. We're looking forward to talking to you in three months. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.