Welcome to EPAM Systems special call. On the call today are Arkadiy Dobkin, Chief Executive Officer and President, and Anthony Conte, Chief Financial Officer. I would now like to pass the call over to Chief Financial Officer Anthony Conte.
Good morning, everyone, and thank you for joining us on this special call today. Since our acquisition with Alliance Global Services closed on Monday and our next earnings call is three months away, we felt it was important to give everyone a chance to ask questions related to the acquisition. I will ask that all questions on this call be limited to the acquisition of Alliance Global since we just completed our Q3 earnings call on November 5th and have nothing new to add beyond that. As you may have read in our company issued press release on Monday, we completed the acquisition of Alliance Global Services, a software product development services and test automation firm. The acquisition continues the expansion of EPAM's global delivery platform, adding strong delivery capabilities in Asia Pacific, North America, and India.
The press release provided a solid overview of the company, but we're happy to address any additional questions that you may have today. 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. Operator, can you please open the line for Q&A?
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, 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 keys. One moment, please, while we pull for questions. Thank you. Our first question comes from a line of Anil Dorodla with William Blair. Please proceed with your question.
Hey, guys. Thanks for letting me ask a question. Anthony and Arkadiy, I mean, let's start from the top. I mean, what was the rationale for this acquisition? We understand what the company does, but can you share with us what was your big, big picture thinking on even acquiring this company?
This is Arkadiy. Sure. First of all, I have to apologize. I'm in an airport in quite a conference room, but still, some announcement might interrupt, so don't be surprised. So the rationale is the following. We're growing, and the kind of the complexity and the size of our engagement is growing significantly as well. And mostly our global clients expect from us to provide services practically without interruption and exceptions on where we need to deliver. During the last several years, we started to deliver, as you know, in projects in China, in Hong Kong, Singapore. We're working today in Malaysia, in Australia. And one of the definite solutions for us is expand our global capability.
And we were looking for some capabilities in India for a relatively long time because we wanted to find a company which would be possible to integrate with a revenue structure and engineering kind of approach similar to what EPAM has. And when we eventually could find it and make a deal, we decided that's the right time. But the short question, we need to expand globally from our delivery perspective, and that's what we were doing during the last several years. You know about China. You know we opened operation in Mexico. So now we will have good kind of potentially growing operation in India.
Okay. Great. And then so that was interesting, the Indian angle. I think this would be your first foray into India. Now, I'm thinking this company does somewhere around $40 million-$50 million revenue in a year. And can you share some color on how big they are and how many people do they have and how many people do they have in India?
For the first nine months, revenue of the company in 2015 was a little bit under $38 million. There is around 150 people in the United States and a little bit over 1,000 in India.
You said 4,000?
No, 1,000. Over 1,000.
Okay. 1,000. And where are they mostly located in India? Do you have?
Mostly in Hyderabad, and there is small offices here. Pune.
Okay. Good. Great. Final question. Over the last quarter or two, we've had some moving parts. You've had some resource allocation going on. Certain revenues from TriZetto going away. It appears that this company has some expertise in healthcare. How much of it was driven by their healthcare expertise? Was it particularly oversight, or was it beyond that?
Clearly, it was multiple parameters for this acquisition. The goal was to expand globally, but it was different additional points. The structure of revenue focused on specific verticals clearly was one of the important attributes to the decision. Healthcare and life science is present in the revenue structure and probably the largest segment right now for Alliance Global, and it was definitely adding to what we have there. Kind of unrelated to TriZetto situation because we're growing healthcare and life sciences anyway independently from this.
Great. Thanks a lot.
Our next question comes from a line of Peter Christiansen with UBS. Please proceed with your question.
Good morning. Thanks for taking my call. Anthony, can you give us a sense of how this acquisition fits in terms of EPAM's profitability? Is this a company that has a similar margin structure as EPAM, or do you see that you need to do some work to get it to where EPAM is today?
Yeah, Peter. We're going to have to do some work to get them up to EPAM, but we have already actually developed a plan that was done through integration. And we also see a lot of opportunities for potential cross-selling. So we think that within 2016, we'll have their margin up in line with EPAM. So we only expect a little bit of a little bit of a pull on Q4, but really, for 2016, it should be in line.
Can you talk about are you acquiring any sizable accounts with this deal? Are you getting new exposure to clients that you haven't previously worked with?
Yes. There are several good client names that we're excited to add into our portfolio. Obviously, I can't disclose any at this stage, but there are definitely some clients that we're excited about. And we already, at this point, have two or three where we're talking to them jointly about future projects. So that's moving forward actually quite rapidly, which is nice.
So if I recall, this is probably the biggest deal I think the company has done. Can you give us a sense of the integration plan? Do you have a team that is going to be heading this? Are you taking some key management from Alliance that are going to be instrumental in the success of this acquisition going forward? And perhaps, can you give us a sense of what EPAM is paying for this?
Yeah. Let me address this. So first of all, the old key management of the company is staying, and also was one of the important components to make sure that critical key people will continue with EPAM. So the management team located in Pennsylvania, practically 40 minutes drive from our headquarters, and practically collocated with one more location of EPAM. So from this point of view, we will be spending a lot of time together. So majority of the management also in the United States. So that's a U.S. company which built up operation in India over time. We clearly have an integration plan. And at this point, it would become one of the divisions in our North American operation. Plus, we will rationalize over time how accounts would be moving between different verticals.
But again, we will have to kind of work together for some time before we'll start doing something like this.
Do you anticipate some of the growth rate to be below where EPAM is now, but over time, with cross-selling initiatives, do you believe you can get it closer to EPAM's growth rate?
Let's go back to what Anthony said. So far, we never were acquiring any company which were growing as fast as EPAM. So that's our kind of goal to realize benefits of combination, to bring it to the growth trajectory which we used to have. And that's exactly what would be happening here as well. So there is very interesting clients on Alliance side. There are some services which we are anticipating to provide from India for our client base. As I mentioned, some of our global clients are actually asking about it. And there are already mutual opportunities which we started to realize. So there are a couple of clients which we're working together already today.
Thank you for taking my question.
Our next question comes from a line of Jason Kupferberg with Jefferies. Please proceed with your question.
Thanks, guys. I jumped on a couple of minutes late. So I apologize if I missed this. But what's the purchase price here for the acquisition?
Jason, the purchase price is $50 million, and it was all cash.
Okay. Okay. Thank you. And how fast has the company been growing? I know you said you're on an annualized run rate this year of about $38 million in revenue. What sort of CAGR have they been experiencing organically?
No. We didn't say that it's annualized $39 million. We said that first nine months were a little bit under $38 million.
Oh, for the first nine months. Okay. Sorry. Okay. And how fast has that been growing year-over-year?
Their growth rate is slower than EPAM's right now. So the value of this is the combined entity and getting both their growth rate and their profitability in line with EPAM, which we expect to be able to do in 2016.
Okay. So I guess, I mean, on a non-GAAP basis, is this accretive in 2016?
Definitely.
Okay. Okay. And just last question.
Should be slightly accretive even in Q4, but just not materially so.
Okay. And then, obviously, the accretion builds in 2016.
Well, once the integration happens in 2016, the expectation is growth and profitability to be in line with EPAM.
Yep. Yep. Okay. And so where does this leave you in terms of M&A pipeline? I mean, do you plan to spend the next year or so just carefully integrating this one and holding off on others, or is there still a pretty full pipeline, and we could see more deals in the next couple of quarters?
Not at all. I mean, we still have a pipeline of other M&A, and we'll continue to evaluate opportunities. So this is not going to stop us. We'll continue to look for other opportunities that would fit into our portfolio.
Okay. Great. Well, congrats on the deal, guys. Thank you.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from a line of Ivan Belyaev with Sberbank. Please proceed with your question.
Yes. Hello, gentlemen. Thanks for the call. I was just wondering, it appears that this new company revenue per employee is way lower than the one for EPAM. But if you manage to bring them to the level of EPAM, which I estimate at $65,000 per engineer, that obviously should be a boost for your margin because the cost of Indian engineers should be lower for AGS. So what do you think? And do you expect that to happen in 2016? Thank you.
Sure. Ivan, we clearly have multiple efforts to list it on our draft of integration plan. At the same time, it's too early to say at this point what would be possible from increasing the rate. So it's longer term. We probably should count on this. We don't know at this point to what extent. Also, the cost of resources in India is not necessarily much cheaper than in Eastern Europe, taking into account this basically, you need to put into account the experience and seniority of the team. So Alliance Global is a relatively small company for India and has a very different structure of the revenue and very different seniority pyramids than traditional large outsourcing companies. So a lot of assumptions probably too early to make right now.
Okay. Thank you. And probably just as a follow-up, it was mentioned that this is definitely your biggest acquisition ever. So do you see some implementation risks, or are you ready to handle it? And probably the thing that over 1,000 people are in India makes it not that difficult.
So definitely, it's always there is implementation risk with any type of acquisition, even if it's 50 people. So it depends on many other factors. But we do believe that we would be definitely capable to handle the size and this type of company which is, in general, much more compatible with EPAM than some other acquisitions which we did before because they're doing similar to us work. They have similar to us engineering culture. They have similar to us portfolio of clients and some type of engagement. So it's not going to be easy like any other acquisition, but we do believe that we would be able to do it successfully.
Okay. For you, thank you very much.
Our next question comes from a line of David Grossman with Stifel. Please proceed with your question.
Thanks. I just have a couple of quick ones. First, is their sales and marketing infrastructure any different than yours in the U.S.? Maybe you could elaborate on how they're structured and how it may be different and how the scale of that effort may be different than yours in the U.S.
They have traditionally pretty mature sales structure. So they have sales organization clearly which is working in the field for a long time. I think it would complement what we do. They have some areas of expertise which would definitely complement what we do. So just interesting to mention that we were talking for a long time about our focus on this project development services and new type of engagements. And some analysts, specifically Forrester, was covering this field. And actually, Alliance Global was included in the list of the kind of the smallest vendors which are focusing on the same segment as we are. So that's why I'm talking about compatibility. And there is definitely some areas where we would be picking up expertise from Alliance.
Okay. So is their sales and marketing effort pretty much aligned along verticals then?
For this type of company, it's rare when there is very strong kind of segmentation on industries, but there is pretty good expertise and sales effort for specific industries. And that's what you mentioned, healthcare and life science and media and publishing. So this presence there, and there is expertise in sales team and account management team, I mean, subject matter expertise.
I see. And then could you help us understand, given the expertise in certain areas, is there any revenue concentration with specific clients, or what is their largest customer representative percentage of revenue?
Sorry. That's me. That's me. Largest customer is roughly around 12%-13% of their revenue.
Okay. And then just one last quick one. Is there any difference in their onsite on-offshore mix relative to your own?
I'm sorry. Say that again, David. I didn't catch the end of that question. Relative to what?
To your own. Is the onsite-offshore labor mix?
It's a little bit higher. Right now, it's around 10%. So Alliance, right now, it's close to 15% onsite.
Okay. Great, guys. Thanks very much.
As a final reminder, if you would like to ask a question, press star one on your telephone keypad. If you were using a speakerphone, you may need to pick up your handset before you press the star keys. Our next question comes from a line of Yulia Gerasimova with Sberbank. Please proceed with your question.
Yes. Good afternoon, everyone. Congratulations from the deal. I have two questions. One is if you could comment on bench utilization of AGS and how that compares to Jointech for you guys. The second question would be on the management of AGS. I guess probably most of them will plan to stay. Will you be offering any options under your program, and what dilution should we expect? Thanks.
Utilization metrics are in line with EPAM, so they tend to run very similar to where we are from a utilization perspective. As far as options go, we're not doing anything special or out of the ordinary for management. They will become part of our management plan and receive options the same as the remainder of management at this stage.
Okay. Thanks.
We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Thank you, everybody, for joining us on the call today. We appreciate your questions, and we're very excited for this acquisition and to take this into 2016. So thank you again for joining the call, and we'll talk to you again in a few months.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.