Greetings, and welcome to the EPAM Systems Q1 2015 Results Conference Call. At this time, all participants are on a listen-only mode. A Q&A 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. It is now my pleasure to introduce your host, Ms. Lilia Chernova, IR coordinator. Thank you, ma'am. 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 Q1 2015 results. If you have not, a copy is available on our website at epam.com. The speakers on today's call are Arkadiy Dobkin, CEO and President, and Anthony Conti, 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, Lilia, and good morning, everyone. Thanks for joining us today. I am pleased to report that while the Q1 showed some continuing challenges, primarily with the currency volatility in several of our markets, it proved to be another strong quarter for EPAM and a solid start to the year. We closed with revenue of $200 million, above consensus and top end of the guidance, and 25% growth over prior year. We were down sequentially about 1%, which is relatively common for Q1 as we deal with holidays in January and short billing months in February, and a sometimes slow start to customer budget allocations. Margins also closed strongly, with 16.7% adjusted operating margin, 30 basis point above last year.
Taking into account that foreign exchange and currency volatility remains a big part of our story in Q1, I would like to state right upfront that our revenue in Q1 2015 faced approximately a 9% headwind when compared to Q1 2014, meaning our constant currency growth was about 34%. At the same time, the impact of adjusted operating margin show that we remain naturally relatively hedged, with the total impact from constant currency being less than $1 million tailwind or less than 3% impact on adjusted income from operation. With that note, I will let Anthony dive deeper into numbers and the currency impact explanation. I will be relatively brief today with my updates on the business, partially because we already described our approach and our differentiation points in regards to EPAM move into digital engagement space.
We talked about that in many details during our calls last year. Partially because Q1 is still just the beginning of the year, and it's too early to evaluate any new trends in our activities in comparison with what we did during our previous call when we talked about 2014 results and our overall plans for 2015. The Q1 for us was a continuation of the growth strategy we began several years back as a part of EPAM 2015 vision. While we continue to face many of the same challenges still today, we are also starting to see dividends on our decisions to focus on the system of engagement space and on many investments we did during the last periods.
As always, we continue to focus on global competencies in core engineering and advanced technology, and on Big Data and analytics and other drivers of digital engagements, and all that while having a very focused approach to regional and local team building. We believe very much that closely aligned hybrid capabilities is a key component in our ability to deliver quality solutions, which driving the system of engagement and allowing our clients to stay competitive. That is why our major continuous effort today are to push harder to the highest level of engagement between the new strategy capabilities, which we are developing organically and non-organically during the last several years. And even more importantly, into very strong alignment with our traditional strengths, high quality software engineering and advanced technology services.
For us, understanding that EPAM is about building hybrid teams of strategists, experienced designers, architects, developers, and business consultants means that we are working very hard to build these teams, not just in general, but very much where they need to be present and to connect with clients better for solving complex problems. So while we are expanding the presence for such teams in our traditional markets in North America and Europe, we are also very focused to improve such capabilities in the APAC region, where we started to operate just during last year and where we already have strong traction. Now we plan to expand in new forward locations, including the most recent one in Guadalajara, Mexico. In addition to that, we are continuing to invest in developing capabilities in our key focused industries.
We believe that EPAM will ultimately be successful precisely because we understand the technology platform exists in the context of specific industry needs. We also know that many of these industries are going through massive disruption and shifts due to technology changes. We are excited to see the examples, how we're increasingly able to help bridging the business with technology in large life sciences and financial services companies. I wanted to say just a few words about our still new capabilities in digital strategy and service design, and how those fit into our broader positioning.
We do believe that combining those offerings with very strong product development mindset, which we develop over the years, should become the true driver for us, and not just in digital engagement, but also in helping to address the full scope of some of these transformational programs by helping clients to find very new solutions to connect digital and physical world together and make total customer experience more natural and transparent, or simply intuitive, if you will. Such type of opportunities we now see on the market more and more, and we're starting to play a role in those very exciting new engagements. We hope to share some interesting stories on this subject in the near future. Finally, as in the past 2014, we continue to educate the market about our progress in all those directions.
Forrester Research included us as a strong performer into B2B Commerce Wave and into Enterprise Mobile Capabilities Wave. We also are seeing increased coverage from analysts, including Gartner and Everest, in our traditional industry sectors, and are starting to be covered in new for us verticals like life science and healthcare. With that, I will turn to Anthony to give more structural information and to provide our guidance for this 2015.
Thank you, Ark. Good morning, everyone. I'll spend a few minutes taking you through the Q1 results, then I'll talk more about our outlook for Q2 and the full year. As usual, you can find the full details of our results in our press release and on the quarterly fact sheet located in the investor section of our website. As Ark mentioned, 2015 opened with another solid quarter of revenue, just over $200 million and 24.7% over last year. Currency headwinds remained, compressing our Q1 revenue by about 9%, meaning in constant currency terms, we would have grown 33.7% over Q1 2014. The final reported results came in above guidance and consensus by about 1%. Sequentially, we were down about 1% from Q4, which is not uncommon for the Q1.
However, in constant currency terms, we would have grown about 1.4%. The key currency mix of our revenue in Q1 has remained pretty consistent with what I shared at year-end. 62% of our revenues remain U.S. dollar-based. The pound is at 13%, euros at 7%, Canadian and Swiss francs are at 6%, and the ruble has dropped to 3%. North America remains our largest segment, representing 52.3% of our Q1 revenues, up 32.3% year-over-year. Europe was up 18.1% year-over-year, representing 39.7% of Q1 revenue. In constant currency terms, Europe would have been up 30% year-over-year.
CIS continues to struggle and is down 26.9% year-over-year and 36.4% sequentially, representing only 4.4% of revenue in Q1. The dynamic of the drop is both currency and volume-related, and in constant currency terms, CIS would have been up 13% year-over-year, but still down 28% sequentially. Our top 20 accounts came in at 57.6% of revenue, growing 24%, while all other clients grew 27% year-over-year. The increased concentration of the top 20 is mainly driven by continued strength in UBS account, which grew 54% year-over-year and 12% sequentially, to represent 15.4% of revenue in Q1.
Turning to our expenses, we completed the quarter with over 12,600 IT professionals, an increase of about 29.8% compared to Q1 of 2014. Approximately 8% of this growth was from acquisitions, bringing the organic headcount growth to about 22%. Currency generated some benefits to the cost of revenue in the quarter when compared to prior year. There was approximately 12% benefit and 3% versus prior quarter. The allocation of our currencies across expense base also remains fairly consistent with the guidance I provided. Roughly 63% of the US dollar, 7% from ruble-based, 8% in Hungarian forint, and 5% in the British pound. The balance are insignificant. Utilization for the quarter was at 77.6%, essentially flat to Q4.
GAAP income from operations increased 4.4% year-over-year to represent 11.4% of revenue in the quarter. GAAP IFO includes stock-based compensation expenses and certain acquisition-related costs that we exclude from our non-GAAP measures. Stock-based compensation expense for the Q1 increased 185% over prior year. 50% of the total Q1 charge and 62% of this increase is related to acquisitions. So if you exclude acquisitions, stock comp is up 92%. However, total outstanding non-acquisition-related equity grants are up only 16%. So the main driver behind the growth in the stock comp expense is the fact that our stock price is up over 90% this year.... Our non-GAAP income from operations for the quarter, after all those adjustments, increased 27% over prior year to $33.4 million, representing 16.7% of revenue.
For the quarter, we generated $0.61 of non-GAAP EPS above the top end of our guidance, and $0.29 of GAAP EPS based on approximately 51 million shares diluted outstanding. The GAAP EPS shortfall is primarily caused by two main issues. First, non-operating foreign currency losses exceeded our estimate by about $4 million, resulting in about $0.08 negative impact on GAAP EPS. Many of our entities hold assets and liabilities and currencies different from the local currency. Each period is remeasured, and the unrealized gain loss goes to our P&L. The strength of the U.S. dollar versus E.U. currencies, mainly the euro, at the end of Q1, created this loss.
The second issue impacting GAAP EPS is driven by a significant increase in our share price in Q1, which caused a larger than expected mark-to-market charge related to stock issued in connection with acquisitions, resulting in approximately $0.02 impact on GAAP EPS. Together, this resulted in a $0.10 negative impact on GAAP EPS. Our balance sheet remained strong. We finished the quarter with approximately $222 million of cash, up $2 million from December 31. During the Q1, operating activities generated approximately $6 million of cash. Unbilled revenues were at $88 million at March 31. Accounts receivable were at $105 million, and DSO ended the quarter at approximately 50 days. Turning to our guidance. Based on current conditions, we reaffirm our guidance for the full year. We expect year-over-year revenue growth to be 21%-23%.
Non-GAAP net income growth for 2015 is expected to be in the range of 20%-22%, and an effective tax rate, approximately 20%. For the Q2 of 2015, EPAM expects revenues between $213 million and $215 million, representing a growth rate of 22%-23% over the Q2 of 2014. Q2 of 2015, non-GAAP diluted EPS is expected to be in a range of $0.62-$0.64, based on an estimated Q2 2015 weighted average share count of 51.2 million shares. GAAP diluted EPS is expected to be in the range of $0.30-$0.32. With that, I would now like to turn the call back over to the operator and open up for Q&A. Operator?
Thank you. At this time, we will be conducting a Q&A session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.
Thank you. Good morning and good quarter. Yes, my first question is trying to figure out, you know, from the time you gave guidance to now, how much incremental FX headwind are you absorbing in your guidance for your full year?
Yeah, versus when we gave guidance, you're asking? I, I didn't hear the first part, I'm sorry.
Yeah, versus when you initially gave the advice.
It was about $2 million of additional headwind beyond what we gave guidance on Q1.
Right. No, no, I meant for the full year.
Oh, for the full year. We haven't changed our expectations on headwinds for the full year. The difference between when we gave guidance and today wasn't material enough to shift. So we're still looking at about 6% headwinds on the full year, but clearly, there's gonna be more headwinds in Q1 and Q2 versus Q3 and Q4, because, you know, 2014, it was that latter half of the year when FX started to ramp. So we expect to see more impacted earlier in the year and less in the back half. But our expectations are still right around that 6% headwind.
Okay. Okay. And I guess the follow-on is really, you know, I mean, you guys are growing at a pretty hectic pace and, you know, in what seems like all the right areas. The headcount growth, if you could address what challenges you face with regards to hiring, training, and the capability to keep ramping that at a healthy pace?
Ashwin, this is like a difficult question because it's, that's a challenges which we see in all the years we're working, and this is like, as you know, there is shortage of talent, and I answered these questions many times. So we really investing in multiple areas inside of the company to support our kind of software engineering skills, because while we think that we're problem with when the most of our competitors at the same time, we don't want to lose this advantage. And I thought we shared this couple of times, how, like, what investments we're doing in training. We have special division of the company which focusing only on this. We dramatically expanded our talent acquisition capability during the last couple of years. I also mentioned that we brought-...
Two years ago, the person from large competitor who experienced already what does mean real scale when you need to hire not just 1,000 people, but tens or tens of thousands of people. So our talent acquisition led by such person, and he put it a lot of efforts to make it scalable. So, university relationships very, very strong. So we expanding in different geographies as well. We opened a couple additional offices in, Central Eastern Europe. As you know, we now operating in APAC and growing there. We also open operation in, Guadalajara in Mexico, at the end of last year.
So, one of the key challenges is actually how to integrate additional skills and advanced consulting skills, which now is a very big, and digital skills, which is a very big, advantage which we having if we can combine them right. And this is different type of people, and it's very difficult to bring them to work as a team. So this is a lot of efforts which we're putting in. So in general, like, it's probably a separate discussion for multiple hours, if you'd like to say it. And also during the Analyst Day, we mentioned our internal systems, which is part of this, too. How to bring people together and how to do assessments right, and we're learning from the best of our clients. And as you know, we have some best names in technology as our clients. So we're learning from this.
I can continue for a long time.
No, no, that's actually, you know, pretty good, good color. I mean, part of the reason to ask, as you know, is that as you grow and each time, you know, 20% growth means more people, growth, 20% growth means more people, compared to-
It's not, and, and you understand it's not just about more people, it's about what type of people and how they're working together, because we're also changing the portfolio of our kind of engagements as well. So it's switching more solution-based or sometimes end-to-end implementations, and this is very different categories of people and how projects implemented. So it's a lot of training, not just from have qualified people, but actually from the processes and this part.
Okay. My, my last quick question was, have you updated that, with the, you know, on-site, headcount percentage metric? Is there a new target? You know, you, you guys used to have a 10%-
Oh, like, we, we don't have a specific target like we had a couple years ago to achieve 10%. What I can tell that it's definitely going to be increasing with the time, and we probably need to assess a little, a little bit situation before we can put a target on ourselves. But, the trend definitely to increase our shore component.
Okay, great. Thank you, and congratulations.
Thank you. Our next question is coming from the line of Jason Kupferberg with Jefferies. Please proceed with your question.
Thanks. Good morning, guys. Congrats on the numbers. Just wanted to talk a little bit more about the, the full year outlook and, make sure we understand kind of the moving parts as we go through the year and, look at the, the year-over-year growth rates by, by quarter. Because obviously here in Q1, you came out ahead of guidance, no matter how you slice it, you know, with currency, without currency, et cetera, you're maintaining the full year, as you said. So that would obviously imply that you're expecting some deceleration in year-over-year growth during the remainder of the year. Is some of that just lapping of acquisitions?
Maybe you can remind us how much inorganic revenue contribution there was in Q1, and how much is embedded in the full year guide of 21-23 in terms of acquisition contribution?
Well, we don't really separate out in our forecast the organic versus inorganic. When we do our planning, you know, we pretty much do the planning as one consolidated entity, and most of these acquisitions have actually been fully integrated at this point, so separating them is actually quite difficult. You know, I can give you a view on actuals in Q1, and, you know, it's a rough separation. But, you know, if you look at from a constant currency basis, our growth organically was around 24%, excluding the contribution from the acquisitions that we received in Q1. And that's, I would say, a very rough percentage because a lot of these accounts have been integrated.
We've grown them post-acquisition, both from the contribution on the EPAM side as well as the acquisition side, so it's very hard to slice them at this point.
Basically, to give you, like, explanation, it is when, like, when we're saying like, this is a number for organic, we assume kind of deducting completely the revenue from accounts which were existed at companies which we brought in. But it doesn't mean that it's really, in some cases, inorganic revenue, because the revenue which increased there probably was delivered by already EPAM people and capabilities which didn't exist in original company. So it's very, really difficult to separate. In some situations, we increase in significantly revenue on EPAM historical accounts because we bring in new capabilities through, from acquired companies, and sometimes it's opposite. So it's really is difficult to calculate.
... Okay, so the implied deceleration the rest of the year, is that more just, hey, let's be conservative since we're only through a quarter? Or is it more a function of, you know, the anniversarying of some of the acquisitions, understanding that it's hard to pull out or quantify those?
Well, you also have to factor in what's happening in the CIS. So I mean, we're seeing, you know, between currency and volume impacts at CIS, we are seeing deceleration there, and we're forecasting, you know, basically pretty significant drops in the CIS business. So that is decelerating due to the currency and due to the macroeconomic issues going on there. North America and Europe continue to grow, you know, in line with expectations. So I think what you're seeing is a blend of the drop we're seeing at CIS, the FX impact that we're anticipating, you know, pulling down the overall growth rates of the company. Not really pulling them down, but, you know, smoothing them out as we go through the year.
Okay. Okay, understood. Maybe just a question more generally about the demand environment. I mean, I know you obviously don't give, like, a bookings metric per se, but just qualitatively, can you talk about what the environment has looked like through the first four months or so of the year, just in terms of your ability to compete for and win brand new business, either at existing clients or adding new logos?
I think, from where we are, it seems like it's pretty healthy environment. And, as I mentioned before, while we're growing, like, 25%-30% during the last several years, even after IPO, we're still relatively small player of this global market. And I don't think in this niche of services which we provide in, we can see any changes during this year. So I think there is pretty strong demand and the whole point, how to provide quality response on this, so.
Okay. And then just, last one for me on, on the supply side. I know you talked about all the investments in, hiring, recruiting, et cetera. Do you have any statistics offhand, for example, in terms of, you know, the percent of job offers that you guys make that are accepted? I'm just trying to get a sense of, you know, your success rate or your hit rate as you obviously try and focus on not only recruiting the right number of people, but the right type of people.
You know, we, we probably have all the statistics, but we never prepared this for this call, and I don't have on top of my head. But what I can tell you that clearly, EPAM become much more attractive company for talented people because from name recognition, there is significant improvement versus several years ago. So I think it's getting better. I know this from multiple, multiple specific cases, but I don't have statistics right now.
Okay, understood. Thank you for the color.
Thank you. Our next question is coming from the line of Moshe Katri with Cowen and Company. Please proceed with your question.
Hey, thanks. Good morning. Good quarter. A couple of follow-ons. One, did you provide a revenue breakdown by verticals for during the call? I missed that.
No, I stopped quoting them. They come out on our fact sheet, which you can get, but I can read through them real quick if you'd like.
Sure. Let's start with financial services.
It was 28.3% of revenue.
And growth?
Growth was... Hang on. I have that on a different sheet. Growth was year-on-year 19.4%.
Okay.
ISV was 22.2% of revenue, and growth of 27.7%.
Yep.
Information and media was 13.1% of revenue and 24.7% growth. Travel and consumer, 21.8% of revenue and 20% growth. Life sciences, which we started breaking out this quarter for the first time, is 7.2% of revenue and, like, almost 200% growth, but it's mainly driven by the acquisition of GGA and NetSoft.
Okay, great. That's helpful.
The other is balance, so.
Yeah. And then, UBS, you said, was up 54% for the quarter. It accounted for 15% of revenues. I think it'll be helpful if you kind of get us some color in terms of, what's going on in this account. What are you doing more there? What sort of traction you're getting? And then, should we expect that mix to continue to move higher, greater than 15%, in the upcoming quarters?
Well, as you may remember, I mean, Jointech, the acquisition we did in APAC, was mostly almost all UBS revenues when we acquired them. So the jump year-over-year is driven, you know, in big part by that. Plus, if you look at the UBS growth last year, 2014, it grew almost 100% year-over-year from 2013 to 2014. So it's really just the continuation of that growth in Q1 and the impact of that growth on the Q1 numbers.
We won, like, pretty large digital program at the beginning of last year, and this program is still growing. It's difficult to predict the speed of this account, because we're bidding potentially for some specific projects, and it's not like just incremental increase in headcount in some other areas, so we will see.
Understood. How large was Barclays during the quarter?
Barclays was about 5.7% of our revenue in the quarter.
Okay. Okay. And then, Arkadiy, you spoke about increased traction in APAC. Could you talk about that in terms of what we've seen so far, year to date out of Asia? And I'm assuming it's coming via the acquisition that you you made last year.
As Anthony mentioned, the acquisition, mostly, not mostly, almost like 100%, was focused on the UBS account. And, for us, it was a move necessary to get involved in the global digital program, which was started from APAC. So we, we need the resources there, and we need, like, very good, strong engineering capabilities there. So what's happening now is that now having kind of a hub there, we're starting to bring new clients in the region. Most of these international companies, plus we have multiple opportunities for existing client base, which operate globally. And we hope that we will kind of replicate this UBS situation where while working in North America or Western Europe, we will be serving needs of these clients in the region, and we see that there is traction there.
Okay. Did you staff the 700 or so seats that you have in China?
Excuse me, what?
With the acquisition, I remember you had about 700 seats of delivery out of China. Have you staffed these, or are you considering staffing them?
You mean from the space point of view, from what-
Yes.
Yeah. No, it's not completely staffed, no.
Okay. Final question, what was the attrition-
We have, we have headcount. I think we still have, in China specifically, we have, like, around 300 people between China.
Okay. The attrition for the quarter? That's the last question.
Attrition for the quarter was right around 7%.
Remind us, how does that compare for last quarter?
It's low. It's low. We've typically been around 10, 11%, so this quarter came in quite low, around 7%.
Wow. Impressive. Okay, guys. Thank you.
Thank you. Our next question is coming from the line of Steve Milunovich with UBS. Please proceed with your question.
Thank you. Good morning. This is Peter in for Steve. Thanks for taking my question. In regards to the headcount, I mean, this was the largest sequential gain you've had, excluding acquisitions. Can you give us a sense of where the employee growth was, and was it more juniors versus lateral hires? And are you also seeing any wage pressure in constant terms?
You're talking about headcount increase, right?
Correct.
Yeah, go ahead.
Well, I was gonna say, yeah, it was about a 7% sequential growth. There's nothing, you know, special or unique about that. We've continued to hire, you know, in line with our needs and, you know, to staff, you know, the projects that we have. Utilization has remained relatively constant. You know, it's part of what has grown, you know, supported the overperformance in the quarter is, you know, that the additional headcount to service the revenue streams that we have. Ark, I don't know if you have anything more.
Well, if you look at our account of the flow, it's always a little bit bulky. For example, end of last year was very high utilization over 80%, I think.
Yeah, in the quarter.
So in the quarter, we were doing hiring, and now probably we will start to utilize these people during the next couple of quarters. And when we bring in also juniors, we... And we have % of juniors relatively high in Belarus and now Ukraine. We're spending, like, two, three, sometimes six months on internal training as well. So that's kind of normal. And then you will see that it's utilization will be a little bit high as well.
Mm-hmm. And were there any wage inflation and changes in wage pressures?
That's a complex question, taking into account all this currency volatility. So because, like, how to look at this, but, I'll give.
Yeah, I mean, you know, overall blended wage increases that we saw last year were about 4-5% in a local currency base, but FX helped us tremendously on this front, and the overall wage inflation that we felt in U.S. dollar terms was close to zero. So it almost, the FX benefits almost completely negated the wage inflation that we felt, which is what you see, you know, you see that in our gross margin pickup. You know, we, we picked up over a percentage in our gross margin. A lot of that is driven by the FX benefits that we've received because of the neutralization of the wage inflation.
That's helpful. And then, relative to last year, do you think M&A will pick up in the next couple of quarters?
... Peter, we will see if it will. So
Okay. And then finally, a number of larger vendors, including, you know, Accenture, Capgemini, even, even Cognizant, have had strong quarters, particularly on quoting growth in digital, particularly in North America. When you're competing for new deals, are you seeing more competition coming to the table? And have you seen any change in your win rates for new business?
So again, just based on our feeling on this, I think competition is increasing, but in my opinion, the market and demand increasing, if not with the same, probably faster than capabilities of delivering this. So this is very interesting market, and I think there are a lot of space there. A lot of people trying to build up capabilities quickly, and it's not so simple. Especially that it's not just kind of creative or digital parts, which is a lot of people putting together many small agencies and trying to compete, but actually how to deliver this complex stuff and integrate in existing system. I think it's on the surface, competition is growing, but quality delivery still is very much in demand.
Great. Thanks for the commentary.
Thank you. Our next question is coming from the line of Mayank Tandon with Needham & Company. Please proceed with your question.
Thank you. Good morning. Ark, you mentioned earlier about the challenges in terms of hiring people. I'm just wondering, are you exploring other delivery locations, whether it's Asia or Latin America or even India, to diversify your delivery over time, and maybe that can help mitigate some of the challenges that you face in terms of hiring?
Number one, I don't remember when we didn't have challenges. Probably when we were very small and nobody wanted to work in Belarus and Ukraine, then you can hire as many people as you want. But then after this, it's unfortunately changed. But we opened a couple new locations in Central Europe, like we now operate in Bulgaria. We growing in Poland, we're still growing in Hungary. We're growing in our traditional locations in Belarus, Ukraine, and in Russia as well, because now we have, after acquisition of GGA, we have interesting hub in Russia for Western clients, too. But we also, as you know, open in China, and we hiring in China. While, again, our development centers, they are more like a front office for APAC region, not just a delivery location for global market.
We also open, as I mentioned, in Guadalajara, Mexico, just recently. It's very much just a greenfield operation, so a couple of people there, but we have already some clients starting with us to operate there. So we have some other plans, but it's too early to share. So I mean, it's nothing unusual this quarter or last quarter. It's part of our day-to-day, kind of, or year, year-by-year challenges.
Great. Okay, that's very helpful. And then I know, in the past, you've also talked about, most of your business historically was won through referrals, but over the last 18 months or so, you've been investing in, the sales force. And I just wanted to get a sense of how that's progressing in terms of impacting new logo wins and also, expanding your relationships with existing customers.
I would say that I don't see any bad from having referrals, and I think that's probably the very good source of business, which talking about reputation and quality of the delivery. And I think it's still relatively big portion of our business, and I hope that it's continue to be a relatively big portion of our business, which is not so uncommon, actually, for services operations, when we need, like, to have hundreds clients, not thousand clients or million clients, so. At the same time, we definitely improved during the last several quarters, our marketing and sales operation, so, which is also bringing new opportunities.
Like, we talked about our kind of rebrand recognition from industry analysts, and becoming some strong performers or leaders in multiple categories, which is helping us to get new opportunities and equip our sales sales teams. We also have new head of North American sales. We brought—we hiring salespeople, we changing salespeople, as usual, so this is normal process. Just to give you kind of very simple metric, which probably illustrate what's come—Like, do we, we just calculated just during the last 6 months, we have at least 20 accounts which already on $1 million-plus run rate, and some of them $3 million or $5 million. And probably five or six of these accounts could be $10 million accounts, for example. And this is-...
kind of brand new logos, which we brought during the Q1 and Q4.
Great. That's great color. And then, just two final questions for me, for Anthony. Anthony, I don't know if you mentioned this earlier, but what was the pricing uptick in the quarter, and what are you building in for, fiscal 2015 guidance? And then finally, also utilization, what was the number in the quarter, and then what is the trend for the rest of the year?
Sure. Pricing, we're sticking with kind of that 6%-8% range, and that's what we're seeing. A lot of that is unfortunately being neutralized by FX as well. Same with our wage inflation, but that's the base that we're building in. Utilization for the quarter came in at 77.6, and our forecast is pretty much holding that steady throughout the year. So it'll be kind of 76%-77% throughout the year. You know, we'll see a little bit of a nor- we forecast a normal dip in Q3, which is a typical vacation cycle, and then it picks up in Q4. So I'm talking on average for the whole year.
Okay, thank you. Good job on the quarter.
Thank you.
Thank you. The next question is coming from the line of David Grossman with Stifel. Please proceed with your question.
Thank you. I just have two very quick follow-ups. First, I think you had mentioned that, you know, the Q1 is typically a flattish sequential quarter, which was obviously different than the way you guided it three months ago. Just curious whether the guide three months ago, did that reflect exogenous factors like, you know, currency, you know, unrest in the Ukraine or whatever it may have been? Or did, in fact, going into the quarter, did you generally believe that there were fundamental reasons to think that you would be down sequentially more than you have been historically?
I think that, you know, when we did the forecasting, you know, we always anticipate a much slower Q1 ramp. You know, we did see some things happening a little bit earlier this year, similar to last year, which benefited the quarter. I mean, the overperform was only $2 million, so it wasn't a significant spike. Everything else was pretty much in line with where we expected it. There's nothing, you know, unusual in the quarter. We just had, you know, $2 million of overperform from some of our customers, you know, ramping things a little bit faster.
Okay. And then just secondly, you know, getting back to your largest customer, which is outpacing the growth of the rest of the business and now at 15% of revenue, can you just help us understand how you're thinking about the growth in that account, primarily as it relates to the risk, you know, overall risk of the business, in the future, in terms of, you know, how it could impact growth if, in fact, that account does decelerate over time?
David, I think we, yeah. So the growth partially due acquisition, we, as in, as we mentioned, right? So we're also growing in this account in very different areas, and we open a couple new kind of areas, specifically on this large digital program. So I don't, I don't see this as a danger at 15 or even, let's say, 20%, which I don't think we're going to, to get. Okay. So, taking into account, like, health of, top five or top 10 or top 20 accounts, which we have, I think we're still pretty, pretty well balanced.
Can you help us understand how many components are that exist within that account, whether it be geographically or within divisions of that account?
Sure. Like, this is very diverse account. We working in now in three continents. We work in Europe, we work in North America, we work in APAC. And in each of this is a significant business. Then we're working across different business lines. Then we're working from delivery point of view. Again, this is like Hungary, Poland, Ukraine, Switzerland, UK, China, Hong Kong, and Singapore. So this is like very kind of spread spread activities across all this.
Okay. And then just third, Anthony, I'm wondering, can you give us what we should model for the non-GAAP adjustments for the year, you know, for stock-based comp and you know, the intangibles, amortization, et cetera?
Sure, I can do that. Stock comp is going to come in in Q2, right around $11.8 million, and then it'll kind of drop to $11.3 million and $11.4 million in Q3 and Q4. You'll end up the year around $43.7 million. As far as amortization of intangibles, it's gonna be about $1.4 million per quarter going forward.
Great. All right, guys. Thank you.
Thank you. Our next question is coming from the line of Darrin Peller with Barclays. Please proceed with your question.
Thanks, guys. Listen, I just want to follow up first on the strong growth at UBS. I mean, obviously, it's continuing to pace well, even organically. And I guess one question is just if the client itself, if UBS itself, has any parameters as to whether or not how much it's willing to work with any given vendor. I know it also works with one of your large competitors.
... so where, where can that go without them getting worried about risk management on their end? And then I guess just to follow up on that, is the growth rate of the top 10. I think we're calculating around a mid-teen, maybe 16-17% growth rate of the top 10 clients, excluding UBS. Although I think currency is probably playing a big part in that, given I imagine at least one of them is out of the Russia region. So can you just give us some color on the organic constant currency growth of the other nine of your top 10?
You want to talk to the UBS question first?
I think in UBS question, I don't know what to add already to we kind of talked about it, when David asked the question and, previously as well. So, I think Anthony is trying to-
Well, what I'm trying to figure out is if they're gonna continue to be comfortable working with any one given vendor when-
Okay. They have, I believe, the clients have some internal policy, how much business they can do with-
Exactly.
So we far from this gate yet.
Good.
So we have space to grow, and I don't think it's we're going to reach with our client kind of spread. I don't think we're going to reach this limit.
All right. That's helpful. And then just on the other side of it, just trying to figure out the organic, sort of constant currency growth, Anthony, of the other top 10 clients, like nine out of the top 10, because I know UBS is a big driver still.
Yeah. UBS is definitely a large driver, and, and looking at the other top accounts, it's about a... Most of them are primarily USD based, with a little bit of a mix of Canadian in there. So I think from a constant currency perspective, let's see, Barclays will have a mix. Yeah. It, it's not gonna be dramatically different. I don't have that number on, on my fingertips, Darrin.
Oh, okay. All right. We can follow up with it.
Yeah. So I'd say there's gonna be some Euro and some Canadian impact.
So is it-
Yeah, on top 10, like, the biggest impact coming from one Canadian client.
Right.
Which is big, and Canadian, like, dollars dropped almost 25%.
Right. And then-
It is a big deal.
Barclays, which is going to be a mixed account. They have a heavy U.S. dollar component, so.
Yeah.
Okay. I just had one follow-up. I mean, you guys had some, it was some pretty good media around, I think, the contract with the SEC. It just seems like another sort of area of growth potential for you guys. Can you just comment on that for a moment and how that's been, what the opportunity is there?
On this project with the Securities and Exchange Commission, as I mentioned multiple times during the calls, we were proud of being selected in the short list, but we not really thinking that we can win this deal realistically, taking the size of the deal and kind of some government requirements.
Oh, okay.
But we might have opportunity, like one of our goals were to get there, to make sure that we will be able to work in this area when implementation of these regulations would be forced, and it would be a lot of work, and we already kind of attached our name on this specific subject matter.
Okay. It must have been earlier in the call.
So, but we like, we for example, in financial services, we started to work with two large banks, and both of them will be growing, in our opinion, pretty significantly. So this is like another, like, we started to work with a couple large retailers on commerce opportunities. So it's, as I mentioned, like, just, just in last six months, we have 20 new names-
Yeah.
- with $1 million+ run rate already.
A number of those, I think you also mentioned a number of those were new logos, right?
That's what I was mentioning.
Yeah, that's great.
Typically, new logos.
That's great. All right, great. Thanks, guys.
Thank you. Our next question is coming from the line of Jamie Friedman with Susquehanna. Please proceed with your question.
I, most of my questions have been answered, but Arkadiy, you were mentioning in your opening remarks that, budgets, which sometimes can be tentative in a Q1, are, proceeding, at a, I think you said more predictably. I was just wondering if you could articulate in which areas, budgets may have a better cadence, like, you know, specifically either by industry or by, service line.
I don't think I can give any specific details on this. Because it's probably true across most of the accounts and industries as well. I don't have any specific kind of splits.
In terms of your, say, digital practice, is that the same buyer as what you have sold in the past? In other words, are you selling more into the Chief Marketing Officer as opposed to Chief Technology Officer or the Chief Financial Officer?
This is, again, everybody's talking about it, so I don't think I'll give you any different number. It's definitely the shift from a traditional IT to more business. We working with business leaders in specific areas, and we working with horizontal kind of digital leaders at our client site. This is definitely increasing very rapidly. And we sell into this business and digital people on client side. Probably still not more than to IT people, but definitely increase in proportion.
Okay. I think at your Analyst Day, you had a number of examples of that. As my last question on that is, I think you had said at the Analyst Day that, well, you had a couple of significant referenceable accounts. This was on March sixth. Yeah, so, you know, if you could talk to the growth of some of those accounts that presented at the Analyst Day, and, you know, if there have been any further update, you know, Canadian Tire and Google in particular.
So all those accounts, like Canadian Tire's CTO was present there. I think he said it the best. I don't think I can do any better than he did, and this is still growing account for us. Clearly, it's a little bit more difficult, taking into account that Canadian dollar dropped so significantly. So but we have a number of growing accounts. I'm not going to mention specific, but we have all our top 10 growing, and we have number below this growing fast. And digital growing faster than anything else for us, too.
Okay, thank you.
Thank you. Our next question is coming from the line of Arvind Ramnani with Global Hunter Securities. Please proceed with your question.
Hi, thanks for taking my question. You know, I know you already kind of touched upon this, but just wanted to see if I could dig a little bit deeper. So, you know, by math, your, the math I've done, the four acquisitions in 2014, you know, contributed about $40 million to EPAM revenues on a partial year basis. So, you know, on a full year revenue basis, you know, aggregate revenue from these four acquisitions may have been, like, $60 million-$70 million. You know, and sort of assuming that they'll continue to grow in 2015, you know, they may contribute, you know, I don't know, $70 million-$80 million.
So based on this, it looks like your guidance may be conservative, given some of the acquisition-related revenue that'll kick in. So is it mostly like FX and CIS business at play, for kind of guiding to kind of a 21%-23% guidance?
Well, I mean, you know, 23% considers about a 6% headwind from currency. So in constant currency terms, we're projecting kind of 29% growth, which I don't think is conservative at all. I think that you have to also factor in, you know, what I had said earlier about the CIS region, where that is dropping. You know, we're anticipating that dropping roughly 40% year-on-year through both currency impacts and, you know, just sheer volume impacts because of the economic situation in the CIS region. So, you know, I would counter and say, I don't think that 21%-23% is conservative, taking into account the 6% currency headwinds that we are factoring into that number and the, you know, the issues that we're facing within the CIS region.
Great. Great. Yeah, that's helpful. And just kind of one question on sort of the, you know, competitive environment. You know, I mean, how much of your business is, you know, kind of, you're going head to head with the US firms versus the Indian firms, versus sort of the in-house, kind of, IT spend, essentially, kind of, greenfield opportunities? You know, and have you all been in situations where you all are kind of competing with these firms, one-on-one? Has the dynamic changed over the last couple of years? If you can maybe provide some examples, that'd be great.
Definitely, we've seen all around all this, line of competitors. We compete with smaller U.S.-based or European-based consultative type of firms, focusing specifically on e-commerce or digital or content, complex content management engagements. So we compete with these guys. We compete with, Accenture and IBM on specific engagements and with special divisions of them, and we definitely compete with, many companies with, back ends in India. So this is, like, all over the place. And it's a luxury to compete one-on-one. Usually, you compete against four or five of them simultaneously. So, and, I don't know, like, what exactly to answer here. Yes, we like, clearly, we win in with... In many cases, we've taken share from existing business from, this competition. In some cases, we get into very-...
Kind of greenfield initial deals and winning those. But right now, the competition all over the place.
Great. Thank you very much, and best of luck for 2015.
Thank you.
Thank you.
Thank you. Our next question is coming from the line of Alex Veytsman with Monness Crespi. Please proceed with your question.
Yes, just wanted to dig further on some of the verticals, specifically on, on the ISV technology. It looks like that the growth rate has accelerated this quarter to about 28% on low 20 throughout 2014. Just wanted to ask you for some, what were some of the drivers behind that growth, and also how should we be thinking about it throughout the year for the next three quarters?
So specifically, what behind of ISV growth?
Right. I mean, the drivers, kind of, what led to the top line growth acceleration in that vertical, and is that kind of a growth rate sustainable for the next three quarters?
So, I think, again, this is not growing faster than we're growing in general, so I don't, I don't see any unusual stuff here. And this is a very kind of traditional, historically very strong offering at EPAM. And even like three years ago, when right after IPO, when we described our strategy, we mentioned that we would like to keep our IC businesses around 20-25%, if possible, because we would like to be involved in all new technology trends and kind of feel hands-on what's happening in this, because that's giving us advantage to offer new ideas and strong hands-on experience with these new technologies to our corporate clients. So we have special group focusing on this, and this is practically business as usual for us.
So I don't see any special here, but we still would like to keep significant portion of our business in independent software vendors and technology segment.
Got it. And then for the life science and healthcare, I mean, this is, I mean, like, obviously a new segment here. How should we be thinking about the growth rates for the remainder of the year? I mean, obviously, it's ramping up, so the growth, I mean, like, we would expect the growth would be faster than other verticals.
So you know that we're not, kind of giving guidance on specific segments. So, at the same time, clearly, we're considering this as an interesting perspective for us. We're still learning, so we had... It's not like all new, new business for us because we were playing in this field a little bit. It was kind of part of our other revenue. Now we're consolidating this, in life science and healthcare. So we're clearly hoping that this would grow faster than the rest of the business, at least initially. So, and we see very interesting opportunities in the field, taking into account that we brought probably with these acquisitions, at least half a dozen Fortune 500 companies on our client list. And they could be double and triple or more during the next couple of years.
But I don't think we can give you any specific quantitative predictions right now.
Thank you.
Thank you. It appears we have no additional questions at this time. I would like to turn the floor back over to Mr. Dobkin for any additional concluding comments.
Okay. As usual, thank you very much for listening to us and asking questions, and hope we will have a good conversation in three months from now again.