Earnings Call: Q1 2018

May 9, 2018

Greetings, and welcome to the EPAM Systems First Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Straube, Head of Investor Relations for EPAM Systems. Thank you. You may begin. Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release the company's Q1 2018 results. If you have not, a copy is available at epam.com in the Investors section. With me on today's call are Coddy Dobkin, CEO and President and Jason Peterson, Chief Financial Officer. Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non GAAP measures have been reconciled to GAAP and are available in our Q1 earnings material located in the Investor section of our website. With that said, let me now turn the call over to Ark. Thank you, David, and good morning, everyone. Thanks for joining us. Let me begin with few financial highlights. We delivered a strong Q4 with revenue of US424 $1,000,000 reflecting 31% year over year growth or 26% in constant currency terms. Our revenue growth was broad based both geographically and across all of our industry verticals. In addition, we delivered strong non GAAP earnings per share of $0.93 which represents 29% growth from Q1 of 2017. Our strong start to 2018 is in part the result of the continuing execution of our strategy across the 3 major pillars of our business: our capabilities and offerings, our people and our key markets and customers. Looking at our capabilities in Nordics, we remain focused on extending our leadership position in digital transformation programs and connected digital platform services, helping our clients develop and integrate a full range of offerings to optimize their processes and deliver positive returns on their technology investments. We are putting a lot of our attention today into developing capabilities in the area of intelligent automation, RPA and AI and machine learning, which is becoming very important for us as a cross functional effort among our engineering, general consulting and specific industry focused teams. We also see growing opportunities in the RVT space where closely connected networks and devices are challenging businesses to create full cycle intelligent enterprises covering end to end business needs of certain customers where data driven decision making creates a completely different level of efficiencies and triggers opportunities to bring new revenue generating ideas and corresponding business models to life much faster than it was possible before. It is very clear that the use of digital in the industrial manufacturing sectors is only just starting and will require to fully realize a very unique mix of creative capabilities and strong engineering disciplines. We do believe that focusing more and more on IT technologies together with advanced automation and DevOps, we are going to be well positioned to help our clients in such sectors to bring to life new solutions and to navigate successfully the challenges ahead and in turn to allow us to grow further too. In response, we are continuously expanding our capabilities both organically as well as through acquisitions. Our most recent example specifically related to the need in strong crossover capabilities between physical and digital worlds. In March, we announced the acquisition of Continuum Innovation, a design firm headquartered in Boston with studios in Milan, Seoul and Shanghai. This acquisition is important to us because while it strengthens our general consulting capabilities and enhances our existing digital and service design practices, it also brings to EPAM a human centered approach to physical design and physical product development. In addition, with this acquisition, we would be able to expand our R and D efforts, which we started by introducing of the palm garages. Now this continue made real lab approach, which enable multifunctional teams to collaborate much more seamlessly across the product development life cycles, we enable sophisticated physical digital prototyping, we would be able to test complex product ideas and experiences practically in real time with instant customer feedback. Lastly, to bring it all together, we are very much focusing on developing our consulting services across business experience and technology disciplines into our mainstream integrated offerings to increase the overall value of the solutions we deliver for clients. Moving to our people engagement, productivity and time development. We ended the quarter with over 23,700 delivery professionals, a 21% increase year over year and net addition of more than 700 production professionals during Q1. Our total headcount ended at more than 26,700 employees. Simply put, focus on our people and their development remains critical to our success. In Q1, we continued our investment in learning and development programs across all key locations. At the same time, we are putting a lot of efforts in rethinking many of such programs, taking into account new advances in educational methods and the growing needs for skills and capabilities necessary for the engagement, we are going to be involved with our clients in very near future. Sizable continued investments also directed to our constantly advanced talent development and employee engagement ecosystems as well as into engineering productivity platforms and tools, some of which we are bringing to open source market. Turning to a few client highlights and market update. All of our clients in every industry recognize that landscape they are competing has fundamentally shifted and the focus on customer experience and engagement from one side and analytics and highest possible level of automation from another are even more critical for success. EPAM has been working with our Lingus Digital and Mobile Group in the areas of web and mobile development, backend services, DevOps and Enterprise Service Business Integration, resulting in significant growth of its digital commerce revenue. Recently, we extended our 5 year relationship with Aer Lingus to develop new ways to enhance Aer Lingus guest experience and automated services and operations. This multiyear relationship highlights our expertise in building specific solution to increase customer satisfaction, including leveraging advanced data and analytics to provide more personalized insight and online and offline touches that connect the physical and digital customer experience. Another example of delivering differentiated solution is our work with AS Watson, the world's largest health and beauty retail group with over 14,000 stores in 24 markets serving over 28,000,000 customers per week. Our teams develop and support ASWatts and e commerce platform, provide necessary changes to the ERP and storage system to be in sync with engagement initiatives and in addition bring big data, data analytics, cloud management and business process automation capabilities to glue all that together. In result, in close collaboration with AS Watson, we collectively develop and support a full range of digital transformation Taking a look at our vertical performance in the Q1. Taking a look at our vertical performance in the Q4. Financial Services, our largest vertical, finished the quarter with 38% growth year over year, driven by clients responding to regulatory changes, digitalization and transformation in addition to demand for YUPAM Wealth Management Platform. Travel and consumer grew 28% for the quarter. Customer experience in e commerce efficiency areas, major focus for clients in the vertical, with demand focus on personalization to help drive better customer engagement and loyalty. Software and high-tech grew approximately 20% year over year for the quarter with growth coming from continued demand for strong software engineering skills and advanced technology practices necessary to accelerate product delivery to the market. We also partnered with our clients this sector to push the boundaries of digital innovation through advanced technologies such as artificial intelligence, machine learning and augmented reality. Business Information and Media, formerly we called it Media Entertainment, posted 32% growth year over year, driven by engagement focused on productizing voice and video platform in the telecom and cable industries as well as the technologies to help clients manage the creation and distribution of content. Life Science and Healthcare grew 19% over the same quarter last year, driven by the healthcare industry focus on delivering patient centric care through interactive apps and hospitals of the future initiatives. In addition, we are helping our life science clients streamline their end to end processes to maintain compliance while driving smart engagement initiative with physicians and consumers. And lastly, our emerging verticals continue their strong trajectory delivering 54% growth driven primarily by Industrial Engineering, Energy and Automotive. And finally, by looking at customer concentration across our client base, we'd like to share that our top 20 accounts grew more than 22% and growth outside the top 20 accounts was more than 38% compared to the same quarter last year. With that, let me turn it over to Jason for detailed financial update. Thank you, Ark, and good morning, everyone. I'll start with some financial highlights, then talk about profitability, cash flow and end on guidance for fiscal 2018 and Q2. In the Q1, we delivered very strong top line performance, exceeded our profitability expectations and grew earnings per share. Here are a few key highlights from the quarter. Revenue closed to $424,100,000 reflecting a 30.6% year over year growth rate or 26% growth in constant currency terms. Sequentially, our Q1 growth rate was 6.2%. From a geographic perspective, North America, our largest region representing 56.5 percent of our Q1 revenues grew 26.5% year over year. Europe representing 36.1 percent of our Q1 revenues, grew 33.9% year over year or 23.4 percent in constant currency. CIS, representing 5.1 percent of our Q1 revenues, grew 49.8% year over year or 46.8% in constant currency. And finally, APAC grew 51.9% or 46.3% in constant currency and now represents 2.3% of our revenues. Moving down the income statement. Our GAAP gross margin for the quarter was 34.5% compared to 36% in Q1 of last year. Non GAAP gross margin for the quarter was 36.5% compared to 37.7% for the same quarter last year. The year over year decline in gross margin reflects the impact of foreign exchange and a higher level of accrued variable compensation based on the strong start to the year. GAAP SG and A was 20.7 percent of revenue compared to 24.2% in Q1 of last year and non GAAP SG and A came in at 18.6 percent of revenue compared to 20.8% in the same period last year. We are pleased with the efficiency we have achieved in our SG and A spend and we'll continue to manage SG and A closely in both dollar terms and as a percentage of revenues. For the remainder of the year, we expect to manage SG and A at a slightly higher level measured as a percentage of revenues. Our current level of SG and A reflects our continued investment in talent acquisition, the extension of our global footprint and expansion of capabilities with a focus on supporting long term sustainable growth. GAAP income from operations was $48,700,000 or 11.5 percent of revenue in dollars or 11.5 percent of revenue in the quarter compared to $31,000,000 or 9.5 percent of revenue in Q1 last year. Non GAAP income from operations was $67,700,000 or 16% of revenue in the quarter compared to $49,300,000 or 15.2 percent of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at negative 34.5%, which reflects the impact of a $22,500,000 one time net benefit related to tax planning and the recently passed U. S. Tax reform legislation. Our non GAAP effective tax rate, which excludes the one time benefit and other adjustments, was 22%. Diluted earnings per share on a GAAP basis was $1.15 which includes the lower tax rate, partially offset by higher stock compensation expense in the quarter. Excluding the one time tax benefit previously mentioned, GAAP EPS was $0.75 Non GAAP EPS was $0.93 reflecting a 29.2% increase over the same quarter in fiscal 2017. In Q1, there were approximately 56,200,000 diluted shares outstanding. Utilization was 77.6% compared to 77.5% in the same quarter last year and 78.8% in Q4. Turning to our cash flow and balance sheet. Cash from operations for Q1 was $7,300,000 compared to $31,200,000 in the same quarter last year. Free cash flow was negative $3,400,000 compared to a positive $23,400,000 in the same quarter last year. Our cash flow from operations in Q1 reflects the payout of a higher level of variable compensation related to 2017 performance addition to an uptick in DSO. Total organic DSO was 83 days compared to 81 days at the end of Q4 fiscal 2017 and 77 days in the same quarter last year. We continue to focus on managing our total DSO performance in the low 80s. Turning now to guidance. Starting with fiscal 2018, revenue growth for fiscal 2018 will now be at least 27 percent reported or at least 25% in constant currency after factoring in 2% estimated currency tailwinds. As a reminder, our full year revenue outlook reflects approximately a 2% contribution from inorganic revenues. We expect GAAP income from operations to continue to be in the range of 12% to 13% and non GAAP income from operations to continue to be in the range of 16% to 17%. We expect our GAAP effective tax rate to now be approximately 4%, which reflects our tax planning efforts in response to the U. S. Tax reform legislation. We expect our non GAAP tax rate to continue to be approximately 22%. For earnings per share, we now expect GAAP diluted EPS will be at least $3.77 for the full year and non GAAP EPS will now be at least $4.11 for the full year. We now expect weighted average share count of 56 point 9,000,000 fully diluted shares outstanding. For Q2 of FY 2018, revenues will be at least $445,000,000 for the 2nd quarter, reflecting a growth rate of approximately 28% reported or approximately 26% in constant currency after factoring in approximately 2% estimated currency tailwinds. Tailwinds. For the Q2, we expect GAAP income from operations to be in the range of 11.5% to be in the range of 15.5 percent to 16.5 percent. We expect our GAAP effective tax rate to be approximately 10% and non GAAP effective tax rate to be approximately 22%. For earnings per share, we expect GAAP diluted EPS will be at least $0.82 for the quarter and non GAAP EPS will be at least $0.98 for the quarter. We expect a weighted average share count of 56,900,000 fully diluted shares outstanding. And finally, a few key assumptions which support our GAAP to non GAAP measurements. Stock compensation expense is now expected to be approximately $14,200,000 in Q2, dollars 14,600,000 in Q3 and $15,000,000 in Q4. Amortization of intangibles is now expected to be approximately $2,200,000 in each remaining quarter for the fiscal year. The impact of foreign exchange is expected to be approximately $1,500,000 in each remaining quarter. Tax effect of non GAAP adjustments is now expected to be around $4,000,000 in each remaining quarter. Lastly, we expect excess tax benefits to now be around $6,100,000 in Q2 $3,300,000 in each remaining quarter. In summary, we are pleased with the Q1 results, which reflect strong broad based growth across our verticals and geographies, a result of the diverse mix of projects and work we are delivering for our clients, Our unique positioning in the market, combined with our solid fundamentals, positions us well for continued growth in fiscal 2018. With that, let's open the call for questions. Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Ashwin Shirva with Citigroup. Please proceed with your question. Thank you. Hi, Jason. So good quarter there. The raised guidance, just to clarify, that primarily reflects outperformance in 1Q. And then as we look at sort of the cadence of revenue growth through the rest of the year, It was good to see in 1Q that headcount growth reaccelerated. Should we make that continuing assumption so that the gap between headcount growth and revenue growth sort of narrows as we proceed through the year? And so, our expectation would be that utilization will actually increase somewhat in Q2 and probably throughout the remainder of the year, certainly in the second half. And so utilization, we've guided to the fact that we expected the utilization would come down from Q4 to Q1 of 2018 with the idea that we wanted to make certain that we had sufficient resources to be able to support our growth in the year. But throughout the remainder of the year, you should expect that utilization will increase somewhat. Okay. Is there a utilization target, although that's not my follow-up question, if you could just address that to complete the first one. Let me ask the second one already, which is the Ashwin, this is Arkadik. So, you're breaking out connection kind of not too good. But as I understand, you're asking if increase in revenue in Q1 is a one time situation or it would be propagated over the year. And at this point, we see in the year number as we've seen and that's what we're guiding to. So and increasing in number of people, it's a reflection of our high utilization numbers at the end of the last year and we are planning to improve utilization slightly during the year as well. That's what Jason was referring to. Yes. Got that. You mentioned a couple of times progress on SG and A hires, which really is sort of the front end consulting type of people, I'm assuming. Can you comment on the progress, what kind of people you're looking for, any particular end markets, how that effort is going? So, that's a different combination of people clearly. And we always were saying that one of the opportunities for us to improve is create better in market connection with our clients. So, we're looking for consultants, which is partially not billable account managers, number of account managers and vertical experts with very different utilization targets at our general population of engineering. So, that's why it created pressure on the G and A as well. Okay, got it. Thank you. Thank you. Our next question comes from the line of Ramsey El Assal with Jefferies. Please proceed with your question. Hi, guys. I wanted to ask you about the general talent market. We've had some of your competitors kind of talk about an intensifying competition for talent. Are you seeing any sort of more sudden intensification out there versus what's just been going on kind of course of business recently? And I also wanted to just ask what are your what is your sort of toolkit in terms of retention? Obviously, you can throw money at employees, but what else can you do to sort of make sure that they stick around? I think it's pretty consistent questions of our public life. And I think situation with talent competition always was very difficult. And I think we're talking about it practically each quarter. And it's not related to Eastern Europe or India. Again, as I usually pointed out, it's all over the United States and Western Europe as well. So, this is constant pressure. So, and we're living in this situation for most of our years of existence. At the same time, we're paying a lot of attention to retention issues like we mentioned today that we've continued the investing in internal system to understand motivations of our people And we're creating different rotation programs, different competencies, but different confidences like the type of projects which people have opportunity to participate highly impacting this as well. So, there is no one simple answer and probably it would be like very separate discussion, but we're putting a lot of efforts around this. And our investment probably in talent management and retention over the last years only were like increasing. You'll probably notice is how much we invested in HR function and how different it is today at the pound versus like 5, 6 years ago when we just started as a public company? Yes. So, we continue to be successful in terms of bringing resources into EPAM. In addition, the attrition rate throughout 2017 declined on a quarter over quarter basis throughout the entire year. And the attrition that we saw here in Q1 is actually quite a bit lower than what we saw in Q1 of 2017. So, we think we've done a fair job of managing retention and adding resources. So do you feel good about our ability to continue to sort of drive revenue growth based on resource availability? But it a challenge and challenge for everybody. So this is one of the main challenges in the industry clearly. Okay. Great, thanks. As a follow-up, I wanted to ask you about the internal implementation of some of the product activity enhancing digital technology that would deliver to clients? In other words, is there what is the internal opportunity for technologies such as AI or intelligent automation or advanced analytics? Is there a are you implementing these things internally or is there an opportunity to and could that have any impact on your expense line in the future? It's kind of a long dated question. Good question and answer is yes. We're trying to apply whatever we think it might apply to client and experimenting in our kind of internal R and D labs, how we can improve internal efficiency across our SG and A costs and just improving services inside of a pump. So, that's one of the efforts which we're constantly doing. And this is true not only for this, but any type of technology which could impact internal operations. So that's always was part of our effort. And some of proof of concept, which we're doing internally, we clearly then demonstrating to the clients as an example of how it could be utilized. Great. Thanks so much. Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch. Thanks guys. Good morning. I just wanted to start with a question on guidance. I know you took up the full year EPS by $0.04 You did just beat Q1 by a few pennies and I think you're picking up a few more pennies from the lower share count outlook for the year. So I just wanted to see what this implies relative to your margin outlook. I know you're maintaining the 16% to 17%, but can we get to the middle of the range or does the lower part of the range seem more likely because obviously you took up the revenue outlook again little bit. So I just want to make sure we've got the different pieces calibrated here. Yes. So we expect to be in the range of 16% to 17% as we sort of guided. We do think that we'll see an improvement in revenue that's largely associated with our organic revenues. So that's not coming from the Continuum acquisition yet. So again, it's an improvement in the demand environment and kind of what we're seeing on the horizon. Yes, I don't think I could comment as to exactly where we're going to be in the range. But generally, what we do see is in the second half of the year is that we do see improvements in our adjusted IFO as revenues grow and as we see an improvement in the utilization numbers. Okay. Just a revenue question. So you mentioned the financial services vertical growing 38% year over year. I think you did have an easy comparison there, but nonetheless, you can see there's some strong underlying trends. So I wanted to see if you can give us a little bit more color there. Was it UBS? Was it a combination of clients? And maybe you can just talk more broadly about what you are seeing in terms of project based spending at some of the larger banks, because it seems like there's been some mixed signals in the market as far as where that stands at this juncture in the year? That's definitely not one answer to the question. So, it's a combination of things. And as we again, over the last quarters, we are pointing out that we're not necessarily good representation of financial services across the global delivery industry and we're focusing on a little bit different subset of engagement and applications, which is giving us better opportunity to grow. And that's probably consistent with previous statements this quarter. But on top of this, we have a couple new logos which we started within last 9, 6 months, which contributed the growth in financial services for Q1. So, we're seeing growth from both existing customers and then we're seeing significant growth from new customers. So, that's why you see the high growth rate in our business. And as Ark said, we're just participating in a different space, wealth management platforms, asset management platforms, maybe more customer facing technologies. Okay. Congrats on the results. Thank you. Thank you. Our next question comes from the line of Moshe Katrin with Wedbush Securities. Please proceed with your question. Thanks. So guys, this is an unusually strong quarter for Q1. Am I right here in terms of the growth that we're seeing, in terms of the guidance raise? Is there an uptick in the managed or anything that's kind of fundamentally pushing this? That's kind of a big picture question. And then in terms of some of the metrics, maybe you could talk a bit about organic growth for the quarter, organic growth that's embedded in the actual guidance. And then what are we factoring on the guidance side in terms of pricing and wage inflation? Thanks. Probably sounds unusual from the numbers point of view, probably not sound so unusual for us internally here. And again, I think, yes, we've seen bigger number, which is attributed to number of clients, which were growing pretty fast during the last couple of quarters. And again, for the rest of the year, we see exactly what we're guiding for and as we try to do each time. So I can talk a little bit about Q1. Yes. Yes. So we look at the quarter is that we probably picked up about $1,000,000 related to foreign exchange versus the rates that we were using at the time of guidance. You'll remember that the Continuum acquisition occurred at the very tail end of Q1. So, we only had about 2 weeks' worth of revenue from Continuum. So, that had a very modest impact on revenues. And so, really what you saw versus guide is just a substantial kind of overperformed based on demand in the market. What about pricing and wage inflation in terms of what's embedded in the guidance? So it's consistent with the guidance that we had at the beginning of the year. I will reiterate that in terms of the growth and the increase in the guidance is that at this time, it's exclusively from our organic revenue. We're seeing some nice traction in terms of customer engagement and meetings and we do think that longer term that you'll see some nice benefit from the Continuum acquisition. At this time, the take up in the guidance for revenue is largely is exclusively due to organic growth. From a wage inflation standpoint, pretty consistent with what we've talked about in the past. It's maybe up slightly. But I would put that in kind of the modest, okay. We continue to get price increases from customers on an annual basis, at least a subset of our customer base. We continue to see opportunities for price increases with new engagements. And so, generally, I think that the pricing opportunities and the wage inflation are not materially different than what we've seen in the past. Understood. Thanks. Good quarter. Thank you. Thank you. Our next question comes from the line of Arvind Ramani with KeyBanc Capital Markets. Please proceed with your question. Hi. This is Brian Gehring sitting in for Arvind Ramani. Just a quick question here. Our checks with clients have been overwhelmingly positive on the quality of technology talent and productivity that they get from EPAM. These companies are much larger IT services providers vendors. Have you found the competitive set changed in the last couple of years? And what are you doing to make sure that you stay ahead of the competition? Again, it could be very long answer, but just in couple sentences, I will repeat what we're communicating during all this time. We're coming from very strong engineering background. And on top of this, we're trying to put the right client facing capabilities, industry expertise, elements of consulting experience, experience design and experience consultancy. And with all this, we're trying to keep up with our engineering standards because that's what actually matter when you're delivering whatever you're advising to the clients. And that's continuous effort and that's what we think probably still differentiators. And we don't want to lose this advantage on engineering part, while we're trying to go up in value chain with additional services. Great. Thanks. Nothing magical. Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Good morning. I wanted to ask about Continuum. It seems like those employees have a slightly different skill set than some of your core EPAM employees. So I'm wondering if you think that this business is scalable for EPAM and then what does that integration timeline look like in terms of when you'll be able to really start driving revenue synergies? So, I think we will be able to answer in much more details like in 18, 24 months from now. But in general, we during the last 5, 6 years, we were adding different type of skills to EPAM which we didn't have insight and continue one of these attempts as well to bring different type of people and see how together we would be able to impact clients better. And at the same time, it's not completely different to YUPAM because continuing with the combination of user experience and design thinking together with physical product expertise from industrial design to actually prototyping of real physical products. And we do things with our attempt to play better role in IoT world and with our clients in industrial engineering and utilities energy. So, that would be very important addition to us. The same like in healthcare and retail. So, we'll see how it would be working out. There is no like simple answer right now. So, we haven't really included any revenue synergies in our guidance. Okay. What we are seeing though is that we already are sort of engaging mutually with clients. And what we think over time that we'll be collectively able to engage on larger programs as we sort of combine the capabilities of the 2 different companies. Okay, great. And then was there any customer overlap with Continuum customers and EPAM customers? And are there any clients that you think could become meaningful contributors to EPAM's growth kind of in that later timeline that you've outlined? We do believe that there are a number of opportunities between our client portfolios and there is some slight overlap, but we're working in different areas. But the whole goal how actually to bring it together and that's exactly the point. Like, I think we will see how it's working like in 18, 24 months. Thank you. It's not a short term impact. Thank you. Our next question comes from the line of Mayank Tandon with Needham and Company. Please proceed with your question. Thank you. Good morning. Ark, I wanted to get your thoughts on pricing in terms of are you seeing an increase in transaction based and outcome based pricing? Some of your peers have called that out as being a driver. Just wanted to get your thoughts in terms of if you're seeing any model shift with your clients? I think in general, our pricing model not changing much. So, there are some experimentation with outcome base, but it's extremely small number of proportion of our revenue right now, very insignificant, but we're experimenting with this. In general, it's the same challenge we have. We still need to improve our in market capabilities to make sure that we reflect on potentially better outcome and solution in which we do it. So, again, I don't think anything changing significantly in our pricing situation. So we're still around or above 90% in terms of T and M pricing or time and materials pricing. Right. Okay. And then just another question around the verticals. Obviously, really strong quarter across the board, but I guess the one area that might be a little bit softer was the healthcare life sciences. So if you could just maybe talk about that, if you're seeing any shift in the trends there? So, I think it's also in line with last quarters. Healthcare and life science was softer than others, but I don't think it's again, it's a reflection of the market. It's a specific situation, several clients, and we do believe that life science, healthcare will kind of reach the same level of growth which other verticals we have like in several in next few quarters. Great. Thank you. Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question. Hi. The move into consulting has been obviously difficult and expensive for others. So I just want to get a sense of what your strategy is as you move up the value chain and any thoughts on what margins could do longer term as you take on more expensive consultants? Our approach right now is relatively simple. We're not trying to build separated line completely separated line of business or revenue stream coming from consultant. We're trying to find the right kind of combination of consulting and design heavily supported by our engineering capabilities. So, basically, we're trying to empower final solution in which we build through right decisions and right design. So that's why our consulting client of revenue not necessarily will be soon listed as a separate one because this is how we're trying to bring more value to the clients and probably eventually improve margins, not to kind of make more pressure on the margins. But it would require investments and that's what we're doing. And clearly, in some of the quarters, it would be pressure on the margins before we will achieve what we are looking for. Okay. And then just on the margin side of things, what's the balance between gross margin and SG and A or operating margins look like throughout the year? It looks like you're headed towards the upper end of the guided range. And where is the SG and A leverage coming from? Is that coming from upside to the top line? Is it better utilization? How should we think about those moving factors? Thanks. Yes. So that's fair. So from a I guess overall profitability standpoint is we had expected that we would see a dip in gross margin in part because we had intended to take down the utilization so that we could grow throughout the remainder of the year. At the same time, we've been very focused on improving our SG and A efficiency and you kind of get there 2 ways. 1 is by looking at probably 3 ways. One is looking at current spending and seeing what you can do to optimize that spending. Other is to make certain that you're adding appropriate headcounts and then making investments extent that, obviously, you're growing revenues rapidly and you're controlling your SG and A expense just the algebra produces in SG and A efficiency and that's something we've been very focused on both as we put our plan in place for 2018 and as we execute throughout the year. And we were like talking about lack of traditional corporate structures for our size. We were growing very fast. And during the last year, we put a lot of investments in this area, including like HR operation, which we call operation, people management, talent acquisition. So and now we're kind of a little bit benefiting from this because we build structure and now we just need to support it. Thank you. Thank you. Our next question comes from the line of James Friedman with Susquehanna International Group. Please proceed with your question. Hi. Thank you. It's Jamie at Susquehanna. I'll just ask my 2 upfront. Jason, I apologize to ask you to do this again, but did is the continuum in or not in because I thought I heard you say that the numbers organic, that's my first one. And then the second one is, ARC, is there anything unique about the CIS Eastern Europe delivery organization in terms of either attrition or supply, because everyone else in the industry is calling out rapid attrition, wage inflation, etcetera. Is there anything unique to that specific delivery region? Thank you. Yes. So first off, from the continuum standpoint, so for our full year guidance, Continuum is in as somewhat less than 2% of revenues and that's consistent with the press release we did at the time of the acquisition as well as the update to guidance. The point that I was trying to make earlier and sorry if it wasn't clear is that the increase in our guided growth rate for 2018 is a result of organic revenue growth, not due to, let's say, synergies associated with Continuum at this time. And so Continuum isn't the number, but we've actually taken up the growth rate guidance for the full year and that's exclusively due to the strength that we see in the organic demand. And in regards to the talent pool, I think we're experiencing the same pressures which everybody else. So, there is volatility. There are some differences even between Eastern European significant differences between different Eastern European countries we operate in. But in general, we again, we experiencing exactly the same challenges which all companies experiencing globally. So, there is a global lack of talent. There is pressure on wage inflations. There is a lot of there are a lot of efforts which we need to put to retain people and motivate people. So that's all over the place. Thank you. Thank you. Our next question comes from the line of Lou Massocca with Pivotal Research Group. Please proceed with your question. Okay. Thank you. I was going to ask a question on margins, but I think you hit that pretty well so far. So let me ask you about automation. It seems that RPA and automation to Cognizant is really starting to kick in. Could you maybe talk about how much you're seeing that and what customers are asking you to do? And then I guess my follow-up question would be to expand that out to also talk about what you're seeing with, I guess, the other new types of technology, AI, Internet of Things, block chain? Thank you. We're definitely seeing a lot of interest in automation because for many companies that's one of the few opportunities actually to improve their operations and for many traditional establishing companies in financial services, insurance space, this could be huge savings and there are a lot of experimentation there. And it's very challenging because it's usually a combination of what people say in automation, but change of the process and kind of internal reengineering as well. It's a combination of all of this. Again, we're seeing this. We're paying attention to this. We're participating in this as well. Probably very much in line with what Cognizant was communicating. But again, we're trying to bring our engineering advantage there because with all these new technologies, with all these new products on the market, there are a lot of engineering challenges to make it efficient as implemented. So, we hope that we will benefit from this. So, in regards to blockchain and machine learning and general artificial intelligence, This is still pretty early, but we do believe that it would grow fast and we invest in competencies and traditionally have had some advantage because we have a good portion of our revenue coming from software and technology companies and we've seen and helping to experiment even during the product development stages with our clients. So, and we're seeing through their eyes sometimes what and how first implementation look like and actually bringing this back to our corporate clients as well. So I think we have some advantage because of our heritage and kind of portfolio of our clients. On the automation side, could you possibly quantify maybe how many how much of the projects you're working on or if it's moving from more proof of concepts to scale or something? So, on RPA part, it's probably dozens of projects and some of them definitely moving to implementations. But it's still experimentation because this implementation still have to prove the returns which promised. Thank you. Our next question comes from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question. Hello. Congratulations on great results and thank you for taking my question. So I have a couple of questions. One is on working capital. You mentioned that your day sales outstanding increased and this reduced your cash flow from operations. So how should we look at this going forward? Are you going to decrease the sales outstanding in the coming quarters? And could you comment on this? And the second question is on your client concentration. When I look at the trends quarter by quarter, throughout last year, there was a decrease in like top 5 clients' concentration, top 10 clients' concentration and top 20 clients' concentration. But if we compare the Q1 with the Q4, there is a slight increase in each category. So basically, do you think that the current client concentration mix is optimal and you're not going to reduce it further in terms of like servicing both big clients and small clients, getting big orders and small owners and so on? Okay. So just in terms of the working capital, so yes, DSO did go up by a couple of days between Q4 and Q1. So, that did have a negative impact on working capital. That's something that's going to get a significant amount of focus throughout the remainder of the year. And we remain committed to keeping DSO in the low 80s. The other thing we talked about is just we have a variable compensation program. It's in part a program that we use to retain our employees. There is an annual payout of that variable compensation plan and that occurs for the most part in Q1 of the fiscal year and then a little bit of that variable compensation element is actually paid out in Q2 in certain of the countries in the CIS region. So generally what you see is that there is somewhat lower cash flow generation in Q1, just courtesy of the variable compensation payout. Then all things equal, you see an improvement in cash flow generation in Q2 and again an improvement in Q3, again all things held equal. So I think that would kind of address the cash flow item. In terms of concentration at customers, do you want to talk about that, Ark, or are you? I think it's also consistent trend during the last couple of years. So, we as we mentioned, we have new logos coming and some of them growing pretty fast. And our growth below our top 20 is way over 30% right now. So, I think this is just reflection of reality and diversification. Yes. And quite simply, we're growing both with existing customers and with new customers. We have a significant amount of revenue coming from again what we call new customers, which are measured as customers, which began generating revenue in the last 12 months. And so, we're getting about 40% of our revenue growth from those customers and then the 60% from the existing accounts. And there's substantial growth opportunities in both the existing customers and in new customer opportunities. Okay. Thank you very much. Thank you. Thank you. Ladies and gentlemen, our final call for today comes from the line of Ashay Kumar with Cowen and Company. Please proceed with your question. Hi, everyone. From a consulting perspective, have you considered any joint ventures or partnerships with standalone consultancies for front end strategic opportunities? Or you think it's critical for you to keep those skills in house? Listen, we're always open for any type of partnership and opportunities to work with other companies which would kind of complement our capabilities and allow us to go to bigger programs. But there is nothing certain which we can talk about it and it's happening from time to time. At the same time, we strongly believe that we need to have some consulting capabilities really inside of the company to blend with our other services much, much tighter. And my next question is regarding your plans to further diversify your global presence and delivery capabilities, any specific regions or countries that you're focusing on at this point? We're focusing on I think we have pretty well diversified number of locations right now. So, clearly, everybody is thinking about us as a Eastern European death center kind of backup, but at the same time, we have India, China and Mexico at this point and we're paying a lot of attention to make sure that we have well balanced delivery locations and focusing how to grow all of them because that's a practically function of client demands and clients wanted us to have these locations and clients' location in many cases driving our presence in all of these global places. Thank you very much. Okay. Thank you. Thank you. Mr. Dobkin, there are no further questions at this time. I'll turn the floor back to you for any final comments. Thank you everybody for joining today. I would like to thank all of our employees for the good start of the year. And if you have any questions, David is always available to address and to talk to you in 3 months. Thank you. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.