Good morning, and welcome to EPAM's Second Quarter 2012 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and question and answer. [Operator Instructions] At this time, I'd like to turn the conference call over to Richard Zubeck [ph], Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone. By now, you should have received the copy of the earnings release for the company's second quarter 2012 results. If you have not, a copy is available on our website, www.epam.com. The speakers we have on today's call are Arkadiy Dobkin, CEO and President; and Ilya Cantor, 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. I would now like to turn the call over to Arkadiy Dobkin.

Thank you, Richard. Good morning to everyone, and thank you for joining us today for our second quarter 2012 earnings call. I will discuss highlights from our second quarter, discuss our key achievements, as well as discuss specific challenges we are currently faced. After this, I will turn it over to Ilya for a more in-depth review of the second quarter financials. We are pleased to report another strong quarter. Our revenue grew 10% sequentially and nearly 30% year-over-year to $103.8 million. This is an important milestone as this is the first time in our history where we exceeded $100 million in revenues per quarter, and I am particularly happy to see that result. I'm proud of our people and of our accomplishments over the past years that made all this possible. So I want to say thanks to all our people for a job well done. We're also pleased to report a strong earnings growth and margin expansion. Non-GAAP income from operations increased 40% to a record of $19.1 million. And operating margins increased 140 basis points to 18.4% from 17% last year. Finally, non-GAAP diluted earnings per share were $0.37 or a 42% increase from last year. During the quarterly close on the acquisition of Thoughtcorp, a Toronto-based IT consultancy and software solution provider. Thoughtcorp had a 17-year history of delivering high-value IT solutions and complex software applications to many of Canada's most recognized companies within telecommunications, financial and retail segments. Thoughtcorp complements our existing global delivery capabilities with its proven expertise in areas important for us, such as Agile Development, Enterprise Mobility and Business Intelligence. And we are excited about the possibility this combination brings. As in the first quarter, we benefited from a growing trend in Europe where in the difficult times, companies are turning to…

Thank you, Ark, and good morning, everyone. After my comments, we'll open the call for questions. As Ark highlighted, Q2 was another solid quarter where we grew revenues nearly 30% to a record $103.8 million, while expanding margins and maintaining a healthy balance sheet. I'd like to start by providing more details and color around our guidance for the third quarter and the year. And you heard, there are 2 specific issues that came up very recently that impacted the top line outlook. As Arkadiy noted, Thomson Reuters informed us of additional and unexpected cuts in our services. We expect the impact of their decision to be approximately $2 million to $3 million in the second half of the year. This estimate, though, does not include any potential upside from reallocation of those resources to other growing or new projects. In other words, a revised full year guidance assumes 100% hit to utilization, which may or may not be the case over the next several months. Second, a stronger dollar negatively impacted revenues by approximately $1.6 million in Q2 compared to previous guidance. And if exchange rates stay at the current levels, it would cost another $3 million or so compared to our original full year guidance. Remember that this is only top line, and in fact, we benefited in Q2 slightly at the operating margin level from offsetting impact of currency on our expense base. So these are 2 specific issues that caused us to slightly decrease full year revenue guidance. Furthermore, we are raising our earnings growth projections for the year. This is primarily a result of 2 things: one is our continuing focus on cost controls. Our SG&A, excluding stock compensations, declined as a percent revenue by 140 basis points compared to last year to 19.1% of…

[Operator Instructions] Our first question is from the line of Moshe Katri with Cowen and Company.

Arkadiy, you spoke about long sale cycles or decision sale cycles. Can you kind of elaborate a bit more on that? Are we seeing this in a specific region or vertical? Are we being just conservative? And then, are we seeing any delays or cancellation in that respect?

I wouldn't say that it's like all -- across all regions or all our line segments, more related to our relatively small business in AES region today and probably 1 or 2 accounts. So again, we see this, and exactly like we have mentioned, it's in some specific cases, but building and see it as a company turn.

Okay, that's fair. And then just a follow-up, Thomson Reuters. Can you just remind us how many people are kind of deployed at this account right now? How quickly can you redeploy them without incurring the incremental utilization rate hit? And then maybe kind of give us some more details on what happened at Reuters in the past few weeks, as you said.

We have around 500 people deployed today. Well, as we mentioned, it would -- with another notification judged during the last couple of weeks, which was in addition to what kind of carefully planned level of ramp down, which we discussed on previous calls. We don't know about specific reasons why it was done. At the same time, we're already starting to redeploy this. We have several really fast-growing accounts with similar skills, and we started the redeployment process very, very aggressively right now. Well, it does seem that in several months, we will be able to utilize these people because it's a very experienced team and was working together for a long time. So it's kind of creating additional opportunities for us.

Our next question comes from the line of Ashwin Shirvaikar with Citi.

Yes, my first question is also on Thomson Reuters. The -- just a clarification, the 100% hit to utilization, I'm assuming it's for both revenues and profit that you assumed in your numbers. And as you redeploy these people, would they be at higher billing rates, given what we know about Thomson Reuters' lower rate?

The answer to your question is yes to both.

Okay. And then -- that was quick. And then on Russia, if you could update us on the situation there. It was one of the sources of weakness, particularly in financial services last time. How is that tending?

So as far as Russia is concerned, specifically, the region is not growing. We -- in the CIS region, as we mentioned, we had a onetime nonrecurring revenue recognition item of $4.3 million, which showed growth for the region but -- of $3.1 million or 25% or so. But if you strip that out, it would be in a slight decline. We don't particularly see sort of additional volatility to this extent from here on out. But we also don't count on growth from that region either. And this is, as we've talked about in the past, by design.

This is not a focus where you draw different -- sort of draw down these revenues over time.

Yes.

Our next question comes from the line of Darrin Peller with Barclays.

Can you just, first of all, comment on the pipeline of what you're seeing, where you're seeing it from, what kind of business? A little more detail and color will be helpful in terms of new pipeline, new bookings, maybe geographically, as well as type of business from a discretionary, and how long the contracts are now. I mean, I know when you guys first went public on...

Yes. Within -- there's a good traction right now in Europe and North America. Both of them growing, and we've had some exceptions like we've mentioned already. Between specific industries, I would say that we have very good opportunities in ISV sector in United States. We also continue to grow way too fast in the financial services in Europe. One of the fastest growing area is Retail and Consumer and Travel and Hospitality for us. So that it's the fastest-growing sector and it's all related to demand through new online experience, commerce-related applications. So -- and we've seen a lot of opportunities around this area, and we actually are very aggressively building up our focus competencies and solution practices specifically in this area.

Our next question is from the line of Alexander Vengranovich with OTKRITIE Capital.

I have a question regarding your potential cost-cutting measures -- cost control measures, which you are planning and already started as far as I understand. As it's implemented in the company, it should result in an increase in net income. Could you please elaborate on this?

Yes. We didn't say we were starting a cost-cutting program. We said we were raising earnings growth guidance because we continued to maintain a really sharp focus on cost controls, as we've always done. And this has been slightly ahead of expectations. That's one of the reasons for raising the earnings growth target. But we are in really good shape. We don't feel we need to sort of have a comprehensive cost-cutting program. It's just business as usual.

That's the normal result of our -- we're still growing with this. We're growing in revenue, we're growing in headcount and clearly, billable headcount, and it's clearly a portion of G&A going down. That's what we specifically mentioned.

Okay. And second question. Could you please update us on your M&A plans for this year? Are you still planning to continue M&A activity?

I don't think we can give you any specifics. You saw that we completed our first acquisition for this year in Q2. And we had some -- had opportunities in our pipeline, but I don't think we can give you any specific answer right now.

[Operator Instructions] And our next question is from the line of Darrin Peller with Barclays.

I just wanted to follow up with a different question also. Around the expense side, obviously, there's been margin improvement going on. Can you just give us a little more color on what we should be expecting in terms of sustainability of that and -- maybe little more specifics, or specificity on what exactly you're doing to really bring out cost in the model and what can go on?

We did have really good margin expansion in this quarter. Part of that was driven by also the onetime revenue recognition item, right? So kind of full disclosure. So we don't expect sort of aggressive expansion of margins like we saw in Q2, in Q3 and Q4, particularly, since our sequential growth we're projecting right now, at least in the model, to be kind of 3% to 5% in Q3 and flattish in Q4 to Q3. So I would moderate sort of expectations about margin expansion from here. As far as your question with regards to taking cost out of the model, again, just like -- I take, though, you dropped off when we were answering a similar question to Alexander. We don't have a comprehensive cost-cutting program going on, it's just business as usual where we always keep a sharp focus on cost. Our SG&A continues to drive leverage into the model. We did see slightly better wage inflation results and we've moderated those expectations for the year as well so that helped.

Our next question is from the line of David Grossman with Stifel, Nicolaus.

Ilya, could you just review, perhaps, the flow of FX down the P&L in terms of revenue and margin? Obviously, we can see the benefit in terms of a gain or loss from FX, but perhaps you can run us through the impact above that.

Okay. So as we mentioned, compared to where we were in Q1, Q2 was negatively impacted on a top line basis by about $1.5 million, $1.6 million. And this came primarily from the euro and ruble. I think pound actually strengthened a little bit. Net-net, it actually gave us a slight benefit in the bottom line, but nothing sort of material to speak of. But if -- again, if we're extending this trend forward, and we're just doing sort of simple dumb math, $1.5 million in Q3, $1.5 million in Q4, would cause another $3 million in top line headwinds. So this is what we're projecting right now. Again, our currency mix is such that we're actually neutral in the bottom line, and this is what we saw in Q2. We don't expect the situation to change materially from there. Hopefully, that answers your question.

When you say neutral to the bottom line, is that including the foreign exchange loss or excluding that?

This is excluding the foreign exchange loss, which, on the P&L right now for Q2, really represents a remeasurement of local currency, monetary assets and liabilities to a functional. So that kind of stuff aside, the economic impact to our P&L is neutral and at times even slightly positive.

Right. So the 1.39 is just balance sheet translation, then?

Remeasurement, yes.

And I guess, just going back to your change in outlook. I mean, I think if you take Thomson Reuters as with $2 million to $3 million and then the FX impact of another $3 million that you just outlined, that pretty much accounts for the change for the year. So should we take from that the balance of the installed base at least and the new business activity that you would actually assume for the balance of the year is pretty much consistent with where we were 3 months ago? Or is that too much of a generalization there?

Well, barring a disaster scenario, yes, it is the answer. We're still in a good place. We still see a healthy pipeline. We still see a good client activity. As Ark mentioned, we had really good results from new client acquisition in the past couple of quarters. So fundamentally, the sort of the tweak to the guidance does relate to those 2 specific issues. And to the extent that we're taking a somewhat conservative approach and not sort of recognizing the benefits of potential reallocation of Thomson Reuters personnel, that's sort of tempered also by the fact that while we don't know what Thomson Reuters is going to do, what we know is what we know right now. We think we've baked in all the bad news, but that's what we said last time.

Our next question is a follow-up question from the line of Moshe Katri with Cowen and Company.

Ilya, I guess, you mentioned the fact that you're expecting wage inflation to moderate. Can you kind of provide some more details on that in terms of where -- what sort of comp increases are baked into the model now versus where -- what sort of increases were baked before?

I think we mentioned before that we were going to have wage inflation around 10% to 12%. We're now seeing it below 10%.

All right. And is there a way kind of to break it down by the various regions? Or this is kind of across the board?

This is really across the board. It's really across the board.

At this time, I'm showing no further questions. I'd like to turn the conference back over to management for any closing remarks.

Okay, thank you. Thank you, Richard. So what we can confirm is that there are some exceptional issues, which we have seen this quarter. In general, business is strong and we have a lot of prospects. And we have most of -- practically, all of our top 10 accounts, except Thomson Reuters, in very good shape and most of them growing pretty fast. So we are very confident in the current situation into the company and have actually various opportunities for the future. So -- and I think we're internally considering the situation with Thomson Reuters as a good opportunity as well. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude EPAM's Second Quarter 2012 Earnings Conference Call. Thank you very much for your participation. You may now disconnect.