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

Thank you, operator, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's third 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 third quarter 2012 earnings call. I will discuss highlights from the quarter, our key achievements, and provide an update on our guidance. After that, I will turn it over to Ilya for a more in-depth review of the third quarter financials. So, we are pleased to report another strong quarter. Our revenue grew 6% sequentially and over 27% year-over-year to $110.1 million. Non-GAAP income from operations increased 6% to $19.2 million. The non-GAAP diluted earnings per share were at $0.37. This performance confirms our unique value proposition which comes from almost 20 years of software product engineering experience, continuing focus on expanding the [indiscernible] and technology domains knowledge and our ability to attract and retain the best [indiscernible] talent [indiscernible]. In Q3, we continued to benefit from growing trends across European companies that had turned into high-value-add nearshore strategic partners to help drive efficiency and optimizing their IT spend. Compared to the third quarter of last year, revenue from clients located in Europe expanded 46%. Banking & Financial and Retail and Consumer verticals were the 2 largest contributors to our growth in Europe. Within North America, which continues to be our largest market, we also had good traction and increased revenue by 27%, driven by both existing and new clients. ISVs & Technology vertical was the largest contributors to our growth in North America. In the CIS regions, revenue was down slightly, in line with our expectations for this region. We also saw continuing growth across most of our verticals. ISV & Technology had a strong quarter and grew 33%, which includes the impact of several clients added in result of third quarter acquisitions. Results in each of the vertical increased by 26%. In…

Thank you, Arkadiy, and good morning, everyone. After my comments, we will open the call for questions. In addition to my comments here, we're now providing a supplemental fact sheet on our website with detailed information about our revenues and results of operations, including information about our verticals, geographies and service offerings. As Arkadiy highlighted, Q3 was another strong quarter. We grew revenue 6% sequentially and 27% over last year to $110 million, which is above the top end of our guidance of $109 million. Earnings per share were $0.37, also above our prior guidance of $0.36 per share. And our outlook, during our Second Quarter Earnings Call, we identified 2 areas of concern that caused us to lower our revenue expectations for 2012. At first, we had anticipated $2 million to $3 million in additional reductions from Thomson Reuters and also a potential $3 million impact from currency on our revenues. While the Thomson Reuters reductions are proceeding as we had expected, currency did not impact revenues by as much as we initially anticipated. More importantly, as Ark said, we are also seeing very strong momentum across virtually all of our key verticals and target geographies. With that, we now expect quarter 4 revenues of between $115 million to $118 million which represents year-on-year growth of 21% to 24% and sequential growth of 4% to 7%. We also expect non-GAAP diluted earnings per share to be in the range of $0.35 to $0.37 per share for quarter 4 with an expected share count of 47.4 million and tax rate of approximately 17%. For the full year, we expect revenues to be between $423 million to $426 million, which represents growth of approximately 27%. On a full year basis, we're also raising adjusted earnings growth to be in the range…

[Operator Instructions] And our first question comes from the line of Moshe Katri with Cowen.

Tremendous growth in financial services. I think it will be helpful Arkadiy if you just talk about what's driving that growth? Is it new logos, is it existing logos and maybe talk a bit about the nature of the work. And then I have another follow on.

We have several very strong strategic relationships in financial services. And with all difficulties which this industry is facing right now, we're actually seeing a good opportunity for us because type of services and kind of expertise we can provide. So the growth relates to several very large accounts, which is growing with us but it is also partially relates to kind of a recovery of financial services in the former Soviet Union region which we mentioned last time that it's -- was kind of question of us, how successful it's going to be this year. So we also have several new accounts but their contributions at this point probably not so critically as we hope that as becomes visible in the next quarter results.

Then this is for Ilya. I guess when you guys went public you spoke about the fact that the company needs to invest in the business. And you did kind of indicate that margins will be down slightly. So I think the general kind of guidance was that for EBIT margins to be similar to mid-teams. Is that a level that we're comfortable at going on an ongoing basis at this point? Just talk a bit about the margin trends. And without talking about next year's numbers but just in general.

Sure, I think we are within what we consider to be our target operating margin range, so adjusted income from operations this quarter is about 17.4%. I believe we said previously, it was anywhere in, as you said, mid-teens up to upper teens. We also said previously that we would continue to reinvest some of the margin back into the business into initiatives such as expanding our on-site presence and strengthening our competencies and competency centers. We have been doing that. It has been -- we've increased our on-site presence by about 100 basis points from the beginning of the year. It's not exactly where we want to be but we continue to push forward on that initiative and some others. But yes, I mean our target operating margin range is from about mid-teens to upper teens.

Our next question comes from the line of David Ferguson with Renaissance Capital.

Just 2 questions, please. Firstly, on the full year guidance. Are you still working on the assumption that sort of the FX impact will be sort negative of around -- I think you said $3 million? So that's the first question. Or what do you see as the sort of constant currency guidance for this year? And then secondly, again looking into next year without going too specific into the numbers, maybe you can just give us a sense of sort of the conversations that you're having with clients at the moment? Would you say things are sort of more buoyant or less buoyant than at this point 12 months ago?

I'll take the first question, Ark will take the second question. On the currency question. Last quarter, we said that Q3 and Q4 would be negatively impacted by currency to a tune of around $3 million provided that rates stay where they were. The euro-pound-ruble in particular came back, as you guys know, from that time. So the currency -- the negative currency impact on Q3 and Q4 was not as great as we thought. And instead of about $1.5 million per quarter, we were impacted by about $1 million per quarter. And obviously, I'm talking about Q3 is an actual and Q4 as an expectation, assuming that rates stay where they are today. As far as income of currency on the margins, again, we're relatively neutral as far as P&L impact of currency on our margins and our bottom line. Really what you see is swings in the topline offset by -- sorry, offset in expenses. So that's about the currency. A little bit more on Q3, compared to last year's Q3 we had a negative impact of about $1.7 million. But compared to prior quarter, Q2 of this year, was a positive impact of about a couple of $100,000. So Ark, I believe the second question is what we're hearing from customers...

For the next year?

To the extent that we can talk about that.

In comparison, if I understand the question correctly, in comparison to what we know in the beginning of the year and what we know right now, I think it was pretty much the communication from the client kind of in line with what is happening during the year. It was some small surprises, negative and positive. But in general, it was pretty consistent. In regards to the 2013, right now, we don't think it's the right time to actually comment. It's the beginning of planning period and probably we'll understand much better the situation kind of in the beginning of the year.

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

The first question I have was, as I look at the growth of headcount versus the year-over-year growth rate for revenues, you maintained a positive gap in revenue growth over headcount growth for many quarters. How long is that sustainable? I mean obviously there are all kinds of positive implications from that trend, so could you go into some detail on that?

We do believe that it would be sustainable. The question at what rate was actually the difference between these 2 growth rates. So why it's sustainable? Because as we mentioned, we invest in a lot in specific competencies and vertical expertise. And we're getting in the areas where we hope to get higher rates and eventually better margins. And yes, you can see it a little bit from now, but it's still our investment. We invested in branch, invested in training, invested in a lot of people right now and some on-site -- increasing on-site presence also. But all of this actually is our effort to kind of distance our revenue growth from our headcount growth.

In terms of, I guess, the forward or predictive nature of your headcount to revenues, how much -- is that a percentage? You may have given this -- I apologize if I missed it. People that are lateral versus college hires, could you give us that delta or that percentage breakout? As well as, what's the training periods you use and so on?

Well, we have a little bit different strategy in our different labor markets because what we do in Belarus is different from what we do in Ukraine, or what we do in Russia, or what we do in Hungary. In general, I think around 30% [ph] of our people coming from universities. And in this case, they have a pretty significant period of time inside training facilities at EPAM. Sometimes for several months, but sometimes up to 5 to 6 months. So in Belarus, this percentage is higher. In Ukraine, it's lower based on the historical kind of situation when [indiscernible] was started and what actually is the skills pyramid and skills experience we have.

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

Could you just give a little more specific color into where you may have been surprised at the upside just given your improvements? I think you mentioned earlier that improvements or better performance across every vertical as part of the reason to drive guidance increase. I think beyond even the beat [ph] from the quarter.

So you're asking about specific examples of -- or what exactly would you like to...

Looking for specifics on the -- like, which industry verticals? Which -- yes, I mean, I guess examples would be nice as well.

From what we have said already, clearly Financial services and Retail Consumer is growing very fast. Also, our ISV or product development services expertise allow us to grow as well. So this is 3 main drivers for our area. On specific cases we have several strategic accounts which committed to the relationship with EPAM and it is very predictable kind of the growth. Probably, if you look at our top 10 clients this year, there are 5 of them were growing over 40% and we still have very large opportunity, practically in each of these clients. Only 2 clients were declining significantly like Thomson Reuters and one more around 20% or more. And another 3 clients practically flat, plus, minus 5% or so but we have, like, from top 10, 5 are clients growing very, very fast. We're also increasing the number of clients with over $5 million in revenue. Each of them have a pretty good potential to become even bigger and we have several of them, specifically in Retail and Consumer Services group and ISV & Technology group which have a potential to grow over $10 million. That's during this year or, let's say, during the last 4 quarters, we got about -- over 10 clients with $1 million run rate already today and half of them having potential to become in the next 4 quarters, $10 million in size.

And I'll add to sort of the -- part of the upside surprise that is causing us to raise guidance. One thing Ark already mentioned earlier, which is what we're seeing as a slight recovery in the financial sector in the former Soviet Union, as well as we were also developing a very good relationship with a very large retailer in Canada, which came about as part of our acquisition of Thoughtcorp earlier this year. And then there was just broad-based strength across, as we said, most of our verticals and we're definitely seeing a lot of indications of budget flush in Q4.

That's interesting because, I mean, it's not exactly -- you're not seeing that across, I would say, broad-based across some of your larger competitors. But that's great to hear. And the type of work, I mean just -- it seems like your software development work as a percentage of overall has gone up a little bit over the past year, not a lot but I guess relatively speaking. Tell us a little bit about the stickiness of this revenue in the sense of how much is a, is this with existing clients that you have basically harvested for more opportunity and just increased in a percentage of your large top 10 or so. You mentioned earlier some that increasing. But more specifically, just want to know how much is actually coming from your existing base and then how much of that do you think can last more than 6-month projects versus longer?

So I think I was sharing this during the my note that around 89% of our revenue come in from the clients who are with us at least for 12 months, and 76% coming with clients who with us over 2 years. So basically, it's a pretty, pretty strong stickiness in our client base. If you think about software companies, they usually releasing software in pretty stable cycles and it creates a very strong relationship. So there are some clients specifically in several hospitality area where you might get onetime big project and it might be finishing after this. Still we hope that this relationships would be continued but besides this area, most of our client base, it's very long-term and very stable, including our revenue stream.

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

Arkadiy, in your prepared remarks you talked about your Digital Marketing business. I'm wondering can you help us understand just how meaningful that business is to you and where the momentum is coming from, whether it be geographic or by vertical?

So from -- if you think about our key industry focus areas, we talked about ISVs a lot. Financial Services probably the most understandable market in IT outsourcing service. But then if you look at the Business Information & Media, Consumer and Retailer, and Travel and Hospitality, all of the 3 segments is very dependent right now on new type of business models. And most of them are driven by digital strategy and include the Internet mobility and cloud deployment. So I think all of these 3 industries very much demanding these types of skills, and these types of skills usually very new. So that's what we're trying to explain, that we accumulate in the skills probably faster than most of our competitors because we're working with a lot of technology companies and getting kind of early [ph] exposure to these new trends and converting them to the experience, which is very much in demand in this segment. So that's probably kind of explanation of importance and what's driving this. From the point of view of geography, how it's split around, clearly, North America and Western Europe providing a lot of demand. But what's interesting is this experience, which we accumulated in these regions, actually now are driving some success for us in former Soviet Union region. We even didn't mention that together with Financial Services, probably e-commerce type of applications right now is the weakest driver in the region for us and for[indiscernible] as well.

And how meaningful is this business to you right now, in terms of size?

Well the most of the growth you see in Retail and Consumer coming from this. Big portion of the growth in Business Information & Media also coming from this type of services.

While you can't use it as a direct proxy, the percent of revenues at Retail and Consumer and Travel and Hospitality together are about 20% of our business. And you could say a lot of that and Business Information & Media is about 14%, right?

Just the proportion of the total business between these 3 segments, it's more like what you mentioned, 40% or 50%.

40% to 50% of those verticals.

And then ISV and Financial Services, each of them around 25%, 26%. The rest is related to this.

And then I think you mentioned this in perhaps some of the earlier questions, but just if I didn't hear it right, that -- do we have any sense yet whether the Thomson Reuters base is stabilizing at current levels, or whether it'll continue to degrade from what you're, I guess, estimating for the fourth quarter?

There is no any news we can definitively share right now about the future. We hope that it stabilize. We actually -- as I mentioned during the last couple of quarters when addressing the Thomson Reuters questions, we have some opportunities outside of the area of where we have decreasing business. But at this point, it's too early to say. So at the same time, you saw the announcement that we discussed -- not actually starting some partnership which, again, too early to say where would go but definitely, the relationship is normal. A lot of it depends on the, actually, business of Thomson Reuters itself. That's why it is very difficult to comment right now. We hope that it stabilizes based on the Q4 kind of the size.

And also, David, just a rough estimate, people that we transferred from or have transferred from Thomson Reuters to other accounts, other new or faster-growing accounts, at higher rates, at full run rate, you would generate about $400,000 to $500,000 in internal revenue per quarter. That's at a full run rate.

And where are you in that transfer process? Are you 75% done based on current revenue rates for Thomson Reuters? Or how much of that capacity has been absorbed?

Yes, we're mostly done.

Was that mostly done in the third quarter?

At the end of the third quarter, it was mostly done. It's clearly still affected the third quarter results.

[Operator Instructions] And your next question comes from the line of Alexander Vengranovich with OTKRITIE Capital.

I have a question regarding your cash on the balance sheet. So you're continuing to accumulate cash. I'm just wondering whether you're actually planning to do some M&A this year or probably have any other ways of using that cash this year going forward?

Yes, Alexander. So yes, we do have a good amount of cash in the balance sheet. And our balance sheet in general is healthy. And now we are looking at a number of M&A opportunities. We obviously cannot talk about opportunities we're looking at in detail. We are also continuing to invest in facilities as we talked about before, our projected investment in total for the new men's facility is about $18 million to $20 million. Of which we've spent only about half so far. And we're also looking at other facilities in Ukraine, for instance, which would also generate incremental benefits in terms of reductions of overhead and increase in resource brand awareness in the region. So while it may seem like it’s a comfortable cushion, if we continue to execute with our M&A strategy as planned and with our facility expansion, then we are utilizing our capital in line with our expectations.

And in case there is not any further M&A's in the landscape, would you consider changing your dividend policy?

Dividend policy, no. We do not intend to change our dividend policy in the near future, same as with our peer group.

And I'm showing no further questions at this time. I would like to turn the call back to management for any closing remarks.

Thank you, very much. Thank you for taking time to participate in our call today. We appreciate the interest and we're happy to entertain a call for any follow-up questions. So on this, I would like to conclude this call today. Thank you, very much.

Thank you. Ladies and gentlemen, this does concludes today's conference call. Thank you for your participation and you may now disconnect.