Good day, and thank you for standing by. Welcome to the EPAM Systems Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. By now you should have received your copy of the earnings release for the company’s second quarter 2021 results. If you have not, a copy is available on epam.com in the Investors section. With me today are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I would like to remind those listening 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 the comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I’ll now turn the call over to Ark.

Thank you, David. Good morning, everyone, and thank you for joining us today. We delivered a strong set of results for the second quarter with revenues of $881 million, reflecting reported year-over-year growth rate of 39% and 36% in constant currency terms. Non-GAAP earnings per share were $2.05, an increase of 40% over the same quarter in 2020. Growth was very much broad based. All our geographies and most of our industry verticals experienced strong demand, reflecting the robust market environment and pushing our growth rate to historically [indiscernible] levels. On a sequential basis, quarterly revenues exceeded our Q1 results by more than $100 million, and we finished another quarter with very strong sequential growth. The reason for surge in demand is pretty obvious. By now we all know that application development and cloud and data integration services are growing postpandemic very strongly and driving corporate budgets forward. But in addition, it has become very visible that the current client transformation efforts are continuous and multidimensional and carries uncertainty of them now. And that is the reason why, on top of application development and cloud integration at large, we are seeing very fast expanding demand for software-enabled business scenarios coming our way, too. Overall and across all our industry verticals we have a portfolio of both new and current customers. We see progression into new and larger multiyear engagements as our customers look in part to fulfill both engineering demand as well as demand for new collaboration models that bring in greater stake in product design and product management. In short, clients really need simultaneous help with both strategy and implementations today. This means that we will have to smartly blend not only industry and functional consulting expertise, but a good portion of management consulting capabilities together with very scalable…

Thank you, Ark, and good morning, everyone. We are very pleased with our Q2 results, which reflect strong growth across a broad range of industry verticals and geographies. In the second quarter, EPAM delivered revenues of $881.4 million, a year-over-year increase of 39.4% on a reported basis and 35.9% in constant currency terms, reflecting a positive foreign exchange impact of 350 basis points. This quarter’s revenue growth was substantially driven by the continued improvement in the company’s ability to expand delivery capacity in response to the extremely strong demand for EPAM’s services. Moving on to industry vertical performance. We delivered very strong sequential and year-over-year growth across the travel and consumer, financial services, telecommunications, energy and manufacturing and automotive industries. Looking at the year-over-year performance across each of our industry verticals, travel and consumer grew 59.9% driven by very strong growth from both our consumer and retail clients, who are initiating and expanding large-scale transformation programs as they look for different ways to connect to their end customers. Financial services grew 51.5% with very strong, broad-based growth coming from banking, insurance wealth management and payment platform providers. Like last quarter, growth was driven by modernization and transformation of core applications, in addition to new payment platforms associated with real-time payments. Software and hi-tech grew 33.2% in the quarter. Life sciences and health care grew 33.1%. Business information & media delivered 12.5% growth in the quarter. Growth in the quarter reflected a tougher comparison with the same quarter last year, with several clients having experienced substantial growth in the first half of 2020 with revenues from those programs generally plateauing late in 2020. And finally, our emerging verticals delivered 56.4% growth driven by clients in telecommunications, energy, manufacturing and automotive. From a geographic perspective, North America, our largest region representing 59.8%…

[Operator Instructions] Our first question comes from David Grossman with Stifel.

It’s obviously a very strong quarter and a very strong outlook. And it sounds like, to some extent, it was volume driven and your ability to access labor pools that you, I guess, earlier in the year envisioned being more difficult. So maybe you can help us better understand, what changed over the course of the last 3 months that enabled you to access that labor? Were you doing something different? Did something break in the market? Maybe just some more insight into kind of what evolved over the last 3 or 4 months.

I think it was happening across multiple efforts, which we started not necessarily even 3 months ago but even before COVID, how were looking at our delivery ecosystem. And we were talking about diversification, going to different markets and growing in existing location. And I think we were not sure what exactly the results would be, but the last couple of quarters confirmed that most of the efforts were fruitful and we grew in like -- we grew pretty well not only in Eastern Europe anymore but also across India. And we started to much more aggressively work in Latin America as well. But even in some markets in Europe -- in Western Europe and in the U.S., we were hiring more people than we were anticipating before. So I think it’s across multiple components of this.

So was there anything specific, Ark, that you thought among those initiatives that was particularly effective in driving your ability to kind of recruit?

Again, I don’t think there is one magic kind of source which was happening. It’s exactly broad based, again with India becoming another point of growth for us in addition to Eastern Europe before.

Yes. So David, probably a broader range of geographies from which we were recruiting. Additionally, probably the ability to sort of bring in staff that are in a more distributed mode gives us access to staff and resources in different geographies, even within the countries that we’ve traditionally recruited. So I think it’s both that and then, just obviously, we’re working hard to meet demand.

Right. And I think you mentioned in your prepared remarks about the ability to offset some of the gross margin pressure from higher labor costs with pricing. So I think that last year was this unusual year where you had pricing going up, labor markets with -- at the same time, trying to keep pricing down to your clients who were under duress. So did that start to change in the first half of the year? Or is that something that’s more of a prospective thing that’s going to -- going back to a more normalized pricing environment?

Yes. So I think one of the things that we’re beginning to see even in the middle of this year, which I think is different than certainly last year and probably different even than prior years, 2019 and ‘18, is we are getting midyear rate increases. So we are working with clients to begin to take up rates even here and as we entered Q3. And then clearly, as I discussed in the last call, is that we’re expecting to see greater-than-usual rate increases in 2022. So there’s a real focus on account margin. There’s even some prioritization of staffing related to both profitability and, obviously, the strategic nature of the client. And so I think that the dynamics on the pricing side are certainly improving. And at the same time, we still have to manage in an elevated wage inflation environment.

Right. And just one last question is I think you mentioned the acquisition contribution for the third quarter and the year. I just want to make sure I got that right. Was it 450 for the year, 450 bps from...

Yes. So it’s 450 bps for Q3 and it’s 300 bps for 2021.

Our next question comes from Ramsey El-Assal with Barclays.

I wanted to ask you about -- you had mentioned that COVID kind of inspired you guys to create more digital platforms with more and more repeatable approaches to delivery. Is this one of the drivers of margin expansion in the business? Is that an overstatement? Or is that part of what’s giving you confidence to raise the full year margin guidance a little bit?

I don’t -- we don’t believe that it’s actually margin related kind of benefit. It’s mostly how to manage and how to deliver and how to bring the talent in the company and be able to operate more actively. So employees will probably deliver and -- while we grow and as we’re growing right now. So...

Fair enough. Okay. And then could you give us an update on your consulting strategy in terms of -- I don’t know what you can share there in terms of cross-sell. Or -- and also, just comment on the driver of your kind of bullish guidance. To what degree has consulting played a part in accelerating your broader growth in terms of engaging with clients or getting more work on the table? If you could comment on that, it’d be great.

I think at large, there is not much change from our previous comment. We’re not trying to build like separate -- completely separate line of business in consultancy. What -- we’re trying to deliver more end-to-end solutions and be able to advise client early in this end-to-end story. And we see in the progress like we definitely must be -- were accumulating more experience and understanding how to bring these multifunctional teams, including consultants and designers and engineers, for more complex opportunities. So -- and I think it’s starting to pay some dividends. And from what we also saw is that we probably need to go even higher in the value chain and bring some strategic advisory services as well. And we were experimenting during the last 12 months with these type of engagements, which were single engagements for us when we were going to this level, and now decided to strategically invest in this area, too. And one of the acquisitions in Europe is exactly in this segment. So I think in short, we’re hoping that we would be able to make more impact and potentially maybe benefit even in the margin situation. But we still have to prove that it’s going to work this way.

Our next question comes from Ashwin Shirvaikar with Citi.

Outstanding quarter here. Congratulations. I want to ask about -- Ark first. In your prepared remarks, you alluded to clients coming to you for software-enabled business scenarios a little bit. Does that change your long-held view that you said many times that you’re a services company, you don’t want to go towards becoming more of a software company, channel conflict, all those things? But I do see that the implied revenue per employee in acquisitions like CORE is much higher. Are you perhaps tweaking around the edges the viewpoint around software in any way?

I think when we’re talking about software enablement, it’s more related to the previous question about how much consulting and how actually new business models could drive the opportunity for us to build solutions with still significant portion of custom development because most of the solutions require like almost in real time understanding what’s happening and not necessarily relying on the very standard portion of enterprise packages. So our typical implementations or solutions even today would include like 70%, 80% for custom code on top of the -- some standard components. But combination of this exactly should enable new business models, and that’s what we mostly mean. But if we have the right level of consultancies, then we can advise with this final solution would look like and then help to build it and implement it. At the same time, there is an increasing portion of some accelerators and parts of software which we’re developing over the years. And it’s helping us actually to build the solution sometimes not only with third-party components but with our own components. But again, there’s not much change from our more traditional business model with the exception that we would like to start early in the value chain, including some strategy advise.

Understood. Understood. That’s very helpful. And then this might seem like a hard question given how much outlook is being raised in the results. But last year, obviously, you had certain parts of business, certain verticals that were quite seriously impacted. Does the current outlook reflect that all of those have reasonably fully recovered? Or is there still some recovery to come from what would kind of impair or may hurt verticals from last year?

I would say our results still reflect the fact that there’s still some impairments in some of the verticals. But our outlook would include expectations for some improvement, particularly possibly in travel and hospitality, where we’re beginning to see sequential growth but not necessarily annual growth. We do think that business information & media will probably continue to deliver revenue growth below our average revenue growth for the remainder of the year. And although we feel that life sciences & healthcare is going to produce sort of a strong market opportunity for the company longer term, we’ve got a few customer programs that are coming to an end in Q3. And so you might see that we’ll have life sciences & healthcare run at a somewhat lower-than-company growth rate. And of course, the company growth rate is quite high. So that doesn’t mean that it’ll be single digits or something, it just means that it’ll be lower than the average. So I don’t know, I’ve said a lot there. Does that answer your question, Ashwin?

Yes, it does. Yes, that’s helpful.

Okay.

Our next question comes from James Faucette with Morgan Stanley.

I wanted to ask -- I was struck a little bit by utilization kind of being down around 80%, which sounds like there’s still a bit more capacity for you. How are you thinking about how long you can kind of stay ahead of the curve from that perspective? And how should we think about utilization evolution over the coming quarters?

Yes. I mean utilization traditionally for us ran below 80%. And then we have this very, very high utilization due to sort of unique circumstances in Q2 of 2020. That was almost 84%. But that was really kind of unparalleled utilization for us. So now we do think that once you get to 80%, it does -- clearly, it limits your ability to grow when you’ve got new accounts or when you’ve got accounts that you didn’t expect, and we’re looking for new resources. You don’t have as much availability on your bench. And so I think we probably believe that running maybe in the high 70s, somewhat below 80% is probably a better place for us to be. We also think that we’re going to see somewhat elevated levels of vacation in the second half of 2021. So right now, what we would model is utilization below 80% in the second half of 2021.

Okay. That’s good to hear. And then as far as -- Ark made comments around setting up new delivery centers and hiring in those regions. I’m just wondering how the EPAM brand itself is -- that’s been an important hiring tool for you in the past and how it’s resonating in these new areas locally. And are you being able to adapt and adjust it as needed based on what you’re seeing in hiring trends and retention trends?

I think recognition of how different we are in the market created like additional level of curiosity for those that we’ve hired, and they’re definitely trying to understand if they would be -- if they would have good opportunity to grow inside of EPAM. We definitely have very different interest from this more experienced portion of the talent pool globally than we had a couple of years ago. It’s very, very reasonable. At the same time also, our brand recognition in the markets where we operate for some time or new markets which we enter in both in Eastern Europe, because we do have this high level of distribution across this more traditional DACH region, but also in India and Latin America visibly illustrate that there is very different recognition and hope for opportunity inside of -- in many minds, different type of services, companies with very strong engineering heritage, which make some additional attractiveness for the talent. We...

Our next question comes from Bryan Bergin with Cowen.

Curious if you can comment on the pace at which you’re able to add new resources to your engagements after they’re hired. So the time to ramp new hires and laterals, has that been accelerated versus the historical pace given just this level of demand? How are you thinking about that? And what kind of levers could you use to drive that better productivity and hiring pace?

So it’s -- in general, we all understand, and it’s not only related to EPAM, there is very different demand trends than we were experiencing not just 12 months ago, because 12 months ago it definitely was a very different story and very different outlook, but let’s say 24 months ago. So everybody knows again, that, pandemic changed the whole direction. In this case, clients -- and many of them work in different kind of agility pressure and ready to work and speed up the whole process. But it’s also a very big effort and kind of harmonization effort to the whole supply chain when you’re growing like we’re growing today. And that’s why exactly we said we invest more in digital ecosystem than I think we experienced, plus we hope we experience some advantages of doing this investment kind of very purposely during the last decade. It’s not just last year or previous year. So -- and we’re benefiting on putting on top of our previous investments. And the whole timing from opening opportunity to start to actually going through staffing process definitely is much more optimal today than it was a couple of years ago for us.

Okay. And then you talked about a progression into new and larger, multiyear engagements. Can you put any numbers around that as far as giving us a sense on how much larger or longer you’re seeing in deals relative to 1 or 2 years ago?

So I think it’s, in general, difficult to quantify. But like with our growth right now and if you look at the number of clients with $100 million and $50 million and $20 million, that’s number is like very obviously increasing very fast right now. So -- but I don’t think I can give -- or we can give at this point like very special quantified kind of points. And like the only things I would like is that we have now clients which are growing from start to $20 million, $30 million, $50 million. The whole -- this acceleration, also very, very visible.

Our next question comes from Jason Kupferberg with Bank of America.

Congrats. Great numbers. I wanted to start with a follow-up on Bryan’s question, just these larger, multiyear engagements. Is it both the MSAs and individual SOWs that are getting bigger and longer? And I’m just wondering if that’s having any effect on your sales approach and strategy as you pursue larger engagements.

I don’t think it’s related to specific MSA sizes because from this point of view, we’re probably in the same situation like before. Nobody promising like huge, huge deals like contractually and up front. The reality of the deals is pretty different. And again, in services business, most of the clients still maintain the flexibility to stop doing things legally, contractually. While in practicality, these engagements are very different right now.

Okay. So given how much your growth is accelerating, have you seen any change in the composition of your top 5, top 10, top 20 clients?

So probably not a lot of change with the top 5, but you certainly would have seen rotation probably in the what I’d call the 11 through 20 cohort. And as Ark was indicating when he answered your earlier question is we have several -- maybe more than several customers that have gone from 0 to our top 20 in a year or less. And so we are seeing some programs where there’s a real strategic imperative where the growth accelerates very rapidly and they’re already running in our top 20.

Okay. Just last one real quick. Are you seeing any return to in-person selling or in-person project delivery?

So that means in-person, you mean me on-site? Or it is -- yes, if you’re asking if clients asking us to bring people on-site or in the workplace, then probably not. I think situation in general is still very unstable. And even if there are some movements in the site like 2 weeks later, it’s -- could be consultants. Right now probably everybody kind of in a wait-and-see mode in regard into on-site working.

[Operator Instructions] Our next question comes from Maggie Nolan with William Blair.

In a strong demand environment like this, is there an opportunity to evaluate your client portfolio or become more selective over which clients you’d like to work with? And what are your latest thoughts on what an ideal or target client portfolio looks like or profile looks like?

Yes, you’re absolutely right. In this situation, there are opportunities to do it, and we definitely are carefully reviewing the situation and sometimes changing priorities from our standpoint. And yes, we’re looking for ideal clients clearly all the time and probably finding some. But definitely an opportunity. But again, we’re evaluating this carefully and constantly in the past before. Right now, more things to do it. So there is choices right now which we make and where to invest. And again, I don’t know how else to answer your question, but saying yes, we do it.

Maggie, in terms of the growth in the -- outside of our top 20, it’s probably coming from exactly the type of decisions that Ark was referring to where we are looking at clients where we think that there’s significant growth potential, but we also think that profitability will be sort of attractive and then we are choosing to sort of staff and grow with those customers. And so I think part of the reason why you’re seeing good growth is not only our ability to bring more resources into the company but also some of the decisions we’re making around somewhat smaller and newer customers that we think have got significant growth potential both in the second half and into 2022.

Okay. And then as you think about the CORE acquisition and maybe future acquisitions you might do, what is the time line for integration into the business? And do you intend to or is it important to let some of these consultancies operate somewhat separately for a period of time?

Any acquisitions which we are doing for some time, we’re trying to understand more details and kind of getting more insight because it’s never possible to have a full picture before closing the deal. So the same is happening right now. And specifically, in consultancies, definitely we will be like looking to what’s happening and what’s the best ways for us to practically in real time.

Our next question comes from Vladimir Bespalov with VTB Capital.

First, could you update a little bit about your M&A pipeline? These are getting increasingly important in your growth story. And do you expect more deals to come in the coming couple of quarters maybe? And what expertise and sort of capabilities do you want to develop further with this M&A? And the second question is like on the growth outlook. If we take the 2-year stack, the growth rates that we are seeing are more or less close to your historical levels, something in the mid-20s. But this -- the last couple of years, I would say we’re like quite bumpy. And maybe you could comment with your visibility, let’s say, 1 year ahead. And do we really see some kind of acceleration from the historical levels of growth -- organic growth that we have seen so far?

I think let’s start on the second question. And I think I agree with you that for the last couple of years, results are bumpy. But I think the environment around us was very bumpy as well. And I think that’s a collection of those. If we take this out, then our long-term kind of promise to grow in above 20% growth, that’s exactly what we’re targeting, and we’re on the same journey right now. We -- definitely, under this pressure of unknown which is around us, putting some extra efforts and maybe we will find some opportunities to improve what we were thinking about. But again, long term for us, how to grow profitably with 20% organic year-over-year growth and how to maintain security of delivery at the same time. I think that’s good enough challenge. And that’s the target. The rest of this, again, impacted by a lot of changes around us. And the first question was about...

M&A.

M&A. And I think here, there is not much changes. We were mentioning before that we’re evaluating the pipeline all the time, that we were looking for new capabilities in market expertise, consulting components, and thinking what would be the best for us, kind of the strategy of our delivery. So it’s all applicable today. That’s -- we closed like 5 deals this year. It just reflects that we found better companies willing to join us. Versus from pipeline point of view -- it was pretty well-developed pipeline. In the past, we have pretty well-developed pipeline. Right now, how many other transactions we’ll be closing in the next 6 to 12 months? We need like to wait and see. And in general, I would like to say like we don’t have a strategy of kind of rolling up acquisitions. We specifically are looking for some which would add capabilities and fill the gaps which we need to fill. So -- and even right now, most of those transactions are pretty small.

Our next question comes from Surinder Thind with Jefferies.

I’d like to start with a big-picture question here. Any color you can provide on perhaps how compressed the times line are clients in terms of trying to get jobs till the project’s done? Meaning pre COVID, what a road map might have looked like and what it looks like nowadays?

Again, I don’t think we’re going to share anything new or what you don’t know. It’s definitely the pressure to perform and to deliver is much higher now in -- I was trying to say post COVID, and we know. Is it post-COVID or still continuous COVID time versus pre-COVID time? That’s definitely changed because everybody understands there is only so much time to adjust business models and build solutions to be able to continuously compete in this continuous COVID time. I mean it is very visible across all markets right now and I think creates pressure on clients and on us as well.

Fair enough. I guess what I’m trying to understand here is the client’s appetite. Obviously, everybody wants to get something done today. And so how much work are you perhaps leaving on the table? And then maybe in terms of the ability -- or an earlier question is about you’re now able to do rate increases at midyear. You may be able to push rates at this point. Can you talk a little bit about that dynamic? Because it just seems like you talk about having bigger projects, longer projects. There’s this dynamic of the rate increases. And then how should we think about how that fits into your strategy of adding headcount at this point? I mean what kind of headcount addition should we thinking about?

So I think it’s kind of a good question. At the same time, we get in our understanding as we speak as well because if 9 months ago somebody will tell you now that we will be growing our talent pool as we’re growing today, we would be very cautious to confirm that it would be possible. At the same time, as we mentioned before, with orchestrating multiple efforts, we say that we can do better than we were thinking in the past. Right now, we’re thinking that probably around 3,000 additions per quarter would be something for us to achieve without much quality risks. Maybe more, but that’s how we’re looking at this. What would be happening in reality, we will see like in a couple of quarters.

Yes. And the rate increase question is about what can happen in terms of revenue growth. Certainly, that’s helpful. And you are seeing an expansion of revenue per head. But at the same time, a lot of the conversations that we’re having with clients are informed by the wage inflation we’re seeing. And so clearly, they’re difficult conversations with clients. We’re helping them understand, obviously, what conditions we’re facing with somewhat elevated levels of wage inflation, which is in part then driving the conversation around meeting the higher rates. So like I do want us to leave with the idea that we’re -- we feel good about the demand environment. The demand environment helps us when it comes to rate increases. But at the same time, the 17% to 18% guide that we have for the full year is informed in part by the lower SG&A in 2021. And you’re likely to see somewhat higher SG&A in 2022. And at the same time, we’re going to work hard to sort of maintain and improve gross margins over time.

Got it. And so just to clarify the last part, is the idea that when you think about 2022, relative margin stability versus this year? Or are you looking to maybe invest more? Or are we -- I’m just trying to understand how that dynamic is working out because it seems that there’s a really big opportunity here to continue to build up globally and do a lot of things. But at the same time, there’s just structural limitations in those kinds of things as well.

Yes. So, well, we back up historically. So you’ll remember that we generally have talked about 16% to 17% as a targeted adjusted type of range. And then we’ve run, in the last couple of years, closer to the top end of that range or somewhat above. And so we guided this year to the 16.5% to 17.5% in part because of what we were seeing and also because we had lower-than-typical SG&A as a percentage of revenue. Right now, with obviously the strength in revenue and ongoing savings in SG&A, we’ve guided to 17% to 18%. But I think as you look forward, I wouldn’t -- I certainly wouldn’t commit to 17% to 18% as a targeted profitability range in future years. So you might think about us coming back to some earlier level in part because, well, we’ll just -- we’ll continue to make investments in delivery centers and in other capabilities so we can continue to grow the business at a high rate.

Thank you. And I’m currently showing no further questions at this time. I would like to turn the call back over to Arkadiy Dobkin for closing remarks.

Thank you. Thank you, everybody, for joining today. So, as usual, if you have any questions, David is available to help. And looking forward to talk to you in 3 months. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.