Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the EPAM Systems First Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker host, 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 first quarter 2022 results. If you have not, a copy is available on epam.com in the Investors section. With me on today’s call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I’d 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 comparable GAAP measures and are available in our quarterly earnings material 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. Thank you for joining us today. During our previous earnings call, I finished my remarks with our assurance that the level of maturity that the EPAM has reached over the last few years, along with our ability to operate and manage our performance during the difficult times in 2014 and 2015 in Ukraine and 2020 and 2021 in Belarus, allows us to say that we were well prepared to address the potential challenges of 2022 by leveraging our broad global reach and deep regional insight and by applying our strong engineering DNA and, most importantly, our never-ending entrepreneurial spirit to continue making the future real for our clients, our employees and our global and local communities while keeping everybody as safe as possible. Like everyone we didn’t expect the war. By any measurement, the quarter has been unlike any other quarter in our history. The Russian invasion of Ukraine has changed the world and impacted tens of millions of people, including tens of thousands of our employees, their families, friends, neighbors in Ukraine and around the world. What we thought was unimaginable when we reported our Q4 earnings on February 17, all changed a week later. Now let me repeat a simple statement. EPAM, as a company, fully stands with Ukraine. During the last months since the beginning of the war that was started by the Russian government, our absolute top priority has been and continues to be the safety and well-being of our employees and their families in Ukraine. Today, our employees in the region and around the globe continue to support each other, donating time and resources to help their colleagues in Ukraine. Additionally, the company has provided significant financial and logistical support to help move our Ukrainian employees and their families…

Thank you, Ark, and good morning, everyone. In the first quarter, EPAM delivered strong results despite the impact of the company’s decision in March to discontinue services to customers based in Russia. In Q1, we also incurred some of the new initial costs resulting from Russia’s invasion of Ukraine, in the acceleration of our geographic diversification strategy. Certain of these costs, including expenditures related to EPAM’s humanitarian commitment to Ukraine, charges for impairment of Russian long-lived assets and costs associated with accelerated employee relocation have been excluded non-GAAP financial results. We have included additional disclosures specific to these and other related items in our Q1 earnings release. During the quarter, EPAM generated revenues of $1.17 billion, a year-over-year increase of 50.1% on a reported basis and 53% in constant current currency terms, reflecting a negative foreign exchange impact of 290 basis points. Looking at the performance of our industry verticals in the quarter, Travel and Consumer grew 90.9% driven by strong organic growth from both our retail and travel customers, as well as revenue contributions from recent acquisitions. Financial Services grew 54% with very strong broad based growth coming from asset management, insurance and banking. Life Sciences and Healthcare grew 35.9%, business information and media delivered 31.5% growth in the quarter. Software and Hi-Tech grew 28.8% in the quarter and finally our emerging verticals delivered 59.4% growth driven by clients in telecommunications, energy, manufacturing and automotive. From a geographic perspective, America is our largest region representing 59% of our Q1 revenues grew 46% year-over-year or 46.5% in constant currency. EMEA representing 36% of our Q1 revenues grew 62.7% year-over-year or 68.1% in constant currency. EMEA performance was driven by stronger organic growth combined with an incremental contribution from recent acquisitions. CEE was representing 3% over Q1 revenues grew 10.5% year-over-year…

Thank you. [Operator Instructions] Our first question coming from the line of Bryan Bergin with Cowen. Your line is open.

Hi, good morning. Thank you. And I hope all of your colleagues remain safe here. First question I have for you is around client retention. So obviously, you had very solid revenue results here. But can you just give us more color around client conversations? Have you experienced any client losses to just their choice for reductions and risk exposure. And how is the conversion of new work with the existing clients progressing relative to maybe historical pace?

So I think it’s pretty understandable that kind of similar to us, clients also went through multiple sorts during the last – first couple weeks of invasion and then through couple months and a lot of opinions and assumptions where it changed. So we do have several cases, where clients decided to stop growing with us. But it’s very, very much exceptions and we have multiple cases where clients were – work with us and then returning back in several weeks and starting to grow with us as well. I think it’s – I would describe it as much better than we would expect several months ago. And I think the level of comfort and confidence is practically growing each week. We have multiple clients who talking to our people in Ukraine and expression there – appreciation and really amazement what happening and how my producing the level of productivity, the same like myself and Jason expressing during this already today. So – and during the last week, we see new business starting to come, some clients specifically asking to accurate and work in location. And we starting again hiring in Ukraine as well. So I think that would summarize this.

Okay. Okay. That’s good to hear. And then just on the profitability outlook, so I wanted to dig into some of the contexts you provided around this phase four. So it sounds like you believe there’s the potential to achieve your prior levels of profitability here in the future. But are there any structural considerations in those future plans versus the prior operating model that you consider? So really just what are the risks you’re thinking about in getting back to that view and I think you said first half 2023? Thank you.

Yes. So if we talk about, I guess, Q2 and then talk about maybe the journey as you head back towards 2023, is that initially we’re going to have lower utilization, as I mentioned during the prepared remarks. Clearly in Russia, as we’ve exited – as we exit operations and particularly we have determined to stop doing work for Russian clients. We’ve got – we’ve modeled somewhat lower levels of utilization for Ukraine, just because the situation remains dynamic. And then, we are also seeking some clients who are asking us to do delivery. As Ark said, stay with EPAM, but ask us to do delivery outside of Belarus. And so you’ve got in that entire region, you’ve got probably somewhat lower utilization. And I think you’ll work through a lot of that here in Q2 with improving utilization in Q3. You do have obviously some standup costs associated with creating a whole series of new delivery centers and growing existing delivery centers, while we’re ramping down and still maintaining some of the costs associated with our current delivery locations, particularly in Russia. And then, what you have and we’ve talked about this in the past is, as you move people into the next geography, into their next delivery country is in some cases those are more expensive countries. And we pretty immediately take people’s compensation up. So there’s an increase in compensation costs. And then there needs to have be a discussion with clients about the associated rate increase. Those conversations are already underway, and we’ll be working on that throughout the year. But that’s probably the balancing act, because I think you work through the utilization and then the SG&A efficiency, SG&A will go up as a percentage of revenue in Q2, but then I believe begin to come back down in the second half. And then we’ve just got to work through all those sort of rate discussions.

Okay. Very good. Thank you.

And our next question coming from the line of Darrin Peller with Wolfe Research. Your line is open.

Thanks guys. First of all, really just hope everybody’s doing well and stay as safe as possible. Secondly, it’s very impressive to see you guys manage through this. And on that note, I really just want to understand when you think about looking forward for the next few quarters, the new balanced portfolio from a supply side for your business, if you could just help us understand if there’s going to be, if you’ve identified like any specifically new centers of real differentiated talent development. The way that you would leverage Ukraine and Belarus in the past, are there other markets that you see becoming your go-to differentiated markets are maybe newer, whether it’s Turkey, I know there’s been areas you’re moving some of the Russian base too. And so I’m wondering if some of those could be that source. And then just on top of that, is there any way you can help us understand the breakdown, the percentage breakdown of your employee base that you’d expect it to be within a couple of quarters after these moves occur?

Yes. Thank you for the question. And I think we directionally indicated already how much we think by the end of the year, we expect people between Ukraine and Belarus, because in Russia we’re closing in the next few months. We are also hoping, I think we indicated this as well and Jason mentioned this specifically, we considering right now – right now that good number of our employees from Russia and some from Belarus will be relocated based on our BCP requirements from the clients. The location is happening right now to multiple countries, because mostly in Europe and Western Asia as well and Central Asia as well. So I don’t think we can ferry now details and percentages, which we going to have. But the idea definitely that we identify a number of specific countries where we think we can scale. But we also bring there the talent, which exists at EPAM. And we believe that in this configuration, we will be able to accelerate recruitment and bring connectivity to EPAM culture. And what it [indiscernible], which we were building this company for a long time. So at the same time, during the last 12 months, the fastest growing market for us was actually India and Latin America. And so we were talking about it before, we started that we focus in on diversification and this is actually working for us, and we will be accelerating even more in this talent market. So India and Latin America will be in the focus and new dev centers and existing dev centers in Europe, which will be complemented with our talent reallocated from our traditional locations, this creates stability and client comfort, which will believe will be driving the growth. Okay. I think that’s what we can share. I don’t think we can share very specific numbers right now.

All right, Ark. And then just a very quick follow-up is – you mentioned pricing discussions will obviously come after this. But can you just comment on the receptivity? We heard from one of your competitors yesterday and others in the industry that they’re seeing pretty understanding receptivity on the industry around it, inflation being passed through in price. So especially in the context of what you have to do to move folks, what kind of reaction are customers having now to that price offset?

Yes. So, we – I think we’ve talked about over the last couple of quarters that the market, just because of the imbalance between supply of technical resources and the immense demand, is that those conversations have been easier for a while. And then on top of it, our clients are also seeing the cost of their employees go up. So there’s some cognition that there is inflation in the market. And so these discussions were easier. The one thing I think I’ve been pleased by is just in conversations with clients, I think there’s an understanding that they do get a different level of productivity from EPAM. And so there’s an understanding that as we’ve had to make all these difficult transitions to different countries, that what they get from EPAM from a delivery standpoint truly is differentiated. And so that’s helped with the stability of maintaining customers, but it also is supportive of the conversations that we’ll be having about pricing. So, I think that’s how I’d answer that.

All right guys. Thanks and be safe. Thanks.

Thank you.

And our next question is coming from the line of Arvind Ramnani with Piper Sandler. Your line is open.

Hey, thanks for taking my questions. And congrats on operating in a really tough environment. I just had a couple of questions. We have done some checks with folks on the ground and we’re quite amazed with the resilience that we heard from Ukraine. Can you provide some, let’s say, granular feedback on how you’re delivering this high levels of productivity from Ukraine? I know you provided the high-level sort of feedback, but can you provide some kind of more specific feedback on how you’re able to deliver these levels of productivity from Ukraine?

So as you know, like Ukraine, our largest location. And we had pretty distributed delivery centers, infrastructure in the country with several major data centers there. So during the first weeks, like the main focus was to bring as many as possible people to the western part of Ukraine where we have Kyiv [ph] of our central and establish a number of new data centers in the smaller cities around the region as well. So from infrastructure point of view and activity point of view, so we didn’t have practically any interruptions in Kyiv as well, which is our major city, major development center. So between these two, we practically were covering majority of the necessary work happening. So, I don’t know what else we here besides like praising our employees who were focusing and actually keeping their mind straight with this difficult situation for the work. So that was – plus a couple of thousand people, specifically women, who were able to relocate to Poland and to Hungary and work from these locations as well.

Perfect. And then just as you transition your talent from Russia or Belarus or Ukraine, where most of them being moved to, right? Is this them being moved to like Poland and Hungary? Or are they moved to the U.S.? Where are most of these folks being moved to who are exiting there?

No, this is pretty – this is a pretty sophisticated operation right now. And if I start to list all countries where people might be being right now, it would probably will be by the end of this call. But there are several specific areas. Poland, obviously, was one of the key destinations, but it’s not only Poland. It’s countries in Central Asia, it’s countries in – countries like Turkey and Serbia. So it’s all known names. But at the same time, it’s not even one-phase exercise because in some situation we have to move people very quickly. And then after this, find the final destination, which could be U.S. or Canada as well, depending on people, depending on skills profile. So it’s very much longer-term operation for us.

Terrific. And last question for me, I just want to follow up on Bryan’s question earlier on sort of existing and prospective clients. Clearly, I think existing clients are being supportive. But what is the feedback from like new clients? Are you still sort of selling to new logos and getting traction with newer clients?

Yes. As we’ve mentioned, like, clearly, the real, real focus was to stabilize operation with existing clients and address opportunities of growth in existing clients which still happen, okay. Definitely, there are new logos coming to us and there are very trusted network of people in the industry who like bringing us to their new destination because people moving and they’re comfortable working with us and this is very, kind of very normal. Some of these people really believe in the differentiation level of service which you can bring. So this is still happening. But as you can see, we’re practically flat right now between Q1 and Q2, which means that it’s a balance right now. We’re getting stabilization and we really believe that Q3 and Q4 should be more reflecting on what’s happening. But we cannot tell exactly. Our expectation, otherwise, we will be guiding for the year.

Terrific. That’s impressed with you and folks in the EPAM. Thank you very much.

Great, thank you.

Thanks very much.

Our next question coming from the line of Ashwin Shirvaikar with Citi. Your line is open.

Thank you. Hi, Ark. Hi, Jason. First of all, much respect for what you and your employees achieved this quarter. It’s truly amazing. I guess my question is, can you accelerate some of the delivery diversification using M&A? Or is there just too much going on operationally that you would not add that to the list of things to do?

I think we’re looking at the opportunities. And even in this very difficult period, I don’t think our M&A strategy changed. We’re looking for actually additional skills and additional locations, but we’re not looking for very large ones because that’s a different level of integration. As you mentioned, it’s probably not exactly on our mind right now. But we’re looking for some small accelerators in different geographies so we can grow faster that would be necessary.

Yes. So they might actually be entry points or beachheads in the countries in which we’re not currently operating. They give us management experience in those countries and then we grow around them. So in many ways, they might start small but allow us to accelerate in different regions, including beyond the Balkans and Latin America.

Understood. Understood. And I think I did hear a comment with regards to new business development having restarted. Could you maybe provide more color around that? And is that perhaps an indicator that even your client conversations, as you mentioned previously, are transitioning from figuring out delivery with you to perhaps figuring out growth with you?

So I really didn’t get the question exactly.

The new business development…

New business development, it’s – well, first of all, again, we have significant presence outside of the region. And we have – we have built pretty good reputation during the last year from quality of delivery. So we still have people coming to us. And some of them actually looking for the type of talent which we were having in this difficult right now region. And we have opportunity to relocate and mix capabilities right now and many clients are actually looking for this as well. So it’s really difficult in this situation to say that it’s a huge not both new logos coming, it’s not because people careful, cautious right now. But we see definitely a very positive direction happening since the beginning of March.

Understood. Got it. Thank you.

Thank you.

The next question coming from the line of Ramsey El-Assal with Barclays. Your line is open.

Hi. Thank you for taking my questions today and also amazing job that you guys are doing as we can all see. Can you describe how your balance – actually, what I meant to ask was, when you’re relocating people right away, is there a lag that’s due to travel, et cetera? Or with those relocation efforts, are you able to make those people productive pretty quickly? And I guess the following question there is, is there a backlog of people who are still waiting to be relocated? Or is the relocation sort of process largely complete, at least as it stands today, understanding that the situation on the ground is fast moving in terms of the conflict.

I don’t think we would be sharing all logistical components of what’s happening because it’s difficult to describe as there are multiple challenges there and we’re really telling very directly that this is not an easy process and there are multiple aspects of this. So what we – I think what’s important instead of like talking about all the specifics, that we do believe that by the end of the year, our locations in Ukraine and Belarus would be not more than 30% of our capacity. I think that’s important focus, the rest of this, I would rather skip right now.

Fair enough. Fair enough. And has there been any issues with attrition outside the kind of conflict zone. In other words, are you having – are the staff who you’re having to lean on in order to keep the going, having any burnout or morale issues in terms of just the degree to which you need to sort of lever them to keep the operation going, or are things okay on that side as well?

I’ll comment on attrition and put a few numbers out there. And so the attrition that has – has also been a very positive, I don’t want to call it a surprise but certainly if we didn’t have any incremental let’s say voluntary attrition. Well, we have that is some incremental involuntary attrition primarily related to Russia. And so we – we are up around, let’s say around the 20% range from an attrition standpoint. But from an – from a voluntary stand point the attrition levels we are seeing are very similar to what we saw in Q4 and Q3. So at least at this time, very little change in attrition and EPAM employees are highly supportive of all the work that needs to be done and obviously that’s why we’ve executed as successful as we have.

That’s great to know. I appreciate it. Thank you.

Our next question coming from the line of David Grossman with Stifel. Your line is open.

Thank you. Good morning. I was wondering if I could, excuse me, just go back to the supply side and I kind of, maybe you could speak to some of the key similarities and maybe even the differences in building supply outside of your historical strengths in Belarus and the Ukraine, and perhaps share some lessons maybe learned from the efforts years ago to start up in India is that operation kind of had some fits and starts. I’m just curious what lessons you took from there that maybe helping you scale outside the region?

Think it did for the question, because like – and with you specifically, and some other analyst on the call who saw EPAM [indiscernible] 10 years ago and visited our locations back then. So 10 years ago, we were operated practically in four countries only. So in those countries at this time nobody was thinking that it’s possible to put together 10 of thousands of people. And we put a lot of investments in infrastructure, in our digital platforms, in our locational eco system. And when you asking what actually similar or not, we trying to bring all of this experience, how to build in kind of not relatively scalable centers, relatively scalable operation. And you mentioned India; we started in India much, much later than anybody else really. 2014 was a trigger for us to open the productions and then in Latin America and Mexico as well. And through applying the kind of lessons we learn during our completely didn’t feel start up in Eastern Europe. So India last year was the fastest growing location for us. But it wasn’t fastest growing location for us for the first three years it was practically flat or even going down. So we changed operations and while we still have the same management, which we acquired long time ago. So we have support of this team to transition this to very different company today. And that’s why India probably by end the year would be probably Number 2, Number 3 locations for us. Very similar has happening in Latin America. We were selecting very carefully the management teams there to see that if they would like to put very different standards on themselves. And we did a small acquisition last year, which we’re very happy. And Columbia growing for us very quickly. We open it like across Latin America as well, and Mexico is one of the fastest-growing locations for us. So I think we’re bringing what we know to new locations. And that’s why we’re pretty confident that – again, it’s difficult to be confident when there are so many unknown. But with some assumptions how it could happen, we do believe that even by the end of this year we will be growing back to our close to normal rates.

Right. So is there – just at least from where you sit today, are there any differences in these other geographies that you would highlight? Or is it looking very similar to what you’ve seen thus far in your key locations that you operate today?

So there are definitely differences. It would be kind of not responsible to say that it’s not. Countries in different development stage, there is a different level of software engineering kind of maturity there. But we do believe that we have multiple locations where we’re moving today which would be able to reach the level of quality which is standard for EPAM. So I can say this. We don’t see right now obstacles which would stop our growth as it was before.

And David, one of the differences might be the circumstances, right? So we’ve got a much larger number of people moving into these newer delivery locations, so bringing EPAM delivery methodologies, culture, all the different types of tools that Ark referred to. And so we start with, I would say, a greater injection of kind of EPAM culture into each of these locations than maybe you would have seen in prior movement into new geographies.

Got it. Great. Thank you for that and I just wanted to clarify one thing. I think you made – maybe it was you, Jason, a comment about the bench included in utilization and maybe I just misunderstood the comment. But perhaps you could just clarify that. Are you maintaining a larger bench in the Ukraine now just to back people up? Or did I just misunderstand that comment?

Yes. No, that’s fair. So let me clarify that probably for everybody here, is that we’ve got some individuals that were – that were added. And as Ark said, the focus of Q1 was to make certain that we were able to maintain delivery and obviously maintain customers. And so we had a fairly significant number of employees that were added that are not billing at this time. They are potentially billable but are currently not being billed. They’d show up in utilization because they’re technically in sort of billable roles, but we’re not charging for them to customers. We did exclude the expense for the purpose of the non-GAAP numbers that we provided. And the idea is that at some point in time and already we’re beginning to have discussions as to make certain that those positions become billable. But right now, they’re there to make certain that if there was any concern about continuity in Ukraine, that we’d have effectively kind of backup resources available. Generally, those are in countries clearly outside of the affected region.

Right. Could you just give us a sense of the scale of that backup kind of work for us at this point?

Yes. I think that you can see it in the press release; I think we’ve got to call out in terms of the guide. And it will – and so you can actually see sort of the percentage, the costs associated with it. And so it’s there in the press release.

Got it. All right. Good luck to all of you. You should be very proud of what you’ve been able to accomplish.

Thank you, David.

Thank you.

[Operator Instructions] And I am showing no further questions at this time. I would now like to turn the call back over to Mr. Dobkin for any closing remarks.

Thank you. First of all, I would like to personally thank the entire EPAM team for their dedication and leadership and commitment. We have been through a lot of – during the last couple of years and we’re definitely dealing right now with something which we never expected during the last months. So I really appreciate everybody staying with us and doing this with us, and our clients and our partners. And as always, for people on the call, so if you have questions, you know where to direct them. And hopefully, we will see you also in Boston in a couple of weeks. Thank you very much.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.