Good day, and thank you for standing by, welcome to the EPAM Systems Third 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. I would now like to turn 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 third 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 materials located in the Investors section of our website. And now let’s turn the call over to Ark.

Thank you, David. Good morning, everyone. Thank you for joining us this morning. Let me begin today with a simple statement that we're very proud of everything EPAM achieved over our nearly three decades and that we are very thankful to the people who pass for their tremendous contribution over those years. And I would like also to add one more side, which feels very important to bring to the top of our conversation. Well, we you all know that the war in Ukraine is still dominating global headlines. And we are seeing this ripple effect across many sectors and geographies, for us as EPAM and many people around us. This war continues to be a very central part of our lives, deeply personal and the constant priority. With this, I would like to start with an update on our progress across our four phased approach, which we shared with you six months ago, back in May, as well as an update on some adjustments we are making as a result of newly available information. Our first phase, the safety of our employees and stabilization of our operations in Ukraine. The war has been ongoing for eight months already. Last time we met, we indicated that we thought that it was going to be longer than anybody was thinking when it began. And we all understand the situation continues to be very serious. And also, the safety is a very relative term for people, who is in Ukraine borders today. With all of that, we are constantly and proactively helping our employees, their families and the people of Ukraine as much as we can, but providing a wide range of support, including the regional allocations and all forms of local assistance, making it possible for our people, their families and…

Thank you, Ark, and good morning, everyone. Before covering our Q3 results, I wanted to remind everyone that in addition to our customary non-GAAP adjustments, expenditures-related to EPAM's humanitarian commitment to Ukraine, the exit of our Russian operations and costs associated with accelerated employee relocations have been excluded from non-GAAP financial results. We've included additional disclosures specific to these and other related items in our Q3 earnings release. In the third quarter EPAM delivered another set of strong results across both top and bottom line, in addition to strong cash flow generation. During Q3, EPAM generated revenues of $1.23 billion, a year-over-year increase of 24.1% on a reported basis and 29.8% in constant currency terms, reflecting a negative foreign exchange impact of 570 basis points. Additionally, the reduction in Russian customer revenues resulting from our decision to exit the market had a 470 basis point negative impact on revenue growth. Adjusting for the exit of our Russian operations, reported revenue growth would have been approximately 29%. Looking at the performance of our industry verticals in geographic regions in the quarter, growth was negatively impacted by the ongoing exit of our Russia operations and the effective foreign exchange on our U.S. dollar reported results were helpful, I'll provide an adjusted year-over-year comparison. Beginning with our industry verticals, travel and consumer grew 41.9%, driven by strong organic growth, primarily from our retail customers, as well as revenue contributions from recent acquisitions. Life Sciences and Healthcare grew 35% with strong growth coming from the healthcare industry in addition to growth in Life Sciences. Financial Services grew 10.4% with growth coming from asset management, banking and to a lesser extent in insurance. Excluding our Russia customers, growth would have been 25.4% and 29.9% in constant currency. Business information and media delivered 20.8% growth in…

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

Hi, guys. Good morning. Thank you, I hope your colleagues remain safe here. Just first, I was hoping you could just dig into more on the detail on how you're forecasting that 4Q growth. Just as we consider a 30% adjusted rate of growth on a constant currency organic basis this past quarter and we try to bridge that to the implied level in 4Q. Can you just talk about some of the puts and takes you factor there? Is it really just a combo of lower utilization and some macro uncertainty on demand?

Yes. I mean, I think, there's a few things. First, there is a decline in revenues associated with bill days, so it's just the natural algebra of there are fewer bill days in Q4 than there are in Q3. And that would net-net would kind of actually reduce revenue by 2% between Q3 and Q4 it gives all things else were held equal. At the same time, I think that we continue to feel good about the growth that we’ve generated in Q3 and I think the other thing Bryan to point out is that we have the same impact on our growth rate from the exit from Russia, so we had a $50 million Q4 last year and we'll have a single-digit -- mid to low single-digit Russian revenue contribution in Q4 of this year. So it's a combination of those two things. And then again, we continue to see growth -- we continue to see spending and investments on the part of our clients, but it's probably at a somewhat lower growth rate than we have experienced earlier in the year.

Okay, okay. And then on the delivery footprint on understanding how the Russia exit this quarter that really impacted that workforce level? Can you just comment on your comfort levels ramping in these other regions? And are there any notable changes in the delivery mix plan that you expect to exit this year at?

So Bryan, I think, we’re kind of illustrating that we were talking like a couple of quarters ago about our -- I think balance in our delivery capacity. We actually exactly on the plan or on progression a little bit. And I think by the end of the year, probably a couple more percentage points we’ll be down from impacted regions, which means that, we're continuously building our operations in Western, Central Asia and India and North America as well. But right now it's all balanced out. Again, inside of the company, probably we will go from current 30%, 31% to 27%, 28% trends in the positive future.

All right. Thank you, guys.

Thank you.

Thank you. Our next question comes from the line of David Grossman with Stifel. Your line is now open.

Good morning and thank you. Just a couple of quick follow-up questions about some of the comments that you made about the dynamic between, if you look at the quarter, you had a sequential decline in headcount. You beat the revenues modestly yet margins performed with utilization down. You mentioned rate, is there anything else that kind of helps to reconcile all those different variables with the outcome?

Yes, there's a couple of different ways to look at this. From a pricing standpoint associated with the realignment of pricing for the relocation of employees, we did better than we expected. So we had expected that to have a more negative impact on profitability in Q3 than it actually did. However, on a year-over-year basis, that wouldn't really show up as a benefit. What we saw was a couple of things, we are getting some benefit from foreign exchange, so foreign exchange is obviously having a negative impact on revenue growth rate. But we have a number of countries in which we deliver from where the currencies obviously have devalued more substantially than the devaluation of the euro or the pound. And so, that's had a somewhat positive impact on profitability on a year-over-year basis. Then the other thing, which I tried to call out in the script is that we had an enormously successful year last year relative to expectations, which drove a higher variable compensation cost. And this year where we're effectively, sort of, booking a bonus, if you will, at 100%. It's lower than it would have been last year. And so, last year, I guess, you could say we would have been even more profitable. And this year, we're sort of booking at a more consistent level of variable compensation based on our performance. So I'm not certain if that gets to the part of it, but foreign exchange would definitely be one of the things that's a positive.

Right. And you had said, Jason, I think last quarter that you expect to get to more normalized margins in the first quarter obviously, next year, and you've obviously, kind of, exceeded that this quarter. As you think about next year and you kind of eliminate some of this noise, is kind of a 17%. I know you don't want to give guidance since earlier in the year, but I guess I'm just trying to get a sense, are you still comfortable with that? Comment of getting back to normalized margins and sustaining that next year? Has anything changed?

Yes, so I think that if I remind, I said, we get -- we expect to get back towards, right, which is -- and right now, I feel actually that the company has done a phenomenal job with not only the profitability in Q3, but also the guide getting back to the 16% to 17% in Q4. And part of that has to do with all the work we've done on the geographic transformation and the realignment of rates. But I think it's too early right now to talk about what profitability could be in 2023, just because there's still a lot of moving pieces with what's going on in -- with the war and some other things. But I definitely am encouraged by the fact that we've generated such a strong level of profitability in Q3, and again our confidence in being able to guide to 16% to 17% in Q4.

Right, and just one last one, if I could. In the demand environment, you give us a good insight into kind of how that informed your fourth quarter guidance. And you called out, I thought, consumer. Any other verticals that you're seeing similar dynamic? Are you just anticipating based on qualitative commentary from your customers that they're planning for a slowdown beyond the consumer vertical? Just any more color you can give us there would be very helpful.

David, your wishing and reading exactly what we do. And in general, I think, I don't know if you use noise as kind of qualifier, but there are enough messagings on the market that many industries are very careful right now and seems like, of course, saving priority becoming number one versus transformation. That's at least what we've seen. It's not necessarily seen in the market from specific actions across the industries. But I think it would be fair to assume that retail probably usually reacting much faster, sometimes much faster recoveries as well, that's what we saw in 2021. But some other you’ll fall and I think it wouldn't be surprised. So I think everybody much more careful, obviously, in compared to just several quarters ago.

Okay, great. Very helpful. Thank you very much.

Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Your line is now open.

Thanks, guys. When thinking about where we are now in terms of the transformation you wanted to be in by the time -- by this time in the year around Russia, and all the sourcing in the labor side and the relocating. Could you just give us a quick update in terms of the percentages more you still have to go to finalize plans on that front? And when we think about the new geographies, obviously, you talked about how pricing in those new markets is helping the revenue side to some degree versus the headcount growth. But I'm curious what you expect your headcount growth capabilities to be from here just being in some of these new markets?

So I think in terms of plans, we kind of shared pretty detailed plans during our Investor Day. I think, we're very much on target with this plan, at the same time, as you understand, each month, not even talking about quarter, but sometimes each week making some adjustments to this. So at this point, we do believe that we do in a recent possible based on the real-time information happening and at large our plans still stays the same. So we're going to become probably the most balanced from delivery perspective company in our sectors. And we’re very strongly looking how we grow it and going to develop talent market across new for us [indiscernible]. So it's all in plan, and that's very much moving forward. So what else we will be necessary -- we'll be doing if different type of scenario will be developed, we have answers for this, I don't think we will be saying in all details, but we have plans for this. But I guess, right now, we're going practically with the same plan, which we shared and we're very much on target for this, which we shared on Investor's Day.

Yes, so we feel quite good about our ability to add headcount in the regions in which we're currently expanding in Latin America and India and in other geographies outside of what we call the impacted region. And so, I think, we’re very much can respond to future upticks in demand and again, feel comfortable with our ability to continue to generate growth in excess of 20% based on available demand. Okay, right now, there's a little bit more focus on taking up utilization again. And so, that's kind of what you see around the headcount additions.

Yes. So the question was, you will feel comfortable that we will be able to find the right talent in new locations. Then the short answer, yes. Right now, we even more comfortable that we were a couple of quarters ago, because now we have much more experience in terms of how to do it as we understand how to reapply the experience, which we developed during our growth in our kind of comfortable zone in Eastern Europe, that is very much applicable to new locations as well.

Just thanks. Just very quickly, when you think of the macro and the demand environment for a minute, I mean, it's pretty clear that companies are taking a little bit longer to make decisions, but for the right technology, the demand is still very high. Have you seen a shift to cost takeout plans or efficiencies by your clients yet? Or is it still very much focused on -- like digitization and differentiation competitively in other projects like it?

I would characterize this like if two, three quarters ago, the growth and so as always, I think, collectively, whatever people mean by digital transformation and growth sense of this. It was absolutely number one priority. I think, right now, it's very much balanced with cost savings and what will be tomorrow, I think, it's visible. So it's pretty balanced from our point of view. Digital transformation is still there and its still one of the two priorities, but it's now one of the two.

Understood. All right. Thanks guys.

Thank you.

Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citi. Your line is now open.

Thank you. And good quarter, guys. I wanted to just kind of take a peek at the planning assumptions as you're going through that process for next year? And as we think in terms of granular modeling. Again, not asking for guidance, but how are you thinking of the setup for next year in terms of the underlying demand for digital transformation? Obviously, Q1 is a tough comp for things like that. Could you just walk through your thought process as you do your own budgeting?

We're in the midst of it today, and so we -- the standard process that we would use where we've got kind of an aspirational model and then a very detailed account level planning, and we're beginning to get feedback from each of the business units as to kind of what they're expecting at the account level. Then as you can imagine, we sort of consider the investment priorities and all of that, and we come back with a guide in terms of both revenue growth and profitability. And so, clearly, we're not at a stage yet where I can talk about that based on where we are in the planning cycle and we're also not guiding to 2023, but I will provide some color on the revenue growth. And so, as we've talked about, we do expect that we will return to a rate of growth greater than 20% at some point in the future. At this time, based on what I'm seeing with our numbers, I would not expect that to occur in the first half of the 2023 fiscal year. And instead, I think that would be more likely to occur sometime in the second half.

Understood. Got it and thank you for that. The other question I had was, obviously, as we see everybody else's results coming through, a lot of weakness in the high-tech vertical? How does that affect, sort of, your thinking in terms of -- thinking or expectations in terms of your own client base and the work you're doing? And are you beginning to see any specific impact in that or other verticals?

Ashwin, I think that we already kind of brought color on this, that in general, everybody much more cautious than before. And I think, I don't think like to loudly say this, like you open any media as everybody talking about it. And there is no very clear sign what would happen, but again, everybody much more careful in making decisions. And it's not only in the retail, retail react in much weaker in consumer reaction as well. The rest of this pretty stable right now, but again, slower from gross point of view, definitely slow.

So we still see spending, we still see investment on the part of clients. Just the rate of growth appears to be somewhat slower and some of the decision-making is a little bit slower.

And if you ask in like broader long-term, then I think, as any other relatively large company, we have a history of going through difficult times and we definitely analyze this. And in our specific case, we know that each time after this, it was time of big growth. And again maybe quiet situation was the closest illustration, if considered as a quiet or little slowdown. Again, it was for several quarters, we don't know. But then it was big, kind of, come back. Similar was in 2008, 2009 for us. And we'll learn our lessons how to navigate through this and how to go through this, to make sure that we save, and in Western is the very right part of the company to come work correctly, and that's what we're focusing. And in short, we talked about it already multiple times. Consulting integrated with engineering, we’ve building up this piece now at our work, and we understand how to scale up the talent. That's another area which we keep intact all the time. Even if numbers of headcount is slowing, the whole machine how to bring talent back, it's still running and we tuning this very carefully.

Thank you. Appreciate that. Thanks.

Thank you. Our next question comes from the line of Ramsey El-Assal with Barclays. Your line is now open.

Thank you for taking my question this morning. I had a question on the pricing environment. And it seems like there's some puts and takes. On the one hand, you have a lot of inflation, which might give you some air cover to pass pricing through? On the other hand, you're talking about some softening macro, maybe some caution on the side of your clients. Can you talk about the puts and takes in pricing and whether you're seeing any changes in the environment?

I think, what I would just comment on, on what we've seen, let's say, over the last maybe five months and then it's a little harder to predict as to what you might see in the future, but I could talk to kind of what we're expecting for Q4. One of the things that was a positive surprise from both revenue standpoint and profitability in Q3 was that, we were able to execute on our realignment of rates for all of the relocations that we've done to higher cost geographies. And so, we made better progress than expected. Already, I think that as we end Q3, we think that we've already got the realignment of about two-thirds of the positions that have been shifted to other geographies. We still have ongoing work to do there. And also, we still are relocating people from countries to higher cost countries, but we do expect to continue to see price improvement associated with realignment. And then in addition, there are probably -- is some additional pricing, kind of, going on in the second half of the fiscal year. Hard to postulate, kind of, what could happen next year. Certainly, in the environment that we've been in where there's been very high demand and some disconnect between supply, that's supportive of pricing discussions and we'll have to see what pricing discussions look like in 2023.

Okay, great. And one last one for me, a question on M&A and similar overlay with the sort of macro cycle. In past cycles, do you guys pull back on deal activity as the macro environment gets a little choppier? Or instead is it the opposite where you maybe see some opportunities that weren't around when times were better? How do you think about M&A in that context?

I don't think we were like adjusting our M&A activities based on specific like economic climate environment. I think, we were looking for the right additions all the time and we continue doing this today as well. And I think it might be a better opportunity for us in a couple of quarters from pricing point of view. But in general, yes, we consider that we’re working on this and it's not happening right now, largely because we don't see the right things. But definitely, we have -- maybe with everything else, yes, we have some other priorities before this. But again, there is no specific slowdown or the M&A.

Got it. All right. Thanks so much. Appreciate it.

Thank you.

Thank you. Our next question comes from the line of James Faucette with Morgan Stanley. Your line is now open.

Thanks very much, a couple of follow-up questions for me. Jason going back to kind of your outline for 2023, I think, it makes sense, particularly given the comps that you faced with Russia and its contribution at least in the early part of the first half of this year. Are there other drivers or things that we should keep in mind as you think about like that, kind of, return to 20%-plus growth in the second half of the year? And kind of what are your planning assumptions are you looking at? New capacity coming online. Delivery capacity coming online? Or just how you're thinking about kind of the evolution of the current demand environment, just any incremental color on what's leading you to kind of think about that cadence?

Yes, you're right that we would have still generated significant revenues from Russia, particularly in Q1 of 2022. So that will be a tougher comp. We still think foreign exchange is going to have some headwind associated with it. And then, I think there's -- right now, we continue to sort of evaluate the demand environment as we've talked about. But I just think the other thing is that, if you look at our headcount additions over the last couple of quarters is that, oftentimes you need to have, sort of, ongoing sequential growth to them continue to sort of produce strong year-over-year growth two or three quarters out. And so, we feel very comfortable with our ability to add headcount over time. And again, as Ark talked about, we feel that we've got increasing, sort of, operational experience in the newer geographies. And right now, I just think as I kind of look at the numbers and the likely headcount adds this quarter, it just appears that your trajectory would, sort of, give you the opportunity for a greater than 20% growth in the second half rather than in the first half. And I think, you guys probably do the same types of math that we do, and you likely could see that as well.

Great. Appreciate that, Jason. And then the second part of my question is like -- and then I think it ties a little bit into what you were saying around employees and where you're adding heads geographically. But I think you had made the comment about wanting to increase utilization, et cetera. Is it right to assume that you're probably running higher utilizations in your more established geos, including maybe those that are impacted still by the war in the Ukraine? And that the improvements in utilization are likely to come primarily from the newer geographies? Or is there more nuance than that?

Yes, it would be mix. So we're definitely running with lower utilization and what I'll call the impacted sort of geographies. But there's also some opportunity for us to tighten up utilization in some of the newer geographies that we've expanded into. And so, again, the goal in Q4 would be somewhat improved utilization, but still maybe a little below our target. And then, as we enter the first half of next year is to make certain that we're continuing to focus on improved utilization.

But in general, what you asked, James, it is correct, because in new locations we have new people and utilization at the beginning of this area is still below. And in quarter two, it will be improved, because it will be stable at, but yes.

That's great. Thanks, Ark. Thanks, Jason.

Yes. Thank you.

Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Your line is now open.

Thank you. I'd like to start with a question about just, kind of, the delivery footprint that you have at this point. Can you maybe talk about the level of comfort that clients actually have with the current exposure to the region? So are they expecting you to maintain backup in case of further disruptions? Are they taking on some of the risk? How should we think about that balance that you have with clients at this point?

Surinder, basically question -- how well the making happening between what locations, clients leading to consider and where we're growing right now from talent point of view, correct?

Well, more about the idea that right now, I think the target is to have 30% of your delivery from the exposed regions where the war is, right? Is there an opportunity to further reduce that? Or it seems like clients are comfortable with that level of risk? And so, how should we think about -- do you have to make feedback in terms of clients, if there is further disruption? Or how should we think about you guys managing to this new global delivery footprint, like why not reduce it further?

I think that's a very dynamic parameter. And I think clients -- because the risk is a very dynamic parameter. And in general clients comfortable with it, but as soon as the risk will elevate then this distribution will be happening, that’s the main challenge that's what we're living through. And at this specific point, I think there is a kind of status quo is some concerns and what will be one month from now or two months from now, it's a little bit different things. Again, that's exactly the challenge on hand. But another side, we have multiple new locations and we have, as we mentioned a significant number of EPAMers, who move from one location to another and came to new locations, which kind of seems to accelerate the EPAM knowledge and quality standards and growing new locations. And also make clients comfortable in these new locations, because some good concentration of people they already know moved there. So from this we’re managing the whole as a rebalancing of the talent. But right now, we have 30%, and it's people with pretty good level of utilization right now.

Thank you. And then as a follow-up, can you maybe talk little -- I understand there's been a lot of questions about demand, but can you maybe talk about the level of visibility that you have with customers? And what I'm trying to get here is, can you maybe talk about the rate that maybe projects are being delayed or canceled relative to historicals? And is there incremental risk in the sense that, once 2023 budgets get established, it's really then that clients have to make decisions. So maybe current conversations may be productive, but when it really the rubber hits the road, they're more hesitant to start projects. So just kind of trying to understand the risk in the numbers as it seems like some commentary from everyone else, things are just slowing faster than anticipated. And so, the question is why can't that continue?

I think, our typical answer at this stage, it's too early to say, because it's kind of not even middle of Q4 and this is very, very true in any very normal year. With a kind of not what is a normal year, probably when I look into our revenue trends or the results of normal year the last time we saw probably at the end of 2019, which was a long time before COVID and before, then it was like being slowdown and a huge acceleration. Then in our case was started, but then the whole general economic trend like going different than we saw just six months ago probably, okay. So that's why like you're asking question, but even in normal year, we're not commenting on this. And this specific year, I don't think we can say like, it is very dynamic.

That's helpful. Thank you. That's it for me.

Thank you. Our last question comes from the line of Jamie Friedman with Susquehanna. Your line is now open.

Hi. Ark, in your prepared remarks, you called out the increase in the on-site composition, the highest in the company's history. So I just want to get some context on that, why now? And then, well, let me just start with that, any perspective. And then I had a question about the $10 billion comment as well, but how about the on-site first?

I think we're talking about EPAM continuing development as a brand. It practically didn't exist three years ago. Now that's in -- may which started to be recognized on the market and consultant field. So -- and with everything, specifically acquisition during 2019 or sorry, 2021, during the 2021, end of 2021, we were increasing this. And to support the new type of engagements, which we anticipate in and which we are doing already. So we actively were hiring in the market, so it's not specifically why now, it's just continuation of what's happening.

Okay. Thank you. And then in terms of your comment about the $10 billion, I don't want to point to a specific time, but how are you thinking about that journey in light of everything that's going on, the $10 billion target?

So it's -- probably it is -- maybe sounds a little bit strange, especially taken exactly in account what's going on right now. But at the same time, while this is a very, very special situation and we will understand it, so all our experience from the past towards it is going to ramp in one quarter and in three quarters. On top of this, there is a potential economic slowdown I'm initially talking about it. If you think about our numbers during the last several quarters, based on economic environment, based on our competitors, if war wouldn't happen, these numbers might be consider it even normal. Not very much different from what others are showing, that I'm just bringing all this colors just to confirm that we're definitely looking into what's going to be with the next couple of quarters, so six months. But we're definitely looking at what we'll be here in two years or three years. And from this point of view $10 billion looks like a very realistic goal for us, still aspirational but realistic. Three years ago, probably $10 billion would be sounded very much aspirational. Right now, it's just a pragmatic target for us, that's all.

Got it. Thank you. I'll jump back in the queue.

Thank you. I’d now like to hand the conference back over to Arkadiy Dobkin for closing remarks.

Yes, thank you very much for joining us today. Thank you for your support, which we are hearing from everybody. I think, it's important to one more time state that EPAM as a company, we're supporting Ukraine 100%. So we're very committed to our people in the country. We do believe that Ukraine will be part of our operation for many years. And while we're going through the difficult part, I think, we're still seeing a very bright future for EPAM and the growth. And we understand that it's a challenging time. So let’s talk in three months, and we'll see what's happening. And thank you very much.

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