Good day and welcome to the Fourth Quarter and Full Year 2024 EPAM Systems Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Finally, I would like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Mike Rowshandel, Head of Investor Relations, to begin the conference. Mike, over to you.

Good morning, everyone, and thank you for joining us today. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. By now, you should have received your copy of the earnings release for the company's fourth quarter and full year 2024 results. If you have not, a copy is available on epam.com in the Investor Relations section. With me on today's call 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 Investor Relations section of our website. With that said, I will now turn the call over to Ark.

Thank you, Mike. Good morning, everyone. Thank you for joining us today. It's good to share that our first quarter results came in better than expected. It was another quarter of strong execution, thanks to our core differentiation and relevance of our advanced capabilities and service offerings across our new and existing client portfolios. Many of the encouraging themes we shared last quarter have carried through into this quarter. Before discussing our Q4 results and some thoughts on 2025, I would like to step back and reflect on the full year 2024, which was a year of uneven demand, improved stabilization and building some sequential momentum. There are three key points I would like to highlight on our performance over the past year. Number one, we were successfully executing our global business strategy while simultaneously addressing many challenges we have accumulated during the last few years. We have done this both organically and through acquisitions with a continuous focus on becoming the most globally geo-balanced talent company in the world for AI native digital business services. The two most recent acquisitions, NEORIS and First Derivative or FD are good examples of how we are investing to accelerate our strategy. They allowed us to meaningfully expand our existing global client relationship and further penetrate new markets and talent geo hubs. While still early, we see encouraging progress across several net new opportunities with more than dozen joint pursuit that combine EPAM NEORIS and FD capabilities together. Number two, we are pleased to end the year with an underlying improvement on our standalone business, delivering better results than our expectations earlier in the year when we had to adjust our outlook for a weaker than expected H1. And finally, number three, exiting 2024, we feel good about the sequential momentum we've built…

Thank you, Ark, and good morning, everyone. In the fourth quarter, EPAM generated revenues of $1.25 billion, a year-over-year increase of 7.9% on a reported basis, including revenues from recent acquisitions, NEORIS and First Derivative. On an organic constant currency basis, revenues grew 1% compared to the fourth quarter of 2023. In Q4, we are pleased to return to year-over-year organic revenue growth. Organic revenues exceeded our Q4 guidance due to higher than expected new project starts, indicating modestly improving client sentiment. Due to the quarter's significant inorganic revenue contribution, I will speak to both organic and inorganic revenues as I discuss industry vertical and geographic performance. Beginning with industry verticals, I want to echo Ark's comments that, in Q4, five out of six of our industry verticals delivered sequential organic revenue growth. Only the travel and consumer vertical declined Q3 to Q4. Financial services delivered very strong growth of 15.9% year-over-year, reflecting 4.3% organic and 11.6% inorganic growth, driven by continued strength in the banking, insurance and payment sector. Life sciences and healthcare increased 8.6% on a year-over-year basis, reflecting 5.7% organic and 2.9% inorganic growth. Growth in the quarter was driven primarily by clients in life sciences, including some revenues derived from new logo accounts. Software and high-tech increased 7.7% year-over-year, reflecting 6.4% organic and 1.3% inorganic growth. Consumer goods, retail and travel decreased 3% year-over-year, reflecting a negative 5.7% organic and a positive 2.7% inorganic growth, largely due to declines in consumer products and retail, partially offset by growth in travel. Business information and media declined 3.9% year-over-year, reflecting negative 4.7% organic and positive 0.8% inorganic growth. Revenue in the quarter was impacted by the previously discussed ramp down of the top 20 clients. However, sequentially, we were encouraged to see the vertical return to strong growth…

[Operator Instructions] And your first question comes from the line of Maggie Nolan with William Blair. Your line is open.

Thank you. Jason, I was hoping you could elaborate a little bit on the expectations that are embedded in the top end and the low end of revenue guidance and both company specific and from a macro perspective?

Yes. So I think we've been fairly careful about our expectations for NEORIS and FD. We both generally delivered at the level of revenues that we expected in Q4. We have them both with some modest degree of growth as we go from 2024 to 2025. And then as I think we said in the prepared remarks is that we've got effectively kind of a zero to 4% revenue growth for organic. And if you introduce the foreign exchange headwinds, you've got a 1% to 5% growth, again, using an organic constant currency. Right now, what we're seeing is a somewhat slow start in January, but we're seeing substantial program starts and clients are beginning to really get started here in 2025 as we enter February and as we work through the month. If I were to talk about that and Maggie is this for revenue or is this for the revenue and -- the revenue? Okay. So what we would have is clearly some degree of sequential growth Q1 to Q2. We are seeing substantial sort of project starts in certain areas of our business and we've got a couple of clients, one particularly in sort of high tech that we expect to show substantial growth in the year. Again the 4% is clearly some degree is sequential revenue growth in the back half of, yeah, if you were to end up in the middle part of the range, it's kind of a softer sequential growth. So I'm not certain that helps too much, but what we are seeing is, it's very strong sort of program starts in customer demand here in February despite the fact we had sort of a slower start to January.

Thank you. That's helpful. And then on the margin side, Arkadiy, you mentioned that some investments that you are clearly going to be making. I'd be particularly interested in some of the commentary around Agentic AI and IP since IT services companies don't typically retain a significant amount of the IP that they generate? And then how are you thinking about balancing those investments with perhaps the need to drive some cost synergies in these acquisitions that you just onboarded?

Yes. So let me just do a quick bridge on adjusted IFO and then I'll probably let Ark talk a little bit more about the importance of the investments in GenAI. Okay, we've got a 2024 at 16.5% adjusted IFO. At the midpoint of our guided range for 2025, that would be 15%. We've talked about dilution due to the acquisition of FD and NEORIS. Both of them are accretive from an EPS standpoint, but they are dilutive from an adjusted IFO. And so I think that while we've updated our assumption and that's about a 60 basis point dilution, so 16.5% with the 60 basis point dilutive impact of the acquisitions we're down 15.9% and then 15.9% compares to the 15%, which is the midpoint of the 14.5% to 15.5%. And what we're seeing is some incremental investment in GenAI, which is causing both an increase in SG&A and a little bit of decrease in gross margin. And then, Maggie, as we've kind of talked throughout 2024 and I think also as we've talked about what we expected in 2025, we have been focused on retaining our top technical talent. And so we have had some degree of cost increases or increases in compensation in 2024 in a year when it was very difficult to get rate increases. We still expect that this is a more challenging certainly in the first half of 2025. So what we are expecting to have is our traditional promo campaign in the first half of 2025 with limited ability to offset those compensation increases with salary increases. We do expect the pricing environment to improve somewhat throughout the year. Clearly, we're focused on utilization and pyramids and that type of thing. But really what is happening in the 15.9% to 15% is some amount of compression due to price sensitivity with clients. India still runs at better than average profitability. Ukraine still runs at high levels of profitability. So we feel good about the business overall, but just the pricing environment still is kind of pressurizing our gross margin and ultimately our adjusted IFO.

I think this type of investment is not something new for us. Typically when there is a visible transition in technology and we will understand that investment in GenAI is a lot of investment in training, changing the mind of our development team how our new software will be built. And on top of this number of accelerators and some IP as well specifically in this transitional period when market itself is not bringing too many stable solutions to build new type of software. And we did it like when cloud conversion was happening with mobile conversion was happening and it was significant investment, it was better macro environment back then. But we do believe that we cannot miss this investment right now because as soon as the GenAI, AI, Agentic AI starting to drive real transformation, we need to be ready and take advantage there.

Your next question comes from the line of Jamie Friedman with Susquehanna. Your line is open.

Hi. Good morning. I just wanted to ask one question. In terms of your prepared remarks, Arkadiy, you say and I'm quoting, in 2025, clients will balance their cost focus with the need to accelerate their transformational GenAI journeys. That to me sounds like kind of a change the business versus run the business narrative. I'm just wondering, in the context of your pricing commentary, is the pricing, do you have any exposure to the run the business opportunities? Is it all really the change the business transformational side, whether it's GenAI or otherwise? And is the pricing pressure that you're feeling on the new stuff or on the old stuff or both? Thank you.

Well, we definitely have, during the last several years, exposure to run the business and we have a number of engagements. And even this we're trying to do differently than traditionally it was executed, especially with everything what we're seeing in very different level of automation driven by our generic progress. But the pressure, pricing pressure coming still during the last several years and there is a big kind of inertia to change it and that's what we quote it will be start happening in 2025 more visibly, but there is a pricing pressure across run and build as well and change as well until again the change will become much more coming to more traditional levels of demand.

Okay, thank you for that. I'll jump back in the queue.

Your next question comes from the line of Bryan Bergin with TD Cowen. Your line is open.

Hi, guys. Good morning. Thank you. On-demand, I was hoping you could dig in more on how the client spending behavior progressed through each month in 4Q. I'm really trying to dig into commentary on new clients versus existing clients. So can you talk about that in any interesting bookings there or anything like that as you look at new versus existing?

So I don't think I can give you like specific numbers, but definitely we enter in good number of new clients. It's not becoming very large right away, but there are some clients which quickly go into the range of kind of annualized $10 million. So at the same time, there are lot of new clients which are coming through GenAI kind of proof-of-concept and then starting to scale. But I also would probably mention that for us, right now, new clients, sometimes it's our old clients as well because for the time when starting from the beginning of the war, it was a lot of the clients]. We've seen return of these clients. Not fully, but visibly and for example, what Jason mentioned, one of the big tech companies which almost went to zero now starting to really scale. So which we consider in some way a new market that we prove again and prove not only would be prove, but that they come back to us because they need the quality level and understanding of the technology which we possess.

Hey, Bryan. So I'm just going to introduce a couple of numbers here. So the guide was $1.205 billion to $1.215 billion. NEORIS performed as expected. We said that we would do about $54 million with NEORIS. FD would have been incremental to that and I can tell you that, that was about $12 million again as we expected. So if you added the FD to the guide, it would have been 12.17 to 12.27 and we landed 12.48. And so it clearly was in what we call our standalone business where we saw strength. We did see sequential growth in Europe. We did see improvement in financial services, including growth in European financial institutions. And so overall it was quite a bit stronger quarter from a revenue growth standpoint than we had expected, particularly with good revenues in the month of November and December.

Okay, very good. I appreciate all that detail. And Jason actually on the margin too for my follow-up here. So thank you for the bridge. Obviously, a lot of moving parts here with the R&D tax credit, but then the acquisition margin profiles, incremental investment and a different geo footprint. But as we kind of just think ahead, as demand ultimately normalizes, do you anticipate a return to profit levels where you've been before or is it too early to make that call?

Yes. We are definitely expecting to see improved profitability in the second half of the year relative to the first half. And then clearly we're looking to drive profitability back to what I would call more typical. I know some externally think about 17% plus. I've always sort of thought of us as a 16% to 17% company. And so the focus on getting back to a 16% or better would certainly be a goal for the company. And again with a slightly different environment, we think that's achievable.

Thank you.

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

Hi. Thank you. Good morning. I'm wondering maybe if you could speak a little bit of your capacity and your ability to accelerate revenue growth once demand improves? And maybe in part of your response, you could help dimension what the headwind we should expect from the bill rate dynamic from geographic mix shift in '25 and how much that may be impacting the growth outlook.

Okay. So in terms of our ability to grow revenue, we have continued to sort of operate with a strong sort of talent capability. So we feel good about our ability to grow in India. We feel good about, obviously, our ability to grow in our traditional Eastern Europe and our ability to grow in the Americas. We are beginning to see some return and we are seeing a little bit of growth even in places like Ukraine, obviously, depending on how things resolve themselves there, that could open up further demand for that geography. And so I think, David, we feel good about the opportunity to kind of grow revenues across a broad range of geographies. I do think you are going to continue to see a little bit of this headwind that we talked about in 2024, whereas you shift into, let's say, Latin America with kind of local to local kind of revenues with NEORIS, some further growth in India and growth in places like kind of [indiscernible] which is an attractive price point where you'll continue to see a little bit of compression. I don't want to say compression, but you'll continue to see some headwinds on the revenue per headcount number as we move through 2025 would be my expectation.

Okay. And did you provide just some color into what you think the mix shift headwind is to revenue growth in '25?

We did not. We talked about it last year. This year, I think it clearly it depends. And I think that the answer is that, what I would say is we are beginning to see somewhat broader demand. Clearly, you continue to see more growth in India, but we are beginning to see demand for our more traditional kind of Eastern European geographies as well. So maybe I would say it's somewhat less of an impact than what I talked about in the middle of 2024, but I would say you'll continue to see some impact from that, but I haven't sized it.

Okay, great. Thank you for that. And then just in terms of the margins, I think you've already given a lot of color there. One thing you didn't mention was, again, any headwinds from diversifying your geographic capacity. I'm just wondering what impact, if any, that's having on the margins currently. And just curious whether there's anything unique about your specific ability to price versus wage increases versus your peers because I don't think your peers are seeing quite as much impression as you may be experiencing currently or in 2024 and your expectation for '25.

Yes. I think one of the things is that we continue to focus on retaining talent and our attrition continues to decline throughout 2024. So our voluntary attrition right now is definitely in the single-digits. As I think Arkadiy could probably talk better than I could that we do think what has made us successful over time is really the ability to deliver base with very high quality talent. We do want to make sure we're able to retain that talent, particularly as we head towards a time where we think there is going to be more transformative programs. We are beginning to see some clients come back to us where they've had either failures or fatigue with other providers. We still think that the quality of execution is important and we do think that there's an opportunity to improve price over some period of time, but I'll let Ark talk about the talent.

Yes. And David this is what we mentioned in our remarks. So there is kind of double movements. And again our exposure changes proportionately much higher than many of our peers. And I think we try to make sure that we have the right talent to come back when demand will be normalized. So and, yes, there is pressure there. When we were relocating people, so we were relocating this to some of them to other countries in Central Europe, some of them to West and Central Asia and there is a very different pricing points. We're trying to keep the right balance and create opportunity to grow in each of these locations.

Great. Thanks for that, Arkadiy. Just any thoughts on the cadence? You said margin is better in the second half than the first half? And any other color you want to provide around that?

Yes. I would just say, probably Q1 to Q2, you wouldn't see a substantial improvement in gross margin, but we are taking the classic sort of steps to improve profitability throughout the year. That's all the things we've been talking about, improvement in utilization, improvement in pyramid and then some amount of scaling. And so we do want to be prepared for us, do we want to exit 2025 with an ability to drive closer or above that class profitability target of 16% or above.

Got it. Great. Thank you.

I'm looking at this previous year where our profitability was increasing.

Okay. Great. Thank you.

Your next question comes from the line of Jason Kupferberg with Bank of America. Your line is open.

Good morning, guys. Thanks for taking the questions. The first one is just on revenue. I wanted to dive in a little bit just in terms of what's embedded in terms of assumptions on further improvement in discretionary spending. Obviously, you've started to see some pickup and I'm wondering if the slope of that line, if you will, does that need to improve to get to, say, the midpoint or the high end of the revenue guide? What's the underlying assumption there that you've built in?

So the -- what does it take to get the high end of the range and what's our assumption on improving discretionary environment?

So we -- growth portfolio we see and this is what we were sharing like during the previous call, we see some discretionary change, which very different than 12 months ago. And we saw it in Q4 and we're saying this is right now in Q1. The challenge here that the pricing environment is still challenging. Again we mentioned this. And how is it going to change? We need to see, but on positive side, this is exactly what we expect to the high range if this is starting to happen because there are already interesting proofs of businesses, advantages once they started to do quality transformations, quality scale, more scale programs GenAI related, so that it will drive the others and pricing together with this. So this is more like our high end assumption.

Okay.

We don't count it on a huge change, but we count it on some more pragmatic views of the companies which would like to run change programs. And we saw already when the pricing was actually to the point in many programs where the vendors couldn't deliver. So this is already built up as a very good argument to do it differently.

Just A follow-up on the margin. So I guess wage inflation is eclipsing pricing this year. I think you said margins down about 90 bps on an organic basis. I was curious just which countries are driving some of that wage inflation you mentioned as you're investing to retain the talent?

Yes, I would generally say it's probably more of what I would refer as the offsite countries. Again, it would be hard for me to be specific on one country or another. What you're just seeing is, again, a focus on retaining top technical talent in an environment where it continues to be hard, as Ark said, to pass on price increases. So again, I would generally view it as, we've been fairly careful on the expense of onsite talent, but it really is more in the delivery locations outside of the US and Europe.

And technology talent specifically with ability to understand what's the new SDLC [indiscernible] ability to work in this enabled by GenAI and solutions enabled by GenAI. This is becoming very hard property and again trying to build a company which is prepared for this demand, that's a retention thing which we need like to focus exactly right now.

Thank you, Ark.

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

Hey, good morning, and thanks, guys. When we exclude the couple of acquisition, it does look like your organic headcount growth inflected for the first time in some time. So maybe a bit more color on your hiring plans for the year, geographies you plan to hire, any maybe specific skill sets? And then just as an attached question to that, geopolitically, obviously, no one knows where things are going from Ukraine, Russia standpoint. But if we were to see any change around the war and any change in terms of abilities for multinational to operate in those areas more, your headcount is still, I mean, you still have a decent headcount in Belarus and Ukraine. Just remind us the mix of where your headcount is going forward for this year? And if that could impact you guys in any way from a margin or labor optimization standpoint of where you guys already have some headcount?

Okay. So just as a reminder, we had net headcount additions that was organic in Q3 of 2024 that was somewhat less than 1,000, but still again a decent number of additions. We're about 1,500, as I indicated in Q4 again on an organic kind of basis. And of course, we had the incremental from FD and NEORIS. And then for Q1 of 2025, we're also expected to be something approaching 1,000, and probably a little bit below based on kind of the slower start to the January month. So we are definitely adding headcount. As I think we've talked about, although I'm not going to be specific about which countries is that we are beginning to see kind of demand return to certain geographies in Europe. We'll clearly still be growing in India, we'll clearly still be growing in [Technical Difficulty]. We still -- we have seen a declining headcount in Belarus on a year-over-year basis and a modest decline in headcount in Ukraine on a year-over-year basis. But actually we did see a little bit of growth played in Q4 in Ukraine. And in a resolution to the conflict, we think that could make clients more open to putting more projects, programs, particularly into Ukraine.

Okay. So I guess we'll have to see how it goes. But I imagine from a margin standpoint, some of those comps, some of those labor forces that you guys have could be helpful from just relative to the mix you had in other markets you've got to build out? And then I guess --

Yes. Let me just quickly -- that's a very good point. Yes. Okay. Ukraine is historically and continues to be one of our most profitable geographies.

Okay. Thanks. Just a quick follow-up. I think you've seen somewhere around 400 basis points or 500 basis points improvement or increase in fixed contract percent, if I'm not mistaken, over the last couple of periods. Maybe just the overall trend, if you could just give us a little bit more color on what you're seeing there and the driving time?

Yes, so we've got probably three things. Okay. One is that we are growing in the Middle East, which tends to be more of a fixed fee environment. And so a little bit of the mix shift there. Okay. We are seeing some more consulting-led programs where there's more of a consulting engagement and then the tail associated with the build. Those oftentimes have kind of a fixed fee component. And we probably have a little bit more kind of managed service or fixed monthly fee. And again that would obviously contribute to the mix of fixed fee business as well.

Okay. Very helpful. Thanks, guys.

Thank you.

Our final question comes from the line of Jonathan Lee with Guggenheim Partners. Your line is open.

Great. Thanks for taking our questions. Can you help us understand what's contemplated across your outlook range from a vertical perspective? Any verticals expected to accelerate versus decelerate throughout the year?

I think it's pretty much in line with what we see during the last year and quarter. So life science and at this point financial services are showing good dynamics. So and we're still not sure about retail, for example, and business information recovery because it was a big hit by the client which we pulled it last year.

And then subcomponents that were emerging, including energy would probably be areas of growth as well.

Yes. In general it seems like across most of the verticals we expect in the growth, yes.

And then I think the only other point is that we do expect to see an acceleration in tech. And we are certainly seeing an improvement there in Q4 and do expect to see an improvement in [Technical Difficulty].

Understood. And look recognize that the pricing environment is somewhat challenging, but what in your view would catalyze a potential return to a better pricing environment?

So we see in some spots where clients are actually starting to focus more on change and in these programs, they also understand that pricing should be changing. And we see in these examples, we just need broader of this. And again that's a previous answer what we're thinking about our high range to achieve. This should be happening by that. So let's see what market will be showing right now.

Appreciate the color.

Okay, thank you very much for joining us today. I think we're really satisfied how we finished the year and each year starting from some new unknown because with that you're feeling much better what's going to happen. I think we have a pretty good -- we -- I would say feeling about how this year is starting from the client communications point of view. We're also trying to be very pragmatic with our annual guidance and let's talk in three months. Thank you very much.

That concludes our conference for today. Thank you for participating. You may now all disconnect.