EPAM Systems, Inc. — 2024 Q1

Thank you. I think in our opening remarks, we -- exactly reflecting what was happening from our standpoint. I think, based on the Q4 level of optimism, I would say, and beginning of Q1, we were trying to predict how potential growth for would look like versus conversations and [ standard ] opportunities.

Yes, Bryan, the -- I think what Ark said is that we're -- at this point rather than trying to predict that there's going to be an improvement in demand, we're just taking kind of what we see today, which is still client decision-making is slow, budgets are being partially released, some programs are being descoped. And so we're just not seeing quite improvement that obviously, we had hoped for. So obviously, it was a miss on our part.

Yes. So -- and again, it's a calculation, if we -- think of a constant currency calculation, where we go if the mix were the same as in 2023. In 2024, what would the impact be? Again, I do want to confirm that we still have demand for Central Europe and Eastern Europe, but again, a lot of the incremental demand due to client sensitivity is coming into India. It could be something approaching $100 million if you did a constant currency impact on a year-over-year basis.

You're talking about sequential growth in Q3?

Yes, Jonathan. So just to -- the question about whether or not we see sequential growth in Q3. The way we have laid out the guidance, okay, really is the seasonal factors are going to drive. And so the Q2 to Q3 growth would substantially be driven by seasonality, which is more available bill days in Q3.

I think we feel quite good about the quality of our India delivery, and we think it's differentiated, okay, our India versus, let's say, our peers or competitors' India. We still feel very good about the quality of our Eastern European delivery. And we clearly have a number of clients who still prefer Eastern Europe, but we feel good about the work that we've done in India to differentiate. And again, we've got good ability to continue to scale the geography, and we have relatively low levels of attrition.

So I think it's broad -- there is no specific on verticals. We actually highlighted that there are some vertical, which impacted by decisions which were done practically in previous period. There are some verticals which operate better, like we highlighted healthcare, life sciences as well. Energy for example, in the same bucket.

And the feedback that we're getting is that certain clients, although they appear to have budget are sort of slow to begin to activate the budget. And I would say probably if we were to talk to a specific portion of the portfolio, we have feared that at some point, we may see more caution in Europe, and I think that's where we're seeing kind of a relative change in the business.

I think we just kind of repeat the [indiscernible]. In general, there is no any kind of dramatic changes. Mostly, it's attributed to delayed decisions and very specific things like if we're talking about Q2, which we have already shared. Billable hours, it's FX, it's multiple parameters, which is calculated one. So the rest of this is in line with what we were seeing before. But again, decisions slow down, and now we try to project exactly what we see versus what we kind of thinking might happen.

Yes, clearly no longer have the confidence of sequential demand improvement in the second half than we had when we released the guidance.

Yes. Maybe what I'll do is unpack, I guess, is the word I'll use, what happened in Q1. So we entered Q1 with the guide that we had, and we expected that we probably could get to the top or maybe a little bit above the high end of the range and had come in with a range that we wanted to make sure that we could make.

Yes. And so let me talk about the top 20. So the top 20 does have a significant number of business information and media clients in it. That is a more challenged portion of the portfolio, I would say, due to their end markets, in addition to the client that we talked about over the last couple of quarters that had ramped down in Q1 and again in Q2 as they kind of exit. We -- and again, this is all known, and we've talked about -- okay? But we are seeing some reduction in spend in another business information and media client in Europe, and that is the top 20-client. So those things kind of show up.

I think we're very satisfied with our progress in India. So -- and by the end of the year, we might be closer to 20% of the total headcount. So it's still going to be the largest -- fastest growing. And probably we'll be on par with Ukraine or maybe larger than Ukraine.

The only thing I'll add to that, similar to what we do in Eastern Europe, we don't seek to be the lowest cost provider in any market in which we operate. Again, we -- differentiated quality in India, and we charge a premium relative to other peers' kind of India rates based on what we believe is a differentiated offering there.

Like again, there are several clients, which we mentioned already. So -- but in general, I think it's very good, at least from wallet-share point of view. We have visible increase in some of the clients. We have pretty good stability and then saying again, there are some companies, which we mentioned before, which make like long-term decision. And we've seen actually visible slowdown in the execution kind of like when decrease [ capacity ] with us and there are a couple which turned back and starting to growing with us. So I think we're pretty comfortable with what we do in this -- our top 20.

That's exactly what we say -- we said already, we don't want to predict anymore. So we try to be more kind of pragmatic in this situation. Historically, whether or not -- volatility can change, and demand could be very fast. I'm not sure that it will be very fast in this current environment. But I only can repeat what we were saying before that the whole point for us starting from all this thing during the last couple of years to prepare ourselves well when environment will change.

Yes. This is happening, and this is happening not necessarily just when clients come back. It's also happening when clients were going down and now become comfortable with our kind of [ diversification ] of delivery and starting to come back to us. It's again, it's not huge things, but it's a very positive message.

Yes. So in Q2, we've got the lower bill days as we talked about, and that usually does have a depressive effect on margins, and so right now for Q2, I am expecting that we could be at 30% gross margin, or slightly below that, on a non-GAAP basis. I think for the first half of 2024, you'll see gross margins around 32%. And then the second half, I think you'd see margins in the 32% to 33% range, and that would kind of blend us into this sort of 31% to 32%.

Yes. I guess it all depends on how you define that. We've never have -- as I think we all know, we had a large portfolio of multiyear maintenance, multiyear BPO or that type of thing. So a lot of our work generally is kind of newer build, digital. And as we talked about, the modernization programs, which we still believe are generally intact but are slow to ramp, in some cases, as Ark indicated, is that people have kind of descoped some of those programs. So we still think that demand is in the future. But arguably, when it comes to discretion, you can certainly delay those programs and expenditures.

So we believe the pricing environment did not improve. So -- as the only improvement could happen if demand will go up. So -- and with the current status quo, I think pricing environment is pretty tough and challenging continuously in India.

So it's not incrementally worse, but it continues to be challenging. It's one of the reasons why there is kind of a bias towards India at the lower bill rates. And the market is -- yes, with, what I would call kind of an imbalance in supply and demand, it continues to be a less-friendly market when it comes to trying to get rate increases for certain.

I think you'll see us continue to invest in India as we've talked on this call. I think you'll see us continue to increase our position in Latin America. I do think, and I implied this, or I think maybe even stated it in our prepared remarks, is that with this kind of budget caution with clients, we are seeing less demand for in-market resources. That continues to be a place where we do have more bench than we would like. So that's a bit of a challenge for us.

Yes. So we're really focused on managing that. And again, very careful to make certain that, obviously, our revenue recognition is appropriate and also that we're trying to avoid any potential kind of write-off of AR. So I'm not concerned about that.

Well, so we had this -- the BIM customer that we talked about where a competitor has sort of taken over their IT function. And that obviously had a step down on a year-over-year basis as well as a quarterly -- a sequential impact, Q4 to Q1. There'll be another slightly sequential impact associated with that same client between Q1 and Q2.

Just to kind of -- there is no any real impact from ramp downs, which kind of new to us. There is a redistribution of delivery, and we talked about it when there is a switch to lower-cost locations. There are new business, which are faster growing there as well, and this is all related again to pricing environment. So -- but, no, ramp downs, right now, not as a real factor. It's more like a normal -- like it's always would happen. It's happening as well, but in a very normal way.

We definitely are learning our lessons, and we put much more pragmatic view because, yes, we were a little bit more optimistic in the past when markets will come back. So right now, we're looking at this very pragmatically with a good level of -- strong level of kind of conservatism. And I don't know what to add. So I think that's actually, exactly what is happening.

Let me comment, and then Ark will probably say something much smarter and more insightful. How I think about it is going to be a trend that we're going to see throughout 2024, but I don't see it as a forever trend. At some point, I think it kind of stabilizes. And I think that we've done a good job of sort of creating a balanced delivery with options or optionality for our clients. And at the same time, I still believe that there's demand for Central and Eastern Europe so far.

I'll say -- we said before, we do believe that we will be able to put very balanced global delivery capability, as well as from geographical point of view, and equalize as much as possible the quality kind of component of it.

Yes. And so it's hard to predict kind of moving quarters at this stage. We've talked about the unevenness or the choppiness or the -- in some cases, we've had programs that we have been awarded and then they either haven't started or as Ark talked about, they've been descoped. We have clients who come back to us and said, "We'd like you to do this, but in a lower-cost geography." And again, all those things kind of impact the revenue growth rate.

Arvind, I'm going to be a little short of my response just because we're kind of at the end of the call or past the time. But I would say yes to both. So you will see us continue to do more and more acquisitions that again, are all strategic and do allow us to continue to expand our position, both end markets and in delivery locations. And you will also clearly see us do more buybacks in the coming quarters.

As always, thank you, everybody for joining today. I think we're looking forward for the next call. And I think we're not going to bring surprises next time, at least similar to today. So let's look pragmatically to everything. So fortunately, we didn't have any questions today about genAI and how we're doing there because we're doing pretty good and feel very good about this area, but probably we can spend more time on this topic next time. Thank you very much.