EPAM Systems, Inc.

Greetings. Welcome to EPM Systems' first quarter 2020 earnings conference call. At this time, all participants will be in listen-only mode. Any brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to David Strobe, Head of Investor Relations. You may now begin.

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 2020 results. If you have not, a copy is available on epam.com in the investor section. With me on today's call are Akati Dotkin, CEO and President, and Jason Peterson, Chief Financial Officer. Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risk 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 GAAP and are available in our quarterly earnings materials located in the investor section of our website. With that said, I'll now turn the call over to Ark.

Thank you, David, and good morning, everyone. I do hope that all of you are staying safe and healthy during this global crisis, and I want to thank you for joining us. While it has been only three months since we shared our 2019 results and provided our somewhat expected by now 20% plus annualized growth outlook for 2020, the COVID-19 pandemic has made it clear that everything we thought we knew then just a few weeks later started to be very much changing on a daily basis. In real terms, the impact we are seeing all over the world is immediate, serious, and localized for each and every one of us and for our clients. And more importantly, we believe that we are far from the end of this event. In fact, in the view of many, we are somewhere near the end of just the first period of disruption. So, while we do understand that significant uncertainty is with us for some time, we wanted to give you a perspective of how EPAM is adapting to this new reality and where we think we might be going in the near future. Since January, we've been responding to the COVID-19 crisis and its only impact in our APAC region. To our benefit, we were able to take advantage of a good amount of work done over the past years to put in place for business continuity as well as for investment in our internal platforms which enable us to support truly agile global delivery environments including readiness for remote workplaces and enhanced productivity measurements. Because of those efforts, combined with our early learnings from our APAP experiences in January and February, already in March, we were able to move nearly all of APAP to a productive and safe work-from-home environment, practically in a matter of days. This transition represented a pretty significant effort, was noticed by many of our clients for its speed and reliability of service continuity. So at this moment, I wanted to share my deep appreciation to the thousands of farmers who are doing everything possible to support each other, to our customers for providing us with their most critical issues, and to our communities around the world, which we are supporting constantly with different means for fighting the pandemic on the front lines. The health and well-being of our people continue to be a top priority for all of us during this time. With that in mind, let me switch to our Q1 performance and then cover some of the changes we are making in order to support customers as they navigate this challenging environment and end with how we see the forces shaping the next few quarters of demand before turning the call over to Jason. First of all, I am pleased to share that we delivered stronger than expected first quarter results with revenues of 651 million, representing 26% in constant currency growth. Despite some of the early COVID-19 reactions in APAC and the first global pandemic impact in March, 2021 came in $9 million higher than our initial guidance, underscoring the value of our diverse and high-quality portfolio and our ability to continue providing relevant and mission-critical services to our clients. Q1 marked also EPAM's 37th consecutive quarter of 20% plus organic growth. The rate of growth we plan to return to post-crisis. Starting from the end of Q1 and through the current quarter, the effect of the coronavirus on our customers has been significant and wide-ranging. With more than a third of our portfolio having experienced some form of revenue impact, and some industries experiencing never-before-seen disruption in their end markets. Customers in our travel and consumer verticals have taken a variety of serious steps to protect their people and to ensure a continuing liquidity and viability of their businesses. And we believe that we may see several ways of impact as the crisis continues to unfold across other market segments as well. It is important to note that across our portfolio, even while discussions are taking place about ways to manage costs during the crisis, many customers still have continued to move forward with programs or in some cases have chosen to accelerate the pace of their digital transformation in order to support radically changed demands for how they engage and serve their clients. We have supported some of these changes in a very, very short period of time. From a virtual shutting down of brick and mortar operations for a major retailer and the move to pure play online commerce, to the massive scaled infrastructure demand needed to support virtual entertainment events for a major gaming platform. Throughout the past several months, we are certain that the patent scale of the pandemic is taking a pump into new territory, both from the challenges of shifting our own way of thinking and doing things to really key directions in our offerings, ranging from how we imagine new digital platforms to what it means to be cloud-first. To date, our success in managing this disruption has been due to our ability to leverage our product engineering heritage and expertise and to push ourselves to move and adapt even faster. Internally, this means an even more serious push to break down silos, to increase investments into knowledge management and productivity platforms, and to establish new, faster processes which enable our teams to address much more seamlessly and productively the challenges we are facing. Not only investment in our network and security infrastructure, much of which has been stress tested by our own delivery centers for the past years, we have and continue to develop new ways of working and helping our customers to respond to the crisis now. All these demands for continued operations and faster and more reliable service offerings bring us back to our top priority as an organization, to be ready for the post-crisis time. And that is to retain, find, attract, and develop our top talent. By continuing to invest in our delivery, collaboration, education, and community platform, and by focusing on our people, we are fulfilling a critical aspect of current and future demands for what is going to be an even more digital world. Now, I want to say a few words about the outlook for our industry segment and for IPAM specifically. As most of you know, the digital service segment in which we operate was generally seen as a high growth market. And it is. Unfortunately, in current environment, it is nearly impossible to count on previous business as usual trends and prior periods data assumptions to establish near-term models. That is why today we are relying on very different and often close to real-time indicators and signals. First, reviewing at our daily stand-up the changes that are occurring on the ground across our specific market and delivery geographies, industries, and individual accounts. We are also looking at the market trends in general, competitors' disclosures, industry and financial market analysis projections. For example, we looked into financial modeling across a number of publicly traded companies and saw that projected revenue ranges for many of them, just for the current Q2 of 2020, could vary very significantly, sometimes up to 20%. That is just another confirmation of how unpredictable the situation is. Just three, four weeks back, we also didn't think we would be able to guide even for the second quarter. But today we are more comfortable and ready to provide a range for our Q3 results, and Jason will share those details shortly. At the same time, we still think it is extremely challenging to say with acceptable level of confidence what would be happening in Q3. As we are seeing high volatility in the client potential behavior. At this point we are open for all types of scenarios including another sequential revenue decline. That is why we decided not to provide a guide for the whole of 2020 at that time. Our key priorities right now are to continue to protect our people and our financial position as well as to make continuous investment into our core capabilities and platforms in order to be better prepared for the comeback. And while these actions may have temporary impact on our profitability, we are absolutely confident of our ability to resume our leading position in the turnaround. In our view now, more than ever, the fundamental case for digital product and platform engineering services combined with the ability to bring integrated consulting on the front end is very much intact. And our proved ability to adapt ourselves and our company to a completely new operating environment in such a short period of time has given us the confidence to say that EPAM will come out of this challenging time a more value and result-driven company and continue growing in paths pandemic environment with our somewhat expected by now 20% plus rate. With that, let me hand the call to Jason.

Thank you, Ark, and good morning, everyone. I'll start with our first quarter financial highlights, follow with industry vertical performance, and then touch on a few operational metrics, ending with thoughts for Q2. Revenue for Q1 came in at $651.4 million. a year-over-year growth of 24.9% on a reported basis, or 26% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.1%. Q1 revenue was higher than expected due to a greater-than-planned level of availability across our client teams, along with stronger performance from a few of our acquired companies. During the quarter, we delivered consistent growth across the majority of the industry verticals. Business information and media, which in Q1 came our largest industry vertical, posted growth of 46%. Life science and healthcare grew 26.4% in the quarter, reflecting a tougher year-over-year comparison, given the exceptionally strong performance in Q1 2019. Software and high tech grew 21.9% in the quarter. Financial services delivered 16.2% growth. Travel and consumer grew 14.6%. And our emerging vertical delivered 30.3% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 59.9% of our Q1 revenues, grew 23.1% year-over-year, representing 3.2% of our Q1 revenues, grew 28.6% year-over-year, or 30% in cost and currency. CIS, representing 3.8% of our Q1 revenues, grew 36.8% year-over-year, and 45.8% in constant currency. And finally, impact grew 4.7%, and now represents 2.1% of our revenues. In the first quarter, growth in our top 20 clients was 30.5%, and growth outside our top 20 clients was 21%, compared to the same quarter last year. And moving down the income statement, our gap gross margin for the quarter was 34.9%, compared to 33.9% in Q1 of last year. Non-GAAP gross margin for the quarter was 35.5%, compared to 36.3% for the same quarter last year. GAAP SG&A was 19.2% of revenue, compared to 19.5% in Q1 of last year. And non-GAAP SG&A came in at 17.6% of revenue.

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Hi, Rob. This is David Straube. We have had some technical problems with our webcaster. We are going to go live reading our script. Can you just confirm that?

Ladies and gentlemen, thank you for standing by. We've experienced some technical difficulties. David, please proceed.

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 2020 results. If you have not, copy is available on epam.com in the Investors section. With me on today's call are Akati Dotkin, CEO and President, and Jason Peterson, Chief Financial Officer. Before we begin, I'd like to remind you that some of the comments made on today's call may contain four of these statements. These statements are subject to risk and uncertainties as described in the company's earnings release and SEC filing. Additionally, all references to reported results that are non-GAAP measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the investor section of our website. With that said, I'll now turn the call over to Art.

Thank you, David, and good morning, everyone. I do hope that all of you are staying safe and healthy during this global crisis and want to thank you for joining us. While it has been only three months since we shared our 2019 results and provided our somewhat expected by now 20% plus annualized growth outlook for 2020, the COVID-19 pandemic has made it clear that everything we thought we knew then, just a few weeks later, started to be very much challenging on a daily basis. In real terms, the impact we are seeing all over the world is immediate, serious, and localized for each and every one of us and for our customers. And more importantly, we believe that we are far from the end of this event. And in fact, in the view of many, we are somewhere near the end of just the first period of disruption. So, While we understand the significant uncertainty is with us for some time, we wanted to give you a perspective of how IPAM is adapting to this new reality and where we think we might be going in the near future. Since January, we've been responding to the COVID-19 crisis and its early impacts in our APAC region. To our benefit, we were able to take advantage of a good amount of work done over the past years to put in place realistic actions for business continuity, as well as of our investments in internal platforms, which enabled us to support truly agile global delivery environments, including readiness for remote workplaces and enhanced productivity measurements. Because of those efforts, and combined with our early learnings from APAC experience in January and February, already in March, we were able to move nearly all of our farm to a productive and safe work-from-home environment, practically in a matter of days. This transition, which represented a pretty significant effort, was noticed by many of our clients with speed and reliability of service continuity. So at this moment, I wanted to share my deep appreciation to the thousands of farmers who are doing everything possible to support each other, to our customers for trusting us with the most critical issues, and to our communities around the world, which we are supporting constantly with different means for fighting the pandemic on the front lines. The health and well-being of our people continue to be a top priority for all of us during this time. With that in mind, let me switch to our Q1 performance and then cover some of the changes we are making in order to support customers as they navigate the challenging environment. And end with how we see the forces shaping the next two quarters of demand before turning the call over to Jason. First of all, I'm pleased to share that we delivered stronger than expected first quarter results with revenue of $651 million, representing 26% in constant currency growth. Despite some of the early COVID-19 reactions in APAC and the first global pandemic impact in March, Q1 came in $9 million higher than our initial guidance. Underscoring the value of our diverse and high quality portfolio and our ability to continue providing relevant and mission critical services to our clients. Q1 marked also IPAM 37 consecutive quarter of 20 plus percent organic growth. The rate of growth we plan to return to post-crisis. Starting from the end of Q1 and throughout the current quarter, the effect of the coronavirus on our customers has been significant and wide-ranging, with more than a third of our portfolio having experienced some form of revenue impact and some industries experiencing never-before-seen disruption in their end markets. Customers in our travel and consumer verticals have taken a variety of serious steps to protect their people and to ensure a continued liquidity and viability of their businesses. And we believe that we might see several waves of impact as the crisis continues to unfold across other market segments as well. It is important to note that across our portfolio, even while discussions are taking place about ways to manage costs during the crisis, many customers still have continued to move forward with their programs, or in some cases have chosen to accelerate the pace of their digital transformations in order to support radically change demands for how they engage and serve their customers. We have supported some of the changes in a very, very short period of time. From a virtual shutting down of brick and mortar operations for major retailer and the move to pure play online corners to the massive scale infrastructure on demand needed to support virtual entertainment events for a major gaming platform. Throughout the past several months, we are certain that the pace and scale of the pandemic is taking a bump into new territory, both from challenges of shifting our own way of thinking and doing things to really key directions in our working, ranging how we imagine new digital platform to what it means to be cloud-first. To date, our success in managing the disruption has been due to our ability to leverage our project engineering heritage and expertise, and to push ourselves to move and adapt even faster. Internally, this means an even more serious push to break down silos toward increased investment into knowledge management, collaboration, productivity platforms, and to establish new, faster processes, which enables our team to address much more seamlessly and productively the challenges we are facing. Supported by all the investment in our network and security infrastructure, much of which has been stressed, tested by our own 100-plus delivery centers for the past years, we have and continue to develop new ways of working and helping our customers to respond to the crisis now. All these demands for continued operation and faster and more reliable service offering bring us back to our top priority as an organization to be ready for the post-crisis time. and that is to retain, find, attract, and develop our top talent. By continuing to invest in our delivery, collaboration, education, community platform, and by focusing on our people, we are fulfilling a critical aspect of current and future demand of a more digital world. Now, I want to say a few words about Outlook for our industry segment and PlayPump specifically. As most of you know, the digital services segment in which we operate was generally seen as a high-growth market. And it is. Unfortunately, in current environment, it's nearly impossible to count on previous business as usual trends and prior periods data assumptions to establish near-term models. That is why today we are relying on very different and often close to real-time indicators and signals. First, reviewing at our daily stand-ups, the changes that are occurring on the ground across our specific market and delivery geographies, industries, and individual accounts. We are also looking at the market trends in general, competitor disclosures, industry and financial market analyst projections. For example, we looked into financial modeling across a number of publicly traded companies and saw that projected revenue ranges for many of them just for the current Q2 of 2020 could weigh very significantly, sometimes up to 20%. That is just another confirmation of how unpredictable the situation is. Just three, four weeks back, we also didn't think we would be able to guide even for the second quarter, but today we are more comfortable and ready to provide the range for our Q2 results, and Jason will share those details shortly. At the same time, we still think it is extremely challenging to say, with acceptable levels of confidence, what would be happening in Q3. And we are seeing high variability in decline potential behaviors. At this point, we are open for all types of scenarios, including another sequential revenue decline. That is why we decided not to provide guide for the whole of 2020 at the time. Our key priorities right now are to continue to protect our people and our financial position, as well as to make continuous investment in our core capabilities and platforms in order to be better prepared for the comeback. And while these activities may have a temporary impact on our profitability, we are absolutely confident of our ability to resume our leading position in the turnaround. In our view, now more than ever, The fundamental case of digital product and platform engineering services combined with the ability to bring integrated consulting on the front end is very much intact. And our proved ability to adapt ourselves and our company to a completely new operating environment in such a short period of time has given us the confidence to say that EPAM will come out of this challenging time a more value and result-driven company and continue growing in post-pandemic environment. with our somewhat expected by now 20% plus rate. With that, let me hand the call to Jason.

Thank you, Art, and good morning, everyone. I'll start with our first quarter financial highlights, all with industry vertical performance, and then touch on a few operational metrics, ending with thoughts for Q2. Revenue for Q1 came in at $651.4 million, a year-over-year growth of 24.9% on a reported basis, or 26% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.1%. Q1 revenue was higher than expected due to a greater-than-plan level of availability across our client teams, along with stronger performance from a few of our acquired companies. During the quarter, we delivered consistent growth across the majority of the industry verticals. Business information and media, which in Q1 became our largest industry vertical, posted growth of 46%. Life sciences and healthcare grew 26.4% in the quarter, reflecting a tougher year-over-year comparison, given the exceptionally strong performance in Q1 2019. Software and high-tech grew 21.9% in the quarter. Financial services delivered 16.2% growth. Travel and consumer grew 14.6%. And our emerging vertical delivered 30.3% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 59.9% of our Q1 revenues, grew 23.1% year-over-year. Europe, representing 34.2% of our Q1 revenues, grew 28.6% year-over-year, or 30% in constant currency. CIS, representing 3.8% of our Q1 revenues, grew 36.8% year-over-year and 45.8% in constant currency. And finally, APAC grew 4.7% and now represents 2.1% of our revenues. In the first quarter, growth in our top 20 clients was 30.5%, and growth outside our top 20 clients was 21% compared to the same quarter last year. Now moving on to the income statement. Our gap gross margin for the quarter was 34.9% compared to 33.9% in Q1 of last year. Non-gap gross margin for the quarter was 35.5%. compared to 36.3% for the same quarter last year. GAAP SG&A was 19.2% of revenue compared to 19.5% in Q1 of last year. And non-GAAP SG&A came in at 17.6% of revenue compared to 17.7% in the same period last year. GAAP income from operations was $87.5 million or 13.4% of revenue in the quarter compared to 64.7 million, or 12.4% of revenue in Q1 of last year. Our gap effective tax rate for the quarter came in at 11.3%, which includes a lower than expected level of excess tax benefits related to stock-based compensation. Our non-gap effective tax rate, which includes excess tax benefits, was 22.8%. Diluted earnings per share on a gap basis was $1.47, and non-GAAP EPS was $1.43, reflecting a 14.4% increase over the same quarter in 2019. In Q1, there were approximately 58.1 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q1 was 63.3 million compared to a negative 0.2 million in the same quarter for 2019. Free cash flow was 34.2 million compared to negative 13.6 million in the same quarter last year. resulting in a 41.2% conversion of adjusted net income. As a reminder, our cash flow in Q1 is impacted by payments related to our annual variable compensation programs, a portion of which will be paid in Q2. CPAM ended the quarter with over $1 billion in cash and available borrowing capacity, made above $916 million in cash and cash equivalents, and $270 million of available credit. DSO was 76 days compared to 72 days at the end of Q4 2019, and 78 days in the same quarter last year. Moving on to a few operational metrics, we ended the quarter with more than 33,100 engineers, designers, and consultants, an 18.7% increase year-over-year, and a net addition of 550 production professionals. Our total headcount for Q1 was more than 37,300 employees. Utilization was 79.5% compared to 79.9% in the same quarter last year, and 77.5% 77.9% in Q4 of 2019. Before moving to our outlook for the second quarter, I would like to spend a few minutes talking about the steps we've taken to improve EPAM's responsiveness to a rapidly changing business environment. By staying close to our customers and updating expected demand on a daily basis, we've developed a detailed and real-time demand view for each customer around the world. This heightened view of demand has been used to drive a tighter connection between our supply and demand, allowing us to deliver revenues while dramatically reducing incremental hiring. In addition, we continue to evaluate our cost structure and have reduced a substantial amount of discretionary spending while improving efficiency and retaining capacity in order to respond to future improvements in the demand environment. Now let's turn to guidance. As we mentioned in our April 9th pre-announcement, due to heightened uncertainty related to the potential impacts of COVID-19 on our business results, We have suspended our full year 2020 financial outlook. However, our current thinking is to provide guidance for Q2, adopting ranges, which we think is more appropriate than our historical at-least guidance. Revenues will be in the range of $590 to $605 million, producing a year-over-year growth rate of 8.3% at the midpoint of the range. For the second quarter, we expect gap income from operations to be in the range of 11% to 13%, and non-gap income from operations to be in the range of 14% to 16%. We expect your GAAP effective tax rate to be approximately 13%, and non-GAAP effective tax rate to be approximately 23%. For earnings per share, we expect GAAP-deluded EPS to be in the range of $0.93 to $1.12 for the quarter, and non-GAAP EPS to be in the range of $1.12 to $1.31 for the quarter. We expect a weighted average share count of 58.4 million deluded shares outstanding. Finally, a few key assumptions as far as GAAP to non-GAAP measurements for Q2. Stock compensation expense is expected to be approximately $16.1 million. Amortization of intangibles is expected to be . The impact of foreign exchange is expected to be approximately a $3 million loss for the quarter. Tax effect of non-GAAP adjustments is expected to be around $4.5 million. We expect excess tax benefits to be around $7.2 million. And lastly, one more assumption that is not part of our GAAP to non-GAAP measures. We expect interest and other income to be $1.4 million in Q2. While we've seen some stabilization in our portfolio, we believe that certain of our end markets will continue to absorb the effects of the global pandemic. At this time, we feel confident we have the right focus on the things that matter in our business, including taking the necessary steps to position EPAM for a future that will demand higher levels of consulting, digital engagement, and software engineering services. Operator, let's open the call up for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone to indicate your line is in the question queue. If you'd like to remove your question from the queue, please press star 2. For participants using speaker equipment, please pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question is coming from the line of Ashwin Shervikar with Citigroup. Please receive your questions.

Thank you. Hi, Jason. Good to hear your voices. I guess my first question is with regards to expense flexibility. If you can walk through the components. Jason, you mentioned some control over discretionary expense. You can kind of quantify how we should think about it, how metrics such as utilization might my trend, and also not just the flexibility you have, but also your willingness to use it versus keep focusing on growth.

Yes. So, I mean, maybe I'll start with a high-level point that, you know, our focus really is on controlling costs, including labor costs, while minimizing the impact on the employee base. And so we do want to make certain that we've got sufficient sort of capacity and capabilities to respond to what we expect to be an improved demand environment in the future. So if I were to provide a little bit more descriptive color, you know, late in Q1, we put significant cost controls in place related to discretionary spending, okay, including hiring. As we saw a slowdown in demand, and that became more apparent, we dramatically reduced production hiring, you know, as well. We also began to evaluate whether or not we had the right staff in the right roles and began taking some performance-based actions. And then clearly relocation, travel events, hiring-related expenses are well-controlled just as a result of everything going on with COVID-19 and the related restrictions. And so as we move forward, we're going to make certain that we have as minimal impact on employees as possible, but at the same time being kind of mindful of overall profitability. And I think that's implicit in that 14% to 16% profitability range that we guided to for Q2.

Got it. Yeah, that answers it. There is a specific question with regards to utilization trends in there, but let me look my second question in as well with regards to, you know, you have obviously a lot of cash on the balance sheet. There's a general expectation that a number of assets that might have been attractive previously, but, you know, from a financial standpoint, maybe not accretive to make the deal, things like that. How do you think of M&A in the current situation? So that and the utilization thing from the previous question.

We're clearly trying to find any bright spots in any situations. And in this situation, clearly there are multiple opportunities, including M&As. But at the same time, it's probably too early. Like we didn't kind of cut any of our activities. We're looking at this. But probably, again, it's too early to see how attractive the SaaS is going to be. And also, as you understand, besides price attractiveness, There is a, for some of them, there is a change in business, and we need to evaluate both criteria, how much impact was there and how price correspond to this. So, but we definitely . Great.

Thank you. Our next question comes from the line of Ramzi Alassal with Barclays. Please receive your questions.

Hi, good morning, guys. This is Damian on for Ramsey. You know, I just wanted to ask a little bit more about the sales productivity. And I know it's probably really difficult to kind of get a read on this, but just, you know, maybe first from a logistical perspective, now that everything is virtual, maybe some details on, you know, the sales productivity there and then on the demand side as well. you know, what's your confidence level and, you know, your ability to refill that pipeline once some of the existing engagements that you're, you know, seeing now start to end?

So I'm sorry, I missed part of the question. So you're asking about demand, supply, kind of matching after coming out from the crisis? Yeah, and kind of the process when you're all remote, so. I think from comfortability of remote operation, I think we are pretty comfortable. I think people, in general, EPAM is much more distributed company by design, and Now both delivery centers and size of this is very different from many other companies. So distribution wasn't like a real problem when we were moving to work from home very quickly. And I think it is pretty effective. And as you know also from other sources, people working in this environment unexpectedly productively, at least that's what's happening even in our engagement with the clients, even in consulting engagement, which now starting to, to be performed completely remotely. So I think it's, that's not much problem right now.

Yeah. I think that ARC, you may miss the first portion of ARC script, which we're still trying to figure out how to resolve. But, you know, we've talked about the fact that, you know, being able to even do kind of business development remotely. We've got, you know, daily kind of war rooms with each of our business units, which you're talking about. You know, not only some of the downsides to demands, but also the upside and potentials that are made available by this kind of unique environment. And we continue to see opportunities, including kind of new engagements, and in some cases, actually potentially new engagements with new customers during this environment. You know, with that said, obviously, there's, you know, clearly challenges in the environment. But kind of longer term, we feel very good about the expectations for the business. And, again, in our script, he talks about the fact that, you know, we look forward and expect a return to the greater than 20% growth over time once we come out of this crisis.

Yeah. We're working much better than this call today. So because, like, and we rely on external agency for this. So I have to. Sorry about some inconvenience. It seems like you didn't hear big portion of my introduction to the results and quota. Okay, we will try to address it through Q&A. Sorry about it.

Great. Yeah, no, I apologize if I missed anything. I just had one follow-up, which is on pricing. You know, it's historically been an advantage for EPAM, but, you know, we've seen some of your peers talk about you know, deterioration in the pricing environment, you know, are you seeing any changes in your ability to command the sort of premium prices that you had in the past in order to secure engagements?

Yeah, I would say that, you know, I don't think that there's, let's say, a difference in terms of our ability to command a premium. But, you know, we've got clients in, for instance, the travel space who are seeing revenue declines of 70-plus percent. And then we also have retailers who got a slow start in China and now have a high percentage of their stores closed. So the pricing environment certainly isn't the same today as it was at the end of the Q4 call where, you know, I would usually talk about, you know, kind of, you know, regular price increasing as a result of, you know, scarcity in the market. But, you know, we're responding to our customers' challenges, okay, and doing so in a way that won't have a long-term impact on our profitability.

I think the situation in general, what we call, everybody calls business not as usual, and that creates a completely different variety of demands. There are some situations when there is a demand, and independently from pricing for new programs, because some of the clients trying to prepare themselves what's going to be after the crisis, and they understand that this period of time could be just... extra availability of the talent and opportunity to build something in advance just for a couple quarters. So and then there are some industries which is under huge pressure. So the variability of the different situation is pretty broad right now. So but. That's really helpful. Fundamentally, we're very, very confident that it would come back. We don't know when. one, two, three quarters, but the demand would be probably even higher than it was at the end of last year. And because of everything that's happening, again, it's pretty obvious right now. And we're trying to prepare ourselves exactly for this comeback. And we're pretty sure the pricing is not going to be an issue after this.

Yeah, that's great. Thanks for the color arc and Jason, thanks.

Absolutely. Our next question comes from the line of Jason Kufferberg with Bank of America. Please receive your questions.

Hi, this is Kathy on for Jason. First, just wanted to clarify a comment you made in your prepared remarks. You mentioned that EPAMP could potentially see quarter-over-quarter decline in 3Q. Are you seeing this as more of a base case in your scenario runs, or is it more of a worst-case scenario? And have you seen any stabilization in any of the markets yet? Thank you.

I think if we would be able to estimate it better, we will share it. I think as soon as we know, we will know, but that's exactly what we see all scenarios right now possible.

Yeah, so to be clear, we just did want to put that out there as a possible scenario. We see a little bit of stability as well, but at the same time, we realize that we're not out of the woods yet. Just wanted to acknowledge that as a possible scenario.

Got it, got it. Just wanted to ask a little bit more about the verticals. Are there any, you know, obviously, you know, travel and leisure and retail are obviously seeing some more pressure, but are you kind of, and the financial services sort of float a bit in one queue. Are you expecting similar trends going forward, and have you seen any, like, reversal in trends so far at this point, and now we're in early May? Thank you.

Okay. I'd say, for instance, travel and hospitality you can imagine is going to be a challenge space, and for us that includes both retailers and consumer goods companies, all that would be impacted. Our emerging includes energy, and so clearly that will have some impact. We continue to see very strong demand in business information and media, as you would expect, saw very strong demand in Q1 and are still seeing good, strong demand in Q2. In financial services, it's probably a little bit mixed, still seeing some good growth there. We do have another one of the European banks, which is showing some declines, and we expect to see some declines in Q2.

Got it. That's helpful. Thank you.

Sure. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your questions.

Hi. Thank you. You mentioned that more than one-third of the portfolio has experienced some form of revenue impact. Can you give a little more granularity on what you're seeing? Is it, you know, push out of contracts, outright cancellations, you know, extended timelines for contracts or changes to payment terms? Anything there would be helpful.

It would probably be kind of E, all of the above. And so what you see in some cases is companies that need to sort of just tighten their belt a little bit. In some cases, you see companies that are suspending certain programs. In some cases, you see companies that are actually accelerating programs or starting new programs, so it's not all negative. You know, some companies and clients are somewhat more concerned about their cash flows and are asking for what I would call sort of, you know, relatively modest extension of payment terms. And so it kind of varies. And again, it's kind of embedded in our expectations for Q2 and in the reference to, you know, a potential, you know, sequential decline in Q3. And again, and what we're trying to do is make certain that we respond to our customers' needs, but do so in a way that doesn't sort of permanently impact the business or the business model over the longer term.

Thank you. And then in terms of, you know, the guidance that you were able to put together for Q2, what types of assumptions have you made in that guidance in terms of the level of utilization that we may see? And do you expect any changes to productivity, you know, either in Q2 or kind of as we go forward as you continue to adapt to this environment?

Maybe I'll just answer this super tactical question around utilization, and then I'll let Art talk about productivity and how our workforce is performing in this new environment. You know, from a utilization standpoint, this is going to be a quarter where, you know, the utilization is going to be very much informed by the revenue number. And so as we tried to communicate, it's this. We want to be highly productive of the workforce. I think it's the right thing to do. And longer term, it's important for us to maintain our capabilities for what we expect to be very robust, renewed demand in the future. And so if we end up at the low end of the range, we'll have lower utilization, as you can imagine. And if we end up at the higher end of the range, the utilization will be pretty solid. Mark, do you want to talk about that?

And on productivity side, So we're operating like in this environment probably for a little bit more than months because like somewhere at the end of March, we moved practically everybody. Right now it's 98% of our people working from home and all of this was done just in several days. So first of all, infrastructure and level of distribution IPAM traditionally was working, was prepared for this, and the level of distribution traditionally was very high. We have multiple delivery centers, and it was historically built to be able to reach out to maximum talent we can. So from this point of view, when it moved to home, it was kind of the next extension of the traditional model we have. And we didn't On top of this, you'll understand when we're talking about platform and everything else, there are a lot of things which we tried to try in the past, how to measure productivity and how to make sure that in this distributed environment it works. So that's why I think we didn't see, at least so far, any impact on day-to-day operation. Opposite, we've seen a lot of compliments from our clients about how speedy we are, and how productive we are in this environment specifically in comparison to many others. So that's why from the model point of view, we don't see any significant changes.

All right. Thank you.

Sure. The next question is from the line of Brian Bergen with Cowan. Please receive your questions.

Hi. Good morning. Thank you. I hope you guys are well. I wanted to ask on the top customers, can you talk about your views and your interactions specific to your top 10? You had a very strong one cue with those. Can you give us a sense of what type of mix those top 10 may be in more pressured industries?

So top 10 is still a pretty broad group. We have some travel companies there. We have financial companies. We have technology companies. In general, actually, our top 10 do in pretty well, but there are exceptions.

Yeah, so increasingly, we're seeing more business information and media customers in the top 10 as well.

Yeah. Okay. And it just is we think longer term structural changes that you think stem from the pandemic here for the service industry and any insight you can share of what you're thinking about as far as changes to your potential delivery model.

You mean how you provided services?

Right.

Yeah, I think there are multiple assumptions how everything going to change or portion of this, how much the work from home or additional level of distribution and delivery model would be accepted. We actually were doing some experiments before and tried to ask clients if they would be open for this. And in general terms, it was pretty negative reaction. And then everything changed with this event. So I think the level of acceptance of distribution, additional level of acceptance of the much more distributed talent and how to orchestrate and coordinate this type of work will be very different after the event. Again, it's very different already. So I think it would have impact on how we're working in the future.

Thank you.

Our next question comes from the line of Surrender Signed with Jefferies. Please receive your question.

Good morning, gentlemen. One question I'd like to start out with is just the difference in visibility between Q2 and Q3. Obviously, you guys were comfortable enough to provide guidance for Q2. Can you talk about the difference in your level of confidence? How wide a, I guess, a range of outcomes does there have to be for you to not provide guidance for Q3?

Yeah. I'm going to actually just talk about some of the processes that we use so that, you know, we've always had a very robust kind of process around our pipeline. We have a system that we use and a set of daily updates, and so we have an updated sort of daily pipeline. In addition, we have, you know, we've instituted processes during this more variable time where we have sort of a daily series of sort of business unit stand-up meetings where we talk about, you know, potential ramp downs, potential opportunities, other sort of sharings around areas of opportunity in the business. And so we've got a very sort of regular updating of activity around clients. And then we're staying as close as clients as possible and connecting with them on a very regular, you know, maybe even daily basis to get inputs as to kind of what their plans are and and importantly, where we can help them. And so that's the reason why we can give you a very good sense for kind of Q2, because we are running an even tighter process than usual, and we've got very good processes in place around demand. But the challenge is you just don't know what's going to happen, I would say, more kind of macroeconomically, and kind of what happens kind of, I think, as economies and cities and states and countries try to reopen. And so I think that's why we've been more careful about any guidance around Q3.

That's helpful. And then one follow-up related to if you can talk a little bit about the mechanics of the pipeline or the visibility in the sense that how much of an advance notice are you getting if projects get put on hold from your clients? And then maybe related to the delta in the growth rate between obviously what was a really good normalized number versus where you are now. Is that primarily just new clients not coming on board at this point, or is it just existing clients putting some projects on hold? Can you talk a little bit about the relative color there as well?

Let me bring a little bit color. Let's try to think what's really happening. Let's try to think what happened at the end of March or second part of the March when suddenly governments, starting to issue very special conditions how to operate. If you think about it, like at the beginning of April, we didn't think we could even guide because nobody knew what's happening. Clients didn't know how they can operate. Their production lines kind of stopped, and they didn't know what was happening with their clients. Like, for example, at the beginning of April, we thought that it would be much worse than it is. That's how dynamically everything happened. Clients starting to communicate very different things. Then one week later, they're starting to change their views. Then another week, they're starting to change their views. That's why when you're asking these questions, you can say that everything was on the table and everything was happening. Why we could guide at the end eventually for Q2? Because with our daily stand-up, with our kind of reading the real-time signals from clients, from the market, we saw that the curve of this change become much more predictable and stable. That's why we decided to share a guidance for Q2. But at the same time, it's still pretty volatile. It's volatile enough that we don't know what will be Q3. And that's exactly what we're sharing.

That's very helpful.

Thank you. So we also understand that if clients say something today, good or bad, it doesn't mean that it would be the same position two weeks later.

I understand. I think that that's the key point from my perspective. It's just the uncertainty at the client level given it within such a short period of time that things can change. Thank you.

Thank you.

Our next question comes from the line of Kyle Peterson with Needham. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the question. Just wanted to get a little more insight and try to parse out the detail in the 2Q outlook. Obviously, it's a deceleration in growth. Is this due to kind of volumes on some project work and existing clients? Is it, you know, fewer expectations for new logo wins or push out price increases or is it a little bit of all of that? Just want to get a sense of the puts and takes driving the deceleration that's expected next quarter?

Yeah, I mean, it would, you know, encompass a range of that, right? Certainly, you've got customers, as I referred to earlier, in the travel and hospitality space who are seeing, you know, 70%, 90% reduction in their revenues And, you know, those customers are clearly having to make the types of decisions that you would make if you saw that type of reduction in revenues. And so you've got, you know, some, you know, ramp downs or sort of need to sort of reduce expense there. You know, we obviously wouldn't have the same sort of pricing ability that we would have in other quarters. But at the same time, we also are seeing some demand increases and in some cases we're seeing clients come to us who are maybe having trouble with other vendors and looking for us to sort of support them with both their existing programs and with new programs.

And just to give you like another color, like how difficult to answer this question, because there is no simple answer to express like in one minute. But let's say consumer goods or retailers, which one of the industries is damaged mostly because all stores closed. And first reaction for them to save money. And that's what they do in the first reaction. The second reaction, we need to increase e-commerce. The third reaction, our e-commerce already increased. Our systems were not designed for this volume. Can you help? And that's a variety. That's why it is an opportunity from a business standpoint because the most damaging industries actually tomorrow will be the most demanding industries because they will have to prepare themselves. And that's happening as we speak. But, again, they need to navigate a lot right now. Their profitability usually, like Adidas, for example, stated their profitability dropped 95%.

Okay, that's good color. And then I guess just a quick follow-up. You guys noticed there's a few areas you mentioned that are actually seeing upticks in demand and potential for new logos getting added in this environment. I just want to see if you guys could provide a little more color, whether it's – is that concentrated in specific verticals or – specific areas of expertise and delivery that you guys have. Just any more detail that you can provide on the stronger demand in some pockets would be really helpful.

Probably the industry which feels better is healthcare or life science. They're more stable. They understand the demand right now. So at the same time, it's pretty volatile across even inside of the industry, depending on the company, which is thinking a little bit longer term versus short term, and ability for them to invest right now. We're seeing like some demand coming from the, exactly as I mentioned before, industry switches damaged, but they understand that in two or three, four quarters, they might have very interesting advantage if they start to invest now. So it's more like, in some cases company by company, and while clearly travel and hospitality and retail on depression. And oil and gas, if you will, as well, because you understand what's happening in energy right now, too.

All right. That's a helpful call. Thanks, guys.

Thank you. Our next question is from the line of Edward Queso with Wells Fargo. Pleasure to see you with your questions.

Hi, good morning. I was wondering if