EPAM Systems, Inc.

Good day, and thank you for standing by. Welcome to the EPAM Systems Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question-and-answer session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. By now, you should have received your copy of the earnings released for the company's third quarter 2021 results. If you have not, a copy is available on epam.com in the investor section. With me on today's call are Akati Dobkin, CEO and President, and Jason Peterson, Chief Financial Officer. I'd like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to 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 comparable GAAP measures and are available in our quarterly earnings material located in the investor section of our website. With that said, I'll now turn the call over to Art.

Thank you, David. Good morning, everyone, and thank you for joining us today. I think it would make sense to start today from the same reference point we used exactly 12 months ago, when we began to see the first positives turning signs after the pandemic hit us earlier in 2020. That reference point was our Investor and Analyst Day, which took place November 2019 in Boston, which was still done in the old-fashioned in-person settings. On that day, we were reminded about EPAM history during our post-APO years and our transformational journey from being a pure software engineering services firm to a much more diverse digital and product consultancy with a strong engineering offerings. Beginning in 2013, we set an aspirational goal to become one of the global leaders in product development services space. Three years later, in 2016, we set out another one to become one of the global leaders in product and platform engineering services. We shared that practically every few years, we focused on the way Palm needs to evolve as an organization with our offerings and the specific elements that were essential to transforming the company. This undertaking enabled us to innovate, remain relevant, and stay ahead in an ever-changing market during those initial post-IPO times. Each aspirational mission was done as a landing point in a longer journey of transformation and was validated by external views, namely industry analysts watching the sector and our ability to grow significantly faster than the market, which has resulted in doubling the company revenue practically every three years. In result, At our investor and analyst day in 2019, we shared our aspiration for the next three years, targeting actually the end of 2021, and softly indicated that we might be able to double the size of Epamaga. We also stated then that to achieve this goal, we will need to continue transforming Epam into a different company with a strong ability to adapt people, platforms, and processes into those that quickly respond to change build and bring to life the digital platform that connects our people to work seamlessly and enables us to be efficient and effective in all what we do, extend our leadership across integrated consulting and engineering services, and, in result, open opportunities for transformation for everybody, anywhere, through net generation delivery, educational, social, and innovation programs. In short, We set our sights on becoming the transformation platform for those clients who would like to become adaptive enterprises themselves, which remains indeed our current undertaking today as well. So last year on our Q3 earnings call, we were reminded of all of that and shared a good level of optimism or self-confidence, if you will, that we would be returning to our traditional 20-plus percent organic growth rate in post-pandemic environment. But we also were almost certain at that point that doubling our 2018 revenue by the end of 2021 would not be a realistic target anymore with everything we experienced in Q2 and Q3 of last year and how we in general saw the situation for 2021 back then in November of 2020. Now, as we sit here today, we see how naive our post-pandemic assumptions were just a year ago, especially regarding the post-pandemic term itself. I guess we all are realizing today that we can drop the post portion of this term for some time in the future. But on another side, we are now realizing that IPAM is an exciting crossroads in its 28-year journey because While looking at the present, we have clear line of sight to a fiscal year, which will be one of the highest growing revenue years in our post-IPO history. That includes also breaking through to our first billion dollar revenue quarter at the end of 2021. And actually still reaching out our aspirational goal of doubling the company for the third time since 2012. This result is an intersection of many factors that have led us to our current state and the next phase of our journey. A journey that has been as much about transforming IPAM as it has been about helping our clients transform themselves. It's exactly through this latest ambition, which we shared in Boston, that we are developing ourselves to be one of the best in the areas of innovation and design, consulting, education, and social responsibility, In addition to driving even higher levels of excellence, it is one of the strongest engineering companies in our space. And today, EPAM is a substantially different company than we were just six, eight years ago. One that has much more diverse foundation to drive the next levels of value to the clients and our growth in result. So, along the way, we had to, and will continue to, solve for the challenges of scaling for growth, geographical expansions, and attracting new types of talent, which brings different experiences and different types of thinking to EPAM, while complementing our strong technical and engineering teams. Additionally, at each convergence, we identified capabilities that we needed to strengthen or build in order to transform EPAM to serve the market needs. and to be done in both ways, organically and through acquisitions, which continue to be an important part of our capability extension strategy. As we turn to the future and set our sights on growing to a 10 billion revenue company, our growth will come from the foundational building blocks we have assembled over the last years, some of which include an integrated consulting and engineering co-finance, which brings together business and strategy, technology, and experience consulting, brought to the market through our EPUM Continuum offerings. High-value cloud services focused on cloud-native development, application optimization, and enabling the data-driven enterprise, helping our customers modernize from inside out. Data and AI everywhere, leveraging our strong advances engineering, and data heritage, building the massive data structures and leveraging API technologies to drive faster insights. And enabled with our global target pool that's connected by our digital platforms, guided by our net generation delivery methodologies, and supported by educational, social, and innovation initiatives. Lastly, we will continue to focus on expanding our partner ecosystem, align with our vision, and map with our vertical and geographical focus, developing joint solutions and going to market together. So, pivoting to the current moment. As I mentioned a short time ago, acquisitions will continue to be a prominent part of EPAM capabilities and geographical extension strategy. This year, we have already closed on five acquisitions, which are enabling us to expand our current offerings in Salesforce, cybersecurity, analytics, strategy consulting, and our presence in Latin America. You also may have seen recent regulatory filings about our intentions to acquire Imakina Group. Imakina is a globally recognized digital marketing and experience agency, or how they call themselves, the user agency, specializing in a range of areas, including commerce and retail, media, planning and buying, service design, branding, and content production across a number of others. headquartered in Belgium, and with more than 1,100 employees and studios across 18 countries in Europe, the Middle East, Africa, and North America. This acquisition will enhance EPAM's ability to deliver creative solutions, personalized experience, and new generation digital products, which we increasingly offer to our global clients. So, worth noting that while EPAM is already listed among, at age, top 25 largest agencies in the world, Demokino will add very new capabilities to our agency offering and significantly strengthen EPAM in market positioning across Europe and Middle East. With that, it seems like it's the right moment now to mention that just a few days ago, Fortune magazine published their 100 fastest growing companies list for 2021 and included EPAM in the fourth time and third consecutive year, ranking us 25th overall. and a number one in the information technology services category. Of note, we are actually the only IT services company on the list. And in addition, Newsweek included IPAM for the first time in the 2021 America's Most Loved Workplace ranking, placing us as a number 49 on the list. So before turning to Jason to provide an update on our third quarter results, in our 2021 outlook, while I would like one more time to state that demand for our services continues to be very strong. And we see this across all market segments. We also very well understand that this is an overall strong demand environment. And this is precisely why we feel we cannot become overly confident. We need to continuously building on our brand and continuously investing in our strong engineering culture, while constantly expanding our services into real end-to-end, higher complexity engagements across the globe to bring unquestionable value to the clients. We understand that everything about our future high growth is hard. But as before, we are not shy to push into new areas because they are challenging. And we are committed to do so in a very thoughtful and sustainable way. So as not to compromise on the quality of the delivery that we are known for. And if anything, we are constantly looking for ways to establish true differentiation for not only our customers, but also, importantly, for eParmers. With that, let me turn the call over to Jason.

Thank you, Art, and good morning, everyone. In the third quarter, ePAM delivered very strong results, reflecting continued significant demand for the company's services across a wide range of industry verticals and geographies. During the quarter, ePAM generated revenues of $988.5 million, a year-over-year increase of 51.6% on a reported basis and 50.7% in constant currency terms, reflecting a positive foreign exchange impact of 90 basis points. A continued robust demand environment, combined with our ability to recruit at record levels while retaining talent, drove a higher-than-expected revenue result for the quarter. Customers continued to turn to EPM for help transforming their businesses, We continue to support our customers across a range of initiatives, including modernizing and transforming applications across the full range of industries we serve, creating new digital products and businesses, and harnessing the resulting data to improve revenue growth, supply chain operations, and end customer experiences. And finally, merging physical and digital to create superior retail experiences. Turning to the performance of our industry verticals, Travel and consumer grew 79.3%, driven by very strong growth from both our consumer and retail clients. In addition, we saw renewed demand and return of growth across our travel customers. Financial services grew 68.9%, with very strong broad-based growth coming from asset management, insurance, payments, and banking. Software and high-tech grew 46.6% in the quarter. Life sciences and healthcare grew 29.5%. Business information and media delivered 23.6% growth in the quarter. And finally, our emerging verticals delivered 61.5% growth, driven by clients in telecommunications, energy, manufacturing, and automotive. From a geographic perspective, North America, our largest region representing 60% of Q3 revenues, grew 51.6% year-over-year. or 51.4% in constant currency. Europe, representing 33% of our Q3 revenues, grew 50.9% year over year, or 49.5% in constant currency. CIS, representing 4% of our Q3 revenues, grew 49.7% year over year, and 44.6% in constant currency. And finally, APAC grew 60.4% year-over-year, or 58% in constant currency terms, and now represents 3% of our revenues. In Q3, revenues from our top 20 customers grew 29%, while revenues from clients outside our top 20 grew 69%, resulting in greater diversification across our revenue base. Moving down the income statement, our gap gross margin for the quarter was 33.9%. compared to 35.1% in Q3 of last year. Non-GAAP gross margin for the quarter was 35.1%, compared to 36.8% for the same quarter last year. Gross margin in Q3 2021 was impacted by higher levels of funding for our variable compensation programs, given the company's outperformance versus targets established at the beginning of the 2021 fiscal year. GAAP SG&A was 17.1% of revenue compared to 17.9% in Q3 of last year. And non-GAAP SG&A came in at 15.3% of revenue compared to 15.9% in the same period last year. GAAP income from operations was $144.1 million or 14.6% of revenue in the quarter compared to $96.4 million or 14.8% of revenue in Q3 of last year. Non-GAAP income from operations was $179.6 million, or 18.2% of revenue in the quarter compared to $123.3 million, or 18.9% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 14.6% versus our Q3 guide of 13% due to a lower than expected level of excess tax benefits related to stock-based compensation. and a one-time benefit related to certain tax credits. Our non-GAAP effective tax rate, which excludes excess tax benefits and includes the one-time benefit of the tax credit, was 21 percent. Diluted earnings per share on a GAAP basis was $1.95. Our non-GAAP diluted EPS was $2.42, reflecting a 77-cent increase or 46.7 percent growth over the same quarter in 2020. In Q3, there were approximately 59.2 million diluted shares outstanding. Now, turning to our cash flow and balance sheet, cash flow from operations for Q3 was 206.1 million compared to 175.6 million in the same quarter of 2020. Free cash flow of 184.9 million produced 129 percent conversion of adjusted net income compared to free cash flow of 165.8 million in the same quarter last year. We entered the quarter with approximately $1.3 billion in cash and cash equivalents, which does not include the restricted cash related to the acquisition of the Makina Group. Additionally, in October, we updated and expanded our unsecured credit facility, which will allow for up to $700 million in funding, plus an additional $300 million via accordion, giving us access to a total of $1 billion in borrowing capacity. This new credit facility replaces the 2017 facility, which allowed for borrowing up to $300 million with an additional $100 million via accordion. At the end of Q3, DSO was 70 days and compares to 70 days for both Q2 2021 and the same quarter last year. We expect to maintain DSO around the same level or somewhat lower in Q4. Moving on to a few operational metrics, we ended the quarter with more than 47,050 consultants, designers, and engineers, a year-over-year increase of 39.4%. Our total headcount for Q3 was more than 52,650 employees. In the first three quarters of 2021, we had approximately 11,500 net additions, a record number for EPAM over a nine-month period. Utilization was 77.1% compared to 78.2% in Q3 of last year, and 82.2% in Q2 2021. Now let's turn to guidance. Based on our year-to-day results, combined with a robust demand environment and continued confidence in our ability to scale production headcount, we are raising our business outlook for 2021. So starting with our full-year outlook, revenue growth will now be at least 40 percent on a reported basis, and in constant currency terms, will now be at least 38 percent after factoring in an approximate 2 percent favorable foreign exchange impact. On an organic constant currency basis, revenue growth will be at least 34 percent after excluding an approximate 400 basis points of revenue contribution from acquisitions we closed in the last 12 months, including eMachina. This compares to the previous full-year revenue growth outlook of 37% reported, 35% constant currency, and 32% in organic constant currency terms, which we provided during our Q2 earnings call. We expect GAAP income from operations to continue to be in the range of 13.5% to 14.5%, and non-GAAP income from operations to continue to be in the range of 17% to 18%. We expect our GAAP effective tax rate to continue to be approximately 11 percent, which includes the benefit of certain tax credits I mentioned previously. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will now be 22 percent. For earnings per share, we expect the GAAP diluted EPS will now be in the range of $7.86 to $7.93 for the full year. and non-GAAP diluted EPS will now be in the range of $8.72 to $8.79 for the full year. We expect weighted average share count of 59.1 million fully diluted shares outstanding. For Q4 of 2021, we expect revenues to be in the range of $1.075 billion to $1.085 billion. producing a year-over-year growth rate of approximately 49% at the midpoint of the range, with the favorable impact of foreign exchange on revenue growth expected to be minimal. Lastly, we expect approximately 800 basis points of revenue contribution to come from acquisitions closed over the last 12 months, including eMachina. For the fourth quarter, we expect gap income from operations to be the range of 13.5% to 14.5%. and non-GAAP income from operations to be in the range of 17 to 18 percent. We expect our GAAP effective tax rate to be approximately 14 percent and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 22 percent. For earnings per share, we expect GAAP-diluted EPS to be in the range of $2.11 to $2.18 for the quarter. and non-GAAP diluted EPS to be in the range of $2.44 to $2.51 for the quarter. We expect a weighted average share count of 59.3 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurement in the fourth quarter. Stock-based compensation expense is expected to be approximately 31.4 million. Amortization of intangibles is expected to be approximately 5.6 million. The impact of foreign exchange is expected to be approximately a $1.5 million loss. Tax effective non-GAAP adjustments is expected to be around $8 million. And finally, we expect excess tax benefits to be around $13 million in the quarter. In summary, we are pleased with our Q3 results and the record growth we are producing in our 2021 fiscal year. While it is too early to give a detailed view of our business outlook for 2022, We believe the demand environment continues to support an elevated annual growth rate in excess of our traditional guidance of greater than 20%. However, we also believe it is important to establish and maintain a more sustainable growth rate in the coming year than that achieved in 2021. As we have done in the past, we will provide our detailed view of 2022 guidance in February on our Q4 earnings call. Operator, let's open the call for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from . Your line is open.

Hi, good morning. I wanted to ask about the spread between headcount growth versus revenue growth. It's really widened here despite the utilization normalizing. Can you talk about some of the key drivers there as well as the sustainable level for that difference?

Yeah, you know, I think that we continue to see some improvement in pricing, as I think we've discussed over the last couple of calls. And then probably there's a little bit of shift from a geographic standpoint and, you know, different geographies to have somewhat higher rates associated with them. And so I think you might continue to see some improvement over time. And as I think we've sort of talked about, we feel that we've definitely increased our capacity to add headcount and, you know, more specifically to retain headcount. And so we expect that we will continue to add headcounts at greater than historic rates But currently, we're guiding to a somewhat lower increase in headcount in Q4 relative to Q3 based on what we think will be a little bit of slowdown in people joining the company in the month of December.

Okay. And then just on the growth outlook, so it really looks quite broad-based across the business. Just any thoughts on how 2022 growth may progress, considering the level of comps you continue to put on board here in 21? And more specifically, how do you feel about headroom to grow in some of your largest clients?

You know, the demand environment continues to be strong. You know, we see quite a bit of growth from existing clients. We also have a number of engagements that we have entered into more recently. that have a lot of growth potential. So the demand environment is obviously quite solid. You know, we also feel that we have increased our ability to support, you know, organic growth rates. At the same time, I should say that, you know, we don't expect that a 36 percent organic growth rate become a, you know, a normal, you know, sort of multi-year sustainable norm.

Okay, and the largest accounts, Headroom and those, do you still feel strong there?

Yeah, there's definitely, there's potential in the larger accounts.

All right, thank you.

Thank you. Our next question comes from Jamie Friedman with Susquehanna. Your line is open.

Hi, let me echo the congratulations. Two questions, I guess I'll ask them up front, maybe for ARC. In your prepared remarks, Mark, you asked, I mean, you were just discussing experienced consultants, and you used that word experience. I was just wondering, you know, how are you doing? What verticals especially are you drawing talent from with the experienced consultants? And then the second thing is, Jason, is there any call out about Q4 seasonality or ideally 2022 budgets? Thank you.

So the question, I'm sorry, the question about where we're taking people, where we're kind of bringing people from, or in what markets we're applying the capability?

Especially the second one, Ark.

Okay. Well, I think, like, I don't think there is in here much difference with us and with other companies playing in the market. Right now, this is pretty much crossing most of the verticals. I think consumer goods, travel, retail, definitely leading this, but it would be relevant for majority of financial services on definitely entertainment and publishing. So I think it's pretty much crossing all and healthcare and life science, all of it.

Yeah, and I guess I'll answer the second question. So good morning. And, you know, from the standpoint of budgets, you know, budgets intact as we sort of exit Q4, clients are looking to invest and to continue to, you know, drive digital transformation. So right now it continues to be a market where probably supply constraint is the greater issue rather than demand. And we entered 2022 with what looks like a pretty intact demand environment.

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

Our next question comes from Ramsey Ellisol with Barclays. Thank you. Our next question comes from Ashton Shevaker with Citi. Your line is open.

Thank you. Congratulations on the quarter. I guess the question, and in the past you guys have spoken about sort of the risk to corporate culture from growing too fast and the ability to grow too fast. So as you scale, has that ability changed or has your view changed?

I think it's definitely a very relevant concern and we're paying a lot of attention to this. At the same time, things are changing. from the point of view how we were thinking about general operation, level of distribution, how people working just two years ago. So I'm just reminded exactly about kind of our naivety sometimes. And we put during the last couple years and even starting to do before a lot of efforts to make sure that we create an environment from digital ecosystem perspective as well. to see how we can support the culture better in what we were thinking will be relevant probably not during the 2020, 2021, but later. It's all accelerated like we all was talking about it. But at the same time, that's exactly what Jason already mentioned. We don't believe that it's sustainable to grow with the growth which is happening right now. for a relatively long period of time. So I think it might be better than what we were expecting a couple of years ago when we were talking about our goal of 20 plus percent organic growth. Maybe it will be better in the future, but it's definitely not the rate which we're growing today because in this case we will be kind of... 50, 60, 70% of people will be new to the company, which is very difficult to sustain culture and quality of the delivery. And we're very, very much focusing on the quality levels.

Understood. Understood. No, so you focused on the right things as far as that type of growth is concerned, which is good. I guess one separate question that goes with E-Machina, which I guess that process has been ongoing since August. Just to clarify, is the acquisition now complete in terms of just the public share repurchase and stuff like that? Is this an area where you would see yourself continuing to to continuing to scale in terms of acquiring a lot of local talent in many different geographies.

Yeah, so from, I guess, the acquisition standpoint, over 98% of shareholders have agreed to tender their shares and cash has been transferred. We're still going through a little bit of, I guess, what's called a squeeze-out process here for the remainder of the shareholders. And so for all practical purposes, we would control the company as of, I guess, yesterday. And I guess that's kind of what I'd say about that.

Yes, that's right. And we're definitely focusing on expanding in the market. And Imaquina Acquisition bringing like 1,100 people to us, specifically in European markets. It's definitely improving our experience consultancy, digital consultancy, marketing. related consultancy skills, which is a little bit new to IPAM, but very complementary to what we're doing. But it's also very visible improvement of our presence across European and in some Middle East geographies. And we're planning to continuously do this, but again, with right proportion and with consistent focus on delivery and engineering

And just to clarify, and I think I said that in my prepared remarks, but we've got two months of eMachina results built into the guidance that we communicated for the Q4 quarter. Understood.

Okay, great. Thank you. Thank you.

Our next question comes from Maggie Nolan with William Blair. Your line is open.

Thank you. I'm wondering what is the level of seniority of the employees that you've been hiring so rapidly in the last couple quarters here, and has the pyramid makeup shifted in the last couple of years?

I think we're definitely doing very specific analysis on this part, and while we're growing faster than we expected, we're keeping the seniority pyramid intact right now. So this is kind of a short answer. Clearly, with the seniority, we bring in more new people, and that's a little bit more challenging. That's kind of related to the previous question. Ashwin was asking, are we carefully doing this? But again, seniority pyramid is supported as needed for the type of services we deliver.

Thank you. And then in previous quarters, you've discussed putting through an additional number of price increases compared to prior years. How widespread is this across your client base and what is the magnitude and how receptive have clients been to these conversations?

We continue to have discussions and negotiations with clients around rate increases. Some of those are coming in the second half of 2021. At the same time, we're also beginning to have the discussions around rate increases for the beginning of 2022, which is kind of the more traditional period for rate increases. You know, obviously nobody likes to absorb a rate increase, but I think, you know, based on everything that people are seeing from a wage inflation standpoint, from, I guess, a global inflation standpoint, and just the continued strong demand for resources, these are, you know, relatively easier conversations than we've had in the past, and I expect that we will see, you know, better price increase or rate increase in 2022 than we've seen in previous years.

Is that pretty widespread across your client base, Jason?

Yeah, so, you know, every client is probably a little bit different, but yes, I think that, you know, there will generally be greater increases across clients that we've seen in the past You know, some clients will have higher rate increases than others. You know, depending on where they've kind of been historically, we are trying to make certain that we are growing our business responsibly and sort of, you know, able to maintain sort of a stable sort of level of profitability the way we've run the business over the last couple years.

Thank you. Congratulations.

Thank you.

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

Hey, guys. This is Cassie on for Jason. Great set of results here. I wanted to ask about margins. I mean, obviously, your margin performance has been very impressive year-to-date, and I think you're already tracking to the upper end of your full-year guidance range of 17% to 18%. Just curious, is there a reason you didn't take up the full-year margin guidance? Is it just conservatism, or are there other factors that we should be aware of? Thanks.

Sure. So, you know, we believe that the 17 to 18 percent guidance that we maintain for adjusted income from operations is the appropriate kind of guidance. Q3 was a quite strong quarter, which did, you know, some of the profitability improvement was a result of sort of the upside in revenue that was somewhat unexpected in the quarter. For Q4, we expect that, you know, SG&A will come up a little bit between Q3 and Q4. We'll maintain gross margins kind of in and around the range that we saw in Q3. And then I think the other thing I should point out is that, you know, our recent acquisitions have somewhat lower levels of profit than our traditional EPM business. So all of those things kind of pushes you more towards a Q4 exit in the middle of that 17% to 18% range. And so that's kind of what informs that 17% to 18% guidance for the full year.

Great, very helpful. And just a quick follow-up. I just wanted to ask about utilization. You know, obviously the 3Q number was the lowest we've seen in about two years now. So, you know, is that just due to timing of onboarding? Because obviously you had a very strong hiring quarter or, you know, obviously demand remains very strong. So I just wanted to know, is there any factors contributing to that thing?

Yeah, so utilization in Q3 is traditionally, you know, the seasonal low quarter. And so if you think about a world, I guess, pre-2020, it's a time when people go on vacation, and if you're lucky enough to be in Europe, maybe it's a two- or three-week vacation, and so utilization is relatively low. Last year, when people couldn't leave their homes and countries, we saw higher utilization than is typical. The 77.1% that we saw in Q3 is actually pretty good and, again, sort of seasonally consistent. We expect utilization might come up a little bit in Q4, but, you know, not unhappy with the 77.1% that we had in Q3. And I guess the other thing I should point out is, you know, we usually think about the business as kind of running in maybe a 77% to 79% utilization, and, again, it is somewhat seasonal. There are quarters when we run, you know, at or above 80%, but we generally consider that, you know, on the hotter side.

Great. Very helpful. Thanks, guys.

Thank you.

Our next question comes from Sarinda Thin with Jeffrey. Your line is open.

Hi, Jason. I was hoping for a bit more color on your commentary around when you mentioned looking towards a more sustainable growth rate and what you're currently generating. Is that around the scale at which EPAM is currently operating at, or is that also some commentary on the industry growth that's occurring and maybe ultimately some expectations of slowdown as we look ahead?

I think it's difficult to comment about industry as a whole. At this point, we think there is very strong demand and there is no really signs that this demand will go down. At the same time, from our internal assessment, we really would like to make sure that we bring in the value to the clients and supporting the reputation which we built during the previous couple decades. And from this point of view, we're talking about sustainability of our growth. Because, like, if you're going to grow in, like, 50% for a couple years, it's our size. We don't don't believe that it's possible to do in the complexity of the business we have, the complexity of the engagements and all of that. So basically, sustainability was referring exactly to our understanding what's possible in reality with keeping the quality and culture of the company again. Similar reply to what we already did to Ashen as well.

Understood. And then related to the commentary around expectations of strong demand outlook as you look over the next X number of years, you made a comment earlier about the naivety of predicting demand about a year ago and where you thought things were. Can you maybe provide some color around what gives you confidence that the current level of demand from an industry perspective is sustainable at these levels? And then if we look at past cycles, it seems like demand, you know, where it's spiked will persist for a couple of years, but then there's generally a quick drawdown. Any color you can provide there on your confidence levels.

I think our point was exactly how difficult to predict the future and how just a couple of years ago we didn't understand that it would be the turnover which happened. And even 12 months ago we saw that impact of pandemic will be different and then just one or two quarters later it will change. That's why from your question, we do believe that it would be strong demand in the next several years. What would be after this and how this wave will be working is an interesting question because everything is changing. So, unfortunately, I cannot give you this kind of assurance for the next decade or something.

Understood. That's helpful. Thank you. Thank you.

Our next question comes from James Fawcett with Morgan Stanley. Your line is open.

Thank you very much, and thanks for all the detail today. I'm wondering, you mentioned in prepared remarks that you're making some progress on standing up new delivery centers in different regions. Can you give a little more detail on that? How's hiring going in those regions, and how are you being able to build the EPAM brand, which seems to have served you really well to date in your existing geographies?

I think we will be very consistent with our comment on this side. I don't remember in what quote we were saying that it's easy to bring talent. And I'm pretty sure we always were confirming that it's also very global. There is no practical spaces in the world today where you can come and start to hire like talent without challenges. And I think each quarter in this demand is becoming more challenging. At the same time, our investments in education and our recruitment processes and automation and everything becoming more impactful and allowed us to support what we're doing today. I don't know what else to say. I think war for talent is like in... all media and all websites everywhere like everybody talking about it and we're pretty proud at this point that we're able to sustain the level of net additions which we have and level of kind of relatively manageable attrition rates.

No, and certainly you have good reason to be proud and impressed with what you've done to date on a hiring. You also talked about it. I just want to talk a little bit or ask quickly on customer growth and contribution. It seemed like there was pretty material sequential growth across your top customers. How much is that the result of their own demand versus you turning away maybe other business and so that's resulting in more concentration? And how should we think about that going forward? Do you think you can get far enough ahead of the hiring curve to be able to take on some of that work that maybe you've been turning away recently or is that going to be an ongoing challenge?

Yeah, so, you know, I think that, you know, we're actually kind of deconcentrating. What I would say is that if you looked at the cohort in the 11 to 20, you did have pretty elevated growth rate in that cohort. And, you know, maybe some of that speaks to sort of the trends we're seeing in the market. So you've got, you know, a few clients, one in the asset management space that was probably somewhat unprepared for, you know, the new digital kind of operating world The pandemic, you know, sort of encouraged them to make investments, and now there's a significant amount of investment around updating their infrastructure and the ways they connect with their end clients. And so you've got, you know, I would say a number of companies who, you know, probably got additional religion via the pandemic, and you're seeing quite accelerated investment. And then, you know, EPAM continues to bring that sort of trusted partner into to the table, and so clients who are looking to make certain that their transformation journey is successful oftentimes are working with EPAM because of the track record that ARC has spoken about. So we did see some really strong growth in the 11 through 20, but we're also seeing very strong growth in the customers below 20. I would say probably if you're an existing customer with strong demand, you probably have a little bit more of a say at the table. And so probably they are getting a little bit more of their share of resources than brand new customers. And again, we continue to be constrained by supply and are expecting that we'll continue to have very, very solid net additions in Q4, but at a somewhat lower level than in Q3. And of course, that excludes the 1,100 additions coming from E-Machina. So I said a lot. Was that relatively clear?

Yeah, no, that was perfect. Just the one clarification, and I think you touched on this in terms of the lower net addition of the fourth quarter. Do you think that is that seasonal or is there some other aspect that's impacting that?

I mean, I think generally what we're thinking is that December is a time when, you know, most people don't change jobs. And so we'll have maybe fewer joiners in December. But it might be a reflection that things could get a little bit harder over time. But, you know, as Ark has talked about, we've really improved our capability to attract. I think our hiring brand continues to improve quarter after quarter, year after year. We've also improved our ability to staff projects and to match supply and demand. So I think that we've, you know, improved our capabilities around organic growth rates, but, you know, again, are expecting a somewhat slower level of net additions in Q4.

That's great. Thank you.

Our next question comes from Arvind Ramnani with Piper Sandler. Your line is open.

Hey, congrats on a terrific quarter. I just want to go back to a comment that Ark made in the prepared remarks in talking about pushing into new areas and capabilities. So a couple of questions around this. What are you doing in terms of figuring out which areas to invest in? Just given the breadth of tech innovation across the space, how are you deciding which areas to really focus on and build capabilities in before there's commercial revenue opportunity? And the second question is, how are you deciding which what areas to kind of de-emphasize, you know, are there certain areas where you don't see much growth? How are you deciding what areas to say, like, we're going to focus less on these areas?

Yeah, Aaron, like, I appreciate your questions, like, all of us trying to understand the future and how we're doing this, and it's, like, simple-sounded question, which, like, really complex. I just would like to remind, like, I'm not going to go to specific topics, but we do believe that one of the advantages which we have that around probably 30-40% of our business is still working with software companies and technology companies and platform companies. And we're doing significant kind of sometimes significant portion of development of new products and platform for this type of clients. Which is giving us like very different exposure to what's happening in different areas. Like sometimes we do a new product on new concept like much earlier than it's going to the market. But then we are forced to help this type of clients to do implementation of this. So we have kind of organic internal barometer, if you will, to help us to select some areas. And we build this capability sometimes in a very organic way. And that's why design, we're trying to keep this proportion of such clients in our business portfolio to be able to continuously do it. This is from technology standpoint. And then from end-to-end solution standpoint, we definitely, with everything what we were sharing about consultancy, we're going up and up in the chain and expanding business perspective of what we're building and how we can help clients. First, consulting was for us strictly technologies, and we added experience components, and we're talking about business now. We're talking about strategy in McKenna part of this, but we also did a couple more acquisitions in this area. And this is when we're talking about new areas. It's not only about new technologies. It's also about the whole end-to-end story.

Perfect, perfect. This is another question. You know, certainly in the last, you know, few years, you have, you know, expanded your consulting capabilities, which makes a lot more sense given that now you're doing close to a billion dollars in revenue per quarter. Can you just talk maybe about the competitive set? Who are you winning business from? Is the competitive set changed now versus three, four years back?

I think you understand our competitive base very, very well, and I think we're just getting proportionally more to the situation when consulting becomes a much more important part to start the business, to open the door. From this point of view, I think we're seeing the difference. From general competitive, kind of what exactly companies we compete against, I think at large it's the same because most of the large vendors had these capabilities before. We're just trying to bring different values through integrating better with delivering engineering.

Perfect. Thank you, and good luck for the rest of the year.

Thank you.

Our next question comes from Steve Enders with KeyBank Capital Markets. Your line is open.

Okay, great. Thanks for taking my question. Talk a little bit more about the macro and kind of where budgets are at this point. You know, good to see, I guess, travel and consumer specifically, recovery here, but are you still seeing some of that depressed spending levels from from COVID? So having to cross some of the verticals in your your client base?

I don't believe we see any any of this at this stage. I think practically, and it's not only about travel and consumer, it's practically about all industries. We do believe that everybody understand that preparation for something new or even like changes which this pandemic trigger is pretty constant. And when I was saying before like it's difficult to predict what would be two years or three years from now, It is difficult, and anything can happen, and we all understand it. But mostly I was referring to level of demand, which is happening specifically right now. The level which we were seeing and predicting for longer term, like before pandemic, I think it definitely will be there for longer term as well. But direct answer to your question, no, we don't see any type of sign of partial depression still from the pandemic right now in the market, in our market.

Okay, perfect. I guess as a follow-up, just, you know, as you kind of think about the biggest challenges that you are trying to solve for today is still the biggest thing, the, you know, ability to bring in more talent and, and, We're just looking at gross margin and where that's at today, but just ability to bring in talent and pass on some of the costs there and deal with the higher hiring levels, or what's the biggest challenge you're still solving for today?

In a very simplistic way, yes, the biggest challenge is bringing talent, but I think it's an overall huge oversimplification of what's happening because Talent is a very broad term, like in general you can, it's possible to hire a lot of people. The point is what type of people, how to orchestrate the complexity of the engagement, how to connect with the clients in the right way. I think orchestration of the kind of integrated teams working together, specifically when you're growing like 30 plus percent when you having a lot of new people and you need to kind of bring them up to what's happening and understand the type of engagement which we're doing in the scale which is happening right now. That's a real challenge. So, talent acquisition important enabler of this. Talent should be there, but the real concern, how we deliver it. And that should be the kind of very well understood.

And I'm going to step in and kind of respond to that sort of more tactical question on gross margin. So, you know, we talked about earlier in this call that, you know, we do continue to see elevated wage inflation. We are getting somewhat better increases in rates, okay, but probably not fully able to offset wage inflation. However, the one important point is that this year we've had, you know, outperformances, I think you've seen as we've taken up our guidance, I think, every quarter. And so we have a variable compensation element that the expense is based on the strength of the company's performance and revenue growth and profitability. So we're booking the expense associated with variable compensation at a much, much higher level this year than we have in past years. So next year, I would think that would normalize. And so that will have a positive impact on gross margin. and then you may continue to have some pressure with wage inflation, and hopefully those two kind of offset each other. And just to sort of round it out, the variable compensation expense shows up throughout the year, and then it's generally paid in the form of a variable payout to employees at the end of the Q1 quarter and the beginning of the Q2 quarter.

Okay, perfect. Thanks for taking the questions. Very helpful.

Thank you. Our last question comes from Vladimir Bessalov with VTV Capital. Your line is open.

Hello. Congratulations on very good numbers, and thank you for taking my question. I would like to ask you about your M&A pipeline and general the M&A market since Alex mentioned that this is a part of your strategy going forward, an important part. So do you feel like the competition on this market is growing because there have been a lot of activities in the sector in general. Do you feel like that it's getting more and more difficult to find the full target, the valuations are going up, and things like this, so we provide some color. Thank you.

I think it's definitely known fact, and the answer will be yes, yes, and yes. Basically, there are A lot of companies on the market, but competition is growing and prices is growing as well. So that's very natural in the market situation which we kind of described today. And we're still going to find the right companies to bring on board and to improve our capabilities. And we, like everybody else, are talking to a number of opportunities right now.

Thank you very much.

No, absolutely. Thank you.

I would now like to turn the call back over to Arkady Dobkin for closing remarks.

As always, thank you very much for attending the call today. You know that if you have any questions, David is available. And again, see you in three months. Thank you very much.

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