EPAM Systems, Inc.

Good day, and thank you for standing by. Welcome to the EPM Systems fourth quarter and full year 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 during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations.

Please Thank you, operator, and good morning, everyone.

By now, you should have received your copy of the earnings release for the company's fourth quarter and full year 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 would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to 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 the comparable GAAP measures and are available in our quarterly earnings material located in the investor section of our website. With that said, I will now turn the call over to ARC.

Thank you, David. Good day, everyone, and thank you for joining us today. Before turning to Jason to provide a detailed update on our first quarter, overall 2021 results and our 2022 outlook, I would like to spend some time reflecting on last year's performance and share some thoughts on our positioning for 2022. But even before doing that, I would like to share a couple other thoughts. Just last week, we celebrated the 10th year anniversary of our initial public offering as a New York Stock Exchange. So that is why this call is a bit special. Exactly 10 years ago, we provided our first guidance on our first owning call. EPAM in Q1 2012 was a company with 7,000 people and about 335 million in revenue. We really felt back then, which reflected a strong reality indeed. The TIPAM was very much an unknown startup with a minimal presence in the United States and Western Europe, and with development centers across just a few countries in Eastern Europe. And we were extremely nervous because of all of that. During our first call, we shared that our quarterly revenue grew 34%, and our annual headcount increased by about 30%. And we guided that our 2012 revenue should go up around 23, 25% from the period year of 2011. Ten years later, we are a very different company. Since our IPO, EPUM has grown more than tenfold, expanding our global footprint across five continents and growing our team of professionals to more than 58,000 people and across 40 countries. to become a recognized world leader in digital engineering and consulting services. So at this moment, I would like to personally thank all of our employees, customers, and shareholders who participated in achieving this notable milestone in the Palm journey, which we just celebrated last week on New York Stock Exchange podium, unfortunately in very small team due to understandable COVID restrictions. What is also important is that 10 years later, we still feel very much as a fast growing, constantly changing and learning startup. And that today we still can share that in our first quarter, we grew 53% and 44% organically, increased our annual headcount by 43%, and plan to grow revenues by at least 37% in 2022. So in short, We are running today faster than we did back then, during our first post-IPO days. To be on a bit more formal side, for 2021, we generated almost $3.8 billion in revenues, reflecting on greater than 40% year-over-year growth, which included strong results across all dimensions of our portfolio. Non-GAAP earnings per share were $9.05, a 43% increase over fiscal 2020. And in 2021, we also generated $461 million of free cash flow. During our previous call three months ago, we shared the history of our transformational efforts while we were setting our three-year mission plans. I will not go into those details again, but would like to mention that 2021 was actually a special year for us. For the third time in a row since our IPO, we doubled the company in three years. 2021 was a year when we were aggressively building and expanding ePalm capabilities through our strong organic app, especially across cloud data and consulting credits. And also it was a record year from an M&A point of view, which helped us to fill some white spaces and also to mature our offerings in consulting cybersecurity, digital marketing, digital platform, cloud delivery, as well as in data and analytics. It also allows to better diversify our global delivery organization. For sure, our 2021 results would not have been possible if not for our ability to attract and retain talent. To meet the extraordinary demand in 2021, we refined our employee value proposition. to elevate EPAM as a home for the next-generation technologists, where engineers, designers, architects, and consultants can embrace modern practices, cutting-edge tech, and deep collaboration approach during our client engagement. We added more than 17,600 EPAMers, which is approximately two and a half times more employees than our previous record hiring year of 2019. 2021 was the second year in a row for very much distributed, with very high percentage of remote work, and with still very limited opportunities to meet in person with our team members and clients on a regular basis. So it was a year when we doubled our efforts to focus on talent engagement practices through understanding of people's capabilities, investing in their training and development, and providing a wide area of opportunities to communicate and gather together virtually as a team, as well as through finding the best suitable engagement, both from professional and from locational point of view. Additionally, we drove deeper connections across our global talent pool to each other and to global community of people and partners through our digital platforms, all of which help us to keep high level of productivity and our attrition levels manageable in the current very challenging environment. In 2021, the majority of our clients have been at the center of significant amount of transformation that has driven very strong demand for our services across all verticals. In travel and consumer, we observed an extra rebound as post-pandemic priorities once again moved to the forefront of the discretionary spent agenda. In financial services, we saw demand growth in both our existing customers and in several new and previously smaller clients, all continuing the same of modernization and innovation of key business domains. Insurance, which was a relatively new focus area within our financial services last year, is today one of our fastest-growing subsegments. Telecommunications, automotive, and energy are all part of our emerging vertical segments. Outpaced previous year performance as clients in these sectors turned to EPUM for expertise in innovation, design experience, and product and platform engineering offerings. Life science and healthcare and software and high tech both continue to grow fast and demonstrate a potential to accelerate fast. While business information and media slowed down during the year, returned to a 30 plus percent growth rate in Q4. 2021 was also a noticeable year from a market recognition point of view. Some of them we shared previously, but I would list those together to demonstrate the progress we achieved of being not only the engineers anymore, but moving beyond into the integrated consulting and advanced engineering zone. Epam was ranked as a top IT services company on Fortune 100 fastest growing companies list for the third consecutive year. and also was included on the list of Forbes Global 2000 companies. Recognized at age as one of the top 25 largest agencies in the world. And consulting magazine named EPAM Continuum as one of the top 20 fastest growing consultancies. Also included by Forrester as EPAM Continuum in the list of eight largest customer experience strategy consulting practices along with Accenture, BCG, Deloitte, E&Y, IBM, McKinsey, and PwC. Named a top 50 most loved workplaces by Newsweek, recognized for our employee-centric work by Great Place to Work in a number of our key talent market. And was also awarded the Best Culture of Learning Talent by LinkedIn. Just last week was included in the top 100 Barron's most sustainable companies list. And lastly, was accepted in S&P 500 index in December. Just several quarters ago, in last May actually, we talked probably for the first time about becoming a $5 to $10 billion company sometime in the future. Today we know that we are guiding to cross the $5 billion mark already in 2022. So we feel much more confident to set our near-term sights on growing to $10 billion company. We believe we are well positioned to do so with our overall progress today. And we continue advancing on our key client markets and growing and very fast diversifying global delivery capabilities. I know it feels like I am missing one hot topic at this point. And I am sure that you follow the news about Ukraine and Russia as much as we do. That is why I would like to share the following before passing the microphone to Jason. 2021 was actually a very challenging year, especially for us. First, due to fast-growing geopolitical and social uncertainties across some of our key talent markets. And the continuous disruption of global pandemic, too. That is exactly why we are very pleased with our standing first quarter and overall performance we delivered in 2021, despite all of that. Our results demonstrate the level of maturity we have reached over the years and our ability to operate and manage our performance during difficult times. We also should remember that this conflict is not new for the region. We too well remember 2014 and 2015, and then 2020 as well. We have dealt well with those in the past, and we also learned a lot since then. So in 2021, to navigate the situation, we continued something which we started actively implementing since 2014, both archaic and M&A-based efforts to improve our geographic talent diversification and to do it without any degradation in quality of our delivery. That was our key focus over those years, as well as significantly maturing our portfolio of consulting industry and overall engineering capabilities. So today we believe we are well prepared to address the challenges ahead in 2022 by leveraging our broad global reach in addition to our deep regional insight and by applying our strong engineering DNA and, very importantly, never-ending entrepreneurial spirit to continue making the future real for our clients, our employees, and our global and local communities, while keeping everyone as safe as possible is our key priority at the same time. With that, I would like one more time to thank our employees, customers, and shareholders for their continued understanding and support. Now let me turn the call over to Jason.

Thank you, Art, and good day to all. In the fourth quarter, EPM delivered extremely strong results, reflecting continued high levels of demand for the company's services across a full range of industry verticals and geographies. During the quarter, EPM generated revenues of $1,107,000,000, a year-over-year increase of 53.1% on a reported basis and 54.1% in constant currency terms. reflecting a negative foreign exchange impact of 100 basis points. Q4 was the first quarter EPM delivered quarterly revenues in excess of $1 billion, a notable milestone in the company's journey. Performance across industry verticals in the quarter was consistent and very strong. Longstanding trends which have been driving significant growth continue and include the need to modernize and transform applications while transitioning them to the cloud. Human-centered innovation as the merging of physical and digital experiences continues to spread across industries. And creation of new digital products and businesses while harnessing the resulting data to improve our customers' revenue growth, supply chain operations, and end customer experiences. Turning to the performance of our industry verticals, travel and consumer grew 91.3%, driven by very strong growth from both our consumer and retail clients. The accelerated growth in the quarter is partially the result of recent acquisitions. Financial services grew 60.3%, with very strong growth coming from payments, banking, asset management, and insurance. Larger consulting-led engagements are helping to drive higher levels of growth. Software and high tech grew 34.7% in the quarter. Life sciences and healthcare grew 33.9%. Business information and media delivered 32.9% growth in the quarter. And finally, our emerging verticals delivered 67.6% growth, driven by clients in manufacturing and automotive, energy, and telecommunications. Moving to our geographic performance, in Q4, we renamed our geographic regions to better reflect EPM's ongoing geographic expansion. These changes are name only. The methodology used to report revenues remains unchanged. The Americas, our largest region, representing 58% of our Q4 revenues, grew 47.2% year-over-year, or 47.4% in constant currency. EMEA, representing 35% of Q4 revenues, grew 66.6% year-over-year, or 69.7% in constant currency. The accelerated growth in the quarter is partially the result of recent acquisitions. CEE, representing 5% of our Q4 revenues, grew 46.4% year-over-year and 43.9% in constant currency. And finally, APEC grew 38% year-over-year and 38% in constant currency terms and now represents 3% of our revenues. In Q4, revenues from our top 20 clients grew 29%. while revenues from clients outside our top 20 grew 70% year over year, driving greater diversification across our revenue base. Growth on our clients outside of the top 20, most notably below the top 200, reflected a higher level of an inorganic contribution during the quarter. Moving down the income statement, our gap gross margin for the quarter was 34.3% compared to 35.6% in Q4 of last year. Non-GAAP gross margin for the quarter was 35.9% compared to 36.9% for the same quarter last year. Gross margin in Q4 2021 was impacted by higher levels of funding for our variable compensation programs, given the company's outperformance versus financial targets established at the beginning of the 2021 fiscal year. GAAP SG&A was 17.2% of revenue compared to 17.8% in Q4 of last year. and non-GAAP SG&A came in at 15.6% of revenue compared to 16.2% in the same period last year. GAAP income from operations was $166 million or 15% of revenue in the quarter compared to $112 million or 15.5% of revenue in Q4 of last year. Non-GAAP income from operations was $206 million or 18.6% of revenues in the quarter compared to $136 million or 18.8 percent of revenue in Q4 of last year. Our gap effective tax rate for the quarter came in at 11 percent versus our Q4 guide of 14 percent. Due to a higher than expected level of excess tax benefits related to stock-based compensation, our non-gap effective tax rate, which excludes excess tax benefits, was 21.9 percent. Diluted earnings per share on a gap basis was $2.40. Our non-GAAP diluted EPS was $2.76, reflecting a 95-cent increase and 52.5% growth over the same quarter in 2020. In Q4, there were approximately 59.3 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q4 was 285 million, compared to 159 million in the same quarter of 2020. Free cash flow of $228 million produced a 139% conversion of adjusted net income compared to free cash flow of $141 million in the same quarter last year. The higher level of free cash flow in the quarter reflects a strong level of cash collections. We ended the quarter with approximately $1.4 billion in cash and cash equivalents, which is net of $366 million used in our acquisition efforts during 2021. At the end of Q4, DSO was 62 and compares to 70 days in Q3 2021 and 64 days in the same quarter last year. Looking ahead, we expect DSO will trend up in 2022. Moving on to a few operational metrics for the quarter. We ended Q4 with more than 52,600 consultants, designers, engineers, trainers, and architects. A year-over-year increase of 43.2%. Our total headcount for the quarter was more than 58,800 employees. In Q4, we had approximately 6,100 net additions, a record number of new additions for ePIM. Utilization was 76.8% compared to 77.9% in Q4 of last year, and 77.1% in Q3 2021. Turning to our results for 2021. Revenues for the year were $3,758 billion, producing 41.3% reported growth and 39.9% on a constant currency basis when compared to 2020. During fiscal 2021, our acquisitions contributed approximately 4% to our growth. Gap income from operations was $542 million, an increase of 43% year-over-year, and represented 14.4% of revenues. Our non-GAAP income from operations was $678 million, an increase of 43.5% over the prior year, and represented 18% of revenue. Our GAAP effective tax rate for the year was 9.7%. Our non-GAAP effective tax rate was 22%. Diluted earnings per share on a GAAP basis was $8.15. Non-GAAP EPS, which excludes adjustments for stock-based compensation, acquisition-related costs, and other certain one-time items was $9.05, reflecting a 42.7% increase over fiscal 2020. In 2021, there were approximately 59.1 million weighted average diluted shares outstanding. And finally, cash flow from operations was $572 million, compared to $544 million for 2020. And free cash flow was $461 million, reflecting an 86% adjusted net income conversion. We are very pleased with our 2021 results, which exceeded each of the guided metrics we set at the beginning of the year. Before I move on to our outlook, I'd like to provide a few highlights on our progress in the area of corporate responsibility and ESG. EPAM has a longstanding commitment to serve the communities in which our people and our customers operate, As we continue to expand, we recognize our responsibility to act according to our principles by operating ethically, protecting the environment, and supporting our global and local communities. Our focus on sustainable growth today will be a catalyst to fuel continued expansion in the future. Over the last year, EPAMers have donated more than 30,000 hours of their time and skills across 27 EPAM sites and at partner organization events, creating and conducting STEM-related courses, supporting social innovation platforms and environmental initiatives, and supporting events including the British Interactive Media Association's Digital Day, the Raspberry Pi Foundation's Coolest Projects, and the Global Scratch Conference. While we are working through specific long-term commitments to fight climate change, we have continued to challenge ourselves to significantly reduce the effects of our carbon emissions. We're also focused on innovating new sustainability concepts and developing digital solutions to support sustainability in our communities. Now let's turn to guidance. Starting with our full-year outlook, revenue growth will be at least 37% on a reported basis, and in constant currency terms will be at least 38% after factoring in an approximate 1% negative foreign exchange impact. We expect inorganic revenue contribution to be approximately 6% from acquisitions we closed in the last 12 months. We expect gap income from operations to be in the range of 13.5% to 14.5%, and non-gap income from operations to be in the range of 16.5% to 17.5%. We expect our gap effective tax rate to be approximately 15%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will be 22%. For earnings per share, we expect that GAAP diluted EPS will be in the range of $10.43 to $10.76 for the full year. And non-GAAP diluted EPS will be in the range of $11.36 to $11.69 for the full year. We expect weighted average share count of 59.8 million fully diluted shares outstanding. For Q1 of 2022, we expect revenues to be in the range of $1.170 billion to $1.180 billion, producing a year-over-year growth rate of approximately 50% reported at the midpoint of the range. Our guidance reflects unfavorable FX impact of 1%, and the year-over-year growth rate on a constant currency basis is expected to be 51%. Lastly, we expect approximately 9 percent of our growth to come from revenues contributed by acquisitions closed over the last 12 months. For the first quarter, we expect gap income from operations to be in the range of 14.5 to 15.5 percent, and non-gap income from operations to be in the range of 16.5 to 17.5 percent. We expect our gap effective tax rate to be approximately 8 percent, and our non-gap effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 22%. For earnings per share, we expect GAAP diluted EPS to be in the range of $2.65 to $2.73 for the quarter, and non-GAAP diluted EPS to be in the range of $2.58 to $2.66 for the quarter. We expect a weighted average share count of 59.5 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements in 2022. Stock-based compensation expense is expected to be approximately 116 million, with 19 million in Q1, 31 million in Q2, and 33 million in the remaining quarters. Amortization of intangibles is expected to be approximately 24 million for the year, evenly spread across each quarter. The impact of foreign exchange is expected to be approximately a $6 million loss for the year, evenly spread across each quarter. Tax effective non-GAAP adjustments is expected to be around $27 million for the year, with $4 million in Q1, $7 million in Q2, and $8 million in each remaining quarter. And finally, we expect excess tax benefits to be around $67 million for the full year, with approximately $27 million in Q1, $18 million in Q2, and $11 million in each remaining quarter. Our 2022 outlook reflects the strong demand environment we see across the business and in markets we serve. in addition to expected ongoing investments across our people, platforms, and processes, which will equip and position EPAM for future growth. As we've done in the past, we will adjust our business outlook each quarter to reflect changes in the demand environment and in our operations. Okay, 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 Ramsey Ellisall with Barclays. Your line is open.

Hi, and thanks so much for taking my call, and congratulations on your anniversary. I wanted to ask about the situation in Ukraine, whether you could give us a little more color on your potential continuity plans in the event that the conflict there sort of escalated, and also maybe weave in whether the you know, post-pandemic remote work, you know, model has made it a little bit easier to contemplate, you know, shifting workloads around.

Hello, this is Arkady. I think number one is that we continue to work in normal environments. There is no any impact on day-to-day operation at this point. So we talked about our experience started from 2014 and in 2015 actually it was active operations on the border with Ukraine and it was questionable part of the land there and it was a very active military activities there. During all this time It didn't have any impact on EPAM operation. What we can bring, in addition to what you're reading, that nobody from EPAM, right now it's a pretty big number of people. We have almost 13,000 production people in the country. So we have anybody who was drafted or anybody who was invited or requested for any type of military training or drills or anything. So that's probably kind of additional color which we can bring. The second point that also since almost eight years of tension in the region, We did a lot of special preparations for this, like we were practically completely independent from local infrastructure, any project infrastructure, any project activity. And on top of your question about COVID and remote work, so it means that from building or any attributes of infrastructure, engagement depending on locale. It practically doesn't exist. I think it will be a lot of questions, so I will add a little bit more. There is no any active relocations, probably from the total number of people which we have between 50 and 100 participated right now in some type of pilots or testing of DCP activities. And we're leaving for in the past or currently for one, two, three, three weeks to different locations. So other than that, again, it's completely normal.

OK. I appreciate that. And I wanted to ask also on margin guidance and fiscal 22. It's down about 50 basis points at the midpoint from the fiscal 21 guide. And I know you had mentioned investing and people and ops. I was just wondering if you can give a little bit more color about the margin drivers and maybe the cadence we should model through this year.

Yeah, so maybe what I'll do is I'll respond to the full year and I'll also talk about Q1 specifically. And so, you know, what we continue to see is a business that obviously is growing at a rapid rate with, you know, extremely strong demand. We've talked about, you know, our ongoing investment in sort of people and processes, education, and also just the ongoing diversification of the business globally as we grow into different centers around the world. Those are probably somewhat less optimized at this time than our, you know, more mature kind of traditional geographies. But, you know, if I were really to sort of provide the color that's probably easiest to understand is that, you know, we continue to see elevated wage inflation, not maybe significantly higher than 2021, but maybe somewhat elevated as we go from 2021 to 2022. We, at the same time, are also seeing substantially better pricing environment, but the pricing, you know, does not fully offset the impact of the wage inflation. So, you know, one of the negatives you've got here is that, you know, ongoing impact. At the same time, I think that you'll see a little bit more normalization of activities related to travel, related to in-person, and so I think you'll see a little bit higher SG&A over time. You know, we've talked about the fact that the variable compensation is going to come off a bit, or we expect that it would come off a little bit between 2021 and 2022. But right now, between the, you know, the somewhat ongoing impact of the wage inflation and pricing not totally sort of compensating and what I expected somewhat elevated SG&A, for the full year, you know, we've got it to 16.5 to 17.5, and I believe that we'll probably operate at the midpoint or somewhat higher than the midpoint of the 16 to 17.5 guide. However, I want to be a little clearer on Q1. So there are very significant impacts between Q4 and Q1. And you'll see them every year if you go back and look at history, where profitability, particularly gross margin, has declined by between 100 and sometimes 200 basis points between Q4 and Q1. And so the first of those is that we just have a lot lower billing capacity or billing days in Q1. And again, it's somewhat the uniqueness of where we operate. which is we have an awful lot of people celebrating Orthodox Christmas, which occurs in January, not in December. There are a lot more holidays in the CEE region, and so you've got lower availability of workdays in January, and then February is a short month for any company. So that has an impact on profitability when you've got a highly time and materials-oriented business. The other thing, and again, this would impact any company, not just EPAM, but you've got Social Security caps that usually kick in in the second half of a fiscal year, and then those Social Security resets at the beginning of the year, so you have much higher employer Social Security payments, particularly in Q1. So both of those things have a pretty negative impact, particularly on gross margin. And so when we do the modeling today, okay, again, for the full year, I would say that that midpoint, we can be somewhat higher than the midpoint, However, for Q1, I would say when I look at the midpoint of 16.5 to 17.5, I would say at or slightly below the midpoint is the modeling that we're doing for Q1 of fiscal 2022.

Super helpful. Thank you.

Thank you. Our next question comes from Brian with Cowan. Your line is open.

Hi. Good morning. Thank you. First, I wanted to follow up on Ukraine. Can you just talk about the nature of client conversations and whether there's any increased selectivity or preference by them for where new work will be delivered from? And then collectively, we see that Belarus and Ukraine as a mix of headcount declined year over year by a notable amount. Just based on your global expansion plans, how are you thinking about the mix of those two countries as you would exit this year?

Okay. I think, in general, the reaction and conversation is very, very similar to what it was eight years back. There are some clients which are very worried and kind of in a situation of wait and see. There are some clients which continue as usual, and this is the majority of them. There are some clients who are preparing for more active BCP if some specific triggers would happen. which is very difficult to define the figures. And this is a very small minority. So there is a category between those, especially in wait and see, which prefer to start somewhere else. And it was a very similar situation, again, eight years ago. And we have many more options. today to alter alternative necessary. Because as you know, diversification was happening. Between Belarus and Russia today, it's probably around 35% of our delivery capacity. versus eight years ago, it was probably over seven.

Okay. And then as far as workforce goes and just the addition, another big addition here this quarter sequentially, I think we estimate over 4,000 organically again. Can you just talk about your comfort levels in the pace of resource additions and kind of what you're anticipating attrition utilization within that 2022 outlook?

Yeah, so let me provide a little bit of color on that and also kind of follow up on one of the other questions you had earlier. And so, you know, you're correct that, you know, we've seen a significant growth in our productive capabilities outside of the traditional Ukraine, Belarus region. So to be specific, you know, Ukraine, Belarus, Russia from a production standpoint grew by 22% on a year-over-year basis between 2020 and 2021. And we had greater than 80, almost 90% growth in the other regions, including India and Latin America, where we've seen particularly high growth. And so we've moved from Ukraine, Belarus, Russia. And again, the idea was that we're becoming an increasingly global company. We're larger. We need to have a broader pool of labor that we access. At the same time, it clearly has diversification benefits from a risk standpoint. So we've gone from 68% of production capacity in Ukraine and Belarus in 2020 to 58%. We expect to continue to see accelerated growth, particularly in places like Latin America, Eastern Europe, let's call it Central Europe, and APAC. And as a result, you'll continue to see, you know, I would expect you would continue to see that number drive down. So I don't know if it would approach 50% or something, but certainly it would be lower than it is today and certainly much lower than it was in 2020. From an attrition and utilization standpoint, I think we see utilization at about the same level as 2021. And then from an attrition standpoint, we are still below 20% with both voluntary and involuntary as we exit Q4 2020. we generally would see a little bit of benefit, you know, in Q1 as people wait to get, you know, vesting of stock and bonus. So you usually see a little bit of a dip in attrition in Q1. And for the full year, we think attrition might be up slightly. But at the same time, we expect that 2022 attrition will definitely remain below 20% as well.

Thank you for the call.

Sure.

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

Great. Thank you very much. Just continue to ask about kind of situation and flexibility. If we think about operationally, if there were disruption or you needed to move out of kind of the region where you're seeing potential disruption out of Ukraine, etc., how flexible are you and how quickly can you move those operations into other regions for delivery, et cetera? Just thinking about those contingency plans and then separately on pricing, Jason, you mentioned that, you know, the wage increases aren't keeping or are moving faster than you can move pricing. Is there a timeframe under which you can better balance those and, and, and fully recapture kind of what you're experiencing from a, wage inflation perspective in your pricing with your customers? Thanks.

On the first part of the, on the first question, first of all, there is no one kind of approach or rule how to operate in this situation because we have BCP plans which are very specific for engagements or accounts or even specific engagement within these accounts, depending on risk factors, distribution of the team, infrastructure on general part, like the mix of clients and us. Again, it's independent from Ukraine, but still there are some specific there. So it is very, very specific and those plans is very detailed including like definition of the key personnel and timing on doing this. Also, it is pretty pragmatic because we were experiencing pressure and very real events eight years ago, and then during this period, multiple escalations as well. It wasn't so much covered by media as happening today, but it was very, very similar. So we feel that we're pretty prepared for this. We also have our understanding, again, from a lot of local science, which is Again, not necessary exactly in life is what we're reading and seeing on TV. And our understanding what could happen is relatively limited across the border in Ukraine. And we have a number of large development centers across Ukraine. So we have plans how to move people from one to another farther from the border if necessary. At the same time, again, we do believe that even those which is closer to the border still in pretty kind of safe zone today and will be in the future. So, but again, specific timing and triggering, it's very specific to clients and engagements.

Yeah, and on the pricing question, you know, we continue to focus on both rate increases with existing clients and then taking new opportunities where, you know, the value of EPAM quality delivery is such that the pricing is also somewhat superior, so a little bit more selective in terms of the deals that we take. I think that what, you know, it's clearly what wage inflation is going to be at the end of 2022. It's kind of hard to predict at the beginning of 2022. But I think what you'll continue to see is sort of price, not just at the beginning of the year and also in Q2, but we'll continue to see sort of price improvements throughout the year And, you know, hopefully by the time we get to 2023, there's, you know, a better balance between price and wage inflation.

Thank you.

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

Good morning, guys. So in 2021, you guys just posted, I guess it was 36% revenue growth, organic constant currency. You're guiding to at least 32% on the same basis in 2022. So it's just the incredibly strong growth seems like it's continuing to persist. I mean, how do you now think about your true kind of underlying organic revenue growth rate on kind of a multi-year basis. I mean, we used to talk about 20% plus, and obviously there's been a surge in demand from the pandemic. But just as you assess, you know, how long that may last and how your competitive position has evolved, would really be curious on your thoughts on what you think normalized growth, you know, looks like, you know, even beyond 2022. Yeah.

Yeah, so let me just, I guess, restate what you said. You know, absolutely correct that in a 37% growth guide, the organic constant currency contribution would be about 32%. That compares to the 35.5-ish, you know, kind of percent organic constant currency contribution or growth rate in 2021. So what you've seen in 2021 and also as we enter 2022 is we've had three quarters now, if you include the guide for Q1 of 2022, where we're 50% year-over-year revenue growth rates. And so clearly that's an extraordinary number. Part of that has been the result of the huge additional headcount additions on an organic basis, plus some of the acquisition-related activity. So, you know, we don't think that 50 percent year-over-year revenue growth rate is sustainable. And I think if you sort of decompose the guide with the growth rate in Q1 and the guidance that we have for the full year, you'll see that we would expect a deceleration in growth rate throughout the year. But even as you exit Q4, I think you're going to see us with a growth rate, you know, including acquisitions in excess of 25 percent. So, I think what you would do is you would exit Q4 with a somewhat accelerated growth rate relative to the historic above 20%. And, you know, we'll get to the guide for 2023 as we get closer to that time period. But, again, you would see a somewhat of a decelerating growth rate throughout the year. And that is somewhat intentional. We believe that it's appropriate to get back to a more sustainable growth rate. But I still think you'll see us exit Q4 at a growth rate that is higher than that traditional, you know, somewhat above 20%. Right, right. Okay.

Yeah, no, that all makes sense. And then if we think about your headcount growth targets for the year, obviously you're going to have some pricing to help on the revenue side. So, should we think about headcount growth kind of modestly lagging revenue growth in 2022?

Art, do you have something you want to say in response to the other question?

I just wanted to add to what Jason was saying. I think the main kind of lesson right now that we have is that we thought about growth in 20 plus percent before and what happened during the last year that we tested ourselves at a much higher level. So we still have to wait and see and expectations that it will come to more normal growth rates in the future, but where this border will be coming on 20, 25 percent or 25, 30 percent or whatever, we will need to test it. But again, we feel more comfortable to answer now the question which we were asked in the past. Would you be able to grow faster than what you were saying in the past? Yes, it is possible, and that's what we probably the kind of positive lesson which we have right now.

And I guess for the growth rates, you know, one of the things that, you know, you see when you've got this organic growth rate from a headcount standpoint of greater than 4,000 in Q3 and Q4, plus, of course, the acquisitions that we've done, by the time you get to Q1 and Q2, it does produce, you know, very, very high growth. Again, particularly on a year-over-year basis, we are comparing Q1 of 2022 to Q1 of 2021, and you've had all that headcount addition in the second half of 2021. Right now, the last two quarters, we've had organic headcount growth of about 4,000 or somewhat over 4,000. And right now, what we're planning is for organic headcount growth somewhat above 3,000. Okay, with the idea that, you know, we believe that that might be a more sustainable growth rate for the time being, and that still produces, you know, the strong growth rates that we're talking about, the 37% plus for the full year of 2022. Great. Well, thanks to both of you for that.

Thank you. Our next question comes from Sarinda Thin with Jefferies. Your line is open.

Thank you. A question about kind of the breadth of demand that you guys are seeing at this point. Obviously, even if we adjust out the acquisitions, very strong growth outside the top 20 in terms of your clients. Can you maybe talk about the pace at which you're adding new clients and the considerations when you onboard those clients? How selective do you have to be in the current environment or how selective are you and what are the considerations? Are these all clients that you believe that will get to 5 million in revenues at some point or how should we think about the trade-offs of having the breadth of clients versus a strategy that's maybe focused on EPAM becoming more ingrained with a larger percentage of a given client's revenues?

So we're definitely more selective than in the past, and we're definitely adding new clients, which in our view, when we're reviewing this, is much more high potential. And we have probably dozens of clients which we landed during the last 12 months, which already bring in at least $1 million per quarter and growing fast. So I think it's actually becoming a much more strategic portfolio.

But you are continuing to see the traditional EPAM growth in existing customers. And as Ark said, you know, a continued growth level from new customers. But maybe we're a little bit more strategic and selective about the new customers that we bring into EPAM. You know, the other thing I think we're hearing is demand continues to be, you know, we've probably still in somewhat of the unprecedented camp. maybe uh clients are a little bit more thoughtful around their budgets but again still strong strong desire to invest um you know and there's still an awful lot of work uh to do and it again continues to be very broad based across industry verticals we're having more and more clients which is uh using like 12 24 months becoming our top 50 or even top 20 as well yeah and that speaks to i think clients and we keep hearing this when we do our channel checks internally clients sort of looking at EPAM differently as, you know, a true transformation partner with the ability to take on projects of much greater sort of scale and scope.

Got it. And then would the reverse be true in this situation if you're being more selective that you're turning away business at this point?

I mean, I wouldn't say that, you know, we're turning away business, but I mean, I think there's been a disconnect between supply and demand for the last, probably year and a half or certainly, you know, throughout 2021. And so, you know, by definition, you are being somewhat selective. I think in some cases, you know, Ark said it well, right, is that we're looking for clients that have the potential to grow. Sometimes we're obviously looking for very interesting projects or programs. We're looking for clients who have sufficient funding. And we're also looking for clients who are willing to pay the rates that we've been talking about when it comes to price. And so all those things would factor in, and, you know, there'll be some self-selecting by clients, you know, and obviously some self-selecting by ePayments as to which clients we do business with.

Okay, I think, like, let's rephrase it. Like, first of all, from the general portfolio configuration, we're still looking for some clients which, as in the past, allowing us to really work in the very much cutting edge of technology and improve our engineering kind of capabilities and understanding what's happening. Because that's the skills which we strategically focus in the past, right now, and we'll be doing in the future. And we hope that it's differentiated. At the same time, I think our criteria is changing. And it's criteria changing not only because of environment, because of the size of operation. general direction of the company where we can offer now much more end-to-end story from consulting to engineering and we're looking for some clients which actually looking for somebody who can speed up the whole continuum kind of transformation so and with all these uh criterias together definitely there is very different selection criteria and some clients which will be working in the past, we're probably not breathing the word today.

Got it. And then in terms of just a follow-on in terms of the questions around geopolitical risk, when you kind of look ahead, is there any acceleration in your view of, or perhaps acceleration towards investing towards building global delivery capabilities faster or do you kind of just continue at the current pace given that obviously you cited rates earlier where you are building the large percentage of your capabilities already out there? Do you accelerate that or do you just kind of keep going?

I think we do pretty obvious acceleration, but we also need to consider that it's not only because of geopolitical risk. It's in general, and that's why we try today kind of to give you perspective what's happened during the last 10 years, from 7,000 people to 58,000 people. So it's not only about geopolitics, it's in general globalization of our services. And we started to do it back then, 10 years ago, A very big acceleration happened in 2014-15 when we practically opened India and Latin America. And India and Latin America are growing right now faster than Eastern Europe. So both criteria are important. And as Jason mentioned already before, by the end of this year, probably dependency on our core locations will be closer to 50% versus 80 plus percent, which we have 10 years back.

Got it. That's helpful. Thank you. Those are my questions.

Yeah. Thank you.

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

Thank you. Congratulations. Are you, you dangled this kind of $10 billion company in front of us. I'm wondering what remains consistent about the company. as you get to that level, and then what operationally or strategically would be significantly different until 10 billion or as you get to 10 billion?

First of all, we're doing it in front of us, not only in front of you. And I think it's a lot of criteria there, and we talked about all of them over the last years. building company which becoming more end-to-end solution provider and this sounds very trivial but how to do it well it's much less trivial than it seems to because we believe that it's still open opportunity to do it right and this is continuous inflow of the talent so we need like to find the way how to grow the talent, and that's a very big component of our ecosystem, education, digital platform, how to make sure that people from different sites working together efficiently. So it's a lot of simple things which have to come together in our view, because it is a very competitive market. And while we're thinking the 10 billion is very realistic, how to do it better is still the challenge. I think it's a very separate conversation. Hopefully, we will be able to answer this a little bit in more details in May when we plan to do our investor day.

Okay, thanks. And then I think, Jason, I think it was you that mentioned that consulting was one of the drivers behind the growth in financial services. Is that widespread across the business? And then when you first rolled out consulting, it wasn't billed separately and you had cautioned us to think about it as something that would be driving margins up. Has that changed as your consulting capabilities have matured over the last several years?

I think it's not only about financial services. It's happening in multiple sectors, in life science and insurance and in retail right now. And for us, the goal is still not to have a separate consulting client of services, but actually very much integrated. And we still don't have very specific separate kind of accounting for this, because it's not just specific number of people in this category. It's very much over the line. Across the department, we have consulting capabilities in very different organizational kind of units of EPAM and the whole effort how to orchestrate it correctly with the right people. So now from this point of view, nothing changed at this point.

Thank you. Thank you. Thank you.

Our next question comes from Ashlyn Shervaker with Citi. Your line is open.

Thank you. Good morning. Congratulations on the quarter and the milestone. Good journey. Happy to be along on it. I guess my first question is when I look at, you know, every single revenue bucket cohort has grown. So you have clients over 20 million between 10 and 20, between 5 and 10 and so on. All of them have grown, which is obviously a good thing, but it leads to the question of sort of what is sort of the serviceable market opportunity in front of you from the current set of clients, just from increasing penetration. Could you perhaps help quantify or put a direction on that, if you could?

Yeah, I probably couldn't do anything more than just kind of anecdotally. But, you know, even in our largest customers, there's a, you know, in our top 10 or top 20, there's a significant opportunity across a range of those customers for significant ongoing growth. Certainly in some of the areas which are, you know, kind of established for many companies, but still somewhat newer areas for EPAM, think insurance. We're still very early days in terms of our penetration of those accounts. So there's a significant opportunity there. In financial services, you're continuing to see growth in existing banks, new banks, wealth management, asset management, and very, very high growth in insurance. Health care and life sciences continues to be a significant growth opportunity for the company with both existing and new clients. And then certainly as you look at the emerging, as I've talked about in the past, manufacturing logistics for us is not even a breakout. It's still kind of part of our emerging verticals. And so I don't think the story has changed that much and that there continues to be a significant growth opportunity with existing customers. And then a lot of those new customers that are talked about that are already at a million dollars or more per quarter, there's significant wallet opportunity in those new customers.

And I think you're asking how much we have kind of run rate from existing client base. And I think we do believe that it's a huge opportunity exactly present in our existing clients and it seems like and it's probably not it's probably true for many other vendors today that after quoted kind of the new life was discovered in old clients it was a lot of concern like two years ago and then some of them started to behave very very differently from our expectation because Again, as we were sharing before, most of them understand that all investments which were done in digital before probably not enough or should be already done because the situation around us changed so much. So there is very big opportunity for us existing client base. That's why we have to be very selective who we bring in on top of them as a new logo.

Understood, understood. The other question I had was, you know, obviously this is a multi-year trend, not necessarily a new thing, but as gross margins, you know, steadily have gone towards the mid-30s, there's a pretty clear SG&A offset to that. And sort of a two-part question, if you could kind of break down the gross margin, is that more a function of, you know, adding capabilities You know, when wage inflation gets added to the mix incrementally, how does that change and for how long do you have perhaps the SG&A offset capability so that operating margins continue to get delivered?

Yeah, so, you know, I have kind of, I guess, about a five-year history with the company. And, you know, I remember when, to be quite honest, we struggled to sort of stay above 16% profitability. So here when we're guiding to 16.5% to 17.5% with the possibility of being, let's say, somewhat above the 17% for 2022, it feels still like a pretty good place. You are right that gross margins have declined over time. Some of what's happened over the last couple of years really has been the whole kind of wage inflation situation. in the market, which I think is unprecedented and probably can't last forever. So I do think you might see some stabilization at some point in the future. Hard to speculate when. Some of it would be the additional capabilities. And specifically, I would say the new geographies. So again, if we were just to grow in a historic Russia, Belarus, Ukraine, you know, and continue to sort of focus on optimizing the cost effectiveness of those delivery locations, you might see a somewhat different gross margin profile, but you would also see, you know, a different sort of growth potential. And so I think it really has been beneficial, but at the same time, it probably has come with a little bit of moderation. The other thing I don't think I totally called out is that our recent acquisitions in many cases are operating more in the low teams and in some cases the single digits from an adjusted IFO standpoint And that puts a little bit of downward pressure, particularly on the 2022 results, where we've got greater acquisition-related revenue. The SG&A, I think, will continue to stay low, in part because I do think facilities as a cost is going to, you know, continue to be a benefit. And so I do expect as we exit the fiscal year that we'd still kind of be below 16%. And so I think the balance of those things, you know, allows the company to potentially And I think that's not a bad place to be with a 37% plus growth rate.

I agree with that. Thank you. Thank you.

Our last question comes from David Grossman with Stifel. Your line is open.

Thank you. I was hoping I'd just ask two really quick follow-ups to some of the questions that have been asked. So the first is on the growth of the cohorts. outside of the top 20, you know, it's accelerated, it's been accelerating all year. I guess my interpretation of that dynamic was that, you know, there was a resource allocation decision that had to be made during the pandemic and other things have, you know, kind of changed a little bit from a resourcing standpoint that you've been able now to pursue growth outside the top 20, which historically has actually been one of the major contributors to your growth, right? So is there any really different going on there or maybe I'm missing something?

I would say yes to that thesis. And then the other piece is the recent acquisitions have incorporated clients that are generally below the top 20 and in some cases below the top 200. And so that has also contributed to the growth. But certainly, you know, I think particularly deep in the pandemic, you know, much of the resources were consumed by a handful of clients. And obviously that's changed throughout 2021.

Right. Okay. And then just to follow up on the situation, you know, the Ukraine, you know, historically in geopolitical hotspots, the issue is getting people to work or transportation and disruption to that and infrastructure with clients having fairly sophisticated global risk management strategies of their own before they even decide, you know, to put work over and, to different geographic areas. So you seem to address, you know, with work from home, you know, the getting to work, you know, kind of risk seems to have diminished and you've got your own infrastructure. So, you know, you grew through the last crisis, you know, we all remember that. So are the risks in this current situation, any different, you know, kind of what they've been historically, is anything different about, you know, the situation that we should be thinking about? Um,

David, you know you're asking a pretty difficult question because big guys cannot answer. And at the same time, we definitely went through multiple geopolitical kind of tensions and crises during the last not even 10 years, which I started to share today, kind of about 20 plus years. And in my view, from our operational point of view, there is not much But the only answer we will get probably in another three months, or maybe nine months, or maybe 24 months. But from work which we're doing, I think impact would be very, very minimal, in my opinion. And also, what also in this like history was telling us, Even if some clients' policies and risk mitigations actions will be changing their direction, in general, the kind of demand for the talent is so big that we're pretty sure that we will be operating in the countries where we are today like years from now, too. And it would be in demand, talent in demand. And that's exactly what happened, again, for example, eight years ago, when one or two clients were, it was too difficult for them to swallow the situation. Practically, immediately, different clients were willing to accept the kind of efforts which we bring in from the region, so.

And I just say, David, that the guidance for the full year also concludes that any impact would be minimal. And so that's the basis for our guts.

But again, we cannot predict the future. We will make it our best history. And as you know, we have a pretty interesting configuration of our management team, which have a lot of experience. in the regions and going through this over the years.

Right. So it sounds so that the client response to the crisis has been really, I mean, I'm sure there are differences here and there, but if you aggregate it all together, it sounds like the response hasn't been terribly dissimilar to what you experienced eight years ago.

I can tell you that at this point, probably eight years ago, it was, more difficult situation from subclient reactions. I think it's much more balanced this time. As I said, we have some pilots for BCP, but it's very, very minimal right now.

Right. Okay, great. Thanks very much.

Thank you. I'm now trying to call back over to Arkady Dobkin for closing remarks.

Okay, thank you again, everybody, and I hope it was not necessarily a usual call today. And first of all, because we celebrated just 10 years of our IPO, but also addressing the challenge simultaneously. And as I just shared, we have a strong team which went through multiple crises, and we do believe that it's just one of them, and we probably will have some in the future as well. Pretty sure about it. So thank you and talk to you in three months. Thank you.

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