EPAM Systems, Inc.

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Penn System's first quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press the star, then the one key on your touch-tone telephone. Please be advised that today's conference is being recorded. If you recall opera systems, please press star, then zero. I would now like to end the conference over to your speaker host, David Straube, Head of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's first quarter 2022 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 of 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 the 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 Ark.

Thank you, David. Good morning, everyone. Thank you for joining us today. During our previous earnings call, I finished my remarks with assurance that the level of maturity that EPAM had reached over the last few years, along with our ability to operate and manage our performance during the difficult times in 2014 and 15 in Ukraine and 2020 and 21 in Belarus, allows us to say that we were well prepared to address the potential challenges of 2022 by leveraging our broad global reach and deep regional insight, and by applying our strong engineering DNA. And most importantly, our never-ending entrepreneurial spirit to continue making the future real for our clients, our employees, and our global and local communities, while keeping everybody as safe as possible. We were wrong. We didn't expect the war. By any measurement, the quarter has been unlike any other quarter in our history. Russian invasion of Ukraine has changed the world and impacted tens of millions of people, including tens of thousands of our employees, their families, friends, neighbors in Ukraine and around the world. What we thought was unimaginable when we reported our queue for earnings on February 17th. All changed a week later. Now, let me repeat a simple statement. IPAM as a company fully stands with Ukraine. During the last months, since the beginning of the war that was started by the Russian government, our absolute top priority has been and continues to be the safety and well-being of our employees and their families in Ukraine. Today, our employees in the region and around the globe continue to support each other, donating time and resources to help their colleagues in Ukraine. Additionally, the company has provided significant financial and logistical support to help move our Ukrainian employees and their families to safe areas inside and outside of Ukraine. As we have previously announced, IPAM has committed $100 million in assistance to help with a broad range of needs for our people and their close ones. Along with financial assistance, there has been an outpouring of support from a great number of clients and partners responding with gestures and different types of aids. Thinking more broadly about the people of Ukraine, we established the Ukraine Assistance Fund to support charitable aid organizations that provide direct relief to those in vulnerable situations across Ukraine. This fund is a separate from and in addition to the 100 million humanitarian commitment previously mentioned. And despite the very challenging and sometimes unimaginable conditions on the ground in Ukraine, Our Ukrainian colleagues have been resilient and dedicated to their work and customer responsibilities, continuing to produce and to deliver results. The PAMS management team, together with our clients, are extremely impressed and grateful for those incredible efforts, and we see today increased interest from our customers to continue directing work to Ukraine. I personally want to thank each and everyone on our Ukrainian team. However, where we got it wrong, we were also somehow right about our level of readiness to address unknown. Because today, despite the broad and disruptive nature of the events unfolding daily, we find ourselves to be better prepared than we imagined just three months ago. Our investments in hardening our operational and logistical platforms, teams, and processes have enabled us to respond quickly in establishing framework for continuing phased recovery procedures. Let us try to illustrate it in a bit more structured way by presenting several stages of our current journey, or at least the way we are currently thinking about things. First, in addition to preserving the safety of our Ukrainian and their families while helping to move many thousands of people from east to west, inside the country and abroad, Our initial focus during the last few months has been on maintaining our customer relationship and continues to deliver on important initiatives despite the war and interrelated geopolitical challenges. Those efforts we define for ourselves as a phase one, a period of safety and stabilization of our operations, with very little attention to anything beyond that. Under the current conditions, we believe this phase is largely completed and we will call it out as a notable success. With Jason, we will illustrate in more details the specific numbers for our Q1 results and our guidance for Q2 shortly. So, while we are managing through the humanitarian crisis in Ukraine, we are also working with our customers to address their concerns and request to reposition projects and teams to different geographies. which is very much guided by the business continuity plans we had previously established with our clients, including multiple relocation alternatives for our employees. In April, we also made the decision to exit our operations in Russia, which is a step with the market and the broader global response to the actions of the Russian government. We are fully committed to our talent in Russia who share our values and our positions. And for most of our employees in the region, we are offering multiple location alternatives to allow them to remain with the company and advance their careers at EPAM. This statement brings us to what we consider to be a phase two, which is our activities to accelerate the diversification or rebalancing, if you will, of our global locations and continued growth of our delivery capabilities. We have already begun the second phase. which closely overlaps with the phase one. This acceleration includes rapidly scaling already existing delivery locations in India, Latin America, and Central Asia, as well as establishing several newly created delivery hubs and expanding many existing across Europe. This expansion supports active repositioning of our current employees and simultaneously creates opportunity to develop the local talent market in those hub locations. This will allow us to maintain the experience delivery talent we currently have while also establishing new delivery footprints and allowing for significant increases in local hiring and better facilitating future growth in those locations. At this point, we can report that this development is in play already and we're seeing early success. We will continue to update you on our progress on those efforts throughout the year. I would also point out that in large part, this diversification program was well underway even during the past several years. Before COVID, our allocation to the talent from Ukraine, Belarus, and Russia was close to 70% of our total production capacity. By the end of 2021, it was less than 60%. And we believe by the end of 2022, we will manage to reduce the allocation of our production staff in the region to about 30%. Additionally, we have a strong intention to maintain and potentially grow our talent pool in Ukraine, which we believe will continue to be a significant IT talent market post-war. While the size and scale of this disruption has been very significant, and while we still should expect some very much unexpected things to happen, I think it's important to bring context that the rest of our business and customer portfolio continue to operate in a business as usual manner. The longer-term demand trends that have driven growth in our business before remain very much intact. We believe these trends combined with our unique offerings enabled by our differentiated engineering DNA and market positioning will place us on the path to our familiar organic revenue growth profile sooner rather than later. And this brings us to what we call phase three, the period to focus on driving demand. This phase is also underway and will occur in parallel with two phases we described above. What this means is that we are focusing on revenue growth for new and existing customers and starting to operate in type of new normal environment for us. We believe that this new normal should elevate us back to sequential revenue growth during the second half of 2022. After that, we believe we will be able to enter phase four of our recovery plan, which will be time to focus on profitability with the objective to return to profit levels consistent with the farm's historical target ranges. It's for sure an important area of attention on our agenda already today, but we plan to have a stronger focus on profitability as well as on improving rate structures and optimizing performance of our new delivery locations throughout the second half of 2022. to show visible performance improvements, while this phase will likely carry on into 2023. I think it's very much understandable that all the phases I just outlined are not sequential, and while many elements of these efforts are overlapping in time, they also are very much interrelated and bring high levels of operational complexity into our day-to-day activities. At the same time, it's also important to underscore that the first two phases are already very much underway, and the next two phases are just getting started, and that all phases will continue to be present in our life for some time. To summarize, while the cause of this disruption is beyond our control, today we are responding at a scale and a pace to put our best effort together to contain as much as possible the impact of this war within 2022. Our new strategy is not really new, but an acceleration of our previously stated strategy. Adapt, grow, and deliver value across a broader, more engaged ecosystem of people, customers, and partners. Based on our engineering heritage, tightly integrated with the innovation and transformational consulting capabilities we were developing over the last years, we will return to industry-leading growth and a more in-line profitability model, while still challenging ourselves in doubling the company's 2021 revenue in three years' time, as we have done previously three times since our IPO in 2012. I am confident we will execute through this unimaginable challenge and emerge as a more diverse, more resilient, and more relevant department. I hope you will be able to join our Investor and Analyst Day event on May 19 in Boston, where we will share more insights in our plans and goals. Now, let me turn the call over to Jason, who will talk about our Q1 results and additional perspective as we look at Q2 and beyond.

Thank you, Art, and good morning, everyone. In the first quarter, EPM delivered strong results, despite the impact of the company's decision in March to discontinue services to customers based in Russia. In Q1, we also incurred some of the initial costs resulting from Russia's invasion of Ukraine and the acceleration of our geographic diversification strategy. Certain of these costs, including expenditures related to EPM's humanitarian commitment to Ukraine, charges for impairment of Russian long-lived assets, and costs associated with accelerated employee relocation, have been excluded from non-GAAP financial results. We have included additional disclosures specific to these and other related items in our Q1 earnings release. During the quarter, EPM generated revenues of $1.17 billion, a year-over-year increase of 50.1% on a reported basis and 53% in constant currency terms, reflecting a negative foreign exchange impact of 290 basis points. Looking at the performance of our industry verticals in the quarter, travel and consumer grew 90.9%, driven by strong organic growth from both our retail and travel customers, as well as revenue contributions from recent acquisitions. Financial services grew 54%, with very strong broad-based growth coming from asset management, insurance, and banking. Life sciences and healthcare grew 35.9%. Business information and media delivered 31.5% growth in the quarter. Software and high-tech grew 28.8% in the quarter. And finally, our emerging verticals delivered 59.4% growth, driven by clients in telecommunications, energy, manufacturing, and automotive. From a geographic perspective, Americas, our largest region, representing 59% of our Q1 revenues, grew 46% year-over-year, or 46.5% in constant currency. EMEA, representing 36% of our Q1 revenues, grew 62.7% year-over-year, or 68.1% in constant currency. EMEA performance was driven by strong organic growth combined with an incremental contribution from recent acquisitions. CEE, representing 3% of our Q1 revenues, grew 10.5% year-over-year and 30.6% in constant currency. Growth in the quarter was reduced by the initial impact of the discontinuance of services to our customers located in Russia. And finally, APAC grew 41.2% year-over-year, or 41.7% in constant currency terms, and now represents 3% of our revenues. In Q1, revenues from our top 20 clients grew 32% year-over-year, while revenues from clients outside our top 20 grew 63%. Moving down the income statement, our GAAP gross margin for the quarter was 33.4% compared to 33.5% in Q1 of last year. Non-GAAP gross margin for the quarter was 33.3% compared to 34.9% for the same quarter last year. Gross margin in Q1 2022 was negatively impacted by the inability to recognize revenue resulting from work done for certain of our Russian customers, as well as lower utilization in Russia, Belarus, and Ukraine. GAAP SG&A was 20.3% of revenue compared to 17.5% in Q1 of last year, and non-GAAP SG&A came in at 15.6% of revenue compared to 15.5% in the same period last year. SG&A in the quarter reflected a higher level of bad debt, largely driven by a higher level of reserves associated with our customers located in Russia. GAAP income from operations was $129 million, or 11% of revenue in the quarter compared to $107 million, or 13.7% of revenue in Q1 of last year. Non-GAAP income from operations was $189 million, or 16.1% of revenue in the quarter. compared to $137 million, or 17.5 percent of revenue, in Q1 of last year. Our gap effective tax rate for the quarter was 15.6 percent. Our non-gap effective tax rate, which excludes excess tax benefits, was 23.9 percent, and includes a one-time charge related to certain tax credits. Delivered earnings per share on a gap basis was $1.52, reflecting a 34-cent decline or 18.3% decrease year-over-year. GAAP EPS includes the impact of Ukraine humanitarian expenditures, charges related to the impairment of Russian long-lived assets, expenses related to accelerated staff relocation, and losses on Russian ruble forward contracts that were unwound in the quarter. Our non-GAAP diluted EPS was $2.49, reflecting a 68-cent increase. or 37.6% growth over the same quarter in 2021. In Q1, there were approximately 58.9 million diluted shares outstanding. Now turning to our cash flow and balance sheet. Cash flow from operations for Q1 was a net cash outflow of 51.8 million compared to a net cash inflow of 13 million in the same quarter of 2021. Q1 cash flow was negatively impacted by expenditures related to our Ukrainian humanitarian support initiative and the payment of a higher level of company-wide variable compensation based on our 2021 performance. We also accelerated the timing of variable compensation payments with a higher proportion paid in Q1 than in prior years. Free cash flow was negative 75.1 million compared to positive free cash flow of 2 million in the same quarter last year. We ended the quarter with approximately $1.3 billion in cash and cash equivalents. At the end of Q1, DSO was 69 days and compares to 62 days for Q4 2021 and 67 days for the same quarter last year. We expect to maintain DSO slightly above current levels throughout 2022. Now moving on to a few operational metrics. We ended the quarter with more than 55,050 consultants, designers, and engineers, a year-over-year increase of 41.8%. Our total headcount for Q1 was around 61,600 employees. In the quarter, we had approximately 2,800 net additions. Production headcount growth was negatively impacted by lower-than-planned growth in Ukraine and an actual reduction in Russia-based production headcounts. We continue to experience accelerated growth in production headcount in countries other than Ukraine, Russia, and Belarus. Utilization was 78.4% compared to 81.4% in Q1 of last year, and 76.8% in Q4 2021. Our Q1 utilization includes those employees who have been assigned in a backup capacity to support projects substantially delivered from Ukraine. Although these employees were counted as utilized for the purpose of our utilization calculations, This work was largely unveiled. Utilization in Ukraine did decline somewhat on a year-over-year basis, but is being maintained at extremely high levels considering the current operating environment. Now let's turn to our business outlook. On February 28th, we withdrew our business outlook due to the uncertainties related to Russia's invasion of Ukraine. For the remainder of this year, we plan to provide guidance for the next quarter only, with the expectation of resuming our full-year guidance at the beginning of the 2023 year. Additionally, to help align with our thinking around significant events, let me provide a few broad assumptions which will help frame our guidance for Q2 and the remainder of 2022. Russian aggression continues to take a terrible toll on Ukraine, but most of the fighting is currently concentrated in the eastern portion of the country. We continue to see relatively high levels of productivity from our Ukrainian staff, who are substantially located in safer portions of the country. Our Q2 guidance assumes that we will maintain Ukrainian utilization at slightly lower levels than those experienced in Q1. During the initial weeks of the invasion, we were able to relocate approximately 2,000 employees out of the country where they are safe and productive. EPAM has spent over $25 million so far as part of the company's $100 million humanitarian commitment to Ukraine and the Ukrainian employees and their families. Further humanitarian expenditures will be made in Q2 and throughout the remainder of the year. To date, we have relocated significant numbers of our Russian employees to delivery locations outside of Russia, and we expect to relocate more of our Russian employees throughout Q2. Employees relocated outside of Russia are being moved to fill billable positions and are expected to be billable in their destination countries. However, during Q2, we expect that lower levels of demand for Russia-based resources will result in considerably lower utilization levels for those staff remaining in the country. At this time, we are planning to maintain operations in Belarus. However, we expect a lower level of utilization as we execute business continuity plans for a defined number of clients who would like us to deliver from countries other than Belarus. In parallel with the repositioning of our people, we have begun the effort to align our cost and rate structures to reflect the prevailing economics and the geographies to which demand has been redirected. In many cases, the result will be increasing billing rates to reflect higher costs, although we expect some lag in the establishment of these higher bill rates. Additionally, we expect some short-term inefficiencies as we scale newer delivery locations. The combination of these factors will put downward pressure on our profitability in Q2. However, we expect to see ongoing improvement in profitability in the second half of 2022, with a return to something closer to our historical levels of profitability, in the first half of 2023. Lastly, based on the continued strong demand, stability in our customer portfolio, and progress in accelerating our global diversification, we expect a return to positive sequential revenue growth in the second half of 2022. Now moving on to our Q2 2022 outlook. We expect revenues to be at least $1.14 billion producing a year-over-year growth rate of at least 29%. In constant currency terms, revenue growth is expected to be at least 34%. Included in these growth rates is approximately 600 basis points of revenue contribution to come from acquisitions closed over the last 12 months. For the second quarter, we expect GAAP income from operations to be in the range of 3% to 5%, and non-GAAP income from operations to be in the range of 10% to 12%. We expect our GAAP effective tax rate to be approximately 19% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be at least $0.73 for the quarter and non-GAAP diluted EPS to be at least $1.70 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 gap to non-gap measurements in the second quarter. Stock-based compensation expense is expected to be approximately $27.5 million. Amortization of intangibles is expected to be approximately $6 million. The impact of foreign exchange is expected to be approximately a $1.5 million loss. Tax effective non-gap adjustments is expected to be around $16.5 million. And finally, we expect excess tax benefits to be around $4 million in the quarter. In addition to these traditional gaps and non-gap measurements, consistent with Q1, we will have additional non-gap adjustments in Q2 that are a result of Russia's invasion of Ukraine. Please see our Q1 earnings release for detailed reconciliation of our gap to non-gap guidance. In summary, despite a challenging March, we are pleased with our Q1 results. In Q2 and for the remainder of the year, EPA will continue to focus on the geographic repositioning of our company. Then in the second half of the year, we expect to see both improving profitability and a return to sequential growth. Now I would like to take this opportunity to thank all EPAMers, but particularly those EPAMers working from Ukraine. It is hard to imagine living through all that you are living through and still doing all that is necessary to meet delivery obligations and sustain EPAM operations in the country. My thoughts and prayers are with you and your families. I also have a huge amount of respect for all of you. Operator, let's open the call for questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the start and the one key on your touch-tone telephone. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Brian Bergen with Cowan. Your line is open.

Hi. Good morning. Thank you, and I hope all of your colleagues remain safe here. First question I have for you is around client retention. So obviously you had very solid revenue results here, but can you just give us more color around client conversations? Have you experienced any client losses due to just their choice for reductions in risk exposure? And how is the conversion of new work with the existing clients progressing relative to maybe historical pace?

So I think it's pretty understandable that Kind of similar to us, clients also went through multiple sorts during the last first couple weeks of invasion and then through a couple months and a lot of opinions and assumptions were changed. So we do have several cases where clients decided to stop growing with us. But it's very, very much exceptions and we have multiple cases where clients were postponing work with us and then returning back in several weeks and starting to grow with us as well. I think it's... I would describe it as much better than we would expect several months ago. And I think the level of comfort and confidence is practically growing each week. We have multiple clients who are talking to our people in Ukraine and expressing their appreciation and really amazement at what's happening and how much they're producing and the level of productivity. The same like myself and Jason were expressing during this already today. So, and during the last weeks we see new business starting to come. Some clients specifically asking to operate and work in location and we're starting again hiring in Ukraine as well. So I think that would summarize this.

Okay. Okay. That's good to hear. And then just on the profitability outlook, so I wanted to dig into some of the context you provided around this phase four. So it sounds like you believe there's the potential to achieve your prior levels of profitability here in the future, but are there any structural considerations in those future plans versus the prior operating model that you considered? So really just what are the risks you're thinking about in getting back to that view? And I think you said first half 23. Thank you.

Yeah, so if we talk about, I guess, Q2 and then talk about maybe the journey as you head back towards 2023, is that initially we're going to have lower utilization, as I mentioned during the prepared remarks. Clearly in Russia, as we exit operations and particularly as we have determined to stop doing work for Russian clients. We've got, you know, we've modeled somewhat lower levels of utilization for Ukraine just because the situation remains, you know, dynamic. And then, you know, we are also seeing some clients who are asking us to do delivery, you know, as Ark said, you know, stay with EPAM, but ask us to do delivery outside of Belarus. And so you've got in that entire region, you've got probably somewhat lower utilization. And I think you'll work through a lot of that here in Q2 with improving utilization in Q3. You do have obviously some stand-up costs associated with creating a whole series of new delivery centers and growing existing delivery centers while we're ramping down and still maintaining some of the costs associated with our current delivery locations, particularly in Russia. And then what you have, and we've talked about this in the past, is as you move people into the next geography, into their next delivery country, is in some cases those are more expensive countries. And we pretty immediately take people's compensation up, so there's an increase in compensation costs. And then there needs to be a discussion with clients about the associated rate increase. Those conversations are already underway, and we'll be working on that throughout the year. But that's probably the balancing act, because I think you work through the utilization and then the SG&A efficiency. SG&A will go up as a percentage of revenue in Q2, but then I believe begin to come back down in the second half.

And then we've just got to work through all those sort of rate discussions Okay, very good, thank you Now next question coming from the lineup there in pillar with wolf's research your line is open Thanks guys, first of all, you know, really just hope everybody's doing well and as safe as possible Secondly, it's very impressive to see you guys manage through this And on that note, I really just want to understand when you think about looking forward to the next few quarters, the new balanced portfolio from a supply side for your business, if you could just help us understand if there's going to be, if you've identified like any specifically new centers of real differentiated talent development, the way that you would leverage Ukraine and Belarus in the past, you know, are there other markets that you see becoming your go-to differentiated markets that are maybe newer, whether it's Turkey or where I know there's been areas you're moving some of the Russian base too. And so I'm wondering if some of those could be that source. And then just as on top of that, is there any way you can help us understand the breakdown, the percentage breakdown of your employee base that you'd expect it to be within a couple of quarters after these moves occur?

Yes. Thank you for the question. And I think we directionally indicated already how much We think by the end of the year, we're expecting to have people between Ukraine and Belarus. Because in Russia, we're closing within the next few months. We also hope, and I think we indicated this as well, and Jason was focusing on mentioning this specifically, we're considering right now, or we planning right now that a good number of our employees from Russia and some from Belarus will be relocated based on the BCP requirements from the clients. Relocation happening right now to multiple countries across mostly in Europe and Western Asia as well. and Central Asia as well. So I don't think we can say right now details and percentages which we're going to have there. But the idea definitely is that we identify a number of specific countries where we think we can scale. But we also bring in there the talent which exists at EPUB. And we believe that in this configuration, we will be able to accelerate recruitment and bring connectivity to Ipam culture and quality standards, which we were building as a company for a long time. So at the same time, during the last 12 months, the fastest growing market for us was actually India and Latin America. So we were talking about it before, was started that we're focusing on diversification and this is actually working for us and we will be accelerating even more in this talent market. So India and Latin America will be the focus and new deaf centers and existing deaf centers in Europe which will be complemented with our talent relocated from our traditional locations fruit creates stability and client comfort, which we believe will be driving the growth. I think that's what we can share. I don't think we can share very specific numbers right now.

That's fine. All right. Thanks, Ark. And then just very quick follow-up. You mentioned pricing discussions. We'll obviously come after this, but can you just comment on the receptivity? We heard from you know, one of your competitors yesterday and others in the industry that they're seeing pretty understanding receptivity on industry around inflation being passed through in price. So especially in the context of what you have to do to move folks, what kind of reaction are customers having now to that price offset?

Yeah, so we, you know, I think we've talked about over the last couple of quarters that the market just because of the, you know, the imbalance between supply of technical resources and the immense demand is that those conversations have been easier for a while. And then on top of it, our clients are also seeing the cost of their employees go up. So there's some cognition that there is inflation in the market. And so those discussions were easier. The one thing I think I've been pleased by is just in conversations with clients, I think there's an understanding that they do get you know, a different level of productivity from EPAM. And so there's an understanding that, you know, as we've had to make all these difficult transitions to different countries, that, you know, what they get from EPAM from a delivery standpoint truly is differentiated. And so that's helped with the stability of maintaining customers, but it also is supportive of the conversations that we'll be having about pricing. So I think that's how I'd answer that. That's good to hear.

All right, guys, thanks, and be safe. Thanks. Thank you.

And our next question coming from the line of Arvin Ramnani with Piper Sandler. Your line is open.

Hey, thanks for taking my question, and congrats on operating in a really tough environment. I just had a couple of questions. You know, we had done some checks with folks on the ground, and we're quite amazed with the resilience that we heard from Ukraine. Can you provide some... let's say granular feedback on how you're delivering this high levels of productivity from Ukraine. I know you provided the high level sort of feedback, but can you provide some kind of more specific feedback on how you're able to deliver these levels of productivity from Ukraine?

So as you know, like Ukraine, our largest location, and we have pretty distributed production delivery centers infrastructure in the country, with several major deaf centers there. So during the first weeks, the main focus was to bring as many as possible people to the western part of Ukraine, where we have Lviv as kind of our center, and establish a number of new deaf centers in the smaller cities around the region as well. So from infrastructure point of view, connectivity point of view, so we didn't have practically any interruptions in Kyiv as well, which is our major city, major development center. So between these two, we practically were covering majority of the necessary work happening. So I don't know what else to comment here besides praising our employees who were focusing and actually keeping their mind straight with this difficult situation for work. So that was a plus. A couple thousand people, specifically women, were able to relocate to Poland and to Hungary and work from these locations as well.

And then just as you transition your talent from Russia or Belarus or Ukraine, where are most of them being moved to? Are they being moved to Poland and Hungary or are they moved to the U.S.? Where are most of these folks being moved to? This is a pretty

This is a pretty sophisticated operation right now, and if I start to list all countries where people might be in right now, it probably will be by the end of this call, but there are several specific areas. Poland, obviously, was one of the key destinations, but it's not only Poland. It's countries in Central Asia, it's countries like Turkey and Serbia, so it's all known names. But at the same time, it's not even one phase exercise because in some situations, we have to move people very quickly. And then after this, finding the final destination, which could be US or Canada as well, depending on people, depending on skills profile. So it's a very much longer term operation for us.

Last question for me, just want to follow up on Brian's question earlier. on existing and prospective clients. Clearly, I think existing clients are being supportive, but what is the feedback from new clients? Are you still selling to new logos and getting traction with newer clients?

As we mentioned, clearly the The real, real focus was to stabilize operation with existing clients and address opportunities of growth in existing clients, which still happening. Okay. Definitely there are new logos coming to us and there are very trusted network of people in the industry who like bringing us to their new destination because people moving and they're comfortable with working with us. And this is very important. kind of very normal. And some of these people really believe in differentiation level of service which you can bring. So this is still happening. But as you can see, we're practically flat right now between Q1 and Q2, which means that it's a balance right now. We're getting stabilization and we really believe that Q3 and Q4 should be more reflecting on what's happening. but we cannot tell exactly our expectation. Otherwise, we will be guided for the year.

Terrific. Thoughts and prayers with you and the folks at EPM. Thank you very much.

Thank you.

Our next question, coming from the lineup, Ashwin Srivastava with Citi. Your line is open.

Thank you. Hey, Arc. Hi, Jason. First of all, much respect for what you and your employees achieved this quarter. It's truly amazing. I guess my question is, can you accelerate some of the delivery diversification using M&A, or is there just too much going on operationally that you would not add that to the list of things to do?

I think we're looking at the opportunities, and even in this very difficult period, I don't think our M&A strategy changed. We're looking for actually additional skills and additional locations, but we're not looking for very large ones because that's a different level of integration. And as you mentioned, it's probably not exactly on our mind right now. But we're looking for some smaller accelerators in different geographies so we can grow faster if necessary.

So they might actually be entry points or beachheads in the countries in which we're not currently operating. They give us management experience in those countries, and then we grow around them. So in many ways, they might start small but allow us to accelerate in different regions, including the Balkans and in Latin America.

Understood, understood. And I think I did hear a comment with regards to new business development and having restarted. Could you maybe provide more color around that? And is that perhaps an indicator that even your client conversations, as you mentioned previously, are transitioning from, you know,

figuring out delivery with you to perhaps figuring out growth with you?

I really didn't get the question exactly. It's a new business development. First of all, again, we have significant presence outside of this region and we have We have built pretty good reputation during the last year from quality of delivery. So we still have people coming to us and some of them actually looking for the type of talent which we were having in this difficult right now region. And we have opportunity to relocate and mix capabilities right now. And many clients actually looking for this as well. It's very difficult in this situation to say that it's a huge number of new logos coming. It's not because people careful, cautious right now, but we see definitely very positive, a very positive direction happening since the beginning of March.

Understood. Got it. Thank you. Thank you.

coming from the line of Ram CLSL with Barclay CLN is open hi thank you for taking my questions today and also amazing job that you guys are doing as we can all see can you describe how your balance actually um what I meant to ask was when you're relocating people right away is there a lag in that's due to travel, et cetera, or with those relocation efforts, are you able to make those people productive pretty quickly? And I guess the following question there is, is there a backlog of people who are still waiting to be relocated, or is the relocation sort of process largely compete, at least as it stands today, understanding that the situation on the ground is fast moving in terms of the conflict?

I don't think we would be happy sharing all logistical components of what's happening because it's difficult to describe and there are multiple challenges there and we're really telling very directly that this is not an easy process and there are multiple aspects of this. I think what's important, instead of talking about all the specifics, that we do believe that by the end of the year, our locations in Ukraine and Belarus would be not more than 30% of our capacity. I think that's an important focus. The rest of this I would rather skip right now.

Fair enough. Has there been any issues with attrition outside the kind of conflict zone in other in other words are you having uh are the staff who you're having to lean on in order to keep the operations going having any burnout or or morale issues in terms of just the degree to which you need to sort of lever them to keep the operation going or is are things okay on that side as well you know i'll comment on attrition and and put a few numbers out there and so you know

The attrition has also been very positive. I don't want to call it a surprise, but certainly we didn't have any incremental, let's say, voluntary attrition. Well, we have that as some incremental involuntary attrition primarily related to Russia. And so we are up around, let's say, around the 20% range from an attrition standpoint. But from a voluntary standpoint, the attrition levels we are seeing are very similar to what we saw in Q4 and Q3. So at least at this time, very little change in attrition. And, you know, EPAM employees are highly supportive of all the work that needs to be done, and obviously that's why we've executed as successful as we have.

That's great to know. I appreciate it. Thank you.

Our next question coming from the line of David Grossman with Stifel.

Thank you. Good morning. You know, I wonder if I could, excuse me, just go back to the supply side. And, you know, Arkady, maybe you could speak to, you know, some of the key similarities and maybe even the differences in building supply outside of your historical strengths in Belarus and the Ukraine and perhaps share some lessons maybe learned from, you know, the efforts years ago to start up in India as that operation kind of had some fits and starts and just curious, you know, what lessons you took from there that may be helping you scale, you know, outside the region?

Thank you David for the question because like, and with you specifically and some other analysts on the call who saw EPAM operation 10 years ago and visited our locations back then. So 10 years ago we were operated practically in four countries only. So in those countries at this time, nobody was thinking that it's possible to put together tens of thousands of people. And we put a lot of investments in infrastructure, in our digital platforms, in our educational ecosystem. And when you're asking what actually similar or not, we're trying to bring all of this experience, how to build in kind of not relatively scalable centers, relatively scalable operation. And you mentioned India. We started in India much, much later than anybody else, really. And 2014 was a trigger for us to open operations there and then in Latin America and Mexico as well. And we were applying the kind of lessons we learned during our completely greenfield startup in Eastern Europe. So India last year was the fastest growing location for us. But it wasn't the fastest growing location for us for three years. It was practically flat. or even going down. So we changed operations, and while we still have the same management, which we acquired a long time ago, so we have support of this team to transition this to a very different company today. And that's why India probably by the end of the year would be probably number two, number three location for us. Very similar is happening in Latin America. We were selecting very carefully the management team there to see that if they would like to put very different standards on themselves. And we did a small acquisition last year, which we're very happy. And Colombia growing for us very quickly. We're opening like across Latin America as well. And Mexico also one of the fastest growing locations for us. So I think we bring in what we know to new locations. And that's why we're pretty confident. Again, it's difficult to be confident when there are so many unknown, but with some assumptions how it could happen, we do believe that even by the end of this year, we will be growing back to our close to normal rates.

Right. So is there, just at least from where you sit today, are there any differences in these other geographies that you would highlight or is it looking very similar to what you've seen thus far in your key locations that you operate today?

So there are definitely differences. It would be kind of not responsible to say that it's not countries in different development stage. There is different level of software engineering kind of maturity there, but we do believe that we have multiple locations where we're moving today, which would be able to reach the level of quality which is standard for a farm. So I can say this, we don't see right now obstacles which would stop our growth as it was before.

David, one of the differences might be the circumstances, right? So we've got a much larger number of people moving into these newer delivery locations. So bringing, you know, EPAM delivery methodologies, culture, you know, all the different types of tools that are referred to. And so we start with, I would say, you know, a greater injection of kind of EPAM culture into each of these locations than maybe, you know, you would have seen in prior movement into new geographies.

got it uh great thank you for that and and i just wanted to clarify one thing i i think he made maybe it was you jason a comment about the bench included in utilization and maybe i just misunderstood the comment but perhaps you could just clarify that are you maintaining a larger bench in in the ukraine now just to to back people up or is did i just misunderstand that comment yeah no that's a that's a fair so let me clarify that probably for everybody here is that we've got um

Some individuals that were added, and as Ark said, the focus of Q1 was to make certain that we were able to maintain delivery and obviously maintain customers. And so we had a fairly significant number of employees that were added that are not billing at this time. They are potentially billable but are currently not being billed. They'd show up in utilization because they're technically in sort of billable roles, but we're not charging for them to customers. We did exclude the expense for the purpose of the non-GAAP numbers that we provided. And the idea is that at some point in time, and already we're beginning to have discussions, is to make certain that those positions become billable. But right now, they're there to make certain that if there was any concern about continuity in Ukraine... that we'd have effectively kind of backup resources available. Generally, those are in countries clearly outside of the affected region.

Right. Can you just give us a sense of the scale of that backup kind of workforce at this point?

Yeah, I think that you can see it in the press release. I think we've got a call out in terms of the guidelines. And so you can actually see sort of the percentage cost associated with it. And so it's there in the press release.

Got it. All right. Good luck to all of you. Should be very proud of what you've been able to accomplish.

Thank you, David. Thank you.

And as a reminder, to ask a question, please press star 1. And I am showing no further questions at this time. I would now like to turn the call back over to Mr. Depkin for any closing remarks.

Thank you. First of all, I would like to personally thank the entire EPUM team for their dedication and leadership and commitment. We have been through a lot during the last couple of years. We're definitely dealing right now with something which we never expected during the last month. So I really appreciate everybody staying with us and doing this with us and our clients and our partners. And as always for people on the call, so if you have questions, you know where to your exam, and hopefully we will see you also in Boston in a couple weeks. Thank you very much.

Ladies and gentlemen, that was our conference for today. Thank you for your participation. You may now disconnect.