EPAM Systems, Inc.

Good day, and thank you for standing by. Welcome to the EPAM Systems first quarter 2023 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's first quarter 2023 results. If you have not, the copy is available on epam.com. in the investor section. With me on today's call are Kadi Dopkin, CEO and President, and Jason Peterson, Chief Financial Officer. I'd like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risk and uncertainties, as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measure and are available in our quarterly earnings materials located in the investor section of our website. With that said, I'll now turn the call over to Ark.

Thank you, David. Thank you for joining us today. Three months ago, you shared some details of what we were thinking about 2023 and how we saw the main factors and trends driving our performance during the year. As you will recall, we anticipated some level of market slowdown in general demand but we are not certain of the impact level of this slowdown in our own portfolio yet. We also saw that some of our customers were mitigating the risk of exposure due to the war in Ukraine, and we are showing signs of managing those risks by diversifying work streams to some other partners. With understanding of all of that, we were proactively investing in building scalable quality delivery locations outside of our traditional comfort zone. to consistently delivering comparable engineering quality across all of our growing global delivery markets. And we also shared that we were expecting to continuously optimize operations across our global delivery locations to bring the cost structure back to our traditional metrics in near and medium timeframe. And despite the number of the EPUM specific challenges, we believe that the market for our services continues to be strong and our proposition remains extremely relevant, so we were broadly expecting a general uplift in demand going into the second half of 2023. Today, three months later, we understand that with the visibility we had in three-year quarters, we underestimated the breadth of the macroeconomic slowdown and the depth of the impact specifically in the transformational sector of the IT services market. And as you know, we always stated that our customers are almost exclusively Global 2000 enterprises, leading global platform companies, and venture-backed emerging tech firms who rely on EPUM to design, engineer, and deploy exactly large-scale transformational and digital engineering programs, helping them to grow and to differentiate themselves based on technology-advanced solutions. Our work largely supports Their disruptive business model accelerates growth and specifically targets new product data and cloud platform development and modernization programs. TouchWork was and is in our focus area and represents a very significant share of our revenue, especially in comparison with most of other companies within the global IT services segment. That type of work was largely responsible for significantly stronger growth rates during the last few decades. Unfortunately, it is likely those programs are all currently showing visible signs of weakness. Instead, during the last three months, it become very clear that the economic environment is more focused than it has been for decades on cost optimization, which for now benefiting more traditional outsourcing firms with strong cost takeout offerings. We understand this is likely a continuing story as the markets adjust to the new economic conditions and the investment climate changes. It means that with all global and regional impact on demand and the headwinds associated with the war, we must accept the picture for IPAM is more complex and nuanced, and yes, Visibly changed today from what we shared with you just three months ago. But before we go into what we're doing to address the immediate challenges and to share some of our more tactical priorities and efforts, I want to restate our view on our mid- and long-term positioning in the future beyond 2023 growth perspective. Let me start with something we all know well, technology change and disruption of traditional business models was the main growth driver during the last decade. During those decades, we saw only three relatively short recessional periods for the technology sector. There is simple evidence that those companies who invested in their digital transformation during the slow periods and those who adapted to new tech and applied new business models realized tech faster versus those who just focused on straight cost cutting become the new leaders in their markets. Plus, each of those short downturns led to a resurgence in demand for our unique breed of services and consequently to our historical growth rates of 20 plus percent and on very consistent and long-term basis. We believe that nothing changed from that trend. And we are in the middle of another turn when we are about to adopt a new wave of technology impact. That is why we believe that the current situation is temporary and that in line with the past, we will see a similar comeback pattern, pushing companies which try to lead for accelerated investments in new and disruptive complex solutions based on rapid adoption of new advanced technologies. With that, we also believe that we will continue to benefit from our traditional capabilities and our delivery track record, and that give us the confidence that we are fundamentally better positioned for future accelerated growth than most of other market players. Those critical pillars include, first, our continuous focus on differentiated product and platform development versus more traditional outsourcing, BPO, and package implementation deals. and our engineering DNA built over decades. Those make us the best partner to learn, understand, and implement new solutions utilizing the next generation technologies. And yes, we do want to share with you in anticipation of the like equation that is a public adoption of generative AI and widespread use of large language models or LLMs. We already have dozens active use cases across the global network of practitioners in all our verticals, and the result of functional areas that we are actively proceeding with both internally and with our customers. Second, our investments and broad deployment of the PAM Continuum integrated consulting services push strategy and experience even closer with engineering, and together accelerating the value we can bring from investments in data and machine learning and gen AI technologies by advising on what is possible tomorrow and what can be made real today. And third, all of our customer engagements and our people are enabled by our own digital platforms, which preparing us much stronger for applying enhanced capabilities of ML and AI and LLMs to drive increased work productivity and knowledge sharing at a new global scale. To sum up, in our view, even with complicated macroeconomic headwinds, the market still points toward disruption and demands companies to transform again to address the challenges posed by many emerging technologies, including such as generative AI, which everyone is talking about today. But what is difficult to predict right now is when this comeback will start at full speed. We believe that it will be happening rather sooner than later, in quarters, not in years. Still, right now, we obviously have an immediate and different challenge. So let us talk about our last quarter and our thinking about the rest of 2023. With all the complexities of current environment, our performance in the first quarter was sorted. While that gives us a better start to move further into complex 2023 environment, We have to acknowledge that the combination of conditions we talked already today of general pullback and delays on transformation, spend, and the geo-risk concerns taken by our customers has now translated into a revision to our initial revenue expectation for a year. With this new view, we are adjusting visibly our full year revenues and EPS outlook. And during the year, expect to be thinking more about sequential growth metrics versus our traditional year-over-year trends. Jason will talk about all relevant details in his section. For now, as long as we are seeing contracted budgets for new built business, we will be adapting a three-pronged approach to navigate the current environment. putting all possible efforts to address our current customers' most pressing tactical items, including the mix of engagement models, cost takeouts, and consolidation priorities, while protecting our share of wallet and long-term relationships, all possibly leading to low short-term profitability metrics. Second, winning and quickly growing new business through increased focus on sales and GTM motions and partnerships, especially across those champions who would like to use the slow time to build a competitive advantage. Over the last two, three quarters, our global business field organization and specialized practice teams have focused on developing new offerings, new engagement models, and new ways of working with our customers, and have done so with some success and new momentum in new logo acquisition, which will still take some time to realize as larger revenue impact down the line, especially in the current economic climate. And third, continuously investing in our strategic priorities, which are staying in line with what we communicated before. Expansion of differentiated consulting agency, data, ML, AI, and cloud capabilities building. Improving our offering by delivering strategy and implementation simultaneously. Expanding our engineering DNA across all strategic global delivery locations. All in anticipation of the sharp return of demand for the next generation transformation services. With that, as part of our continuous investment strategy, I want to share some updates on our global delivery expansion programs. During the past quarter, we have made good progress in both maintaining the level of delivery quality in Eastern and Central Europe and strengthening such quality in Central and Western Asia, where both geos benefited from integrating strong IPAM talent moving to many new locations across the regions. As part of our heritage, and our core differentiation Eastern and Central Europe delivery and most notably our Ukrainian operation will continue to be in cornerstone of our proposition. While we accelerate our investments in new center of excellence and while we continue to hire across our global footprint for high demand skills. As part of the global delivery strategy, we continue to focus on building our father our two currently fastest growing regions, India and Latin America. In addition to opening several new locations across those geographies, we are happy to see sizable work streams starting and expanding there. And now not only from our visiting clients, but also these brand new logos who are attracted by advantages demonstrated by IPAM in those regions. It's also important to mention that the configuration of our client footprint in those still relatively new for us geographies now very much represents our traditional client mix with some of our top 10 customers, but also new ones across multiple verticals from large corporations to technology platforms, firms, and to software product companies. In our view, it's a very good illustration of the quality of the services we are delivering from the region. Confirming that continuing investments into engineering excellence programs, education, and integrated delivery platforms bring the results we expected to achieve to date. Also, with experience of the past few years, we are now able to stand up new locations across the PAM global footprint in months versus years. By leveraging all elements of our digital platform ecosystem and strong talent acquisition capabilities. We believe during the next few years we will be able to build the most geo-balanced delivery talent platform on the market. To conclude, we believe that while we are experiencing and addressing accordingly very specific but still temporary challenges, fundamentally we are moving in the right direction. Our strategy for future accelerated growth is based on delivering complex business solution driven by advanced disruptive technology and quality engineering. Many of those solutions require unique alignment of consulting and implementation services and are specifically attracted to the client base consisting of leading global enterprises whose markets are driven and disrupted by continuous technological transformations. We do believe that such enterprises will have to come back to significant investments into technology-built components to lead and disrupt further their respectful markets, and they will need partners like EPAM to progress. With that, I would like to pass to Jason to share more details and numbers for Q1 and for our change in outlook for the rest of the year.