EPAM Systems, Inc.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to EPAM's third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press star one again. I'd now like to turn the conference over to David Straube, head of investor relations. Please go ahead.

Thank you, operator. Good morning, everyone. By now, you should have received your copy of the earnings release for the company's third quarter 2023 results. If you have not, copies available on epam.com in the investors section. With me on today's call are Akati Dobkin, CEO and president, and Jason Peterson, chief financial officer. I'd like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risk and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to comparable GAAP measures and are available in our quarterly earnings materials located on the investor section of our website. With that said, I'll now turn the call over to Arc.

Thank you, David, and good morning, everyone. Before I get into the results of our third quarter, I would like to recap what was said in regards to our expectations for Q3 and full year outlook three months ago during our last call. We stated that while the current business environment is more focused on cost optimization versus our differentiated build and deploy offerings, we do believe the demand for transformation services will come back and that the services market will be moving from core IT to accelerated digitization to reinvent entire business models and ways of working with generative AI at the core of the transformation. And that we expect this new demand to be underpinned and even more driven exactly by our traditionally strong product platform engineering, data analytics, and AI ML capabilities. At the same time, we said we still expect the negative dynamic to continue in the second part of 2023. even as the outlook begins to normalize. We stated that we are focusing on turning the experience from very challenging past quarters into pragmatic plans and action items, which will be applied to our business throughout the rest of 2023 and into 2024. These changes are transformational for us and already better positioning us in preparation for the return of stronger market demands. That was the first part of our premise. The second critical part was about our efforts to further globalize and stabilize our delivery ecosystem, propagate the power engineering quality standards, and optimize operationally our talent allocations while closely focusing on our growth margins improvement efforts. All that to continue throughout the remainder of this year, and I expect it to go throughout 2024. So, with that reminder, let's talk about three key topics to address our demand environment, global capabilities, and key investments. Demand. We believe that while the demand for the new build for platform application remains lower than historic levels, and the impact of rundowns and deferrals continue to work through specific client portfolios, our Q3 results point to sign of stabilization in our business. Both in new logos and in retained and expanded programs in our existing portfolio, we are seeing signs of renewed interest, particularly in our life science and health care verticals, also in insurance and energy, and not only that. What is important to highlight, in today's business environment, we are putting all possible efforts to address our client current priorities, including adjusting a mix of engagement models cost takeouts, and consolidation initiatives while protecting our share of wallet and long-term relationships. While these factors are leading sometimes to like the low short-term profitability metrics, we are seeing signs that clients are returning to a balance between cost and quality, and the pump continues to be well positioned there. Also, it's required today an increased focus on demand-led sales and go-to-market motions and investments in global partnerships to winning and quickly growing new business. Over the last quarter, our global field organizations and our specialized practice teams have focused on developing new offerings in key verticals and horizontals, expanding to new engaging models, and extending our client portfolio to include new logos across a broader spectrum of brands. from large enterprises to mid-market players to new and exciting startups in key for us verticals. And more and more often, we are engaging with clients at the C-level of both IT and business functions. One of the examples of those relatively new for us ways to engage is transitioning our partnerships, which have taken on a greater momentum recently with key collaborations driving net new go-to-market propositions new IP, and new client links. Last quarter, we started our global partnership with Google Cloud to help our clients fast-track the development of artificial intelligence, machine learning, and data solutions to help them accelerate their transformations into AI-enabled business. Earlier this week, we announced and signed a strategic collaboration agreement with AWS. This will aim to accelerate modernization, adapt cloud native architecture, and leverage artificial intelligence and advanced analytics to create customer value in key industries such as healthcare, life science, financial services, insurance, energy, and gaming. Furthermore, we expanded our partnership with Microsoft, becoming a globally managed enterprise system integrator. The enhanced partner status and APAM Advanced Cloud Native AI and data expertise will enable us to help our clients modernize, transform, and simplify complex enterprise platform application and processes to accelerate business growth powered by Azure Open AI Service. Current results of these efforts are showing up an increasing number of conversations with clients and growing numbers of opportunities. And while it's still too early to say when we can so significantly result in revenue growth, our production load is starting to come back to the level comparable with our Q1. And we hope to see this trend take shape during the next quarters. Still, despite signs of improving demand conditions, the global macroeconomic environment remains volatile. And we see certain trends reflecting in our own business, notably in Europe, where the construction in the third quarter is likely to take a few quarters to reverse. Now moving on to global capabilities. India and Latam for us are key growth delivery regions, while Central Eastern Europe and Central Western Asia are areas of stabilization after our massive relocation efforts. And we think future growth opportunities. Part of the effort regarding globalization and stabilization of delivery is the right sizing and cost optimization across multiple locations. based on current and future demand outlook and specific location capabilities, seniority of pyramids and office infrastructures. Some identical efforts are also relevant in several locations in Western Europe and North America. While we are optimizing some locations, we continue to reinvest in new talent in key initiatives to expand our engineering DNA across all strategic global delivery locations with continuous harmonization and upskilling efforts, enabled by our own use of AI and EPUM productivity platforms. Those efforts are on the way as we speak, and we've already seen first results and expect to have additional benefits to materializing in 2024. This brings us to the topic of additional investments, which we mentioned in the past multiple times. We are continuously investing in our strategic priorities, such as expansion of differentiated consulting agency, data, ML, AI, and cloud capabilities with focus on vertical expertise. Development of go-to-market offerings and solutions, which now include propositions related to use of responsible AI across a broad range of business and technology use cases. Strong cloud engineering. data and ML core services profile should position the pump to benefit in the medium and long term from the impact of both current demand for modernization and also from the fundamental skills shortage in complex technological transformations which still persist today. The impact will become even more real in terms of complexity of future applications and platforms by encapsulating not just currently available elements GenAI and requirements for trust, reliability, and security management of AI, but also by closely integrated with new classes of composite and adaptive AI platforms, as well as with foundational models and specific industry cloud platforms. One of the key propositions offered by APAM is our ability to make AI real. As part of this focus, a number of our labs and centers of excellence have created IP that we are using to productize our learnings and to share them with our clients through our own open source initiatives. We mentioned our work with DIAL, our AI orchestration workbench, in our previous call. And today we see a number of extensions of this platform into specific use cases and specific industries based on real-life problems, which we are addressing with a growing variety of integrated AI tools and data sources. One of our most significant investments related to AI is the development and internal rollout of IPAM-responsible AI framework and a broad employee training to adapt it. Today, we are confident that IPAM has the necessary capabilities and talent to help our clients to evolve in the general adoption of AI and also in modernization of applications and proper data engineering efforts to drive the value AI promised to bring. Conversations with our clients are evolving as it becomes generally understood that fundamental capabilities and readiness in cloud engineering and data are necessary prerequisites for success. Still, the level of interest continues to indicate the demand for AI-related services will build momentum into 2024 and beyond. I believe that provides good level of an overview of current state and our key areas of focus. To summarize, I would like to say that with the exciting opportunities in front of us, we are still facing a complex demand environment. We are working to invest for the future while balancing supply and demand for skills and capabilities across a much more diverse delivery footprint. This challenge continues as the war in Ukraine extends into the third year, as well as the new disruptions since the Middle East escalation. requires to continuously adapt the company in appropriate manner. Good thing, at this point, we feel being well-trained to manage all of this better. So with that, I would like to pass to Jason to share more details and numbers for Q3 and for an update for our business outlook for the remainder of 2023.