EPAM Systems, Inc.

Good morning, everyone, and thank you for joining us today on our first quarter 2025 earnings announcement. As the operator just mentioned, I'm Mike Rochandle, head of investor relations. We hope you've had an opportunity to review the two news releases we shared earlier today. If you have not, copies are available on epam.com in the investor section. With me on today's call are Akadi Dopkin, 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 materials located in the investor section of our website. With that said, I will now turn the call over to Arc.

Thank you, Mike. Good morning, everyone. Thank you for joining us today. As you may have seen in our additional press release this quarter, we have one more update to share today that goes beyond our usual business performance. Alongside our strong Q1 results, despite a tough macro environment, we also announced our planned leadership succession. So before we get into the details of our performance and growth momentum, I want to take a moment to share a few thoughts on my planned transition from CEO role. After 32 years since starting EPAM and serving as the chairman, CEO, and president, I decided to transition into the role of executive chairman. This move has been thoughtfully planned over the past several years, and I believe that the right moment is now, both for me personally and for the future of the company. But I am not leaving EPAM. As executive chairman, I plan to continue providing strategic guidance, combining my years of experience to hold relationships and board leadership, and ensuring that the ICO transition is smooth and effective, and that EPAM continues advancing our mission, culture, and values. Beyond the transition period, I will be actively engaged as an employee of the company and helping to shape EPAM long-term strategic direction, maintaining key relationships with clients, partners, and investors, providing guidance on critical strategic initiatives and programs, and promoting the company brand worldwide. I will be closely collaborating with CEO and the leadership team to help ensure that the values, relationship, and strategic focus that have defined EPAM for decades continue to guide the company's future. With that said, I am pleased to announce today that Balazs Fejers will become our new Chief Executive Officer and President on September 1st, 2025. Balazs, better known as FB, joined the company over 20 years ago and has been a critical part of our growth story. His leadership has been instrumental to EPAM's development, serving as our first CTO, building our financial services business globally, leading our European and APAC markets, and most recently serving as the President of Global Business and Chief Revenue Officer. HB is uniquely positioned to provide both strategic and operational leadership during our next phase of evolution. I'm confident that his rare combination of business and technical acumen will enable him to continue driving EPUM forward. AV brings not only deep operational experience, but also a strong sense of energy and vision for EPUM's continuous evolution into the world-leading AI-native transformation company with a reputation for quality execution and excellence, commitment to our customers, employees, and community. In terms of timing and priorities, we remain focused on Q2 and full 2025 execution, working hard to extend our sequential momentum by driving and winning more . The CO transition plan should be completed on September 1st, 2025, at which point we will provide a more comprehensive update with an opportunity to hear directly from . I look forward to working closely with him, our entire executive team, and the board to support the continuous growth and long-term success of the company as the pump enters the next phase of its evolution. Now, let's talk to our Q1 results. I am pleased to share today that our first quarter results came in better than expected, despite a more challenging microeconomic environment than most would have predicted 90 days ago. This marks our third consecutive quote of our performance, and we are pleased to see sequential momentum, which we hope will continue throughout the remainder of this year. In a climate where cost continues to be top of mind, our clients' conversations have been broadly positive, and we are encouraged to see pump benefit from supplier consolidation activity in our core portfolio. It continues to be our view that the pivot reliability and quality is slowly progressing. Japan's proven track record and reputation for high-quality execution put us in a sweet spot and is driving increased levels of New Deal activity, which is enabling us to maintain and grow our organic footprint with existing clients. Outside the volatility of the broader geopolitical economic environment, most of the growth seems we have been discussing over the past few quarters, especially AI-related, have continued through Q1, and we expect will carry throughout the remainder of this year. During Q1, we returned to double-digit revenue growth year over year. And while our inorganic contribution was driving a large portion of that, We are notably delivering year-over-year organic growth as well, which was significantly above our initial Q1 expectations, while being flat at the midpoint of our guidance. This marks our second quarter in a row of delivering positive year-over-year organic growth since 2022, and illustrates continuous improvement in the core business. Overall, in Q1, client sentiment and engagement remain strong across most of our verticals and geographies. It's particularly high interest in our rapidly expanding AI-related capabilities. Our performance this quarter was driven by meaningful progress in strengthening client engagement, enhancing cross-selling efforts, and continuing to deliver advanced complex solutions. Our global footprint, supported by robust platforms, tools, and diversified talent hubs, is enabling us to effectively meet the evolving needs of our clients in rapidly changing business environment. Now, turning to demand. Despite the notable changes over the past 90 days, we remain cautiously optimistic, given our strong Q1 results and the Q2 momentum we have built. The February and March project ramp up dynamics that is signaled last quarter played better than expected. as the client sentiment continues to improve. Further, we are encouraged by the incremental demand we continue to see for our AI capabilities. This focus on productivity and efficiency gains turns into more comprehensive AI-native transformation programs and encompass multiple types of AI-centered solutions. In short, our baseline client demand in H1 is improving faster than anticipated. While we remain mindful of external pressures caused by challenges in our clients and markets, as well as isolated instances of increased caution and shift in decision-making due to microeconomic uncertainty, we have not seen any material impact on our business to date. Overall, we feel good about the resilience of our performance so far this year. It's also important to emphasize that we are doing everything we can to stay closely aligned with our clients. Taking proactive discipline steps to effectively manage our operations. Ensuring we are well prepared to respond to any potential impacts that we had into the second half of 2025. In addition, reflecting our recent client conversations, one thing become clear. During the past few years of greater volatility, some clients who had prioritized cost above all else in selecting partners are now returning to EPAM. Their experience with underperforming programs has reinforced the critical value of deep expertise, consistent delivery quality, and the trusted ability to execute at scale. That is why, even as we expect 2025 to remain a year of transition, with the potential for increased uncertainty in the second half. We believe clients will continue to focus on the most strategic priorities. We should translate into stronger growth for us compared to 2024. And our credibility and growing reputation as a leading partner in AI and AI-native transformation are already driving greater market awareness and demand, a trend we expect to continue throughout the remainder of this year. Moving into our four global delivery hubs, which now are working together in some new ways and with rapidly growing access to our advanced AI-enabled productivity platforms. In Q1, we saw another quarter of sequential increase in net organic headcount across India, Europe, and Western Central Asia. Central Eastern Europe continues to be cornerstone geography for us and serves as a backbone for many long-term clients with growing global location strategies. We saw modest growth in Hungary, Poland, Croatia, and Serbia, and stability across the rest of the region. Ukraine, as well, remains stable in terms of scale and core capabilities, as our nearly 9,000 people remain highly productive and continue to support both new and current clients across a diverse range of programs. In India, we continue to see strong demand for our differentiated project engineering offerings alongside our core capabilities in platforms, cloud, data, and AI. The momentum we built last quarter carried out into Q1, with additional net headcount growth. We are also deepening our relationships with global capability centers, or GCCs, reinforcing our role as a trusted transformation partner. In Western and Central Asia, we continue to invest and expand our delivery presence with modest net additions across several locations. As we shared in the past, these locations allow us to have even greater adaptability when it comes to serving our clients by balancing cost, quality, and execution, and in some cases, proximity to client locations. Finally, in Latin America, we continue to progress with our significantly expanded client and talent footprint. Now, shifting to AI. As highlighted in our recently published AI report, while improved productivity and operational efficiency remain universal goals, scaling AI adoption across the enterprise continues to be a challenge. In fact, only 30 percent of even the most advanced companies surveyed reported success in implementing AI at scale. AI at scale remains a relatively new concept today. We believe the broader transformation required, including modernizing platforms, data, organizational structures, skills, and business processes. All of that represents a significant opportunity for IPAM. Our unique combination of deep engineering and consulting expertise, backed by our advanced suite of IP tools and accelerators, position us well to lead in this space. While the AI landscape is evolving rapidly, one thing is undeniable. AI continues to drive new demand for us. Even in the context of traditional modernization programs, AI plays a central role in majority of client discussions. We are currently engaged in a wide range of AI initiatives with the vast majority of our top 100 clients. Our early stage AI engagements are maturing visibly strong year-over-year growth, with more of them evolving into mid-size projects with clearly defined outcomes and measurable ROIs. As we expand into larger scale AI factories, these programs are becoming increasingly comprehensive, now incorporating agentic AI in government's frameworks while also scaling in volume and complexity. In Q1, our AI-native revenues grew strong double-digit quarter-over-quarter, continues the strong momentum from the previous quarter. As we continue to mature our AI consulting and engineering offerings, we are also strengthening our overall value proposition by partnering with strategic players in cloud data and platforms to deliver innovative, commercially attractive software assets focused on industry-specific transformation and productivity gains. One illustrative example of our progress is an oil and gas manufacturing vertical, where we develop breakthrough innovation in AI-powered geospatial data visualization and insights. Built in partnership with Google Cloud industry solutions, this work led to upon being named Google 2025 Partner of the Year for oil and gas. The solution, which integrates with Google Gemini models, can also apply to broader data challenges across manufacturing and supply chain use cases, demonstrating our deep domain expertise, our ability to handle large and complex datasets, and our proven track in delivering AI-native cloud-based applications at scale. Another strong example is our ongoing effort to advance global engineering productivity through AI. Our focus extends beyond individual code generation to full lifecycle transformation in team environments. In Q3 of last year, we introduced EPAM AI Run, our AI-native SDLC framework and toolkit. And we are now well-positioned to build on this foundation through a strategic collaboration agreement with AWS. By leveraging advanced generative AI services, including Amazon Bedrock, we'll empower clients to develop specialized AI agent in a native solution that addresses as you'll see productivity challenges for large teams. This collaboration creates a robust platform for accelerating cloud and data modernization through AI-driven workflow and tooling automation. Finally, to illustrate our continuous innovation with the Palm Dial platform, we continue to integrate advanced AI technologies into custom-tailored business strategies, which is driving significant impact across the industry and open-source community. DAO has evolved through several advancements and iterations since we started building it. Today, DAO is a complete generic platform with orchestration, including a genetic marketplace, mind maps, and DAO expressive logic, and so much more. DAO is evolving into a complete AI platform for enterprises. To conclude, we are pleased with our stronger than expected Q1 results. the improvement in organic growth and the sequential momentum we continue to build. Our increasingly diversified and agile global delivery hubs combined with advanced AI native capabilities and deepening strategic partnerships are having real impact. As we shared last quarter, we expected 2025 to be a transformative year. And that outlook is proven true, perhaps even more visibly than we anticipated three months ago. We are encouraged by the opportunities ahead and remain cautiously optimistic about the second half of 2025, even as macro uncertainty persists. Our focus and discipline execution remains our top priority. Let me now turn call over to Jason, who will provide additional details on our Q1 results in 2025 outlook.

Thank you, Art, and good morning, everyone. In the first quarter, EPM generated revenue of 1.3 billion, a year-over-year increase of 11.7% on a reported basis. On an organic constant currency basis, revenue grew 1.4% compared to the first quarter of 2024, exceeding our expectations of flat organic growth anticipated at the midpoint of our Q1 guidance. We are pleased to deliver another quarter of year-over-year organic growth in constant currency, reflecting ongoing demand for EPM services and strong execution across our global portfolio of clients. As Ark mentioned, we believe the outperformance is in part driven by client recognition of EPM's superior delivery quality and momentum across our AI offerings. Moving to our Q1 vertical performance, four out of six industry verticals delivered strong to very strong revenue growth. Revenues from our FD and EORTH acquisitions had the most impact on our financial services in emerging verticals. so I will break out the organic and the inorganic contribution within these two verticals. Financial services delivered very strong growth of 29.3% year-over-year, reflecting 4.5% organic growth in constant currency, driven by continued strength in insurance, banking, and payments. Software and high tech grew 9.6% year-over-year, driven by strong execution and broad improvement across our existing portfolio, as well as new logo activity. Life sciences and healthcare increased 10.5% on a year-over-year basis. Growth in the quarter was driven primarily by clients in life sciences and med tech. Goods retail and travel decreased 1.4% year-over-year, largely due to declines in consumer products and retail, partially offset by growth in travel. Business information and media declined 2.2% year-over-year. Our emerging verticals delivered very strong growth of 22.8%. Growth was positively impacted by New York's industrial materials customers. Emerging verticals organic revenue in constant currency contracted by 3.5%. It was negatively impacted by softness across manufacturing and telecom clients. From a geographic perspective, America is our largest region, representing 60% of our Q1 revenues, grew 12.6% year over year. EMEA, representing 38% of our Q1 revenues, increased 10.7% year over year. And finally, APAC, representing 2% of our revenues, increased 4.3% year over year. Each of our geographies delivered year over year organic constant currency revenue growth in the quarter. Lastly, in Q1, revenues from our top 20 clients grew 6.1% year over year, while revenues from clients outside our top 20 increased 14.6%. Moving down the income statement, our GAAP gross margin for the quarter was 26.9% compared to 28.4% in Q1 of last year. Non-GAAP gross margin for the quarter was 28.7% compared to 30.4% for the same quarter last year. Relative to Q1 2024, gross margin in Q1 2025 was negatively impacted by 2024 compensation increases, which were only partially offset through pricing. Additionally, lower profitability from recent acquisitions negatively impacted gross margin. The negative impacts from compensation and lower profitability from acquisitions exceeded the benefits of improved utilization and the positive impact from the Polish R&D incentive. The company will be focused on improving gross margin throughout the remainder of the year. GAAP SG&A was 16.8% of revenue compared to 17% in Q1 of last year. Non-GAAP SG&A in Q1 2025 came in at 14.2% of revenue compared to 14.1% in the same period last year. GAAP income from operations was 99 million or 7.6% of revenue in the quarter compared to 111 million or 9.5% of revenues in Q1 of last year. Non-GAAP income from operations was 176 million or 13.5% of revenue in the quarter compared to 174 million or 14.9% of revenue in Q1 of last year. Our gap effective tax rate for the quarter came in at 22.2%, and our non-gap effective tax rate was 23.1%. Delivered earnings per share on a gap basis was $1.28. Our non-gap delivered EPS was $2.41 compared to $2.46 in Q1 of last year, reflecting a 5 cent decrease year over year. In Q1, there were approximately 57.3 million diluted shares outstanding. Turn to our cash flow and balance sheet. Cash flow from operations for Q1 was 24 million compared to 130 million in the same quarter of 2024. Higher bonus payments in Q1 2025 and a higher DSO resulting from the impact of an increasing share of fixed fee revenues with associated milestone billing both contributed to the year-over-year decline in operating cash flows. Free cash flow was 15 million compared to free cash flow of 123 million in the same quarter last year. Cash and cash equivalents were 1.2 billion as of the end of the quarter. At the end of Q1, DSO was 75 days and compares to 70 days for Q4 2024 and 73 days for the same quarter last year. Share repurchases in the first quarter were approximately 796,000 shares. for $160 million at an average price of $201.07 per share. Moving on to a few operational metrics, we ended the Q1 with more than 55,600 consultants, designers, engineers, and architects, reflecting total growth of 18.2% and organic growth of 6.4% compared to Q1 2024. In the quarter, we added over 500 professionals, Our total headcount for the quarter was more than 61,700 employees. Utilization was 77.5% compared to 76.8% in Q1 of last year, and 76.2% in Q4 2024. Now let's turn to guidance. Before moving to the specifics of our 2025 and Q2 outlook, I'd like to provide some thoughts to help frame our guidance. While the macroeconomic environment remains highly dynamic, we are pleased with our strong Q1 performance with year-over-year organic constant currency revenue growth exceeding our expectations. This has resulted in three consecutive quarters of sequential organic revenue growth. With good visibility into Q2, we expect ongoing improvement in our organic revenues with both year-over-year and sequential growth in the quarter. We continue to experience improving demand for our highly differentiated services, and client budgets appear to remain substantially intact. with a few pockets of caution, which we are closely monitoring. Clients are turning to EPAM for trusted quality of execution and our advanced AI offerings. To date, we have not seen a material slowdown in client spending, as evidenced by our stronger-than-expected Q1 performance and sequential momentum we have seen thus far in Q2. That said, we acknowledge the elevated uncertainty in macroeconomic risks. Considering our stronger-than-expected first half, Balanced with a thoughtful assessment of client demand in our second half, we are raising the lower end of our organic full-year revenue guidance while leaving the upper end of the range unchanged. There are several additional factors impacting our view of revenue growth during the remainder of the year. Since we issued guidance last quarter, certain currencies have strengthened considerably relative to the U.S. dollar. At the same time, due to the elevated uncertainties resulting from tariffs and impacts on the manufacturing and materials industries, we are seeing a reduction in demand from the top customer acquired as part of our Neuris acquisition. With our improved organic revenue contribution, the expected benefit from foreign exchange partially offset by a modest reduction in expected inorganic revenues, we are raising both the upper and lower end of our reported revenue guidance. Our guidance continues to assume that we will be able to deliver out of our Ukraine delivery centers at productivity levels similar to those achieved in 2024. So moving on to the full year outlook, revenue growth will now be in the range of 11.5% to 14.5%, with an inorganic contribution of approximately 9% for 2025. Based on today's spot exchange rates, coupled with an assumption of modest strengthening in the U.S. dollar in the second half, foreign exchange is now expected to have a positive impact on revenue growth of 0.4%. We expect year-over-year revenue growth on an organic constant currency basis to now be in the range of 2 to 5%. We expect gap income from operations to continue to be in the range of 9% to 10%, and non-gap income from operations to continue to be in the range of 14.5 to 15.5%. We expect our gap effective tax rate to now be 25%. Our non-gap effective tax rate, which excludes excess tax benefits related to stock-based compensation, will continue to be 24%. For earnings per share, we expect the GAAP diluted EPS will now be in the range of $6.78 to $7.03 for the full year. And non-GAAP diluted EPS will now be in the range of $10.70 to $10.95 for the full year. The increase in non-GAAP diluted EPS is in part driven by our assumption of a reduced share count resulting from our plan to increase share repurchases within the constraints of the current share repurchase authorization. We now expect weighted average share count 56.5 million fully diluted shares outstanding. Moving to our QG 2025 outlook, we expect revenue to be in the range of 1.325 to 1.340 billion, producing year-over-year growth of 16.2% at the midpoint of the range. Our guidance reflects an inorganic contribution of 10.6%, with a 1.8% positive foreign exchange impact during the quarter. For the second quarter, we expect GAAP income from operations to be in the range of 9 to 10%, and non-GAAP income from operations to be in the range of 14 to 15%. We expect our GAAP effective tax rate to be approximately 26%, and our non-GAAP effective tax rate to be approximately 24%. For earnings per share, we expect GAAP-diluted EPS to be in the range of $1.67 to $1.75 for the quarter. and non-GAAP diluted D EPS to be in the range of $2.56 to $2.64 for the quarter. With increases in share repurchases during the year, we expect a weighted average share count of 56.7 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q2 and the full year. Stock-based compensation expenses expect to be approximately 40 million for Q2, 45 million for Q3 and 46 million for Q4. Amortization of intangibles is expected to be approximately 17 million for each of the remaining quarters. The impact of foreign exchange is expected to be negligible for each of the remaining quarters. Tax effective non-GAAP adjustments is expected to be around 13 million for Q2 and 15 million for Q3 and 14 million for Q4. We expect excess tax shortfall to be around 1 million for Q2. with minimal excess tax benefits or shortfalls in the remaining quarters. Severance driven by our cost optimization programs is expected to be around 2 million in Q2 and 3 million for each of the remaining quarters. Finally, one more assumption outside of our gap to non-gap items. With the increased share repurchases, we will have a lower level of interest generating cash. Therefore, we now expect interest and other income to be 2 million in both Q2 and Q3 and 3 million in Q4. We remain committed to continuing to drive sequential momentum and are confident in our positioning entering Q2, despite the dynamic environment. We will continue to run ePIM efficiently while remaining focused on strong execution and profitability throughout the year. Lastly, my continued thanks to all our employees for their dedication and focus on serving our clients and driving results for ePIM. Operator, let's open the call for questions.