EPAM Systems, Inc.

Rebecca, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EPAM reports results for third quarter 2025 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Mike Rochandle, Head of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today on our third 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 our earnings release we issued earlier today. If you have not, copies are available on epam.com in the investor section. With me on today's call are Balash Faish, 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 gap 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 FB.

Thank you, Mike, and good morning, everyone. It's a pleasure to be here with you on my very first earnings call as a CEO. And please just call me FB, as Hungarian names are notoriously difficult to pronounce. And why FB? Because in my native language, filming name comes first. This quarterly call arrived faster than even my standard double espresso shot in the morning. And that's really the theme for the day. Things have been moving quickly since we spoke last, and today we have positive news to share. Our third quarter results came in better than expected, marking another quarter of broad outperformance and strong delivery execution. We continue to benefit from AI and AI-native-led demand or thesis that data and modern cloud architecture are critical for AI adoption and auto-realization is broadly being confirmed by what we are seeing. Our clients are prioritizing their AI build-outs, turning to EPAM to help them accelerate their investments and innovation in AI. The unique combination of our deeply rooted engineering DNA and our globally recognized best-in-class AI-native expertise continues to differentiate our offerings and help us further expand wallet share within our existing client portfolio and targeted new logo segments. At the same time, we are more focused than ever on upgrading our engineering skills advantage and investing for the future with new advanced AI playbooks and accelerators. Serving as client zero for AI adoption, we believe innovation starts from inside, which is why in parallel, we continue to relentlessly push our AI literacy and AI adoption rates. Looking at our progress year to date, more than 90% of ePamers have completed their mandatory AI literacy education, and approximately 95% of our engineers have completed foundational AI education. Additionally, our internal business processes are increasingly benefiting from AI-driven efficiencies. As you can see with the recent launch of EPAM AI Run Transform, which includes next-generation AI-managed services and EPAM Agenting QA, we are programmatically expanding new offerings and highly specialized capabilities, often in conjunction with our clients and strategic partners to help clients transform themselves into AI-native organizations. Our efforts are being recognized by our partners, as well as industry analysts, such as IDC Marketscape, who have positioned EPAM as a leader across experience engineering, custom build, and AI consultancy capabilities. Further, Glassdoor ranked EPAM number seven on their 2025 best-led companies list, along with Forbes, who recognized EPAM as one of the world's best employers, for first time being recognized across both. We will dive into the details a bit later in the call, but first I would like to provide a quick update from my early days as a CEO and my recently completed work tool. Over the past quarter, I met in person with many senior client executives, ecosystem partners, and of course, many, many EPAMers from all around the world. I experienced firsthand the high level of optimism and appetite for EPAM-proven quality of execution across our global, deeply specialized talent base. I am pleased with our continued and growing ability to assure higher levels of performance across a much more globally diversified footprint than ever before. But our work is not done. AI presents a permanent sea change in our industry and across our clients' businesses, driving the need for investment in modernization, data and cloud foundations, and critical AI native skills. EPAM is positioned to lead both the foundational and the transformational programs demanded by AI as clients need support from trusted partners who can reliably deliver through the need to simultaneously balance costs and productivity with an increasing need to reinvest, innovate, and keep pace with change. In line with Amara's law, we believe that as productivity grows and as costs to develop software declines, complexity will significantly accelerate, pushing the bleeding edge and resetting the boundaries of what is possible and triggering a flywheel effect of demand for EPAM's unique breed of capabilities and global scale. We believe that as complexity rises, so does enterprise risk, raising the importance of highly advanced engineering proven enterprise-grade quality execution. While we have seen the flashy white coding video shorts and headlines, in our view, the absolute need for true engineering expertise, risk management, fault tolerance, and reliability are overlooked and underestimated. Now, let's turn to some Q3 highlights. In Q3, we delivered another quarter of double-digit revenue growth. including very strong year-over-year organic constant currency revenue growth of 7.1%, which exceeded our expectations set a quarter ago. This marks our fourth consecutive quarter of positive year-over-year organic constant currency growth, reflecting a steady build of improvement and strong execution in our core business as we continue to ramp our AI-native services. Our broad-based growth momentum carried forward in Q3 with five out of six verticals growing year-over-year. Notable standouts included emerging verticals, financial services, and software and high tech. We also saw solid improvement in life sciences and healthcare, along with consumer goods, retail and travel, while business information and media remained steady. Geographically, all three regions delivered strong year-over-year growth. We continue to add net organic headcount across key locations such as India, Central Eastern Europe, and South America, with increases partially offset by ongoing optimization in select pockets that we have discussed previously. Now, turning to demand environment. AI continues to trigger incremental demand and is driving positives in our pipeline globally. The maturity of our top 100 clients remains highly engaged in AI-native initiatives. Clients engage EPAM to build out their data platforms and modernize their cloud, often redirecting work from other partners who successfully sold advanced capability but failed to deliver it. Overall, we continue to see improvement in the demand environment as we're seeing a continued upshift in investment towards everything that supports AI adoption and its deployment to production. This is where reputation for trusted quality and execution remains a significant competitive advantage and the key enabler for us to continue to maintain our pricing integrity. We gain traction with our ongoing client-centric initiatives, while at the same time continuously strengthening and optimizing our global delivery footprint, which is enabling us to better meet market demand. When you look across the AI project lifecycle, from proof of concepts to medium-sized use cases and the large-scale project in production, we're seeing a continued shift in the volume of project towards medium and large-sized projects. Many making use of our own IPs, such as Dial, AI Run, and other components, both open source and proprietary. Of the hundreds of individual AI-native projects we had active in Q3, between 60% to 70% have expanded into larger programs from the origination as proof of concepts, illustrating our ability to scale and deliver AI-native solutions in production. We are also seeing positive signs at the top of the funnel, enabling us to replenish our pipeline or some projects come to a natural close. Our hard work and continuous effort To further position EPAM as a leader in AI native services is serving us well, as our pure AI native revenues continues to grow nicely with a third consecutive quarter of double-digit sequential growth. And of course, as we have discussed before, the foundational services necessary to make AI work are a core fundamental to our business. In both our data and cloud practices, we saw outsized growth in Q3 compared to the rest of the business. which is incremental and highly connected to the momentum we are seeing with our pure AI native revenues. Now turning to our AI-run transform and agent QA announcements. First, a couple of core beliefs to frame our evolving AI approach. Number one, AI is not just a technology. It's a transformative force that is already redefining how enterprises innovate, operate, and create value in the future. And in this context, advanced engineering, bleeding edge, AI technology, and toolsets only with deep knowledge across the software development industry and new product lifecycle are the core competencies that will drive the most tangible AI outcomes. This will become even more evident as we see further rise of AI in the global and regional lineups of players in both Western markets and broadly across APEC, LATAM, and Middle East. Number two. We believe in building AI responsibly with trust, transparency, governance, and measurable outcomes at the core. AI must deliver real outcomes with proper traceability and risk management. Number three, we believe we are creating a new AI native engineering profile or North Star when it comes to talent development strategy, embedding AI, intelligence, and orchestration of agents directly into the development process. Over time, this role becomes the architect of AI native products and experiences, augmented by agents to expand the scope of what teams can achieve in the future. And finally, AI investments are an intense race. Our approach is to invest in accelerators, tooling, and people who help us deliver reliable outcomes on the promise of AI. We do not sell foundation AI in a silo. Instead, we use our expertise and advanced IP to sell and deliver with AI, packed with proven quality and execution that guarantees outcome and value realization. This is true across our entire IP portfolio and is shaping into a structural blueprint we are calling AI run. AI run transform represent or unified AI strategy that harmonizes or go to market notions with better activation across strategy and consulting, frameworks and methodologies, talent and advanced tool sets. We have two key offerings, AI innovation business transformation and AI native engineering transformation. The first offering is focused on optimized expand run across AI industry solutions, AI horizontal solutions and AI product design and experience. The second offering is focused on mastering the SDLC, advancing the agentic delivery lifecycle known as ADLC, and preparing for product development lifecycle known as PDLC. This encompasses AI native delivery, AI-driven modernization, and PDLC agentic solutions. We will be talking more about these offerings in the quarters to come. Or AI-run blueprints and compasses or AI frameworks and include our AI 360, AI Factory, AI-run SDLC, and AI adoption and education frameworks, which are agnostic and provide critical flexibility, which help EPAM deliver more enterprise-grade AI solutions at scale for our clients. Or AI-run talent, houses, or verticalized industry teams, ontologies, and accelerators. which includes strategic advisory data models, process modeling, and solution build with partners. Most importantly, this is the scaffolding we are using to define the forward skills of the future and the paths for upskilling people and organizations. And finally, our AI-run tools combines our best-in-breed IP assets such as ePanDial and AI Run Platform with our strong AI data and cloud ecosystem partner solutions and many available today on our partner marketplaces. You may have seen we also recently announced one of these tools, Agenti QA, which bridges the gap between automated and manual testing, enabling clients to move faster by reducing lead times and costs. What's impressive is that our agentic QA is shown to be 10x more efficient than manual testing, driving a 50% reduction in manual efforts and a 30% reduction in testing costs, covering 90% of the manual checks performed on standard releases while ensuring a high degree of quality and precision. Now turning to some client examples to illustrate some of our progress. This past quarter, we announced several collaborations with both new and existing clients, which illustrate not only evolution of our client proposition, but also how EPAM is able to systematically address innovative needs while offering real value. A few notable examples. Agenting customer service breakthroughs are real with Einz und Eins, a major provider for telecommunications, cloud, and internet services in Germany. By deploying EPAM's AI-run transformed Blueprint and leveraging Microsoft Azure, this client launched AI voice agents that handle over 100,000 calls weekly, with the first agents going live under three months into production. Two, our collaboration with Hugo Boss and our Empathy Lab studio is reimagining what it means to be a sports fan in the age of spatial computing. This innovation is shaping the next generation of motorsport fandom and lifting the bar how luxury fashion, sport, and technology intersects. We are blending our deep expertise in groundbreaking user experiences with gaming, fan engagement, advanced data, and analytics, and working with our clients to help package the 2025 Stevie Award winning solution for the AI native age. Three. Finally, we are putting EPAM and Neoris together in a way that goes beyond simple synergies. For a UK headquartered global biopharmaceutical company, EPAM, with the addition of Neoris, recently became a global strategy supplier across a broad range of transformation pillars. A key joint win for us is in helping the client to build out a modern data and AS center of excellence, which spans across multiple programs in new locations, including Iberoamerica. The close or operating momentum is strong. We are pleased with our performance throughout the year and continue to work on improving profitability. We are confident in the upward trajectory we have been working hard to build and sustain over the past several quarters and feel good about our Q4 positioning, which has improved over the past 90 days. We are focused on what's right in front of us and finishing 2025 strong, which we believe should set up a solid foundation to build upon in 2026 as we continue to work on expanding our organic constant currency growth rate. We are prioritizing client-centric disciplined execution while bringing a new level intentionality on building verticalized and differentiated horizontal go-to-market offerings. Looking ahead, We see our investments in upskilling, differentiated AI playbooks, IP partnerships, and new lines of services, such as agentic business process outsourcing, helping us to further capture new demand. Jason, over to you.

Thank you, FP, and good morning, everyone. In the third quarter, EPM generated revenue of $1.394 billion. a year-over-year increase of 19.4% on a reported basis, exceeding the high end of our Q3 revenue guidance. On an organic constant currency basis, revenues grew 7.1% compared to the third quarter of 2024. We delivered another consecutive quarter of very solid year-over-year organic constant currency growth, reflecting ongoing steady execution. Our growth in the quarter was driven by a continued shift to quality and accelerating momentum across our AI-native data, cloud, and AI foundational initiatives. We're making early headway with the launch of our AI run transform strategy, which complements our underlying growth momentum, positioning us well to continue to capture demand. Our outperformance in the quarter was broad based. We also recently announced a new $1 billion share repurchase program. The underlying strength of our business and continued momentum, coupled with our efficient free cash flow generation and a strong balance sheet, enable us to take advantage of the current market dynamic while returning cash to shareholders. Moving to our Q3 vertical performance, five of our six industry verticals posted year-over-year growth, with four of the six growing double digits. Nearest and first derivative continue to contribute substantially to our financial services and emerging verticals. Financial services once again delivered very strong growth, up 32.7% year-over-year on a reported basis, with 6% organic growth in constant currency. Growth came from banking, asset management, and insurance clients. Software and high tech grew 19.1% year-over-year, driven by strong execution and broad improvement across large clients. Life sciences and healthcare increased 11.8% on a year-over-year basis. Revenue growth in the vertical continues to be driven primarily by clients in life sciences and med tech. Consumer goods, retail, and travel delivered 9.9% year-over-year growth, marking a notable rebound relative to prior quarters. The vertical also delivered solid sequential growth, which was driven by growth in consumer products and retail. Business information media was steady and delivered flat year-over-year revenue performance. Our emerging verticals delivered another quarter of very strong year-over-year growth of 38.9%, with New Yorkers continuing to contribute to the vertical's performance. On an organic constant currency basis, growth was 15.1%, primarily driven by ongoing strength in energy and materials. From a geographic perspective, Americas, our largest region, representing 58% of our Q3 revenues grew 16% year-over-year on a reported basis, and 3.9% in organic constant currency. AMEA, comprising 40% of our Q3 revenues, increased 24.9% year-over-year and 11.8% in organic constant currency. And finally, APAC, making up 2% of our revenues, increased 17.7% year-over-year and 14.2% in organic constant currency. Lastly, in Q3, revenues from our top 20 clients grew 10.2% year-over-year, while revenues from clients outside our top 20 increased 24.4%. Moving down the income statement, our gap gross margin for the quarter was 29.5% compared to 34.6% in Q3 of last year. Non-gap gross margin for the quarter was 31% compared to 34.3% for the same period a year ago. As a reminder, the prior year period benefited from a cumulative catch-up related to the Poland R&D credit. The third quarter of 2025 includes a single quarter's benefit of 13.2 million. Additionally, for Q3 2025, we recognized higher variable compensation driven by expected stronger second half performance. Combined with ongoing lower profitability associated with recent acquisitions, both contributed to the little gross margin level. GAAP SG&A was 16.8% of revenue compared to 17.7% in Q3 of last year. Non-GAAP SG&A in Q3 2025 came in at 14.1% of revenue compared to 14% in the same period last year. Gap income from operations was $145 million or 10.4% of revenue in the quarter compared to $177 million or 15.2% of revenue in Q3 of last year. Non-gap income from operations was $222.8 million or 16% of revenue in the quarter compared to $222.9 million. or 19.1% of revenue in Q3 of the previous year. Non-GAAP income from operations in Q3 2024 was similarly impacted by the Polish R&D credit. Our GAAP effective tax rate for the quarter came in at 25.6%, and our non-GAAP effective tax rate was 24.1%. Diluted earnings per share on a GAAP basis was $1.91. Our non-GAAP diluted EPS was $3.08 compared to $3.12 in Q3 of last year, reflecting a 4 cent decrease year over year. In Q3, there were approximately 55.8 million diluted weighted average shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q3 was 295 million compared to 242 million in the same quarter of 2024. Although seasonality always has a positive impact on Q3 cash flow, cash flow from operations in a quarter exceeded the impact of typical seasonality, resulting in the highest level of quarterly cash flow from operations in EPAM's history. Free cash flow was $286 million compared to free cash flow of $237 million in the same quarter last year, and also represented an all-time high. Cash and cash equivalents were just over $1.2 billion as of the end of the quarter. At the end of Q3, DSO was 75 days compared to 78 days for Q2 2025 and 74 days for the same quarter last year. Share repurchases in the third quarter were approximately 493,000 shares for $82 million at an average price of $167 per share. Moving on to operational metrics, we ended Q3 with more than 56,100 consultants, designers, engineers, and architects. reflecting total growth of 17.5% and organic growth of 6.4% compared to Q3 2024. In the quarter, we added approximately 300 net delivery professionals. Our total headcount at quarter end was 62,350 employees. Utilization was 76.5% compared to 76.4% in Q3 of last year and 78.1% in Q2 2025. Now let's turn to guidance. Before moving to the specifics of our 2025 and Q4 outlook, I would like to provide some thoughts to help frame our guidance. Based on the strength of our Q3 and solid Q4 visibility, we are expecting a strong Q4 exit, ending the year with higher organic constant currency growth rates than we forecasted just 90 days ago. At the same time, we are not expecting to see a significant release of excess client budgets, and typical seasonality will also have an impact. Compared to Q3, Q4 is negatively impacted by a higher number of holidays, vacations, and potential furloughs. As a reminder, we acquired New York's first derivatives in Q4 2024, in November and December, respectively. As per our usual reporting practice, revenues from these acquisitions will move from inorganic to organic in Q4 2025, as contemplated in our previous guidance. Based on a better-than-expected performance in the second half, coupled with improving visibility into Q4, we are raising the bottom end of the range for 2025 full-year organic constant currency revenue growth and now expect the midpoint of the range to be 4.6%, an increase from the guidance we gave 90 days ago, which was 4% at the midpoint of the range. While driving top line revenue growth, we also remain focused on improving profitability. While there is more work to be done, we've been pleased with the results of our ongoing focus on improving account profitability, which is evident in our improved profitability outlook for Q4 and full year 2025. Lastly, we continue to work on improving utilization and will continue to reduce isolated pockets of bench while adding that headcount to support growth. 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. Moving to our full-year outlook, we now expect revenue to be in the range of 5.430 to 5.445 billion, reflecting a year-over-year growth of 15% at the midpoint, with inorganic continuing to contribute approximately 9.1% for 2025. Based on current spot rates, foreign exchange is now expected to have a positive impact on revenue growth of 1.3%. We expect year-over-year revenue growth on an organic constant currency basis to now be 4.6% at the midpoint. We expect gap income from operations to now be in the range of 9.4% to 9.7%, and non-gap income from operations to now be in the range of 15 to 15.3%. We expect our gap effective tax rate to now be 25%. Our non-GAAP effective tax rate, which excludes the impact of benefits and shortfalls related to stock-based compensation, will continue to be 24%. For earnings per share, we expect the GAAP-diluted DPS will now be in the range of $6.75 to $6.83 for the full year. And non-GAAP-diluted DPS will now be in the range of $11.36 to $11.44 for the full year. We now expect weighted average share count of 56.2 million fully-diluted shares outstanding. Moving to our Q4 2025 outlook, we expect revenue to be in the range of 1.380 to 1.395 billion, producing a year-over-year growth of 11.1% at the midpoint of the range. Our guidance reflects an inorganic contribution of 4.3% with a 2.4% positive FX impact during the quarter, producing a 4.4% organic constant currency growth rate at the midpoint of the range. For the fourth quarter, we expect gap income from operations to be in the range of 10 to 11%, and non-gap income from operations to be in the range of 15.5 to 16.5%. We expect our gap effective tax rate to be approximately 24%, and our non-gap effective tax rate to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $2 to $2.08 for the quarter, and non-GAAP diluted EPS to be in the range of $3.10 to $3.18 for the quarter. We expect a weighted average share count of 55.1 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q4. Stock-based compensation expenses are expected to be 44 million. Amortization of intangibles is expected to be approximately 18 million. The impact of foreign exchange is expected to be $1 million. Tax-effective non-GAAP adjustments is expected to be around $16 million. We expect a tax shortfall related to stock-based compensation of around $1 million. Severance driven by our cost optimization program is expected to be around $10 million. And one more assumption outside of our GAAP to non-GAAP items. We now expect interest and other income to be $3 million for the remaining quarter. We remain focused on driving revenue growth and enhancing profitability. We are confident in our strong positioning as we enter Q4. We will continue to run EPAM efficiently, maintaining our focus on both growth and profitability throughout the remainder of the year. Thanks again to all our employees for their dedication and focus on serving our clients and driving results for EPAM. Operator, let's open the call for questions.

At this time, I would like to remind everyone, in order to ask a question, press star 1. on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Please limit to one question and one short follow-up question due to time restrictions. And your first question comes from the line of Maggie Nolan with William Blair.

Hi. Thank you for taking my question. So I wanted to start with the push that you mentioned into agentic BPO. Do you intend to enter that space with proprietary products or can you talk about maybe build versus buy decisions from clients for processes and then just like the ability to automate this, how that may be or may not be any different from the robotic process automation wave? that we saw several years ago that ended up being sort of difficult to accomplish given variability of processes.

Good morning, Maggie. Thank you for the question. Actually, it's a really interesting subject. It's early days for us. As you know, we made two acquisitions in this space. First was first derivative where it had a line of business, which was in business services. That's where we really went after that acquisition with a piece we could automate with agentic AI the key by theme crime elements of their business. The second acquisition was Linksys, which was this year. It was a small BPO to really understand the space itself. So going back to what we are seeing, we are seeing our clients are keen to try out, but it's early days. We are using EPEM build platforms itself in order to really deliver the automation. But it's very different than RPO in the past. What we're trying to do is we're trying to experiment on simple and more complex agentic flows, which requires high level degree of engineering going beyond simple RPO or simple RPA capabilities. We don't know yet where the market will go. We don't know where it's heading. Right now, we are seeing a big momentum from the clients which we are talking. But it's a very small sample which we're talking about. It's early days for us.

Your next question comes from the line of Brian Burgin with TD Cowell.

Hey, guys. Good morning. Thank you. I wanted to ask about, as we think, you know, on your 4Q exit rate considerations and think beyond that as we move forward to 26, how we should be thinking about growth potential. And specifically, if you can kind of comment on the impact of bill days and furloughs and things like that as you go through 3Q into 4Q and then into 1Q, as well as just any other important factors, such as how growth in the U.S. and F.B., may affect your organic growth rate as you fold those in going forward.

Hey, Brian, this is Jason. I think most people know that there's a negative impact from a seasonality standpoint if you look at sequential Q3 to Q4. And so that impact is kind of three things, which is one, it's fewer bill days, you've got more vacation, and then you also have a higher degree of furloughs. So all of those things produce some tens of millions of kind of headwind on sequential growth Q3 to Q4. When I look at the performance of our business throughout 2025, Q1 to Q2, Q2 to Q3, and Q3 to Q4, if you adjust for foreign exchange and you adjust for sequential factors, our sequential growth rate has actually been surprisingly consistent. The other thing I would add is you've got probably a little bit of headwind on foreign exchange sequentially Q3 to Q4. Just to sort of maybe answer a question that you hadn't asked, it's that our guide at the midpoint of the range contemplates, I think I said 4.4% organic constant currency growth. If we operate at the high end of the range in Q4, we'd be at about 5% organic constant currency growth.

Your next question comes to the line of Jason Cooperferk with Wells Fargo.

Good morning, guys. Thanks for taking the question. So the organic constant currency in the quarter, obviously the 7%, I think, kind of best in class now among the peer group. But just to kind of build on the last question, I guess, can you kind of break down the sources of what looks to be some deceleration in the Q4 on a year-over-year basis? You just walked us through the sequentials, Jason. We just want to make sure we have the puts and takes right there, and then how we should just at least directionally be thinking about where the organic growth can go in 26 versus call it a 4.5% exit rate for this year.

Thanks. Okay. So from a year-over-year standpoint, I think maybe the biggest difference is we see clients continue to make investments and move forward on programs. What we're not seeing is a release of excess budget at the end of the year, the way we saw in Q4 of last year. And so I think that is probably the biggest difference. Clients continue to invest, but there just isn't, you know, a big kind of opening up the wallet at the end of the year. From a demand standpoint, it still feels broad-based. And it still feels, again, like we're continuing to see growth in financial services, high tech. and also kind of the emerging energy portion of the portfolio. FBU, thoughts on 2026? I think we believe that organic oil trade will be higher than this year.

We see the momentum. It's driven by very much, as we mentioned, some of the AI and AI fundamental build-out, the foundational build-outs. And we see the pipeline for 2026 building very nicely at this point in time. It's early days. but we see positive signals.

Your next question comes from the line of Jonathan Lee with Guggenheim Partners.

Great. Thanks for taking my questions, NFB. Welcome to the first of hopefully many earnings calls as CEO. It's interesting to hear that clients are redirecting work from partners who fail to deliver, effectively highlighting that you're winning share from peers. Can you help size that contribution and unpack your competitive advantage here versus your peers? And how do you expect to maintain that gap going forward?

Jonathan, thank you very much for the kind words. I don't think we can size it yet, right? I don't think we can size it how much work is actually redirected to us. We are seeing that in major programs, competitors who failed to deliver. Now clients are redirecting the work to us. And the reason why, because it's actually delivering these solutions in enterprises much more difficult than what it seems on a YouTube short or a TikTok video. You need really deep engineering skill set capabilities across the foundation elements on data, on data platforms, on cloud, or enterprise platforms. platforms themselves or actually modernization in order to deliver on that. You also need to consider the cost. You need to cost engineer because web stop-ups are quite expensive. You need to consider risk elements and actual reliability and performance. All of this requires deep engineering skill sets. So how are we going to keep our advantage? Because we are investing in our people. We are investing in our in our engineering talent, investing into tooling, methodologies, investing into the playbooks, and we're actually trying it out and experimenting on ourselves. That's why we believe being the customer zero, EPEM being the client zero, is so important for our future.

At this time, I would like to remind everyone, please limit to one question and to one follow-up. And your next question comes from the line of Jim Snyder with Goldman Sachs.

Good morning. Thanks for taking my question. FB, welcome. You know, in some of your public commentary and interviews recently, I think you've kind of struck a chord about focus on costs for the company. Can you maybe give us a sense about how that focus on cost is being manifest across the company and how that might materialize in terms of SG&A or other kind of cost savings or margins over time. Thank you. Thank you very much.

So I think in the last recent months, I was talking about the focus on pyramids. We focus on actually balancing the pyramids. When we diversified our delivery, we actually went into certain geographies. into certain locations, we were not able to really create the ideal pyramid structure. Now we're working on that and we're trying to rebalance the pyramid. Rebalancing the pyramid is actually allowing us to really focus on and bring down some of the costs. Second is, as a CEO, I'm putting more emphasis on profitability on the deals, emphasis on the capabilities to actually deliver profitable projects, profitable growth, which really manifested for us selecting the right clients, being more picky, more selective on the deals that we take, which we can only do because our demand is changing and the demand is up for us. And that's what you are seeing the effect of that.

Yeah, I think I'll add a piece on this as well. So, you know, as FB indicated, With that focus, we are seeing an improvement in account margin in the second half of the fiscal year. And I think probably what is most notable is throughout the year, we've been talking about 15% midpoint of our profitability range. And at this time, we feel pretty strongly that we'll operate in the upper half of the 14.5 to 15.5 range. And as we talked about in my prepared remarks, we expect to operate in the 15 to 15.3. And that is a result of a number of things. including a better account margin as we work through the fiscal year.

That's helpful. Thank you. And then maybe as a follow-up, you gave many data points relative to your AI project traction and increasing size of deals in AI. Can you maybe give us or level set any kind of quantification in terms of the size of your average AI project today and then where you hope it may go in, say, two years?

I think our pre-pandemic mark, we actually kind of explained how projects are evolving moving from proof of concepts to medium to large scale engagements so it's an evolving sense we have hundreds of engagements right now and most of most engagements typically start on a small side of the proof of concept and as they're scaling up some of them gets into the tens of millions of dollars range as we go forward we do see most of our top 100 clients are actually engaging with EPAM with large AI initiatives, which looks like an AI initiative. It doesn't mean that right now we are executing large AI projects, but they have large AI initiatives. We are hoping that most of our revenue will be coming in the coming years from these initiatives, either because of AI transformation, either because of introducing AI, or creating the foundational elements for the AI deployment, which is right now the main driver for our business.

Thank you.

Your next question comes from the line of Jamie Freidman with SESQ HANA.

Hi. Good morning. Epi, some of your comments were considerably more technical than what some of us are accustomed to. And we appreciate that because that's where the industry is going. So we'll adjust. I wanted to ask specifically about agentic delivery, lifecycle management. Yeah, that one. So in terms of like the vectors or phases that the customers need in order to proceed with agentic delivery, How would you describe the chronology of that aspect and the relative size of that one and delivery lifecycle relative to some of the others that you mentioned? Thank you for the question. So what we need to really start considering is when clients were just delivering software products, they still had to master SDLC cycles. Most clients

Most of our clients and most of the industry haven't really fully mastered the SDLC itself. When you start deploying agentic capabilities and trying to automate large scale of processes and works using agentic AI capabilities, you need to really follow an agentic development process, agentic life cycle. And it is also complex or even more complex compared to SDLC. Not as simple as it looks in order to make it really work in the enterprise, right? So I know that everybody believes, and keep believing that this is a simple step. And agitating development lifecycle is as complex as any SDLC lifecycle, and you need to really master it. And this is going to, we think, is going to be a bigger problem because you are going forward than mastering SDLC. The reason being, is now you're no longer just touching on certain elements of your software stack, but now you really need to consider how you automate processes which you never automated before. You are going to step into automating previously very manually intensive components, and automating those are very, very complicated and difficult and error-proof process itself. As you're migrating in this, it's not just you need to upskill your teams who are doing it. And it's no longer just engineers who we're talking about. You need to also introduce the right tooling, the right processes across the enterprise. And if you want to really get the benefits, you need to also start considering not just the element of can I actually automate this, But during automation, I really also want to achieve a certain ROI. Because if the automation results into a higher cost, then you kind of deliver on your promise. So we think this is a large shift. It is not going to be a very quick one. It really requires tremendous amount of work to make it happen. And companies will have to partner with organizations such as ePath. actually do that in what we call an AEI factory model where you introduce the foundation, build a foundational component, build the right process in place, the right governance itself, and then you go process by process and building the agentic operations.

That's great. That's a great answer. Thank you. I'll drop back in the queue.

Your next question comes from the line of David Grossman with Stifle.

Good morning. Thank you. You know, just kind of looking at high level at the business and how it's been performing, you know, it looks like the revenue per head is up for the first time in three quarters despite, you know, flat utilization. So maybe you could just talk a few minutes about what's going on under the covers here. Is it geographic mix? You know, where you're delivering from? Is it you know, perhaps growth outside the top 20, which has been very strong and historically a pretty good leading indicator of, you know, kind of new business activity and funnels. So maybe you could just illuminate what's happening there.

Hey, David, good question. And, you know, one of the things about the revenue per headcount number is that there is a lot of, I guess, what I'd have to call noise in it. And so utilization, as you pointed out, is one of the factors. Point of change actually impacts as well. And so it is a number that I think most people will look at and try to sort of draw a conclusion from, you know, how much price uplift is a company getting as they increase revenue per headcount. But I think there's more noise in it that I think people realize. Okay, but as we look at our number, and I subtract out some of these factors that I just referred to, what we're really seeing is we are getting somewhat better price than we've gotten in the past. Some of that is probably mix-related. Again, I would say more kind of customer mix. And as we talked about, it's consistent with the account margin improvement that I referred to earlier in the call. And so, again, some of it is foreign exchange, but some of it really is actual price improvement.

And when did the contract profitability – is this the first quarter that it really inflected, or has it been inflecting and just not visible?

Yeah, I think we've been working on it throughout the year. I think we talked about it a fair bit last quarter. And so it's all the things that drive that, including pyramid. And again, the pyramid that will probably have more of an impact on 2026. And I think it's just really beginning to probably show up in this discussion as we see both solid profitability in Q3 And what we're now expecting is much better profitability in Q4 than we originally anticipated 90 days ago. And so, again, some of that is a count profitability improvement. And I think, you know, as I said earlier, you know, I was very convinced that we were going to operate at about 15% this year. And now, as you heard me, you know, we're talking about operating in a 15 to 15.3% range. Got it.

All right. That's it for me. Thank you.

The next question comes from the line of Brian Keene with Citi.

Hey, guys. Congrats on the solid results. Jason, let me just follow up on that discussion. What does that mean for headcount growth going forward in this model and maybe even revenue per head going forward? How should we think about that as we get into the fourth quarter and into next year? And then my second question is just the organic growth of FD and EORUS. Maybe you can help us with that. Thanks.

Yeah, so you would, you know, you'd expect us to see us add headcount in Q4. You know, it'll be similar to what we've been doing throughout the year, where we do have some pockets of excess bench that we continue to kind of reduce, and we'll be making net additions globally. And so you'll see an increase in headcount in Q4. You know, from an FD and Neoris standpoint, you know, as we talked about very early in the year, the lead customer at Neoris, was impacted early by U.S. tariffs and kind of generally kind of political and economic instability in Mexico. And so we definitely see a decline in that customer on a year-over-year basis. And so it probably has a modestly negative impact on organic constant currency growth. But both of those businesses have kind of stabilized at this point, and we think there's a lot of strategic benefits. Again, particularly with that lead customer from New York, it has a modestly negative impact on our, again, it comes to currency growth.

Okay, that's helpful. And then any comments on revenue per head on what that might look like going forward?

You know, so it's always, you know, utilization and foreign exchange really moves the needle on this one. So it's difficult for me to tell. What I will just do is comment on rising revenues. What we do think is that pricing is better at this time than it was last year at the same time. And, you know, maybe it hasn't improved a lot over the last 90 days, but it is a somewhat better pricing environment. And we are expecting modest price increases as we enter 2026. Again, maybe not at the level that we would have gotten four or five years ago, but, you know, in kind of the low single digit kind of range.

Thank you.

Which is a good requirement, and certainly 2023 was, so 2024.

Yeah, no doubt. Thanks so much.

Next question comes from the line of Sean Kennedy with Mijuho.

Hi, good morning. Very nice results. Great to see the growth momentum in the business. So I have a follow-up on the AI project. I appreciate it's still early, but how does the AI work differ from EPAM's non-AI projects in terms of duration and profitability now? And how do you think that could evolve in the future? Also, are you seeing certain clients in terms of size and industry engage in AI projects more than others? Thank you.

Sean, nice meeting you. So, I think... Projects, I don't think it's fundamentally different in AI. It requires the same engineering discipline, engineering capability. It might have more scoot towards data or scoot towards data platform or the capability around AI. So it requires a little bit different engineering skillset, different understanding. On the other hand, it also requires a combination of business domain understanding. And really, you need to combine it because now you are start automating processes which were not automated before. So building the platform is probably very similar to what we've done in the past. Preparing the foundation, cloud migration, data platform build out, data engineering, or building, modernizing the back ends. This is very typical. for EPAM, but when you really start automating new processes, that's where domain capabilities, select capabilities and understanding of how to automate that process and understanding the specific industry is where needed. Profitability-wise at this point, probably similar than others, but I think There is a clear potential for better profitability as you are potentially not just delivering the projects maybe on a time and material basis, but maybe you can export alternative business models too. And I'm hoping, of course, that with this kind of projects we are able to charge probably higher rates to begin with.

Great. Appreciate the color. Thank you.

Your next question comes to the line of Darren Peller with Wolf Research.

Hi, thanks. This is Paul Obregdon for Darren. Jason, I appreciate all the color on headcount. Just curious, longer term, if you think the greater usage of AI will perhaps impact the need to hire in any way, and just to what degree as you increasingly embed AI internally, is that perhaps allowing for lower delivery requirements?

I think I'm going to turn that one over to FP.

So we continue to believe that although AI does create efficiency against your demand increase will outstrip any kind of efficiency gains what we are seeing. believe that going forward basis, we continue to hire, continue to grow. Our organization will grow. We need to bring in maybe differently trained teams, and we're also bringing on, anticipating your next question, we're going to continue bringing in junior engineers because with the right training, with the right background, with the right education, we do believe that the balance pyramid is the best serving, not just our clients,

Your next question comes in line of James Fawcett with Morgan Stanley. And your line is open.

Hey, guys. How are you? It's Antonio on for James Fawcett. I wanted to ask more on back to the like AI part of the equation. Just on your build versus buy strategy, I know that you had touched on that earlier, but I'm just trying to get a sense of, you know, like, what is the growth, like, of your, like, Gen AI, like, revenue? Yeah.

Yeah, a little bit hard for me to tell exactly what you're looking for there, but what we continue to see is this strong sequential improvement in revenues for what we call the Gen AI native, and so that continues to be kind of double-digit sequentially. We saw again here in this quarter. And then as FB's been talking about, and maybe he wants to add some color, is that we continue to see strong growth in what we call the foundational side, which is the cloud modernization and data in that business.

So we continue to see lots of demand coming in. As Jason mentioned, the AI-native revenue is growing sequentially, very strongly, with double digits. We are seeing more clients building more solutions and actually taking advantage of AI. A software engineering feature or a capability, a functionality, because of functionality, the cost of it is decreasing. building more. So we believe that people going forward basis, they will build more than buy. It's actually the equation of, or the percentages will start screwing towards the build versus the buy side. So that's our, that's our thesis and we are seeing evidence around that.

Got it. Got it. That's helpful. And then as a followup, I wanted to ask on the software and high tech vertical, What are some of the key drivers for that growth? I know it's grown pretty nicely sequentially. Any one-time factors there, or is this just a broadening out of demand there?

Yeah, I mean, we've had a few large customers that are growing nicely. We've got one client that particularly has a large kind of platform program that they've been investing in. You won't see the growth rate stay like that forever in that space. But we've been pleased with the ongoing revenue generation from the high-tech portion of the program.

Great. Thank you, guys.

At this time, there are no further questions. I will now turn the call back over to FB for closing remarks.

Thank you very much for attending my first earnings call. Really, I would like to thank all the EPM employees for delivering a successful quarter, and we talk next time in 90 days approximately. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.