EPAM Systems, Inc. (EPAM) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the EPAM Systems Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Farrell Kramer from the Investor Relations team. Thank you. Mr. Kramer, you may begin comp.

Thank you, operator, and good morning, everyone. By now you should have received the copy of the earnings release for the company's fourth quarter and full year 2012 results. If you have not, a copy is available on our website, www.epam.com, together with our supplemental data sheet. The speakers we have on today's call are Arkadiy Dobkin, CEO and President; and Ilya Cantor, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. I would now like to turn the call over to Arkadiy Dobkin. Please go ahead, Arkadiy.

Thank you, and hello, everyone. 2012 was a year of significant accomplishments for EPAM. In our first year as a public company, we increased revenues by 30%. We increased adjusted net income by 22%, while continuing to make significant investments for future growth including the addition of our 1500 IT professionals. And we completed 2 strategically important acquisitions: Thoughtcorp in May and Empathy Lab in December. And we continue to execute on our strategy to become a world-class provider of complex software engineering solutions and emerging technology services. Last year on our first quarter and our first post-IPO earnings call, I talked about the key elements of our long-term growth strategy. And today, I am pleased to review our progress. First, we said we would continue building on our culture of innovation, technology leadership and process excellence to develop strong competencies that would help us deepen and extend our services into key vertical markets. Let's talk a bit more about the subject because it's a key driving force to our growth. During the last 12 months we invested significantly in today's most demanding technology domains such as Enterprise Mobility, Cloud deployment, Big Data, Enterprise Content Management, Business Intelligence and eCommerce. The results of these efforts were recognized by a number of independent publications in the industry on [indiscernible] . For example, Zinnov, a leading globalization and market expansion advisory firm named EPAM as a global R&D and product development services leader in the enterprise and consumer software markets. As well as the Enterprise Mobility and Cloud Verticals. Global Services Magazine included EPAM in the top 10 leaders of its global product development category within its Global Services 100 ranking. Finally, just this week, Everest Group included EPAM in its major contenders category within its key metrics which recognizes and ranks capital market service providers according to scale, scope, demand investment and market success and delivery capabilities. Everest also highlighted EPAM as a star performer, which is a rare classification shared only with 2 other major players. Most importantly, recognition of our achievements were clearly and publicly validated by many of our top accounts. Let me share just a few of those which we are allowed to disclose. Hotels.com, which has been with us from 2007, confirm our status as a strategic delivery partner based on our deep understanding of the travel industry and our tailored agile approach. Chevron, a new client, agreed to co-present with us at the Gartner Strategic Partnerships Summit in Orlando to share how the world's leading integrated energy companies utilize value-added services from their key partners. Sephora Americas, the North American division of the world's leading retailer of cosmetic and beauty products, selected EPAM to help launch the next-generation version of Sephora.com, a new resource that Sephora its social and mobile makeover, which together with new iPhone and iPad applications complete the solution to provide the best-in-class online shopping experience. TriZetto Corporation, a healthcare IT company, with solutions touch over half of the U.S. insured population and reach more than 200,000 care providers, was looking for a partner that has strong product engineering capabilities, and selected EPAM because of our track record coupled with our deep experience in Microsoft technologies, BI/Big Data and Agile development. These are just a few examples of why a company select EPAM. The common thread is that they come to us to help meet an ever-increasing mandate, to build new sophisticated solutions that rely on a number of emerging competencies in technology platforms, while still reducing time to market and managing course. This contributed to revenues from 3 out of our 4 verticals growing more than 20% in 2012 and overall revenue growth of 30%. The second key element of our long-term growth strategy that we discussed a year ago said that we were in position to take advantage of the growing demand for qualitative services in Europe and we did. Our European business grew almost 45% in 2012 and accounted for 35.8% of our total revenues up from 32% last year. Third, we talked about the importance of attracting and retaining a quality workforce. Again, in 2012, at approximately 11%, our attrition rate was amongst the lowest in the industry. Fourth, we posted a 27% increase in revenues from ISV or independent software vendors. This is a core differentiating vertical for EPAM, the foundation for our business and represented 25% of our 2012 revenue. Our strong long-term relationships with ISVs and the knowledge we have gained working with them, have enabled us to: Number one, to demonstrate a confirmation of our excellency in software engineering culture; two, successfully expand in key vertical markets; and three, deepen our existing client relationships. Finally, we discussed last year making acquisitions that would expand our geographic footprint, complement our global delivery capabilities and deepen our industry knowledge and technical capabilities. In May of 2012 we acquired Thoughtcorp, based in Toronto, which extend our North America presence as well as further develop our capabilities within several important competencies. As a confirmation of our strategy, we won a large key account that neither company could have achieved alone. In mid-December, we acquired Empathy Lab, a digital strategy and multichannel experience design firm, that is a recognized leader in both e-Commerce and digital media and entertainment space. The combination of their front-end digital capabilities and now proven strengths in global delivery of complex software engineering, puts us in the strong position to offer end-to-end cutting edge e-Commerce solutions. We are currently working closely with them on important integration efforts as well as business development programs to take advantage of near-term growth and selling opportunities. All in all, we achieved what we set out to do in 2012. Looking forward, we are confident that our growth momentum will continue in 2013 and beyond. We will continue to invest in the development of technical capabilities, further develop our on-site presence in both organic and non-organic opportunities, to expand our scope of services, complement existing technical expertise and add new vertical markets. With that, I will turn the call over to Ilya for the financial review.

Thank you, Ark, and good morning, everyone. As detailed in our press release, our fourth quarter revenue grew 14% sequentially and 32% over last year to $125.5 million, ahead of the top end of our guidance of $118 million. Overall, 2012 was another strong year for us. We grew revenues by 29.7% year-on-year or 31.4% on a constant currency basis, while growing adjusted net income by 21.6% and maintaining a healthy balance sheet. For the fourth quarter, Banking & Financial Services increased 57.4% year-over-year and represented 28.4% of revenues. ISV & Technology was up 34.1% from quarter 4 of 2011 to account for a 24.4% of total. We have recently combined our Travel and Hospitality and Retail and Consumer verticals into one, as it more appropriately represents the common technological needs of those customers and markets . Travel and Consumer increased 19.9% and was 21.5% of revenue. You can find the historical data for the merged vertical on our data sheet in the Investor Relations section of our website. Business Information & Media was down 9.8% in the quarter, accounting for 11.5% of total revenue. However, excluding the decline at Thomson Reuters, this vertical would be up 33.9%. For the fourth quarter, our European revenue was up 33.4% of total, up 38.7%. North America represented 44.7% of revenue, up 22.3%. Finally, CIS represented 19.2% of total, up 47.6%. 91.9% and 82% of our revenues in 2012 came from clients who had used our services for at least 1 and 2 years, respectively. We have talked about growing new clients into significant relationships for us and we were successful in this effort during 2012. In 2011, we had 54 clients that generated at least $1 million in revenues with us. For 2012, that number increased more than 50% to 81. At the same time, we remained diversified. No single client accounted for more than 10% of our revenues this past year, and our top 5 clients represented 31% and our top 10, 44.4%. Turning to costs, cost of revenue exclusive of depreciation and amortization was $77.3 million in the fourth quarter of 2012, an increase of 30.1% over the $59.4 million reported in the last year period. For the full year, cost of revenues increased 31.7%. These increases are primarily due to higher compensation of benefits associated with the increase in IT professionals throughout the year, as well as an increase in incentive compensation. Cost of revenue excluding stock comp cost was $77 million in the fourth quarter and $267.6 million in 2012. Fourth quarter SG&A expenses were $26.4 million and $85.9 million for full year 2012. Growth in SG&A was due to increased overhead in non-production staff necessary to support the growth of this business. SG&A as percent of revenue was 19.8% for 2012, up slightly from 19.4% in 2011. Or I should mentioned that in SG&A, in 2012, we had incremental stock comp cost of $2.5 million and approximately $1 million in incremental public company cost. Depreciation expense for 2012 was $10.9 million, a 44.4% increase over 2011. The increase in depreciation is due to additional CapEx for equipment to support the growth in headcount as well as the amortization of intangibles from the Thoughtcorp acquisition. Non-GAAP income from operations was $20.6 million for the fourth quarter representing a 26% gain over the fourth quarter of the previous year and $74.9 million for 2012, an increase of 23.1% from 2011. For the fourth quarter of 2012, non-GAAP operating margins were 16.4%, within our target range down slightly from the 17.1% a year ago, mainly as a result of 2 items: First of all, our performance this year was better than expected and as a result, we increased our bonus accruals in the fourth quarter. Second, we won a project with one of Russia's leading consumer-electronic retail chains. As part of the implementation we hired a U.K.-based firm, specializing high-end ATG e-Commerce implementations on a subcontract basis, to perform the initial phase of the project in Q4. So this is basically a pasture of revenues for the work done in the fourth quarter. So this part of the project has been completed, and going forward, we'll receive a more normalized margin on this project. Net interest income was $0.4 million for the quarter and $1.5 million for the full year. Foreign exchange loss was about $100,000 for the quarter and $2.1 million for the year. Non-GAAP net income or net income excluding the impact of foreign exchange, acquisition cost, amortization of acquisition and intangibles and stock-based comp was $17 million for the quarter or $0.37 per diluted share, up 23.3% versus the $0.30 diluted earnings per share in quarter 4 of 2011. For the full year, non-GAAP net income was $65.5 million or $1.42 per diluted share versus the $1.19 in 2011. Now let's look at the balance sheet. We ended the year with $118 million dollars in cash. Cash from operating activities was $48.5 million, down from $54.5 million in 2011. This was due to higher bonus payments for 2011 performance prior to the IPO that were paid in 2012. Net cash of $59.6 million was used in investing activities during 2012, primarily for the construction of new facilities in Belarus and for the acquisitions of Thoughtcorp and Empathy Lab. Net cash provided by financing activities was $38.8 million, primarily due to funds received in connection with the IPO. Capital expenditures for 2012 were $26.7 million, of which $13.4 million was for the new facility in Belarus. Accounts receivable were $78.9 million at the end of 2012, up 32.7% over 2011. We finished the quarter with a DSO, day sales outstanding, of 56 days compared to 58 days last quarter. Turning to 2013 and our guidance, based on our current visibility and market conditions, we expect a year-over-year revenue growth in the range of 23% to 25%. Non-GAAP net income growth for 2013 is expected to be in the range of 12% to 15% with an effective tax rate of approximately 20%. I'd like to point out that our effective tax rate, for modeling purposes, has increased from 17.3% in 2012 to 20% going forward, mostly due to the 2 acquisitions that we made in North America. However, I should also mention that as both acquisitions were asset purchases, while the effective tax rate did not benefit, we do get a real benefit in terms of cash tax savings from amortizing the intangibles against our tax liability. For the first quarter of 2013, we expect revenue between $122 million and $125 billion, representing growth rate of 29% to 31% over the first quarter of 2012 revenue, which includes results from 2 acquisitions made in 2012 that were not in the comparable period. Non-GAAP diluted earnings per share is expected to be in the range of $0.32 to $0.34 based on first quarter 2013 weighted average of $47.6 million diluted shares. Lastly, capital expenditures for 2013 will be approximately $25 million, of which $19 million is to support continued growth in the business excluding spend on IT equipment, and leasehold improvements and other capital purchases. Also included in that is $6 million to complete the construction of our new facility in Belarus. With that, I would like to turn the call back to the operator to open it up for Q&A.

[Operator Instructions] Our first question comes from the line of Moshe Katri with Cowen.

Question, it seems that guidance for the year is based on a higher effective tax rate. Can you comment on that a little bit?

Hi Moshe, yes -- this is Ilya. We made 2 acquisitions in 2012 that are North America in particular. And what that does is that it has the impact of driving our effective tax rate. In particular, the acquisition of Empathy Labs that we made in December of 2012 pushes our tax rate from what we saw in 2012 of 17.3% to close to 20%, and the acquisition made in Toronto in May of 2012 also has a much more smaller impact but yet it does have an impact. So this is why we're projecting a higher tax rate because North American acquisitions tend to drive the effective tax rate. I should say -- and as I said in the script, we do get a real cash tax benefit because both of those acquisitions were asset purchases rather than stock purchases. Unfortunately, the effective tax rate we'll report on the P&L does not get recognition of that tax benefit.

And then again, a couple of more questions, with -- looking at guidance. What sort of inorganic revenues are included in your guidance for the year? I.e. how much in revenue contribution are you going to get from both of those of acquisition for the year?

So, let me just preface this by saying that first of all, the acquisition of Thoughtcorp, the Canadian consultancy in May of 2012, is almost fully integrated. The acquisition of Empathy Labs in December, it is well underway in terms of integration. The -- one of the main strategies in doing these 2 acquisitions was that we could supplement their front-end, their consulting expertise, their on-site with our global delivery platform to where 1 and 1 make 3. So with that, Thoughtcorp is almost entirely insipid [ph]. It's close to impossible to break out, on a standalone basis, the revenue contribution for Thoughtcorp either in '12 or '13. And with Empathy Labs, it is likewise very difficult. We've already started [indiscernible] joint projects where we have our people working on their customers. We have their people helping out our customers. It's getting very, very, very diffuse if you will. But what we can say is particularly look -- it will help if you guys look at our estimates for Q1 of 2013, if that's up against an easy comp in Q1 of 2012 where there was no impact of those 2 acquisitions. What we can say is, those 2 acquisitions combined did approximately $7 million in Q1 of 2012, so before they were acquired. So hopefully that gives you a kind of like a way to help figure out at least the relative materiality of these. Again, the broad intent to make these acquisitions is the thing that makes it very difficult to split out going forward.

Okay and then what sort of -- how should we think about adjusted EBIT margins this year and then your free cash flow generation this year as well?

So Moshe as you know we don't guide to margins.

Are we going to be flat year-over-year? Is there any -- or is there anything that you can talk about in terms of trends?

We continue to reinvest into the business and we're consistent with what we said before. We're continuing to invest in putting more specialized, more experienced resources on-site next to our clients in order to drive future revenue growth. Second, we continue to invest in our competency [ph] centers to make sure that we can offer our existing clients the most cutting-edge technologies possible, as well as to make sure that we can use these technologies and increased our [ph] efforts. And therefore, again, drive for the revenue growth. There's a third dimension, part of the investment is that you maintain a slightly bigger bench going into 2013, we're probably 100 basis points to 200 basis points below our normal range. That's part of the reinvestment. This is to train people. And as part of the initiative again, we're investing in the business to drive future revenue growth.

Okay. So margin should be, from a trend perspective, down slightly year-over-year? Is there anything you can say about that? I just -- we just want to make sure that -- I don't think anybody is going to -- we don't want get anybody surprised, again later to be positively.

Again, we don't give guidance to margins. I mean, we feel pretty good about 2013. It's another good normal year.

Moshe, listen, we kept to like to see what's happening around us right now. We see a lot of demands for new type of technologies. Like clients are actually, why we're growing so much because clients rely on us to do some work which we know the company is going to do. We -- we're growing clearly faster than the general electrical company in our segment. And to do this, we have to differentiate ourselves from skills. We have very good base [ph] on this, we've talked about it many times from in the past about our focus on may I see [ph] and how it's helping us. But at the same technology changes so fast and some demand for understanding specific businesses require from us doing the work. We're doing this because we do believe that at some point it would give us better rates and better margins. But when this right going for negotiation or getting this record happened, we don't know. So that's why you're asking what would we be doing in the next couple of years? We're going to grow, that's what we can say. We're going to focus on specific technology, et cetera, which we've highlighted. That's what we can say. We do believe that it would give us advantage against competitors. When that happening this year or the next year that's what we can kind of tell you. And we will adjust our projections like at each quarter versus what you've see quarter. This is the best we can do right now.

Our next question comes from the line of David Grossman from Stifel. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Maybe just to expand a little bit on Moshe's questions. It looks like obviously, you're getting very strong top line growth and in fact, the gross margin remains fairly strong. So it would appear that there was obviously a fairly significant sequential spike in SG&A and there may be a seasonal element of that for some bonus accrual. But it was like 25% sequentially in dollars and again, as kind of Moshe was referring to the guide for '13, would seem to imply that the G&A may or SG&A may stay at elevated levels through the year. So I think Ilya, you referenced a couple of points about what's going on in G&A. Perhaps you can help us again by just reviewing what impacted the fourth quarter? And in fact, what may impact next year as well? Because it sounds like the one retailer that were ramping in the quarter, if you're hiring subs, that would -- I would like at least intuitively that would have more impact on the gross margin and cost to revenue rather than G&A. But -- I mean, I may not be thinking about it right. So if you could perhaps just go through that attendant, that'd be great! could just go through with that again?

Sure. I will try. So SG&A as I mentioned has, for 2012, an additional $2.5 million in stock compensation costs as compared to prior year and has an extra $1 million in public company costs. Our total public company costs are approximately $2 million. But compared to 2011, it's an extra million. And so it's $3.5 million of additional cost in SG&A right there, which means that if you do factors those out, our SG&A, as percent of revenue, would go down in 2012 versus 2011. And so far as the question about the subcontractor specializing in Oracle, our commerce platform and presentations [ph] that we got for the commerce project in Russia. Yes, I mean, that had a negative impact on Q4, because it was essentially dollar for dollar with a revenue that we recognized in Q4 for that particular project. And yes, the subcontracting cost did go into the gross margin. I'm sorry, did you have a third question? David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Well, I think if you look at the adjusted operating margin which factors out stock-based comp, the adjusted operating margin did kind of decline below 17%, I think it's about 16.4%., which is lower than it has been. So like I said, given the strengths in the gross margin, even despite that subcontracting cost it appears the operating cost are higher and I'm just trying to understand what are the moving pieces there that are driving that increase, which again, already factors out both stock-based comp as well as the item that we talked about with a ramping of the new customer.

Well, let me address first just the operating margin. And what we see is, I think -- let's make sure, we have the right numbers is 17.3% adjusted operating margin in 2012. Is that what you have? David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: I've got that as the adjusted EBITDA margin but perhaps for our perhaps mixing terminology here.

That may be a disconnect then, because income from operations is 17.3%, close to $75 million. And Ark did you want to say something?

David, as a G&A equation -- like, this number is approximately flat, the relative numbers. But if you think about the -- I can give you kind of explanation which is probably difficult to quantify, but we were talking about the history of the company where everyone was focusing so much on engineering coming from certain ISVs for a long time. And that's what we were sharing for the last year when we become probably public that we need to invest a lot in sales structure, in account management structure, because that's a component of EPAM which is way underdeveloped over the years. The same like pro forma HR and recruitment infrastructures as well. So we're growing very fast. As you know like before this year, we were growing 2 years for -- by 50% and that's only happening based on our reputation and our technology advanced skills. So we're clearly going to different -- a little bit different space right now where our vertical industries starting to drive. And where relationship of these clients should be done very differently. So we are investing a lot in account management, sales and human resources and recruitment. And it's all coming to SG&A. So for some time, it would be kind of growing particularly in line with the company. Again, we do believe that it will bring benefits later on. When it's exactly would be happening, so we will talk to you again. [indiscernible] Adjusted by quarter-by-quarter. And this topic you know, is we discussed this with everybody, because everybody was questioning how fast we can grow using new sales. So we invest here and to existing clients as well. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: I think I understand that better. And just in -- Ilya just a follow-up question on the tax rate. So as the revenues ramp and I guess as you integrate these and get more back in revenue, does the tax will come back down or is 20% more or less a steady state to think about for the foreseeable future here?

We look at it as a steady state for the foreseeable future. If we do make further acquisitions in North America then that does tend to have a negative impact on the stated effective tax rate, although again the cash tax rates benefits we -- we continue to somehow make these asset purchases and that's a pretty huge benefit in cash terms. But also, if you -- the benefits that we have from acquisition, from Empathy Labs for instance, their on-site rates blended with our offshore rates. This is going to help us in terms of overall yields. Whether that's going to fall this side of the border or that side of the border we still have to sort out and it depends on the engagement, right? So it's hard to say. So for now, we're going to stick with 20%. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Got it. And just one last question. I know your -- one of your big media clients, obviously, they were about of a yo-yo over the course of 2012, do you feel that the exit rate in the fourth quarter is a steady state for that client? Or do you think you're going to see more volatility in 2013?

It's hard to say right now what's going to happen. We don't know beyond what we've been told. Right now it's relatively stable. We actually we're able to put through a pretty decent rate increase because as you know we have this client had been with us for 12 or 13 years, and therefore had some of the lower rates. So we think that's a pretty good vote of vote of confidence for the type of skills sets that they're using and need to use in the future. But we can't obviously talk to what they're going through internally which drives some of the stuff.

Our next question comes the line of Darrin Peller with Barclays.

Can you guys just comment on some of the -- the dynamics in some of your largest clients. It looks like the contribution to revenue -- I may have missed this earlier, but some of the contribution to revenue from your top 5 has dropped pretty considerably sequentially from last quarter to this quarter being in the less-20% range. What drove that and how was the demand environment among the top qualified top 10 clients?

Actually, probably, some of the decline that you mentioned relates to the client we just talked about with David. But we still see -- actually just to give you a sense of the impact of this large client had on our business. In terms of Business Information & Media, we reported for the full year that it's was down slightly. It'd be up 29%, if you exclude entirely the impact of this client. For the quarter instead of down 9.8%, Business Information & Media segment would be up 34%. In terms of the top 5, I don't have it with and without, but we think actually the top 5 in 2012, the contribution for year-on-year growth from top 5, it was 25.5% and that's fairly good. From top 10, it was 29.1%. To us, that's -- well, we grew 30%. So this is fairly good as well. So besides this -- our client, which we keep talking about. We feel fairly good about everyone else in our top 10 accounts --that

Just a quick question on sales and distribution. Again, I brought this up with you guys before but I'm always impressed by the amount of referral business you have rather than direct sales, and it might just be the nature of the headboard you do. But I've been curious with your -- I mean, what is the sales channel look like for you? I mean, obviously, there's been a lot of discussion on this conference call around build-on expenses and margins. And I mean, if we had -- I'd like to, at some point, have a better understanding of when we might be able to see operating earnings grow at a similar pace as revenue which I'm sure everyone on this call wants to hear at some point. The call as the some point. But on that note, I mean is there a build-out in sales going underway? I mean, are you still growing your revenue primarily from At least organic revenue primarily from revenue business Dor minute the number primarily from referral business? Or have you seen more sales contribution?

So clearly that, that is changing. We're going to first off all, it's still more than around 90% of our business coming from the clients, which we already create within the previous 12 months, and this is probably pretty typical for our business. So there is still a big number of referrals, and I don't want to excuse it Darrin, we're actually proud it's happening. At the same time, we're seeing a lot of pickup in our channel sales where, like -- we were talking about how ISV influenced generally [indiscernible] business and how some clients from ISV and a specific technology and solutions which we helped them to develop, creating a channel for us and it is a growing size of the company to be coming much more available partner for large software and technology companies. We're seeing this growth in e-Commerce space and Business Intelligence space, which is openings for us doors to large corporates, and then you can see the sales multiple line of services which will where working on. So this is happening much more than it happened just 12 months ago. And the directs sales also is starting to work more effectively but we still have a long way to go to, to be a really good there.

Our next question comes from the line of Ashwin Shirvaikar with Citigroup.

I guess, let me start with Ilya, I may have missed this, but what is your cash tax rate?

It's approximately 15%.

Okay. Okay. The second question I have is with regards to the contract sizes, the contracts you have signed. Are you, from a macro standpoint or client-specific standpoint, are you seeing any change that could be construed as what is some, in terms of the ramping, existing clients or project activity or anything like that, is it pretty much in a good, strong secular team continues to work for you plus the execution?

Ashwin and I would say that we see -- we don't, we don't see much change. It's is very similar to what it was before. And there is no any visible slow down for us right now. So basically that's what we were repeated during the last previous quarters, and I think it's true right now as well.

Okay. Good to know...

And as you know, we were working a little bit like it's difficult to compare us with much bigger companies We're competing for different type of deals. We have different entrance points and I think it's actually differentiate us because we're doing a little bit different type of work than most of our regularized competitors.

No. I understood, absolutely. But I just had to ask the question because a couple of your larger competitors are large banks and they have seen headcount cuts and we do get to question from investors. So it's good to see that your plan continue to be quite good. Now not to beat a dead horse but going back to margins, at the time of IPO, if I'm not mistaken, while you don't provide short-term margins items or annual margins items, I think you did you did or you had put long-term 16% to 18% range out there. And based on this [indiscernible] backtracking from your numbers, it seems like its [indiscernible] all though slightly lower than the 17.3%. Just want to understand are you still consistent with long-term 16% to 18%.

I think for the long-term we're still consistent with that mid-teen to upper-teen range for adjusted income from operations or adjusted operating margins. Again, not to restate what we said before, about reinvesting into the business but the business is growing at a rate of 25% to 30%. Of course, we're guiding 23% to 25%. Last year, it grew 30%. I think this is on top of the heap, right, Ashwin?

Yes.

It's difficult to say whether its margins are going to be 16.2%, 15.5%, 17.8%, we're going to be around that range but we're continuing to reinvest into the business. And it may fluctuate quarter-to-quarter. We're focusing on running the business the way the business should be run and you may see fluctuations quarter-to-quarter even year-to-year. But again the intent is to drive further revenue growth.

Okay. I guess last question, FX, I must have missed that -- it's little bit more difficult to predict, but what's a good number to go with, in terms of where you are currently with your projects, located -- project locations and so on and so forth? And any change to your original intent to basically not really hedge?

Obviously it's difficult or impossible to project future currency moves, otherwise I would be in that line of business. But looking at 2012 say versus 2011, we did have roughly $5.5 million to $6 million negative impact on revenues. In other words, revenue growth would have been even higher by about 130 basis points, I think. However, as we said before and as reaffirmation of the statement, the impact on margins, it has actually been positive even though the impact of revenues have been negative. So we think our mix continues to provide us with relatives certainty now. This is not an absolute guarantee that this point to happen in the future. But we continue to look at this month-to-month and quarter-to-quarter, we discussed it with the board. We think our value at risk is manageable at this time. So we're not going to hedge in the near future higher or if continue to accumulate more and more, say euro-based, ruble-based or pound-based revenues which would tip the scales to a level that we find unacceptable then we will contemplate then turning to hedges. But at this time, no.

Okay. And last question, I promise. As you think of the quarters for this year, is it safe to assume, consistent with historical patterns you gained strength as you go from Q1 to Q2 to Q3 and so on?

I think the seasonal pattern we had before should probably hold true. Obviously, you have to be careful with percentages, right? Because look at Q4 of 2012 that's going to be a tough comp, as you had an extra $8 million of revenues and there are stuff that doesn't necessarily recur. So we should have a good steady [indiscernible] percentage growth in Q2 and Q3 and Q4 it's going to be a little bit below to come up to that 23%, 25% target.

[Operator Instructions] Our next question comes from the line of Alexander Vengranovich with OTKRITIE Capital.

Actually I noticed that the share of fixed-price contracts is constantly increasing. I'm just wondering whether you're making this deliberately or it's the market trends and whether you'll be able to move forward in the future to improve your gross margin from the back of more fusion service of the clients. That's the first question. And second, regarding the headcount growth, what sort of headcounts increase for 2013 should be planned in order to support such a high growth rates of your revenue?

Alexander, so on fixed fees, I think it's not constantly increasing. What we're seeing is that roughly 85%-15% split. We think that’s within the normal range of time and materials versus fixed fees, now you may see a couple of hundred bps here and there. When we get into new clients or new significant projects, typically it's on the fixed fee basis. When we prove ourselves, the client themselves tend to convert the contract type to time and material, essentially letting us guide the engagement and therefore it becomes more of a recurring stable revenue scheme, even though the underlying work is project-based. So sort of the nominal fluctuations you see in fixed fees versus T&M, to us are not meaningful, or at least not indicative of some adverse trend. On your second question about gross margins, again, not to sort of restate the things we've said before about reinvesting into the business for future revenue growth, business that's growing 23%, 25%, 30%, we're going to continue to invest into the business. On your third question about headcount growth, there's a lot of dependencies there probably. If we are going by 23% to 25%, we think roughly 15% headcount growth would be in the ballpark. So hopefully that answers your questions.

But also when bring in new people on board there is an approximately 50-50 split between people coming from what it is like, more doing is less and people coming from the market and it's -- when you put in projections for the next year, it's driving a lot of our understanding, what would be not in the next quarter or 2, what would be in the next 9 or 12 months. That's why this number could be adjusted during the year because we're investing for this 50% of the people, we invest in a lot schemes -- specific trainings. So this number will be fluctuate during the year.

And also one more question, just really quickly. You have any M&A's in the pipeline that you can comment on?

We typically cannot comment on any M&A in the pipeline but obviously since -- ever since the time we went public and one of the reasons for going public is to get the higher profile and the currency for M&A. We have been literally deluged with inbound M&A inquiries. So we're in a good high-class position to be able to be selective about that acquisition that we do make. As evidenced by the 2 really good acquisitions we made in 2012. And so we're going to continue to look to do those kinds of acquisitions in the future.

Our next question is a follow-up from Moshe Katri from Cowen.

Just another question, prior 2012 your financial services vertical was exceptionally strong and obviously that was unusual for -- compared to your peers. Can we talk about some of those trends in terms of what's driving growth? What has been driving growth in financial services? And then what are your expectations for this vertical in 2013?

I think, actually, I'll repeat myself from the previous calls. But I would like to bring again the attention that we're doing a little bit different type of work. The financial services we're outsourcing is [indiscernible] and that's why even if some companies say in the news that financial services might be going down. In our case is actually taken still growing even in a fled-budget situation. Some of the clients in this space shared this asset when we entered this segment like 4, 5 years ago and had almost 0 revenue, of the competitors had like used to count with million from one client. And today we're actually on par in the same budgets. So basically they decrease, and we are increasing. So I think focus on specific [indiscernible] conflicts, development plus in some situation, be in Europe, which is advantage for European capital market and [indiscernible] systems given this advantage. And right now, it's in pretty strong demand for the services. So you should expect similar growth.

Ladies and gentlemen, as we've come to the end of our time for Q&A, I'd like to turn the floor back to Mr. Dobkin for closing comments.

Thank you, everybody, for attending our call today. So I would sum up that we do believe that we achieved our goals for 2012 and we're pretty confident that we can continue our growth momentum in 2013. We still going to invest a lot in improving our technologies, capabilities because we do think it's one of the main differentiating factor in our segment. We can do better and more complex work than most of our competitors. So we're going to look for organic and non-organic opportunities to do this, to expand our scope of services, complement technical expertise and entering new markets. So it's all in our plans. So I look forward talking to you next quarter and provide the next update. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.