EPAM Systems, Inc. (EPAM) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the EPAM Systems Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ilya Cantor, Chief Financial Officer. Thank you, Mr. Cantor, you may begin.

Thank you, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's third quarter 2013 results. If you have not, a copy is available on our website, epam.com. The speakers on today's call are Arkadiy Dobkin, Chief Executive Officer; Ilya Cantor, Chief Financial Officer; and Anthony Conte, VP of Finance. 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. Ark, please go ahead.

Thank you, Ilya, and good morning, everyone. EPAM third quarter performance was strong, ahead of our original guidance for the quarter and at the top end of our updating guidance from October 8. Third quarter revenue was $140 million, a year-on-year increase of 27.3% and a sequential increase of 5.2%. Non-GAAP operating margin was 17%, in the middle of our target range of 16% to 18%. Our results reflect growth across all vertical services and geographies. As we continue to invest in and strengthen our client base and organization, we see some improvement in both penetration of existing accounts and the quality of our pipeline. However, it's still very early to quantify direct effect of these efforts. So we have a long-term view here and do believe that continuous innovation, constant result evaluation and, if necessary, realtime adjustment to the process is the way of doing business rather than a specific phase. Next month in December, it will be 20 years of EPAM doing business. While a lot has changed during those 2 decades, our core principle remains intact. This is a commitment to delivering relevant engineered complex software solutions and information technology services to our clients. When we started, it's mostly on the independent software vendors and technology-oriented companies who are interested in our work. High-quality standards demanded by those clients helped us very much to advance in the field and to support a strong engineering culture in the company. Eventually, those capabilities opened new doors for us to the larger corporate world. The world during the last decade become so much dependent on software and digital way of doing business, we had to turn to a relatively small numbers of vendors capable at scale to deliver critical business solutions, utilizing new emerging technologies with a commercial-grade software quality. Over the last years, we acquired a new set of skills and capabilities in order to complement our engineering focus and to deliver much more sophisticated and more business-oriented software solutions. As a result, we still have the same core principle: Enduring commitment to delivering well-engineered complex software solutions and information technology services. But now, we benefit already different and the most demanding set of clients, those who operate with a threshold operation in new digital era [ph]. As in the past, we are very dedicated to transform the company to continue recruiting in line with our core principle and our client commitment. So it's very encouraging during this anniversary year to see high level of recognition of our approach. Throughout the month, EPAM was named #6 on the Forbes annual list of American Best Small Public Companies. The list, which includes public companies with revenue under $1 billion. Also, EPAM was #2 on 20 fast-growing tech start-up list on this rating. If you remember, earlier this year, EPAM was included also in Forbes list of America 25's 5 fastest-growing technology companies, underscoring the company's status as one of the most rapidly developing software, engineering and IT-consulting companies in America. Our ability to continue delivering this kind of industry-leading growth is good affirmation of the strength of our approach and capabilities. Our recently increased guidance was partially driven by a solid quarter in Banking & Financial Services, which grew 33% year-over-year, with particular strong performance from investment banking clients in Europe. Key demand is growing in line with increased adoption of new technologies by many financial institutions to differentiate themselves in the highly digitized world. A good example is one of our clients in Tier 1 investment bank. Our relationship has progressed over the past several years from participating in cost-optimization initiatives in the beginning to becoming an improvement technology partner and now to a more trusted strategic relationship. This covers a substantial amount of innovation work and change [ph] of bank work, which includes mobile, cloud, big data and complex analytics service, as well as user experience design initiative, which has strong potential to transform into a sizable and critical for the business new engagement. We also established variations in several new locations in the Asia-Pacific region at the request of our client, which means that we are able to expand to new product geographies, is a less risk we've been doing that in greenfield way. Our other clients in Banking & Finance are increasing their spending in similar transformational activities, aimed at not only saving money, but also changing how they go to market, how they interact with their customers, how they manage their regulatory compliance, risk management and a host of other problems. Business & Financial Services also is good illustration of our investment that we've talked about during this year. We significantly strengthened the team with very senior talent coming from the industry to accumulate necessary level of business knowledge in our site and to provide such leadership in our engagements. By the way, just recently, the Everest Group recognized EPAM as 2013 Capital Markets Star Performer for the second year in a row. And this is only 5 from 20 asset providers that received the star performer status. ISVs & Technology has solid performance, growing by 22.6% to 24.4% of total revenue. We had positive new account acquisitions both between actual results of our company, as well as several new technology start-ups. With continuing independent liquidization of our expertise on this segment, EPAM was recognized in Zinnov's Global R&D Service Provider Ratings for 2013 as a Leading Consumer Software Service Provider and the Leading Software/ISV R&D Service Provider in the consumer and the software categories, respectively. Business Information & Media grew by 29%. However, if you exclude the impact of the decline in Thomson Reuters from last year, the segment increased 64%. This is the first time, during the last year, when Thomson Reuters started to grow again, and as a result, Business Information & Media showed 8% sequential growth during this period. Within the vertical, we're also benefiting from the impact of our strong integrated set of skills in Enterprise Mobility, complex web content management solutions, data analytics, digital strategy and user experience design. Retail and Consumer had healthy growth of 24% this quarter, helped by strong expansion with several client accounts, as well as by a number of new clients acquired this year, in particular in Europe. For example, in Retail, we won the one of the Europe's largest nutritional supplement supplier, one of UK's largest home improvement retailers, one of the largest [indiscernible] retailers and leading U.K.-based special discourse retailer. Several good deals for this year in hospitality including a U.K.-based luxury hotel chain, a middle Scandinavian tour operator and national air carrier. Clients in this sector are either the forefront of fastest moving changes in technology, in mobility and e-channel [ph] commerce, digital marketing, big data, analytics and cloud. Our understanding is important to the industry business solutions, to get the result by the experts in new technologies and being reassured to major European customers in this segment, continues to result in market share gains for EPAM in Europe. Another important trend in this segment is spending control by the business and specifically by CMOs. While there is continued pressure to control CIO budgets, spending by CMOs on product leadership is typically aimed to support revenue growth, which makes it incremental to IT budgets in total. Recognizing the importance of this, we are focusing on cultivating a relationship at multiple points in enterprise and continuing investment in client-facing abilities and deeper business understanding. Moving on to our performance by geography. We had better-than-expected performance in North America, which increased 34% year-over-year and 5% -- 5.7% sequentially. This is mostly driven by growth within key accounts in ISVs & Technology, Retail and Consumer and Business Information & Media vertical. These segments are particularly sensitive to dramatic changes in technologies, and EPAM is ideally positioned to benefit from this. Europe once again had solid and consistent growth now at 36% of total revenues with revenue growth of 25% year-over-year and 6.2% sequential. As I already mentioned here, Banking & Finance grew well, also as stated, Retail and Consumer in Europe benefited from strong new client activity. CIS showed moderate growth this quarter year-over-year. Here you also have the benefit of 2 significant e-commerce initiatives as retailers in Russia are ramping up investments on modern omni channel commerce platform, and we are in exceptional position to have base on our Expedia technology in Europe and North America. Our results this quarter once again showed our clients are allowing us to help them cope with today's disruptive innovations and cyclical economic pressures. If you were to sum what we have seen in the business long term. Technology, or the developing applications, is changing following the way how those applications are being consumed. Clients are facing a variety of pressures both global and more specific to the industry of their own operations. New digital business models are forcing companies to change the way they trade. Helped by strong discretionary spending, we continue to see an increase in spending aimed at adapting a software-to-service model. To that end today, we, first of all, help our clients move into the cloud by re-architecture, re-platforming and rebuilding their applications to utilize the power of this model. ISVs and our technology customers have been experiencing results -- that for a long time. Our long history of helping the clients with such efforts allowed us to be very early adapters of those trends and to develop strong skills and expertise to engineer cloud-capable solutions, as well as comfortably work in the cloud environment. All of that position us well to support our corporate customers, moving in the same direction, where the size of cloud transition applications will also help to build fully functional, scalable public/private [indiscernible] clouds, as well as providing all key aspects of related dev app services. Because of complex nature, the majority of our work and our very little share of traditional for the industry production wins in support of legacy platforms, we view the revenue opportunity from cloud adoption by our existing clients as incremental. In other words, we don't see any decrease in spending on our services when our clients move to the cloud. As we mentioned before to capitalize on this opportunity, we are continually investing in developing right skills, partnerships and infrastructure, including establishing through multi-tenant private cloud for all our external operations. This environment has been up and running for some time, and we have seen today numerous benefits, which we could now with full confidence offer to our clients. To conclude, we continue to focus on maintaining our leading position in complex software engineering services and solutions market, which contribute our ability to grow above the industry average. Our results this quarter once again show that our deep industry technology knowledge, our sophisticated global delivery platform position EPAM well to deliver the services to our clients who need to deal with in today's highly disruptive shift in technology and new digitally driven business models. Now, I will turn it to Anthony who will review the financials.

Thank you, Ark, and good morning, everyone. I'm going to spend a few minutes taking you through our third quarter results and then I will talk about our fourth quarter outlook. As usual, the full details of our results can be found in our press release and the quarterly fact sheet located on the Investors section of our website. As detailed in our press release, our third quarter revenue grew 5.2% sequentially and 27.3% over last year to $140.2 million, at the top end of our updated guidance. On a constant-currency basis, revenues would be up 4.9% sequentially and 27.7% over last year. Our non-GAAP net income grew 21% year-over-year and 8% sequentially. For the quarter, we generated $0.43 of non-GAAP EPS, also at the top end of our guidance, and $0.34 of GAAP EPS. SG&A, excluding stock compensation and acquisition-related expenses, was 18.6% of revenue for the quarter, slightly above the 18.3% from Q3 last year, but down from the 19.3% in the preceding quarter. Non-GAAP income from operations increased to 24.2% over prior year to $23.8 million, representing 17% of revenues, right within our 16% to 18% target range. Diluted share count for the quarter has increased by 2.2 million shares to 48.7 million from the same quarter last year, mainly due to stock option exercises by employees and acquisition consideration. Looking at service lines. We experienced no significant changes in our revenue mix. Software development services continues to be our largest service offering, growing 27% over last year and representing 67% of revenues. Testing was 19.8% of revenues, or 26% growth over last year. And maintenance and support was 8.4% of revenues or 33.5% over last year. Infrastructure services increased by 16.8% to 2.7% of revenues. Our growth continues to be fueled by deeper penetration into existing accounts, while also consistently adding new customers to our mix. Customer concentration remains healthy with our top 20 clients accounting for 57.7% of total revenues and growing 23.3% while all clients below the top 20 grew 32.5%. Barclays remains our top customer and accounts for 10.2% of revenues. Our customer loyalty remains high with 93% of customers working for us as at least 1 year, compared to 89% 1 year ago. And 79% coming from those who have been with us for 2 years or more, compared to 76% last year. Turning to our balance sheet. We finished the third quarter with approximately $123 million of cash, up by approximately $15.5 million for the quarter ending June 30. During the third quarter, operating activities generated approximately $15.6 million of cash. Unbilled revenues were at $65 million at September 30, compared to $33.4 million at December 31, in line with normal quarterly trends. And in October, we subsequently built $25 million of that unbilled. Accounts receivable were at $87.6 million at the end of Q3, up 11% from year end. DSOs for the quarter was at 58 days compared to 59 days last quarter. IT professional headcount increased 11.5% over last year to 9,065, supporting our 27% revenue growth. Our utilization and bench management continue to improve, and we continue to see favorable pricing environment. Turning to our guidance for the full year 2013. We feel very comfortable with the guidance we provided 4 weeks ago. Our business development activity and pipeline continue to be strong, and we are seeing lots of positive indicators from our largest accounts. As such, for the full year, we are reiterating our prior guidance of revenue growth to $542 million to $545 million. Adjusted earnings growth is expected to be in the range of 15% to 20% year-over-year with an effective tax rate of 19%. For the fourth quarter of 2013, EPAM expects revenue between $144 million and $147 million, representing a growth rate of 15% to 18% over fourth quarter 2012 revenues. Fourth quarter 2013 non-GAAP diluted EPS is expected to be in a range of $0.44 to $0.47 based on an estimated fourth quarter 2013 weighted average of 49.2 million diluted shares. We would now like to open the call for questions. Operator?

[Operator Instructions] Our first question is from the line of Mayank Tandon with Needham & Company. Mayank Tandon - Needham & Company, LLC, Research Division: The color was very helpful, but Ark and Anthony, could you maybe give us a sense of what are you're hearing from your customers in terms of budget levels from 2014 and how the priorities might be different from what you saw in 2013?

Thank you. It's Arkadiy. So, as usual, at this time of the year, clearly some conversation rate has started, but I think it would be too early to disclose any specifics. So I know that this sounds kind of boring, but all I can say is that we don't see much change at least in our situation from the previous years. We see approximately similar levels of visibility, we saw like year ago at the same time. So no kind of very good surprises, no any great news as well. So we probably will be able to answer this question much better during the next call. Mayank Tandon - Needham & Company, LLC, Research Division: Sure. Let me ask you this, though. In terms of the size and scope of opportunities that you're seeing, is that different from what you may have seen 12 months ago? Then, also, maybe you could comment on how your win rate is tracking directionally versus some of the larger global IT services peers that you might be competing against in specific opportunities.

Yes, a little bit back to your previous questions what type of opportunities. We do see a lot of interest in this. We're still all seeing new technologies for the last couple of years, but it's still relatively new, like, mobile, compass [ph], e-Commerce and portal applications, so analytics, big data implementation from scalability point of view, so cloud deployment. It's all becoming much and much more visible for us. And we invest in a lot of in this area to provide to the clients what they're looking for. So this engagement increasing proportionally in our case. So from the -- again, statistically, it would be very difficult for me to kind of quantify any specific win rates, but I -- we do see a lot of situations where we need to combine our capabilities in U.S. [ph] in digital strategies with our portal skills and mobile extensions to win new type of deals in comparison with just a couple of years ago. And we compete in these deals with very large competitors, top companies in the world and we're seeing some good rate of winning for ourselves. Again, I cannot quantify this specifically. Mayank Tandon - Needham & Company, LLC, Research Division: Okay. That's helpful. And then one final question on the cost front. Just give us a sense of what the recruiting environment looks like in your key delivery markets, and then what should we think about in terms of attrition rates and wage inflation levels going forward.

So recruitment is not easy stuff, easy process for ourselves, because competition is growing. And again, it sounds kind of I'm repeating myself, but we mentioned this all problem on all our previous calls. Competition for good talent is very, very tough all around the world starting from San Francisco going to New York, switching to Europe, Western Europe and Eastern Europe. So it is one of the biggest challenges for any technology company. And as we understand like [indiscernible] doesn't help here. So our attrition rates are pretty much in line with our historical numbers. For the whole year, right now, it's approaching a rate approximately a little bit lower than 12%. And wage inflation probably is the same area. And that's exactly what was historically in our numbers, and that's what we are approximately expect in the future.

Our next questions from the line of Steve Milunovich of UBS.

Could you talk a bit about your hiring plans going forward? And I believe you've had stronger growth in non-billable workers than billable, is that expected to continue or to change?

It's a very, very, very slight difference, and also during the last multiple quarter, we're talking that we need to improve our client-facing capabilities. And with the type of projects which we see, and which we mentioned before, we need different ratio of onshore, offshore. And specifically, people with strong business understanding and strong account management functions, which were like in the past -- and again, we were talking about it openly over the last couple of years. So basically that's why some number of unbillable people were increasing a little bit faster. So if it will continued during the next quarters, probably very -- it would be very similar to what we're seeing today. So when you'll find exactly balance necessary for success, we kind of -- we will define it based on experience and see the output of our work.

Okay. And then regarding the comments about new technology and the cloud, first of all, can you quantify at all how much of your business is SaaS-related or new technology-related? Number two, why do you think you don't lose any kind of older legacy business as you move to the new technologies? And three, when you're doing cloud deployments, are those primarily private clouds or do you get involved in some public cloud work as well?

So as we mentioned, this is what we've seen from clients' conversations and opportunities. And also, as we stated, majority today of the cloud work relates to our engineering skills to build applications capable to work in cloud with all possible requirements. So there is no very strong numbers right now to -- again, to illustrate it because in development and engineering portion of this, it's very difficult to separate what's exactly going to cloud-specific work or not. But if you look at the applications as a whole, it's a different architecture usually. And if you think about the 24% of our current from IT and technology, majority of the work is done there now engineered in very different way. Again -- and that it was our main point. At the same time, there is movement to the cloud. And in our case, mostly we're helping clients with establishing production kind of environment for cloud development, in private cloud for engineering process, for continuous integration and continuous development. That's what we build for the whole company internally, and that's we actually explaining to a number of clients how to get benefits from this. And we've seen some increase in deluxe services as well, which provided completely different level of flexibility and kind of flexibility to the clients. So if you're asking me for specific numbers, no, I cannot give you any specific split.

That's fine. And finally, you've indicated you're getting positive indications from your large accounts in terms of business going forward. Can you talk a bit more about what those indications are?

I didn't say that -- I am saying that we've seen very similar indication as in previous years. So I don't see that indication is more positive this year than it was last year or even 1 year ago. Clearly, it's much more positive than it was in 2009.

Our next question is from Darrin Peller of Barclays.

Just want to start off, first, one of the obvious efforts you guys have been making is to hire more senior relationship management-type personnel to really, really work with your best and largest clients. And specifically, people that are probably more technologically capable than the average senior relationship person that you might see at your competitors. How difficult is that process? How's it going? Have you hired any kind of key people that might help you grow these larger clients even faster?

Yes. As we mentioned today already that one of the focuses -- and we have pretty good progress in our Banking & Financial Services, where we brought to the company multiple very senior managers from the industry. And we've seen how it's changing our capability to offer different type of services and deliver kind of -- and lead some of new type of engagements. Similarly, what's happening right now in Travel and Hospitality business units, we're looking for people. We've hired some, but it's not enough. And the same happening in Business Information & Media. Also, we're starting to create special group, kind of strategic groups for business development activities, and we're very seriously improving our leadership in Technology in our CTO [ph] office and capabilities there around multiple competencies, which we consider very strategic for us. So again, let's -- coming back to the ratio of unbillable people. So we bring in some people, which focusing how to accumulate knowledge, how to distribute knowledge, how to manage clients better. So it's a very key effort for us.

And so where is that process? Are you around 30% or 40% through that process now?

I think you also try to address it in -- during kind of our conversation order. So we are not trying to model this, now it's 30% complete or 40% complete. So this is kind of step by step and verification process. When we do one step, we're seeing what the impact of this. Because if impact is very good, maybe it's never going to be finished. So it's a multiple kind of cycles, small cycles, where we see what would be the next one.

All right. Could you just kind of talk a little bit more about, more broadly, your hiring efforts and what opportunity is there? I know you mentioned earlier that it's competitive, obviously. But you get 11% growth, I think, in personnel right now and, I guess, what we're trying to figure out is, when you look at your future growth rate and where utilization rates are, give us the moving parts on how you're going to work through your headcount needs for next year when you're growing materially lower than your revenue growth rate now.

Okay, sure. I was hoping that we will give chance to Anthony to talk today on more financial stuff and kind of would be good to welcome to him. But it seems like I have to continue for now.

Yes, you're doing good.

Okay. So, first of all, our strategy kind of in resource development always was very balance between hiring from the market experienced people and actually training people coming from the newer cities. So -- and we have pretty scalable infrastructure for training facilities. During the 2012, we put a lot of efforts to actually build up bench. And, for example, our utilization in Q4 last year, Q1 this year, were probably the lowest. And kind of clearly the bench were the largest bench during the last 3 years. So with this buildup, we've been able to kind of work in this year's result necessity to hire too many people. So we utilized bench. We kind of optimized it. And again, even today, our billable utilization around 75% for the year, which means that we have good capacity in our bench to grow. That's why hiring numbers kind of lower than our revenue growth, and it should be lower because there are some other attributes to this threshold, beside just utilization. As we were mentioning before, one of our goals were to increase onshore presence. And now our onshore presence, for example, is around 2.5% higher than last year. Also, there are annual growth in billing rates, and it's usually between, like, 6% and 8%. So when you calculate all this, this would explain what's happening. So from the future point of view, we continue to do exactly what we were doing in the past. We kind of accelerating training facilities. We, during this year, invested a lot in buildup very strong recruitment machine. So we brought, also, like we -- some expert from outside of the company who know how to build up recruitment with 1,000 people per year. So we feel that we have all components available for us to continue growing next year.

What's the appropriate utilization rate we should think about modeling longer term?

You mean for the future?

Yes.

So we should think about like 73%, 75%, probably, in the future as well.

Our next question comes from Ashwin Shirvaikar of Citigroup.

I guess my first question is with regards to 4Q '12 last year. Can you remind us what the one-timers were and were they genuinely one-timers? Can you -- because part of that was a budget flush. Would you expect a similar budget flush this year with your clients, and so then last year would not be a one-timer in that regard?

Ashwin, it's Anthony here.

Yes, you can talk.

I can talk, yes, thank you. Thank you for that question, that gives me an opportunity to speak. As far as budget flush, as you know, the budget flush last year came very late in the fourth quarter. At this point, we are seeing some slight indications of budget flush, but really nothing material or significant. So we are not anticipating a recurrence of the flush that we saw last year. I mean, you remember last year was $10 million of flush that came very late in the fourth quarter. We're not seeing indications of that level or anything even close to that this year.

Okay. So the implied growth rate for 4Q this year, we probably should be looking at adding back sort of the impact of that flush to figure out what a good ongoing rate is, is that what you're implying?

Yes, yes.

Is it a good exit rate? Okay, good, good. And with regards to -- a couple of the earlier questions have obviously tried to get to this gap between headcount growth and revenue growth. And there are multiple pieces clearly, there's utilization, which you guys just addressed, and there's pricing. And pricing, obviously, has 2 elements. One element is just wage inflation and charging clients a little bit more because of that. But the other element is increasing the headcount, client-facing people, in the U.S. and the U.K., which, obviously, carries higher billing rates with them. Can you talk about how you're proceeding with that one? I mean, you want to go, obviously, from 5% of your -- 5% to 7% of your employee base, at client, to roughly 10%. What's the impact of that?

What's the impact of these for the future, you mean?

Yes.

It would be probably very similar to what's happening right now. For example, during the last year, we increased between 2% and 2.5% ratio between onshore and offshore. Probably during the next year, it will be similar growth, and we will come very close to 10%, which we're talking about. And it probably would -- now it's very, Ashwin, as you know, it's very difficult to quantify this in advance because, like, we don't have thousands of people on site, all right, so -- and basically, even a couple hundreds make a big impact on the ratios. And a couple hundreds with our size, it's not also a big umber to consider unreasonable, for example, in 6 months we will realize that for some clients, we will have to kind of expedite offsite presence and bring a couple hundreds more than we're anticipating today. So that's why it's, again, difficult to quantify. But at this point, we think that it will be similar to this year. The thing is we will have to hire more people because we will utilize the bench, which we built up in 2012, even in 2013. Next year, we will have to build up some bench again.

Okay. I guess...

But even with all this, you understand that we have pretty good bench size currently, also. It's 75% utilization.

Yes, absolutely. And you do need that flexibility to grow, I understand that. The -- I guess the third part of growth is M&A. With regards to your M&A pipeline, how healthy is that? Should we look for something to happen here in the near term in the next 2, 3, 6 months?

Listen, you will find out as soon as everybody else will find out, right? Again boring, traditional answer here. So we're looking all the time. We have opportunities. We're hoping that during the next quarters, we will close some. But if it happens and when it happens, I cannot comment.

Okay, got it. So last question is with regards to -- clearly, you guys are building an engine for the future in terms of getting all these people who can hire at industrial strength and recruit and all that kind of good stuff. And so the question sort of becomes, now that you have some of that built, with regards to hiring in Eastern Europe, they are sort of a little bit used to hiring in other geographies and what hiring cycle is another geographies. What's the hiring cycle look like in Eastern Europe? In order to grow next year at a reasonable rate, when would you need to hire these people?

So proper -- we start -- again, we're hiring all the time. We're not like really working in cycles. Even with what I mentioned before that we build up pretty sizable bench at the beginning of last year. And utilizing this, we still kind of wishing this all the time. Usually, when you find a person and give them the offer, it's kind of pretty global. So it could take like 1 month or so for a person to see the job. But again, we're not targeting just people from the market. We're investing a lot of special training center. I don't remember when we talked about it. We have program where people, even after coming to EPAM still -- more junior people, still on training from 3 to 6 months. So this is a lag, which we understand we have to kind of keep in mind when we're scaling up. So probably between these 2 parameters, bringing people from the market is probably months or 45 days. And when we bringing people from the university -- so even if already becoming our employees, it's still 3 to 6 months for internal training before they can go to production. So we're planning this in advance.

Our next question is from the line of David Grossman, Stifel. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: I was just looking at the 3Q performance and your 4Q guidance, which would seem to suggest that the margins are migrating to a level towards the higher end of your target range. Do these margin levels fully reflect the investment spending that we've been talking about or perhaps is there some seasonality to the spend? And I guess, what I'm really getting at is, do these margin levels reflect a level that would be sustainable in the next year?

So all I could give you, again, some pretty fuzzy answer. So we designed our kind of future around 16%, 18%, as I mentioned. So is this specific number already reflect the investments which we did? This is where I would be cautious because this is again, experiment in process where we kind of relate what's right and what's wrong. So probably it would be too early to tell right now that this is already reflects. So most likely 4 quarters from now when we see consistency with this and we really would be able to kind of draw the connection between our actions and performance, we will be answering you more precisely. But I don't want to speculate that our investment will already show up. So -- but we do believe that we're investing in the right direction, and it will show up. Hopefully, sooner than later. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Okay, fair enough. So second question I had is really on your maintenance model or maintenance revenue. I think you said it's about 8.5% of revenue. As the applications migrate to the cloud, does maintenance become more important or less important in your model in terms of the potential revenue stream down the road? Because your percentage of maintenance mix is, obviously, much lower than many of your competitors, and just curious whether this paradigm shift has an impact on that level whether either positively or negatively.

So I think we talked about this in the past, and it is an interesting thing and actually pretty complex answer to this question because like everything in our business, when you're saying application development or testing or maintenance and support, it has pretty broad meanings, and there are many variations of this. So general term, like maintenance and support, in our services industry usually means pretty sizable engagement for production activities around managing large legacy installed base. And this is, again, traditional understanding of this maintenance and support. And in this traditional sense, EPAM never had any sizable business. And even from this 8-plus percent we have today, it's probably just half of this would be qualified as a regular maintenance and support. Why it's happening because, yes, we were working mostly on new technology starts. We don't have, for example, any mainframe capabilities today. So -- and in this new technology start, maintenance and support is very different activity. Like if you think about -- and we also talked about SaaS model. If you think about the SaaS model, so the number of releases of the software is not like 1 per 6 months or even 1 per 3 months, it could be weekly or daily, multiple daily releases. So the line between maintenance and support and actually development of new features is very, very tight. So basically the team, which working on application is a combination of different set skills. So that's why it's very difficult to draw the line. And even inside of our 8%, 9%, which we stated, there is a big portion of this type of new maintenance and support work. And when we're saying that we don't see this, for example, deployment to the cloud would affect us, it exactly means that we're not losing the revenue in legacy production maintenance and support as many of our very large competitors probably will. And when clients move into this new model, they're actually looking for the company which have skills to make this support activities, kind of, a new environment. And we are very well positioned to do it, because that's what exactly we are already doing for long time for IT vendors and technology vendors. And even our corporate vendors, which is in reality, as we mentioned many times, in many senses, today technology companies, so even kind of not traditional software companies. So that's why we don't see that it's going to affect us. It's all actually an advantage.

Our next question comes from the line of Moshe Katri with Cowen.

Should we expect any major changes in tax policies or regulations in Belarus or Russia for next year? So can we get an update on that?

Moshe, at this point, we don't see any changes coming from any location as far as tax policy, and we pretty much expect a consistent tax environment going forward. So the answer is no, there's no change.

Tax holidays and some of the benefits will continue, the non-direction of this plant lease in the next few years.

Tax holiday is in place until...

'21.

'21.

'21, 2021. So that should not change at all for the next 7, 8 years. And other jurisdictions' tax structures are pretty stable. We don't see any real changes. If anything, we're seeing some environment lowering their rates as the years go by. So we may see a little bit of some benefits from some jurisdictions, but nothing significant.

Great. And then, if I remember correctly -- talking about wage inflation, I think the Ukraine was probably an area of concern for you guys in the past. Any changes there in terms of wage inflation that we can get an update on what happened in the Ukraine so far this year? Maybe a same update about Belarus. And then maybe we can talk also about attrition rates in both of these locations so far this year.

So, Moshe, I actually don't remember that we were kind of more concerned about Ukraine versus other regions. I think we -- or I would say, I'm personally concerned about all the regions. And again, we're working towards how to mitigate it. And -- but it's the same concern, which we had previously. And this is like all this competition for talent is very tough all over the place, because the same problems in -- on the West Coast and in New York and in London. So I cannot distinguish this right now. So I don't think any significant differences between Belarus, Ukraine or even Russia right now. On attrition front, there are some slight differences between regions, but it's becoming more and more kind of balanced for year-after-year with the kind of we were growing much, much faster in Ukraine, and we started much, much later than in Belarus. So basically it was different now in Ukraine in size, practically coming to the level of Belarus. So it will come -- during the next 12 to 18 months, all these parameters becoming kind of more comparable as well.

Understood. And just last question -- and this is more related to demand trends and maybe you addressed it at the beginning of the call, just got in a bit late into the call. But what sort of feedback or comments are you getting from clients regarding their budgets next year? And then looking at your existing pipeline or new deal pipeline, which vertical/verticals are the most active?

Yes. We -- it was probably one of the first questions, and we have our traditional answer and not because we'd like to give a traditional answer because that actually reflect the reality. So we don't see any differences in comparison with last year. Again with our size, as I mentioned before, $0.5 billion company, we don't see kind of different behavior from the clients than we were seeing during the last couple years. And I would say that all 3 verticals like Financial Services, Business Information & Media and Travel and Hospitality, we expect good level of growth there because that's -- again, that's the industries which we have to utilize new applications to be competitive in the market all the time. And we see pretty good interest from their side for our services. So I cannot even like distinguish some of them. So one quarter could be better. Financial Services still traditionally more stable, but we do believe that others will catch up as well.

[Operator Instructions] Our next question is coming from the line of Nick Robinson of Renaissance Capital.

A quick question in relation to the cash balance. That's obviously picking up slightly over the years. And now, while there's still some potential M&A, assuming that's going to be small bolt ons, do we get to a point soon where you get beyond some excess cash? And if so, what sort of level would that be and what would you think about doing with that going forward?

As far as excess cash, I mean, we most likely will be using that cash to continue to reinvest into the business. We're constantly looking -- as we grow in the regions and add people, we constantly have a need for new facilities, so we're constantly looking at need for facilities. We're constantly looking at M&A. So a lot of those cash funds will be used in the M&A cycle, and that is our main intention, is really to continue to invest in facilities and M&A with that cash.

Our next question is from Ivan Belyaev with Sberbank.

Yes. Well, I look at your adjusted operating profit for the third quarter and for the 9-month of the year, and it looks like your margins are like lowering a bit. So from your point of view, what's the main impact or what was the main impact for that? Is it that the hires of this year, staff or something -- some other costs?

Yes, I assume you're referring to the decline versus last year. And that is -- again, as we've kind of mentioned before, we're continually reinvesting into the business. And we are targeting the 16% to 18% range for those operating margins, adjusted operating margins. And we are going to continue to live within that space with those investments that we're making.

And can you elaborate a bit on the investments, on what you mean about investing in the business? Or maybe major items or something.

Yes. We -- again, it was probably a key topic for us during the old calls, previous calls. So we do invest in account management and business development operation, which was underinvested in the past. We invest in building very strong competencies inside of EPAM, and this requires dedicated people who's not billable, otherwise you cannot develop this. We invest in developing internal applications to optimize operation and management. We're replacing some systems which we built over the last 10, 15 years. And this is significant install base for us, and we do believe that it would actually bring additional differentiation who install the service. So there are multiple items, and that's what we mean by investment. And this is again, as we mentioned, continuous process. So when we will have upside from this, that was the question earlier today as well. We cannot give answer to you right now exactly. So we hope it will, and maybe kind of adjusting our actions based on what we see. So -- but this investment definitely was increased in comparison with last year and previous years as well.

Okay, clear. And the next question regarding your verticals. The technology and ISV vertical, it grew 13% in the third quarter. I just wonder if this is sustainable, and what's going on within this vertical?

23%.

The ISV in the third quarter actually grew 23% year-on-year, and it's pretty much in line with expectations. We've spoken about ISV vertical in the past. It's kind of the core of what we built our business on, and we expect to see it running at around -- right around the 25%-ish of -- percent of revenue.

So are you asking if we're thinking that it -- we will be growing in the future with the same 20%, 25% growth? Or like what can you...

Yes, yes. The thing is, I saw that being, previously -- 3, 4 previous quarter, whereas it grew above 30%, and now it's lower. So I just wonder if this is -- how sustainable is that?

Again, as Anthony answered, we strategically would like to keep this to be a sizable part of our business between 20%, 25% of total revenue, which means that it should grow approximately with the same rate which we grow it. So -- and again, quarter-on-quarter, it clearly could vary, and that's very difficult to control. But long term, that's what we're quoting to support. At the same time, I do believe that -- you see, it's also very loaded question, because if you like to understand like detail what is ISVs & Technology and what is, for example, business with company like Expedia, which is travel, online travel. Is Expedia technology, client or not? We actually have these type of clients all over -- over all our verticals right now. So -- and ISV is more preferred to software companies, but it's also includes guys like Google and Zinnov. So -- but a simple answer, yes, we're planning to grow the same rate.

There are no further questions at this time. I would turn the floor back over to management for any additional or closing comments.

Okay. We'd like to thank everyone. And I also would like to use this opportunity to, one more time, thank Ilya, who is with us on this call kind of the last time for all his contribution during the last 7 years to the company to helping us to come here, and helping a lot through our IPO process and almost the 2 years after this. So I just would like to pass to him for a couple of words. Thank you very much.

Thank you very much, Ark. Thank you. I appreciate the opportunity to say a few parting words. It's been an interesting 7 years where I was fortunate to participate in EPAM's journey from what was then a small, but very focused engineering shop with just over 1,000 engineers to where we are today, a larger publicly traded, rapidly growing, but still very much focused provider of complex software engineering solution services, but to a much broader and diversified set of clients. I will certainly miss some of the intangibles that help make EPAM what it is, like the honesty of the Eastern European culture, the environment of accountability and a very strong competitive spirit that is very much alive in EPAM today. So while I'm sad to leave, I've happy to leave EPAM in the great shape that is today with solid leadership and a bright future. So thank you, all, for joining today, and we are happy with this quarter's performance and the outlook for the rest of the year.

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