EPAM Systems, Inc. (EPAM) Q2 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the EPAM Systems second-quarter 2014 results conference call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lilya Chernova. Thank you. Ms. Chernova, 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 second-quarter 2014 results. If you have not a copy is available on our website, www.EPAM.com. The speakers on today's call are Arkadiy Dobkin, Chief Executive Officer, and Anthony Conte, 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. Arkadiy.

Thank you and good morning, everyone. Thanks for joining us today. I am very pleased to report that our second quarter, excluding any impacts from GGA acquisition proved to be another strong quarter for EPAM exceeding both guidance and consensus. Our second-quarter revenue was $174.7 million, a sequential increase of 9% and 31% year over year. Included in this figure is $2.4 million from the GGA acquisition that was not in our guidance. Non-GAAP net income was up almost 34% year over year and non-GAAP operating margin was in the range of 16.5%. Anthony will review the quarterly results in more details a bit later and provide you our guidance for Q3 and for the full year. At this point I would like to bring additional highlights on several important topics to continue explaining EPAM's overall challenges and opportunities in the market we serve and in the markets we operate. It will include the story around the latest CMO-CIO study we just released, some details on the GGA acquisition and an update on the Ukraine and Russian situation. During the last couple of calls we spent some time talking about EPAM's history and our strong software product engineering [inaudible]. We also touched on our [inaudible] evolution to solution provider to service a very fast developing subset of [inaudible] global market which consists in its majority from the companies never considered themselves as traditional software enterprises. At the same time during the recent year those companies were forced to change and to change very fast because their business model and their primary brands were starting to be impacted very rapidly by software. As a result they have been in search of very different technology providers capable in helping them to compete in the new software dependency areas. We also talked about the challenging set of hybrid skills needed to successfully serve that market and about specific reasons why EPAM might be one of the best to fill such needs. Finally, during our last call we [inaudible] with Forrester, a leading independent research analyst firm. Recognize EPAM is a leader in the emerging market, they named as a software for the development services 40 years. Forrester also identified several key vertical industries [inaudible] to their majority of such services. Those key industries include financial services, information services, detail [inaudible] and media and entertainment. For many years in the past our work put us in front of technologies, the CTOs and CIOs of the companies, very similar to who we dealt with when working with their independent software programmers. Now with a key focus on the verticals mentioned above the conversation as shifted to include the business and market insight of these enterprises. We are now talking to the CMOs and business leads in addition to the CIOs to understand both worlds better and to help them in developing their digital product strategy. At the same time, however, the responsibility for digital product development is not always clear and brings new challenges that we need to address to be successful. So EPAM decided to partner with CIO magazine and the CMO cloud to conduct a study looking deeper into CIO and CMO relationships and how companies are handling their only channel presence and digital strategy. The study was published just last week and surveyed over 400 CMOs and CIOs. It is available for download from our website and we encourage you to get a copy. So let me take you over some key points. First, the study showed that the reason this communication between CIO and CMO – digital product platform [inaudible] and only channel all have different meanings depending on if you speak with a CIO or CMO. This breakdown or miscommunication makes it very difficult to move forward with an aggressive digital strategy. The second key point was a technology finding is creating attack of war between the CIO and CMO. Even as their overall technology budgets have broadened, the allocation of the spend is shifting. Markets and budgets are becoming more linked to technology. Cloud-based digital marketing software, customer analytics and social media technologies to name a few force the CMO to involve the CIO on more market oriented projects. The third key point is that mobile has become the absolute flashpoint for [inaudible] channel. The study found that both CIO and CMO are using sales with all new the mobile strategy. While it sounds good, it can quickly become a negative if they don't have a collaborative approach. This brings us back to the first key point, and again highlighting the importance of vertical coordination between these 2 critical roles. The [inaudible] become more challenging. This in turn makes it even more difficult to succeed for suppliers that are not prepared to deal with it. After all, CMO has [inaudible] working with agency as well as CIO focus has been the system integrator traditionally. These are 2 different worlds. So to deal with that a new breed of partners should emerge who can breach this relationship and can help companies with their digital strategy that heavily depend on the disruptive technologies and new operational models to be delivered properly. Interesting to note that the same [inaudible] problem becoming the critical issue within vendor's multi-functional organizations. This actually multiplies the challenges for providers that have to deal not only with external but also with internal complications. What does this mean for EPAM and other providers? In short many providers struggle to find the right balance for digital customer centric product oriented strategy to execute today. That is exactly the challenge to overcome and the opportunity to [inaudible] for EPAM. To do so we are focused on leveraging our software for the development capabilities and as seamlessly as possible merging it with digital and specific vertical expertise as it was highlighted in the Forrester [inaudible]. That also explains the key focus area for our investments to bring the necessary [inaudible], both by our organic and not organic efforts. Finally, to better align these mentioned efforts, we are in the middle of a project to evolve our brand so that it reflects the significant growth in both breadth and depth of our capabilities. And our readiness to help these companies to bring to life their long-term digital service. GGA – it drew the close third acquisition this year of GGA. GGA is a US-based provider of scientific informatics services to global pharmaceutical, scientific instrumentation, medical device, scientific publishing and software and early-stage life science companies. The acquisition has a lot of potential by combining EPAM's more traditional software development capabilities with GGA's algorithmic development, mathematical modeling and sophisticated content database development capabilities. While initially the focus will be to develop this into Life Sciences solutions practice within EPAM the acquired capabilities could have broader application across our [inaudible]. GGA brings us over 500 employees, most in St. Petersburg, Russia, with over 20 people in US and Western Europe. Their client base includes 8 of the top 10 largest pharmaceutical companies in the world. This acquisition is right in line with our strategy of bringing on capabilities that help us to penetrate new verticals and to develop new [inaudible]. We believe that Life Sciences is among the industries which are disrupted by the same trends as industries we talked before. Therefore it is opening some potential for us to combine the power of GGA, their main expertise with existing EPAM capabilities and to grow this vertical into significant business over the next several years. Finally, before I turn it over to Anthony for the financial review let me update you on the Ukraine and Russia – Russian sanction situation. All EPAM locations continue to operate normally today. [inaudible] report over the past several months doesn't show any deviation from normal attendance rate in the offices in the region. Additionally, non-Ukrainian engagement in EPAM delivery [inaudible] in other countries were impacted. Neither EPAM nor any of EPAM clients have initiated disaster recovery or started to execute business continue to program steps. It is worth noting that majority of large client engagements are delivered from multiple locations and therefore have limited exposure to Ukraine. In those cases where a team's assembled source from Ukraine steps were taken to increase readiness for relocation should situation deteriorate significantly. EPAM hired over 400 IT professionals in the first 7 months of 2014 in Ukraine. This reflects our commitment [inaudible] from the vast majority of clients and staff. Additionally, EPAM brought over 100 university graduates into training and dozens of non-billable administrative and support staff. Sanctions against Russian government and government control interest don't affect EPAM. Extended sanctions target Russian government and government controlled interest and don't concern EPAM as a US-based Company. Russian activity in Western Ukraine has not disrupted EPAM's operations. EPAM has 2 offices in the east of the country Kharkiv and Dnipropetrovsk. Most of the associates are over 100 miles away and have no experience in any disruption. The situation in Eastern Ukraine continues to change on a daily basis and EPAM continues to monitor it closely. Ukraine mobilization doesn't have material impact on EPAM. Ukraine has and always had compulsory military service. This means that a good fraction of young men need to go through military training or service unless they are not eligible for health, family or work-related reasons. Daily report on attendance mentioned above includes absence due to participation in this type of activities and, as mentioned above, doesn't show deviation from historical averages. Need to separate real versus perceived risks. Given EPAM locations and the information shared, we are in position as of today of dealing with perceived risk. And this is what we explain to our customers on a regular basis. As you can see from our financial results and the facts we have shared, we have not felt any significant impact from the crisis and don't have real risk assuming the situation doesn't escalate. Now I will turn it over to Anthony to review the quarter in more details.

Thank you, Ark, and good morning, everyone. I'm going to spend a few minutes taking you through the second-quarter results, then I will talk more about our Q3 and full-year 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, the second-quarter revenue grew 31.2% over last year and 8.9% sequentially to $174.7 million, above top end of our guidance. This includes $2.4 million from the GGA acquisition completed in early June and $2.3 million of over performance driven by continued strength in North America and Europe. North America remains our largest segment representing 49.6% of revenue, up 27% year over year and 9.4% sequentially. Europe was up 42.9% year over year and 1.8% sequentially, now representing 39% of revenue. CIS is down 5.4% year over year and represents only 8.4% of revenue. However, sequentially it grew 22.6%. Looking at service lines, we experienced no significant change in our revenue mix. Software development and application testing services continue to be our largest service offerings representing 69% and 20% of revenue respectively. Our top 20 clients accounted for 56.3% of total revenue and grew 30% while all our clients below the top 20 grew 33% year over year. Our customer loyalty remains high with over 90% of customers working for us for at least a year and 80% coming from those who have been with us for 2years. Each of our verticals grew year over year led by banking and financial services, our fastest-growing vertical, which increased 45.5% from prior year and represented 31% of our Q2 revenues. Trial non-consumer increased 27.2% and was 21% of revenues. Business information and media was up 22% accounting for 13% of total revenue, ISV and technology grew 12.5% accounting for 21.6% of revenue and the other vertical grew by 60% year-over-year and represents 12.7% of Q2. GAAP income from operations increased 5.4% year over year to represent 10.6% of revenue. Included in our operating results on a GAAP basis are stock-based compensation expenses, amortization of purchased intangibles, acquisition-related costs and certain other one-time items that we exclude from our non-GAAP measures. Full details of these can be found in our press release. Stock-based compensation expense increased 83.6% sequentially in Q2. This was due to stock that was granted as part of the acquisitions in the quarter, plus we had an employee stock option grant at the end of March. Also related to acquisitions, Q2 amortization of purchased intangibles more than tripled sequentially. Additionally, within one-time items for Q2 you will see a $2 million write-off. This relates to a building currently under construction in Minsk. In May the contractor we have been using notified us that they could no longer continue as general contractor to complete the building in time and on the terms that we had agreed. In early June EPAM provided the contractor with notice of termination of the contract construction agreement and requested payment of approximately $4.5 million which included the return of advance payments made by the Company. We do not expect to recover the full $4.5 million and have written off $2 million of these advance payments in Q2. We have taken control of the construction site and we are assessing all of our options to get this project back on track. After these adjustments our non-GAAP income from operations increased to 32.7% over prior year to $28.9 million, representing 16.5% of revenue. GAAP net income increased 4.9% year over year and non-GAAP net income grew 37.7% year over year. We completed the quarter with 10,533 IT professionals, excluding GGA, an increase of 18% compared to Q2 of 2013 and 8% sequentially. Utilization for the quarter was at 76.7%, about 1% higher than Q2 last year. For the quarter we generated $0.53 of non-GAAP EPS, also above the top end of our guidance, and 30% GAAP EPS based on approximately 49.6 million diluted shares outstanding. GGA, which was not included in our guidance, added about half a penny to our results in the quarter. Now turning to our balance sheet – we finished the quarter with approximately $175 million of cash, up approximately $6 million from December 31. During the second quarter operating activities generated approximately $15.4 million of cash. Unbilled revenues were at $68 million as of June 30, an increase of about $9 million compared to Q1. This sequential increase is normal as our fixed-price projects grow throughout the year and then expire in the fourth quarter. As a percentage of revenue this is still lower than Q2 of 2013. Accounts receivable were at $108 million at the end of Q2 and DSO ended the quarter at 52 days. Turning to our guidance. For the full year 2014 based on current conditions and including the impact of all acquisitions, EPAM expects year-over-year revenue growth to be 28% to 30%, non-GAAP net income growth for 2014 is expected to be in the range of 26% to 28% year over year with an effective tax rate of 20%. The full year weighted average share count is expected to be just over 50 million diluted shares outstanding. For the third quarter of 2014 EPAM expects revenue between $188 million and $190 million, representing a growth rate of 34% to 36% over third-quarter 2013 revenue. Third-quarter of 2014 non-GAAP diluted EPS is expected to be in the range of $0.53 to $0.55 based on an estimated second-quarter weighted average shares outstanding of 50.3 million. GAAP diluted EPS is expected to be in the range of $0.25 to $0.27. I would now like to turn the call back to the operator and open up for Q&A. Operator?

[Operator Instructions]. One moment while we pull for questions. Thank you. Our first question is from the line Moshe Katri of Cowen. Please proceed with your question. Moshe Katri – Cowen and Company: Hey, thanks. Good morning. Nice quarter. Can you look at your guidance for this year? Is there a way to kind of break down the incremental contributions from M&A to the 28% to 30% top-line growth guidance? Thanks.

Yes, I think there is – what we can share is contribution of GGA this quarter was $2.4 million and we shared this. It would be much more difficult to already separate what is happening with Jointech or even Netsoft because we're working on multiple projects together. And that is why we kind of put in transfers [inaudible] last quarter and it is more even difficult to do it this quarter. Our expectation, for example, for GGA, because it is a very different market segment in Life Sciences for us, would be that they will contribution this year around $16 million. At the same time, again, as we mentioned this quarter, we over performed consensus – consensus and guidance in an organic way as well. Moshe Katri – Cowen and Company: Okay, that is fair. And then was there any FX – were there any FX benefits or headwinds during the quarter to margins?

Yes, there was. There was about – during the quarter about $1 million of benefits in the revenue numbers. Moshe Katri – Cowen and Company: Okay. And where would that be on the income statement?

Net income though is about flat though, Moshe. Moshe Katri – Cowen and Company: Okay. Where would that be in the income statement, which items?

Well, it is built into the revenue, it is built into our cost structure. So we get some benefits obviously from revenues that are invoiced in currencies other than US dollars. So we will see some benefits from that in the quarter and then we also will get some cost savings as well. So there is a net neutral impact on net income, but we will see some additional revenue benefits and some additional cost impacts from the movements in currencies. Moshe Katri – Cowen and Company: Okay, great. And then final question. Can we get an update on the Hong Kong acquisition, talk a bit about the potential there and whether we are seeing any deals in the pipeline from APAC at this point?

We clearly are like not going to go in details on any specific opportunities. But in general our operation in China focused to serve first of all, and this would be for us a priority, to serve our existing clients. So we already share with the client from, again, even before acquisition. So there are some opportunities to expand global projects with a big part initiated in the region. But additionally, right now we're talking to several – our existing global clients which consider into – which allows us in expanding in the region. So – . And again, that would be our first priority. We are not planning right now to extensively market for local Chinese enterprises. Moshe Katri – Cowen and Company: Right. Thanks.

Our next question comes from the line of Darrin Peller, Barclays. Please proceed with your question. Darrin Peller – Barclays Capital: Thanks, guys. Look, I just want to start off first with the – last quarter we obviously talked about certain clients that had greater exposure to either Ukraine or Russia as it pertains to labor sourcing. And it seemed like those clients were still growing with you. Yet, I think they were looking for other avenues of which to source labor for their projects. Is that – how has that gone? Is that still the case? I mean some of those were top of clients if I remember correctly. And where do we stand in terms of any future clients feeling impacts? It seems like obviously, as you mentioned on the call, the growth rate – and as apparent from your growth rate, you are not seeing much of an impact so far. So, so far so good, but any update would be great on that specifically.

Yes, I only can repeat practically the same information we shared at last quarter. So in general we're growing in Ukraine, as we mentioned. So there are different situations with different clients, some of them fled, some of them growing, some of them going down a little bit in specifically Ukraine. So for some of them we put in more effort to bring them to different locations. But again, in general demand still exists and we're bringing new clients there. And just to repeat myself, I think that the demand for clients is so big that if some clients slowing down there kind of consideration for delivery from Ukraine there are some other clients which picking up this opportunity. And that is what we're seeing continues right now. Darrin Peller – Barclays Capital: Okay. And so, I think you mentioned that you hadn't lost any clients, maybe that has changed. But I mean you haven't probably lost any new clients to any competitors, in other words market share has been unaffected so far from this?

You mean in regarding to Ukraine? Darrin Peller – Barclays Capital: Yes, or – yes, I mean specifically Ukraine or…

Yes. No, we didn't lose any clients. Darrin Peller – Barclays Capital: All right, that's…

I'm confirming this, yes. Darrin Peller – Barclays Capital: All right. Just want to follow-up on the headcount number quickly also. I mean, the 18% growth rate I think you mentioned during the quarter, is that what I think if I remember if I heard you correctly. What is the expectation for us to hear? First of all, I assume that that 18% was just engineers specifically. What do you expect for the full year for headcount growth, if you don't mind? And maybe just a little more color on where you expect to actually replace those employees. And then a follow-up to that is sort of the relationship management oriented folks I think you were trying to really go after the past couple of quarters. How has that gone?

So this 18% actually includes 2 acquisitions, so you can think about it like it is around 300 people in comparison from last year was part of this 18%. I think in general we – and again, from organic point of view we were thinking about probably 16%, 18% total increase. But again, we will see what is happening during the next couple quarters and how the staff which we brought with acquisitions would impact it. Darrin Peller – Barclays Capital: All right I mean but I guess just looking forward, again, 16% to 18%. And I think we asked this before, just the correlation between that and your revenue growth. The linearity has obviously widened out to some extent, you are growing much faster. So maybe just give us – I will leave it at this, but maybe you could just give us more color onto what is really driving that and how sustainable that is. Or should we expect some narrowing between those 2 variables going forward? Thanks again, guys.

Again multiple, multiple factors, general increase in blend in the rate. So each is coming from new contracts which is happening at higher rate as a rule, especially that some of them relate to more advanced work and price differently. So increase – as part of this as well, increase in headcount in United States and Western Europe. Annual increase in existing contracts, so a combination of all of this actually driving these factors. Darrin Peller – Barclays Capital: So pricing is generally helping out. That is great. Okay, makes sense. Thanks, guys.

Our next question comes from the line of David Grossman of Stifel. Please proceed with your question. David Grossman – Stifel Nicolaus: I just wanted to go back to an earlier question asked by Moshe. So is the acquisition contribution from GGA in terms of the increment and guidance, was that $16 million then vis-a-vis where we were in terms of guidance at the end of last quarter?

Approximately, yes. David Grossman – Stifel Nicolaus: Okay. Because we increased revenue guidance about $17 million for the year. So should we kind of interpret that as the vast majority of that coming from the acquisition?

Yes, the vast majority is from the acquisition growth adjustment in our full-year guidance. David Grossman – Stifel Nicolaus: Right. And then, Arkadiy, I guess maybe in a perverse sense of logic here I am just wondering whether all the issues that are going on between Russia and the Ukraine, whether in fact companies who are committed to the region perhaps either had some in-house resources or were going to use more in-house resources, have decided that given the conflict and perhaps some of the incremental risk that there are more prone to use an outsource provider than do it in-house. Do you think any of that is going on right now or do think that is perhaps reading too much into the situation right now?

I'm sorry, let me clarify the question. Are you asking that some clients would utilize in-house resources where – versus going to the region? David Grossman – Stifel Nicolaus: No. I guess I'm just wondering whether in fact there is a tailwind to demand in the region because companies being risk-averse are less likely to engage in-house resources. But again, committed to the region and therefore are more likely to use an outsource provider if they are going to…

Do you mean the impact on general economy size of people wouldn't be careful hiding their own engineers and you will increase share of external providers, is that the question? David Grossman – Stifel Nicolaus: Yes.

Okay. No, I don't see this trend. I think in line with what we were kind of sharing for the last couple – during the last couple calls, I think the driver here for many of our clients actually to build new type of publication sooner than later. And that is driving the demand. And in many cases there is almost no option to do it internally. David Grossman – Stifel Nicolaus: Okay, so then just getting back to my first question, it sounds like you outperformed a little bit in the quarter ex the acquisition. But when you kind of rolled that up into guidance you really just took the acquisition and that is basically the increase to guidance vis-a-vis where you were…

That is right. In general because while clearly there is a demand to fulfill this demand with right capabilities it is a challenging task. So we're kind of still between those two. And there is like while in general the situation that's impacting us, but you can see that, for example, our revenue in CS slowed down significantly and even to replace all the stuff and repurpose some delivery capabilities which would take time. It is not necessary that 1 or 2 quarters would be enough. David Grossman – Stifel Nicolaus: Okay, I see.

But again, in general I think the growth is balanced between demand and our right – specific capabilities each client is looking for. David Grossman – Stifel Nicolaus: Okay. And then just the last question on that. Are you seeing any other vendors pulling out of the region because of the conflict?

Nobody like really pulling out, some people – oh you mean vendors. David Grossman – Stifel Nicolaus: Yes.

In my opinion maybe some very small ones, credibility of which were impacted by separation much more than more established. So maybe very little ones. But I don't think so. David Grossman – Stifel Nicolaus: Okay. And then just looking at the geographic mix, is the Asia Pac disclosure just a new disclosure or was that an acquisition? It just looks like it went from $0 to $3 million sequentially. I am just wondering what drove that or is that just new business with an Asia Pac client?

Yes, a combination of those two, it is acquisition plus projects which we started there. And again, that was the reason to do acquisitions because we know that we have some opportunities in the region. David Grossman – Stifel Nicolaus: Okay. And then just finally, on the non-GAAP expenses or adjustments for the year, Anthony, I'm just wondering if you could give us some sense of how we should model those for the balance of the year given the spike in stock-based comp. And obviously you had a $2 million item in there as well. But you had amortization tick up. I mean, what are the right numbers we should be thinking about in the back half of the year?

Okay, yes, from a stock comp perspective you are going to see an additional increase as we go into Q3. t is probably going to jump up to about – what is the right number, it would be about probably $7.4 million in total stock comp in Q3 once the acquisitions are kind of a full up full quarter worth of stock comp charges. And then that number probably holds fairly consistent for a quarter going forward. And from an amortization of intangibles perspective, it is going to go up probably a little bit – I would say next quarter is going to go up by another $400,000 or so. So I would just factor in an additional $400,000 next quarter and hold that number going forward. And then obviously the write off for the Minsk building, we don't expect that to recur. David Grossman – Stifel Nicolaus: Right. And is there any other residual things we should think about in the context of that building and its impact on your capacity or anything like that?

No, the building – the purpose of the building is obviously to consolidate our people from all the various locations in the Minsk into 1 central building. So what – the delay will just require us to keep those rented spaces for a little bit longer while we complete the building. But it should not impact our capacity and our abilities to recruit and have places for people to sit. David Grossman – Stifel Nicolaus: Okay, got it. Thanks very much.

[Operator Instructions]. The next question comes from the line of Ashwin Shirvaikar of Citigroup. Please proceed with your question. Ashwin Shirvaikar – Citigroup: So I guess my first question, Ark, I want to go back to your comments around digitization and the work being done with the CMO and so on. Could you take that maybe a step further? By the way, I agree with those comments completely. But can you take it one step forward and how is EPAM adapting to that trend in terms of its own talent hiring, in terms of its own account and sales management growth? Do you have to change the kind of salespeople and account managers you hire? Any comments along those lines?

Yes, and thanks for question because it is exactly kind of in line and the reasoning why we shared this information because it is clearly impacting our organization and how we operate. And as you remember, our acquisition of digital strategy and experience design capabilities like almost 18, 19 months ago and [integration] of these capabilities, which bring new opportunities but clearly bring new challenges because, as I mentioned, it's similar to our clients. Kind of complications happen inside of organizations when you integrate creative parts and engineering parts. And that is a challenge which we do believe that we overcoming. And we've seen a lot of benefits from this. We also started to hire people with – we talked about it before – not once with consultant we're ground, with very strong industry we're ground. And the main point how to actually integrate all this, how to [inaudible] harmonize all this [inaudible] into the clients to bring not 3 or 4 or 5 organizations or skills but actually one. We're changing the profile of people we hired and we're changing some stuff in the Company to make sure it is happening. Because we do believe that the ones who would be able to do it in more efficient way to merge all these capabilities in one we think will be bringing the future opportunities. Ashwin Shirvaikar – Citigroup: Got it. And does that potentially change your offshore on-site mix, make it a little bit more on-site, a little bit faster than planned? I know you have a plan in place anyway to modestly increase the on-site people ratio. But I'm wondering if this accelerates that trend?

From one point of view it does and I think it is on an organic basis it does accelerate. At the same time with one of the recent GGA acquisition kind of we changed this ratio again because from one point this Company has a very, very strong industry expertise in life sciences space. From another point of view their onshore ratio is very little. So basically we kind of went forward, a little bit back, now we will need to compensate for this as well. Ashwin Shirvaikar – Citigroup: Right. And that's probably a good transition because I did have a question on GGA. The $2.4 million contribution in the June quarter, obviously it is not – based on your other comments not appropriate to annualized that. Otherwise you would have raised your guidance by a bigger number. So what was the annualized revenue run rate for GGA? And how should we think of maybe the seasonality or lumpiness of that revenue stream?

I just treat this table like – again, you can calculate easily from the acquisition date and our projection right now around $16 million [ph], for example, so you can get this number pretty simply. But from – it is a pretty stable contract, so long-term. So there is no [inaudible] seasonality there. So it is not consultant, consultant [inaudible], it is basically pretty much stable services through R&D parts of life sciences. Ashwin Shirvaikar – Citigroup: Okay, understood. And I understand what they do. I think the focus between GGA and Netsoft towards healthcare, I think there is certainly a lot of demand in that area.

Yes, that is exactly – we very much believe that we would be able to apply a lot of current capabilities which we develop certain other verticals to this one, because they become very much dependent on kind of system engagement type of applications which we build good expertise to deliver during the last several years. Ashwin Shirvaikar – Citigroup: Okay. My last question if I can – I may have missed this. Did you mention CapEx for the full year and free cash flow outlook? Has that changed? I may have missed that, sorry.

We did, I mean our normal CapEx is still going to be in that $12 million to $14 million range. There were probably be an uptick with the building – we're going to have to spend a little bit more on the building now to get that going. And that estimate right now is somewhere in the $6 million range over the next 12 months. So probably this year about half of that and the rest will be maybe next year. Ashwin Shirvaikar – Citigroup: Okay. And then once you have that building will that result in rental costs going down as you move your people? Is that sort of a future benefit we should think about?

That is the plan assuming that we don't grow beyond that capacity and have to look for additional space for growth and headcount. But the plan is to consolidate into 1 location. We will see in 12 months if that benefit is still realizable or if we…

And again, the size of the building will not allow us to consolidate in 1 place.

Right.

In Minsk anyway, so it is still [inaudible]. And by the time we finish we probably will grow to another building again.

Right.

Okay, got it. Thank you, guys. Congratulations.

Our next question comes from the line of Steve Milunovich of UBS. Please proceed with your question.

This is Peter in for Steve Milunovich. Ark, can you talk about the performance in the CIS region? Was that impacted at all by sanctions from the UN and the US towards Russia? And if the sanction situation were to get more complicated having delivery centers in Russia, would that impact the business at all?

There is definitely risk like that. But – and the answer would be we're not impacted directly by the sanctions but probably sanctions if not yet potentially can impact the economy in Russia and it would in turn impact our clients and us as well. So, but as you can see even during the last couple years, the trend was the proportion of business in Russia was going down for us and we don't consider this as a very big risk. From the point of view which allows resources, we will be able to reassign these resources to other clients. But again it would take some time. So basically the worst-case scenario, if something would happen very kind of transactionally, like if something would happen overnight then it could impact us for a couple quarters. But we rather expect that it would be more kind of transitional work if anything. And also I would say that – and I mentioned this during our last conversations. During the last couple years we decreased our dependence in Russia from government services a lot. So we still have some clients which are partially owned by government, but at the same time some business in Russia coming for us and increasing from private enterprises specifically in retail and consumer goods areas where we're implementing a lot of new large e-commerce implementations kind of independent from sanctions. But again economy could impact this as well clearly.

Thank you. And then you talked about some new business coming in with the higher rate card. Can you talk about some of the pricing that has been going on with your renewals or the core business and how that has been trending?

I think we can repeat what we were saying before. The general kind of blended increase has been around what, 7%-8%?

7%-8%, yes.

7%-8% a year each. Big portion of this coming from new contracts signed in high rates. And some of this from increasing the annual rates moving people from one skill set or experience level to another. So I don't think I can give you more information on this.

Okay, that is fair. And then in terms of the sequential change in the utilization rate, was that more of a factor of recent acquisitions or the Easter holiday? Were there other impacts to that?

I think it's both. So there is some utilization – some level of the utilization impacted by acquisitions. And also increase in [inaudible], because you know there are 5 kind of cycles there and we were talking before that we, for example, in 2012 hired a lot of people and then we were utilizing this bench due to the 2013. Now we have a little bit of increase in starting to kind of compensate for this. And, yes, June vacations also already impacting [inaudible].

And then a final question following up on the Minsk building. Do you foresee any changes to your headcount addition plans pushing this out? Does this slow down your plans for headcount growth either in delivery or in support staff?

No. We in Minsk we always rely significantly on leasing external space. And we have a good base of this and we have enough – enough room there.

Great, thank you. Good quarter, guys.

Thank you. At this time I would like to turn the floor back to Mr. Arkadiy Dobkin for closing comments.

Okay, thank you for joining today. Thank you for listening to us. And we hope to continue reform and update you in 3 months. Thank you very much.

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