EPAM Systems, Inc. (EPAM) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the EPAM Systems Third Quarter 2016 Earnings Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your Ms. Lilya Chernova. Thank you. Please go ahead.

Thank you, and good morning, everyone. Right now you should have received your copy of the earnings release for the company's third quarter 2016 results. If you have not, a copy is available in the Investors section on our website at epam.com. The speakers on today’s call are Arkadiy Dobkin, CEO and President; 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 risks and uncertainties as described in the company’s earnings release and other filings with the SEC. Arkadiy?

Thank you, Lilya. And good morning to everyone. Thanks for joining us today. Today we are pleased to share our results for Q3 climbing revenues $298.3 million in revenue, which is up 26.4% over third quarter last year and 28.7% growth in constant currency and 6.2% sequentially. Last time we talked about some demand and pricing changes in the market in our anticipation of some level downstream affect several BFSI accounts and few consumer clients. Today we can say that along with our industry peers we continue to experience some level of unpredictability due Brexit situation, which just in Q3 impacted our revenue by 2.3% due to currency headwinds on top of continued questions around this longer term impact. On another side, despite this general challenges everybody is talking about, we at EPAM have seen continued demand for our services. The demand which we see for complex technology solutions and business transformative services the deliveries were well balanced, consulting design, engineering integration and managed services gives us further confidence in our long-term strategy and our [indiscernible] to bring as anticipated really to our clients and in turn to continue to support our industry region revenue growth of over 20%. So Anthony will provide more detailed financial updates. But I want to share a several important Q3 highlights, which also would apply at large extend to our free cash for Q4 and for the full year. First, we continue to see more diversification in our client concentration, more so new acquisition but also through increased expansion in our existing clients fell outside of our top 20 accounts where we saw a 43% growth rate which is consistently higher than the overall company growth. Because of this our top 10 concentration grew by 5% to 37.6% from last year and now it’s up 20%, it’s down almost 6% to 48%. Turning to verticals. Media and entertainment delivery to a 40% growth and thus for the past four quarters primarily fueled by continued expansion with clients. Our imaging vertical which includes a variety of clients continued its strong growth as well up 56% year-over-year. Also as part of this emerging story, we are excited to partner with several leading private equity owners, we selected a pharma vendor in health portfolio company to drive life scale transformation program, as well as to enable high potential digital start up to scale. We believe that this partnership have good potential to grow as we demonstrate our value and expand to grow to higher proportion of this portfolio. As you can see, all of our vertical grew over 20% year-over-year with exception of travel and consumer which came in just under the as a result of deceleration of growth in two large and highly penetrated accounts. Last, the currency impact driven by several large detail accounts in the UK. Current share in fact we do see continued strong growth outside in our travel and consumer vertical, globally with a number of strategic accounts growing over 40% year-over-year. Overall, we look at this as a positive trend towards and better diversification which is in line with our longer term strategy of keeping a fair balance across our verticals which should allow us to continue generating topline growth, while mitigation risk could be impacted by over concentration in one or two specific markets. Looking to our global operations. We continue to invest significant resources in developing the right mix of delivery capabilities by hiring global teams of experts which have the skills needed to upgrade demand or less specific subset of the market which in the industry analyst view and in all you use as well. We will continue to grow faster than the rest. During Q3, our headcount came at over 19,000 IT professionals which is 36.2% year-over-year increase. There are several reasons for that. First of all, all in the year [indiscernible] was accelerating of several large scale clients including UBS in several newer locations. When they started to get indications the demands was going to be delayed they had already committed to hiring and in most cases hire a significant number of staff in anticipation of their ramp. Their ramp up eventually did not happen, in addition we had to continue acquiring locations committed to either growing accounts. In addition, during last quarter's we saw weaknesses in the growth prospects of some key years accounts, leading to lower than anticipated utilization and revenue in there is still new cost part of the client business. So we have to compensate partially as GAAP revenue in our already established locations, where you have to continue hiring the personnel. While in some cases we worked to partly address this lack by deploying people to different new client programs and others reelected to maintain this excess capacity in anticipation of newly wins over the next several quarters and focus on. All that led to imbalance in our utilization. In summary, overall utilization came in at 72% in Q3, which was lower than the sort of volume a year. At this point we expect to see continued utilization softness into Q4 and some locations and we work to clear the range and redeploy available capacity. All that clearly carries and follow EPS guidance adjustment and Anthony will go at more details on this strategy. As part of our voice to address the situation better, in the future, especially result continues commitment to build a true global company with expanded presence in over 25 countries. We recently strengthened our people and improve operations by bringing several new senior leaders to focus on our employee [indiscernible] and management and number of people management programs and platforms. Larry Solomon who will be leading this team has achieved people like us and very new role IT firm. Larry came to us after many years at Accenture, he served a number of people and senior management positions with the last three years being chief operating officer of Accenture. As I have said before, this is new investments in delivery capabilities in quality personal are critical to ensure that we are well-positioned to deliver on our commitment we have made to our employees and all customers, and this is also the strategic differentiators despite the current difficult business environment they will position us to take advantage of the opportunity that build certainly revenues themselves over the course of the next few quarterly. So in closing, we are productively managing our utilization and we are also seeing good progress on other key operational methods, including improvement in operating cash flow, working capital and lower attrition numbers. This is all continued program and focused investment in building our global delivery teams and platform, should enable us to continue to deliver 25% growth and to do so with no significant scale. With this, I turn it over to Anthony for detailed financial update.

Thank you, Ark and good morning everyone. I'll start with some financial highlights then profitability and cash flow and end on guidance. As you heard in Ark's comments, our growth strategy is engineered to deliver consistent sustainable results and we have trend in another strong performance in the third quarter. Here are a few key highlights. Revenue closed at $298.3 million, 26.4% over third quarter of last year and 6.2% sequentially, which represent a constant currency growth rate of 28.7%. Geographically, North America represents our largest region, representing 56.4% of our Q2 revenues, up 34.8% year-over-year. Europe was up 19.3% year-over-year and 25.6% in constant currency, representing 37% of Q3 revenue. APAC grew slightly and now represents 2.3% of our revenue and CIS is flat year-over-year. Turning to profitability, GAAP income from operations increased 22.1% year-over-year to represent a 11.4% of revenue in the quarter. Our non-GAAP income from operations for the quarter increased 19.9% over prior year to $49.7 million, representing 16.7% of revenue. Our effective tax rate for the quarter came in at 21.3% and for the quarter we generated $0.49 of GAAP EPS and $0.76 of non-GAAP EPS, which includes the tax effect on non-GAAP adjustments and is based on approximately $53.9 million diluted shares outstanding. The utilization challenges continue to create pressures on our income from operations, and ultimately EPS. Utilization ended lower than anticipated at 72%. Our non-GAAP SG&A, which excludes all stock comp expense came in at 19.5%, which is slightly lower than last year. We continue to focus on leveraging our SG&A spend and executing our strategy to focus on talent acquisition, workforce planning, balancing the bench and hiring functional management who bring value to our long-term sustainable growth strategy. Our attrition remains low at 10.4%. Turning to our cash flow and balance sheet. Cash from operations for Q3 was $61.8 million and 11% year-over-year increase. Free cash flows came in at $55 million or 136% of adjusted net income conversion. In addition to strong quarterly performance, the cash flow improvement can also be attributed to our decrease in our DSO. This quarter our AR DSO is 58 days and our unbilled DSO is 25 days for a total of 83 days, compared to Q2, 2016 total of 88 days. As we mentioned in past quarters, we would implement changes to improve our processes, which we clearly have. Our efforts have reduced unbilled DSO by 19% sequentially. We have a better process in place now, but can't predict of the Q3 levels will be sustainable. As we continue to work through additional enhancements we will keep you updated. Turning now to guidance. Following our comments about macro demand pressures in the industry, our current outlook for Q4 revenue is expected to be at least $310 million, which will result in full year revenue of $1.156 billion, an increase of 26.5% over prior year and constant currency growth of 29%. GAAP diluted EPS will be at least $0.54 for the quarter and $1.94 for the full-year. Non-GAAP EPS will be at least $0.78 for the quarter and $2.90 for the full-year and is based on a weighted average share count of $54.3 million fully diluted shares outstanding. The $0.11 GAAP EPS drop in guidance is attributed to the compounded effects of lower utilization across multiple quarters, combined with FX losses on assets held in foreign jurisdictions. The $0.07 non-GAAP drop in guidance is related exclusively to the utilization challenges. Now, I'll turn it back over to Arkadiy for some additional comments.

One more important comment. As we stated in our press release Anthony, while he will be staying with us through the third quarter of 2017. So it may be noted that he plans to resign as the company's Senior Vice President, Chief Financial Officer and Treasurer as end of this period. Anthony has been a key part of our growth and success over his 10 years with us. We really thankful for that and wish Anthony growth in the future as well. But just to make sure we are all on the same page, during the next quarters Anthony will continue to work and serve is capacity, assist us in our search which is successor and then help to ensure smooth transition. Now we can turn to Q&A part.

Thank you. [Operator Instructions] Our first question comes from the line of Anil Doradla with William Blair. Please proceed with your question.

Hi, guys. This is Maggie Nolan in for Anil. I was hoping that you could give us a little bit more color on the two travel [ph] request that you are seeing some softness at, as well as the adjustment your other top clients and the dynamics there?

I think we shared it our - several notes this morning that first of all there is impact on some financials services clients which we talked before and some trend [ph] in consumer which is not really noticeable. So I think certain is coming from again, just if you account, but it’s - will be account which we mentioned during the last call and…

We can't really mention the client if that's what you're looking for. I mean, there are two - we have two of our larger travel and consumer clients that are very fully penetrated, and you know we're starting to see just a little bit slow down in the growth rates for those two big accounts. But there's nothing concerning there except that you know, they reach kind of scale and a size where the growth is starting to slow down there. They are still growing just at a slower rate. And then when you look at the rest of the vertical there are number of up-and-coming account within the vertical. But they are still relatively new and they are not material at this stage to offset the slowdown we're seeing in the two fully penetrated account. So that that dynamic is what's hitting us now, we're still very confident around this vertical, and as these newer account start to really gain and build some traction we should see growth continue and get back up to the levels where we've seen in the past.

Okay, great…

Does that help?

Yes. That’s very helpful. Thank you. And then the other question I had is, how are you planning to address the utilization challenges moving forward and how is this going to impact your hiring plans over the next couple of quarters and keeping in mind that you obviously have spoken to the fact that you want to keep the long-term growth plan impact? Thanks, guys.

Since we also mentioned this topic already, but in general we felt some - some long-term planning for couple of accounts which didn’t realize and we have excessive capacity in very specific locations which we cannot utilize immediately and might take a decision but we are not going to rush, but opportunity and with additional training, while still continue hiring in locations where we plan to grow further account. So in result of this we got to situation where our utilization were all driven that we expected before. So at this point, we were planning to make right assignments for this extra capacity and bring these two levels which is in much more normal range for us which is probably 3%, 4% up. So when it is exactly going to happen it’s difficult to say, it probably will take us couple quarters, but that’s what we are planning right now. The good part of this that it’s pretty manageable process, it’s not like very specific situations which we cannot control, it just with our choice to invest in people during this period.

Okay.

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

Thank you. Could you tell us what the organic revenue growth was in the quarter and expectations for organic growth in the fourth quarter? The Alliance acquisition is lapping in November, I believe, is there anything else that’s lapping?

Nothing else lapping, so just AGS in Q3 organic was 21%, organic constant currency was about 23%.

Okay. And I think Ark commented on expecting 20% plus growth going forward, is that is still reasonable expectation looking out for 12 to 24 months, based on the pipeline that you see you?

Yes. We believe it’s pretty reasonable explanation and again, even this numbers impacted by the same reasons which you said it already today, including our utilization situation and some capacity and locations which we couldn’t immediately realize. So - but we believe that we will be able to continue growing 20% plus.

Is there anything changing significantly, I'm sometimes asked about the Indian vendors and whether they're able to kind of move up the stack and acquire better software development skills and compete with you?

I think we feel the same way like we feel before. So market is to big specifically in the subset of the market where we play and I am pretty sure everybody improving, but I think it's impacting in general the opportunities for growth.

Understood. Thank you.

Thank you. Our next question comes from the line of Jason Kupferberg with Jefferies. Please proceed with your question.

Hi, guys. This is Amit Singh for Jason. Sorry to get back on this question again, but the utilization part, the long-term plans for certain client that you saw anything, didn’t realize, were these clients primarily in banking financial services sector and what does that mean for your revenue growth sort of next year, is this sort of the revenue that you were expecting to come next year that did not going to realize now?

So, yes, it was mostly in financial services and that’s exactly what we're trying to communicate. Yes, it might be impacting us for the next several quarters, but we do believe that the market is strong enough specifically in the area in which we play and that would allow us to grow 20 plus percent, that’s exactly our message. So how specific clients we'll be having during the next quarter or two or next 12 months it's very difficult to predict. We're not relying on specific clients, just probably talking about diversification from client balancing, concentration, specific verticals in which we play and we are very profitable with our convincing - kind of strategy of the revenue and portfolio right now to continue grow in 20 plus.

Great. And then just one quick question Anthony, sorry to see you resign, but talking about your non-compete, how long is that, what is the duration of the non-compete that you have?

It will be 12 months from the time that I actually leave, will be the actual non-compete period.

Okay, great.

I have no - I have no intentions of going to a competitor or competing with EPAM in anyway, I actually intend to remain a shareholder of EPAM. So most of the reason I'm leaving is more for personal business interests outside of EPAM.

All right. Thank you very much.

Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citigroup. Please proceed with your question.

Hi. Thanks. So the question I have is with regards to - is the standard 16% to 18% non-GAAP EBIT margin still achievable over the next couple of quarters and next 2 to 4 quarters let's just say, given what's going on with the utilization issue, and if not, what's a good range?

At this point, we are staying with that 16% to 18% range, but as you have seen this year and I would expect it to continue next several quarters, we're feeling pressure and it’s going to keep us to the lower end of that range.

Ashwin, right now our feeling is that we have got some utilization and we'll be improving and clearly utilization is probably the strongest impact on this number as well. So still thinking that that unless market change drastically for some one another reason we should be able to be in this corridor in the future.

Got it, got it. And in terms of 50, just to try to understand specifically what is going on because you do have a fairly robust increase in headcount that’s going on, what you're basically saying is you are hiring in certain locations. Your clients don't necessarily want current to be based in those locations is that what you're saying?

No, what we are saying and there are multiple reasons, again, it’s much more difficult analysis, but on the high-level what we're saying right now that we were planning to stuff client engagement, specific clients engagement, in specific locations and prepare for this and it was delayed couple times and then it was postponed and with our extra capacity in this locations. So at the same time we did committed to grow the other part of the clients in different locations and continue to hire simultaneously in different locations to satisfy our initial commitment and then we have already partial team there, so it wasn’t possible to change, that’s why we were around two extra capacity. So that's one of the biggest reasons, but it's again, it’s more complex situation and we have our operation in India which we mentioned didn’t play exactly as we expected all in the year, so which was additional point, and combination of this broad situation to where it is right now. But again, in our view all of this very fixable and manageable.

Okay. Basically you have enough demand at the people you have hired can get sort of utilized, used up and put on projects in the next couple of quarters, it seems like. The…

Yes, we are comfortable that where it was in locations where you have extra capacity which was prepared for specific clients, its qualified capacity, it’s just taken several quarters to reassign the few sources.

Got it. Can you comment little bit on the nature of what is causing the delay in these couple of locations, is it primarily macro demand?

That’s what we talked before, that’s what we’re sharing last quarter about financial services and that’s - and last quarter we said we don’t know exactly how it’s going to play out, but we know there is something happening. So it’s become much more clear right now. But even right now it could step on with the next couple of quarters the same clients compare to us. So it’s still pretty further.

Got it. Thank you.

Thank you. Our next question comes from the line of Avishai Kantor with Cowen. Please proceed with your question.

Hi, good morning. Thank you very much for taking my question. I think in the beginning of the year you were talking about factoring 3% pricing increases for this year for 2016, do you have any early indication what should we expect in early - in 2017 related for the for the next 12 months, are we still talk about 3%?

I think we will share with you this probably next quarter. So it’s too early for us right now to say it.

Okay. And in the last conference call you were talking a little bit about pricing pressure, I mean, is this - are you still seeing the same environment?

At this point, you know, pricing - pricing is usually locked down in the first half of the year when you talk about renewals for existing accounts and then as new accounts come in its varied in this negotiation. So that hasn't changed dramatically from what we discussed last quarter, we're still feeling from a kind of an organic constant currency perspective we're still at just under 3% from a pricing perspective.

Thank you so much.

Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.

Hi, guys. This is Mike Reid on for Joe Foresi. Thanks for taking our question. I just saw that the euro ticked up pretty good as a percentage of revenues this period. Could go on to a little detail on maybe what some of the causes of this were as percentage of revenues?

Euro it didn’t move dramatically this quarter. So I don’t want actually kind of talk to you about what you're looking at, the euro has been running pretty consistently as a percentage of revenue for the past several quarters. So what statistics are you looking at that show its spiking.

Is it not on the stat sheet, it was up to 12% from about 9%?

It’s - yes, but it's been pretty consistently in that 10% or 11%, 12% for a number of quarters. That's why I don't see that as a significant increase.

Okay…

There is nothing special to that moving - there is nothing special that’s moving the euro concentrations, just normal contracting, nothing dramatic has shifted.

Okay, thanks. And then with the DSO down again, it was better, also is that something you see that level is - will still be sustainable?

At this point we're not comfortable saying that the Q3 DSO is sustainable. It took a big drop, a lot of this is the additional efforts we really been focusing over the past couple quarters. So I think that brought it down significantly, not willing to commit to these levels at this points, as a go forward we're going to take couple quarters and see how it trends and then we could talk about what's a consistent level.

All right. Thanks, guys. Operator Thank you. Our next question comes from the line of James Friedman with Susquehanna International Group. Please proceed with your question.

Hi. If I could to Anthony, you are going kind of quick there, when you were discussing the as reported versus constant currency performance in Europe could I trouble you to repeat that?

As reported versus constant currency, yes, sorry. So the organic growth was 21%. The organic constant currency was 23%. That's what you were referring to?

I got that one, I appreciate you saying Anthony. I was asking specifically about Europe what as reported versus constant currency Europe number was?

As reported, for just European revenues? Or you talking euro revenues?

We're not…

I am not 100% sure, I am not 100% sure what the question is that you are asking.

In the language where you are saying North America growth that was 56.4% of revenue, up 38%, then you had Asia and then CIS is flat. What was in the script that you said about Europe?

I am sorry, I thought you were referring to the last question, my apologies. Europe constant currency was 25.6% versus 19.3% reported.

Yes, that’s what I was looking for. And then…

Sorry, apologies, I thought you referring to the last question.

Yes. And then with regard to the tax rate Anthony as we are going forward, I'm doing this from distant memory. But my recollections you had some special economic zones, that's too fancy word in some parts of CIS, what do you see is the tax rate from that region going forward anything to call out?

The only place we have a special tax benefit from an income tax perspective is in Belarus where we're enjoying a tax holiday through 2021, that's the only current special tax regime that we have and really we don't comment on regional tax structures, but we expect to stay in this 21% for the foreseeable future. 21 or low 20s is what I would expect until clearly in 2021 that could change, but that's a number of years out.

Okay. Last thing from me if I could, I realize you're not projecting the improvement in DSO and unbilled to continue, but could you just remind us, is there any seasonality - I seem to recall there was that occurs in the Q4 related to DSOs?

There has been in the past some Q4 seasonality where company is trying clear budgets and get payments closed out before the end of the year. That’s part of why I don't want to you know confirm any trends around the DSO until we have a few more consistent quarter. So there is a possibility of some additional you know benefits in Q4, that trend continues, but we need to see how things play out for the next couple quarters, so I am not really committing to any specific levels.

Got it. Thank you.

Thank you. Our next question comes from the line of Georgios Kertsos with Berenberg. Please proceed with your question.

Yes, hi. Thanks for taking the question guys. Couple from me, hopefully very quick ones. First of all is on the pricing environment. So if I am looking basically on non-GAAP operating it’s probably about 1 percentage points down year-on-year. Is that entirely due to utilization - capitalization or is it at least partly attributed also to some sort of adverse pricing movements? And then I have a follow up.

Utilization is the biggest impact that you are seeing on profit margins for this year. There are some other dynamics that play into that. We have been stepping up more over the past year in offshore locations, so that creates a little bit of a dynamic shift as well, because offshore obviously are going out at a lower price point than the on-site. So as you see our offshore concentration increase that impacts it. And then obviously the inclusion of India and China, which are at lower price points than our organic resources that create additional pressure. So I would say utilization as the top impact and then some shifting to lower price point locations adds additional impact there as well.

Got you. And a quick follow up on that, basically so I am looking at it from sort of a - is it the off shore penetration at present broadly at steady state level, i.e., should we expect the sort of year-on-year price deflationary or impact that you are seeing, you just highlighted to remain for the following quarters or basically accelerating the numbers?

Can you repeat that…

Can you repeat the question?

Yes. So basically if we're thinking about of off-shoring and if I have heard Anthony correctly, just actually seeing increasing slow penetration creates a price deflationary impact, so you h have constant volumes that pricing basically might becoming incremental lower for off-shore stuff. Now that top line headwind is likely to remain for as long as we increase off-shore penetration, i.e., it will grow way, when the off-shore penetration hit the state level. So effectively are we had already touched maybe state level or do we expect increasing off-shore in the following quarters as well?

Okay. Let me take on this. First of all and this is related to situation to make sure we are on same pace. We [indiscernible] 3% production increase and if you try to analyze our organic numbers then we exactly as 3% so far during this nine months. So the second are increase in our store proportion clearly impacts the total pricing numbers is that what Anthony mentioned. But in our plans we go into - it’s not like we plan this like acquisition of the year since some increase in headcount we've had in china impacting this. So basically we slowed down with unsure growth in relative numbers. What we're planning to do, we definitely planning to increase our on-shore presence and country presence and we're going to grow into these areas in the next 12 months, so that's our plan. We still very committed to increase our presence in countries where we are getting revenue from and kind of client facing capabilities.

Okay…

So does it answer your question? Okay…

Yes, it does. And then quick follow up from me, can you just perhaps share a few high level thoughts about basically the UBS account, how you are seeing basically demand shaping up on that from? Thank you.

So I think we share it everything we knew and very difficult right now to make projections in this area. So we'll rather - we'll see what would be happening on the market, but clearly account slowed down, you can see from top line performance. But it is again, might go back, might grow back, might stay flat at this point, we don’t know.

Okay. Clear, thank you.

Thank you. Our next question comes from the line of Peter Christensen with Citigroup. Please proceed with your question.

Good morning. Thanks for taking my question. I think last week Thomson Reuters made a previously interesting announcement accelerating its restructuring, reducing headcount quite a bit, but they also said they are going to pick up the pace of their transformational efforts, which sounds like it's a positive for EPAM. Can you just give us any sense if there is any changes in the relationship there or perhaps the opportunities that you see with this large client of yours?

The problem was listed as one of the five preferred vendors, so is also you who kind of watching us for a long time [indiscernible] at some point it was logistic on cost and then it was down, today the account is one of the top three basically, much bigger than it was when it was the largest one. So - but again, similarly like with UBS, the account is extremely difficult to predict the future, that’s why we really focusing on right balance of account and diversification across industries as well.

Okay. And then you know, as it relates to the new executive appointment that you announced today, Larry Solomon, it did seem like you are hiring somebody that has extensive North American experience, does that tell us anything about your strategy of perhaps building up delivery here in the US or North America or just increasing your onshore ratio going forward?

I think you need to understand Larry's experience significant time is his previous employer and he was responsible for the duration of globally challenged with current four locations and the gross across several hundred thousand people globally. His last three years was focus in North America, which is clearly beneficial for us, but Larry very well understands the global market as well.

Okay. Fair enough. Thank you.

Thank you. Our next question comes from the line of Arvind Ramnani with Pacific Crest Securities. Please proceed with your question.

Hi, guys. This is Jason Washburn, for Arvind. I guess, we want to touch a little bit on kind of Anthony leaving and we saw its certainly surprise and we just wondered if there be a transition time for when you hiring new CFO and basically is the deadline extendable with no CFO is tired by then?

Well, the transition time frame him is about nine months. I mean, is committed through Q3 of 2017. We are going to begin the search immediately and quite frankly we're very optimistic that we can find somebody within that timeframe, and still have an adequate transition to ensure there is a smooth transition. So that's - you haven't really discussed extending beyond Q3 of 2017 at this point because we thought that that was nine months is more than sufficient…

I think if we will see any difficulties to fulfill this, but addition [indiscernible] so we can share right now.

Okay. Thanks, guys. That’s it from me.

Thank you. Our next question comes from the line of David Grossman with Stifel. Please proceed with your question.

Thank you. And sorry if this is been asked. I jumped on a few minutes late, we can take this offline. But I am just wondering is there a way to look at the mechanics to get to 20% growth going forward and by mechanics I mean, , is there a way to look at, for example, how the top 20 maybe growing vis-à-vis how the balance of the portfolio may be growing, because it sounds like we're going to have more diversified mix going forward than we've had historically and I'm just curious if you have some thoughts on how that may play out between those two pockets?

I think as you can see even historically, the vast majority of our growth is coming from outside of the top 20, where we are seeing growth in excess of a 40% year-over-year and the top 20 clearly as they become much larger clients you see the growth rates being more in line with that 20% and in some cases little bit lower than side of the account. So I think we still feel that the majority of our growth is going to be coming from deeper penetration into those existing accounts, many of which are currently outside the top 20. And as we continue to expand that's where we get confidence in our over 20% growth looking at the availability of the penetration in those particular accounts.

And then sorry, what was the growth by the top - outside the top 20 this quarter versus what it has been?

For this quarter the growth outside the top 20 was actually 43% and historically it’s been - this year we were at 45%, last quarter we had a 50% growth. It's always been in the high 20s, 30s and it's been trending up over 40 for at least the past year.

Okay. And then just looking - going back to the utilization challenge that you're facing right now, and I think I understand the dynamics when you are running a global model here. So what are the mechanics of how you get back to a normalized level? When you think about rebalancing the workforce to achieve higher utilization, is there an opportunity to keep people in the same locations and redeploy them another work or is it a lot more complicated than that as you try to work through this particular share?

The reality is all this more complicated [indiscernible] and that’s kind of what it is. But we do believe locations where you have more capacities then we need like during the last quarters, it’s a very good quality of the people and we will be able to bring new clients there. So we clearly on the press to deploy these people during the next several quarters.

So should we think of reason of going forward at least the next couple of quarters that we would expect headcount growth to moderate over the next couple of quarters as you absorb the capacity is that hard to do based on the geographic mix?

We do believe that - and that we don’t know if it’s one quarter or two, three quarters exactly, but we do believe that with the next several quarters we will bring in there blended utilization to the normal across it.

Right. So but just in terms of what we should expect to see on a reported basis going forward over the next couple of quarters, should we expect headcount to overall just to moderate to reflect the…

Yes, the headcount clearly that means that headcount will slow down versus current.

Right, okay. And then as I looked at - a saw the attrition rate ticked up a little bit and it has been ticking up over the last three quarters, I think you are running in the 7% to 8% range last year, and you are now, you are now at 10.5%. So is that dynamic reflecting what we're seeing in the slowing demand in some of these larger customers or is there a different dynamic that’s driving that?

So I think volunteer this mix was probably exactly at the level as it’s during the last couple of quarters, 1% or 2% volatility, it’s probably specific through the range we share was build up and become unnecessary. So but it’s very small.

Just David, come back, I mean, when we were down at the 7% to 8% and we were saying at that point we didn’t think that was a sustainable level, that was unusually low, we saw attrition drop quite a bit over the past couple of years. So we expected it to tick up a little bit as we move forward.

Okay, great. Thanks for that. And then just, Anthony, is there any way the current spot rates you can give us a sense of what that FX impact would look like in the fourth quarter, assuming the current spot rates just held steady?

I haven’t really done a current spot rate, what we actually do when we're doing our forecasting is we actually get revenue - sorry, currency forecast from a couple different banks and we use kind of blended forecasts as opposed to just kind of this path forward and we're still thinking you in Q4 that the headwinds - year-over-year headwinds are to be about 2%, 1% to 2% and that’s we're building kind of into our models for right now, based on forecast, not just spot.

Got it. All right, guys. Thanks very much.

Thank you. Our next question comes from the line of [indiscernible] with Wedbush Securities. Please proceed with your question.

Hi. This is [indiscernible] Thanks for answering my question. Apologies if this is been hit a few times already, but can you please clarify what's going on with utilization rate and what kind of challenges you guys are facing in utilization? Thank you.

I don’t know what we can add, again, we can just repeat ourselves. And then we have some commitments from clients to grow in specific locations, we prepared for this, then this was slowed down and then it was actually postponed for some unclear time period. So basically we have got extra capacity in very specific locations which were protected from assign into our accounts because of our commitment. At the same time, we continue to carry on other locations because we need to continue to grow and also when postponed was happened we try to compensate for this region and others locations as well continue to grow where we could. So because of the assignment of resources is not immediate. Let's bring some disconnect number one, number two, our expectation with India was exactly in line and we've got lower utilizations that we expected initially and again this is integration new for those locations, we are learning a lot of new and we are absolutely committed to grow in this area, but we have some slowdowns there too. Between these two factors, actually they are all disconnecting on utilization. But in our view it’s very much fixable and that’s what would our focus during the next couple of quarters.

Sounds great. Thank you.

Thank you.

Thank you. Our final question comes from the line of [indiscernible] with VTB Capital. Please proceed with your question.

Hello and thank you taking my questions. Could you comment probably a little bit on the financial services [indiscernible] the UBS, do you see any bright spots this year and stabilization of this situation maybe not over the next couple of quarters, but in the longer term and do you see opportunities for you to grow here. And my second question is on your strategy, you have a pretty big cash pile on one hand on the other hand you have some extra capacity in some locations, as you mentioned, how do you see strategically growing, are you going to make any new acquisitions and grow maybe in the vertical areas and things like this? Thank you.

So we do believe there many opportunities in financial sector, everybody knows about utilization and means that clients will have to adapt for this two, so invest a lot in [indiscernible] areas, at the same time I don’t think we can quote in longer term right now and specifically about our expectations, in 2017 we will be talking next time. So in regards to M&A, nothing changed here too, we definitely slow down during the 2016, but it’s not because lack of opportunities, it’s just due diligence just didn’t happen and we still considering different options how to bring expertise to growth. So we probably not going through all this specific new verticals, I think we have been balanced right now and it might happen that we will increase some focus on emerging areas, we have good place to - but I don’t think we are going to expand dramatically from areas where there are…

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Dobkin for any closing remarks.

As usual, thank you, everybody for joining. I think we addressed questions and in summary we have challenging quarter based on utilization, but we are pretty confident in our ability to continue growing and I hope to update you on this during the next call. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.