EPAM Systems, Inc. (EPAM) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the EPAM Systems Q4 2016 Earnings Conference Call. At this time, all participants are in a 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 host Mr. David Straube, Senior Director, Investor Relations. Thank you, Mr. Straube, you may begin.

Thank you operator and good morning everyone. By now, you should have received your copy of the earnings release for the company’s fourth quarter and fiscal 2016 results. If you have not, a copy is available at epam.com in the Investor section. With me 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 may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company’s earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP numbers have been reconcile to GAAP and are available in our Investor Relations materials in the Investor section of our website. With that said, I will now turn the call over to Ark.

Thank you David and good morning everyone. Thanks for joining us. I would like to start from a simple remainder that last week [indiscernible] opportunity to come back to New York stock exchange to celebrate the 5th Anniversary of our IPO and to ring the closing bell. We are proud to see today five years later that we have been able to negotiate successfully many challenges during that period. Moreover, to bring continuously significant value to our clients and some results to demonstrate year-after-year strong growth despite geopolitical uncertainties, economic instabilities and massive global competitors who just started to notice EPAM brand recently. EPAM changed a lot during the past five years, we have more than tripled the company size, significantly expanded our horizontal and vertical capabilities and started global diversification of our delivery locations. We also invest into developing mainly needed corporate functions that practically didn’t exists by [indiscernible]. So at this point, I would like to state that today five years later, we are very confident the EPAM is in much better position to continue growing than we ever been before. [indiscernible] into the past, we feel especially [indiscernible] to report during the last year, we reached quite a milestone, we could only dream about in 2012. Our annual 2016 revenue crossed the billion mark and reached 1.16 billion, which correspond into 26.9 year-over-year growth, but 29.4% in constant currency terms. And in addition, [indiscernible] even more important represent 24% organic growth in constant currency. Let us move in more details with what happened with EPAM in 2016. Now let’s start some delivery capabilities. In 2016 while traditionally benefiting from our strong [indiscernible] expertise. We continuously focused on investing into the quality of our technology practices, engineering productivity, industry accelerator, maturity of our delivery processes and tools. The overall goal was not only to maintain our advantage in that area, but also to differentiate [indiscernible] against growing competitors with our ability to engineer and deliver successfully company’s products and solutions, the Shanghai demand crossed our strategically targeted markets. During 2016, we continue to make sure our digital and data capabilities as well. We are specifically, we are focusing on the capabilities with our core engineering and technology practices. That allow us to deliver to our customers much more programs in comparison with the past ranging from our commercial software project development to digital end-to-end platforms and now to business in digital strategic executions. And confirmation for that, we would like to share during the last year we have one six customer innovation awards in partnership with several of our top clients [Indiscernible] one of the top digital agencies in Europe. [Indiscernible] has also been recognized in our 60 industry analysts reports for our increasingly comprehensive capabilities in driving agile digital transformation across all of our key verticals. In fact, we were named the leader in digital platform, engineering services for a survey of Digital Platform Engineering Services in Q2 2016. Lastly, in 2016, we continued to expand our global delivery footprint which brought very important hands on experience in several new geographies and allowed us much better understand how to integrate and develop from one side and [indiscernible] benefit from another such new global delivery within EPAM and within our clients. Now, moving to our vertical performance. For 2016, we had very strong growth across three of our six industry verticals included in Media and Entertainment, Life Science and Healthcare and Emerging Verticals, which all grew over 40% We see very promising opportunities across all of those segments, where we present already at a good number of portion and companies, but still only at the initial stages of potentially significant growth during this year. Financial services finished the year with 17% growth, which reflected a Q4 growth of 4.6%. It’s important to note that with the effect of UBS our growth in Q4 would be 21.2% and over 30% for the full-year and reported currency, which represents a very healthy growth of this segment across Europe, North America and Asia. Travel and Consumer finished the year at 20.5%, which reflected a Q4 growth rate of 10.8%. We attribute this temporary slowdown to currency impact in Euro Zone approximately 5% global impact. [Indiscernible] retailers and consumer brands to show positive returns investment in digital. And in addition to the completion of significant milestones in multi-year products at two of our clients. As we expand our capabilities in this segment, we expect to be able to delivering innovative solution not only in platforms, but also in business model including helping our customers address digital disruption and to support our over 20% growth here in the long run. Lastly, our traditionally strong software and hi-tech portfolio grew respectfully 23% for the year, which allow us to this important segment strategic target of 20% [indiscernible]. Overall, in 2016, the specification of our concentration continues to run positive trend. For the year, our growth rate outside the top 20 accounts was 44.3% growth in the top 20 was 12.5%. Turning to our people and talent development, we very well recognized the simple fact that we have to continuously investing in our people to stay relevant on the market. Simply put the commitment to talent is single biggest factor in our sustained growth. In the end of 2016, we brought onboard a very senior HR and talent leadership team to elevate our [indiscernible] client management and engagement functions new roles. This also should allow us [indiscernible] into much more growth environment with diverse multi-cultural talent and in turn well position the company to hiring new highly skilled multi-disciplinary hybrid teams capable for all of the most complete technology challenges and delivering the most innovative industry solutions. In addition, we were continually innovating in our internal employee engagement software system as well as in engineering for more [indiscernible] tools and practices. We also invested significantly in 2016 in [indiscernible] internal training initiatives through network of collaborative global events as well as in person and online courses. With the result of all the surplus, we believe that EPAM today is much better positioned to continue hiring and developing our global talent. Specific to headcount in Q4 we ended with over 19,680 professionals which is 22% increase year-over-year. Before I turn the call to Anthony for the update on our financials and 2017 outlook, let me cover a few other tactics which weren't focusing during our previous update three months ago. First of all UBS concern, in January we announced strategic agreements with UBS which extends our nine year relationship with them for the next three years. This agreement which is well at more than $300 million allows EPAM to continue focusing on innovative end-to-end solutions and should help our client to reduce time-to-market and improve the ROI and technology investments. Utilization concerns. We certainly have significant progress and improving our utilization since last quarter. Finishing Q4 at 75.9% which is almost 4% improvement in comparison to Q3. We still are not at the level where we would like to be, but we are very confident in our ability to get into more normalized level in the first half of 2017. With that, let me turn it over to Anthony for detailed financial update for 2016 and our 2017 guidance.

Thank you Ark and good morning everyone. I will start with some financial highlights talk about profitability, cash flow and end on guidance. As Ark mentioned, we are pleased with the quarter having delivered strong top-line performance, generated significant free cash flow and improved our utilization. Here are few key highlights from the quarter. Revenue closed at $313.5 million 20.5% over our fourth quarter of last year and 5.1% sequential which represents a year-over-year constant currency growth of 22.8% and organic constant currently growth of 20%. From a geographic perspective, North America our largest region representing 58.7% of our Q4 revenues grew 26.8% year-over-year. Europe representing 33.9% of our Q4 revenue grew 12.3% year-over-year or 19.3% in constant currency. CIS grew 14.4% year-over-year and now represents 4.2% of revenue and finally APAC decreased 2.8% and now represents 2% of our revenue. Moving down the income statement, gross margin for the quarter was 36.8%, compared to 39.2% for the same quarter last year. The primary driver for this decrease was utilization, which ended at 75.9%, compared to 78.8% in the same quarter last year. But it was an improvement from the 2% in Q3 of this fiscal year. Utilization this quarter reflects our continued efforts in balancing supply and demand across our business. Non-GAAP SG&A, which excludes stock compensation expense in certain other items came in at 20.2%, compared to 21.3% in the same period last year. We continue to leverage our SG&A expense strategically focus on talent acquisition, workforce planning, balancing the bench and hiring functional management to bring value to our long-term sustainable growth strategy. GAAP income from operations increased 17.7% year-over-year to represent 11.9% of revenue in the quarter. Non-GAAP income from operations for the quarter increased 9.7% over prior year to 51.5 million representing 16.4% of revenue. Our effective tax rate for the quarter came in at 22.7% driven by a shift in geographic mix of revenues. And for the quarter we generated $0.46 of GAAP EPS and $0.77 of non-GAAP EPS, which reflects the tax effect on non-GAAP adjustments and is based on approximately 53.4 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash from operations for Q4 was 53.7 million, compared to 11.8 million in the same quarter last year. Free cash flows came in at 44.3 million, resulting in adjusted net income conversion ratio of 108%. Our strong quarterly performance and ongoing DSO improvements were the primary factors in the strong free cash flow performance. This quarter our AR DSO was 59 days and our unbilled DSO is 18 days for a total of 77 days, compared to a total of 95 days in the same quarter last year, which is driving most of the cash flow improvements. We continue to be pleased with improvements in this area, I won’t expect DSO to normalized in the low-80s during fiscal 2017. Let me some up or we finish the fiscal year. Revenues for the fiscal year closed at 1.16 billion or 26.9% growth over 2015, which represented a constant currency growth rate of 29.4% and makes fiscal 2016 a milestone year for EPAM having crossed the 1 billion revenue mark. Organic constant currency growth for the full-year is 24% further demonstrating our ability to drive growth through an ongoing challenging marketplace. GAAP income from operations increased 26.2% year-over-year to represent 11.5% of revenue for the year. Our non-GAAP income from operations increased 20.9% over prior year to 191.8 million, representing 16.5% of revenue. Our effective tax rate for the year came in at 21.5% and we generated $1.87 of GAAP EPS and $2.90 of non-GAAP EPS, which reflects the tax effect on non-GAAP adjustments and is based on approximately 53.2 million diluted shares outstanding. Cash from operations for was 164.8 million, compared to 76.4 million for fiscal 2015 and free cash flow came in at 135.5 million or 88% adjusted net income conversion. Turning now to the guidance. Revenue growth for fiscal 2017 will be at least 20% after factoring in about 3% estimated currency headwinds. Meaning we expect constant currency growth will be at least 23%. We expect GAAP income from operations to be in the range of 12% to 14% and non-GAAP income from operations to be in the range of 16% to 18%. We expect our effective tax rate to be at least 19%. This reflects the adoption of the stock-based compensation pronouncement, ASU 2016-09, which will be effective January 1, 2017. For earnings per share, we expect GAAP diluted EPS will be at least $2.45 for the full-year and non-GAAP EPS will be at least $3.38 for the full-year. We expect weighted average share count of 54.8 million fully diluted shares outstanding. For Q1 of fiscal 2017, revenues will be at least $315 million, reflecting a growth rate of at least 19% after 3% currency headwinds, meaning, we expect constant-currency growth will be at least 22%. For the first quarter, we expect GAAP income from operations to be in the range of 10% to 11% and non-GAAP income from operations to be in the range of 15% to 16%. We expect our effective tax rate to be at least 20%. And for earnings per share, we expect GAAP diluted EPS will be at least $0.49 for the quarter and non-GAAP EPS will be at least $0.72 for the quarter. We expect a weighted average share count of 53.9 million fully diluted shares outstanding. And finally, a few key assumptions which support our GAAP to non-GAAP measurements. Stock compensation expense is expected to be around $55.4 million with $13.4 million in Q1 and $14 million in each remaining quarter. Amortization of intangibles will be about $7.5 million or about $1.9 million per quarter. FX assumptions is expected to be around $7 million loss for the year with $1.6 million in Q1 and $1.8 million in each remaining quarter. The tax effect of non-GAAP adjustments is expected to be $18.8 million for the year with $4.2 million in Q1 and $4.9 million in each remaining quarter. With that, let me turn the call back to Ark.

Thank you, Anthony. A few points before we turn to Q&A. Our 2017 outlook reflects the continuous strong demand for our services. We should expect the markets that we serve to be disrupted and go through the natural cycles. At the same time, we are very confident that our strategy of combining our traditional technology and engineering advantage. This proven capabilities in digital transformation, design and emerging consultancy should enable EPAM to mitigate those events responsibly and to drive results from a business which has very solid fundamentals in our view with industry leading growth rates. With that, let me turn the call back to operator for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Darrin Peller with Barclays. Please proceed with your question.

Darrin are you on mute?

Our next question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.

Hi, I was wondering, Ark, if you could provide an update on what you had talked about with regards to supply demand mismatch on a 3Q call. From your guidance, it seems like it will still have some impact into 1Q and then it should be life as normal. So part of the question is to get that update part of it is what can you do in the future so that this sort of thing may not happen?

Okay. So thank you asking for question. So I will remind what you were shared in last quarter. The mismatch was mostly driven by two components. One of them was UBS change in plans for their future growth and our preparedness to provide services and basically hiring people in specific locations for this client. And the second was our integration processes in the years and kind of our new experience at the rate operate in the new geography. And between this two, basically it was a mismatch and we decided not to do any reduction in headcount, because we know that we continue growing. There is relatively pretty strong demand and we don't need to hire a people like one quarter later anyway. So we decided to stay at this and continuing to invest in the talent. So that was the mismatch which started to happen actually not even last quarter but second part of the last year. As we mentioned already today, versus Q3, Q4 actually was performing practically 4% better on utilization. At the same time, it will take probably another quarter to get to normal or maybe even two quarters, so it's very difficult to predict. But definitely there is a right approach. How to eliminate this kind things in the future, that's much more difficult equation, because sometimes not necessarily it completely difference on us, there is some level of unpredictability in client situation in the market. And being honest, this type of thing will happen in any the part of world. There is relatively volatile kind of history in utilization depends on some client. When it's a biggest client it' s more noticeable, but on another side as we mentioned we are paying much more attention to this, this is another lesson for us. And we also brought additional experienced people from outside who were dealing with this in the past on bigger scale. And we hope that we will be managing this as much more closely right now. So that's all I can share.

No that's good thank you. And then the other question I had actually one of the number of questions so let me quickly ask it with regards to for free cash flow, should we expect roughly 90% conversion rate again this year? But with regards to [indiscernible], I noticed that there is a lot of healthcare related hiring and capability improvement in your base at the EPAM to some of my checks. I was just wondering, if you can give us an update on the particular vertical?

You mean in like life science and healthcare?

Correct yes.

We are pretty optimistic about this when we started like two years ago. And as we said today its growing pretty strongly right now in excess of 40%. So at the same time it’s relatively small, because life science and healthcare only 10% of our business today. But we definitely very interesting in this sector and we are planning to invest product. So we build in additional expertise, we build like considering to build some consultancy around it. So all I can say, we think it’s one of the growth area for us.

And your question on cash flow at the beginning. We don’t give specific guidance at this point around cash flow or cash flow conversion. Clearly 2016 saw improvement, some of that improvement was driven by or most of that improvement was driven by the improvements in the DSO. So we had some pick-up in 2016 that was recovery from kind of late 2015. We are working to stabilize and normalize DSO and maybe at some point in the future, we can talk about guidance around that number. But at this point, we are just issuing kind of DSO guide, which is kind of to be in the low-80s is where we expect and we are feeling out cash flow and then possibly sometime in the future we can talk about guidance around free cash flows and conversion.

Got it. Thank you, guys.

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

Good morning, guys. Just wanted to start with the question around somebody underlying assumptions in the 2017 guidance. Specifically for pricing utilization and revenue growth at UBS?

Sure. Pricing we are anticipating pricing to be low single-digits I think 2% to 3% is roughly what we are putting in. That’s in constant currency and reported, it will most likely be zero or possibly less than zero based on what we see as far as the currency assumptions. As far as utilization, our guidance is the same, we are looking to get it back in range between 76% and 78%. So we need to get ourselves back into that range for the year. And we don’t provide specific guidance on customers. So for UBS, we are not giving any specific guidance there.

This will probably be deal clearly.

Right.

Are you anticipating any share loss within the UBS account?

All we can share is that we have this deal, which actually bring stability and predictability for us and actually [indiscernible]. How margin would go up, it’s very difficult to predict. Right now, It looks pretty stable and we are optimistic.

Okay. And then just on the margin side, I mean I think the EPS in Q4 came up, just a hair below what you are targeting. It sounded like utilization came in about where you were expecting. You could have that nice quarter-over-quarter improvement. Anything else you would call out in margin that fell short of your expectations in Q4?

No. I mean, margins came in pretty close to what we were talking about last quarter. So nothing else was in there.

Okay. And just last very quick for me. How much movement in the top 10 accounts was there during 2016? And what might you anticipate on that front in 2017, just given the way the client concentration is decreasing here?

In the movement, you mean what?

Well, in other words, if you look at your top 10 accounts in 2015, how many were still top 10 in 2016? And how many of those top 10 in 2016 are expected to still be top 10 in 2017? Or will there be some new high-growth accounts that will take the place of others in the top 10?

So there is a very, very relatively small volatility there. So basically, we might expect that two or three accounts from second dozen will go to the top 10, which is very normal. And we didn’t lose any accounts from this combination. But clearly, there is some replacement, it’s always happening like the kind of bottom two, three, four accounts as they kind of move in between top 20.

So nothing outside of the normal course. Every year, we have movement, and we don’t expect anything different in 2017.

Okay. Thank you

I would like to comment because I think it would be multiple equations on concentration and top line. I just, again, would like to remind that, and kind of going back five years in 2012 when practically as we go there we are talking about Thomson Reuters. And just to remind us, the Thomson Reuters, at this time, was probably as big proportionately as UBS or maybe even bigger. And then the second largest client was probably two last time smaller than that and Thomson Reuters actually went out of our top five with the next several years, and we still we are growing and balancing. And again, just to remind that Thomson Reuters is now number three client back and a much bigger than was in 2012. What I mean that we have pretty good concentration, client concentration and balancing of this so with all this volatility, it's not the kind of the key worry for us.

Okay. Thank you. That’s very helpful.

Thank you. Our next question comes from James Friedman with Susquehanna Financial Group. Please proceed with your question.

Hi. Thank you for the incremental disclosures, Anthony, with some of the financials. I just wanted to ask, Ark, in some of your prepared remarks, I mean it, you were going kind of fast, but I think that you mentioned that you completed some milestones, there are two clients, I thought in the consumer vertical? Did I get that right? Or could you repeat what you said about that? You used the word milestones, if you could revisit that for me?

Yeah, what I mentioned is in our view, very temporary slowdown in Retail and Consumer vertical was as a result of multiple reasons, and one of them was that we have two big programs which were finished.

Okay. So would you anticipate that projects return from those customers? Or are you moving on? How should we be thinking about that?

So these projects actually continues just kind of increase towards slowdown and kind of flatter position. Two programs which we potentially might start a new programs there or like new clients so that's why we considering this pretty temporary.

Got it. And then just maybe one more, I thought in your prepared remarks you called out media and entertainment, life science and emerging. If I could just ask if we were to overlay those verticals, because you had a big surge this is on page 19 in the slides, you don't have to look at. But it's one where the $10 million to $20 million account, you had a big surge in that category. As my question is how much of the opportunity in media, entertainment, life science emerging would we find and say the top accounts, I don't know top 10 or 20 accounts of the company?

So we already discussed number of accounts several accounts which in our categorization will have to emerging or to life science, which is among the top 10, we have several of them. And in our view we are very fast in penetrating this accounts, there is a pretty good opportunity to grow there. And same like gross many life science accounts which very large forms where our budget share is very, very small still.

Got it.

I think we have very, very strong opportunity to grow those segments.

Thank you.

Thank you. Our next question comes from the line of Darrin Peller with Barclays. Please proceed with your question.

Thanks guys. Just a question first on the organic assumption versus inorganic in 2017. And I guess bigger picture question around the deal activity around tuck-ins specifically around digital capabilities you've always done. It's been a little slow on that front, so if you can touch on that high level what you're looking for and the things in the pipeline on that front as well? And then just a follow-up question as well please.

Okay I think first of all our guidance for 2017 it is an organic guidance so we expect to organically grow at least 20% and in the constant currency it's 23%. So now we operate at pretty strong organic growth so not assuming any acquisitions in this numbers. The second, I am not sure I have the comment that you mentioned that our digital not growing fast enough?

It was acquisition strategy around digital.

Yes and I guess on that note, now that you bring it out. You guys have called out there being something like 70% plus digital of your revenues before. Maybe if you can just confirm if that's if that right if you really ever talked upside that. And I guess as how much in terms of new acquisitions we could expect going forward given pure point organic is, the guidance is organic. It's been a little wide and you've seen a pretty good flow of your tuck in deals you got a deal bunch of the last two years. But really in the last I think the last year it's a little slower. So where are you on that now?

Yes. I mean our M&A strategy hasn't changed, 2016 was a light year, not for lack of working. I mean we have a pretty robust pipeline we went through a number of diligence processes through 2016 nothing just really came to provision and close for a variety of different reasons. So we are still looking pretty aggressively. We have a pretty healthy pipeline, looking for, again, capabilities, focus and looking for that tuck-in-type deals. So that, nothing has changed there. Ark, do you want to add?

Again, this is normal. So our, as Anthony mentioned, strategy is the same. When we are asked about acquisitions, plan and M&A, this is very binary. It's going to happen or not so, and very difficult to talk about [probabilities] (Ph). So we are looking for good opportunities and we have a pipeline. So

All right. And then, I appreciate that. And just a quick follow-up, on the topic of immigration reform, which obviously has been coming up a lot lately, you guys have touched on it being not as material for you or more manageable given the size of your numbers of H-1Bs. Again, can you just refresh us on where you stand on that? If let's say, hypothetically, the wage amount were to go up dramatically? Or any way, any other changes you could think of that's worth mentioning now would be helpful.

So first of all, we still think that it's too early to understand exactly the parameters of these changes. And it's kind of very speculative assumptions in any case. But in our case, we have a little bit over 100 people who is in H-1 from our probably 1,300 billable in renewals and consultants in United States. So a thousand people. So basically, it's less than 10%.

Okay. So I guess you could always manage that. In other words, whether it's through mixed shift, if you need to or other changes if need to be.

That’s right.

Okay. I will leave it that and go back from queue. Thanks guys.

Thank you.

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

Thank you. Good morning. So I'm wondering if you could just help us understand the composition of the growth guidance for 2017. And what I mean by that, just look at the relative contribution of growth from the top five, top 10, top 20 and beyond and how that compares to prior years. And I realize that the UBS dynamic may be impacting that significantly, but beyond UBS, is there any other things we should think about in terms of where the source of growth will be in 2017?

Hi David. Yes. Clearly, UBS growth is going to be different than was in previous years, so this is probably not a surprise to anybody right now. So, at the same time, it would be very difficult to talk in parameters like top 10, top 20, top 30 because there is multiple dynamics between different clients. let me rephrase it. We have very strong client base in our top 100 clients, with multiple Fortune 1000 or Fortune 2000 clients where we have revenue from a couple million to $20 million, $30 million and penetration of this client base in comparison with our competitors is very, very low. So we have dozens of clients which could be double, triple in revenue from their budgeting kind of capabilities. And from capabilities of EPAM right now is services issue, weakened for a while. So I think we are pretty confident that we can grow 20-plus percent organically during the next years.

Right. So historically, when you've mix shifted away from the top clients, you've had a favorable margin impact. Should we expect the same thing as we migrate through the course of 2017?

I’m not sure that margin in part directly related to shifting from the top clients. And again, I just mentioned a couple of minutes ago, the history which was with us, like practically four years ago, when we were replacing Thomson Reuters, which was growing practically again, proportionately from their share of our total revenue and from growth perspective, and was a good account from margins point of view, when the shift happened we were be able to mitigate it. Yes, right now, we are practically 2.5 times, three times bigger than that, but proportions in similar and with our $1 billion revenue, which we proudly kind of – while talking today, we are still pretty small company in these series of market.

Right. So your margin assumption or your assumption of improving margin next year is primarily driven by the utilization number then?

Well, utilization will contribute definitely. So it was unusually low in 2016, so we will get some pick up from utilization which will help margins. But we also have to balance that against continued investments into the business and where we need to continue to support the growth.

David, main difference in margins in part versus today and three, four years ago is still going to be currency, because if you think what was happening with the pounds and euro versus several years ago and the base the currency base for our delivery locations, there is a challenge here. So this is the main impact to which we are seeing right now. And where you look kind of the predictability on how these currencies will play.

Right. Okay, got it. Thanks for that. And then, just quickly back to the you know this whole, kind of visa thing. Even though you’re not heavily dependent on visas, and I think, we all understand that there are strategic arguments for increasing U.S. staffing levels. I think this is a topic you have thought a lot about in the past, Ark. How was your thinking evolving on the topic? And what should we expect to see from you in the U.S. over the next 12 to 24 months, if any?

I think we also mentioned already today in our prepared notes that we are really focusing on how to bring EPAM to a more welcoming front for different type of people coming from different locations from different cultures. And, again, our investment in talent management and talent acquisition across North America and Europe, this is exactly the answer to your concern. We put it much stronger team for talent acquisition from local perspective. We are going to focus on this and to kind of address and manage this potential, potential risks. At the same time, like, we also need to, like EPAM, for example, historically, always has pretty low proportion of on-site versus [indiscernible] resources. We are strategically increasing this, but we are still very well positioned how to work in the global distributed world and still deliver very complex solutions without necessity to have massively staffed to on-site positions.

All right, very good. Thank you for that.

Thank you. Our next question comes from Anil Doradla with William Blair.

Hey guys. A couple of questions, so a lot of questions and focus around on the 2017 guidance. So if I rephrase the question, Ark and Anthony, what would you say would be the top one or two challenges in achieving the 20% guidance?

So I think we have, again, in general, the business model in services is relatively simple. There is no miracles here, there is no assumption, unusual happening. At the same time, there are too many variables and too many parameters you have kind to of balance together. So I still do believe that all fundamentals are pretty strong. And challenge in 2017 would be the same challenges you have had in 2016 and 2015 and before and mainly in the future too, balancing between clients' demand and right talent in right places in right time. So this is the main challenge and everything else is variations of this. So clearly, currency and geopolitical issues, but we are living through this already for the last three years as a minimum. And if you think about it where EPAM originally coming from, so that was the challenge for the last 20 years. So I think nothing really new. We are really kind of responsibly and carefully managing what is happening, what we can manage and trying to address things very quickly when it's a more a surprise for us and less predictable. So I don't know what other [Technical Difficulty].

Well I was hoping that there's something more specific, but what you are saying is that it's just business as usual, the same issues are going to play out in 2017.

So we do think that with our size of the company today and configuration of our capabilities and client demand, which we are seeing. There is a pretty, pretty good opportunity for us to grow. That's what we are very confident.

Right. And as a follow-up, when I look at the 2017 outlook, obviously hiring is going to be a big component. Any particular geographies that you are going to focus on as you build out the year?

So it's also pretty much in-line with our previous performance. We are still pretty optimistic about capabilities and ability to grow in Eastern Europe. We are improving our capabilities in India right now. China, for us, still mostly in market capabilities, what we do is, we started to do some delivery for global clients. And clearly, North America and Western Europe would be a focus for us. We are still planning to increase proportion of in-market resources. So that would be our focus area. And again, we already comment on this.

Very good. Best of luck in 2017 guys.

Thank you

Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald.

Hi. Can you provide an update on spending in financial services, that particular vertical? Any impact or change given some of the political changes in either Europe or the U.S.?

I think we have provided some comments like in our remark earlier today, where we gave the number, our percentage of growth for the vertical results without UBS. And this is a pretty strong number taking into account that it's not even accounted for FX headwinds so, because without UBS, I think it was a 22% growth without the currency impact. We think it's still pretty, strong. With all, as you mentioned, geopolitical impact and some things, which we cannot predict. We are optimistic about it, we also invested in a lot in special competency including like payments and work share and experimenting with is and having the first projects and actually some of them pretty light. So we are optimistic that we will find the opportunity to grow in line with our total expectations.

Okay. And then on UBS, I know you are not giving client-specific guidance, but any concessions that were given when you signed the three-year deal? I guess I'm concerned maybe more on the pricing side, whether discount is given for a minimum volume commitments, things like that that you could provide us with?

I can say that our expectation's pretty balanced with our historical metrics around this account, okay? So clearly, there are more complex deals there but I think it's given flexibility to those parts, and we are very optimistic from the point of view that with the level and quality of the services we provide for stability which we have now would benefit us in the future.

Okay. And then last one for me. On the labor side, any trouble finding talent at this point? I think you remain fairly concentrated in Eastern Europe. And how do wage increases and attrition look like in that region at this point?

Again, this is exactly like fundamental equation for our business, and we probably answered this in each call. And my traditional answer would be that there is nothing new and challenging to bring being talent to the company. This is a growing challenge for the last probably 20 years, it started like from before that comp situation and it's a global challenge. So it's not just about Eastern Europe, it's about Silicon Valley and East Coast, U.S. and London, but we are investing heavily in trainings. We are investing heavily in education and internal people. We expanded during the last several years our geographical footprint. So we are addressing these challenges as you can see during the last five years, and we are pretty comfortable with our current base of only 20,000 people, comfortable in comparison with many of our bigger competitors that we would be able to handle this challenge.

Okay. Thank you.

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

You mentioned that your pricing will be fairly flat this year. What is going on with wages? And are you going to see some margin pressure if wages have to go up?

Yes. Actually, wage inflation is targeted around the same range. We are looking at right now just under 3% wage inflation globally. And that's in constant currency, so we do expect to see some benefit from currency. So right now, it’s looking at least, based on our planning, pricing and wage inflation are fairly balanced.

And any update on the CFO search?

We are in the midst of the search, we are making some progress, we are seeing a number of candidates, and we are just betting the candidates in the pipeline. So nothing more to update at this point.

All right. And then finally on the marketing side, this used to be almost a word-of-mouth business, but kind of what’s of evolved in terms of maturing your sales and marketing effort?

First of all, I do believe that word-of-mouth in services business is not a bad thing because we would like need to have like thousand clients, we need to have three, four hundred very good ones. So on another side, clearly, I hope it’s visible for those who are following us for some time how marketing function changed. How our kind of analyst recognition changed during the last several years. Now our brand is pretty well known. The same is happening in this business development function as well. But combination of referrals and actually markets in Forrester and Gartner, this is all a probably very strong sign of change happening.

Thank you.

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

Yes, hi, guys. Thanks for taking the questions. Most of my questions have been answered. I have three very quick ones, hopefully. So the first one…

Can you speak up, please.

We can’t hear you.

Can you hear me now?

Yes.

Yes.

So a couple of quick ones from me, if I may. So first one, apology if I missed this. How much of the UBS contract is actually factored in into the FY 2017 guidance? Is this something you can share?

How much? I mean, so full contract factored in terms of guidance, and our expectations for the clients is all baked into the guidance. Not sure I understand the question.

Yes, yes. So basically, I’m trying to get a feel of what part of the FY 2017 guidance comes from UBS and what part comes from outside UBS account?

We don’t separate that.

Okay, clear. I was hoping to get your thoughts around the pricing environment, and I know that this has been sort of touched upon from other call from a couple of other guys. But if we sort of ex out utilization and normalize it, would you expect the gross margins to be relatively stable? Or do you see any sort of underlying sort of pricing/salary inflation dynamics playing out? So the question is, excluding staff utilization’s ups and downs, normalizing for that, would you expect the gross margin to be relatively flat year-on-year?

The answer is yes. I would expect to see stability. Right now, based on the pricing environment and wage inflation, we are seeing those two being fairly balanced and allowing us to keep our gross margin stable absent utilization moves.

Okay, clear. And last one from me. I was hoping if you could comment a little bit around the potential impact of to the EPAM’s effective tax rate if we were to see a change in the U.S. corporate tax rate. So how would that, basically is likely to affect your group effective tax rate? I know it’s very much a guesstimate at the moment, but then people are talking about streaming the corporate tax rate from 35% to 20% or even 15%. I’m just trying to get a feel of what that would do to your numbers.

It's very hard to say. I mean everything right now is completely speculative, so it's really hard to assess or predict what that impact would be on our business at this point. We are watching the topic. We have seen a number of the proposals and all I can say is, at this stage, it's much too early to really assess what that impact would be.

Okay clear. That's all from me.

Operator, I think we have time for one more question.

Thank you. Our final question comes from the line of Avishai Kantor with Cowen.

Yes, hi. Good morning. My first question is how much of your scope in financial services is related to regulatory and compliance work? And what could be the effect from a potential deregulation? And then my second question, will the rate of shifting billable employees between delivery and location change in 2017?

On the regulatory piece, about 20% is regulatory and we are not anticipating really any dramatic shift based on the visibility we have right now in that aspect of the business. And I'm sorry, can you repeat the second part of the question?

Will the rate of shifting existing billable employees between delivery and locations change in 2017?

You mean like how aggressive any type of relocation program for people from one country to another or something like this?

Exactly.

No. There is no any shift and it wasn't aggressive and important in the history as well so. In our case.

That answers my question. Thank you so much.

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

So first of all, we look forward to seeing you at our Annual Investor and Analyst Day on March 14th in New York City. So just would like to confirm in general that we are pretty confident, and I think we addressed [indiscernible] questions. And thanks for attending today's call and if you have any questions, David should be able to help. Thank you.

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.