EPAM Systems, Inc. (EPAM) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the EPAM Systems Third Quarter 2018 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 my pleasure to introduce your host, David Straube, Head of Investor Relations for EPAM. 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 third quarter 2018 results. If you have not, a copy is available at epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. Before I begin, I'd 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 measures have been reconciled to GAAP and are available in our Q3 earnings material located 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. Let me begin with a few financial highlights from Q3. We delivered a strong third quarter with revenue of $468 million, reflecting 24% year-over-year growth or 25.4% in constant currency terms. Our revenue growth was broad-based both geographically and across all of our industry verticals. In addition, we delivered strong non-GAAP earnings per share of $1.17, which represents 27% growth from Q3 of 2017. Our results for the first three quarters of fiscal 2018 point to a very consistent story of our ability to execute and grow in the market that demands high-end expertise and ever-changing cutting-edge capabilities spread across multi-functional teams and geographical locations. With the story of consistencies as a backdrop, I would like to step back from the quarter and share a bit broader prospective. We are now approaching EPAM 25th anniversary in December and we started to orchestrate a number of events across the company. Just last month, we hosted our 11th Annual Software Engineering Conference, we brought together all community support practitioners to connect loan and exchange ideas about technology trends and define the market we're currently in. This year event was attended by over 3,000 employees as well as the guests from our clients and from professional communities. They visited from over 20 countries. From one side, our message during this conference was kind of a familiar one to practically everyone today. The world continues to be disrupted in a pace and scale that is forcing massive change across all industries and for the clients we serve. And in results the environment continues to be even more demanding and challenging. Outdated inflexible IT systems that cannot compete against upstarts operating on natively digital platforms a need for completely new enterprise architecture, simple customer centric and configurable, but they often lack the right capabilities to do so and in many cases the current partners they are relying on don't have the capabilities to comprehend such new architectures either. And most importantly, the speed of the changes occurring is a real danger because most often before client can replace a system or build new ones at their regular pace the time will be gone; it's a killer, if you don't have the speed. And demand for capability is an experience become even more challenging because this next wave of digitization the digital ecosystem where everything is coming together: people, suppliers, consumers, and businesses into scalable and flexible platform environment brings a completely different level of sophistication and designing and building and delivering perfect systems. So from another side the question which we really try to address was and still is how to better prepared for those challenges? How to disrupt ourselves further? To be able to solve this question for us and for the client. We do believe we have unique advantage by benefiting from our core software engineering and product development expertise accumulated over last 25 years in collaboration with Strobel technology and software companies. By being their trusted partners, both to build software and to deliver the most complex solution around it. That allow us to navigate over the last years a much more intrinsic journey through digital augmentation and digital services ways and arriving naturally into the world of much more advanced digital ecosystem enterprise level challenge. Still even with a slight advantage the realities of speed, agility, and the right capabilities at the right place and time force upon to disrupt ourselves further by continuously investigating how to turn the company into truly digital ecosystem itself. It simply means that to support needed speed and agility, we need to encourage on our own advanced and native digital platforms and be able to result to orchestrate on demand capabilities across business technology and experience consultancy in a way of thinking internal and external right in time of educational and training services and also help in the majority of our clients do the same. Otherwise, we wouldn't be able to help them solving their critical business challenges. And with all of that, we also have to continue to support and expand the key for us, our engineering advantage even further. So that is a set of challenges which we're trying to address during the last few years. We are sure that is a set of challenges we will have to address in the future too. All that means we need to understand what are the right investments we have to make to continuously challenging and disrupting ourselves to find the right answer fast, or sometimes in advance. So far we do believe that this push is bringing new types of opportunities to EPAM where we're getting into very different competition with much larger and if you will much more experience for us. But by demonstrating a different level of speed and agility and engineering quality, we started to see the engagements now which include implementation, roadmaps. These all aspects have changed from organizational strategy to digital operating models to future platform architecture, design and build of such platforms and even new ways of running those. In fact same started to happen practically across all industry sectors we are playing in. In addition, we continue our efforts in open source contributions where we are one of the industry leaders. Continue to focus on our top tier partnerships for example this has now over 2,000 certified architects and engineers to our various cloud competency centers, with over 500 certification for Google Cloud platform, which probably makes us number one in such category. Continued to launch platform accelerators and productivity tools as well as establishing new engineering labs and correspondent initiative to bring financial, speed, agility to ourselves and our clients. With that, I think it's almost the right time to come back to our consistency story and to pass it to Jason to reiterate it with much more specific data than I did in the beginning. begin. But still before that I would like to provide a bit more details on this morning's news which very much relate to the same topic I mentioned in my earlier comments. You might have seen it already. We announced the acquisition of TH_NK Digital; a UK based consultancy with three studios across UK. TH_NK brings a high level of consultants and customer engagement experience -- expertise that expands upon Global Digital and the organizational consultant capabilities within UK and Europe. This acquisition should further enhance our ability to meet customer demand for dynamic design-led consulting, digital products innovation, and advanced business solutions, helping us to build platform speed of scale. So we are the story that continues to evolve. With that said, let me turn finally the call over to Jason for an overview of our Q3 results and business outlook update.

Thank you, Ark. Good morning everyone. I will start with some financial highlights and then talk about profitability, cash flow, and then on guidance for fiscal 2018 in Q4. In the third quarter, we delivered very strong top-line performance, exceeded our profitability expectations, and improved earnings per share. Here are a few key highlights from the quarter. Revenue came in at $468.2 million, a year-over-year growth of 24% and 25.4% growth in constant currency. In the quarter revenue reflected a negative foreign exchange impact of 1.4% greater than the 1% impact we expected when we set our Q3 guidance in August. Reported revenue would have been approximately $2.1 million higher this quarter applying the same foreign exchange rates to non-USD revenues used for our Q3 guidance. Looking at revenue growth across our industry verticals in the third quarter, the drivers of growth remain very consistent in the industries we serve, include digital transformation, and increased focus on customer engagement, product development, and driving efficiencies and deeper insights to artificial intelligence, machine learning, and analytics. In Financial Services, our largest vertical we delivered 18.1% growth year-over-year. Growth in Q3 was impacted by an expected ramp-down of activity at a few clients outside of our top five, predominantly based in Europe. Travel and consumer grew 21.9%, software and hi-tech grew approximately 20.1%, Business Information & Media posted 27.2% growth, life sciences and healthcare grew 40.3% reflecting growth in existing clients and quite strong growth in new client revenue. And lastly, our emerging verticals delivered 31.4% growth driven primarily by clients in industrial engineering and energy. From a geographic perspective, North America our largest region representing 60.7% of our Q2 revenues grew 30.3% year-over-year or 30.7% in constant currency. Europe representing 32.5% of our Q3 revenues grew 12.4% year-over-year or 14% in constant currency. CIS representing 4% of our Q3 revenues grew 15.9% year-over-year or 27.8% in constant currency. And finally, APAC grew 67.6% or 71% in constant currency and now represents 2.8% of our revenues. We continue to deliver growth across a broad range of industries, geographies, and engagement types, while driving further diversification in our client concentration. In the third quarter, growth in our top 20 clients was approximately 23%, and growth outside our top 20 clients was approximately 25% compared to the same quarter last year. Moving down to income statement, our GAAP gross margin for the quarter was 35.7% compared to 36.6% in Q3 of last year. Non-GAAP gross margin for the quarter was 37.3% compared to 37.9% for the same quarter last year. The decline in gross margin was primarily driven by higher level of accrued variable compensation compared to the same quarter last year. GAAP SG&A was 19.8% of revenue compared to 21.5% in Q3 of last year. And non-GAAP SG&A came in at 18% of revenue compared to 19.8% in the same period last year. And at the bottom of the 18% to 19% range, we used to manage the business. GAAP income from operations was $64.6 million or 13.8% of revenues in the quarter compared to $49.2 million or 13% of revenue in Q3 last year. Non-GAAP income from operations was $82.1 million or 17.5% of revenue in the quarter compared to $62.6 million or 16.6% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 0.6% which includes the impact of a $7.1 million favorable adjustment to the original charge for the one-time transition tax under U.S. Tax Reform originally booked in Q4 2017, as well as a $6.1 million excess tax benefit related to stock option exercises investing of restricted stock units. Our non-GAAP effective tax rate which excludes these and other adjustments was approximately 20%. Diluted earnings per share on a GAAP basis was $1.15 and non-GAAP EPS was $1.17 reflecting a 49.4% and 27.2% increase over the same quarter in fiscal 2017. In Q3 there were approximately 57 million diluted shares outstanding. We ended the quarter with over 25,200 delivery professionals, a 16.6% increase year-over-year and a net addition of more than 900 production professionals during Q3. Our total headcount ended at more than 28,400 employees. Utilization was 76.4% compared to 77.6% in the same quarter last year and 78% in Q2. Turning to our cash flow and balance sheet, cash flow from operations for Q3 was up $102.3 million compared to $62.2 million in the same quarter last year and free cash flow was $94.1 million compared to $56.8 million in the same quarter last year. DSO was 81 days compared to 83 days at the end of Q2 fiscal 2018 and 82 days in the same quarter last year. We continue to focus on managing our total DSO performance in the low 80s. Now let's turn to guidance. Our updated full-year and Q4 outlook reflect both an acceleration in revenue growth expected for the quarter relative to that achieved in Q3, as well as a modest contribution from the acquisition we announced earlier today. So starting with fiscal 2018, revenue growth is now expected to be at least 26.5% reported despite the strength of the U.S. dollar reducing the full-year benefit of foreign exchange from 1% to 0.5%. Revenue growth on a constant currency basis will now be at least 26%. As a reminder, our full-year revenue outlook continues to reflect an approximate 2% contribution from inorganic revenues. We expect GAAP income from operations to now be in the range of 12.5% to 13.5% and non-GAAP income from operations to now be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to now be approximately 2% which reflects our tax planning efforts in response to the U.S. tax reform legislation. We expect our non-GAAP effective tax rate to continue to be approximately 22%. For earnings per share, we now expect GAAP diluted EPS to be at least $4.22 for the full-year and non-GAAP diluted EPS will now be at least $4.32 for the full-year. We continue to expect weighted average share count of 56.7 million fully diluted shares outstanding. For Q4 of fiscal year 2018, revenues will be at least $500 million for the fourth quarter including an estimated $2 million contribution from the TH_NK acquisition producing a growth rate of at least 25% reported and at least 26% in constant currency after factoring at a 1% estimated unfavorable foreign exchange impact. For the fourth quarter, we expect GAAP income from operations to be in the range of 14% to 15% and non-GAAP income from operations to be in the range of 17% to 18%. We expect our GAAP effective tax rate to be approximately 19% and non-GAAP effective tax rate will be approximately 22%. Earnings per share, we expect GAAP diluted EPS will be at least $1.03 for the quarter and non-GAAP EPS will be at least $1.22 for the quarter. We expect a weighted average share count of 57.1 million fully diluted shares outstanding. And finally, a few key assumptions which support our Q4 GAAP to non-GAAP measurements. Stock compensation expense is now expected to be approximately $13 million. Amortization of intangibles is now expected to be approximately $2.7 million. The impact of foreign exchange is expected to be approximately $0.5 million loss. The tax effect of non-GAAP adjustments is now expected to be around $3.2 million. Lastly, we expect excess tax benefits to now be around $2.3 million. In summary, we are pleased with the third quarter results which reflect strong broad-based growth across all our verticals and geographies. Our unique positioning in the market combined with our solid fundamentals positions us well for continued growth in fiscal 2018. With that, let's open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.

Thank you, hi Ark, hi Jason. Good morning. My question is with regards to the acceleration in revenues that you're seeing, if you could maybe break that down into sort of signing new clients versus your contract sizes increasing as software engineering and digital transformation just becomes more and more mainstream. I guess let me start if you could provide a little bit of color as to what's driving that acceleration and the sustainability of it?

Hi. So first of all the acceleration exist, but it's not so huge, it's probably in line with what we were showing before but the type of work is slowly that's kind of starting to change we see this more platform demand opportunities. And we do believe we have some advantage there but it is very complex and there is a lot of demand there but kind of delivering is still challenge for us as well and that's why I was trying to explain and focusing on a lot of potential challenges we see ahead of this. And this is also like I was trying to highlight, it's on our capabilities, but it's also material decline from one point of view clients needed from another point of view clients not necessarily always ready for this. But again in short, we see the change in the kind of portfolio where more than once come in from more integrated platform lead solution. I don't know if I can bring more color to this, might just happen.

Yes, I guess the only sort of subtle adder would be that we are seeing somewhat of an acceleration in new customer revenues. So we have a significant demand from new customers. They obviously start small and then grow over time and that that is contributing to the somewhat higher level demand that we're seeing in Q4.

Got it. And then just to pick out a couple of the areas the verticals obviously good, it looks like good sequential acceleration in life sciences and the emerging verticals are also doing well. Could you kind of talk about sort of first of all what's contained in the emerging verticals and just talk about just frankly then back to the comments on platform, life sciences and healthcare. Maybe something about the nature of the work you're doing, is it -- the reason you're seeing the pickup there?

Okay. It's a lot of questions a lot.

So a, b, c and b side?

So what we qualify under others is everything we should not blow into the -- our key line of business right now but you’re right it’s growing fast and it includes for example oil gas, energy, engineering, and even telco as well.

In automotives.

So basically in automotives right, so and it is high growth and this is many of them new clients for us and good portion of this coming with this platform lead opportunities where we need like to put the best of us to be able to deliver, okay. So specifically on life science, for example, or some other verticals, like this quarter life science and healthcare are showing much better results than before and again this is relatively so only 10%, 11% of our business, so volatility here is happening and will be happening because again one, two clients start or finish might impact specific quarterly results. This quarter looks very good, so what we do is in life science and what is operating in R&D space and data space which specialization and focus on some programs around genomic data for example where automations are lot good. So but we grow in commercial part as well, so what does equation for that?

No. I think I just basically looking for those sorts of examples on life sciences trying to connect it to your platform comment but I think I do get that. Thank you, congratulations on this quarter.

Thank you.

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

Hi, good morning everyone. My first question is around pricing, is the growing consulting what seems to be the growing effort and focus around consulting, does that enable you to have a positive impact on the overall pricing plan?

So, I think in longer-term we will expect more impact. But at this point consulting for us has enabled for total solutions and for us there is and we shared this in the past as well, there is no goal to bring consulting as a just separate service risk, higher margins, the goal how to help to do end-to-end solutions and help clients in our sales actually to explain ROI in advance and then focus on the things which are necessary. I think it would take some time before maturity of this whole operation would grow and we will see much big impact on our margins. There are probably some but it's very difficult to measure specifically because of we not treating consulting just as a line of business. So it's difficult to understand exactly from where the benefits or problem would begin.

And the next question regarding finding the right talent, are you looking for new regions or new countries in order to find the required talent?

So we always looking for new regions, for new talents because all of us practically each time we repeat, it’s one of the key challenges for everybody in global market and we open in offices, additional offices in Europe, we’re thinking about some additional investments in locations where we have started to improve the quality of talent we can bring, how to train it, and how to bring the level which we need. But yes simple answer we look all the time.

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

All right, hey guys, good morning, thanks. Maybe to start off with a financial question, your margin did come in better than we thought and your rising EPS guidance nicely now. Maybe you could just give us some building blocks on what the key drivers of that versus your prior expectations going into the beginning of the year and maybe even into the quarter?

Yes, we have to run at somewhat higher utilization than we had expected, we are expected to see the higher utilization again in Q4. We're also seeing a stable wage environment, probably getting a little bit of benefit from customer mix and then throughout the year, we've had a focus on account profitability and I’d like to think that that is producing benefit. Finally, we're also seeing benefits from our focus on managing SG&A. At the same time where we continue to invest to make sure we can deliver greater than 20% both in the upcoming fiscal years.

Great, thanks. I mean that sounds like some of these variables are sustainable in terms of utilization, wage, did you tell me I mean not the word in your mouth, would you say that wage inflation in your view is looking like it's pretty stable at this point or like for the next few quarters more than just your thought?

Yes, it’s always hard to predict what will happen with wage inflation and so what I can say is that wage inflation let’s say this year has been very much within our expectations and it’s been relatively stable and not elevated over the levels we've seen in the past. But it would be hard for me to predict the future.

And I would agree that it's difficult to predict how it's going to work out because it’s clearly a function of talent ability and you all know and confirm that it’s a global challenge and we will see how next quarter should work so difficult to predict.

But as always but over the years but certainly I think with a little bit more focus we are quite focused on account level profitability and doing what we can do to maintain and improve profitability despite what happens with the wage inflation.

That’s good to see that commentary. Just a quick follow-up on the financial verticals, looks again I mean revenue growth is strong, one vertical looks like it deceled a little bit and I’m just curious if it’s something around by maybe one of your larger clients I think it's showing that's sort of running at a theme or anything else going on there? Thanks guys.

So and I think that’s just a couple of things. If we brought -- if we included foreign exchange which was a negative the growth in that financial services would have been just over 20%. We did see a few financial services customers not in our top five that -- that's all declines. So there were few customer specific events, we still see very strong demand in financial services and expect to see very strong demand in Q4, we did see a few of our smaller clients with the decline.

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

Good morning guys, thanks. I just wanted to add on with the margin question, so obviously you took the guide up there 50 basis points at the mid-point to your 17% now for the year, I mean how much headroom is there over time in the margins, I mean is there still room to drive additional SG&A efficiency over time as you think about business over the next couple of years because it sounds like this is a little bit of a new normal to the expenses the recent range was kind of pegged between 16% and 17% and now we're trending higher than that?

Yes, I think I’d say that we’re still working on our 2019 plans, so it would be hard for us to comment at this time. We're going to continue to make investments to make sure we’re continuing to grow the company in excess of 20% per year. I think that the one comment I would make just kind of based on history is that the first half of the year you saw in the low end of the 16% to 17% range clearly in Q3 and in Q4 we're talking about being above the 17% range. So I think what I would say is you can clearly see that we can operate anywhere in that 16% to 17% range at the high-end of the range as well as the low-end of the range. But this time we wouldn’t be able to sort of provide any additional color on what we expect for adjusted IFO in 2019.

Okay. What can you tell us just in terms of attrition trends in the quarter, I know you don't disclose an exact number but I think last quarter the comment was that it had grown up quarter-over-quarter, so what was the direction there in Q3?

So attrition still is the same kind of level like maybe significantly higher than the last quarter but it's mid-teens right now. So and again it's all combination of balance and wage, so you know.

Yes, digital count is still tight?

It's not -- it's not decreasing let's say that.

Thank you. Our next question comes from the line of Mayank Tandon with Needham & Company. Please proceed with your question.

Thank you. Good morning. Jason as you look ahead into next year and maybe for Ark as well just wanted to get your thoughts on how you think about growth from the standpoint of headcount additions versus pricing leverage and any further improvement in utilization. And then I have a follow-up around just over time, do you expect the model to shift more to fixed price maybe even outcome based or transaction based pricing versus currently being much more heavily weighted towards timing materials? Thank you.

Okay. I think on utilization, we probably at the level which we’re not going to make it higher. I think it's around optimal and we would be probably if we're able to maintain at this level. Specifically, telling that we continue to grow pretty fast. So, on the model we definitely research and brainstorming what's possible to do here? But like also pointed before and I would like to point to once again the T&M is not just the model which we selected because it's easier to do. T&M is practically subject of type of work which we do in a way to go and build a new staff which dynamically changing from client side and from the client competition side and it's very difficult to turn this type of work to fixed cost or isolates because again fixed cost isolates something which very well define or you do it multiple times, you know how to predict, you know how to cut fast and this is not the type of work which we usually do. So at the same time, outcome with might be an answer for this, if there are right kind of relationship understanding and readiness not only from us but from the clients. And that's why we were talking about all we're working and creating this digital ecosystems to run ourself to be more fast and speedy and we’re trying to starting to work type of consultancy to clients as well because some of them are really like an ability to act accordingly. And I think there are some first signs that might be opportunities for us to earn more. The different models but it's still very early to say but we definitely thinking and experimenting with it right now.

Great. So it sounds like the growth will be largely driven by headcount additions at least in the near to medium term?

So it would be both, we clearly we have multiple initiatives right now, how to separate this two but headcounts still would be the number of quality of engineering stuff still would be very important.

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

Thanks. Just a quick financial question to get started. Are you going to disclose the top 5% in top five anymore? I know you gave the top 10 and top 20 or outside the top 20.

Yes, we've got that [indiscernible]. David is it --

Yes, David that is in our fact sheet on our website the top five.

Okay. I can look there earlier. Yes and then I think this has come up in a couple of different questions but if you go back starting at the end of last year is when the cost of per head started growing at a faster rate than the revenue per head and I know there is some utilization element to that but is that the state of the world that we're in for the foreseeable future given the labor markets and how much historically I know pricing leverage to some extent has been a function of employee or customer turnover but can you give us a sense of kind of what we should be thinking about over the next 12 months in terms of that equation?

In terms of price increases or in terms of --

Yes, the price wage dynamic historically you were able to drive revenue per head at a faster rate than cost per head in that dynamic split last year?

I'm not sure it's I believe since the last year, so. David it's difficult to answer the question and I'm not exactly understanding.

Yes, David again you can imagine this is one of those that defense questions in terms of the answer. But what we’re seeing is the ability to take up the rates, we did see some rate increases across some large customers here in Q3, it is a focus of ours obviously to deliver certain quality and to make certain that we’re getting more return for our clients but at the same time to capture some of the value for our investors and so it is a focus of ours to sort of drive to account profitability. And there is definitely attention to the pricing element and so it’s hard to say whether or not pricing is going to accelerate at a greater rate than wage inflation. But what I can’t say is that we do continue to get rate increases and we clearly look for those opportunities with both existing and new customers.

Thank you. Our next question comes from the line of Jamie Friedman with Susquehanna. Please proceed with your question.

Hi, thank you and congratulations on the 25th anniversary, Ark in your prepared remarks you had outlined increased complexity was already used in the technology landscape, I just want to make sure I understand is that a good or bad thing for EPAM, that's my first question? I will ask my other one, Jason, with regard to the DSO is a good cash flow quarter and good to see that DSOs stable, is there any opportunity to improve on that even further, so first on the complexity and second on the cash the DSO? Thank you.

Question number one, good or bad it’s first of all that’s the reality and we do believe for the component of the market we should blame in is given us opportunity to potentially win more deals because we believe better prepared for this type of more complex work. But at the same time more complex work require different combination of capabilities and all of this is creating challenges as well. So we do think it’s good but it’s more challenging as well.

From the DSO standpoint, we took down DSO by two days in the quarter, I would not expect to see a further decline, I think we’re comfortable with this low 80s but it is an area of focus of ours and we are looking to continue to evolve that. But at this time, I would say just to consider sort of a low 80s is a corporate target for us.

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

Hi Ark, hi Jason. Congrats on another strong quarter.

Thank you.

I just had a couple of questions on automation in the last earnings call; you had kind of explained what you're doing on automation. Just wanted to see if you have an update and specifically are there particular vendors that you're working with as it relates to RPA?

I think nothing significantly changed during the quarter. It’s still very good area and it’s growing area for us but I don’t think there is any specific update over the three months which makes sense to bring it.

Yes. But are there some particular RPA vendors that you're working with I know Work Solution is one but are there others you’re working with as well?

No, we’re working with same set of vendors. We’re choosing one of the top and we’re working with couple others. Exactly, again its landscape didn’t change in few months.

Right.

While I understand you’re asking it because it’s a very dynamic market and everything can happen but not so fast.

Great. And just in terms of like the pricing models on your automation projects, is it similar to kind of the other projects you do or are the pricing models slightly different?

This is very new and clearly automation much most of you go for outcome based because it’s much easier to measure the impact and there are multiple discussions in our current deals how we’re going to do it. So that’s a very right question, that’s probably the area where we might be going out of T&M in the future much faster.

Great. And this last question on this topic, are there particular set of clients either by geography or by industry there you’re seeing higher interest or is this kind of an area that has demand across all of your client base?

So definitely I think insurance and financial services probably champion is right now because there are a lot of fewer type of services there but it’s also related to retail as well.

Terrific, thank you. Good luck for the remainder of the year.

Thank you.

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

Yes, hi guys, thanks for taking the question. I guess a quick high level question from me, are you seeing increasing demand from your clients for near and onshore delivery, I expecting you’re updating gradually and steadily away from offshore?

So I think we’re seeing demand for more cross-functional teams and with some of them to be staffed in the market. So because of complexity of the problems not because specifically wanted people here but to deliver this complexity we need more subject expertise, more vast knowledge, more consultant skills, and very often this type of skills should be deployed in the market. So this is happening and this is a brand we’re seeing but we don’t see the brand like no global delivery and no offshore and this is still the play between all capabilities cost and scalability clearly. There are dramatical change but it would be some type of evolution to and again in our case specifically we’ve have given still only what 10%, 11% of the people in the market which is probably at least wise way than most of our competitors.

Thank you. Our next question comes from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question.

Hello, congratulations on very strong number and thank you for taking my question. My first question is on the appliance concentration, I see that in the second file in your top 20 there is a big increase of the share of those clients maybe you could provide some color what was this driven by acquisition of new clients or ramping up of the existing clients and my second question is on capital allocation, I ask this question from time to time but I see cash file keeps increasing, so any new developments in this area how to allocate this cash, how to use it and could you maybe provide how much of this is in Belarus and outside Belarus? Thank you.

So from a concentration standpoint and it’s a good point because I saw the same thing which is the 11 to 20, the 11th largest to the 20th largest customers had a very at the high growth rate in the quarter and a number of those customers are customers that may not be new customers the customers that we’ve acquired within the last two years. And what I think it does speak to is just a fact that we are still in a position with our customers and even our larger customers where many of them have significant wallet share opportunities for us. There are large global companies, we get in, we do work, we are successful with the program and then they ask us to help out in another areas. And so what we do find there is continues to be significant growth opportunities even within these large customers and again you add a couple of very nice kind of growing accounts in that 11 to 20 range. From a cash flow -- from a cash standpoint, you're right and we're using more cash this quarter than last, about and we have taken the opportunity post U.S. tax reform to bring some of that cash back to the United States, right now over 40% of that cash is in the U.S. so we have taken down the balance that we have in Belarus. And from a capital allocation standpoint still very focused on acquisitions, I think you might see in the first half of 2019 is see us doing deals that are somewhat accelerated rate. So couple of deals in that time period rather than one I think you might see us do somewhat larger deals and so rather than deals that are $30 million or $50 million deals that would be somewhat larger than that. And so that’s what we’re going to continue to sort of focus these cash. However we do meet with our board and discuss the evolution of our capital allocation strategy and we do think about all the obvious sort of share purchased that sort of reduced dilution in some of that. But we’re not at a point in time where we would be discussing that and certainly not with any sort of communication.

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

Hi. I was wondering if you could give more color on what type of projects and clients had issues within financial services.

Financial services clearly is very diverse segment and I think we were telling the story of what we do on more traditional investment banking side and we also shared some successes and we continue doing this on the wealth management side and more digital type of projects. So working in financial services also incorporates for us number of clients which is more in data side for financial services. In fact smaller companies which are build in new type of banking systems and payment systems that's another segment which we’re seeing and most of this like when I’m saying banking, I’m more referring to retail banking, one line retail banking and everything around payments which is pretty interesting and growing area for us. And there are also number of services we provide for hedge funds as well. So again it’s very diverse portfolio with very different type of projects and from geography point of view as well, it’s pretty much spread across Europe and North America and Asia.

So that is where we’re really seeing the growth with the wealth management, asset management, FinTech, also seeing nice growth in the insurance area still relatively small for us. But growing with a lot in these customer revenues and so I guess maybe you could conclude from that that I get the inverse in terms of answering your question.

Okay. That’s what I thought, okay and then just on the platforms, move to platforms. Did those come in at higher margins, are there build ones and kind of resell opportunity and how should we think about that as it becomes a bigger piece of your business, does it extend your comp set how do we think about that and its impact on margins? Thanks.

We kind of answering this already and there is no black and white answer here because from one point of view this platform build-up is a very complicated effort, starting from consultancy and going to architecture and going to silicon the right component and then put it together and what I’m trying to say that it's still in majority T&M type of job and you need like in some categories you need much more higher caliber people for this but at the same time, this high caliber people is also more expensive. So until we will see enough experience doing this and able to bring more our accelerators and some components and we're focusing on this too, it would be difficult to kind of predict what is the margin impact, it is going to be. But at the same time, it’s definitely giving us opportunity to grow fast and to support the investments which we need to do.

Thank you. There are no further questions at this time. I’d like to turn the floor back over to management for closing comments.

Okay. Thank you, thank you everyone. So it was a good quarter, we hope to deliver a good year in three months and share this with you and also just to share that in December we’re going to celebrate our 25th year anniversary. So it’s kind of a special year for us. And I would like to thank all of our employees and clients for giving us opportunity and for investors clearly, too. Thank you very much.

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