EPAM Systems, Inc. (EPAM) Q4 2021 Earnings Report, Transcript and Summary

0:02 Good day and thank you for standing by. Welcome to the EPAM Systems Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]. 0:25 I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations. Please go ahead.

0:41 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 full year 2021 results. If you have not, a copy is available on epam.com in the Investors section. 0:54 With me on todays’ call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I would like to remind those listening 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 the comparable GAAP measures and are available in our quarterly earnings material located in the Investors section of our website. 1:27 With that said, I’ll now turn the call over to Ark.

1:30 Thank you, David. Good day, everyone, and thank you for joining us today. Before turning to Jason to provide a detailed update on our fourth quarter overall 2021 results and our 2022 outlook, I would like to spend some time reflecting on last year performance and share some thoughts on our positioning for 2022. But even before doing that, I would like to share a couple of other thoughts. 1:59 Just last week, we celebrated the 10-year anniversary of our initial public offering on the New York Stock Exchange. So that is why this call is a bit special. Exactly 10 years ago, we provided our first guidance on our first earnings call. 2:17 EPAM in Q1 2012 was a company with 7,000 people and about $335 million in revenue. We recall back then, which reflected a strong priority indeed. EPAM was very much an unknown start-up with a minimal presence in the United States and Western Europe and with development centers across just a few countries in Eastern Europe. And we were extremely nervous because of all of that. 2:54 During our first call, we shared that our quarterly revenue grew 34% and our annual headcount increased by about 30%. And we guided that our 2012 revenue should go up around 23%, 25% from the prior year of 2011. Ten years later, we are a very different company. Since our IPO, EPAM has grown more than tenfold, expanded our global footprint across five continents and growing our team of professionals to more than 58,000 people and across 40 countries to become a recognized world leader in digital engineering and consulting services. 3:39 So at this moment, I would like to personally thank all of our employees, customers and shareholders who participated in achieving this notable milestone in EPAM journey, which we just deliberated last week on New York Stock Exchange podium, unfortunately, in a very small team due to understandable quality restriction. 4:02 What is also important is that 10 years later, we still feel very much as a fast-growing, constantly changing and learning start-up. As of today, we still can share that in our fourth quarter, we grew 53% and 44% organically, increased our annual head count by 43% and plan to grow revenues by at least 37% in 2022. So in short, we are running today faster than we did back then during our first post IPO days. 4:37 To be on a bit more formal side, for 2021, we generated almost $3.8 billion in revenues, reflecting a greater than 40% year-over-year growth, which included a strong result across all dimensions of our portfolio. Non-GAAP earnings per share were $9.05, a 43% increase over fiscal 2020. And in 2021, we also generated $461 million of free cash flow. 5:10 During our previous call three months ago, we shared the history of our transformational efforts while we were setting our 3-year mission plans. I will not go into the details again, but I would like to mention that 2021 was actually a special year for us. For the third time in a row since our IPO, we doubled the company in three years. 5:34 2021 was a year when we were aggressively building and expanding EPAM capabilities through our strong organic, especially across cloud data and consulting credits. And also, it was a record year from an M&A point of view, which help us to fuel some white spaces and also to mature our offerings in consulting, cybersecurity, digital marketing, digital platform and cloud delivery as well as in data and analytics. It also allows to better diversify our global delivery organization. 6:09 For sure, our 2021 results would not have been possible if not for our ability to attract and retain talent. To meet the extraordinary demand in 2021, we refined our employee value proposition, to elevate EPAM as a company with new-generation technologies where engineers, designers, architects and consultants can embrace modern practices, cutting-edge tech and deep collaboration approach during our client engagement. 6:42 We added more than 17,600 EPAMers, which is approximately 2.5x more employees in our previous record year of 2019. 2021 was the second year in a row of very much distributed with very high percentage of remote work, and with still very limited opportunities to meet in person with our team members and clients on a regular basis. 7:10 So it was a year when we doubled our efforts to focus on talent engagement practices through understanding of people capabilities, investing in their training and development and providing a wide area of opportunities to communicate and gather together [Indiscernible] as a team as well as through finding the best suitable engagement both from professional and from vocational point of view. 7:36 Additionally, we drove deeper connections across our global talent pool to each other and to global community of people and partners through our digital platforms, all which help us to keep high level of productivity and our attrition levels manageable in the current very challenging environment. 7:55 In 2021, the majority of our clients have been at the center of significant amount of transformation. This has driven very strong demand for our services across all verticals. In travel and consumer, we absorbed an extra rebound as post-pandemic priorities once again moved to the forefront of the discretionary spend agenda. 8:20 In financial services, we saw demand growth in both our existing customers and in several new and previously smaller clients. We'll continue the same of modernization and innovation of key business domains. Insurance, which was relatively new focus area within our financial services last year is today one of our fastest-growing subsegments. 8:43 Telecommunications, automotive, all part of our emerging verticals [Indiscernible] outpace previous year performance as clients in these sectors turn to EPAM's expertise and innovation, design experience and product and platform in [Indiscernible]. Life sciences & healthcare and software & hi-tech both continue to grow fast and demonstrating the potential to accelerate fast. While business information & media slowed down during the year, returned to a 30-plus percent growth rate in Q4. 9:17 2021 was also a noticeable year from a market recognition point of view. Some of them we shared previously, but I would list those together to demonstrate the progress we achieved or being not only the engineers anymore, but moving beyond into the integrated consulting and advanced engineering zone. EPAM was ranked as a top IT services company on Fortune’s 100 Fastest-Growing Companies list for the third consecutive year and also was included on the list of Forbes Global 2000 companies; recognized by Ad Age as one of the top 25 largest agencies in the world; and Consulting Magazine named EPAM Continuum as one of the top 20 fastest-growing consultancies. 10:09 Also included by Forrester as EPAM Continuum in the list of eight largest customer experience strategy consulting practices, along with Accenture, BCG, Deloitte, E&Y, IBM, McKinsey and PwC; named in top 50 most loved workplaces by Newsweek; recognized for our employee-centric work by Great Place to Work in a number of our key talent markets; and was also awarded the Best Culture of Learning Talent by LinkedIn. Just last week was included in the top 100 Barron's Most Sustainable Companies list. And lastly, was accepted in S&P 500 Index in December. Just several quarters ago, in last May actually, we talked probably for the first time about becoming a $5 billion to $10 billion company sometime in the future. 11:07 Today, we know that we are guiding to close the $5 billion mark already in 2022. So we feel much more confident to set our near-term sights on growing to $10 billion floor company. We believe we are well positioned to do so with our overall progress today, and we continue advancing on our key client markets and growing a very fast, diversifying global delivery capabilities. I know it feels like I'm missing one hot topic at this point. And I am sure that you follow the news about Ukraine and Russia as much as we do. That is why I would like to share the following before passing the microphone to Jason. 11:54 2021 was actually a very challenging year, especially for us. First, due to fast-growing geopolitical and social uncertainties across some of our key talent markets and the continued disruption of global pandemic too. That is exactly why we are very pleased with our standing in first quarter and overall performance we delivered in 2021. Despite all of that, our results demonstrate the level of maturity published over the years and our ability to operate and win share performance during difficult times. 12:33 We also should remember that this conflict is not new for the region. We do well remember 2014 and 2015 and then 2020 as well. We have dealt well with those in the past, and we also learned a lot since then. So in 2021, to navigate the situation, we continued something which we started actively implementing since 2014. Both organic and M&A-based efforts to improve our geographic timing diversification and to do it without any degradation in quality of our delivery. 13:09 That was our key focus over those years as well as significantly maturing our portfolio of consulting industry and overall engineering capabilities. So today, we believe we are well prepared to address the challenges ahead in 2022 by leveraging our broad global reach in addition to our deep regional insight and by applying our strong engineering DNA and very importantly, never ending entrepreneurial spirit to continue making the future real for our clients, our employees and our global and local communities while keeping everyone as safe as possible as our key priority at the same time. 13:51 With that I would like one more time to send our employees customers and shareholders for their continuing understanding and support. Now let me turn the call over to Jason.

14:03 Thank you, Ark, and good day to all. In the fourth quarter, EPAM delivered extremely strong results, reflecting continued high levels of demand for the company's services across a full range of industry verticals and geographies. During the quarter, EPAM generated revenues of $1.107 billion, a year-over-year increase of 53.1% on a reported basis and 54.1% in constant currency terms, reflecting a negative foreign exchange impact of 100 basis points. 14:34 Q4 was the first quarter EPAM delivered quarterly revenues in excess of $1 billion, a notable milestone in the company's journey. Performance across the industry verticals in the quarter was consistent and very strong, long-standing trends, which have been driving significant growth continue and include the need to modernize and transform applications while transitioning them to the cloud. 14:57 Human-centered innovation is the merging of physical and digital experiences continues to spread across industries and creation of new digital products and businesses, while harnessing the resulting data to improve our customers' revenue growth, supply chain operations and end customer experiences. 15:14 Turning to the performance of our industry verticals. Travel & consumer grew 91.3%, driven by very strong growth from both our consumer and retail clients. The accelerated growth in the quarter is partially the result of recent acquisitions. Financial services grew 60.3% with very strong growth coming from payments, banking, asset management and insurance. Larger consulting-led engagements are helping to drive higher levels of growth. 15:45 Software & hi-tech grew 34.7% in the quarter. Life sciences & healthcare grew 33.9%. Business information & media delivered 32.9% growth in the quarter. And finally, our emerging verticals delivered 67.6% growth, driven by clients in manufacturing and automotive, energy and telecommunications. 16:08 Moving to our geographic performance. In Q4, we renamed our geographic regions to better reflect EPAM's ongoing geographic expansion. These changes are name only, the methodology used to report revenues remains unchanged. The Americas, our largest region, representing 58% of our Q4 revenues, grew 47.2% year-over-year or 47.4% in constant currency. EMEA, representing 35% of Q4 revenues, grew 66.6% year-over-year or 69.7% in constant currency. The accelerated growth in the quarter is partially the result of recent acquisitions. 16:50 CEE, representing 5% of our Q4 revenues, grew 46.4% year-over-year and 43.9% in constant currency. And finally, APAC grew 38% year-over-year and 38% in constant currency terms and now represents 3% of our revenues. In Q4, revenues from our top 20 clients grew 29% while revenues from clients outside our top 20 grew 70% year-over-year, driving greater diversification across our revenue base. Growth in our clients outside of the top 20, most notably below the top 200, reflected a higher level of inorganic contribution during the quarter. 17:35 Moving down the income statement. Our GAAP gross margin for the quarter was 34.3% compared to 35.6% in Q4 of last year. Non-GAAP gross margin for the quarter was 35.9% compared to 36.9% for the same quarter last year. Gross margin in Q4 2021 was impacted by higher levels of funding for our variable compensation programs, given the company's outperformance versus financial targets established at the beginning of the 2021 fiscal year. 18:06 GAAP SG&A was 17.2% of revenue compared to 17.8% in Q4 of last year, and non-GAAP SG&A came in at 15.6% of revenue compared to 16.2% in the same period last year. GAAP income from operations was $166 million or 15% of revenue in the quarter, compared to $112 million or 15.5% of revenue in Q4 of last year. 18:33 Non-GAAP income from operations was $206 million or 18.6% of revenues in the quarter compared to $136 million or 18.8% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 11% versus our Q4 guide to 14%. Due to a higher than expected level of excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits was 21.9%. Diluted earnings per share on a GAAP basis was $2.40. Our non-GAAP diluted EPS was $2.76, reflecting a 95% increase and 52.5% growth over the same quarter in 2020. In Q4, there were approximately $59.3 million diluted shares outstanding. 19:26 Turning to our cash flow and balance sheet. Cash flow from operations for Q4 was $285 million compared to $159 million in the same quarter of 2020. Free cash flow of $228 million produced a 139% conversion of adjusted net income, compared to free cash flow of $141 million in the same quarter last year. The higher level of free cash flow in the quarter reflects a strong level of cash collections. We ended the quarter with approximately $1.4 billion in cash and cash equivalents, which is net of $366 million used in our acquisition efforts during 2021. At the end of Q4, DSO was 62 and compares to 70 days in Q3 2021 and 64 days in the same quarter last year. Looking ahead, we expect DSO will trend up in 2022. 20:21 Moving on to a few operational metrics for the quarter. We ended Q4 with more than 52,600 consultants, designers, engineers, trainers and architects, a year-over-year increase of 43.2%. Our total headcount for the quarter was more than 58,800 employees. In Q4, we had approximately 6,100 net additions, a record number of new additions for EPAM. Utilization was 76.8% compared to 77.9% in Q4 of last year and 77.1% in Q3 2021. 21:01 Turning to our results for 2021. Revenues for the year were $3.758 billion, producing 41.3% reported growth and 39.9% on a constant currency basis when compared to 2020. During fiscal 2021, our acquisitions contributed approximately 4% to our growth. GAAP income from operations was $542 million, an increase of 43% year-over-year and represented 14.4% of revenues. Our non-GAAP income from operations was $678 million, an increase of 43.5% over the prior year and represented 18% of revenue. 21:45 Our GAAP effective tax rate for the year was 9.7%. Our non-GAAP effective tax rate was 22%. Diluted earnings per share on a GAAP basis was $8.15. Non-GAAP EPS, which excludes adjustments for stock-based compensation, acquisition-related costs and other certain onetime items was $9.05, reflecting a 42.7% increase over fiscal 2020. In 2021, there were approximately 59.1 million weighted average diluted shares outstanding. 22:18 And finally, cash flow from operations was $572 million compared to $544 million for 2020. And free cash flow was $461 million, reflecting an 86% adjusted net income conversion. We are very pleased with our 2021 results, which exceeded each of the guided metrics we set at the beginning of the year. 22:40 Before I move on to our outlook, I'd like to provide a few highlights on our progress in the area of corporate responsibility and ESG. EPAM has a long-standing commitment to serve the communities in which our people and our customers operate. As we continue to expand, we recognize our responsibility to act according to our principles by operating ethically, protecting the environment and supporting our global and local communities. Our focus on sustainable growth today will be a catalyst to fuel continued expansion in the future. 23:13 Over the last year, EPAMers have donated more than 30,000 hours of their time and skills across 27 EPAM sites and partner organization events, creating and conducting STEM-related courses, supporting social innovation platforms and environmental initiatives and supporting events, including the British Interactive Media Association's Digital Day, the Raspberry Pi Foundation's Coolest Projects and the global Scratch Conference. 23:40 While we are working through specific long-term commitments to fight climate change, we have continued to challenge ourselves to significantly reduce the effects of our carbon emissions. We're also focused on innovating new sustainability concepts and developing digital solutions to support sustainability in our communities. 24:00 Now let's turn to guidance. Starting with our full year outlook, revenue growth will be at least 37% on a reported basis, and in constant currency terms will be at least 38% after factoring in an approximate 1% negative foreign exchange impact. We expect inorganic revenue contribution to be approximately 6% from acquisitions we closed in the last 12 months. We expect GAAP income operations to be in the range of 13.5% to 14.5%, and non-GAAP income from operations to be in the range of 16.5% to 17.5%. 24:36 We expect our GAAP effective tax rate to be approximately 15%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation will be 22%. For earnings per share, we expect that GAAP diluted EPS will be in the range of $10.43 to $10.76 for the full year, and non-GAAP diluted EPS will be in the range of $11.36 to $11.69 for the full year. 25:05 We expect weighted average share count of 59.8 million fully diluted shares outstanding. For Q1 of 2022, we expect revenues to be in the range of $1.170 billion to $1.180 billion, producing a year-over-year growth rate of approximately 50% reported at the midpoint of the range. Our guidance reflects unfavorable FX impact of 1% and the year-over-year growth rate on a constant currency basis is expected to be 51%. Lastly, we expect approximately 9% of our growth to come from revenues contributed by acquisitions closed over the last 12 months. 25:45 For the first quarter, we expect GAAP income from operations to be in the range of 14.5% to 15.5% and non-GAAP income from operations to be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to be approximately 8% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation to be approximately 22%. 26:10 For earnings per share, we expect GAAP diluted EPS to be in the range of $2.65 to $2.73 for the quarter, and non-GAAP diluted EPS to be in the range of $2.58 to $2.66 for the quarter. We expect a weighted average share count of 59.5 million diluted shares outstanding. 26:31 Finally, a few key assumptions that support our GAAP to non-GAAP measurements in 2022. Stock-based compensation expense is expected to be approximately $116 million with $19 million in Q1, $31 million in Q2 and $33 million in the remaining quarters. Amortization of intangibles is expected to be approximately $24 million for the year, evenly spread across each quarter. The impact of foreign exchange is expected to be approximately a $6 million loss for the year, evenly spread across each quarter. 27:06 Tax effect of non-GAAP adjustments is expected to be around $27 million for the year, with $4 million in Q1, $7 million in Q2 and $8 million in each remaining quarter. And finally, we expect excess tax benefits to be around $67 million for the full year with approximately $27 million in Q1, $18 million in Q2 and $11 million in each remaining quarter. 27:30 Our 2022 outlook reflects the strong demand environment we see across the business and end markets we serve. In addition to expected ongoing investments across our people, platforms and processes, which will equip and position EPAM for future growth. As we've done in the past, we will adjust our business outlook each quarter to reflect changes in the demand environment and in our operations. Okay, operator, let's open the call for questions.

28:02 Thank you [Operator Instructions] Our first question comes from Ramsey El-Assal with Barclays. Your line is open.

28:18 Hi, and thanks so much for taking my call. And congratulations on your anniversary. I wanted to ask about the situation in Ukraine, whether you could give us a little more color on your potential continuity plans in the event that the conflict there sort of escalated and also maybe we've in whether the post pandemic remote work, model has made it a little bit easier to contemplate, shifting workloads around?

28:49 Hello, this is Arkadiy. I think number one that we continue to work in normal environment, there is not any impact on day-to-day operation at this point. So we talked about our experience started from 2014. And in 2015, actually, it was active operations on the border with Ukraine and was questionable part of the lens there, and it was a very active military activities there. During all this time, it didn't have any impact on the EPAM operation. What we can bring, in addition to what you're reading, that nobody from EPAM and right now, it's a pretty big number of people. We have almost 13,000 production people in the country. So we have anybody who is drafted or anybody who is invited or requested for any type of military training or drills or anything. So that's probably kind of additional color, which we can bring. 30:13 The second point that also since almost eight years of tension in the region, we did a lot of special preparations for this, like we practically completely independent from local infrastructure, any project infrastructure -- any project activities, so -- and on top of your question about COVID and remote work. So it means that from building of any attributes of engagement depending on Lacao, it doesn't -- practically it doesn't exist. I think it will be a lot of questions, so I will add a little bit more to it. There is not any active relocations. Probably from the total number of people, we should have between 50 and 100 participated right now in some kind of pilots or testing of BCP activities. And we are living for -- in the past or currently for one, two, three weeks to [Indiscernible]. So other than that, again, it's completely normal.

31:53 Okay. I appreciate that. And I wanted to ask also on margin guidance in fiscal '22. It's down about 50 basis points at the midpoint from the fiscal '21 guide. And I know you mentioned investing in people and ops. I was just wondering if you can give a little bit more color about the margin drivers and maybe the cadence we should model through this year.

32:18 Yes. So maybe what I'll do is I'll respond to the full year, and I'll also talk about Q1 specifically. And so what we continue to see is a business that obviously is growing at a rapid rate with extremely strong demand. We've talked about our ongoing investment in sort of people on processes, education and also just the ongoing diversification of the business globally as we grow into different centers around the world. Those are probably somewhat less optimized at this time than our more mature kind of traditional geographies. But if I were really sort of provide color that's probably easiest to understand is that we continue to see elevated wage inflation, not maybe significantly higher than 2021, but maybe somewhat elevated as we go from 2021 to 2022. We, at the same time, are also seeing substantially better pricing environment. But the pricing does not fully offset the impact of the wage inflation. So one of the negatives you've got here is that ongoing impact 33:11 At the same time, I think that you'll see a little bit more normalization of activities related to travel related to in-person. And so I think you'll see a little bit higher SG&A over time. We've talked about the fact that the variable compensation is going to come off a bit or we expect that it would come off a little bit between 2021 and 2022. But right now, between the somewhat ongoing impact of the wage inflation and pricing, not totally sort of compensating in what I expected somewhat elevated SG&A for the full year, we've guided to 16.5% to 17.5%, and I believe that we'll probably operate at the midpoint or somewhat higher than the midpoint of the 16% to 17.5% guide. 34:17 However, I want to be a little clearer on Q1 basis points between Q4 and Q1. And you see them every year you go back and look at history where profitability particularly gross margin has declined by between 100 basis points and sometimes 200 basis points between Q4 and Q1. And so the first of those is that we just have a lot lower billing capacity or billing days in Q1. And again, it's somewhat the uniqueness of where we operate, which is we have an awful lot of people celebrating Orthodox Christmas, which occurs in January, not in December. There are a lot more holidays in the region. And so you've got lower availability of workdays in January and then February is a short month for any company. So that has an impact on profitability when you get a highly time and materials oriented business. 35:07 The other thing, and again, this would impact any company, not just EPAM. But you've got social security caps that usually kick in, in the second half of a fiscal year. And then those social security resets at the beginning of the year, you have much higher employer social security payments, particularly in Q1. So both of those things have a pretty negative impact on -- particularly on gross margin. And so when we do the modeling today, okay, again, for the full year, I would say that, that midpoint, we can be somewhat higher than the midpoint. However, for Q1, I would say, when I look at the midpoint of 16.5% to 17.5%, I would say at or slightly below the midpoint is the modeling that we're doing for Q1 of fiscal 2022.

35:55 Super helpful, thank you.

35:59 Thank you. Our next question comes from Bryan Bergin with Cowen. Your line is open.

36:05 Hi, good morning. Thank you. First, I wanted to follow-up on Ukraine. Can you just talk about the nature of client conversations and whether there's any increased selectivity or preference by them for where new work will be delivered from and then collectively, we see that Belarus and Ukraine as a mix of headcount declined year-over-year by a noble amount. Just based on your global expansion plans, how are you thinking about the mix of those two countries as you would exit this year?

36:36 Okay. I think in general, the action and conversation very, very similar to what was eight years back. There are some clients which very worried and kind of situation, wait and see. There are some clients which continue as usual, and this is majority of them. There are some clients who are preparing for more active BCP if some specific triggers would happen, which is very difficult to define the figures. And this is a very small minority. 37:16 So -- and the risk category between those like especially in wait and see, which prefer to start somewhere else. And it was a very similar situation again, eight years ago. And we have many more options today to work an alternative because as you know, [Indiscernible] what's happening. To be in Belarus and Russia today, so probably around 5% of our delivery capacity versus eight years ago, it was probably over seven.

38:12 Okay. Okay. And then as far as workforce goes and just the -- another big addition here this quarter sequentially, I think we estimate over 4,000 organically again. Can you just talk about your comfort levels in the pace of resource additions and kind of what you're anticipating attrition utilization within that 2022 outlook?

38:35 Yes. So let me provide a little bit of color on that and also kind of follow up on one of the other questions you had earlier. And so you're correct that we've seen a significant growth in our productive capabilities outside of the traditional Ukraine, Belarus region. So to be specific, Ukraine, Belarus, Russia from a production standpoint grew by 22% on a year-over-year basis between '20 and '21. And we had greater than 80%, almost 90% growth in the other regions, including India and Latin America, where we've seen particularly high growth. And so we've moved from a Ukraine, Belarus, Russia. And again, the idea was that we're becoming an increasingly global company, where we're larger, we need to have a broader pool of labor that we access. At the same time, it clearly has diversification benefits from a risk standpoint. So we've gone from 68% of production capacity in Ukraine and Belarus in 2020 to 58%. We expect to continue to see accelerated growth, particularly in places like Latin America, Eastern Europe, let's call it, Central Europe and APAC. And as a result, you'll continue to see -- I expect you'll continue to see that number drive down. So I don't know if it would approach 50% or something, but certainly it would be lower than it is today and certainly much lower than it was in 2020. 40:02 From an attrition and utilization standpoint, I think we see utilization at about the same level as 2021. And then from an attrition standpoint, we are still below 20% with both voluntary and involuntary as we exit Q4. We generally would see a little bit of benefit in Q1 as people wait to get vesting of stock and bonus. So you usually see a little bit of a dip in attrition in Q1. And for the full year, we think attrition might be up slightly. But at the same time, we expect that 2022 attrition will definitely remain below 20% as well.

40:45 Thank you for the color.

40:47 Sure.

40:48 Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open.

40:54 Great. Just continue to ask about kind of situation and flexibility. If we think about operationally, if there were a disruption or you needed to move out of kind of the region where you're seeing potential disruption out of Ukraine, et cetera, how flexible are you and how quickly can you move those operations into other regions for delivery, et cetera, just thinking about those contingency plans? And then separately on pricing. Jason, you mentioned that the wage increases aren't keeping -- or are moving faster than you can move pricing. Is there a time frame under which you can better balance those and fully recapture kind of what you're experiencing from a wage inflation perspective in your pricing with your customers? Thanks.

41:53 On the first part of the first question, first of all, there is no one kind of approach or rule how to operate in this situation because we have BCP plans, which were [Indiscernible] engagements or accounts or even specific engagement within these accounts, depending on risk factors, distribution of the team, infrastructure on general part like the mix of clients and us, again, it's independent from Ukraine. But still, there are some specifics there. So it is very, very specific. And those plans is very detailed, including like definition of the key personnel and timing on doing this. Also, it is pretty pragmatic because we were experiencing the pressure and very real events eight years ago and then during this period, multiple escalation as well. It wasn't so much covered by media as happening today, but it was very, very similar. 43:28 So we feel that we're pretty prepared for this. We also have our understanding again from a lot of local science, which is again not necessarily exactly in line with what we're reading on synergy. And our understanding of what could happen is relatively limited across the boarder in Ukraine, and we have a number of large development centers across Ukraine. So we have plans how to move people from one to another, farther from the border if necessary. At the same time, again, we do believe that even those, which is closer to the border, still in pretty kind of safe zone today and will be in the future. So I think a specific timing in triggering that's very specific to clients and engagements.

44:21 Yes. And on the pricing question, we continue to focus on both rate increases with existing clients and then taking new opportunities where the value EPAM quality delivery is such that the pricing is also somewhat superior, so a little bit more selective in terms of the deals that we take. I think that what -- clearly, what wage inflation is going to be at the end of 2022, it's kind of hard to predict at the beginning of 2022. But I think what you'll continue to see is sort of price not just at the beginning of the year and also in Q2, but we'll continue to see sort of price improvements throughout the year. And hopefully, by the time we get to 2023, there's a better balance between price and wage inflation.

45:17 Thank you. Our next question comes from Jason Kupferberg with Bank of America, your line is open.

45:22 Good morning, guys. So in 2021, you guys just posted I guess it was 36% revenue growth, organic, constant currency, or guiding to least 22%, or sorry, at least 32% on the same basis in 2022. So it's just the incredibly strong growth seems like it's continuing to persist. I mean, how do you now think about your true kind of underlying organic revenue growth rate on kind of a multiyear basis? I mean, we used to talk about 20% plus, and, obviously, there's been a surge in demand from the pandemic, but just as you've assessed, how long that that may last, and how your competitive position has evolved would really be curious on your thoughts on what do you think normalized growth, looks like even beyond 2022?

46:18 Yeah, So let me just -- to I guess, restate what you said. Absolutely correct that in a 37% growth guide, the organic constant currency contribution would be about 32%. That compares to the 35.5-ish kind of percent organic constant currency contribution or growth rate in 2021. So what you've seen in 2021 and also as we enter 2022, is we've had three quarters now if you include the guide for Q1 of 2022, where we're 50% year-over-year revenue growth rates. And so clearly, that's an extraordinary number. Part of that has been the result of the huge additional headcount additions on an organic basis, plus some of the acquisition-related activity. 47:09 So we don't think that 50% year-over-year revenue growth rate is sustainable. And I think if you sort of decompose the guide with the growth rate in Q1 and the guidance that we have for the full year, you'll see that we would expect a deceleration in growth rate throughout the year. But even as you exit Q4, I think you're going to see us with a growth rate, including acquisitions, in excess of 25%. So I think what you would do is you would exit Q4 with a somewhat accelerated growth rate relative to the historic above 20%, and we'll get to the guide for 2023 as we get closer to that time period. But again, you would see somewhat of a decelerating growth rate throughout the year, and that is somewhat intentional. We believe that it's appropriate to get back to a more sustainable growth rate. But I still think you'll see us exit Q4 at a growth rate that is higher than that traditional somewhat above 20%

48:10 Right, right. Okay. Yeah, no, that all makes sense. And then if we think about your headcount growth targets for the year, obviously, you're going to have some pricing to help on the on the revenue side. So should we think about headcount growth, kind of modestly, lagging revenue growth in 2022?

48:32 Ark, are you something you want to say, sponsored?

48:37 I just wanted to address on -- I think the main kind of lesson right now that we thought about growth in 20 plus percent before and what happened during the last year that we tested ourselves at a much higher level. So we still have to wait and see an expectation that we'll come to a more normal growth rates in the future. But where this border will be coming on 20%, 25% to 25%, 30% or whatever, we will need to test it. But again, we feel more comfortable to answer now the question, which we were asked in the past. Would you be able to grow faster than what you were saying in the past? Yes, it is possible, and that's what we probably kind of positive lesson which we have right now.

49:35 And yes, I guess for the growth rates, one of the things that you see when you've got this organic growth rate of -- from a headcount standpoint of greater than 4,000 in Q3 and Q4 plus, of course, the acquisitions that we've done. By the time you get to Q1 and Q2, it does produce very, very high growth. Again, particularly on a year-over-year basis, we are comparing Q1 of 2022 to Q1 of 2021, and you've had all that headcount addition in the second half of 2021. Right now, what we -- the last two quarters, we've had organic headcount growth of about 4,000 or somewhat over 4,000. And right now, what we're planning is for organic head count growth somewhat above 3,000, okay, with the idea that we believe that, that might be a more sustainable growth rate for the time being. And that still produces the strong growth rates that we're talking about, the 37% plus for the full year 2022.

50:39 Great, well, thanks throughout the year for that.

50:43 Thank you. Our next question comes from Surinder Thind with Jefferies. Your line is open.

50:51 Thank you. A question about kind of the breadth of demand that you guys are seeing at this point. Obviously, even if we adjust out the acquisitions, very strong growth outside the top 20 in terms of your clients. Can you maybe talk about the pace at which you're adding new clients and the considerations when you onboard those clients? How selective do you have to be in the current environment? Or how selective are you? And what are the considerations? Are these all clients that you believe that will get to $5 million in revenues at some point? Or how should we think about the trade-offs of having the breadth of clients versus a strategy that's maybe focused on EPAM becoming more ingrained with a larger percentage of a given clients' revenues?

51:47 So we're definitely more selective than in the past, and definitely the new clients, which, in our view, when we review this is much high potential. And we have probably a dozen of clients which we landed during the last 12 months, which already bring in at least one million per quarter and growing fast. So I think it's actually becoming much more strategic portfolio, so. But you are continuing to see that traditional EPAM growth in existing customers. And as Ark said, continued growth level from new customers, but maybe we're a little bit more strategic and selective about the new customers that we bring in to EPAM. The other thing I think we're hearing is demand continues to be probably still in somewhat of the unprecedented camp. Maybe clients are a little bit more thoughtful around their budgets, but again, still strong, strong desire to invest, and there's still an awful lot of work to do, and again, continues to be very broad-based across industry verticals.

52:57 Having more and more clients, which is reason like 12, 24 months becoming our top shift to, or even top 20 as well.

53:07 Yeah. And that speaks to I think, clients, and we keep hearing this, when we do our channel checks internally, clients are looking at EPAM differently as a true transformation partner with the ability to take on projects of much greater sort of scale and scope.

53:24 Got it. And then would the reverse be true in the situation if you're being more selective that you're turning away business at this point?

53:34 I mean I wouldn't say that we're turning away business. But I mean, I think there's been a disconnect between supply and demand for the last probably 1.5 years or certainly throughout 2021. And so by definition, you are being somewhat selective. I think in some cases, Ark said it well, right, is that we're looking for clients that have the potential to grow. Sometimes, we're obviously looking for very interesting projects or programs. We're looking for clients who have sufficient funding, and we're also looking for clients who are willing to pay the rates that we've been talking about when it comes to price. And so all those things would factor in, and there'll be some self-selecting by clients and obviously, some self-selecting by EPAM as to which clients we do business with.

54:23 Got it.

54:25 Okay. It seems like -- let me rephrase it. Like first of all, from the general portfolio configuration, we're still looking for some clients, which as in the past, allowing us to really work in the very much cutting edge of technology and improve our engineering kind of capabilities and understanding what's happening because that's the skills which we strategically focused in the past, right now and will be doing in the future, and we hope that it differentiates us. At the same time, I think our criteria is changing. It's criteria changing not only because of the environment because of the size of operation and general direction of the company where we can refer now much more end-to-end study from consulting to engineering. And we're looking for some clients, which actually looking for somebody who can speed up the whole continuum kind of transformation. So -- and with all these criteria together, definitely, there is very different selection retails. And some clients, which will be working in the past, we probably not bring in work today.

55:43 Got it. And then in terms of just a follow-on in terms of the questions around geopolitical risk. When you kind of look ahead, is there any acceleration in your view of -- or perhaps acceleration towards investing towards building global delivery capabilities faster? Or do you kind of just kind of continue at the current pace, given that obviously, you cited rates earlier where you are building the -- a large percentage of your capability is already out there. Do you accelerate that? Or do you just kind of keep going?

56:22 I think we do pretty obvious acceleration. But you also need -- we also need to consider that it's not only because of geopolitical risk. It's in general, and that's why we try today kind of to give you perspective what's happened during the last 10 years from 7,000 people to 58,000 people. So it's not only about geopolitics, it's in general the globalization of our services. And we started to do it back then 10 years ago, very big acceleration happened in 2014, '15, when we practically opened India and Latin America, and India and Latin America growing right now faster than Eastern Europe. So both criteria is important. And as Jason mentioned already before, by the end of this year, probably depending on our core locations, we will be closer to 50% versus 80-plus percent, which we have 10 years back.

57:34 Got it? That's helpful. Thank you. Those are my questions.

57:37 Yeah. Thank you.

57:39 Our next question comes from Maggie Nolan with William Blair, your line is open.

57:43 Thank you, congratulations. Ark, you dangled this kind of $10 billion company in front of us, I'm wondering what remains consistent about the company, as you get to that level, and then what operationally or strategically would be significantly different until $10 billion, or as you get to $10 billion?

58:09 First of all, we're doing it in front of us, not only in front of you. And I think it's a lot of criteria there. And we talked about all of them over the last years. We building company, which becoming more end-to-end solution provider, and this sounds very trivial, but how to do it well, it's much less still than it seems to because we believe that it's still open opportunity to do it right, and this is continuous inflow of the talent. So we need to like to find a way how to grow the talent, and that's a very big component of our ecosystem education, digital platform, how to make sure that people from different sites working together efficiently. So it's a lot of simple things, which have to come together in our view because it is a very competitive market. And while we're thinking the $10 billion is very realistic, how to do it better is still the challenge. I think it's a very separate conversation. Hopefully, we will be able to answer this a little bit in more details in May when we're going to do our Investor Day.

59:39 Okay, thanks. And then I think, Jason, I think it was you that mentioned that consulting was a one of the drivers behind the growth in financial services, is that widespread across the business? And then when you first rolled out consulting, it wasn't billed separately, and you would caution us to think about it as something that would be driving margins up, has that changed as your consulting capabilities have matured over the last several years?

60:07 I think it's not only about financial services. So it's happening in multiple sectors and less time selling [Indiscernible] in retail right now. So and for us girls to know to have a separate consult consultant client. Services, but actually very much integrated and we still don't have very specific separate kind of accounting for this because it's not just specific number of people in this category. It's very much overlap, across department, we have consultant capabilities and very different organizational units of report and as a whole effort how to orchestrate that correctly it was right before. So from this point of view, nothing change at this point.

61:04 Thank you.

61:08 Thank you.

61:09 Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.

61:14 Thank you. Ark and Jason, good morning. Congratulations on the quarter and the milestone. Good journey. Happy to be along on it. I guess my first question is, when I look at every single revenue bucket cohort has grown. So you have clients over $20 million, between $10 million and $20 million, between $5 million and so on, all of them have grown, which is obviously a good thing. But it leads to the question of sort of what is sort of the serviceable market opportunity in front of you from the current set of clients, just from increasing penetration, could you perhaps help quantify or put a direction on that, if you could?

62:16 Yes, I probably couldn't do anything more than just kind of anecdotally. But even in our largest customers, there's -- in our top 10 or top 20, there's a significant opportunity across a range of those customers for significant ongoing growth. Certainly, in some of the areas which are kind of established for many companies, but still somewhat newer areas for EPAM. I think insurance we're still very early days in terms of our penetration of those accounts. So there's a significant opportunity there. In financial services, you're continuing to see growth in existing banks, new banks, wealth management, asset management and very, very high growth in insurance. Healthcare and life sciences continues to be a significant growth opportunity for the company with both existing and new clients. And then certainly, as you look at the emerging, as I talked about in the past, manufacturing and logistics for us is not even a breakout. It's still kind of part of our emerging verticals. And so I don't think the story has changed that much in that there continues to be a significant growth opportunity with existing customers. And then a lot of those new customers that Ark talked about that are already at $10 million or more per quarter, there's significant wallet opportunity in those new customers.

63:33 And I think you're asking how much we have kind of run rate from existing client base. And I think we do believe that it's a huge opportunity exactly present in our existing clients. And it seems like -- and it's probably not -- it's probably true for many other vendors today that after COVID kind of the new life was discovered in old clients. It was a lot of concern like two years ago and then some of them started to behave differently from our expectation because as we were sharing before, most of them understand the total investment, which were done in digital before probably not enough or should already be done because the situation around has changed so much. So there is a very big part from existing client base. That's why we have to be very selective who will be bringing on top of them as a new logos.

64:39 Understood, understood. The other question I had was, obviously, this is a multi-year trend, not necessarily a new thing, but as gross margins, steadily have gone towards the mid-30s. It’s pretty clear SG&A offset to that and sort of a two part question, if you could kind of break down the gross margin, is that more a function of adding capabilities? Then wage inflation gets added to the mix incrementally? How does that change and for how long the hell perhaps the SG&A offset capability, so that operating margins continued to get delivered?

65:26 Yes. So I have kind of, I guess, about a 5-year history with the company. And I remember when -- to be quite honest, we struggled to sort of stay above 16% profitability. So here, when we're guiding to 16.5% to 17.5% with the possibility of being, let's say, somewhat above the 17% for 2022, it feels still like a pretty good place. You are right that gross margins have declined over time. Some of what's happened over the last couple of years really has been the whole kind of wage inflation in the market, which I think is unprecedented and probably can't last forever. So I do think you might see stabilization at some point in the future, hard to speculate when. Some of it would be the additional capabilities. And specifically, I would say, the new geographies. So again, if we were just to grow in our historic Russia, Belarus, Ukraine, and continue to sort of focus on optimizing the cost effectiveness of those delivery locations, you might see a somewhat different gross margin profile, but you would also see a different sort of growth potential. And so I think it really has been beneficial. But at the same time, it probably has come with a little bit of moderation. 66:36 The other thing I don't think I totally called out is that our recent acquisitions, in many cases, are operating more in the low teens and in some cases, the single digits from an adjusted IFO standpoint. And that puts a little bit of downward pressure, particularly on the 2022 results where we've got greater acquisition-related revenue. The SG&A, I think, will continue to stay low in part because I do think facilities as a cost is going to continue to be a benefit. And so I do expect, as we exit the fiscal year, that we'd still kind of be below 16%. And so I think the balance of those things allows the company to potentially operate somewhat above 17% in 2022, and I think that's not a bad place to be with a 37% plus growth rate.

67:23 Clearly, I agree with that. Thank you.

67:26 Thank you.

67:28 Our last question comes from David Grossman with Stifel, your line is open.

67:33 Thank you. I was hoping I'd just ask two really quick follow-ups to some of the questions that have been asked. So the first is on the growth of the cohorts. Outside of the top 20, it's accelerated. It's been accelerating all year. I guess my interpretation of that dynamic was that there was a resource allocation decision that had to be made during the pandemic. And now that things have kind of changed a little bit from a resourcing standpoint, that you've been able now to pursue growth outside the top 20, which historically has actually been one of the major contributors to your growth rates. So is there any really anything different going on there or maybe I'm missing something here?

68:16 Yes, I would say yes, yes to that thesis. And then the other piece is the recent acquisitions have incorporated clients that are generally below the top 20 and in some cases, below the top 200. And so that has also contributed to the growth. But certainly, I think particularly deep in the pandemic, much of the resources were consumed by a handful of clients. And obviously, that's changed throughout 2021.

68:45 Right. Okay. And then just to follow up on the situation in the Ukraine. Historically in geopolitical hotspots, the issue is getting people to work or transportation and disruption to that and infrastructure with clients having fairly sophisticated global risk management strategies of their own before they even decide to put work over to different geographic areas. So you seem to have addressed with work from home, the getting to work kind of risk seems to have diminished and you've got your own infrastructure. So you grew through the last crisis, we all remember that. So are the risks in this current situation any different kind of what they've been historically? Is there anything different about the situation that we should be thinking about?

69:37 David, you know you're asking pretty difficult question because like big guys cannot answer. And at the same time, we definitely went through multiple geopolitical kind of tensions and crises during the last, not even 10 years, which has started to share today kind of what, 20-plus years. And in my view, from our operational point of view, there is not much difference. And -- but the only answer we will get like probably in another three months or maybe nine months or maybe in 24 months. But from work which we're doing, I think impact would be very, very minimal, in my opinion. And also, what also in this specific like history was telling us that even if some clients' policies and risk mitigation actions will be changing the direction, in general, the kind of demand for the talent is so big that we are pretty sure that we will be operating in the countries where we are today, like years from now, and it would be in the talent in demand. And that's exactly what happened. Again, for example, eight years ago, one or two clients where it was too difficult for them to swallow the situation, practically immediately different clients were willing to accept the [Indiscernible] kind of efforts which we bring in from the region.

71:30 And I would just say, David, that the guidance for the full year also concludes that any impact would be minimal, and so that's the basis for our guidance.

71:39 But we -- but again, we cannot predict the future. So the history, and we have -- as you know, we have pretty interesting configuration of our management team, which have a lot of experience in the regions and on cruises over the years.

72:04 Right. So it sounds so that the client response to the crisis has been really -- I mean, I'm sure there are differences here and there. But if you aggregate it all together, it sounds like the response hasn't been terribly dissimilar to what you experienced here.

72:22 Because like, yes, I can tell you that at this point, probably eight years ago, it was more difficult situation from some client reactions. I think it's much more balanced this time. As I said, we have some pilots for BCP, but it's very, very minimal right now.

72:44 Right. Okay. Great. Thanks very much.

72:48 Thank you. I would now like to turn the call back over to Arkadiy Dobkin for closing remarks.

72:54 Okay. Thank you again, everybody, and I hope it was not necessarily usual call today and first of all, because we celebrated just 10 years of our IPO, but also recently challenged simultaneously. And as I just shared, we have a strong team. We went through crisis, and we do believe that it's just one of them, and we probably will have some in the future as well. Pretty sure about it. So thank you and talk to you in three months.

73:34 Thank you.

73:35 This concludes today’s conference call. Thank you for participating. You may now disconnect.