Good day and thank you for standing by. Welcome to EPAM Systems Fourth Quarter and Full Year 2022 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. I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations. Please go ahead, sir.

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 2022 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I'd like to remind those listening that some of our 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 measure and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Thank you, David. Good morning, everyone. Thank you for joining us this morning. 12 months ago on February 17, we were looking towards -- to 2022 with optimism. [indiscernible] has been added to S&P 500 and we expect it to grow almost 40% and generate over $5 billion in revenues in this year. Even with some falling volumes, the Russian invasion struck the world one week later and put us on a very different place or priorities. The new reality redefines the meaning of success for us. And we are very grateful to the tens of thousands of EPAMers and our customers around the world who mobilized support for people in our business during the past year. Our success in 2022 was defined by new criteria and priorities, many of which we have shared it with you in our regular calls and updates during 2022. Priority one was to do everything possible for the safety of our people in Ukraine. Next, our global mobility mission was immediately repurposed and scaled to support over 10,000 EPAMers. We chose to stay [indiscernible] countries and many with their families. In addition, our business continuity strategy was adapted to include an exit of our business from Russia. And throughout the year, our customer focus was further elevated to ensure that even with environment that was anything but normal, our clients continued to bear the consistent, high-quality of delivery and level of service that they would expect under normal business conditions. 2022 was in every way the most disruptive year for EPAM I remember, and I have a previous history to remember all of them. You might ask why we are considering 2022 a relative success. As a result of our 2022 efforts, in 2023 we have a global delivery footprint in urbanization that makes…

Thank you, Ark, and good morning, everyone. Before covering our Q4 results, I wanted to remind everyone that in addition to our customary non-GAAP adjustments, expenditures related to EPAM's humanitarian commitment to Ukraine, the exit of our Russian operations and costs associated with accelerated the employee relocations had been excluded from non-GAAP financial results. We have included additional disclosures specific to these and other related items in our Q4 earnings release. In the fourth quarter, EPAM delivered solid results. The company generated revenues of $1.23 billion, a year-over-year increase of 11.2% on a reported basis and 14.4% in constant currency terms, reflecting a negative foreign exchange impact of 320 basis points. Additionally, the reduction in Russian customer revenues resulting from our decision to exit the Russian market had a 440 basis point negative impact on revenue growth. Excluding Russia revenues, reported year-over-year revenue growth would have been 15.6% and constant currency growth would have been almost 19%. Beginning with our industry verticals, travel and consumer grew 16%, driven by strong growth in travel and hospitality with some moderation in retail and consumer goods, as customers exhibited incremental caution in the last few months of 2022. The ongoing exit of the Russian market also impacted the growth in this vertical. Absent the impact, growth would have been 19% or 25.4% in constant currency. Financial services grew 2.4% with very strong growth coming from asset management and insurance. Excluding our Russia customer revenues, growth would have been 17.8% and 20.8% in constant currency. Software and Hi-Tech grew 10.3% in the quarter. Growth in the quarter reflected a reduction in revenue from a customer that was previously in our top 20, in addition to slower generalized growth in customer revenues across the vertical. Life sciences and healthcare grew 11.5%. Growth in the quarter…

Thank you. [Operator Instructions] And our first question comes from the line of Ramsey El-Assal with Barclays. Your line is open.

Hi, thanks so much for taking my question this morning. I wanted to ask about Ark's comments on some clients preemptively making the decision to move some workloads sort of off of EPAM and that sort of playing out as we speak. I guess the question is, is that dynamic already largely complete, or is that something that's sort of ongoing into -- deeper into the year? And then maybe you could speak to how do you -- if you can and how you can go about winning those workloads back?

I think with the [indiscernible] first of all, it's very difficult to measure what's happening, but we have not taken -- say that work taken from EPAM. What we were saying, look, we are realizing right now that some work -- future work which we traditionally will be getting from existing client base were waking probably to some alternative vendors and decisions were made to [indiscernible]explore this several quarters ago when clients were not sure how well we're going to navigate the whole disruption in Eastern Europe. So again, it's very difficult to measure, but seeing the current demand situation in Q1, that's what we assume happening. And the reconfirmation of this is not necessarily easy to get. At the same time, we know that with majority of the client, as we mentioned, we didn't lose practically any client or didn't lose significant clients at all. So they understand that we have been able to prove that we can navigate continuously working from Ukraine and the quality of our delivery is comparable with traditional, even when working in our new destinations of the world. And we believe that right now there is a level of comfort that clients will be considering us for future work as well. And there is confirmation for this. But at the same time, we mentioned cost changes as well. This is another challenge or another thing which we are actively working to make sure that we bring in the balance there too.

Okay, thank you. And one quick follow-up from me. Maybe Jason, could you comment on the margin cadence this year? Should we expect margins to sort of step up along with revenue in somewhat of a straight line as we move deeper into the year and all the way to the fourth quarter, or is there any other color on just the cadence in margins that you might need to share?

Yeah, let me you actually use this opportunity to be a little clearer on kind of what we think we'll see in 2023. And so, I think the first statement I would make is, clearly, we were very thoughtful about our guidance with a 15.5% to 16.5% adjusted IFR range. At the same time, we do anticipate that we would operate above the midpoint of that range in 2023. And you're correct that in the first half of the year, we expect to see lower levels of profitability. And then in the second half of the year higher levels of profitability. And let me take this opportunity to be sort of specific. So, we entered 2023 with a reset of Social Security caps and a lower utilization that resulted from some of those ramp-downs that I talked about earlier. So we expect to see gross margin in the first half of the year probably in the 31% to 32% range, and quite possibly closer to 31% than 32%. At the same time, with the lower level of revenue, I think you're going to see SG&A go somewhat above 15% in the first half. And then what I anticipate in the second half with stronger growth, a stronger bill days -- greater bill days in the second half, improved utilization and we will be focusing on kind of matching our cost to our demand. And then a little bit of SG&A efficiency that results when you have the stronger revenue growth that you would see an improvement in the gross margin, probably around the 34% range in the second half. And then what you would see is SG&A below 15% in the second half. So again, so SG&A above 15% in the first half of the fiscal year and below 15% in the second half.

Very helpful. Thanks so much.

Thank you. And our next question comes from Bryan Bergin with Cowen. Your line is now open.

Hi, thank you. I wanted to ask on the outlook here. So as you built the 1Q and the 2023 growth outlook, is that a baseline from 4Q and really the December client activity you saw, or is that more sort of a real-time view of client contract into the last few weeks? I'm trying to understand the underlying assumptions there in that full-year guide. And maybe whether you have a different level of visibility to the full year target versus what you would normally have at this point in the year, just given all the moving parts.

Yeah. Clearly, it's a more challenging environment to sort of forecast. And clearly, I think we're all seeing some positives around the macroeconomic environment that maybe gets us a little bit more comfortable. But as we exited 2022, we clearly saw slow December and I would say a slow January. And what I think we're beginning to see is what I would call, a little bit of green shoots of incremental demand as clients potentially get more comfortable with what 2023 might look like. And so with this, I guess, full year view shows clearly that the start of Q1 and then we're beginning to see more activity in terms of at least RFPs and other kind of requests for discussions with clients. And as a result, we feel relatively confident that we can generate stronger revenue growth and probably more consistent with the type of sequential growth that we've seen in the past. And I think, Bryan, you know that usually pre-pandemic we sort of generated between 5% and 8% sequential growth throughout the year.

Yeah, I would say, our assumptions -- because [indiscernible] you've got a general economic slowdown [indiscernible] And given the very specific trends in the case of EPAM, it's also in some way a reflection of this slowdown as well, because clients got comparably less work out, as they also got more optionality vis-a-vis others as well. So our assumptions right now, as we mentioned that probably this difficult situation would be for several quarters, and then demand will start to pick up and then we will measure this approximately in the terms which we consider pre-pandemic and in this situation [indiscernible] growth as we do. And with this, we think that again high-teens should be happen closer to the end of the year and potentially we will go to normal somewhere in the beginning of next year.

Okay. My follow-up on margin here. So just within this margin outlook, can you talk about the degree to which lower growth impacted the year-over-year decline versus the global investments you're making to support diversification versus just normal pricing and wage pressures, just as you move to new lookout, trying to rank what are those three in this margin outlook. And, Jason, is there any structural change to the margin profile from here, just based on how you're seeing this play out?

Yeah. So I think the first thing is that, it's a little bit of a tale of two halves, where the first half is definitely lower profitability due to the unexpected lower level of demand. And so, you do just have lower utilization in the first half. And then as we said, we'll make certain that [indiscernible] appropriately matching cost to demand in the second half. Then I think the other piece, just on a year-over-year basis is, I do think that -- the pricing power that I think probably all of us saw over the last couple of years is going to be not quite as pronounced in 2023. And so price is going to be a little bit harder to come by. And at the same time, you have an awful lot of cost inflation around the world that is driving relatively high wage inflation. And so, I do think this year is going to be a different year where I think we've benefited from obviously strong price and, let's say, appropriate sort of wage inflation. I think this year, you're going to see still relatively high wage inflation and a little less opportunity on the price side. Structurally, Bryan, we've talked a lot about [indiscernible] into these new geographies, that over time we will sort of scale and optimize and that will improve profitability. I think, with the slowdown in demand, it's a little bit hard to make some of those changes to bring in more junior staff to improve off the relations that improve scale. And so I do think that as you move throughout the year, particularly as you enter 2024, there's greater opportunities, and generally I feel comfortable on our ability to continue to improve our profitability when we enter 2024.

Okay. Thank you all the detail.

Thank you. And our next question comes from Maggie Nolan with William Blair. Your line is now open.

Thanks very much. I'm curious what steps you're taking to revive the new business pipeline, given that with a secondary focus as you were adapting last year.

What we are doing to revive the pipeline.

Okay. I think we kind of mentioned this, but in general, there is much better stability in our global operations which is giving us opportunity to focus on business. We were talking about our focus on consultants and this is working for us. We have new opportunities which is driven by this. But also we are working on a number of different models, specifically for this market today. And we talked about it even last time. So attention to sometimes shorter programs in [indiscernible] before. These are transformational programs, will be a [indiscernible] for our clients again. So multiple activities. I don't think it would be possible to kind of describe this in a couple of minutes. But we focus really to support new revenue generation right now from small deals to consulting-led deals as well.

Okay. And then [Multiple Speakers]

So what I think important to mention here that we've definitely seen [indiscernible] good life at the markets there are large deals, where we are invited and we participate in right now, [indiscernible]. And most important, we do believe that the clients' confidence that we can continue even in this environment and given still not finished war is very, very different than it was at the beginning of the disruption when some of them started to consider alternatives. I think this situation changed. But, as you understand, every time there is a delay as we were really seeing the visible impact in Q4 and Q1 right now.

Okay. And then you mentioned a top 10 customer -- top 20 customer that was slowing. Outside of those two, can you talk about the rest of the top client portfolio, how you see growth materializing with that base, or is there a level of caution there into 2023? And then any patterns emerging amongst those top customers in terms of where they'd like you to deliver from a geographic perspective?

That's another point that we are actually delivering now from very different geographies, and I think majority of the clients are comfortable. And again, there is no 100% of clients ready to work in occasions with the size of the portfolio we have today. We really don't have the problem from a geographies point of view, because there are clients working from different regions, and from this point of view, utilization, today it is well kind of balanced across the regions. At the same time, if you are talking about other trends in clients, then I will say that it's very much in line with everything else -- everybody else talking about it today, because there is a caution as there is a slowdown. There are some clients still growing fast, but again some decisions making much more slower. And some of them still delay. And on top of this, let's not forget, it is the mid of Q1. And Q1 in a normal year, there is no full kind of confirmation what will happen. I think in the next month or two, we will understand a little bit more about -- taking an account of this very special year, not only for EPAM. So I think the delays in decisions will be a little even one. But in general, the rest of the portfolio action for us, more in line with the -- kind of normal to the market.

Thank you.

Thank you. And the next question comes from the line of James Faucette with Morgan Stanley. Your line is now open.

Great. Thank you so much. I wanted to dig in just quickly a little bit on some of the comments Ark you and Jason have made around the relationships with your customers and the like. I'm wondering what levers right now you're looking to pull or can pull to reengage and maybe rebuild some of the relationships, and more specifically, the work streams? And should we expect any changes to pricing or delivery strategy in response to kind of those client dynamics?

I will reply, of course, obviously, in general terms. I think we are watching what's happening in real-time. And for specific clients for specific deals, we are actually making sometimes real-time decisions as well, because again there are two trends we are clear about. There is a general situation on the market and there are some specifics to EPAM. And specifics still will withstand here, but on another side, due to the last 12 months we probably make our clients feel much more comfortable, our ability to overcome the challenge. You could imagine [indiscernible] due to the first couple of months after the war started, or even when it was destruction in Ukraine in infrastructure and we kind of overcome all of these challenges that Ukraine has delivered. So I think we mentioned that thousands of people have moved and they [indiscernible] because we don't have complaints. But clients clearly were expecting some problems. We are saying right now that this is probably behind of us. While the challenge is still there. So when you say rebuilding the trust with the client, I think, let's put caution kind of there.

Yes. And I'll just comment on the pricing. And so, as I said, the environment is probably a little less -- there's little less opportunity for price improvement. And clearly, we're going to go off and make certain that we're able to sort of win opportunities, but at the same time, we're still working on pricing and we're certainly going to make certain that we don't do anything that would impair profitability over the long term.

Thank you for that. And then quickly just on capital allocation, how are you thinking about acquisitions, especially given the buyback authorization, and what are you looking for in acquisitions and what's the current landscape and pipeline for potential deals? Thanks.

Sure. So similar to the comments that Ark made around where our priorities were in 2022, that would also be consistent for our acquisition activity. We had other priorities. And so the aggressive pursuit of acquisitions was somewhat de-prioritized. At the same time, we have continued to be active through due-diligence. Sometimes we've sort of disqualified potential opportunities. And so, what I said in my prepared script really is consistent with, we believe that we can do pretty active acquisitions and also pursue a share buyback. And so, we do expect to be active throughout 2023, certainly a lot more active than we were in 2022. And I would say that generally the same sort of focus. So things that are probably somewhat more sort of consulting kind of oriented, maybe things that have a platform flavor to them. And we're tending to see a fair bit of growth in Continental Europe. And so, we'll clearly continue to look for opportunities to drive growth in that region as well.

Thanks so much.

Thank you. And our next question comes from the line of Surinder Thind with Jefferies. Your line is now open.

Good morning. I think in your prepared commentary you talked about potentially seeing some green shoots. So just as a clarification, are you seeing that clients are a bit more optimistic now than they were in December and January? And I guess, if that's the case, what kind of gives you comfort around maybe growth in the back half of 2023, given some of the challenges of maybe forecasting demand in the near term or the changes in demand that you've seen in the near term from clients?

I'll start at the front end of that, because I was the one who introduced the green shoot language, and that was in response to an earlier question. And so, David and I do sort of our own channel checks internally with the business units. And so that commentary, Surinder, was based on a number of conversations that we've had with business unit heads. And so you see, even in consumer goods, hopefully, retail will also return with a little bit of strength in the retail sector. So we are seeing clients begin to come back and look for work. I specifically said in my prepared remarks that even the client who sort of had to ramp down between Q3 and Q4 is beginning to ask for new teams. And so, there's just a whole series of kind of anecdotes, or more than one or two. And then maybe Ark, you want to talk about what we're seeing in terms of larger deal opportunities and RFPs and that sort of thing.

As I mentioned, we've seen [indiscernible] that are opportunities. There is very active work with our business development and the sales team right now. There are some deals in probably some regions which we are participating in the process as well. So when you are asking about how confident we are about the guidance right now and how have we calculated, I think I was trying to address this already, but we are definitely working through multiple assumptions. And how good is transaction, this is a different question, because if you think about 2020, 2021 and 2022, so each time it was a very different situation in the last three years where there's a lot of news to the market. And results were really different than people expected at the beginning of the year. But versus assumptions, I think I feel that situation -- now development efforts will be similar to what it is right now, including aggression in Eastern Europe. So we assume that we will be maturing our delivery and pricing structure across new locations which we entered within the next quarters. We assume that demand will grow stronger in the second part of the year, based on our, again, assumptions that what we were seeing before, maybe slowdown in technology, usage of [indiscernible] relatively fast comeback, because as we've mentioned in the current world, new companies will be coming and bringing new technology, and the traditional [indiscernible] status quo, and started to invest very greatly despite of various events. And we saw it during the pandemic time. And again, we are absolutely a country that is not good with this type of growth, but it will be coming back. I think the combination of these assumptions and our ability to come where we're standing right now in Q1 should lead us to the number which we shared with you.

That's helpful. And as a follow-up here, can we maybe talk about the delivery footprint cost? Obviously, your global deliveries changed over the past year, the average cost of delivery has gone up. How should we think about that from a structural perspective? It seems like some of the competitive edge that you may be had in the past from maybe lower-cost talent in Eastern Europe, has that gone at this point, or how should we think about that from a competitive standpoint, the cost of your new delivery footprint and what clients think of it?

I think that's a question which -- or that's a challenge which we are working right now. We are still in Eastern Europe that we -- over aggression in many countries inside of EU, but also outside of EU. At the same time, like the fastest growth in headcount happened in India and Latin America. So this is two new countries now which are, I mean, organic fast growth, because we have kind of some countries which is growing fast, but because of the allocation impact. So is in Latin America, this is a organically growing and we will be focusing on these regions. Plus, we have in our portfolio right now across Central and Western Asia, a number of regions which we do believe will be cost-competitive, and at the same time with a level of talent comparable and in line with general EPAM requirements. So I think it's a little bit moving target, but that's exactly what we simply will be able to manage in the next quarters as well.

Thank you.

Thank you. Our next question comes from the line of David Grossman with Stifel. Your line is now open.

Thank you. Good morning. I'm wondering if you could -- looking at the 2023 guide, perhaps you could break it down in terms of the headwinds that you're experiencing from geographic diversification concerns among your clients' demand and lower benefit from rates.

And David, are you talking about in terms of revenue growth or profitability or...

Yeah, Jason, revenue growth, just the revenue growth headwind from each of those three things, if you could break it down.

Let me clarify the question, was that breaking down between what -- breaking revenue [Multiple Speakers]

So on a year-over-year basis, the revenue growth headwind. I think we identified kind of three buckets, right? One was some clients concerns earlier in 2022 about geographic diversification, who initiated a process for that. There is a demand issue on a year-over-year basis, as result of slowing economic growth. And then third, the environment is creating less opportunity to get rates than what you would typically get. So I'm just wondering if you could help us understand the size of the headwind of each of those three dynamics on a year-over-year basis.

I don't think we can speak specifics right now. I don't know, Jason, if you would be able to create some...

Yeah, a little bit complicated, David, because we still have probably some benefit in rate from the rate changes that we did as people moved geographies in the second half of 2022. And then, of course, that shows up in a full-year impact in 2023. But we think we'll see less, what I would call, traditional kind of pure rate in 2023. We moved into a lot of new geographies, as Ark talked about, Central and West Asia, which we think is an attractive location longer term. We probably still need to make certain that our clients are comfortable with the region in the same way that decades ago we had to get clients comfortable with Belarus. And so this is probably just some -- let's say, some timing lag [indiscernible] very comfortable with growing there.

Yeah. David, I think it is very difficult to split between two things what you were talking about, some clients were [indiscernible] were counted on more growth in existing clients and we don't see this, and the cost factor as well. So I think calculation between these two, almost impossible because it's more distended and there is a trend between these versus specific calculation. So we definitely can't say how much we counted on couple of clients which changed their mind. But I don't think -- again, it's tens of million of dollars as well. That's all.

And then I just think I'll just sort of close David with, these are things that, obviously, we're working to address throughout 2023, and as Ark said, already the ability to sort of deliver from these new geographies, we feel that clients are comfortable -- clearly comfortable with our ability to generate -- to deliver from geographies that have been impacted in Eastern Europe. And then, as Ark talked about, we continue to sort of grow geographies that offer our clients very cost-competitive solutions. And, of course, we've got the high level of talent in geographies, might be a little bit more expensive, but are appropriate for specific clients need.

Got it. Fair enough. Thank you for that. And maybe just back, I think, to the question came up about supply in a couple of previous questions, but I'm just curious, as you look at these new geographies, can you share any information in terms of trends in utilization rate or churn and how we should think about that in each of these locations? I'm sure it's all over the board given there are new start-up operations. But just wondering if there's any observations about any of those dynamics as well, with just kind of your recruiting model in these new geographies and how that template is playing out for you.

Yeah. So it will be a question to go in details. So, yes, as I mentioned, 2022 was a big growth in India and Latin America. And so I'll start actually in those locations. It was a significant growth in 2021 as well. As you know, 2021 was a reasonably good year. And what -- so it was already proved in 2021. So it was like -- India was growing like -- I don't remember, 70%, 80%. And Latin America, probably in the same terms. Now it's 30%, 40% in India and even more in Latin America as well. So these regions, we are pretty comfortable. And yes, it's different from traditional, but we bring in there a lot of experience or expertise, how to build and grow within our status. And I think it's working. So this is one bucket. Another bucket, it's a number of locations where we have simultaneously bring in local talent and bring in experienced talent from other locations. And we started to -- knew it, as already mentioned previously, not only after the war started. It started actually in 2021. And we also feel comfortable that this has been in the quality results in line with what we experienced in kind of traditional EPAM locations as well. So now, definitely second part of 2022 was a very different trend than before. That's why when you were asking about practices, how are we hiring, what's the speed, how the Group is working? I think we are very comfortable that we will be able to speed it up, but we didn't need to speed it up. And I think we are much more diversified, and we have many more kind of tools right now, how to grow as soon as the growth will be there, demanded as before.

So, operator, I think we are running a little bit late. We have time for one more quick question if we could.

Thank you. And our last question comes from the line of Jason Kupferberg with Bank of America. Your line is now open.

Thanks, guys. I'll just ask a quick two-parter. I guess, of all the factors impacting the revenue growth in 2023, which really surprised you the most? And then can you just speak to the type of conservatism that you feel is in the revenue guide, in particular, because it does sound like you're incorporating these green shoots into the guide? There is some pretty big acceleration that you're building in between Q1 and Q4. Thank you.

Yeah. I think what we clearly saw in the month of January was slower demand, and specifically, obviously, further ramp-downs with a couple of clients that we had talked about in our prepared script. And so, just probably the entry point, Q1 2023, is kind of what changed, and in a couple of cases, it was specific to a few large customers. At the same time, we've stripped those two customers out. The dialog with our BUs is they sort of drive revenues and carefully evaluate their pipelines. But actually, there were some positive tonalities associated with it. And so the guide really does incorporate kind of the lower starting point, but obviously, four quarters is -- it's 12 months. So it's hard to predict exactly where you are going to end up in Q4, but it does already suggest that we're beginning to see an improvement in potential demand relative to that we saw in November, December and January and that's kind of what gives us the confidence in the guide. But at the same time, of course, we want to make certain that we'll be able to achieve the revenue guidance for the full year. So hopefully that answers that question.

Thank you. At this time, I'd like to hand the conference back to Mr. Ark Dobkin for closing remarks.

Thank you as always for attending today's call. As you know, any questions, David is available to help. And talk to you in three months. Thank you.