Thank you for standing by my name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to the EPAM Third Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn over the call to Mike Rowshandel, Head of Investor Relations. Please go ahead.

Good morning, everyone and thank you for joining us today. As the operator just mentioned, I’m Mike Rowshandel, Head of Investor Relations. By now, you should have received your copy of the earnings release for the company’s third quarter 2024 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 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 materials located in the Investors section of our website. With that said, I will now turn the call over to Ark.

Thank you, Mike. Good morning, everyone. Thank you for joining us today. It’s good to share today that our third quarter results came in better than expected, reflecting our strong execution, core differentiations and continued value and relevance across our global portfolio of clients. Further, we have been busy since its forecast is signing two large acquisitions announced on Friday of last week we closed NEORIS, which is the most significant addition in our history. From a strategic perspective, the acquisition of NEORIS does three things for us. Number one, it gives us an entry point into attractive new markets in Latin America and parts of Europe. Number two, accelerate net new growth opportunities with our joint clients and brings significant new logos to our clients’ portfolio. And number three, creates a powerful and unified NEORIS delivery platform in the region, which we believe will be highly regarded across Latin American and Spanish and Portuguese speaking world in general while strengthening our services with local and near-shore value propositions. We will be talking more about it a bit later today, but first, let me share some key highlights across our business. During Q3, we delivered revenue growth both year-over-year and sequentially. We saw broad improvements in client engagement across all our verticals and geographies, which we believe demonstrate what we hope to be a more stable overall market outlook. The level of our performance in Q3 was driven by increased client trust and are now much more globally diversified capabilities and in our ability to continuously execute with a high level of quality. That triggered a better-than-expected client willingness to increase their budget share results. Key verticals to call out includes life science and healthcare, emerging markets and notably financial services and software and biotech, which both returned to sequential…

Thank you, Ark, and good morning, everyone. In the third quarter, EPAM generated revenue of $1.168 billion a year-over-year increase of 1.3% on a reported basis or 0.9% in constant currency terms, reflecting a positive foreign exchange impact of 40 basis points. Excluding the impact of our exit from Russia, Year-over-year revenue for reported in constant currency would have increased by 1.5% and 1.1%, respectively. In addition to returning to year-over-year revenue growth, the company also saw 4 out of 6 reported industry verticals contribute positively to this growth. Along with the revenue growth, EPAM also delivered solid operating performance and profitability. Additionally, the company recognized a benefit from Polish government incentive program to further improve the company’s profitability in the quarter. During the third quarter, the company recognized $52 million of benefit resulting from government incentives the company expects to receive for qualifying research and development activities conducted in Poland. This benefit reduced cost of revenues, improving GAAP gross margin and IFO by 450 basis points. $22.9 million of the benefit pertains to incentives for activities conducted in 2023 and this amount has been adjusted out for non-GAAP purposes. The remaining $29.1 million in benefit derived from 2024 year-to-date R&D activities in Poland, improved non-GAAP gross margin and adjusted IFO by approximately 250 basis points. We expect the incentive to be recurring and estimate that the company will receive a further benefit of approximately $9 million in Q4 2024 as well as benefits in 2025 and other future fiscal years. While the poll and R&D incentive is reflected as a benefit to operating expense for GAAP reporting purposes, the effective tax rate during the 3 and 9 months ended September 30, 2024, was negatively impacted by the accounting with respect to the receipt of the incentive. Therefore, the positive…

[Operator Instructions] Your first question comes from the line of Bryan Bergin with TD Cowen. Your line is now open.

Hi, good morning. Thank you. It’s good to hear the broad improvement here that you noted in client behavior over the last 3 months. Are there particular areas that are leading that recovery that you’re most optimistic about and as you just think about the discussions with these clients in recent weeks, any color you can share on early ‘25 budget discussions?

Yes. I think clearly, we’re seeing improvement in financial services. And obviously, it shows up in the results for Q3, and it’s something we would expect to see as we exit the fiscal year. It does feel like those clients have reached a point where they do need to make investments and are beginning to recognize that they’ve got to start spending again. We’re obviously seeing improvement in hi-tech and then we continue with our domain investment in life sciences and health care, we continue to see good improvement there. I don’t know that, that’s necessarily budget improvement with those clients, but probably relative success on our partner company. Probably still a little bit too early to sort of comment on what we see for 2025. But again, I think we just reiterate that there’s certainly a degree of stability and conversations feel incrementally more constructive.

Okay. And then a follow-up, just on the Poland R&D incentive benefit here. Understanding this is expected to continue. Just all else equal, can you give us a sense of how much this will help on gross margin and just then the headwind as well on the effective tax rate as we think about refreshing ‘25 forward?

Yes. So how I think about it is that the entire benefit I guess, the $29 million for Q3, which was kind of a year-to-date number and the $9 million that we talked about Q4, all of that impacts gross margin. And so I think one of the quick takeaways is that if you just looked at Q3 and if you adjusted out Poland, we’d be at about 31.8% for gross margin on the post tax benefit, sorry, and then the adjusted IFO would still be at a quite strong 16.6%. As we look ahead, we do expect to have a, let’s call it, a similar level of kind of benefit but we continue to have that challenge where we’ve got wage inflation and the pricing environment hasn’t gotten worse I mean we do think there may be some opportunity for very modest price increases next year, but we still think we’ve got a disconnect between wage inflation and price improvement in 2025. So I think that’s still going to kind of pressurize 2025 profitability. Somewhat consistent with what I’ve been talking about over the last couple of earnings calls.

Okay, thank you.

Operator, we will take the next question.

Next question comes from the line of Bryan Keane with Deutsche Bank. Your line is now open.

Hey, guys. Congrats on the progress here. It’s good to see. Can you just talk a little bit about revenue per head, what you’re seeing there and what the outlook is going into 4Q and any kind of hiring and pickup in the European region that you guys are seeing that might be helping with the revenue perhaps.

Yes, you’re asking just about the mix is that we’ve talked about increases in headcount in Q3 and also said that we expect to see increases in headcount again in Q4, which is generally, as we’ve talked about, a positive leading indicator. We also think we’re at a point now where we’re beginning to see hiring more broadly globally. So not just in India or Latin America, but also in other geographies in Eastern Europe and Western Asia. So I think you’re beginning to see something that is beginning to kind of broaden.

And then just looking at the guidance organically. The third quarter came a little bit better than the fourth quarter guide at the midpoint. Third quarter basically being flat fourth quarter. I mean, just down slightly in the midpoint, maybe a decline of like 1.5% or so. Just thinking about the plus and minuses going from third quarter to fourth quarter, is there any things to think about or call outs in terms of tougher comps or just some conservatism as we go into the fourth quarter versus the improvement we saw in the third? Thanks.

Yes, you’ve got a significant seasonality impact between Q3 and Q4. So you’ve got more vacation, you’ve got more just classic holidays and then you also have for low impact. So that’s kind of what’s sort of in a sequential growth where you see a modest decline. The one thing I think I would call out, though, is that we have seen improved results in – clearly in Q3 versus our guidance but our Q4 results are stronger as a stand-alone business than we originally expected. So if you think about the guide that we did pre NEORIS, we talked about 45.90 to 46.5. If we adjust out the NEORIS the updated guidance would be 46.31 to 46.41. So again, with the stand-alone business, clearly, we saw better-than-expected Q3. At this time, we’re also expecting to see a stronger Q4 than we had expected when we did the Q2 earnings call.

Got it. Appreciate all the disclosures especially in organic growth. Thanks.

Your next question comes from the line of Ramsey El-Assal, Barclays. Your line is now open.

Hi, thank you for taking my question. I wanted to follow up on the R&D incentives from Poland. And I just I’m trying to understand, is that an amount that we should think will flow into the model from here on out, I suppose, in other words, does the amount change quarter-to-quarter or year-to-year? And then secondarily, is there any other opportunity to look for incentives like that from other jurisdictions?

No, that’s a great question. And we have taken this year to evaluate opportunities, particularly as we’ve moved into somewhat more expensive geographies in Central Europe and there are some incentives that we have begun to take advantage of. And obviously, we will continue to look at that. Poland, we do think we will offer a, let’s say, a similar level of kind of benefit next year, okay? I do think at the same time, what I said earlier with Bryan is that there continues to be, I would say, not a worsening in the pricing environment, but just not an improvement in the price environment. And at the same time, we have wage inflation. So I have kind of been talking for a while about thinking about profitability in somewhat below our 16% to 17% range in 2025. So again, somewhat below 16% to 17% and I think that even with the Polish incentive, I would still encourage people to think about our business in that way, again, just because I think what you’ll see is a modest price improvement environment next year and at the same time, we will still be exposed to some degree of wage inflation.

Okay. A quick follow-up for me. On M&A, you mentioned continuing to strategically invest in capabilities. You guys have obviously been pretty active lately. Should we expect a similar level of activity in the quarters ahead and sort of what types of assets are you looking for?

I think I don’t think we expect the same level of size impact. And in general, our approach for acquisition didn’t change much. We will also assess related to [indiscernible] but it’s function of components. It just happens that Polish just play right in our opinion during the last quarter. But in the future, we will be focusing as we lead into best [Technical Difficulty] that would be more in line with what you said before, it would be small acquisitions with specific purposes on capabilities or very specific leaders.

Okay. Thank you.

Your next question comes from the line of Jonathan Lee with Guggenheim Securities. Your line is now open.

Great. Thanks for taking our questions and tremendous to see the improvement in demand here. Historically, you have talked about expecting a reversion back to delivery in Eastern and Central Europe as demand picks back up. Have you seen any meaningful evidence of that in your customer conversations just yet?

We begun to see some recovery in demand for Eastern Europe.

Yes. I think as Jason mentioned already, we are starting to carry across all locations. During the previous quarters, India was absolutely champion and Latin America was probably the second. Right now, Eastern and Central Europe becoming – is the focus for us to increase capacity, because it’s what we see in some clients, 2022 kind of trust, we stabilize it, majority ‘26, and they also much more right now for the diversified teams not only India. So, we will see how it works. Again, as we mentioned before, we don’t want to pay the infusion to large, but that’s a trend which we are seeing right now.

Thanks for that and a follow-up. It’s good to see improvement across your top accounts. Are you seeing any shifts in the makeup of that cohort? And have there been any other changes to the type of work or again, delivery geographies that you are seeing pursued from those accounts?

Yes. We are seeing positive changes in general from just stabilization to activation of more transformational programs. And we have seen not necessarily consistently, but much more offer when programs started to go to realization much faster than we saw several quarters ago. So, it’s again, positive movement from our side. Even now we, given a situation when suddenly plan to start as to accelerate much faster than we would expect if anyone go to it like again during the next or last couple of quarters. There is positive opinion while, again, we all need to understand that it even changes quickly, plus there are too many external factors which we foresee then we go ahead with those [Technical Difficulty] have more projections, but it’s much better, Jon.

Thanks for that detail.

Your next question comes from the line of Maggie Nolan with William Blair. Your line is now open.

Thank you. Could you talk a little bit about any underlying profitability improvements you have seen this quarter, either sequentially or year-over-year when you exclude the Poland related benefit?

Yes. When we have been working to obviously improve utilization, and that’s had a positive impact. You have also seen, obviously, the improvement in SG&A as a percentage of revenue. So, I think those are the two positives. And as we have been talking about, we continue to have not a pricing impact that is changing, but just we have a promotion campaign. Early in the fiscal year, we haven’t seen much price improvement throughout the year. And so when you do year-over-year comparisons, that still shows up. But we still have an opportunity to work on pyramid. And again, we are beginning to introduce more juniors as well as beginning to as Ark talked about staff a little bit more broadly globally.

Thank you. And then could you spend a little time on your plans for integrating these acquisitions, and in particular, driving synergies, maybe some commentary around the margin profiles of these acquisitions and your plans for the trajectory there?

Yes. So, let me first say that with NEORIS, we have been specific that we expect a contribution of $54 million in Q4. And then we have not provided any direction for First Derivative, which has not closed yet. We do expect that it would close later in the quarter. But we don’t have any contribution from that acquisition in today’s guidance. From an integration standpoint, the clear focus right now is really on revenue opportunities and we are already pursuing quite actively a number of engagements where we are kind of jointly working with NEORIS as sort of NEORIS-EPAM combined to meet the needs of some existing clients and some newer opportunities. And so I would say that the first focus really is on, again, revenue growth and that’s one of the things that we think is very exciting about the combination of EPAM and NEORIS. Just to pick up the profitability question, we do expect that both of these acquisitions will have somewhat lower profitability than EPAM standalone. And so whereas we have talked about historically sort of 16% to 17%, and I have said, we would probably be a little bit below that in 2025 both First Derivative and NEORIS would likely to contribute more in sort of the low-teens. And so we will have a modestly negative impact on adjusted IFO [ph]. But again, when I guide in this sort of slightly below 16%, most of the impact really is floor in this sort of pricing, wage inflation disconnect.

I think I would add that what you guys collect is these companies, we are focusing very much on the quality of probably, capabilities and quality of engineering in most cases. So, because from integration perspective, we are also very carefully focusing right now to understand deeper capabilities, deeper characters of the company because when you do the due diligence under pressure, to win these deals, time is very compressed. So, at the same time, we know there are some areas where we definitely have the business, and we understand the risk on how to improve all the financial parameters as well because like in a broad market, this company is placed today more traditional capabilities and capacity we can bring to their clients. It’s all – we will be working our opinions we have [ph] next year, because it’s not, again, right after on its kind of one plus one equal something you can collect it, but the core synergies being realized in the next couple of years.

Thank you.

Your next question comes from the line of Surinder Thind of Jefferies. Your line is open.

Thank you. Jason, can you maybe comment on margins more from a structural perspective as you think about a more diversified global delivery footprint. Anything we should be aware of there, versus maybe having a more concentrated footprint in the past?

Yes. We have talked about this, I think throughout if this is a question about India versus Eastern Europe versus Western, but is that the margin profiles of the businesses are, I think more similar than I think people understand or have believed. And so I don’t think a shift into one geography or another produces a radical change or a significant change in the profitability levels. I think what really has been kind of impactful has been both the increasing sort of seniority pyramid globally. And then just this environment that has, again, has us still do it from us in appropriate wage increases without being able to pass those done to clients. And so what Ark and I were talking about yesterday, is it with a change in the demand environment, clearly, the first thing that you would see is an improvement in revenue. And then you might see a lag in terms of the ability to also improve pricing. But we do think that, that comes eventually with a future improvement in the demand environment.

That’s helpful. And then in terms of just the pyramid at this point and the reshaping of the pyramid, is there a way that you can perhaps quantify the opportunity in terms of the seniority versus the general employees, or how we should think about that on a go-forward basis?

I think we need to think about it on a going basis. And the simple answer is that even pyramid, I know there is someone else, that it might depend on how demand market will change, how much it will be accelerated and across good locations, because we definitely wish a seniority, and we are doing whatever we can encouraging environment. But we think exactly how it will be benefit like 12 months from now. We need to understand how the next 12 months will look like from the demand perspective. But we have [Technical Difficulty] We have different models to address it. And we never stop our kind of educational and recruitment improvement for development. So, comfortable that we would be able to start hiring and scaling better, whether it will be necessary, specifically in the near-term component.

It is a dial that takes time to show benefit. Both the demand environment needs to be somewhat better, and then it takes some time.

But we definitely had an opportunity because our pyramid right now is more senior than in traditional back in the time. So, we have opportunity to benefit.

Thank you.

Question comes from the line of David Grossman with Stifel. Your line is now open.

Good morning. Thank you. And I know you have talked quite a bit about the overall demand environment. And sorry if I missed the nuance here, but perhaps you could just repeat how much of the improvement you are seeing is macro demand-related factors as opposed to clients just becoming more comfortable with the new diversified delivery platform?

That’s a great question and almost impossible answer because mantra and geopolitics play huge work in direct. And at the same time, like any total level, I can say that what we were talking about it enterprise, then all benefits from new technology whereas of GenAI introduction that’s what we implied to understand that they need to do something now to believable for the benefits in the future. And some clients really starting to pay much more attention to data and general cloud infrastructure, not so easy and started to invest in this. We see a change versus several quarters ago, but how to quantify, it’s ready to go.

I mean there is a lot of different things that are kind of moving the needle. And maybe in some of the markets, financial services are a little bit in hi-tech. It feels like there is maybe some improvement in budget. One of the other things we are seeing, David, and we have talked about over the years is that we are beginning to see some clients return to us based on quality challenges they have had with other vendors. It’s still again on the margin. But as we do our own internal channel checks, we have multiple examples of accounts that are beginning to grow again or new logos that are growing because of clients being somewhat exhausted with the experience they have had with other vendors, or return to quality method.

Yes. And in total basis, visibly more clients come back to us. I didn’t bid the clients to start working with those clients who decrease to a lot, starting to come back with visible level of growth, one point. And then we started to see clients which we started relatively recently and scaling up vintage [ph] for us at least kind of tens of millions in revenue annually, which wasn’t really often for us during the last 12 months, 18 months to 24 months.

Got it. And I just – I know you have talked quite a bit about Poland and margins and sorry again to ask this question. But just to be clear, Jason, do you want us to start slightly below the 16% to 17% level next year and then add the benefit from Poland, which would be roughly equivalent to the $38 million we got in ‘24?

So, I am glad we are having this very explicit opportunity to clarify is that we do expect to see benefits from Poland. And at the same time, I would prefer that you continue to use something slightly below 16% as you think about 2025.

So, slightly below 16%, inclusive of the $38 million that you would get from Poland next year, is that correct?

That is correct.

Got it. And sorry, just if I could sneak one last one in here. Just the headcount, I did see the headcount grew 600 people sequentially. However, it looks like 550 of those were non-IT people. Did I read that right with only 50 being IT, if I got that right, is there a reason there is such a big increase in non-production folks?

I thought we had 750 headcount that were production. So, we can go back over that with you, but now we have production headcount increases, most of the increase. And again, we expect the production headcount increase again in Q4.

Got it. Okay guys. Thanks very much.

Sure.

Line of Jason Kupferberg with Bank of America/Merrill Lynch. Your line is open.

Thank you, guys. I just wanted to come back on organic year-over-year growth. So, you were flat in Q3, you are down, call it, 1.5% in Q4 at the midpoint, but it does sound like demand is getting better. I mean is there any reason to think that you won’t return to meaningfully positive organic revenue growth year-over-year in 2025?

We would definitely expect to return to organic revenue growth in 2025. I guess the question is what’s the definition of meaningful, but yes, we are looking to return to growth next year.

Okay. And then just on NEORIS, can you clarify what the organic revenue growth profile of that asset is as well as the client concentration, I think from CEMEX there, just given the captive model.

Yes. So, we talked about $54 million in November and December. December is usually a somewhat soft month just because of the holidays and vacations and that type of thing. And so I think if you go to take those two months and multiply it by six, you probably add a little bit to the two months to kind of get to a number. It is a growing business. CEMEX obviously is a significant customer for NEORIS and will be a significant customer on NEORIS. But it’s not a huge percentage of their business, right. It’s just a significant customer. They have got other customers in that same kind of space, let’s call it, manufacturing or materials, they also have some presence in financial services. So, again, it’s not as if CEMEX is a majority customer or anything.

Okay. Sorry, how fast is with CEMEX – I am sorry, how fast was NEORIS growing on its own organically before you bought it?

I don’t think we have talked about that yet. And I probably won’t do it right now, but we will decide what we discuss probably as we get into next year. But again, it’s a growing business, and we have talked about in excess of $300 million, you can take the November-December. And as I said, add a little bit to it and probably multiple by six to kind of get a $0.01. But again, we are not only excited about the growth of the business, but also specifically our opportunity to grow in aggregate as we combine our two capabilities and address markets that EPAM has not historically addressed.

Okay. Thank you.

At this time, I would like to inform everyone that we still have one time for one more question. Your next question comes from the line of Puneet Jain with JPMorgan. Please go ahead.

Hi. Thanks for taking my question. So, earlier this year, you talked about improving employee productivity in new regions, which were still slightly below what you had in Eastern European countries. Can you update us on LatAm, specifically with NEORIS acquisition there, LatAm being like a much larger region for you? And India, like how is employee productivity there?

So, essentially would be much more comfortable to talk about it like in a couple of quarters. But based on our current assessment, we expect that engineering well is region and in many areas comparable to what we see across our centers as well. So, when you talk about productivity is how we manage these basic investments [Technical Difficulty]. This is very different metric and the best very much from the market were separate. And as you know, duration the revenues coming from Latin America, which is different markets. We hope that we will be able to impact this, but we also hope we will be served together on joint client basically of global companies operating in Latin America and of course increase opportunity and impact on our North American clients is very scalable now. So, then that’s what I feel we will need to talk about this [Technical Difficulty].

Got it. And as we think about 2025, are there any client-specific headwinds that we should consider or most of them are behind you by now?

We – as we mentioned, again, those want to predict mostly what we cannot right now. There are too many new factors even today, okay. At the same time, like we think about like what exchange reach – in the calculations like very visible to us even for Q4 right after election. So, there are a lot of sales which is unpredictable. There are [Technical Difficulty] which didn’t happen 1 year ago when we were a little bit more optimistic and we are trying to predict the future. So, let’s say, what would happen, how we saw global politics will be shaped, how it’s going to impact the market and what will pressure our plants will have to actually starting to fight the technical that which is, in our opinion, still very, very deep.

Thank you.

Thank you very much for listening to us today. I think in summary, we would like to say again, that we reached best our Q3 results. We are also realistically optimistic how Q4 is shaping which is good. And we would like to remind, we definitely believe that EPAM continues to be well positioned and to capture rebound in market demand in the future as well. So, with this, let’s say, three months from now. Thank you very much.

Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.