The operator welcomes participants to the EPAM Systems Q4 2023 Earnings Conference Call and reminds them that the call may contain forward-looking statements. CEO Arkadiy Dobkin expresses gratitude to the company's team for their hard work in the past year and looks forward to their continued commitment in 2024. He then briefly mentions the company's performance in 2023, which is in line with the information shared in the press release.

In 2023, EPAM's performance was impacted by volatile demand growth due to geopolitical and macroeconomic conditions. The company focused on harmonizing delivery quality, optimizing costs, and leveraging advanced technology and consulting capabilities. The relocation of over 13,000 employees and their families due to the Russian invasion of Ukraine in 2022 also affected operations and required adjustments in team composition and cost effectiveness. EPAM's team in Ukraine proved to be a reliable partner for clients despite challenges. The company also worked on scaling its delivery centers in India and Latin America, while preparing for future growth in Europe and Western and Central Asia. India remained the fastest-growing location for EPAM in 2023.

In the year 2024, EPAM's geographic delivery platform will be significantly refactored and more balanced, with a focus on harmonizing engineering competencies and capabilities in cloud, data, and AI. EPAM will continue to invest in these areas to differentiate themselves and support the growing trend of clients utilizing their diverse geographic footprint and advanced delivery capabilities. Additionally, EPAM is investing in engineering excellence and AI learning programs for all employees, with specific adoption targets set for all locations. A new tool was released in 2023 and will continue to receive upgrades in the first quarter and beyond.

EPAM has made significant upgrades to their digital delivery platform, incorporating AI and a variety of tools to support critical capabilities and ensure cost-effective and reliable consumption. They are also focused on improving productivity and becoming the most geographically diverse and AI-assisted delivery talent platform in the industry. In light of the current economic environment, they are continuously considering cost optimization efforts and working on rebalancing their seniority pyramid. EPAM has been investing in data, ML, and predictive AI capabilities and has engaged in over 400 GenAI-related projects since mid-2022.

The company's use cases cover a wide range of industries and applications, and they have recently launched an orchestration platform and made it open source. They have seen high demand and interest from clients in various industries, including tech, insurance, retail, and more. However, there has been some pullback in spending, so the company is focusing on expanding sales strategies and partnerships to capitalize on potential new demand.

In 2023, EPAM brought in new clients at a higher rate than previous years and plans to continue this trend in 2024. The company's operations have been recognized by leading analysts and their efforts in insurance consulting have been acknowledged by Gartner. EPAM was also featured in a Forrester report for their cybersecurity consulting services. Additionally, the company was recognized as one of the top 3 companies in the Magic Quadrant for Critical Capabilities for Customer Software Development Services by Gartner. EPAM is also focusing on developing capabilities in healthcare, retail, and oil and gas industries.

EPAM's leadership and strengths were recognized in leveraging generative AI, pioneering DevOps, and providing superior customer support and unique user experience. In 2023, they were named a leader by IDC in three reports and recognized by Ad Age as one of the top agencies in the US and worldwide. Despite a decline in revenue, the company was able to maintain a strong adjusted income from operations. The current market conditions are not ideal for EPAM, but they are optimistic about future opportunities due to their ability to adapt to changing demands and conditions.

In the coming years, there is expected to be a rebound in demand for building, driven by legacy modernizations, customer-centric solutions, and interest in GenAI and general AI capabilities. The company plans to invest in strategic initiatives and expects this to have some impact on profitability in 2024. In the fourth quarter of 2020, the company generated revenues of $1.16 billion, a 6% decrease from the previous year. The decrease was primarily due to the decision to exit the Russian market. The life sciences and healthcare industry saw growth, while the travel and consumer industry saw a slight decrease.

In the fourth quarter, financial services contracted by 7.1%, driven by declines in banking, but partially offset by work from marketplace exchange and finance information and analytics clients. Excluding the impact of exiting Russian operations, revenue declined by 5.5%. Business information and media declined by 14.8%, primarily due to reduced spending from large clients in the mortgage data space. Software and hi-tech declined by 16.8%, mainly due to a decrease in revenue from a top client and slower growth across other customers. Emerging verticals saw growth of 4.2%, driven by clients in energy, manufacturing, and education. The Americas, EMEA, and APAC regions all saw declines in revenue, while CEE saw a significant decline due to the exit of operations in Russia. Revenues from top 20 clients declined by 5%, while revenues from clients outside the top 20 declined by 7%.

The company's GAAP gross margin for the quarter decreased compared to the previous year, but non-GAAP gross margin also decreased. SG&A expenses were impacted by one-time charges and the company's cost optimization program. GAAP income from operations and non-GAAP income from operations also decreased compared to the previous year. The GAAP effective tax rate was lower than expected due to excess tax benefits, but the non-GAAP effective tax rate was higher. Diluted earnings per share on a GAAP basis decreased compared to the previous year. Cash flow from operations and free cash flow also decreased compared to the same quarter last year.

The company ended the quarter with $2 billion in cash and cash equivalents and saw a decrease in days sales outstanding compared to the previous quarter and the same quarter last year. They also repurchased shares and have remaining share repurchase authority. The company had a decline in consultants, designers, engineers, trainers, and architects, as well as overall headcount, but saw an increase in utilization. For the full year, revenues decreased by 2.8% and GAAP income from operations decreased by 12.5%. Non-GAAP income from operations also decreased, but at a lower rate. The company's GAAP and non-GAAP effective tax rates were 22.3% and 23.7%, respectively. Diluted earnings per share on a GAAP basis was $7.06 and non-GAAP EPS was $10.59.

In 2023, EPAM had a cash flow from operations of $563 million and a free cash flow of $534 million, with 686,000 shares repurchased for $164.9 million. The company managed to navigate challenging macro conditions and is focused on generating revenue growth in 2024, despite a persistently uneven demand environment. However, there may be pressure on margins due to higher compensation and limited ability to improve client pricing. The company's operations in Ukraine remain unaffected by the war and the guidance for 2024 includes a 1-4% revenue growth, with minimal impact from foreign exchange and no significant contributions from inorganic revenue. Visibility for the year is still limited.

The company expects modest sequential growth in Q1 of 2024, but it may not be enough to offset seasonal revenue impacts throughout the year. They anticipate GAAP income from operations to be 9.5% to 10.5% and non-GAAP income from operations to be 14.5% to 15.5%. The GAAP effective tax rate will be 21% and the non-GAAP effective tax rate will be 24%. They expect GAAP diluted EPS to be $7.20 to $7.60 for the full year and non-GAAP diluted EPS to be $10 to $10.40 for the full year. For Q1, they expect a year-over-year decline of 4% in revenues, with minimal impact from FX. GAAP income from operations is expected to be 9% to 10% and non-GAAP income from operations is expected to be 13.5% to 14.5%. The GAAP effective tax rate will be 11% and the non-GAAP effective tax rate will be 24%. GAAP diluted EPS is expected to be $1.79 to $1.87 for the quarter and non-GAAP diluted EPS is expected to be $2.26 to $2.34 for the quarter. The company also shares key assumptions that support their GAAP to non-GAAP measurements for 2024.

In paragraph 14, the speaker discusses expected expenses and income for the year 2024, including stock-based compensation, amortization of intangibles, foreign exchange impact, tax adjustments, and interest and other income. They also mention their expectations for an increase in demand in the second half of 2024 and attribute this to an increase in client conversations and a backlog of delayed projects.

Arkadiy Dobkin, the CEO of EPAM Systems, stated that the company has been taking a lot of activities in Q4 and having conversations, but decisions have been delayed. However, they believe that future delays will be difficult to hold due to companies needing to address growing debt. The company has taken a responsible view of the situation and is planning and shaping their activities accordingly. In terms of margin, the company had a good result in the 4Q AOM and is now considering costs and investments for 2024. They have decided to return to a more typical variable compensation and will move forward with traditional salary increases in Q2. The company has low voluntary attrition.

The company plans to maintain its current investments in people programs and AI, as they have confidence in a return to growth later in the year. They also plan to continue investing in demand generation and enhancing their domain capabilities. The CEO and CFO believe that there will be a return on the AI investment, and they will be working on improving utilization and seniority pyramids to improve gross margin in the second half of 2024 and profitability in 2025.

The speaker is asked about the progress of their ramp down and whether the second-half improvement is consistent across their larger clients. They respond by saying that there was a known and expected ramp down in Q1, but they are seeing stabilization in demand and growth in certain industry verticals. The speaker also mentions that their headcount is down in most geographies, except for India, and explains that this is due to factors such as higher utilization rates and the bill rate differential between countries.

The company had to increase headcount in various countries as a contingency plan in case things did not go well in Ukraine. They have since adjusted their headcount and are now seeing growth in India and Latin America. The company's original guide for 2023 was optimistic and they are now adjusting their numbers to reflect the changing market conditions. They are still investing in hiring and feel comfortable with their current numbers.

During a recent earnings call, David Grossman asked Jason Peterson about the margin dynamic for the year and whether margins would improve as the year progresses. Peterson responded that he expects lower gross margins in the first half of the year, but a significant improvement in the second half due to available bill days and improvements in utilization and pyramid. He also mentioned that the company will likely adjust the seniority of employees, which could impact the average experience and revenue per employee. However, he noted that revenue per employee may not be an accurate metric as it depends on how the company optimizes its delivery locations, such as the significant growth in India.

In this paragraph, the speaker discusses the impact of seasonality and demand on the company's performance. They mention that the company is seeing a better demand environment and more stability, with larger deal size opportunities. However, they also note that the second quarter typically has a negative seasonal impact, while the third quarter is usually strong.

The speaker discusses the potential for flat or even declining growth due to seasonality, but expects to see sequential growth in the first and second quarters. They also mention efforts to protect pricing and increase profitability through shorter commitments and more fixed fee engagements. The speaker is asked about the need to reshape the company's skillset for the evolving demand environment.

The speaker addresses the question of how quickly the company can hire in response to an increase in demand. They mention the uncertainty surrounding productivity growth and the need to closely monitor client support for new technology. The company has invested in training for junior employees and feels confident in their ability to increase capacity when needed. They also mention their flexibility in responding to demand across different geographies.

The clients who had reduced spending with EPAM last year due to uncertainty and risk related to the pandemic are now starting to come back. This delay in decision-making and potential replacement of EPAM was not fully realized until the end of Q1 2023, and the impact of these actions may have a long-term effect.

The company is facing a visible impact in 2023 due to clients declining their services and signing with competitors. This is partially due to the slowing economy and increased competition for rates and costs. However, there are some positive signs as some clients are returning and new business is being brought in. This decline is expected to continue into 2024, but will be smaller than in 2023. Clients are reengaging with the company due to factors such as comfort with their execution in locations like India and Ukraine.

The speaker discusses the competitive landscape and how the company has seen some customers come back to them, as well as adding a higher number of new clients compared to previous years. They mention feeling pressure from competitors and adjusting their behavior to protect their client base.

The company's transition between the first half and second half of 2023 was much more visible, and this trend is expected to continue for the next quarter. This is due to clients starting bigger programs and an improved competitive situation. The second half of 2023 is expected to bring opportunities to demonstrate this acceleration. The company expects stronger new logo activity and revenues from new customers, but there may still be some unpredictability in the demand environment. The company remains conservative in its expectations for margins and growth, as the current situation in the IT segment is uncertain. One final question was asked before the call concluded.

The CEO of GenAI, Arkadiy Dobkin, discusses the current excitement surrounding GenAI capabilities among clients, particularly in terms of its potential to change interfaces and provide new insights. However, he notes that the technology is still in its early stages and capabilities are expected to change as it matures. Dobkin also mentions the challenges of keeping up with the rapidly evolving market and trends. Despite this, he is optimistic about the company's recent stabilization and slight growth in revenue and client base. The call concludes with Dobkin expressing gratitude for the questions and stating that they will reconvene in three months.

The conference call has ended and the participants are thanked for their participation. They are now free to disconnect from the call.

This summary was generated with AI and may contain some inaccuracies.