The conference call for EPAM Systems' first quarter 2024 earnings begins with the operator welcoming everyone and introducing the speakers. The Head of Investor Relations reminds listeners about the possibility of forward-looking statements and provides information on where to find the company's earnings release and SEC filings. The CEO, Arkadiy Dobkin, discusses the company's guidance change due to volatility in global demand and the emergence of new, specific demands for their services.

The company initially believed that the first half of 2024 would continue the trends of the second half of 2023, with potential growth in demand. However, they now realize that macroeconomic and geopolitical factors are still causing volatility in the market and many anticipated programs have been postponed or scaled back. The need for cost-cutting has also affected revenue growth. As a result, the company's expectations for accelerated revenue in the second half of 2024 will not be met. More details will be provided in the updated 2024 outlook, but current highlights from Q1 show a slowdown in business.

The company has been making progress in key areas such as talent delivery, cost effectiveness, and expanding capabilities in India and Latin America. They have opened new offices and acquired a software development company. They are also investing in technical capabilities and improving domain industry capabilities. The demand environment has become more balanced and the company is focused on go-to-market strategies for long-term growth.

EPAM has recently partnered with a leading energy company in the UK to improve their customer experience and with a global car brand to redesign their data platform. They are also seeing an increase in demand for modernization and next generation support from their long-term clients. Their focus on domain led propositions has led to strong growth in certain verticals, such as healthcare and life sciences. However, they are still dealing with the impact of ramp downs from a few large clients in their business information and media sector.

In summary, while there has been a more balanced demand outlook in Q1 and a gradual return to modernization and business change programs, there has also been a noticeable increase in AI-related opportunities. However, the speed and scale of these changes were not as expected. To manage the current business cycle, the company is focusing on driving new demand and increasing wallet share with clients, while also seeking opportunities for efficiency and focus. This includes ongoing efforts to rebalance the business geographically.

EPAM is shifting its focus towards a more targeted approach to geographic investment and market segments, particularly in AI and cloud data consulting. They are also working on enhancing efficiency and rebalancing their geographical footprint, while maintaining a focus on client centricity. EPAM's fundamentals are strong and they are confident in their ability to rebound and lead in the market. In the first quarter, they experienced a slight decrease in revenue due to foreign exchange impacts.

The company's exit from the Russian market resulted in a negative impact on year-over-year revenue growth. Excluding Russia, revenue would have decreased by 3.3% and 3.8% in reported and constant currency, respectively. Life sciences and healthcare showed strong growth, while the travel and consumer vertical saw a decline due to decreases in retail. The software and hi-tech vertical remained stable, while financial services and business information and media declined. Emerging verticals showed solid growth, and the Americas and EMEA regions saw declines in revenue. APAC saw the largest decline in revenue and represents a small portion of the company's overall revenue.

In the first quarter, the company's revenue was impacted by a decrease in work within the financial services sector. Revenues from top 20 clients declined more than those from clients outside the top 20. Gross margin and income from operations also decreased compared to the same quarter last year, due to foreign exchange and the inability to adjust prices after a promotion campaign. The company's focus on managing costs led to an improvement in SG&A. The effective tax rate was lower due to excess tax benefits related to stock-based compensation. Diluted earnings per share decreased slightly compared to the same quarter last year.

In the first quarter of 2024, the company saw an increase in cash flow from operations and free cash flow compared to the same quarter in 2023. However, there was an uptick in DSO due to longer payment review times from clients. The company also had a decline in employee headcount and an increase in utilization. The business outlook is showing modest improvement in demand, but client decision-making remains cautious and may not meet the original 2024 guidance. The company expected flat to modest sequential improvement in Q2, followed by solid sequential growth in Q3 and Q4, but this is dependent on generating regular sequential growth to achieve year-over-year growth.

The company expects seasonal factors and foreign exchange headwinds to have a negative impact on revenue growth for the remainder of the year. They will continue to focus on demand generation and prioritize revenue growth, while also incurring additional costs and facing pricing pressure. They plan to initiate cost savings measures to achieve profitability of at least 15%. The company's operations in Ukraine are running at high levels of utilization. The full year outlook predicts a negative growth rate of 1.4% with a negative impact from foreign exchange and a 1% revenue contribution from completed acquisitions.

The company has updated their financial outlook for the year, with expected GAAP income from operations at 10% to 10.5% and non-GAAP income from operations at 15% to 15.5%. The GAAP effective tax rate is expected to be 20%, while the non-GAAP effective tax rate will be 24%. Earnings per share are expected to be in the range of $7.34 to $7.64 for the full year, with a weighted average share count of 58.7 million. For the second quarter, revenue is expected to decline by 2.6%, with a negative impact from foreign exchange. GAAP income from operations is expected to be 9% to 10%, while non-GAAP income from operations is expected to be 13.5% to 14.5%. The GAAP effective tax rate is expected to be 25%, while the non-GAAP effective tax rate will be 24%. Earnings per share are expected to be in the range of $1.52 to $1.60 for the quarter, with a weighted average share count of 58.8 million. The company also provided key assumptions for stock-based compensation expense, amortization of intangibles, and the impact of foreign exchange for the remaining quarters of the year.

The company expects tax effective non-GAAP adjustments to be around $10 million for Q2 and $11 million for each remaining quarter, with excess tax benefits of $1 million for Q2 and $1.7 million for each remaining quarter. They also anticipate incremental restructuring charges in the second half of 2024, but cannot estimate the amounts at this time. Interest and other income is expected to be approximately $15 million for Q2, $20 million for Q3, and $15 million for Q4. The company attributes the change in growth outlook to a combination of macro market-driven slowness and idiosyncratic factors, and continues to run efficiently to prepare for a more normalized demand environment. They thank their employees for their dedication and open the call for questions. The first question asks for more detail on the change in growth outlook and whether it is broad-based or due to specific clients. The company attributes the change to various factors and mentions their opening remarks.

In the second part of Q1, the company realized that many programs were delayed and some were being started at a smaller scale. This led them to focus on their current situation rather than trying to predict future market trends. They have not lost clients or faced unexpected problems, but there are some specific trends, such as an increase in India's share of delivery and foreign exchange and billable hour availability in Q2. The company is not seeing the expected improvement in demand and is instead taking a realistic approach based on their current observations. They have also noticed strong demand for locations like Ukraine and Poland, but growth is more pronounced in India.

The company has noticed a shift towards more work being done in India, which is causing a decrease in revenue growth measured in dollars. This was expected to some extent, but not fully. The company is working to rebalance their delivery platform and reduce the number of countries they work in. This shift to lower-cost locations may result in a $100 million impact on revenue growth in 2024, but the profitability in India remains solid.

During the conference call, the company discussed their guidance for the year and the expected growth in the third and fourth quarters. They believe that the growth in the third quarter will be driven by seasonal factors, such as more available bill days. They also feel confident in the quality of their delivery in India and Eastern Europe, with low levels of attrition and differentiation from their competitors.

The speaker from William Blair asks about the impact of rate cards and project delays on the company's top line. The CEO responds that there are no specific verticals affected, but there have been delays in project start dates and slower decision-making from clients. There have been no cancellations, but there have been changes in pricing and delivery for some of the company's largest clients. The company has also seen relative weakness in their European business.

The speaker discusses the lack of significant changes in client retention or win rates since the company's previous announcement of intended changes. They attribute this to delayed decisions and specific factors such as global hours and foreign exchange. The speaker also mentions a lack of confidence in sequential demand improvement for the second half of the year. In response to a question about intra-quarter trends in the first quarter, the speaker mentions that they entered the quarter with a guide and expected to reach the high end of the range, but things were slower than expected. They benefited from foreign exchange and a modest amount of M&A contribution.

The company's revenue fell short of expectations in Q1 due to slower growth and a shift towards India. The top 20 clients, which include business information and media clients, are experiencing challenges in their end markets. However, there is stability in the existing client portion of the portfolio and growth in new logo revenues in North America. The company is not expecting to see an improvement in demand and is adjusting their guidance accordingly.

The speaker discusses EPAM's progress in Europe, noting that while there is activity, it is not enough to drive significant growth. The next question is about competition in India, where EPAM is a newcomer compared to other service delivery geographies. The speaker is satisfied with EPAM's progress in India and expects it to become the largest country in terms of headcount in the near future. EPAM has invested in India for a long time and has seen significant growth in the region, particularly in data, digital engagement, and GenAI practices.

The company differentiates itself by focusing on quality rather than just scale, and their competition for talent is mostly captive and technology companies. They have had a positive experience in India and believe it will play a bigger role in the company. They do not seek to be the lowest cost provider in any market and charge a premium for their differentiated offering. Their win rate on new logos is intact and they have seen an increase in wallet share among their top 20 existing clients. They have also had stability with some clients while others have shown a visible slowdown in execution or have started growing with the company again. They are comfortable with their approach in this area.

During a conference call, Wedbush Securities analyst Moshe Katri asks EPAM CEO Arkadiy Dobkin about the company's pipeline and deferrals in light of current market volatility. Dobkin responds that the demand environment is fluid and it is difficult to predict when things will turn around. However, he notes that the company has been preparing for a change in the market and is well-equipped to handle it. Katri follows up by asking about clients returning to EPAM, to which Dobkin replies that some have indeed come back.

During the quarter, EPAM has seen a trend where clients who previously expanded their scope with other companies are now returning to EPAM. This is due to EPAM's restructuring of delivery and expansion into new locations. This may not be reflected in proportional revenue growth due to increased work in India. When asked about margin expectations, EPAM stated that Q2 may see a slight decrease in margins due to lower bill days, but they expect margins to improve in the second half of the year.

The speaker discusses the current pricing environment and states that there have been no improvements and it remains challenging. They mention a bias towards using lower cost locations like India due to this environment.

The market is currently facing an imbalance in supply and demand, making it difficult for the company to secure rate increases. As a result, they may dial back on growth investments and decrease headcount, although they will continue to invest in India and Latin America. The demand for in-market resources has decreased, leading to a higher bench than desired. The company is also facing challenges with billing and DSO, which have improved significantly since the CEO's start.

Jason Peterson and James Friedman discuss the impact of revenue recognition and managing accounts receivable in the current environment. They also mention that clients are taking longer to make payments, leading to a higher DSO. The decline in revenue is attributed to a few clients who have either switched to a competitor or have reduced their spending, resulting in a decrease in headcount and revenue.

The company is not currently experiencing significant impacts from ramp downs, but there is a redistribution of delivery and new business in lower-cost locations. The company is taking a more pragmatic and conservative approach to planning, given the lessons learned from the past few quarters. They are closely monitoring the situation and will adjust their plans accordingly based on the direction of general conditions.

The revenue headwind caused by mixing geographic shifts and pricing changes will likely continue throughout 2024, but is not a permanent trend. The company is focused on creating a balanced global delivery capability and believes that demand for their services will increase in the future as clients seek modernization and transformational solutions.

The speaker believes that India will play a large role in the bond market, but there will also be demand from other regions. The focus will be on quality and value rather than just cost. The speaker acknowledges that the current situation is uncertain, and guidance is difficult to predict due to the changing environment and factors such as descoping and clients requesting lower-cost options. The demand environment has not developed as expected.

The speaker briefly discusses the company's plans for using cash, including potential M&A and buybacks. He also mentions the success of their Gen AI program. The call concludes with a reminder to look pragmatically at the company's progress.

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