The first paragraph of the conference call transcript introduces the participants and the primary topics of the call. It begins with the operator welcoming participants to EPAM Systems' First Quarter 2025 Earnings Conference Call and outlines the call structure, including a question-and-answer session. Mike Rowshandel, the Head of Investor Relations, then introduces himself and mentions the availability of earnings materials and press releases online. He notes that the call will include forward-looking statements and non-GAAP financial measures. Arkadiy Dobkin, the CEO, is then introduced and he highlights strong Q1 results amidst a challenging macro environment, as well as a significant leadership succession announcement, with a focus on his transition from the CEO role.

After 32 years in leadership roles at EPAM, the current Chairman, CEO, and President is transitioning to Executive Chairman. This change is strategically planned to ensure smooth leadership continuity and support EPAM's mission and values. The outgoing leader will remain actively involved, providing strategic guidance and maintaining key relationships. Balazs Fejes, known as FB and a long-time EPAM executive, will become the new CEO and President on September 1, 2025. With a strong leadership history within the company, FB is expected to lead EPAM into its next phase of growth.

The paragraph discusses EPAM's strategic focus and recent achievements. The company is emphasizing its transition into an AI-native transformation leader, with FB bringing operational expertise and vision to fulfill this goal. EPAM remains committed to its targets for Q2 and 2025 and plans to finalize its CEO transition by September 1, 2025. Despite challenging macroeconomic conditions, EPAM's Q1 performance exceeded expectations, marking its third consecutive quarter of strong results. The company benefits from client consolidations and a reputation for quality, driving new business and maintaining growth despite external economic volatility.

The company experienced strong growth in Q1, driven by both inorganic and notable organic revenue increases, particularly in AI-related services. Client engagement and demand have been robust across various sectors and regions, with an increasing interest in AI capabilities. The company's global infrastructure supports its ability to adapt to changing client needs, and positive sentiment from clients has fueled demand for more comprehensive AI transformation programs. Overall, the company is cautiously optimistic about sustained growth momentum into Q2, as demand in the first half of the year has surpassed expectations.

The paragraph discusses the company's current business performance and outlook, highlighting resilience amidst external pressures and microeconomic uncertainty. Despite these challenges, there hasn't been a significant impact on the business. The company is focused on aligning closely with clients and managing operations effectively in preparation for potential impacts in the second half of 2025. There's been a shift in client preferences back to the company due to past experiences with underperforming programs, valuing expertise and consistent delivery. The company anticipates stronger growth in 2025 compared to 2024, driven by strategic client priorities, AI expertise, and increased market demand. Additionally, they report a rise in organic headcount growth across India, Europe, and Western Central Asia.

The paragraph discusses EPAM's geographical focus and growth strategies. In Central Eastern Europe, the company sees steady growth and stability, with a strong workforce in Ukraine. In India, there is high demand for their engineering and technology capabilities, including a growth in relationships with Global Capability Centers. The company is also expanding in Western and Central Asia, balancing cost and proximity for clients. In Latin America, EPAM is expanding its talent and client base with the acquisition of NEORIS. The paragraph also highlights the challenges and opportunities in scaling AI adoption, noting that only a small percentage of advanced companies have successfully implemented AI at scale, presenting a significant opportunity for EPAM in modernizing various business aspects.

The paragraph highlights the company's strong position in the AI landscape, emphasizing its combination of engineering and consulting expertise enhanced by advanced IP tools. It discusses significant engagement with AI initiatives among its top clients, noting growth in AI projects, including larger scale "AI factories" and the integration of Agentic AI in government frameworks. It mentions robust quarter-over-quarter growth in AI native revenues and the strengthening of partnerships with strategic cloud, data, and platform players. An example of success is provided with a breakthrough AI-powered geospatial data visualization solution for the oil and gas sector developed with Google Cloud, earning the company recognition as Google's 2025 Partner of the Year for Oil and Gas. The solution also demonstrates their domain expertise and capability in managing complex data for various industries.

The paragraph discusses EPAM's efforts to enhance global engineering productivity through AI. They've introduced the EPAM AI/Run framework and partnered with AWS to improve software development lifecycle (SDLC) productivity using generative AI services like Amazon Bedrock. This collaboration aims to accelerate cloud and data modernization. The EPAM DIAL platform has advanced into a full GenAI platform with various features, impacting the industry and open-source community. The company is achieving strong results, organic growth, and strategic partnerships, with 2025 anticipated as a transformative year.

In the first quarter, EPAM reported $1.3 billion in revenue, marking an 11.7% year-over-year increase, surpassing expectations with a 1.4% organic growth in constant currency. The growth highlights EPAM's strong execution and demand for its services, particularly in AI offerings. Four out of six industry verticals saw significant revenue growth. Financial services experienced a 29.3% increase, with 4.5% organic growth, driven by insurance, banking, and payments. The Software and Hi-Tech sector grew by 9.6%, while life sciences and healthcare increased by 10.5%, mainly due to life sciences and med-tech clients.

In the article, it is noted that generic goods, retail, and travel-related revenues decreased by 1.4% year-over-year due to declines in consumer products and retail, despite some growth in travel and other sectors. Emerging verticals saw strong growth of 22.8%, aided by NEORIS industrial materials, although these verticals' organic revenue in constant currency fell by 3.5% due to weakness in manufacturing and telecom. Geographically, revenue grew in all regions: America (60% of revenue) grew by 12.6%, EMEA (38%) by 10.7%, and APAC (2%) by 4.3%. Revenues from top 20 clients increased by 6.1%, while other clients saw a 14.6% increase. The company aims to improve its gross margin, affected by 2024 compensation increases and lower profitability from acquisitions. Despite increased utilization and Polish R&D incentives, the GAAP gross margin dropped to 26.9% from 28.4%, and the non-GAAP gross margin decreased to 28.7% from 30.4%. GAAP SG&A was slightly reduced to 16.8% from 17%, while non-GAAP SG&A hovered around 14.2-14.1%.

The paragraph provides a financial overview for the first quarter, noting a decrease in both GAAP and non-GAAP income from operations compared to the previous year. The GAAP income was $99 million, while non-GAAP income was $176 million. The GAAP and non-GAAP effective tax rates were 22.2% and 23.1%, respectively. GAAP diluted EPS was $1.28, while non-GAAP was $2.41, down by $0.05 from the previous year. There were 57.3 million diluted shares outstanding. Operating cash flow declined to $24 million from $130 million the prior year due to higher bonus payments and increased DSO from fixed fee revenues with milestone billing. Free cash flow decreased to $15 million from $123 million. Cash and cash equivalents stood at $1.2 billion. DSO was 75 days, up from Q4 2024 and Q1 2024. The company repurchased 796,000 shares for $160 million at an average price of $201.07. The workforce grew by 18.2% to over 55,600 professionals, with more than 61,700 total employees. Utilization improved to 77.5%. The paragraph concludes with a mention of upcoming guidance for 2025 and Q2.

The paragraph discusses the company's strong Q1 performance, highlighting better-than-expected year-over-year organic revenue growth despite a dynamic macroeconomic environment. The company anticipates continued growth in Q2 with both year-over-year and sequential improvements. Although some risks and cautionary areas remain, demand for their services, especially AI offerings, is strong, and client budgets are stable. Consequently, the company is raising the lower end of its full-year organic revenue guidance. Despite currency fluctuations and reduced demand from a top customer due to tariffs affecting certain industries, the company's overall revenue forecast has been adjusted upwards for both organic and reported figures.

The company anticipates maintaining productivity levels from its Ukraine delivery centers in 2025, with expected revenue growth between 11.5% and 14.5%, including a 9% inorganic contribution. Foreign exchange is predicted to positively impact revenue growth by 0.4%. Organic constant currency revenue growth is expected between 2% and 5%. GAAP operating income is projected to remain between 9% and 10%, while non-GAAP operating income is expected to be between 14.5% and 15.5%. The GAAP effective tax rate is forecasted at 25%, with the non-GAAP rate at 24%. GAAP diluted EPS is expected to be $6.78 to $7.03, and non-GAAP diluted EPS is anticipated to rise to $10.70 to $10.95, partly due to increased share repurchases. In Q2 2025, expected revenue is $1.325 to $1.340 billion, reflecting 16.2% year-over-year growth at the midpoint, with a 10.6% inorganic contribution and a 1.8% positive foreign exchange impact. GAAP operating income for Q2 is projected between 9% and 10%, and non-GAAP operating income between 14% and 15%.

The company anticipates a GAAP effective tax rate of 26% and a non-GAAP rate of 24%. GAAP diluted EPS is expected between $1.67 and $1.75, while non-GAAP diluted EPS should range from $2.56 to $2.64. The average share count is projected at 56.7 million. Key assumptions include specific stock-based compensation expenses, amortization costs, minimal foreign exchange impact, and tax adjustments. There's a slight excess tax shortfall and severance costs due to optimization programs. Due to increased share repurchases, interest and other income estimates are outlined. The company is focused on maintaining efficiency and profitability throughout the year, thanking employees for their efforts.

In the earnings call, Bryan Bergin from TD Cowen congratulates Ark on their success and inquires about the raised growth guidance for 2025. Arkadiy Dobkin explains that the first half of the year performed better than expected, leading to a more optimistic outlook. The projection for the second half remains consistent with previous expectations, and adjustments will be made as visibility improves. Jason Peterson adds that demand improved as anticipated in February and March, with continued growth in April and May. While forecasting remains challenging, the business outlook for Q3 is solid, though Q4 could be softer. No significant changes in client purchasing behavior are observed.

The paragraph is a discussion among executives about EPAM's performance, particularly its free cash flow trends and AI-related revenue growth. Arkadiy Dobkin mentions a strong double-digit growth in AI revenues from Q1 to Q2. Jason Peterson explains that free cash flow is typically low in Q1 due to seasonal factors like payments for bonuses, and while it was better last year, they expect a cash flow conversion rate of 80% to 90% going forward. He also notes that Days Sales Outstanding (DSO) might remain somewhat elevated.

In the paragraph, there is a discussion about financial metrics and expectations for the year's remainder. Ramsey El-Assal asks about potential pricing adjustments due to increasing demand, but Arkadiy Dobkin responds that it's too early for significant changes, noting only modest improvements so far. Maggie Nolan then inquires about strategies to enhance gross margins, especially with anticipated softening in Q4. Jason Peterson explains that seasonal factors typically improve financial outcomes in the latter half, and they are concentrating on boosting utilization.

The paragraph discusses a company's focus on improving utilization rates, aiming for 77% and potentially better by 2026, while also emphasizing the significance of partnerships in driving revenue growth. Maggie Nolan inquires about partnership revenue, to which Jason Peterson affirms its positive impact but doesn't provide specific figures. The operator then introduces David Grossman, who asks about growth dynamics within customer cohorts, particularly outside the top 20, and the impact of customer losses. Arkadiy Dobkin notes a visible trend of recovering customer losses, contributing to gradual improvements each quarter.

In the paragraph, Jason Peterson and Arkadiy Dobkin discuss the dynamics of growth outside the Top 20 organizations, driven by M&A activities and new customer engagements, particularly in the Middle East. David Grossman asks about the recruitment dynamics in India compared to more mature geographies like Ukraine. Dobkin notes that while India is growing rapidly with a mature senior workforce, comparing it to established regions like Ukraine is challenging due to different growth dynamics and the evolving ratio of senior to junior staff.

The paragraph discusses a conversation between several people, including Arkadiy Dobkin and Jason Peterson, about the growth and importance of their workforce in India, which currently constitutes about 20% of their capacity and is rapidly growing. They highlight the challenges and changes in skill levels and perceptions in the region compared to mature markets like Ukraine. Jonathan Lee from Guggenheim inquires about the contribution of Global Capability Centers (GCCs) to their growth and the impact on contracts. Arkadiy mentions that they can't share specific numbers but notes that contracts are generally in line with industry standards regarding terms and profitability. Jason adds that GCCs are part of their growth strategy but not the main driver, and EPAM's specialized engineering skills remain a significant selling point. Jonathan also notes the positive traction in AI-related work.

The paragraph discusses the level of reinvestment needed to drive AI-related volume amidst a 90 basis point headwind on margins. Jason Peterson indicates that there hasn't been a change from previous discussions on investment, which continues to yield benefits and positive client feedback on their differentiation strategy. Peterson anticipates some reduction in investment as a percentage of revenue by 2026 but maintains consistency with earlier statements. Following this, during a Q&A, Jason Kupferberg from Bank of America inquires about vendor consolidation, where clients are returning to EPAM. Arkadiy Dobkin explains that while work is coming back, it may not necessarily return to its original location, reflecting the restructuring and changes in EPAM's delivery centers, which now include Eastern Europe, India, and Western Central Asia.

The paragraph discusses a financial conference call where Jason Kupferberg and Jason Peterson are addressing company performance, particularly focusing on Q1 revenue in the financial services sector. Peterson explains that the growth in Q1 from Q4 includes contributions from recent acquisitions, NEORIS and FD, which both have substantial financial services components. The company is also seeing organic growth in its financial services, especially in banking, insurance, and payer sectors. Jamie Friedman from Susquehanna congratulates Ark and FB on their new endeavors and asks questions about the shift to fixed-price contracts, which grew to 19.4%, expressing interest in Peterson's confidence regarding delivery as risks in fixed pricing shift differently.

In the paragraph, Jason Peterson discusses factors affecting the company's gross margins, primarily focusing on wage increments and market adjustments occurring in future quarters. He clarifies that salary increases set for Q2 2024 and beyond don't impact Q1 2024 but will affect Q1 2025 instead. He also notes the difficulty in passing salary increases to clients despite some minor improvements and highlights a 50 basis point negative impact due to two acquisitions. Additionally, Peterson addresses fixed-price agreements and the evolution of pricing models, including fixed monthly fees and AI utilization, which could enhance productivity and margins. The conversation concludes with a transition to the next question.

Puneet Jain congratulates the team and asks Jason Peterson about the billing dynamics and guidance for the second half of the year, specifically about billing days. Jason clarifies that they do not expect an improvement in billing throughout the year but anticipate potential future rate increases if the demand environment improves. He notes that while the pricing situation this year isn't as challenging as last year's, it's still not significantly better. There's good visibility for Q2 and Q3 with no signs of reduced client demand or project spending. He acknowledges some revenue benefit from foreign exchange, especially the euro's appreciation. Puneet clarifies that he is asking about the number of billing days, excluding holidays and vacations, in the quarter.

The paragraph discusses the seasonality of business performance, where typically there's growth from Q2 to Q3 due to more billing days in Q3, and a potential decline from Q3 to Q4. However, in recent years, there has been growth between Q3 and Q4 even with challenging demand. The current guidance suggests a seasonal pattern of Q2 to Q3 revenue improvement, but potential softness in Q4. Additionally, Darrin Peller from Wolfe Research asks about headcount strategy following notable growth and recent acquisitions. Arkadiy Dobkin responds, indicating cautious hiring based on expected demand in specific locations and maintaining a better balance of staff in uncertain conditions.

In the paragraph, Arkadiy Dobkin discusses the challenges in predicting the future performance of their business given the varying market conditions in the first and second halves of the year. He highlights India's fast growth and the hiring strategy of recruiting both skilled and junior employees, with plans to enhance training capabilities to prepare for potential recruitment increases. The focus is on adapting to AI advancements impacting the software development life cycle. Dobkin notes that AI deal sizes are growing, including the number of deals worth over $10 million, and mentions the dynamic nature of AI applications, which complicates direct comparisons with past projects.

In the paragraph, the speaker, Arkadiy Dobkin, discusses the positive client outlook and conversations compared to peers, noting that some clients are returning with both previous and new types of projects. Despite this, the overall visibility for the second half of the year remains challenging, with decisions being made in real-time and difficulty in predicting the latter quarters. While there is cautious optimism about future opportunities, there is also an awareness of the uncertainty posed by the macro environment. The speaker aims to balance a positive message with the recognition of the challenging conditions.

The paragraph indicates the end of a conference call. The operator thanks the participants and informs them that they can now disconnect.

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