Epam Systems Inc (EPAM) 2021 Q1 法說會逐字稿

Thank you for standing by, and welcome to the EPAM Systems First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's call is being recorded. (Operator Instructions)

I would now like to hand the call over to David Straube, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. By now, you should have received your copy of the earnings release for the company's first quarter 2021 results. If not, a copy is available on epam.com in the Investors section. With me today 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 material located in the Investors section on our website.

That said, I'll now turn the call over to Ark.

Thank you, David. Good morning, everyone, and thank you for joining us today. Before I begin my summary of the quarter, I want to acknowledge that the past month has been a stark reminder that we are still amid a deadly and very much global pandemic and that we must continue to be united in our efforts against COVID. As we have done over the last year, we will do everything possible to support our people on the ground and the communities in which we live and work.

Now turning to our results. For the first quarter, we delivered $781 million in revenues, reflecting growth of 20% year-over-year as reported and 18% in constant currency. Non-GAAP earnings per share of $1.81, a 27% increase over the same quarter in 2020. Book revenue growth, combined with a greater level of profitability, enabled us to continue to invest at higher levels across the business.

Since we last talked mid-February, we have seen a meaningful increase in demand across our business, a notable acceleration at the end of the second half of the quarter. Demand for our core services is very robust as clients doubled down on digital transformation and innovation journeys. Increasingly, we (inaudible) not only build new platforms also to consist new digital products and services as well as to modernize and transform the technology strategy and delivery models.

The utilization trends are driving increased interest in business strategy, new types of engagement platforms, cloud migration and modernization efforts, data engineering and data analytics engagements and, in turn, machine learning and AI applications.

On industry perspective, we are experiencing this dynamic most notably in life science and health care, financial services, insurance, CPG, retail and telecommunications. Today, we're focusing on building a strong vertical expertise to leverage even more effectively our market-leading capabilities in core engineering, data and cloud.

As a result, while we still have much more work to do to continue building our integrated consultant propositions under EPAM Continuum brand, with our increasing depth in vertical domains, we are already realizing the promise of delivering increasingly differentiated offerings to our global enterprise customers. As an example, EPAM health products is creating a platform, developing modern cloud-based applications products and services and bringing their data offerings to a new generation of consumers. It is a critical part of multiyear cloud and data-driven transformation for Equifax, where we are working together to build a Google Cloud platform-based data fabric to enable Equifax to organize its disparate, legacy data sources into a single seamless structure while keeping all critical government and separation measures in place.

Also worth mentioning while rewriting Equifax legacy system to be cloud-native would normally take years, EPAM successfully assisted in transforming Equifax mainframe applications in less than 1 year. This is only one example, which is repeating across most of markets and verticals we serve, from financial services, a rebounding interest in retail and wholesale platforms.

We believe this underscores the amount of technology-led change that is pushing all industries into higher levels of activity. All these dynamics have led to this and hopefully soon in post-COVID environment, the number of business domains and processes which must be digitized is going to be rapidly increasing. Those market drivers, along with opportunities in cloud modernization, composable architecture, data, ML and AI and cybersecurity will give us sizable room for continuous and sustainable growth.

To meet this growing demand, we also continue to focus on scaling up our talent. 2020 challenged us to create a reliable and secure remote operations. 2021 has presented an opportunity to leverage those investments in infrastructure, modern talent processes and touring across the globe to explore base in which we can activate broader talent markets and deploy a more diverse set of capabilities. The result is that our current net head count growth is accelerating.

For Q1, we welcomed approximately 2,300 net hires to EPAM, which included an increase of senior level hires coming to us with strong industry experience. And overall, since the beginning of Q4 2020, more than 5,400 net additions have joined the company, representing the highest level of EPAMers we have added in 2 consecutive quarters. So while the shortage of technical and deep industry talent is a known industry issue, we are confident that our investment in that area, our elevating brand recognition and expanding employee career journey will continue to draw top talent to EPAM.

Also part of EPAM's growth strategy is the expansion of our capabilities with very focused acquisition efforts. Recently, we closed 3 acquisitions, bringing to EPAM talent and experience in the areas of sales force, business intelligence and security.

In April, we announced the acquisition of PolSource, a Salesforce Consultancy, with a talent concentration in the U.S., U.K. and Poland. We will extend our Salesforce services and opportunities as global footprint and provide a foundation for building additional expertise, IP and scale around Salesforce ecosystem. This acquisition builds on our earlier acquisition of MuleSoft partner, Ricston, advance our Salesforce API capabilities and to enable customers to leverage a multi-cloud approach.

Already working closely with PolSource team to bring together a very different proposition enterprise clients by joining our expanded consulting and global engineering confidence and to become one of the top global players in the Salesforce services space.

A few days ago we announced the acquisition of White-Hat, a niche cybersecurity consultancy based in Israel. White-Hat expertise, methodologies and team of talented professionals will intensify cyber defense capabilities and help clients to further improve cyber protection within their platforms.

And lastly, we recently closed an acquisition of (inaudible), an analytics consultancy firm with offices in Europe and Asia, serving customers across retail, consumer (inaudible). This acquisition will bring a team of trusted advisers and experts to provide the full spectrum of data and analytics consultancy, including strategy advisory, data management, market leader accelerators, custom [apps] and end-to-end delivery across multi-vendor platforms and solutions. We are pleased to have the 3 companies join EPAM.

In conclusion, we're were encouraged about the road ahead. During the last 12 months, we improved our leadership position within the digital segment of a very competitive global IT services market. The EPAM of today is much more adaptable, diverse and global company with increasingly strong market offerings and all the necessary components of scalable talent ecosystem which are required for growth as we think about EPAM becoming a $5 billion to $10 billion company.

With that, let me hand the call over to Jason to provide more specifics in our Q1 results and an update to our 2021 business outlook.

Thank you, Ark, and good morning, everyone. We are pleased with our performance this quarter. As Ark mentioned, we delivered strong growth across a broad range of industry verticals and geographies.

First quarter, EPAM generated revenues of $780.8 million, a year-over-year increase of 19.9% on a reported basis and 17.8% in constant currency, reflecting a positive foreign exchange impact of 210 basis points. Revenues came in higher than previously guided due to stronger demand in the second half of the quarter, combined with our ability to accelerate hiring in response to the improving demand environment.

Our industry vertical performance produced strong sequential growth across the majority of the portfolio, driven by a higher level of revenues from both new work at existing clients and new customer relationships established over the last 12 months.

Looking at the year-over-year performance across our industry verticals, Life Science & Healthcare grew 31.6%. Growth in the quarter was driven by platform development to support new business models and data and analytics to drive deeper customer insights. Financial services grew 28.3%, growth coming from traditional banking, insurance and, to a lesser degree, wealth management. Growth was driven by our clients' need to transform beyond digital banking to modernize core processes and applications, leveraging the cloud.

Software & Hi-Tech grew 20.7% in the quarter. Travel and Consumer grew 16.3%, driven by strong growth from our consumer clients, along with solid and improving performance with retail. Business information and media delivered 6.5% growth in the quarter. Growth in the quarter reflected a tougher comparison with the same quarter last year, several clients having experienced substantial growth in the first half of 2020 with revenues from those programs generally plateauing late last year. And finally, our emerging verticals delivered 23.6% growth, driven by clients in telecommunications, automotive and materials.

From a geographic perspective, North America, our largest region, representing 60.2% of our Q1 revenues, grew 20.6% year-over-year or 19.9% in constant currency. Europe, representing 33.2% of our Q1 revenues, grew 16.3% year-over-year or 10.9% in constant currency. CIS, representing 3.9% of our Q1 revenues, grew 21.2% year-over-year and 28.2% in constant currency. Finally, APAC grew 53.9% year-over-year or 48.4% in constant currency and now represents 2.7% of our revenues. Growth in the quarter was driven primarily by clients in financial services. Additionally, the shutdown of economic activity in the region in March 2020 produced a beneficial year-over-year comparison.

In Q1, revenue growth across the portfolio was more diverse than in previous quarters. Our top 20 clients growing 12.1%, while clients outside our top 20 grew 25.9%. Additionally, we saw good growth in both existing and new clients.

Moving on the income statement. Our GAAP gross margin for the quarter was 33.5% compared to 34.9% in Q1 of last year. Non-GAAP gross margin for the quarter was 34.9% compared to 35.5% for the same quarter last year. The lower gross margin in the quarter was primarily the result of Q1 2021 having 1 less available day of capacity than Q1 2020. Additionally, we're beginning to see some degree of elevated labor costs in certain geographies.

GAAP SG&A was 17.5% of revenue compared to 19.2% in Q1 of last year. Non GAAP SG&A came in at 15.5% of revenue compared to 17.6% in the same period last year. SG&A continues to reflect a lower level of corporate spend, which we believe will tick up as we progress throughout the year.

GAAP income from operations was $107.3 million or 13.7% of revenue in the quarter compared to $87.5 million or 13.4% of revenue in Q1 of last year. Non-GAAP income from operations was $136.9 million or 17.5% of revenue in the quarter compared to $105.3 million or 16.2% of revenue in Q1 of last year.

Our GAAP effective tax rate for the quarter came in at 5.1%, which includes a lower-than-expected level of excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits, was 22.7%.

Diluted earnings per share on a GAAP basis was $1.86. Non-GAAP diluted EPS was $1.81, reflecting a 26.6% increase over the same quarter in 2020. In Q1, there were approximately 58.8 million diluted shares outstanding.

Turning to the cash flow and balance sheet. Cash flow from operations for Q1 was $12.8 million compared to $63.3 million in the same quarter of 2020. Free cash flow was $1.6 million compared to $34.2 million in the same quarter last year. Lower level of cash flow in the quarter was a result of timing of payments related to our annual variable compensation programs returning to more historic norms. Additionally, income tax payments were higher compared to the same quarter in 2020.

We ended the quarter with $1.37 billion in cash and cash equivalents. Q1 DSO was 67 days and compares to 64 days in Q4 2020. 76 days in the same quarter last year. We believe we can continue managing DSO levels in the upper 60s.

Moving on to a few operational metrics. We ended the quarter with more than 38,800 engineers, designers and consultants, a year-over-year increase of 17.3% and a sequential increase of 5.7%. Total head count for Q1 was 43,450 employees. Utilization was 81.4% compared to 79.5% in Q1 of last year and 77.9% in Q4 2020.

Now let's turn to guidance. We continue to see strong demand across a broad range of our offerings. The elevated demand across the portfolio, combined with improvements in staffing capacity, we are raising our revenue and EPS outlook for 2021. I mentioned during our last earnings call, throughout 2021, we will be investing at elevated levels across the business to support growing demand, and we will continue our expansion into new geographies, underpinning our long-term growth objectives and goal of becoming a large -- both a larger and increasingly global EPAM.

Starting with our full year outlook. Revenue growth will now be at least 29% on a reported basis, and in constant currency terms, will now be at least 28% after factoring in an approximate 1% favorable foreign exchange impact. We now expect approximately 200 basis points of revenue contribution to come from acquisitions we closed in the last 12 months.

We expect GAAP income from operations to continue to be in the range of 13.5% to 14.5%, and non-GAAP income from operations to continue to be in the range of 16.5% to 17.5%. As mentioned earlier, our income from operations reflects a higher level of investment in the planned expansion of our capabilities and geographies in 2021. We expect our GAAP effective tax rate to continue to be approximately 12%, and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to continue to be approximately 23%.

Earnings per share, we expect GAAP diluted EPS will now be in the range of $7.09 to $7.31 for the full year. Non-GAAP diluted EPS will now be in the range of $7.54 to $7.76 for the full year. We expect weighted average share count of 59 million fully diluted shares outstanding.

In Q2 of 2021, we expect revenues to be in the range of $853 million to $861 million, producing a year-over-year growth rate of approximately 35.5% at the midpoint of the range. We expect a favorable impact of FX on revenue growth to be approximately 3%. Lastly, we now expect approximately 250 basis points of revenue contribution to come from acquisitions we closed in the last 12 months.

In the second quarter, we expect GAAP income from operations to be in the range of 13.5% to 14.5%, and non-GAAP income from operations to be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to be approximately 11% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 23%.

Earnings per share, we expect GAAP diluted EPS to be in the range of $1.76 to $1.83 for the quarter. Non-GAAP diluted EPS to be in the range of $1.88 to $1.95 for the quarter. We expect a weighted average share count of 59 million diluted shares outstanding.

Finally, a few key assumptions that support our GAAP to non-GAAP measurements. Stock-based compensation expense is expected to be approximately $21.8 million in Q2, $21.5 million in Q3 and $21.2 million in Q4. Monetization of intangibles is expected to be approximately $3.1 million for each of the remaining quarters. Impact of foreign exchange is expected to be approximately a $1.5 million loss for each of the remaining quarters. Tax effective non-GAAP adjustments is expected to be around $5.7 million in Q2 and approximately $5.5 million in each remaining quarter. And finally, we expect excess tax benefits to be around $14.2 million in Q2, $10.2 million in Q3 and $8.6 million in Q4.

In summary, we are pleased with the high-quality results we delivered in the quarter, which combined with the broad-based strength we see across the business, provide support for strong 2021 performance.

Operator, let's open the call for questions.

(Operator Instructions) Our first question comes from Bryan Bergin with Cowen.

I wanted to ask on the outlook first. Can you talk about where the strongest recoveries in demand have been that enabled the upside guidance raise here? And are you seeing improved pricing discussions with existing clients? Or is this upside predominantly being driven by volume of work?

Yes. So the upside would predominantly be generated by volume. And so what we are seeing is that it's a whole wave of modernization programs kicking off within the financial services industry. So a significant amount of growth expected, as you saw in Q1, but also probably further acceleration of growth in financial services in Q2 due to the modernization programs with large banks and then also with a much accelerated growth in insurance.

We're seeing recovery in the travel and consumer section of our portfolio, quite strong growth with consumer-oriented programs, both in retail and with consumer goods companies. We're even beginning to see some sequential growth in the travel space. We're seeing strong growth in health care and life sciences. We're seeing a continued sort of solid growth in our traditional sort of hi-tech, software and high-technology clients. And we're seeing reemergent kind of emerging verticals with very strong growth in telecommunications, automotive and materials, as we talked about.

And again, where we expect between Q1 and Q2, we expect to see even stronger growth in financial services, even stronger growth than Q1 in the travel and hospitality vertical, and, again, even stronger growth in the emerging verticals. And so again, it is pretty broad-based. It's existing relationships. It's new relationships. So we're seeing some good new customer revenues.

And then from a pricing environment, I think we're having more constructive conversations with clients. And I think both existing and new clients understand that with the wage inflation that's out there in the marketplace, that it is going to likely require somewhat higher pricing to support the addition of new teams. But for the most part, this is volume-based.

Okay. And then on margin, you talked about a building cadence, particularly during, I think, the second half of the year, which would suggest you're pretty well set up within the outlook. But did you have any investments that had shifted within the year? Or any changes in your expectation on the scale of talent investments? Can you dig in a little bit on that elevated labor cost comment you had?

Yes. We're expanding our capacity in terms of adding staff. And probably -- that would probably more show up in the SG&A portion. I think that as we look at gross margin, if I were to be very clear, I think we're expecting now that gross margin might be slightly lower, not lower than Q1, but lower than our original expectations for 2021 based on this updated guidance. But SG&A will also be somewhat lower.

And so we're able to maintain the profitability in the 16.5% to 17.5% range that we've talked about with a real focus on the midpoint, 17%. But we are seeing somewhat elevated levels of compensation being required both to retain and bring staff into EPAM. And that's something that we're mindful of, you know, both as we produce the guidance and as obviously we try to drive the company throughout the remainder of the year.

Our next question comes from Maggie Nolan with William Blair.

To build up on some of those talent questions, any changes to the geographic focus that you talked about last quarter with Poland, India and Mexico, just given some of the talent challenges? And then as you broaden your capabilities and become a more global company, what do you think is the right distribution of that talent in terms of onshore, nearshore and offshore locations?

I don't think there are significant changes in the direction from the locations, like we talked about India, we talked about Mexico, and we continue to grow with them. Actually, India, probably the fastest-growing for us components -- in talent composition right now.

So from this point of view, again, we, each year, are becoming more distributed and more rightly balanced and concentration is going down in Eastern Europe, so which is normal with the growth of the company and globalization of our clients as well.

So in terms of what's the best offshore, onshore, we're still increasing our onshore component, especially with the complexity of the engagement. We're doing [it out] a necessity to have strong industry connectivity and consulting connectivity. So that's growing, but it's not drastically changing as well. So we're very carefully managing the balance right now.

So what is ideal? I don't think anybody knows. So it's very dynamically changing, even if you think about what's happened in 2020 will continue in 2021. I don't think anybody is talking about ideal right now.

Okay. And then, Jason, I understand the current gross margin dynamics that you just outlined and the expectations. But when you think about more kind of medium term and becoming a more global company, does that allow you to start to drive gross margins back up over time? Or what should we expect over kind of a more medium-term time frame?

Yes. So let me try to be -- so on the, I guess, the 34.9% adjusted gross margin that we booked here in Q1, the lower level gross margin was in part the result of there being 1 less available day at capacity in the quarter. And so that's -- and it's just the way that Monday through Fridays fall in the calendar for Q1, it was 1 less day than what we would have traditionally seen in previous Q1s. However, I do think we are seeing somewhat elevated levels of wage inflation. And those could continue to elevate throughout the fiscal year.

So I think that in the, let's call it, throughout the remainder of the year, I think we might run below the approximate sort of 36% that we've kind of talked about over time from a gross margin standpoint. It is -- I think it's sort of generally stabilized at a slightly lower level than that 36%. But -- so I don't expect it to continue to decline. And I think the question mark is kind of what happens in 2022.

Right now, again, I am feeling that we've kind of -- gross margin is going to stabilize. And then we'll kind of see what happens throughout the remainder of the year in terms of the pricing environment. And I think we'll be able to provide a little bit better guidance probably later in this fiscal year.

Our next question comes from James Faucette with Morgan Stanley.

I wanted to ask on hiring. The 2,000 net head count addition looks really strong, especially considering the competitive environment for talent. Can you provide a bit of an update on hiring and the traction you're seeing on anywhere? And I guess just generally, your hiring strategy for FY '21. And what do you think is achievable or sustainable given just the strong competition and demand for high-skill talent right now?

I think we're comfortable with current level of guidance. So I think -- thinking about a couple thousand net new per quarter, it should be achievable for this year. Maybe a little bit higher, we will see. But based on our understanding of the market, which is extremely challenging, I don't want to downplay the like message which you're probably hearing from any other company and -- which would be differently included. It's an extremely challenging talent market. But with the geographical distribution we have today and which we were building during the last 5, 6 years very purposely, so I think we would be able to continue with the pace which we had in Q1.

Got it. Got it. And then you announced the White-Hat acquisition yesterday. Just what's your appetite for further acquisitions this year? And what kinds of capabilities do you think are important to be looking for and looking to add?

Really nothing changing in our direction in M&A. So it just happened this quarter. This quarter, it was 3 of them, and we're in constant search and constant discussions. Also need to understand that 2 of this is pretty small boutique type of consultancies, which is adding right capabilities to the base which we have. So -- and very much in our traditional kind of approach for acquisitions, we're looking for mostly capabilities and some geographical diversification as well. And I think, again, that's what we're going to do in the future, too.

That's great. And all I can say is keep it going, right.

Thank you.

Our next question comes from Jason Kupferberg with Bank of America.

This is Cathy on for Jason. Just wanted to ask about utilization. What's your comfort level that's just around 81% kind of -- I know you guys are slowing a little bit in sequential head count growth, but still very strong. I just wanted to know kind of how are you balancing that and what's the real sweet spot on utilization?

Yes. When we're running at 81%, that would still generally be hot. So we're -- we continue to explore kind of what the right level is. I think we believe that somewhere in the high 70s continues to be a better place for us because it does allow us to be more prepared for new customer engagements and for unexpected expansion at existing customers. And so I would say that as we think about the remainder of the year, we're thinking more in the high 70s.

We also think that there's some possibility that there could be some elevated vacation-taking in the second half, if you think about all of the unused vacation that's out there from 2020. Our revenue guidance would also incorporate some amount of lower utilization due to further vacation-taking in the summer and fall months.

Okay. Perfect. And just a follow-up question. Wanted to ask, has there been any change in deal sizes that you guys have seen? Or an update kind of on the pace of converting backlog to revenue. It sounds like you guys are -- haven't had any problems, but just wanted to get an update there.

I mean there's been a series recently of, I would say, quite large modernization programs that are likely to be multiyear in length that have kind of kicked off. And as we've discussed it, that we continue to engage with our customers in, let's say, a somewhat different way than maybe we would have 5 years ago, with a broader sort of consulting solutioning and then, of course, sort of delivery capability. And I think you're seeing more of those types of engagements as well.

Our next question comes from Moshe Katri with Wedbush.

Our next question comes from Ashwin Shirvaikar with Citi.

Ark, Jason, so I think my first question, you guys mentioned both elevated labor costs. And I'm wondering, is it in any particular geo? And the flip side of it, you mentioned pricing, and I wanted to find out if that's either more narrowly capabilities-based? Or are clients willing to pay up for the -- given the shortage of talent?

So when I think of the wage inflation and everything, this is probably would be fair to say that it's across all markets, including end markets as well. So as you can see from the sector right now, there are a significant increase in demand and excess (inaudible).

So in regards to pricing, I think Jason mentioned that at this point, majority of the revenue growth coming specifically from the volume of work we're doing. But there are conversation restarting to happen. And I think they're becoming right now much more realistic from both clients -- from client side as well. And we do expect some pricing improvement specifically, in the big programs led by consultant efforts, too. So -- but it's a little bit too early to talk about it right now.

Got it. Got it. Okay. And then I know that there's always churn in sort of the top 20 client list; top 10 client list, that thing, but clients outside top 20 growing faster. Is that -- do you think that's a general sustainable trend whereby just newer relationships just kick off and ramp much faster than expected. Is that what you're seeing?

Yes. I think when we look at the pipeline that we expect it's a trend that would certainly continue in Q2, where, again, we have more rapid growth in our other than top 20 than in our top 20. And so -- and then we'll see what happens throughout the remainder of the year. But I think last year was a little bit unique, right, where we had probably a series of customers in our top 10 who are very large corporations who were probably less impacted by the pandemic in terms of their business. And those companies continue to grow quite rapidly.

I think this year, what you're beginning to see is some of the newer relationships we established in 2020. And then also relationships that we've had for long periods of time but where the clients are looking to do very important kind of modernization programs. They're looking to EPAM. And that's driving growth as well, and that's in the other than top 20 customers.

(Operator Instructions) Our next question comes from Jamie Friedman with SIG.

Great results here. I want to ask you, Ark, about 2 things you had in your prepared remarks. So the first one was about the theme of data digitization, I think was the language that you were using. I'm just wondering, do you consider that like modernization? Last quarter, you started talking about systems integration. How would you categorize where data digitization is classified?

I don't think it was a data digitization term there. I think it was a bit -- some quality of our call today wasn't best. And I was talking about general much more kind of traditional term digitization in general. And clearly, data in cloud and AI and ML, all play significant roles there. So -- but I didn't try to invent another term.

And then I did notice though that you -- so you said $5 billion to $10 billion as the target for the company. I realize you haven't given a time frame, but my recollection is that's a little bit different, bigger, than what you had said previously, which was just to double. So any context that you could share on the $10 billion, especially because that's a lot more than $5 billion, would be helpful.

Yes. That's a longer discussion, clearly. And you -- I know that you're watching us for a very long time, practically before 9 years ago. And you remember us back then. And you saw what was happening after IPO when we were changing everything from offering to our delivery kind of landscape to make sure that we're looking for the number of years ahead. And we practically were doubling company each 3 years. And if not pandemic, we probably would be doubling at the end of this year against 3 years ago, and who knows.

But if you put even slower pace, then it is pretty practical thinking on our side right now how to become a company of $5 billion or higher. And that's how we're thinking about building the company, not just for the next quarter.

Our next question comes from Ramsey El-Assal with Barclays.

It's Damian on for Ramsey. I wanted to ask, again on margins here. But maybe I'll do it in the context of employee travel. I think, obviously, as the world starts to normalize, the expectation is that there's a little bit more employee travel. So to the extent that that is included in your margin assumptions, would love to get that.

And maybe on that same subject, Ark, would love to just get your high-level thoughts on sort of this virtual delivery. In the thick of the pandemic, I remember your view was sort of -- it's going to continue to stick around for the long term. But are you all seeing any change to what your clients are looking for in terms with -- of how you engage with them?

I think -- I think it's still too early to judge what's going to happen. There are definitely desire from all of us to get back in some type of more traditional conversations, seeing each other not through the screen. And some clients are actually talking about it. But at the same time, it's still very difficult to predict what would happen. And also like our understanding what's happening and changing on the fly, like even a couple of months ago, I personally would be much more optimistic about vaccination process. And right now, it's not clear if it would be (inaudible) like this 50 -- 50% even in the U.S. So -- and as soon as you're looking at the global map, who knows how this would work for 2021 for all of us.

So at the same time, if you're talking about like working environment in much more distributed way, I think that's what we were focusing way before pandemic hit. And I think that's what's happening. And I think productivity not really impacted. And at the same time, it's pushed a lot of these believers in this highly distributed way of working and had to accept it, which is making all of this to work even better. So I think that would stay. I think our human part, as everybody understand and talking about, will take all and we will (inaudible). But again, too early right now to judge.

Yes. And quickly on the margin front, I think we had modeled that the second half of the year would move towards some degree of normalcy. But as Ark just said, it's unclear that we end up there in the second half. But the idea was that there would be some increase in costs. We still think that there's some temporary benefits that we're seeing in the P&L.

But I believe that we are seeing greater efficiency in SG&A and where some of that's going to stick in future years. So that's kind of how I think about the business right now is, as I said before, running very much in the midpoint of that 16.5% to 17.5% range, which is pretty much the top end of the range that we used to use at 16% to 17%.

And so we definitely account in for the situation that if everything suddenly improved, then travel might pick up. So we're thinking about it even in our numbers right now. But again, not clear if it's going to happen or not.

That's very helpful. Maybe I'll just do a quick follow-up here on involuntary attrition. Just if you could speak a little bit about what you're seeing in your employee base and how that sort of changed? Obviously, it's slowed at the beginning of the pandemic, but just an update on involuntary attrition, that would be great.

So I'm going to assume voluntary or rather than involuntary? Or do we still have you -- I'll just kind of talk generally?

Yes, attrition in Q1 for the entire quarter is still relatively low, below 15%. It's actually somewhat lower than it was in Q1 of 2020. However, we are beginning to see some degree of elevation and attrition at the end of the quarter in March and here again in April. And so again, we are below 15%. And again, I think, well within our expectations for the quarter as a whole. But beginning to see some increase in attrition, both at the end of Q1 and the beginning of Q2.

Our next question comes from Vladimir Bespalov with VTB Capital.

Congratulations on the number. My first question will be on your latest acquisition. You are clearly moving to the cybersecurity area, which probably has not been that much of a focus before. Could you please provide more color? Are you looking at this area as a new big opportunity? Or this is still going to be kind of complementary to your offering to the clients?

And my second question will be on price discounts. Last year, during the pandemic, you provided price discounts to clients, but this should be expiring now. Will this help you to generate more revenues and help with pricing?

So on the first question about cybersecurity, so it always was important part for us when we built applications and platforms because at the end of the day, that's one of the main points to make sure that it's secure enough as we all understand. And we organically developed practices and capabilities, but similar like with other capabilities, which important for kind of overall platform engineering, so we add in additional skills.

And as I mentioned, it's a relatively small consultancy, but with a very high experience. And that will be just a part of our global engineering practice, which is helping us to make sure that everything is secured. So I think it's a very simple answer here. There's nothing special to you.

Yes. And on the pricing front, you're right that the COVID concessions are pretty much gone at this point. That would have already sort of showed up in the Q1 numbers and in the guide for Q2. So I don't think that there's too much uplift to be expected from that. And as we've talked about, we're increasingly having, not always easy, but let's call them constructive conversations with clients about pricing.

Our next question comes from David Grossman with Stifel.

I wondered first if you could just perhaps give us a little more insight into your commentary about modernization in the financial services industry and that being a driver of volume growth. Could you just give us a little more detail on what exactly you're referring to and if there's a specific catalyst that may be driving these larger programs?

Again, I don't think we have time here for a big discussion, but it's still pretty generic and pretty much in line with everybody else talking, but with our -- even our example, which we are sharing this morning, about Equifax with bringing infrastructure and applications to the cloud with very often additional functionality and upgrading this and maybe with a very different target environment, that's huge, huge efforts across multiple capabilities usually touching on legacy data, analytics and everything.

So I don't know what specific we can add here, but going with online banking for -- from one point of view and going to, again, cloud and new architecture from another point of view, probably describing the whole scale of this.

Okay. We can take that offline then. And then the second question I had was, I know there's already been a lot of questions about pricing, wage inflation, margins, et cetera. But I'm just curious, why is this playing out differently than historically where the market is a little more dynamic in terms of responding to that imbalance? It sounds like you're being a little more guarded about kind of that ability to get pricing at least near term. So is there something different in the market? Is it that the market may be pricing in some of the more secular OpEx savings from a work-from-home environment? Or am I just misinterpreting this and this is just the typical dynamic that you see?

Yes. So having -- so I think one of the questions you're asking is whether or not with work from home, that's impacting pricing, that clients are somehow asking for either no rate increase or savings from that. Is that what you're asking, David? Or...

Well, that was just kind of a guess on my part that what could be going on. But the bigger question is just why the market isn't responding as quickly to the supply-demand imbalance that you're talking about in terms of...

I think David, I think it just takes time, right? As you would know, with both engagements that you negotiate pricing and SOWs and everything that are in place, it takes some time. And then, of course, clients have got budgets. And clients are still trying to work their way through what happened last year. So those conversations are definitely accelerating, but probably a little bit of disconnect just based on the economic disruption of last year. And I think those conversations will continue to potentially accelerate as we work through the remainder of the year.

I don't know, Ark, you have thoughts or...

No. I agree. I think it is timing because it's too quick change from we don't know what would be happening to run. And I think there is a kind of a gap on this, but we will see. And maybe partially you guess also correct as well because in some thinking there is idea that it's probably cheaper without infrastructure, but it's not necessarily true because investment and support and distribute it, in -- again, and in the talent, sorry, because it's all look kind of very connected might require even more investments.

Right. And just one last question, just -- I think this came up in another question as well about growth outside the top 20. But my recollection is that over the last 12 months, particularly during the pandemic that you had to prioritize your capacity utilization to those larger customers, longer term customers. Is some of that growth -- because this is more of a normalized kind of dynamic for you with that growth outside the top 20s. So is that just an indication we're back to a more normalized operating environment? Or is it something different than that?

I don't know if you're trying to derive some conclusion from this dynamic. I think there are some big clients which -- inside of the top 20, which is growing very aggressively. There are some clients which has slowed down, practically flat out. And there are several clients which we picked up just 12, 18 months ago who now become a part of top 20. I don't know if it's a function of the market or it's a more function of EPAM change in dynamic as well. So -- and I think probably it's more on the second one, where with our offering, we now can accelerate some clients development much faster.

Our next question comes from Jack Nichols with KeyBanc Capital Market.

This is Jack on for Steve Enders. What trends are you seeing with account consolidation within your accounts? And what's been your ability to capture incremental share of wallet?

I would answer very, very shortly. So I think we're pretty happy with our ability to consolidate in some accounts right now. I think we're winning in the budgets inside of the accounts.

I think you'd certainly see the performance in financial services, that would give you some indication that we have had some success there.

Okay. Perfect. And you talked about investing more in your consulting business. How have those investments been resonating? And how much have you been able to capture consulting services within your customers?

Yes. And as we mentioned like many, many times, we're not trying to just capture consulting services as a line of business. We're trying to get in the conversations with the clients much earlier in the game to make sure that we can actually drive the next step, the tail of the consulting kind of activities, to more practical implementations of the platforms.

And I think, again, we're pretty happy with the progress which we do in like quarter-after-quarter and we're getting new use cases and we're getting higher in the kind of value chain and creating these examples. But again, it's not about just chasing the consultant market as a pure consulting revenue.

Our next question comes from Arvind Ramnani with Piper Sandler.

I'd like to add, congrats on another great quarter. I just had a question on some of the sort of emerging technologies you all are working on. I know a couple of years back you were working on kind of blockchain technologies. Are you all starting to see kind of interest in those areas of blockchain? And is that becoming a meaningful portion of your kind of capabilities? And similar to blockchain, is the stuff around like AI that you all are working with clients?

It's difficult to say that blockchain becomes a significant driver, but it's definitely part of number of engagements as similar like any other advanced technologies as well. And we're definitely seeing also some pickups in ML, AI engagement while it's still a relatively small portion of what's happening. We think it might accelerate in the future. But -- because, again, a lot of effort during the last several years to create a data infrastructure capable to support this type of new applications. And I think I would finish with this.

Great. Great. And just like -- but I guess, within your digital, which is kind of a very broad word, are there particular areas within digital that you're seeing really fast growth? Because, I mean, like I said, digital is extremely broad. It could mean many different things. But are there specific technologies where you're seeing really high growth or really high levels of client interest?

I think I would prefer and even from my kind background to talk about very broad terms. And clearly, again, everybody knows that all this cloud modernization is a driver. And around this, a lot of different things are important, but I wouldn't call anything specifically right now.

There are no further questions. I'd like to turn the call back over to Ark for any closing remarks.

Yes. Thank you. Thank you, everybody, for your time today to participate. And as usual, if you have any questions, Dave is available to help. And talk to you in 3 months. Thank you very much.

Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone, have a great day.