Epam Systems Inc (EPAM) 2012 Q4 法說會逐字稿

Greetings, and welcome to the EPAM Systems fourth-quarter and full-year 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Farrell Kramer from the Investor Relations Team. Thank you, Mr. Kramer, you may begin.

Thank you, operator. Good morning everyone. By now you should have received a copy of the earnings release of the Company's fourth-quarter and full-year 2012 results. If you have not, a copy is available on our website, www.EPAM.com, together with our supplemental data sheet.

The speakers we have on today's call are Arkadiy Dobkin, CEO and President; and Ilya Cantor, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company's earning release and other filings with the SEC. I would now like to turn the call over to Arkadiy Dobkin. Please go ahead, Arkadiy.

Thank you. Hello, everyone. 2012 was a year of significant accomplishments for EPAM. In our first year as a public company, we increased revenues by 30%. We increased adjusted net income by 22%, while continuing to make significant investments for future growth, including the addition of over 1,500 IT professionals. And we completed two strategically important acquisitions -- Thoughtcorp, in May, and Empathy Lab, in December. And we continue to execute on our strategy to become a world-class provider of corporate software engineering solutions and imaging technology services. Last year, on our fourth-quarter and our first IPO earnings call, I talked about the key elements of our long-term growth strategy.

Today, I am pleased to review our progress. First, we certainly would continue building on our culture of innovation, technology leadership, and product excellence, to develop strong competencies that would help us deepen and expand our services into key vertical markets. Let's talk a bit more about this [outfit] because it is a key driving force for our growth. During the last 12 months, we invested significantly in today's more demanding technology domains, such as enterprise mobility, cloud deployment, big data, enterprise content management, business intelligence, and e-commerce. The result of these efforts were recognized by a number of independent publications and industry annals. For example, Zinnov, a leading globalization and market expansion advisory firm, named EPAM as a global R&D and product development services leader in the enterprise and consumer software markets, as well as enterprise mobility and cloud verticals. Global Services Magazine included EPAM in the Top 10 Leaders of its Global Product Development category within its Global Services 100 ranking.

Finally, just this week, Everest Group included EPAM in its Major Contenders category with a mix of metrics which recognizes and ranks capital market service providers according to scale, scope, domain investment, and market success and delivery capabilities. Everest also highlighted EPAM as a Star Performer, which is a rare classification, shared only with two other major players. Most importantly, recognition of our achievements were clearly and publicly validated by many of our top clients. Let me share just a few of those, which we are allowed to disclose. [Etfil.com], which has been with us from 2007, confirmed our status as a strategic delivery partner based on our deep understanding of the travel industry and our tailored agile approach. Tiburon, a new client, agreed to co-present with us at the Gartner Strategic Partnership Summit in Orlando to share how the world leader in integrated energy companies, which allies well-used services from the key partners.

Sephora Americas, The North American division of the world leading retailer of cosmetic and beauty products, selected EPAM to help launch the next generation version of sephora.com, a new resource that Sephora calls its social and mobile makeover, which, together with the new iPhone and iPad applications, complete the solution to provide the best-in-class online shopping experience. Izetta Corporation, a healthcare IT company, with solution attached over half of the US-insured population and reach more than 100,000 care providers, was looking for a partner with strong product engineering capabilities, and selected EPAM because of our track record, coupled with our deep experience in Microsoft technologies, BI, big data and agile development.

This is just a few examples of why companies select EPAM. The common thread is that they come to us to help meet an ever-increasing mandate to build new sophisticated solutions that rely on a number of emerging competencies and technology platforms, while still reducing time to market and managing costs. This contributed to rating us from three out of our four verticals, growing more than 20% in 2012, an overall revenue growth of 30%. The second key element of our long-term growth strategy that we discussed a year ago said that we were positioned to take advantage of the growing demand for qualitative services in Europe, and we did. Our European business grew almost 45% in 2012 and accounted for 35.8% of our total revenues, up from 32% last year.

Third, we talked about the importance of attracting and retaining a quality workforce. Again, in 2012, at approximately 11%, our attrition rate was among the lowest in the industry. Fourth, we posted a 27% increase in revenues from ISV, or independent software vendors. This is a core differentiating vertical for EPAM, the foundation for our business, and represented 25% of our 2012 revenue. Our strong long-term relationships with ISVs and the knowledge we have gained working with them, have enabled us to -- number one, to demonstrate a confirmation of our excellence in software engineering culture; two, successfully expand in key vertical markets; and, three, deepen our existing client relationships.

Finally, we discussed, last year, making acquisitions that would expand our geographic footprint, complement our global delivery capabilities, and deepen our industry knowledge and technical capabilities. In May of 2012, we acquired Thoughtcorp, based in Toronto, which expands our North American presence as well as further develops our capabilities within several important competencies. As a confirmation of our strategy, we won a large key account that neither company could have achieved alone. In mid-December, we acquired Empathy Lab, a digital strategy and multi-channel experience design firm, the recognized leader in VOS, e-commerce and digital media, and entertainment space. The combination of their front-end digital capabilities, and now-proven strength in global delivery of complex software engineering, puts us in the strong position to offer end-to-end cutting edge e-commerce solutions. We are currently working closely with them on important integration efforts, as well as business development programs that take advantage of near-term growth selling opportunities.

All in all, we achieved what we set out to do in 2012. Looking forward, we are confident that our growth momentum will continue in 2013 and beyond. We will continue to invest in the development of technical capabilities, further develop our on-site presence and [will alert] organic and non-organic opportunities to expand our scope of services, complement this in technical expertise and its new vertical markets. With that, I will turn the call over to Ilya for the financial review.

Thank you, Ark. Good morning, everyone. As detailed in our press release, our fourth-quarter revenue grew 14% sequentially and 32% over last year to $125.5 million, ahead of the top end of our guidance of $118 million. Overall, 2012 was another strong year for us. We grew revenues by 29.7% year on year, or 31.4% on a constant currency basis, while growing adjusted net income by 21.6% and maintaining a healthy balance sheet.

For the fourth quarter, banking and financial services increased to 57.4% year over year and represented 28.4% of revenues. ISV and Technology was up 34.1% from quarter four of 2011 to account for a 24.4% of total. We have recently combined our Travel and Hospitality, and Retail and Consumer verticals into one, as it more appropriately represents the common technological needs of those customers and markets. Travel and Consumer increased 19.9% and was 21.5% of revenue. You can find the historical data for the merge vertical on our data sheet in the Investor Relations section of our website.

Business Information Media was down 9.8% in the quarter, accounting for 11.5% of total revenue; however, excluding the decline of Thomson Reuters, this vertical would be up 33.9%. For the fourth quarter, European revenue was up 34.3% of total, up 38.7%. North America represented 44.7% of revenue, up 22.3%. Finally, CIS represented 19.2% of total, up 47.6%. 91.9% and 82% of our revenues in 2012 came from clients who had used our services for at least one and two years, respectively. We have talked about growing new clients into significant relationships for us, and we were successful in this effort during 2012. In 2011, we had 54 clients that generated at least $1 million in revenues with us. For 2012, that number increased more than 50% to 81. At the same time, we remain diversified. No single client accounted for more than 10% of our revenues this past year, and our top five clients represented 31% and our top 10, 44.4%.

Turning to costs, cost of revenue exclusive of depreciation and amortization was $77.3 million in the fourth quarter of 2012, an increase of 30.1% over the $59.4 million reported in the last year's period. For the full year, cost of revenues increased 31.7%. These increases are primarily due to higher compensation and benefits associated with the increase in IT professionals throughout the year, as well as an increase in incentive compensation. Cost of revenue, excluding stock comp cost, was $77 million in the fourth quarter and $267.6 million for 2012. Fourth-quarter SG&A expenses were $26.4 million, and $85.9 million for full-year 2012. Growth in SG&A was due to increased overhead and non-production staff necessary to support the growth of the business. SG&A as a percent of revenue was 19.8% for 2012, up slightly from 19.4% in 2011. However, I should mention that in SG&A in 2012, we had incremental stock comp costs of $2.5 million and approximately $1 million in incremental public Company costs.

Depreciation expense for 2012 was $10.9 million, a 44.4% increase over 2011. The increase in depreciation is due to additional CapEx for equipment to support the growth and headcount, as well as the amortization of intangibles from the Thoughtcorp acquisition. Non-GAAP income from operations was $20.6 million for the fourth quarter, representing a 26% gain over the fourth quarter of the previous year, and $74.9 million for 2012, an increase of 23.1% from 2011. For the fourth quarter of 2012, non-GAAP operating margins were 16.4%, within our target range, down slightly from the 17.1% a year ago, mainly as a result of two items. First of all, our performance this year was better than expected. As a result, we increased our bonus accruals in the fourth quarter.

Second, we won a project with one of Russia's leading consumer electronic retail chains. As part of the implementation, we hired a UK-based firm specializing in high-end ATG e-commerce implementations, on a sub-contract basis, to perform the initial phase of the project in Q4. So, this was basically a pasture of revenues for the work done in the fourth quarter. This part of the project has been completed. Going forward, we will receive a more normalized margin on this project. Net interest income was $0.4 million for the quarter and $1.5 million for the full year. Foreign exchange loss was about $100,000 for the quarter and $2.1 million for the year. Non-GAAP net income, or net income excluding the impact of foreign exchange, acquisition costs, amortization of acquisition intangibles, and stock-based comp, was $17 million for the quarter or $0.37 per diluted share, up 23.3% versus the $0.30 diluted earnings per share in quarter four of 2011. For the full year, non-GAAP net income was $65.5 million, or $1.42 per diluted share versus $1.19 in 2011.

Now, let's look at the balance sheet. We ended the year with $118 million in cash. Cash from operating activities was $48.5 million, down from $54.5 million in 2011. This was due to higher bonus payments for 2011 performance, prior to the IPO, that were paid in 2012. Net cash of $59.6 million was used in investing activities during 2012, primarily for the construction of new facilities in Belarus, and for the acquisitions of Thoughtcorp and Empathy Lab. Net cash provided by financing activities was $38.8 million, primarily due to funds received in connection with the IPO. Capital expenditures for 2012 were $26.7 million, of which $13.4 million was for the new facility in Belarus. Accounts Receivable were $78.9 million at the end of 2012, up 32.7% over 2011. We finished the quarter with a DSO, days sales outstanding, of 56 days, compared to 58 days last quarter.

Turning to 2013, and our guidance, based on our current visibility and market conditions, we expect year-over-year revenue growth in the range of 23% to 25%. Non-GAAP net income growth for 2013 is expected to be in the range of 12% to 15%, with an effective tax rate of approximately 20%. I would like to point out that our effective tax rate for modeling purposes has increased from 17.3% in 2012 to 20% going forward, mostly due to the two acquisitions we have made in North America. However, I should also mention that as both acquisitions were asset purchases, while the effective tax rate did not benefit, we do get a real benefit in terms of cash tax savings from amortizing the intangibles against our tax liability.

For the first quarter of 2013, we expect revenue between $122 million and $125 million, representing a growth rate of 29% to 31% over the first quarter of 2012 revenue, which includes results from two acquisitions made in 2012 that were not in a comparable period. Non-GAAP diluted earnings per share is expected to be in the range of $0.32 to $0.34, based on first quarter 2013 weighted average of 47.6 million diluted shares. Lastly, capital expenditures for 2013 will be approximately $25 million, of which $19 million is to support continued growth in the business, including spend on IT equipment, leaseholder improvements, and other capital purchases. Also included in that is $6 million to complete the construction of our new facility in Belarus. With that, I would like to turn the call back to the operator to open it up for Q&A.

Thank you.

(Operator Instructions)

One moment while I poll for questions. Moshe Katri, Cowen.

Thanks, guys. Good morning. Nice quarter. Question, it seems that guidance for the year is based on a higher effective tax rate. Can you comment on that a little bit?

Hi, Moshe. Yes. This is Ilya. We made two acquisitions in 2012 that are in North America, in particular. And what that does is, it has the impact of driving up our effective tax rate. In particular, the acquisition of Empathy Labs, that we made in December of 2012, pushes our tax rate from what we saw in 2012 of 17.3% to close to 20%. The acquisition made in Toronto in May of 2012, also has a much smaller impact, but yet it does have an impact. This is why we are projecting a higher tax rate, because North American acquisitions tend to drive up the effective tax rate. As I said in the script, we do get a real cash tax benefit because both of those acquisitions were asset purchases, rather than stock purchases. Unfortunately, the effective tax rate we report on the P&L does not get recognition of that tax benefit.

A couple of more questions. Looking at guidance. What sort of inorganic revenues are included in your guidance for the year, i.e. how much in revenue contribution are you going to get from both of those acquisitions for the year?

Let me just preface this by saying that, first of all, the acquisition of Thoughtcorp, the Canadian consultants, we made in 2012, is almost fully integrated. The acquisition of Empathy Labs in December is well underway in terms of integration. One of the main strategies in doing these two acquisitions was that we could supplement their front end, their consulting expertise, their on-site, with our global delivery platform, to where one and one make three. Right? With that, Thoughtcorp is almost entirely in soup. It is close to impossible to break out on a stand-alone basis, the revenue contribution for Thoughtcorp, either in '12 or '13.

For Empathy Labs, it is likewise very difficult. We have already started selling joint projects where we have our people working on their customers. We have their people helping out our customers. It is getting very diffused, if you will. What we can say is, particularly to help you guys look at our estimate for Q1 of 2013, if that's up against an easy comp in Q1 of 2012, where there was no impact of those two acquisitions. What we can say is that those two acquisitions combined did approximately $7 million in Q1 of 2012. So before they were acquired. Hopefully that gives you kind of a way to help figure out at least the relative materiality these. Again, the broad intent to make these acquisitions, is the thing that makes it very difficult to split out going forward.

Okay. How should we think about adjusted EBIT margins this year and then your free cash flow generation this year as well?

Moshe, as you know, we don't guide to margins.

Are we going to be flat year-over-year? Is there anything that you can talk about in terms of trends?

We continue to reinvest into the business, and we are consistent with what we said before. We're continuing to invest in putting more specialized, more experienced resources on site next to our clients, in order to drive future revenue growth. Second, we continue to invest in our competency centers to make sure that we can offer our existing clients the most cutting edge technology as possible, as well as to make sure that we can use these technologies and pre-sales efforts. Therefore, again, drive further revenue growth. There is a third dimension. Part of the investment is that you maintain a slightly bigger bench. So going into 2013, we are probably 100, 200 basis points below our normal range. That is part of the reinvestment. This is to train people and it is part of the initiatives. Again, we are investing in the business to drive future revenue growth.

Okay. So margins should be, from a trend perspective, down slightly year-over-year? Is there anything you can say about that? We just want to make sure that, I don't think anybody's going to -- we do want to get anybody surprised negatively or too positively.

Again, we do not give guidance to margins. We feel pretty good about 2013. It is another good, normal year.

Moshe, listen, we have to like to see what is happening around us. Right now, we see a lot of demand for new type of technologies, like clients, actually. Why we are growing so much, because clients rely on us to do some work which, many other companies do not do. We are growing clearly faster than General Electric Company in our segment. To do this, we have to differentiate ourself on skills. We have very good weight on this. We talked about it many times in the past about our focus on ICS and how it is helping us.

At the same time, technology changes so fast and some demand for understanding specific businesses require from us to invest. We do this because we do believe that at some point it will give us better rates and better margins. But when this rate go in for negotiation or getting this rate, what happens, we do not know. So that's why you're asking what do we do in the next couple years, we're going to grow. That is what we can say. We're going to focus on specific technology sectors, which we highlighted. That is what we can say.

We do believe that it would give us advantage against competitors. Whether this happens this year or next year, that's what we can not tell you. We will adjust our projections like each quarter, based on what we see in our [office].This is the best we can do right now.

All right, guys. Thank you for the color.

David Grossman, Stifel.

Thank you. Maybe just to expand a little bit on Moshe's questions. It looks like, obviously you were getting very strong top line growth. In fact, the gross margin remains fairly strong. It would appear that there was obviously a fairly significant sequential spike in SG&A. There may be a seasonal element of that for some bonus accrual. It was up by 25% sequentially in dollars. Again, as Moshe was referring to, the guide for '13 would seem to imply that the SG&A may stay at elevated levels through the year.

I think, Ilya, you referenced a couple of points about what is going on in G&A. Perhaps you can help us again by just reviewing what impacted the fourth quarter and In fact, what may impact next year as well. It sounds like the one retailer that you were ramping in the quarter, if you were hiring subs, I would think at least intuitively, that would have more of an impact in the gross margin and cost to revenue, rather than G&A, but I may not be thinking about it right. If you could perhaps just go through that again, that would be great.

Sure. I will try. SG&A, as I mentioned, has for 2012, an additional $2.5 million in stock compensation costs, compared to prior year, and has an extra $1 million in public company costs. Our total public company costs are approximately $2 million. But compared to 2011, it is an extra $1million. So that is $3.5 million of additional costs in SG&A right there, which means that if you do factor those out, our SG&A, as a percent of revenue, would go down in 2012 versus 2011. In so far as the question about the sub-contractor, specializing in Oracle commerce platform permutations, that we got for the commerce project in Russia, yes, that had a negative impact on Q4. Because it was essentially dollar for dollar with the revenue that we recognized in Q4, for that particular project. And yes, the sub-contracting costs did go into the gross margin. I'm sorry, did you have a third question?

I think if you look at the adjusted operating margin, which factors out stock-based comp, the adjusted operating margin did decline below 17%. I think it was about 16.4%, which is lower than it has been. Like I said, given the strengths and the gross margin, even despite the sub-contracting costs, it appears your operating costs are higher. I'm just trying to understand, what are the moving pieces there that are driving that increase, which, again, already factors out both stock based comp as well as the item that we talked about with the ramp of the new customer.

Let me address, first, the adjusted operating margin. What we see is, let's make sure we have the right numbers, 17.3% adjusted operating margin in 2012. Is that what you have?

I have got that as the adjusted EBIDTA margin. Perhaps I am mixing terminology here.

That maybe a disconnect then, because income from operations is 17.3%. Close to $75 million.

Got it.

Ark, did you want to say something?

The SG&A question. This number is approximately flat, right? The relative numbers. But if you think about the -- I can give you kind of an explanation, which is probably difficult to quantify. We were talking about the history of the Company where were focusing so much on engineer income were coming from several ISVs for a long time. That's what we were sharing for the last year when we become public, that we need to be in where to lock in sales structure and account management structure, because that is a components of EPAM, which is way underdeveloped over the year.

The same like a proper HR and recruitment infrastructures as well. We're going very fast. As you know, before this year, we were growing two years by 50%. That is already happening based on our reputation and our technology advanced skills. We are clearly going to a little bit different space right now, where our vertical industry is starting to drive and where relationships with clients should be done very differently. We are investing a lot in account management, sales, and human resources and recruitment. It is all coming into SG&A.

So for some time, it would be growing practically in line with the Company. Again, we do believe that it will bring benefits later on when it's exactly would be fair opinion, so we will try to again. We tend to adjust it by quarter by quarter.

Right, that is helpful, thanks.

And that topic, that we discussed is for everybody, because everybody was questioning how fast we can grow with the new sales. We are investing here and to existing clients as well.

Okay, thank you. I think I understand that better. Ilya, just a follow-up question on the tax rate. As the revenues ramp, I guess as you integrate these and you get more back-end revenue, does the tax rate come back down, or is 20% more or less a steady state to think about for the foreseeable future here?

We look at it as a steady state for the foreseeable future. If we do make further acquisitions in North America, that does tend to have a negative impact on the stated effective tax rate. Although, again, the cash tax rates benefits. We continue to somehow make these asset purchases, and that is a pretty huge benefit, in cash terms. But also, if you -- the benefits that we have from acquisition, like Empathy Labs, for instance, their on site rates blended with our offshore rates. This is going to help us in terms of overall yield. Whether that is going to fall on this side of the border or that side of the border, we still have to sort out. It depends on the engagement. It is hard to say. So for now, we're going to stick with 20%.

Okay. Got it. Just one last question. I know when your big media clients, obviously they were a bit of a yo-yo over the course of 2012. Do you feel that the exit rate in the fourth quarter is a steady state for that client? Or do you think that you're going to see more volatility in 2013?

It is hard to say right now what is going to happen. We don't know beyond what we have been told. Right now, it is relatively stable. We actually were able to put through a pretty decent rate increase, because as you know, this client had been with us for 12, 13 years and therefore had some of the lower rates. So we think that is a pretty good vote of confidence for the type of skill set that they are using and need to use in the future. But we can't obviously talk to what they are going through internally, which drives some of this stuff.

Right. All right, guys. Thanks very much.

Thank you, David.

Thank you. Darrin Peller, Barclays.

Hi. Can you guys just comment on the dynamics of some of your largest clients? It looks like the contribution to revenue, I may have missed some of this earlier. Some of the contribution to revenue from your top five has dropped pretty considerably sequentially from last quarter to this quarter being in the low 20% range. What drove that and how is the demand environment among the top, let's call it 5 to 10 clients?

Actually, probably some of the decline that you mentioned relates to the client we just talked about with David.

Okay.

But we still see, actually, just to give you a sense of the impact that this large client had on our business, in terms of Business Information Media, we reported for the full year that it is down slightly. It would be up 29% if you exclude entirely the impact of this client. For the quarter, instead of down 9.8%, Business Information Media segment would be up 34%. In terms of the top five, I do not have it with and without, but we think actually the top five in 2012, the contribution for year on year growth from the top five was 25.5%. That is fairly good from top 10, it was 29.1%. To us, we grew 30%, so this is fairly good as well. Besides this top client, which we keep talking about, we feel fairly good about everyone else in our top 10 accounts.

That is helpful. Just a quick question on sales and distribution. Again, I have run this out with you guys before, but I'm always impressed by the amount of referral business you have rather than direct sales. It must be the nature of the type of work you do. I'd be curious to hear, what is the sales channel look like for you? Obviously, there's been a lot of discussion on this conference call around build-out on expenses and margins. I think I would like to, at some point, have a better understanding of when we might be able to see operating earnings grow at a similar pace as revenue, which I'm sure everyone on this call wants to hear at some point. On that note, is there a build-out in sales going underway? Are you still growing your revenue primarily from, at least organic revenue, primarily from referral business? Or have you seen more sales contribution?

Clearly, the drivers are changing. First of all, it is still more than around 90% of our business is coming from the clients, as you already said, within the previous 12 months. This is probably pretty typical for our business. There is still a big number of referrals. I do not want to excuse it from, so I am actually proud that this is happening.

Yes, it's an impressive feat.

At the same time, we have seen a lot of pickup in our channel sales where we were talking about how our three business influence generally upon business and how some clients from ISV and specific technologies and solutions, which we helping to develop, create a new channel for us and there is a growing size of the company. We're becoming much more available partner for large short-range technology companies. We see this growing in e-commerce space and business intelligence space, which is opening for us doors to large corporate's and then we can resell them multiple lines of services, which we offer. This is happening much more than it happened just 12 months ago. The direct sales [soucer] is starting to work more effectively, but we still have a long way to go to be really good there.

Okay, I am all set now, guys. Thanks.

Thanks, Darrin.

Ashwin Shirvaiker, Citigroup.

Thanks. Hey guys, good quarter. Let me just start with, Ilya, I may have missed this but what is your cash tax rate?

It is approximately 15%.

Okay. The second question that I have is with regards to the contract sizes, the contracts that you signed. Are you, from a macro standpoint or a client-specific standpoint, are you seeing any change that could be construed as worrisome, in terms of ramping existing clients or project activity or anything like that? Is it pretty much good strong secular team that continues to work for you in contract execution?

Ashwin, I would say that we do not see much change. It is very similar to what it was before. There is not any visible slowdown for us right now. Basically, that's what we repeated during the last previous quarters, and I think it is true right now as well.

Okay. That is good do you know.

As you know, we work in a little bit like it is difficult to compare us with much bigger companies. We're competing for different type of deals. We have different interest points. I think it is actually differentiate us, because we're doing a little bit different type of work than most of our rather large competitors.

Understood. Absolutely. I just had to ask the question because a couple of your larger competitors have large banks and they have seen headcount cuts and we do get that question from investors. So it's good to see that your plans continue to be quite good. Not to beat a dead horse, but going back to margins, at the time of IPO, if I'm not mistaken, why do you don't provide short term margins items, instead of annual margins items. I think you did, or you had put a long-term, 16% to 18% change out there. And based on this, backtracking from your numbers, it seems like it is 15%, although slightly lower than the 17.3%. I just want to understand, are you still consistent with that long-term 16% to 18%?

I think for the long term, we're still consistent with that mid-teen to upper teen range for adjusted income from operations or adjusted operating margins. Again, not to restate what we said before about reinvesting into the business, but the business is growing at a rate of 25% to 30%. Of course, we're guiding 23% to 25%, last year, it grew 30%. I think this is on top of the heat. Right, Ashwin?

Yes.

It is difficult to say whether the margins are going to be 16.2%, 15.5%, 17.8%, we're going to be around that range, but we're continuing to reinvest into the business. It may fluctuate quarter to quarter. We're focusing on running the business the way the business should be run. You know, you may see fluctuations quarter to quarter, even year-to-year. But again, the intent is to drive further revenue growth.

Okay. Last question. Hedges, I might have missed that, obviously a little more difficult to predict, but what is a good number to go with in terms of where you are currently with your projects, project locations and so on and so forth and any change to your original intent to basically not really hedge?

Obviously it is difficult, well impossible, to project future currency moves. Otherwise I would be in that line of business. But looking at 2012 say, versus 2011, we did have roughly a $5.5 million to $6 million negative impact on revenues. In other words, revenue growth would have been higher, by about 130 basis points, I think. However, as we said before, and this is reaffirmation of the statement, the impact on margins, it has actually been positive. Even though impact on revenues have been negative.

We think our mix continues to provide us with relative certainty. Now, this is not an absolute guarantee that this is going to happen in the future, but we continue to look at this month-to-month and quarter-to-quarter. We discuss it with the board. We think our value of risk is manageable at this time, so we are not going to hedge in the near future. However, if we continue to accumulate more and more, say, euro-based, ruble-based, or pound-based revenues, which would tip the scales to a level that we find unacceptable, then we will contemplate entering into hedges. But at this time, no.

Okay. Last question, I promise. As you think of the quarters for this year, is it safe to assume, consistent with historical patterns, you gain strength as you go from Q1 to Q2, to Q3 and so on?

I think the seasonal pattern we had before should probably hold true. Obviously, you have to be careful with percentages, right? Because look at Q4 of 2012. That is going to be a tough comp because you have an extra $8 million of revenue in there, stuff that does not necessarily recur. We should have good steady consistent percentage growth in Q2 and Q3. In Q4, it is going to be a little bit below to come out to that 23%, 25% target.

Okay. Good job, guys. Thank you.

Thanks a lot.

(Operator Instructions)

Alexander Vengranovich, Arkady Capital.

Thank you and good morning. Actually, I noticed that the share of fixed-price contracts is constantly increasing. I'm just wondering whether you are making this deliberately or is the market trends and whether you'll be able, going forward in the future, to improve your gross margin and more efficient service of the clients circulation? Second, regarding the headcount growth, what sort of a headcount [leaf] for 2013 should we plan in order to support such a high growth rate of your revenue? Thank you.

Hi, Alexander. So on fixed fees, I think it is not constantly increasing. What we're seeing is that roughly 85%/15% split, we think that's within normal range of time and materials versus fixed fees. You may see a couple of hundred bips here and there. When we get into new clients, or new significant projects, typically it's on a fixed-fee basis. When we prove ourselves, the clients themselves tend to convert the contract type to time and materials, essentially letting us guide the engagements. Therefore, it becomes more of a recurring stable revenue stream, even though the underlying work is project-based. The nominal fluctuations you see in fixed-fees versus T&M to us are not meaningful or at least are not indicative of some adverse trend.

On your second question about gross margins, again, not to restate the things we said before about reinvesting into the business for future revenue growth, business that is growing 23%, 25%, 30%, we're going to continue to reinvest into the business. Your third question about headcount growth, there is a lot of dependencies there probably, if we are growing 23% to 25%. We think, roughly 15% headcount growth would be in the ballpark. So hopefully, that answers your questions.

Also, when we bring in new people on board, there is approximately 50/50 split between people coming from universities like more juniors class and people coming from the market. When you put in projections for the next year, it is driving a lot of our understanding what would be, not in the next quarter or two, what would be in the next 9 or 12 months. That's why this number could be adjusted during the year, because we are investing for this 50% of people, we invest in a lot of specific trainings. This number will be fluctuating during the year.

Yes, thank you. I'll go for one more question, really quickly. Do you have any M&As in the pipeline that you can comment on at this time?

We typically cannot comment on any M&A in the pipeline. Obviously ever since the time that we went public, and one of the reasons for going public, was to get the higher profile and the currency for M&A, we have literally deluged with inbound M&A increase. So we are in a good high-class position to be able to be selective about acquisitions that we do make, as evidenced by the two really good acquisitions we made in 2012. We're going to continue to look to do those kinds of acquisitions in the future.

Thank you.

Follow-up from Moshe Katri, Cowen.

Just another question. Through out 2012, your financial services vertical was exceptionally strong. Obviously, that was unusual compared do your peers. Can we talk about some of those trends, in terms of what is driving growth, what has been driving growth, in financial services? And then, what are your expectations for this vertical in 2013? Thanks.

I think actually I will repeat myself from the previous calls. We would like to bring in attention that we are doing a little bit of different type of work, than financial services where outsourcing is the past. That is why even if some companies sharing the news of financial services might be going down, in our case, we're actually taking the -- still growing even in the present budget situation. Some of the clients are in this space shared with us that when we entered this segment four or five years ago and had almost zero revenue, our big competitors had $150 million from one client. And today we are actually on par with them, in the same budgets. So basically they decreased and we are increasing.

I think focus on specific offerings complicates development, plus in some situations being in Europe, which is an advantage for European capital markets and banking systems, giving this advantage. So right now, we are seeing pretty strong demand for the services. We should expect similar growth.

All right. Thanks.

Thank you. Ladies and gentlemen, as we have come to the end of our time for Q&A, I would like to turn the floor back over to Mr. Dobkin for closing comments.

Thank you, everybody, for attending our call today. I would sum up that we do believe that we achieved our goals for 2012, and we're pretty confident that we can continue our growth momentum in 2013. We are still going to invest a lot in improving our technologies capabilities because we do think it is one of the one main differentiation factors in our segment. We can do better, more complex work than most of our competitors. We're going to look for organic and not organic opportunities to do this, to expand our scope of services, complement technical expertise and entering new markets. It is all in our plans. We look forward to talking to you next quarter and provide the next update. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.