Epam Systems Inc (EPAM) 2013 Q3 法說會逐字稿

Greetings and welcome to the EPAM Systems third-quarter 2013 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, Ilya Cantor, Chief Financial Officer. Thank you, Mr. Cantor, you may begin.

Thank you, and good morning, everyone. By now you should have received your copy of the earnings release for the Company's third-quarter 2013 results. If you have not, a copy is available on our website, EPAM.com.

The speakers on today's call are Arkadiy Dobkin, Chief Executive Officer, Ilya Cantor, Chief Financial Officer, and Anthony Conte, VP of Finance.

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 that are described in the Company's earnings release and other filings with the SEC. I would now like to turn the call over to Arkadiy Dobkin. Ark, please go ahead.

Thank you, Ilya, and good morning, everyone. EPAM's third quarter performance was strong, ahead of our regional guidance for the quarter and at the top end of our updated guidance from October 8.

Third quarter revenue was $140 million, a year-on-year increase of 27.3% and a sequential increase of 5.2%. Non-GAAP operating margin was 17%, in the middle of our target range of 16% to 18%. Our results reflect growth across all vertical services and geographies.

As we continue to invest in and strengthen our client-facing organization we see some improvement in both penetration of existing accounts and the quality of our pipeline. However, it's still very early to quantify the direct effect of these efforts. So if, over the long term, you hear and do believe that continuous investment, constant result evaluation and as necessary, real-time adjustments as a process is a way of doing business rather than a specific phrase.

Next month, in December, it will be 20 years of EPAM being in business. While a lot has changed during those two decades, our core principle remains intact. This is a commitment to delivering well-engineered complex software solutions and information technology services to our clients.

When we started, mostly only independent software vendors and technology reengineered companies that were interested in our work. High-quality standards demanded by those clients helped us very much to advance in the field and to support a strong community culture in the Company.

Eventually those capabilities opened new doors for us to larger the corporate world. The world during the last decade has become so much dependent on software and digital way of doing business that it had to turn to a relatively small number of vendors capable at scale to deliver critical business solutions which provides the new emerging technologies with the commercial-grade software quality.

Over the last years we acquired a new set of skills and capabilities in order to complement our engineering focus and to deliver much more sophisticated and more business-oriented software solutions. As a result we still have the same core principles, enduring commitment to delivering well-engineered complex software solutions and information technology services.

But now we benefit a very different and the most demanding set of clients, those who operate with the pressure of operating in new digital reality. As in the past, we are very dedicated to transforming the Company to continue executing in line with our core principles and our client commitments.

So it is very encouraging during this anniversary year to see high-level recognition of approach. Last month EPAM was named number 6 on the Forbes annual list of America's Best Small Public Companies, a list which includes public companies with revenue under $1 billion.

Also, EPAM was number 2 on 20 Fast-Growing Tech Stars [are released] on this rating. If you remember, earlier this year EPAM was included also on Forbes list of America's 25 fastest-growing technology companies, underscoring the Company's status as one of the most rapidly developing software engineering and IT consulting companies in America.

Our ability to continue delivering this kind of industry-leading growth is good affirmation of the strength of our approach and capabilities.

Our recently increased guidance was partially driven by a solid quarter in banking and financial services, which grew 33% year over year with particularly strong performance from investment banking clients in Europe. Here, demand is growing in line with increase adoption of new technologies by mainly financial institutions to differentiate themselves in a highly digitized world.

A good example is one of our clients in tier 1 investment bank. Our relationships have progressed over the past several years from participating in growth optimization initiatives in the beginning to becoming an important technology partner, and now to a more trusted strategic relationship.

This (inaudible) is a substantial amount of innovation work and change of bank work which includes mobile, cloud, Big Data and complex analytic server as well as user experience design initiatives that have strong potential to transform into sizable and critical for the business new engagements.

We also established new operations in several new locations in the Asia-Pacific region at the request of our clients, which means that we are able to expand into new foreign geographies with less risk than doing it in a greenfield way.

Our other clients in banking and finance are increasing their spending in similar transformational activities aimed at not only saving money but also changing how they go to market, how they interact with their customers, how they manage their -- develop their compliance, risk management and a host of other problems.

Business and financial [here as a result] is good [reiteration] of our investments we talked about earlier this year. This significantly strengthens the team, is very senior talent coming from the industry to accumulate necessary level of business knowledge on our side and to provide [good] leadership in our engagements.

By the way just recently the Everest Group recognized EPAM as 2013 Capital Markets Market Star Performer for the second year in a row. And this is only five from 20 assessed providers have received the Star Performer status.

[I think] technology has solid performance, growing by 22.6% to 24.4% of total revenue. It had positive new account acquisitions balanced between mature software companies as well as several new technology startups.

The continued independence [and addition] of our expertise in this segment, EPAM was recognized in Zinnov's Global R&D Service Provider Ratings for 2013 as a leading consumer software service provider, and the leading software ISV R&D service provider in the Consumer and Enterprise Software categories respectively.

Business information and media grew by 29%. However, if you exclude the impact of the decline in Thomson Reuters from last year, the segment increased 64%. This is the first time during the last year, when Thomson Reuters started to grow again, and in the result business information media showed 8% sequential growth during this period.

The business vertical is also benefiting from the impact of our strong integrated set of skills in enterprise mobility, complex Web content management solutions, data analytic digital strategy and user experience design.

[Revenue in] consumer had healthy growth of 24% this quarter, helped by strong expansion within several current accounts as well as by a number of new clients acquired to this year, in particular in Europe. For example, in retail, we won one of the Europe's largest nutritional supplement suppliers, one of the UK's largest home improvement retailers, one of the largest (inaudible) retailers and leading UK specialty sports retailer.

Several good news this year in hospitality, including a UK-based luxury hotel chain, a leading Scandinavian tour operator and a national air carrier. Clients in the sector for (inaudible) fast-moving changes in technology, in mobility, on e-channel commerce, digital marketing, Big Data, analytics, and cloud.

Our understanding important to the industry business solutions to better develop our position as experts in new technologies and being near shore to major European customers in this segment continues to result in market share gains for EPAM in Europe.

Another important trend in this segment is spending control by the business and specifically by CMOs. While there is continuing pressure to control CIO budgets, spending by CMOs or product leadership is typically aimed to support revenue growth which makes it incremental to IT budgets in total.

Recognizing the importance of this, we are focusing on cultivating relationships with market proponents in enterprise in the continuing investment in client-facing capabilities and deeper business understanding.

Moving on to our performance by geography, we had better than expected performance in North America, which increased 34% year over year and 5.7% sequentially. This is mostly driven by our growth within key accounts in ISV and technology, travel and consumer, and business information and media vertical. For this segment a particular sensitivity to dramatic changes in technology and EPAM is ideally positioned to benefit from this.

Europe once again had solid and consistent growth now at 36% of total revenues with revenue growth of 25% year-over-year and 6.2% sequential. As I already mentioned here, banking and finance grew well. Also as stated, travel and consumer in Europe benefited from strong new client activities.

[JF] showed moderate growth this quarter year-over-year. Here we also had the benefit of two significant e-commerce initiatives as retailers in Russia are ramping up investment in modern omnichannel commerce platforms. And we are in an exceptional position to help based on our experience accumulated in Europe and North America.

Our results this quarter once again showed that our clients rely on us to help them focus today's (inaudible) innovation and cyclical economic pressures.

A few words on what we're seeing in the business long term. Technology of the (inaudible) applications is changing following the way how those applications are being consumed. Clients are operating a variety of pressures both global as well as specific to the industry of their own operations. New digital business models are forcing companies to change the way they trade.

Helped by strong discretionary spending, we continue to see an increase in spending aimed at adapting the software as a service model. To this end today, we first of all help our clients move into the cloud by (inaudible) architecture, re-platforming and rebuilding their applications to utilize the power of this model.

ISV and our technology customers have been experiencing results of that for a long time. Our long history of helping those clients in such efforts allowed us to be very early adopters of those trends and to develop a strong skill and expertise to engineer capable solutions as well as comfortably working in cloud environments.

All that positions us well to support our corporate customers moving in the same direction by decisive help and to transition applications. We also help to build fully functional, scalable public/private (inaudible) clouds as well as providing all key aspects of related dev apps series.

Because of the complex nature of the majority of our work and our very little share of traditional for the industry production maintenance and support of legacy platforms, we view the revenue opportunity from cloud adoption by our existing clients as incremental. In other words, we don't see any decrease in spending on our services as our clients move to the cloud.

As we mentioned before, to capitalize on this opportunity we are continually investing in developing the right skills, partnerships and infrastructure including establishing true multi-tenant private cloud for all our external operations. This environment has been up and running for some time and we're seeing today numerous benefits which we can now [give full concept] to our clients.

To conclude, we continue to focus on maintaining our leading position in complex software engineering services and solutions market, which contributes to our ability to grow above the industry average. Our results this quarter once again showed that our different industry and technology knowledge, our sophisticated global delivery platform positions EPAM well to deliver these services to our clients, who need to deal with in today's highly disruptive shift in technology and new digitally driven business models.

Now I will turn it to Anthony for a review of the financials.

Thank you, Ark, and good morning, everyone. I'm going to spend a few minutes taking you through our third-quarter results and then I will talk about our fourth-quarter outlook. As usual, the full details of our results can be found in our press release and the quarterly fact sheet located on the investor section of our website.

As detailed in our press release, our third quarter revenues grew 5.2% sequentially and 27.3% over last year to $140.2 million, at the top end of our updated guidance. On a constant currency basis, revenues would be up 4.9% sequentially and 27.7% over last year.

Our non-GAAP net income grew 21% year over year and 8% sequentially. For the quarter, we generated $0.43 of non-GAAP EPS, also at the top end of our guidance, and $0.34 of GAAP EPS.

SG&A, excluding stock compensation and acquisition-related expenses, was 18.6% of revenue for the quarter, slightly above the 18.3% from Q3 last year but down from the 19.3% in the preceding quarter. Non-GAAP income from operations increased to 24.2% over prior year to $23.8 million, representing 17% of revenues, right within our 16% to 18% target range.

Diluted share count for the quarter has increased by 2.2 million shares to 48.7 million from the same quarter last year, mainly due to stock option exercises by employees and acquisition consideration.

Looking at service lines, we experienced no significant changes in our revenue mix. Software development services continues to be our largest service offering, growing 27% over last year and representing 67% of revenues. Testing was 19.8% of revenues or 26% growth over last year, and maintenance and support was 8.4% of revenues or 33.5% over last year. Infrastructure services increased by 16.8% to 2.7% of revenues.

Our growth continues to be fueled by deeper penetration into existing accounts while also consistently adding new customers to our mix. Customer concentration remains healthy with our top 20 clients accounting for 57.7% of total revenues and growing 23.3%, while all clients below the top 20 grew 32.5%. Barclays remains our top customer and accounts for 10.2% of revenues.

Our customer loyalty remains high with 93% of customers working for us at least a year compared to 89% a year ago, and 79% coming from those who have been with us for two years or more, compared to 76% last year.

Turning to our balance sheet, we finished the third quarter with approximately $123 million of cash, up by approximately $15.5 million from the quarter ending June 30. During the third quarter operating activities generated approximately $15.6 million of cash.

Unbilled revenues were at $65 million at September 30, compared to $33.4 million at December 31, in line with normal quarterly trends. And in October we subsequently billed $25 million of that unbilled.

Accounts receivable were at $87.6 million at the end of Q3, up 11% from year-end. DSOs for the quarter was at 58 days compared to 59 days last quarter.

IT professional headcount increased 11.5% over last year to 9065, supporting our 27% revenue growth. Our utilization and bench management continued to improve and we continue to see a favorable pricing environment.

Turning to our guidance for the full-year, 2013, we feel very comfortable with the guidance we provided four weeks ago. Our business development activity and pipeline continue to be strong, and we're seeing lots of positive indicators from our largest accounts.

As such, for the full year we are reiterating our prior guidance of revenue growth to $542 million to $545 million. Adjusted earnings growth is expected to be in the range of 15% to 20% year over year with an effective tax rate of 19%.

For the fourth quarter of 2013 EPAM expects revenue of between $144 million and $147 million, representing a growth rate of 15% to 18% over fourth-quarter 2012 revenues. Fourth quarter 2013 non-GAAP diluted EPS is expected to be in the range of $0.44 to $0.47 based on an estimated fourth-quarter 2013 weighted average of 49.2 million diluted shares.

We would now like to open the call for questions. Operator.

(Operator Instructions) Mayank Tandon, Needham & Company.

The color was very helpful, but Ark and Anthony, could you maybe give us a sense of what you are hearing from your customers in terms of budget levels for 2014 and how their priorities might be different from what you saw in 2013?

It is Arkadiy. So as usual in this time of the year, clearly some conversations were already started, but I think it would be too early to disclose any specifics. So I know that it sounds kind of boring, but all I can say is that we don't see much change at least in our situation from the previous years. We see approximately similar level of visibility we saw like a year ago at the same time.

So no kind of very good surprises; nor any bad news, as well. So we probably will be able to answer this question much better during the next call.

Sure. Let me ask you this, though. In terms of the size and scope of opportunities that you are seeing, is that different from what you may have seen 12 months ago? And also maybe you could comment on how your win rate is tracking directionally versus some of the larger global IT services peers that you might be competing against in specific opportunities?

Yes, a little bit work to your previous questions, what type of opportunities. We do see a lot of interest in this. We are still all saying it's new technologies for the last couple of years, but it's still relatively new like (inaudible) complex e-commerce and portal applications.

So analytics, Big Data implementation from a scalability point of view, so cloud deployment, this is all becoming much and much more feasible for us. And we invest in a lot in this area to provide to the clients with they are looking for. So these engagements are increasing proportionately in our case.

So, again, statistically, it would be very difficult for me to quantify any specific win rates. But we do see a lot of situations where we need to combine our capabilities in -- you have some digital strategy with our portal, skills and mobile extensions to be in new types of deals in comparison with just a couple of years ago.

And we compete in these deals with very large competitors, top companies in the world. And we've seen some good rate of winning for ourselves. Again, I cannot quantify this specifically.

Okay, that's helpful. And then one final question on the cost front, just give us a sense of what the recruiting environment looks like in your key delivery markets and then, what should we think about in terms of attrition rates and wage inflation levels going forward?

So the recruitment is not easy, it is tough as a process for ourselves because competition is growing. And again it sounds like I am repeating myself, but we mentioned this all probably on all of our previous calls. Competition for good talent is very, very tough all around the world starting from San Francisco, going to New York, switching to Europe, Western Europe and Eastern Europe.

So it is one of the biggest challenges for any technology company. And as we understand, like (inaudible) doesn't help you. So our attrition rate is pretty much in line with our historical numbers.

For their whole year right now, it is approaching the rate of approximately a little bit lower than 12%. And wage inflation probably is the same area. And that is exactly what was historically in our numbers and that is what we approximately expect in the future.

Great. Thank you for the color.

Steve Milunovich, UBS.

Could you talk a bit about your hiring plans going forward? And I believe you've had stronger growth in nonbillable workers than billable. Is that expected to continue or to change?

It's a very, very, very slight difference. And also during the last multiple calls we were talking that we need to improve our client-facing capabilities.

And with that type of projects which we see in which we mentioned before, we need different ratio of onshore/offshore. And specifically people with a strong business understanding and strong account management functions which we liked in the past. And again, we were talking about over the last couple of years.

So basically that is why some number of unbillable people were increasing a little bit faster. So if it would be continuous during the next quarters, probably it would be very similar to what you are seeing today. So, when we will find exactly the balance necessary for success we will define it with some experience and see the output of our work.

Okay. And then regarding the comments about new technology in the cloud, first of all, can you quantify at all how much of your business is SaaS related or new technology related?

Number two, why do you think you don't lose any older legacy business as you move to the new technologies? And three, when you are doing cloud deployments, are those primarily private clouds or do you get involved in some public cloud work as well?

As we mentioned, this is what we're seeing from clients' conversations and opportunities. And also as we stated, the majority today of the cloud work relates to our engineering skills to build applications capable to work in clouds with all possible requirements.

So there is no very strong numbers right now to, again, to illustrate it because in developed and engineering portion of this, it's very difficult to separate what exactly is going to cloud-specific work or not. But if you look at the applications as a whole, it's a different architecture usually.

And if you think about 24% of our work coming from ISV and technology, the majority of work is done there now engineered in very different way. Again, and that was our main point. At the same time, there's movement to the cloud.

And in our case, mostly we're helping clients with establishing production kind of environment for cloud development in private clouds for engineering process, for continuous integration, continuous development. That is what we build for the whole company internally and that is what we actually explain to a number of clients, how to get benefits from this.

And we've seen some increase in the webs services as well which provide a completely different level of flexibility, and flexibility to the clients. So if you are asking me for specific numbers, no, I cannot give you any -- any specific split.

That's fine. And finally, you indicated you are getting positive indications from your large accounts in terms the business going forward. Can you talk a bit more about what those indications are --?

I didn't say exactly. I am saying that we're saying very similar indications as in previous years. So I don't see the indication as more positive this year than it was last year or even one year ago. Clearly, it is much more positive than it was in 2009.

Thank you.

Darrin Peller, Barclays.

Just want to start off first, one of the obvious efforts you guys have been making is to hire more senior relationship management type personnel to really work with your best and largest clients. And specifically, people that are probably more technologically capable than the average senior relationship person that you might see at your competitors.

How difficult is that process? How's it going? Have you hired any key people that might help you grow these larger clients even faster?

Yes, we mentioned today already that one of the focuses, and we have a pretty good progress in our banking and financial services where we brought to the company multiple very senior managers from the industry. And we have seen how that is changing our capabilities to offer different types of services, and deliver and lead some new types of engagements.

Similarly what is happening right now in travel and hospitality business unit, we are looking for people. We have hired some, but it's not enough. And the same is happening in business information and media, all starting to create a special group, a strategic group for business development activities.

And we are very seriously improving our leadership in technology, in our CTO office and capabilities there, around multiple competencies which we consider very strategic for us. So again, that is coming back to the ratio of unbillable people. So we bring in some people which focus on how to accumulate knowledge, how to distribute knowledge, how to manage clients better. So it's a very key effort for us.

So where is that process -- are you around 30% or 40% through that process now?

I think we also tried to address it during our conversation earlier. So we're not trying to measure this how it is 30% complete or 40% complete. So this is step by step in verification process. When we do one step, we are seeing what is the impact of this, because if impact is very good, maybe it's never going to be finished.

So it's multiple cycles, small cycles where we see where would be the next one.

Could you just talk a little bit more about more broadly your hiring efforts and what the opportunity is there? I know you mentioned earlier that is competitive, obviously, but you've got 11% growth, I think, in personnel right now.

And I guess what we're trying to figure out is when you look at your future growth rate and where utilization rates are, give us the moving parts on how you're going to work through your headcount needs for next year, when you are growing materially lower than your revenue growth right now

Sure. I was hoping we will give chance Anthony to talk today on more financial stuff and kind of -- would be good welcome to him. But it seems like I have to continue for now (laughter).

You are doing great (laughter).

Okay, so first of all, our strategy in resource development always was very balanced between hiring from the market experienced people and actually training people coming from universities. So, and we have a pretty scalable infrastructure for training facilities.

During the 2012 we put a lot of efforts actually build up bench. And for example, our utilization in Q4 last year, Q1 this year were probably the lowest. And clearly the bench was where the largest bench during the last three years.

So with this buildup we have been able to work in this year without necessity to hire too many people. So we utilize the bench. We optimize it.

And again, even today our billable utilization around 75% for the year, which means that we have good capacity in our bench to grow. That is why higher numbers lower than our revenue growth. Again, it should be lower because there are some other attributes to this ratio besides just utilization.

As we had mentioned before, one of our goals was to increase onshore presence. And now our onshore presence for example is around 2.5% higher than last year. Also there are annual growth in billing rates and it's usually between like 6% and 8%. So when you calculate all this that would explain what happened.

So from the future point of view, we continue to do exactly what we were doing in the past. We accelerated training facilities. We, during this year, invested a lot in buildup of very strong recruitment machine.

So we brought also like with some experts from outside of the Company who know how to build up recruitment with thousand people per year. So we feel that we have all components available for us to continue growing next year.

What is the appropriate utilization rate we should think about modeling longer term?

You mean for the future?

Yes.

So we should think like about 73%, 75% probably in the future.

Okay, all right. Thanks very much. I will turn it back to the queue for now.

Ashwin Shirvaikar, Citigroup.

My first question is with regards to 4Q 2012, last year. Can you remind us what the one-timers were and were they genuinely one-timers? Can you -- because part of that was a budget flush. Would you expect a similar budget flush this year with your clients, and so then last year would not be a one-timer in that regard?

Ashwin, it is Anthony here.

Now you can talk.

I can tell, yes, thank you. Thank you for that question. That gives me an opportunity to speak.

As far as budget flush, as you know, the budget flush last year came very late in the fourth quarter. At this point we are seeing some slight indications of budget flush, but really nothing material or significant. So we are not anticipating recurrence of the flush that we saw last year.

You remember last year it was $10 million of flush that came very late in the fourth quarter. We're not seeing any indications of that levels or anything even close to that this year.

Okay, so the implied growth rate for 4Q this year probably should be looking at adding back the impact of that flush to figure out what a good ongoing rate is? Is that what you are implying?

Yes.

It's a good [exit rate]? Okay. Good. And with regards to a couple of the earlier questions have obviously tried to get to this gap between headcount growth and revenue growth, and there are multiple pieces, clearly. There's utilization which you guys just addressed, and there's pricing.

And pricing obviously has two elements. One element is just wage inflation and charging clients a little bit more because of that. But the other element is increasing the headcount, client-facing people in the US, in the UK, which obviously carries higher billing rates with them.

Can you talk about how you are proceeding with that one? You want to go obviously from 5% [or] 7% of your employee base at client to roughly 10%. What is the impact of that?

What is the impact of this for the future, you mean?

Yes.

It would be probably very similar to what is happening right now. For example, during last year we increased between 2% and 2.5% ratio between onshore and offshore. Probably during the next year it will be a similar growth and we will come very close to 10% which we are talking about.

And it probably would -- it's very actually -- as you know, it's very difficult to quantify this in advance, because we don't have thousands of people on site. And basically even a couple hundred is making a big impact on the ratios. And a couple hundred, with our size, it's not also a big number to consider unreasonable that, for example, in six months we will realize that for some clients we will have to expedite our onsite presence and bring a couple hundred more than we are anticipating today.

So that is why it is, again, difficult to quantify. But at this point we think it would be similar to this year. The thing is that we will have to hire more people because we will utilize the bench which we built up in 2012, the beginning of 2013. Next year we will have to build up some bench again.

Okay. I guess --

But even with all this, you understand that we have a pretty good bench size currently. Also it is 75% utilization.

Yes, absolutely. And you do need that flexibility to grow. I understand that.

The third part of growth is M&A. With regards your M&A pipeline, how healthy is that? Should we look for something to happen here in the near-term in the next two, three, six months?

You will find out as soon as everybody else will find out. Again, more traditional answer here, so we are looking all the time. We have opportunities. We are hoping that during the next quarter's we will close some, but if it happens and when it happens I cannot comment.

Okay, very good. So last question is with regards to -- clearly you guys are building an engine for the future in terms of getting all these people who can hire at industrial strength and recruit and all that kind of good stuff.

And so the question becomes now that you have some of that build, with regards to hiring in Eastern Europe, there are a little bit more used to hiring and other geographies and what the hiring cycle is in other geographies. What does the hiring cycle look like in Eastern Europe? In order to grow next year at a reasonable rate, when would you need to hire these people?

Again, we're hiring all the time. We are not like really working in cycles, even with what I mentioned before that we built up with a sizable bench at the beginning of last year and utilizing this. We are still kind of watching this all the time.

Usually when you're finding the person and giving the [order], so it is pretty global. So it could take like a month or so for a person to switch the job. But again, we're not targeting just people from the market. We are investing in a lot of special training.

I don't remember if we talked about it. We have a program where people even have to come into EPAM, more junior people still in training from three to six months. This is a lag which we understand. We have to keep in mind when we are scaling up.

So probably between those two parameters we will be bringing people from the market is probably a month or 45 days. And when we bring in people from the universities or even if already becoming our employees it's still three to six months for internal training before they can go to production. So we're planning this in advance.

Okay. I think I can follow up off-line. Thank you for your comments.

David Grossman, Stifel.

Just looking at the 3Q performance and your 4Q guidance, which would seem to suggest that the margins are migrating to a level towards the higher end of your target range, do these margin levels fully reflect the investment spending that we've been talking about? Or perhaps is there some seasonality to the spend?

I guess what I am really getting at is do these margin levels reflect a level that would be sustainable in the next year?

All I can give you again is some [three- to five-year] answer. So we design our future around 16%, 18%, as we mentioned. So if this specific number already reflect the investments which we did, this is where I would be cautious because this is again an experiment in process where we are evaluating what is right, what is wrong.

So, probably it would be too early to tell right now that this already reflects. So most likely four quarters from now, when we see consistency with this and we really would be able to draw the connection between our actions and performance, we will answer you more precisely.

But I don't want to speculate that our investments already show up. But we do believe that we invest in the right direction and that will show up hopefully sooner than later.

Okay, fair enough. So, second question I had was really on your maintenance model or maintenance revenue. I think you said it's about 8.5% of revenue. As the applications migrate to the cloud, does maintenance become more important or less important in your model in terms of the potential revenue stream down the road?

Because I know your percentage of maintenance mix is obviously much lower than many competitors. And just curious whether this paradigm shift has an impact on that level whether either positively or negatively.

I think we talked about this in the past. It is an interesting and actually pretty complex answer to this question, because like everything in our business when we say an application development or testing or maintenance and support, it has pretty broad meanings and there are many variations of this.

So, general terms like maintenance and support in our services industry usually means pretty sizable engagement for production activities around managing large legacy installed base. And this is again traditional understanding of this maintenance and support.

And in this traditional sense, EPAM never had any sizable business. And even from this 8%-plus we have today, it's probably just half of this would be qualified as regular maintenance and support. Why it is happening is because we're working mostly on new technology stack; we don't have for example, any mainframe capabilities today. And in this new technology stack maintenance and support is very different activity.

Like if you think about -- and we also talked about the SaaS model. If you think about the SaaS model, so the number of releases of the software is not like one for six months or even one for three months. It could be weekly or daily, multiple daily releases. So the line between maintenance and support and actually development of new features is very, very tight. So basically the team which is working on application is a combination of different set skills.

So that is why it's very difficult to draw the line. And even inside of our 8%, 9% which we stated, there is a big portion of this type of new maintenance and support work.

And when we are saying that we don't see that, for example, deployment to the cloud would affect us, it exactly means that we are not losing the revenue in legacy production maintenance and support as many of our very large competitors probably will. And when clients move into this new model, they actually are looking for a company which has skills to make support activities a new environment.

And we are very well-positioned to do it, because that is exactly what we're doing for a long time for our ISV vendors and technology vendors. And even our corporate vendors, which is in reality is I mentioned many times in many senses today, technology companies, so even nontraditional software companies. So that's why we don't see that it is going to affect us at all -- or actually an advantage.

Actually very helpful. Thank you.

Moshe Katri, Cowen.

Should we expect any major changes in tax policies or regulations in Belarus or Russia for next year? Can we get an update on that?

At this point we don't see any changes coming from any locations as far as tax policy and we pretty much expect a consistent tax environment going forward. So the answer is no, there's no change in -- (multiple speakers)

So tax holidays and some of the benefits will continue with no interruption at this point, at least for the next few years?

Yes, tax holiday is in place until --?

2021.

2021. So that should not change at all for the next seven, eight years. And other jurisdictions, tax structures are pretty stable. We don't see any real changes. If anything, we are seeing some environments lowering their rates as the years go by, so we may see a little bit of some benefits from some jurisdictions, but nothing significant.

Great. And then if I remember correctly, talking about wage inflation, I think the Ukraine was probably an area of concern for you guys in the past. Any changes there in terms of wage inflation? Maybe we can get an update on what happened in the Ukraine so far this year, maybe the same update about Belarus. And then maybe we can talk also about attrition rates in both of these locations so far this year.

So I actually don't remember that we were more concerned about the Ukraine versus other regions. I think I would say I personally am concerned about all regions. And again, we're working towards how to mitigate it.

But it's the same concern which we had previously and this is like all this competition for talent is very tough all over the place, because we have the same problems on the West Coast and in New York and in London. So I can't distinguish this right now. So I don't think there is any significant differences between Belarus, Ukraine, or even Russia right now.

Okay.

And on the attrition front, there are some slight differences between the regions. But it's becoming more and more balanced year after year with -- we were growing much, much faster in the Ukraine and we started much, much later than in Belarus. So basically it was different.

Now in the Ukraine, in size practically coming to the level of Belarus, or will come during the next 12, 18 months. All these parameters will come in more comparable as well.

Understood. And just last question, and this is more related to demand trends, and maybe you addressed it at the beginning of the call. I just got in a bit late into the call.

But what sort of feedback or comments are you getting from clients regarding their budgets next year? And then looking at your existing pipeline, or new deal pipeline, which vertical or verticals are the most active? Thanks.

Yes, it was probably one of the first questions and we have our traditional answer, and not because we'd like it to be a traditional answer, but because it actually reflects the reality. So we don't see any differences in comparison with last year.

Again with our size, as I mentioned before, of a $0.5 billion Company, we don't see different behavior from the clients than we were seeing during last couple of years. And I would say that all three verticals like financial services, business information and media, and travel and hospitality we expect a good level of growth there because again, those are industries that have to utilize new applications to be competitive in the market all the time.

And we see pretty good interest from their side for our services. I cannot even distinguish some of them. So in one quarter could be better. In financial services, it's still traditionally more stable, but we do believe that others will catch up as well.

Okay, thanks.

(Operator Instructions) Nick Robinson, Renaissance Capital.

A quick question in relation to the cash balance. That's been picking up slightly over the years. And now, while there's still some potential M&A opportunities that's going to be small bolt-ons, do we get to a point soon where you get beyond there's some excess cash? And if so what sort of level would that be, and what would you think about doing with that going forward?

As far as excess cash, we mostly likely will be using that cash to continue to reinvest into the business. We are constantly looking as we grow in the regions and add people.

We constantly have a need for new facilities, so we're constantly looking at a need for facilities. We're constantly looking at M&A, so a lot of those cash funds will be used in the M&A cycle. And that is our main intention is really to continue to invest in facilities and M&A with that cash.

Okay, thank you.

Ivan Belyaev, Sberbank.

I look at your adjusted operating profit for the third quarter and for the nine months of the year, and it looks like your margins are lowering a bit. So from your point of view, what is the main impact? What has the main impact for that? Is it the hires of the senior staff or something -- some other cost?

I assume you are referring to the decline versus last year. And that is again, as we have mentioned before, we are continually reinvesting into the business. And we are targeting the 16% to 18% range for those operating margins, adjusted operating margins. And we're going to continue to live within that space with those investments that we are making.

And can you elaborate a bit on the investments, on what you mean about investing in the business, or maybe major items or something?

Yes, again, it was probably a key topic for us during the old calls -- previous calls. So we are doing with account management and business development operation which was under-invested in the past. We invest in building very strong competencies inside of EPAM and this required dedicated people who are not billable, otherwise you cannot develop this.

We invest in developing internal applications to optimize operations and management. We are replacing some systems which we built over the last 10, 15 years and this is a significant installed base for us. And we do believe that it would actually bring additional differentiation for installer series.

So there are multiple items, and that is what we mean by investment. And this is again as we mentioned, a continuous process.

So when we will have upside from this, that was the question on today as well. We cannot give answer to you right now exactly. So we hope it will and we addressed in our actions based on what we have seen. But this investment definitely was increased in comparison with last year and previous years, as well.

Okay, clear. And the next question regarding your verticals -- the technology and ISV vertical; it grew [30%] in the third quarter. I just wonder if this is sustainable and what is going on within this vertical?

The ISV in the third quarter actually grew 23% year on year. And it's pretty much in line with expectations. We have spoken about ISV vertical in the past. It is the core of what we have built our business on and we expect to see it running at around, right around the 25%-ish of revenue.

So are you asking if we're thinking that we will be growing in the future with the same 20%, 25% growth or what -- can you --?

Yes, the thing is, I saw that previous -- at least three, four previous quarters it grew [about] 30% and now it is lower. So I just wonder how sustainable is that.

As Anthony answers, we strategically would like to keep this to be a sizable part of our business, between 20%, 25% of total revenue, which means that it should grow approximately with the same rate which we grow it. And again, quarter on quarter, it clearly could vary and that's very difficult to control. But long term that's what we are hoping to support.

Okay, clear. Thank you.

At the same time, I do believe that -- you see, it's also a very loaded question, because if you like to understand details, like what is ISV and technology and what is, for example, a business with a company like Expedia which is travel, and online travel. Is Expedia a technology client or not? We actually help these type of client over all our verticals right now.

And ISV it's more precisely a software company, but it also includes guys like Google and similar. So -- but the simple answer, yes, we're planning to grow at the same rate.

Okay, thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back to management for any additional or closing comments.

Okay. Would like to thank everyone and I also would like to use this opportunity to one more time thank Ilya, who, is after this call the last time, for all his contributions here in the last seven years to the Company, to helping us to come here and helping a lot to the IPO process and almost for two years afterwards. So I would like to pass to him for a couple of words.

Thank you very much, Ark. Thank you. I appreciate the opportunity to say a few parting words. It's been an interesting seven years where I was fortunate to participate in EPAM's journey from what was then a small, but very focused engineering shop with just over 1000 engineers to where we are today, a larger, publicly traded, rapidly growing, but still very much focused provider of complex software engineering solutions and services, but to a much broader and diversified set of clients.

I will certainly miss some of the intangibles that help make EPAM what it is, like the honesty of the Eastern European culture, the environment of accountability and the very strong competitive spirit that is very much alive in EPAM today. So while I am sad to leave, I'm happy to leave EPAM in the great shape that it is today with solid leadership and a bright future.

So thank you all for joining us today. We are happy with this quarter's performance and the outlook for the rest of the year.

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