Epam Systems Inc (EPAM) 2016 Q3 法說會逐字稿

Greetings, and welcome to the EPAM Systems third-quarter 2016 earnings call. (Operator Instructions). As a reminder, this conference being recorded. It is now my pleasure to introduce your host, Miss Lilya Chernova. Thank you. Please go ahead.

Thank you, and good morning, everyone. By now you should have received your copy of the earnings release for the Company's third-quarter 2016 results. If you have not, a copy is available in the investor section on our website at EPAM.com.

The speakers on today's call are Arkadiy Dobkin, CEO and President, and Anthony Conte, 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 risks and uncertainties as described in the Company's earnings release and other filings with the SEC. Arkadiy?

Thank you, Lilya, and good morning, everyone. Thanks for joining us.

Today, we are pleased to share our results for Q3, coming in with $298.3 million in revenue, which is up 26.4% over third-quarter last year, and 28.7% growth in constant currency, and 6.2% sequential.

Last time, we talked about sentiment and pricing changes in the market and our anticipation of some level of downstream effect with several [EFSI] accounts and even a few [consumer-oriented] clients. Today we can say that, along with our industry peers, we continue to experience some level unpredictability due to Brexit situation. The [adjust] in Q3 impacted our revenue by 2.3% due to currency headwinds on top of continued questions around its longer-term impacts.

On another side, despite the general challenges everybody is talking about, we at EPAM have seen continued demand for our services. The demand, which we see for complex technology solutions and business transformative services, delivered by a well-balanced consulting, design, engineering, integration and managed services, gives us further confidence in our long-term strategy and our ability to bring anticipated (inaudible) to our clients, and, in turn, to continue to support our industry [driven] revenue growth of over 20%.

Soon, Anthony will provide more detailed financial updates, but I want to share several important Q3 highlights, which also would apply at large extent to our forecast for Q4 and for the whole year.

First, we continue to see more diversification in our client concentration both through our new (inaudible) acquisitions but also through increased expansion and our existing clients, based outside of our top 20 accounts where we saw a 43% growth rate, which is consistently higher than the overall Company growth rate. Because of this, our top 10 concentration grew by 5% to 37.6% from last year, and our top 20 is down almost 6% to 48%.

Turning to verticals media and entertainment delivered to our 40% growth and has for the past four quarters, primarily fueled by continued expansion with existing clients. Our emerging vertical, which includes a variety of clients, continues with strong growth as well, up 56% year-over-year.

Also as part of this emerging story, we're excited to partner with several region private-equity firms. We selected a pharma preferred vendor in health in their portfolio companies to drive life-scale transformation programs as well as to enable high-potential digital startups to scale. We believe that these partnerships have good potential to grow as we demonstrate our value and expand to grow the higher proportion of these portfolios.

As you can see, all of our verticals grew over 20% year over year, with exception of travel and consumer, which came in just under as a result of deceleration of growth in [toolage] in highly penetrated accounts.

Last, the currency impact driven by several large hotel accounts in the UK.

Currency aside, we do see continued strong growth upside in our travel and consumer vertical globally, with a number of strategic accounts growing over 40% year over year. Overall, we'll look at this as a positive trend over better diversification, which is in line with our longer-term strategy of keeping [a fine] balance across our verticals, which should allow us to continue to generating top-line growth while mitigating the risk of being impacted by over-concentration in one or two specific markets.

Looking to our global operations, we continue to invest significant resources in developing the right mix of delivery capabilities by hiring global teams of experts with the hybrid skills needed to address demand for that specific subset of the market which in the industry analysts' view and in our view as well. We will continue to grow faster than the rest.

During Q3, our headcount came in over 19,000 IT professionals, which is 36.2% year-over-year increase. There are several reasons for that. First of all, early in the year plans were made for the accelerated ramp-up of several [light-scale] clients including (inaudible) in several new locations. When we started to get indications that the demand was going to be delayed, we had already committed to hiring and in most cases highly significant number of staff in anticipation of this ramp-up.

That ramp-up eventually did not happen. In addition, we had to continue hiring in locations committed to other growing accounts. In addition, during last quarters we saw weaknesses in the growth prospect of some key AGS accounts, leading to lower than anticipated utilization and revenue in this still-new-for-us part of the (inaudible).

So, we have to concentrate partially this gap in revenue in our already established locations, where we have to continue hiring the personnel. While in some cases we look to proactively address this slack by redeploying people to different new client programs, in others we elected to maintain this excess capacity in anticipation of new demands over the next several quarters and focus on training. All of that led to an imbalance in our utilization.

In summary, overutilization really came in at 72% in Q3, which was lower than we thought earlier in the year. At this point, we expect to see continued utilization softness into Q4 in some delivery location as we work to clear the branch and redeploy available capacity. All of that clearly carries (inaudible) EPS guidance adjustment, and Anthony will provide more details on that side.

As part of our approach to address that situation better in the future, especially with our continuous commitment to build a true global Company with expanded presence in over 25 countries, we recently strengthened our people in HR operations by bringing several new senior leaders to focus on our employee workforce planning and management and number of people management programs and platforms.

Larry Solomon will be leading this team as the Chief People Officer, a very new role at EPAM. Larry came to us after many years at Accenture, where he served the number of people and HR senior management positions, with last three years being Chief Operation Officer of Accenture North America.

As I have said before, this has meant investments in delivery capability and quality personnel are critical to ensure that we are well-positioned to deliver on our commitment we have made to our employees and our customers. And these are also the strategic differentiators and, despite the current difficult business environment, will best position us to take advantage of the opportunities that will certainly reveal themselves over the course of the next few quarters.

So in closing, we are proactively managing our utilization, and we are also seeing good progress on other key operational metrics including improvement in operating cash flow, working capital, DSO and low attrition numbers. This is (inaudible) continuous program and focused investment in building our global delivery teams and platforms, should enable us to continue to deliver 20%-plus growth and to do so at what is now significant scale.

With this, I turn it over to Anthony for detailed financial update.

Thank you, Ark, and good morning, everyone. I'll start with some financial highlights, then profitability and cash flow, and end on guidance. As you heard in Ark's comments, our growth strategy is engineered to deliver consistent, sustainable results, and we have turned in another strong performance in the third quarter. Here are a few key highlights.

Revenue closed at $298.3 million, 26.4% over third quarter of last year and 6.2% sequentially, which represents a constant currency growth rate of 28.7%. Geographically, North America represents our largest region, representing 56.4% of our Q3 revenues, up 34.8% year-over-year. Europe was up 19.3% year-over-year and 25.6% in constant currency, representing 37% of Q3 revenue. APAC grew slightly and now represents 2.3% of our revenue, and CIS is flat year-over-year.

Turning to profitability, GAAP income from operations increased 22.1% year-over-year to represent 11.4% of revenue in the quarter. Our non-GAAP income from operations for the quarter increased 19.9% over prior year to $49.7 million, representing 16.7% of revenue.

Our effective tax rate for the quarter came in at 21.3%. And for the quarter we generated $0.49 of GAAP EPS and $0.76 of non-GAAP EPS, which includes the tax effect on non-GAAP adjustments and is based on approximately 53.9 million diluted shares outstanding.

The utilization challenges continue to create pressures on our income from operations and ultimately EPS. Utilization ended lower than anticipated at 72%. Our non-GAAP SG&A, which excludes all stock comp expense, came in at 19.5%, which is slightly lower than last year. We continue to focus on leveraging our SG&A spend and executing our strategy to focus on talent acquisition, workforce planning, balancing the bench and hiring functional management to bring value to our long-term sustainable growth strategy. Our attrition remains low at 10.4%.

Turning to our cash flow and balance sheet, cash from operations for Q3 was $61.8 million, an 11% year-over-year increase. Free cash flows came in at $55 million, or 136% of adjusted net income conversion. In addition, to strong quarterly performance, the cash flow improvement can also be attributed to our decrease in our DSO. This quarter, our AR DSO is 58 days, and our unbilled DSO is 25 days for a total of 83 days, compared to Q2 2016 total of 88 days.

As we mentioned in past quarters, we would implement changes to improve our processes, which we clearly have. Our efforts have reduced unbilled DSO by 19% sequentially. We have a better process in place now but can't predict if the Q3 levels will be sustainable. As we continue to work through additional enhancements, we will keep you updated.

Turning now to guidance. Following Ark's comments about macro demand pressures in the industry, our current outlook for Q4 revenue is expected to be at least $310 million, which results in a full-year revenue of $1.156 billion, an increase of 26.5% over prior year, and constant currency growth of 29%.

GAAP diluted EPS will be at least $0.54 for the quarter and $1.94 for the full year. Non-GAAP EPS will be at least $0.78 for the quarter and $2.90 for the full year and is based on a weighted average share count of 54.3 million fully diluted shares outstanding.

The $0.11 GAAP EPS drop in guidance is attributed to the compounded effect of lower utilization across multiple quarters combined with FX losses on assets held in foreign jurisdictions. The $0.07 non-GAAP EPS drop in guidance is related exclusively to the utilization challenges.

Now, I'll turn it back over to Arkadiy for some additional comments.

One more important comment. As we shared in our press release, Anthony, while will be staying with us through the third quarter of 2017, submitted notice that he plans to resign as the Company's Senior Vice President, Chief Financial Officer and Treasurer at the end of the period. Anthony has been a key part of our growth and success over his 10 years with us. We are very thankful for that, and we wish Anthony the best in the future after (inaudible).

But just to make sure we are all on the same page, during the next quarters, Anthony will continue to work in his current capacity to assist us in our search for his successor and then help to ensure a smooth transition.

Now we can turn to the Q&A part.

(Operator Instructions) Anil Doradla, William Blair.

Hi guys this is Maggie Nolan in for Anil. I was hoping you could give us a little bit more color on the two travel clients that you are seeing some softness at, as well as address some of your other top clients and the dynamics there.

I think we shared it at our notes this morning that, first of all, there is impact on some financials services clients, which we talked before, and some travel and consumer issues not really noticeable. So I think softness coming from, again, just a few accounts, but it's a big account which we mentioned during the last call and --

We can't really mention the clients, if that's what you're looking for. There are two -- we have two of our larger travel and consumer clients that are very fully penetrated. And we are starting to see just a little bit of slowdown in the growth rates for those two big accounts. But there's nothing concerning there except that they've reached kind of a scale and a size where the growth is starting to slow down there. They are still growing, just that a slower rate.

And then when you look at the rest of the vertical, there are a number of up-and-coming accounts within the vertical. But they are still relatively new, and they are not material enough at this stage to offset the slowdown we are seeing in the two fully penetrated accounts.

So that dynamic is what is hitting us now. We're still very confident around this vertical. And as these newer accounts start to really gain and build some traction, we should see growth continue and get back up to the levels of what we've seen in the past.

Okay, great.

Does that help?

Yes, that's very helpful. Thank you. And then the other question I had is how are you planning to address the utilization challenges moving forward? And how is this point impact your hiring plans over the next couple of quarters, keeping in mind that you obviously have spoken to the fact that you want to keep the long-term growth plan intact. Thanks, guys.

I think we also mentioned this topic already. But in general, we have some long-term planning for a couple of accounts which we didn't realize. And we have excessive capacity in very specific locations which we cannot utilize immediately. And we made a decision that we're not going to rush, but actually invest in additional training while still continue hiring in locations where we plan to grow further it counts. So end-result of this, we've got to a situation where our utilization were lower than we expected before.

So at this point, we are planning to make right assignments for this extra capacity and bring these two levels which is and much more normal range for us, which is probably 3%, 4% up.

So when it is exactly going to happen is difficult to say. It probably will take us a couple of quarters. But that is what we are planning right now. It's a good part of this that is pretty manageable process. It's not like very specific situations which we cannot control. It just was our choice to invest in people during this period.

Thanks.

Steve Milunovich, UBS.

Could you tell us what the organic revenue growth was in the quarter and expectations for organic growth in the fourth quarter? The [alliance] acquisition is lapping in November, I believe. Is there anything else that's lapping?

Nothing else lapping. So, just AGS in Q3 -- organic was 21%, organic constant currency was about 23%.

Okay. And I think Ark commented on expecting 20%-plus growth going forward. Is that still a reasonable expectation looking out for 12 to 24 months based on the pipeline that you see?

Yes. We believe it's a (inaudible) explanation. And, again, even this number is impacted by the same reasons which you heard already today, including our utilization situation. And some capacity in locations which we couldn't immediately realize. So we believe that we will be able to continue growing 20% plus.

Is there anything changing significantly competitively? I'm sometimes asked about the Indian vendors and whether they are able to kind of move up the stack and acquire better software development skills and compete with you.

I think we feel the same way like we feel before. So, market is too big specifically in this subset of the market where we play. And I'm pretty sure everybody improving, but I don't think it's impacting in general the opportunities for growth.

Understood. Thank you.

Jason Kupferberg, Jefferies.

You guys, this is Harmeet Singh for Jason. Sorry to get back on this question again. But the utilization part, the long-term plans for certain clients that you are saying you didn't realize, were these clients primarily in banking financial services sector? And what does that mean for your revenue growth sort of next year? Is this sort of the revenue that you were expecting to come next year that you're not going to realize now?

Yes, it was mostly in financial services and that's exactly what we are trying to communicate. Yes, it might be impacting us for the next several quarters, but we do believe that the market is strong enough specifically in the area which we play and that would allow us to grow 20%-plus. That's exactly our message.

So, how specific clients will behave during the next quarter or two or next 12 months, it's very difficult to predict. We are not relying on specific clients. That's why we're talking about diversification from client balancing, concentration, specific verticals which we play in. We are very comfortable with our kind of structure of the revenue in the portfolio right now to continue growing 20%-plus.

Great. And then just one quick question, Anthony. Sorry to see you resign. But talking about your non-compete, how long is that? What is the duration of the non-compete that you have?

It will be 12 months from the time that I actually leave will be the actual non-compete period.

Okay. Great.

I have no intentions of going to a competitor or competing with EPAM in any way. I actually intend to remain a shareholder of EPAM. So most of -- the reason I'm leaving is more for personal business interests outside of EPAM.

All right. Thank you very much.

Ashwin Shirvaikar, Citigroup.

The question I have is with regards to -- is the standard 16% to 18% non-GAAP EBITDA margin still achievable over the next couple of quarters? Next two to four quarters, let's just say, given what's going on with the utilization issue? And if not, what is a good range?

At this point, we are staying with that 16% to 18% range. But as you have seen this year, and I would expect it to continue next several quarters, we are feeling pressure and it's going to keep us to the lower end of that range.

Ashwin, right now are feeling that we at the [bottom] of utilization (inaudible) that will be improving. And clearly utilization in the -- probably the strongest impact on this number as well. So we still are thinking that unless market change drastically for some one or another reason, we should be able to be in this corridor in the future as well.

Got it, got it. And in terms of just to try to understand specifically what is going on -- because you do have a fairly robust increase in headcount that's going on -- what you're basically saying is you are hiring in certain locations. Your clients don't necessarily want talent to be based in those locations. Is that what you are saying?

No, what we're saying -- and there are multiple reasons. Again, it's a much more difficult analysis. But on the high level, what we're saying right now is that we were planning to staff client engagements, specific client engagements in specific locations and prepared for this. And it was delayed a couple of times and then it was (inaudible). And we have extra capacity in this location.

So the same time, we did commit it to grow with other part of the clients in different locations and continue to hire simultaneously in different locations to satisfy our initial commitment. And then we have already partial teams there. So it was impossible to change. That's why we run to extra capacity. So that's one of the biggest reasons. But it's -- again, it's more complex situation than we have our (inaudible).

And India, which we mentioned, didn't play exactly as we expected early in the year, which was additional point. And combination of this broad situation to where it is right now. But, again, in our view, all of this very fixable and manageable.

Okay. Basically you have enough demand that the people you have hired can get sort of utilized, used up and put on projects in the next couple of quarters, it seems like.

Yes, we have already -- we are comfortable that where we have in locations where you have extra capacity, which was prepared for specific clients. It's a qualified capacity. It just taken several quarters to reassign those resources.

Got it. My last question really is related to -- can you comment a little bit on the nature of what is causing the delay in these couple of locations? Is it primarily macro demand?

That's what we thought before. That's what we were sharing last quarter about financial services. And last quarter we said that we don't know exactly how it's going to play out, but we know that something is happening. So it's become much more clear right now. But even right now it could happen that with the next couple of quarters the same clients will come back to us. So it's still pretty [far there].

Got it. Thank you.

Avishai Kantor, Cowen.

I think in the beginning of the year, you were talking about factoring 3% pricing increases for this year for 2016. Do you have any early indication what should we expect in 2017 [elected] for the next 12 months? Are we still talking about 3%?

I think we will share this probably next quarter. So it's too early for us right now to say it.

Okay. And in the last conference call you were talking a little bit about pricing pressure. I mean is this are you still seeing the same environment?

At this point, pricing is usually locked down in the first half of the year when you talk about renewals from existing accounts. And then as new accounts come in, it's varied in those negotiations. So that hasn't changed dramatically from what we discussed last quarter. We are still feeling from kind of the organic constant currency perspective, we are still at just under 3% from a pricing perspective.

Thank you so much.

Joseph Foresi, Cantor Fitzgerald.

This is Mike Reid on for Joe Foresi. Thanks for taking our question. I just saw that the euro ticked up pretty good as a percentage of revenues this period. Can you go into a little detail on maybe what some of the causes of this were as a percentage of the revenues?

The euro, it didn't move that dramatically this quarter. So I would want to actually talk to you about what you're looking at. The euro has been running pretty consistently as a percentage of revenue for the past several quarters. So, what statistics are you looking at that show it spiking?

Is it not on the stat sheet, it was up to 12% from about 9%?

Yes, but it's been pretty consistently in that 10%, 11%, 12% for a number of quarters. That's why I don't see that as a significant increase. There's nothing special that's moving the euro concentration. Just normal contracting. Nothing dramatic has shifted.

Okay, thanks. And then with the DSOs down again, it was a better -- also, is that something you can see that level will still be sustainable?

At this point, we are not comfortable saying that the Q3 DSO is sustainable. It took a big drop. A lot of this is the additional efforts we've really been focusing over the past couple quarters, so I think that has brought it down significantly. Not willing to commit to these levels at this point as a go-forward. We're going to take a couple of quarters and see how it trends, and then we could talk about what's a consistent level.

All right. Thanks, guys.

James Friedman, Susquehanna International Group.

If I could, too, Anthony -- you were going kind of quick there when you were discussing the as-reported versus constant currency performance in Europe. Could I trouble you to repeat that?

As-reported versus constant currency, yes, sorry. The organic growth was 21%. The organic constant currency was 23%. Is that what you were referring to?

I got that one. I appreciate your saying that one. I was asking specifically about Europe, what the as-reported versus constant currency Europe number was.

Oh, as-reported versus for just European revenues? Or are you talking euro revenues?

You know, when you said --

I'm not 100% sure what the question is that you are asking.

In the language where you are saying North America was 56.4% of revenue, up 38%, and you had Asia and then you had CIS was flat, what was in the script that you said about Europe?

I'm sorry; I thought you were referring to the last question. My apologies. Europe constant currency was 25.6% versus 19.3% reported.

Yes, that's what I was looking for.

Sorry, apologies. I thought you were referring to the last question.

And then with regard to the tax rate, Anthony, as we're going forward -- I'm doing this from distant memory, but my recollection is you had some special economic zones, if that's too fancy a word, in some parts of CIS. What do you see the tax rate from that region going forward? Anything to call out?

The only place we have a special tax benefit from an income tax perspective is in Belarus, where we are enjoying a tax holiday through 2021. That's the only current special tax regime that we have. And really we don't comment on regional tax structures, but we expect to stay in this 21% for the foreseeable future. 21% or low 20s is what I would expect, until clearly in 2021 that could change. But that's a number of years out.

Okay. Last thing for me, if I could. I realize you are not projecting the improvement in DSO in unbilled to continue. But could you just remind us is there any seasonality -- I seem to recall there was -- that occurs in the Q4 related to DSOs?

There has been in the past some Q4 seasonality where companies try and clear budgets and get payments closed out before the end of the year. That's part of why I don't want to confirm any trends around the DSO until we have a few more consistent quarters. So there is a possibility of some additional benefits in Q4 if that trend continues. But we need to see how things play out for the next couple quarters. So I'm not really committing any specific levels.

Got it. Thank you.

Georgios Kertsos, Berenberg.

A couple from me -- hopefully very quick ones. First of all is on the pricing environment. If I'm looking basically at non-GAAP operating profit, it's broadly above one percentage point, down year on year. Is that entirely due to staff utilization, or is it at least partly attributed also to some sort of adverse pricing movements? And then I have a follow-up question.

Utilization is the biggest impact that you're seeing on the profit margins for this year. There are some other dynamics that play into that. We are -- we have been staffing up more over the past year in offshore locations. So that creates a little bit of a dynamic shift as well. Because offshore, obviously, are going out at a lower price point than the on-site. So as you see our offshore concentration increase, that impacts it. And then obviously the inclusion of India and China, which are at lower price points than our organic resources, that creates additional pressures. So I would say utilization is the top impact, and then some shifting to lower price point locations adds additional impact there as well.

Got you. And a quick follow-up on that. Basically if I'm looking at it from a sort of a -- is it the offshore penetration at present broadly at steady-state level? I.e., should we expect this sort of year-over-year price deflation or impact as you are seeing, you just highlighted will remain for the following quarters, or basically tolerating the numbers?

Can you repeat the question?

Can you repeat that?

Yes, so basically if we are thinking about offshoring -- and if I heard Anthony correctly, the fact that he was seeing increased offshore penetration, increased price deflationary. So you have constant volumes and pricing basically might become incrementally lower for offshore stuff.

Now, that top-line headwind is likely to remain for as long as we increase offshore penetration, i.e., if it will go away when the offshore penetration hits a steady-state level. So effectively, are we at already at that steady-state level, or do we expect increasing offshore in the following quarters as well?

Okay, let me take on this. First of all -- and this is related to this question to make sure we're on the same page. We were thinking about 3% pricing increase. And if you tried to analyze our guidance numbers, then we are exactly at the 3% so far during these nine months. So the second, our increase in offshore proportion clearly impacting the total pricing numbers. That's what Anthony mentioned.

But in our plans, we're going to -- it's not like we were planning -- this is like acquisition of AGS and some increase in headcount we had in China impacting this. So basically, we slowed down with onshore growth in relative numbers.

What we are planning to do is definitely planning to increase our onshore presence, in country presence, and we're going to grow in these areas in the next 12 months. That's the plan. We still are very committed to increase our presence in the countries where we are getting the revenue from kind of client-facing capabilities. (multiple speakers) answers your question?

Yes it does, yes it does. And a quick follow-up for me. Can you just perhaps share a few high-level thoughts about basically UBS account, how you're seeing basically demand shaping up on that front? Thank you.

I think we shared everything we knew. And, again, very difficult right now to make projections in this area. So we rather will see what will be happening on the market. But clearly accounts slow down; you can see it from top-line performance.

But this is, again -- we might go back, might grow back, might stay flat at this point. We don't know.

Okay, clear. Thank you.

Peter Christiansen, Citigroup.

I think last week, Thomson Reuters made a pretty interesting announcement accelerating its restructuring, and they were reducing headcount quite a bit. But they also said that they're going to pick up the pace of their transformational efforts, which sounds like it's a positive for EPAM. Can you just give us any sense if there's any changes in the relationship there or perhaps the opportunities that you see with this large client of yours?

EPAM was selected as one of the five preferred vendors. And for those of you who watching us for a long time, you remember that at some point it was the largest account for us and then it go down. Today, one of the top three; basically, much bigger than it was when it was the largest one.

But, again, similar like with UBS or any other accounts, it's extremely difficult to predict the future. That's why we really are focusing on right balance of accounts and diversification of growth in this piece as well.

Okay. And as it relates to the new executive appointment that you announced today with Larry Solomon, it's interesting that you're hiring somebody who has extensive North American experience. Does that tell us anything about your strategy of perhaps building up delivery here in the US or North America, or just increasing your onshore ratio going forward?

I think you need to understand Larry spends significant time with his previous employer. And he was responsible for operations (inaudible) globally challenge was covering all locations and the growth across several 100,000 people globally. His last three years was focusing on North America, which is clearly beneficial for us. But Larry very well understands the global picture as well.

Okay, fair enough. Thank you.

Arvind Ramnani, Pacific Crest Securities.

This is Jason Washburn in for Arvind. I guess we wanted to touch a little bit on kind of Anthony leaving. And we feel that it's certainly surprising. We were just wondering if there would be a transition time for when you hire a new CFO? And basically is the deadline extendable if no CFO is hired by then?

Well, the transition time frame is about nine months. I mean, I've committed through Q3 of 2017. We are going to begin the search immediately. And, quite frankly, we're fairly optimistic that we can find somebody within that time frame and still have an adequate transition to ensure that there's a smooth transition.

So that's -- we haven't really discussed extending beyond Q3 of 2017 at this point because we thought that that was -- nine months was more than sufficient. But if we (multiple speakers) --

I think if we see any difficulties to fulfill this position externally and internally, then we can come back to conversation. But that's all we can share right now.

Okay. Thanks, guys. That's it for me.

David Grossman, Stifel.

Sorry if this has been asked; I jumped on a few minutes late. We can take this off line. I'm just wondering, is there a way to look at the mechanics to get to 20% growth going forward? And by mechanics, I mean is there a way to look at, for example, how the top 20 may be growing, vis-a-vis how the balance of the portfolio may be growing. Because it sounds like we're going to have a more diversified mix going forward than we've had historically and I'm just curious if you have some thoughts on how that may play out between those two buckets?

I think as you can see, even historically, the vast majority of our growth is coming from outside of the top 20, where we are seeing growth in excess of 40% year over year. And the top 20 -- clearly, as they become much larger clients, you see the growth rates being more in line with that 20% and in some cases a little bit lower depending on the size of the account. So I think we still feel that the majority of our growth is going to be coming from deeper penetration into those existing accounts, many of which are currently outside of the top 20. And as we continue to expand, that's where we get confidence in our over 20% growth looking at the availability of the penetration in those particular accounts.

And I'm sorry, Anthony, what was the growth outside of the top 20 this quarter versus where it's been?

For this quarter, the growth outside the top 20 was actually 43%. And historically it's been -- this year we were at 45%. Last quarter we had a 50% growth. It's always been in the high 20%s, 30%s, and it's been trending up over 40% for at least the past year.

Okay. And then just looking -- going back to the utilization challenge that you're facing right now -- and I think I understand the dynamics when you're running a global model here. So, what are the mechanics of how you get back to a normalized level when you think about rebalancing the workforce to achieve higher utilization? Is there an opportunity to keep people in the same locations and redeploy them in other work? Or is it a lot more complicated than that that you try to work through this particular issue?

The reality is always more complicated than (inaudible) and that's kind of what it is. But we do believe that in locations where we have more capacity than we needed like during the last quarters, it's a very good quality of the people. And we will be able to bring new clients there. So we clearly are on the path to deploy these people during the next several quarters.

So should we think, Arkadiy, then, of going forward at least the next couple of quarters that we would expect headcount growth to moderate over the next couple quarters as you absorb the capacity? Or is that hard to do based on the geographic mix?

We do believe that -- again, we don't know if it's one quarter or two or three quarters exactly. But we do believe that with the next several quarters we will bring in the blended utilization to the norm across EPAM.

Right. But just in terms of what we should expect to see on a reported basis going forward over the next couple quarters, should we expect headcount growth overall just to moderate to reflect (multiple speakers)?

Yes, headcount -- clearly that means that headcount growth will slow down versus current rate.

Right, okay. And then as I looked at -- I saw the attrition rates ticked up a little bit, and it has been ticking up over the last three quarters. I think you were running in the 7% to 8% range last year. And now, you started the year at 8% and you're now at 10.5%. Is that dynamic reflecting what we're seeing in the slowing demand in some of these larger customers, or is there a different dynamic that's driving that?

Again, I think volunteer dismissals probably exactly at the level during the last couple of quarters. So 1% to 2% volatility, it's probably specific junior range which was built up and become unnecessary. But it's very small.

And I'll just, David, come back. When we were down at the 7% or 8%, we were saying at that point we didn't think that was a sustainable level. That was unusually low. We saw attrition drop quite a bit over the past couple of years. So we expected it to tick up a little bit as we moved forward.

Okay. Great. Thanks for that. And then just, Anthony, is there any way at current spot rates you can give us a sense of what that FX impact would look like in the fourth quarter assuming that current spot rates have held steady?

Haven't really done it on a current spot rate. What we actually do when we are doing our forecasting is we actually get revenue -- sorry -- currency forecasts from a couple of different banks. And we use kind of blended forecast as opposed to just carrying the spot forward. And we are still thinking in Q4 that the headwinds -- year-over-year headwinds are going to be about 2% -- 1% to 2%, and that's what we're building into our models for right now. Based on forecasts, not just spot.

Got it. All right, guys. Thanks very much.

Ariel Hughes, Wedbush Securities.

Hi. This is Ariel Hughes for Moshe Katri. Thanks for answering my question. Apologies if this has been hit a few times already. But can you please clarify what is going on the utilization rate and what kind of challenges you guys are facing in utilization? Thank you.

Don't know what we can add. Again, we can just repeat ourselves. Because we have some commitment from clients to grow in specific locations. We prepared for this. Then it will slow down. And then it was actually postponed for some unclear time period. So basically, we have got extra capacity in very specific locations, which we're protecting from assigning to other accounts because of our commitment.

At the same time, we continue to hire in other locations because we need to continue to grow it. Also when (inaudible) kind of happened, we tried to compensate for this revenue in other locations as well. Continued to grow where we could. So, because the reassignment of resources is not immediate. Let's bring some [disconnect], number one.

Number two, our expectation with India wasn't exactly in line, and we've got lower utilization than we expected initially. And, again, this is integration new for us locations. We're learning a lot of new and we absolutely committed to grow in this area. But we had some slowdown there, too.

Between these two factors, actually the whole disconnect on utilization. But in our view, it's very much fixable and that's what would be our focus during the next couple quarters.

Sounds great. Thank you.

Vladimir Bespalov, VTB Capital.

Could you comment probably a little bit on the financial services view and just your client base and the UBS? Do you see any bright spots? Do you see any stabilization of the situation maybe not over the next couple quarters but in the longer-term? And do you see opportunities for you to grow here?

And my second question is on your strategy. You have a pretty big cash pile on one hand. On the other hand, you have some extra capacity in some locations. And as you mentioned, how do you see strategically you growing? Are you going to make any new acquisitions and grow maybe new verticals, new areas and things like this? Thank you.

We do believe there are many opportunities in the financial sector. Everybody knows about the FinTech revolution, and it means that clients will have to adapt. And we've been preparing ourselves for this too. So we invested a lot in training in new technologies and new areas. At the same time, I don't think we can comment anything longer-term right now. It's typically about our expectation in 2017, we will be talking next time.

In regards to M&A, nothing changed here too. We definitely slowed down during the 2016. But it's not because of lack of opportunity; that just didn't happen. And we still consider different options how to bring expertise to EPAM.

So we're probably not going to go with specific new verticals. I think we have balance right now. It might happen that we will increase some focus on some emerging areas. We have good ways to (inaudible) there. But I don't think we are going to expand dramatically from the areas where we are right now.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Dobkin for any closing remarks.

As usual, thank you, everybody, for joining. I think we addressed questions. And in summary, we have challenging quarter based on utilization, but we are pretty confident in our ability to continue growing. And I hope to update you on this during the next call. Thank you very much.

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