Epam Systems Inc (EPAM) 2016 Q4 法說會逐字稿

Greetings and welcome to the EPAM Systems' Q4 2016 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, Mr. David Straube, Senior Director, Investor Relations. Thank you Mr. Straube, you may begin.

Thank you, operator and good morning everyone. By now you should have received your copy of the earnings release for the Company's fourth quarter and fiscal 2016 results. If you have not, a copy is available at epam.com in the Investor section. With me on today's call are Arkadiy Dobkin, CEO and President; and Anthony Conte, Chief Financial Officer.

Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the Company's earnings release and SEC filings. Additionally, our references to reported results that are non-GAAP numbers have been reconciled to GAAP and are available in our Investor Relations' materials in the Investors section of our website.

With that said, I will now turn the call over to Ark.

Thank you, David and good morning everyone. Thanks for joining us. I would like to start from a simple reminder, that the last week, we've got an exciting opportunity to come back to New York Stock Exchange to celebrate the fifth anniversary of our IPO and to ring the closing bell. We are proud to see today five years later, that we have been able to mitigate successfully many challenges during that period. Moreover to bring continuously significant value to our clients, and some results to demonstrate year-after-year strong growth despite geopolitical uncertainties, economic instabilities, and massive global competitors, could just started to notice EPAM brand recently.

EPAM changed a lot during the past five years. We have more than tripled the company size, significantly expanded our horizontal and vertical capabilities, and started global diversification of our delivery locations. We also invested into developing many needed corporate functions that practically didn't degrees by exam. So at this point I would like to state that today five years later, we are very confident EPAM is in much better position to continue growing, than we have been before.

The such brief (inaudible) into the past, we feel especially happy to report that during the last year, we reached quite a milestone we could only dream about in 2012. Our annual 2016 revenue crossed a $1 billion mark and reached $1.16 billion which correspond 26.9% year-over-year growth, or 29.4% in constant currency terms. And in addition, which was increased even more important represent 24% organic growth in constant currency.

Let us look in more details, what was happening with EPAM in 2016. Now let's start some delivery capabilities, first in 2016 while traditionally benefitting from our strong software engineering expertise from our strong software engineering expertise. We continuously focused on investing into the quality of our technology practices, engineering productivity, industry accelerators, maturity of our delivery processes and tools. The overall goal was not only to maintain our advantage in that area, but also to differentiate EPAM further along against growing competitors with our ability to engineer and to deliver successfully complex products and solutions which in high demand across our strategically targettted markets.

During 2016, we continue to mature our digital and data capabilities as well. We are statistically -- we are focusing on integrating those capabilities with our core engineering and advanced technology practices that allow us to deliver to our customers much more diverse programs in comparison with the past, ranging from our commercial software product development to digital end-to-end platforms and now to business in digital strategy executions.

In confirmation of that, we'd like to share that during the last year, we have won six Customer Innovation Awards in partnership with several auto clients, two of that Design Awards and has been listed as one of the top digital agencies in Europe. EPAM has also been recognized in over 60 industry analysts' reports for increasingly comprehensive capabilities in driving agile digital transformation across all of our key verticals. In fact, we were named the leader in digital platform engineering services in the Forrester Wave digital platform engineering services in Q2 2016.

Lastly, in 2016 we continue to expand our global delivery footprint which brought very important hands on experience in several new geographies and allowed us much better understand how to integrate and develop from one side and positional benefit from and as such new global delivery locations within EPAM and within our clients.

Now move into our vertical performance. For 2016 we had very strong growth across three of our six industry verticals including media and entertainment, life science and healthcare, and emerging verticals, which all grew over 40% in the year. We see very promising opportunities across all of those segments where we are present already at a good number of Fortune 1000 companies but still only at the initial stages of potentially significant growth this year.

Financial services finished the year with 17% growth, which reflected a Q4 growth of 4.6%. It's important to note that, without the effect of UBS, our growth in Q4 would be 21.2% and over 30% for the full year in reported currency, which represent a very healthy growth of that segment across Europe, North America and Asia. Travel and consumer finished the year at 20.5%, which reflected a Q4 growth rate of 10.8%. We have to review this temporary slowdown to currency impact in euro zone approximately 5% global in part. [Present] and additional retailers and consumer brands to show positive returns on investment in digital, and in addition to the completion of significant milestones in multi-year projects with two of our clients. As we expand our capabilities in that segment, we expect to be able pro-actively deliver innovative solution, not only in platforms but also in business models, including helping our customers address digital disruption and to support our over 20% growth here in the long run.

Lastly our traditionally strong software and high-tech portfolio grew respectfully 23% for the year, which allow us to give this important segment a strategic target of 20% of our EPAM total revenue. Overall in 2016, with specification of our client's concentration continues along the positive trend. For the year, our growth rate outside of the top 20 accounts was 44.3%. Growth in the top 20 was 12.5%.

Turning to our people and talent development, we are very well recognized the simple fact that we have to continuously invest in our people to stay relevant on the mark. Simply put the commitment of talent being the single biggest factor in our sustained growth. In the end of 2016, we brought on board a very senior HR and talent leadership team. To elevate our workforce planning management and engaging functions (inaudible). That also should allow us to [enter] EPAM into much more welcoming environment for diverse, multicultural talent and in turn well positions the company to hiring new highly skilled multi-disciplinary hybrid teams capable of solving the most complex technology challenges and delivering the most innovative industry solutions.

In addition we were continually investing in our internal employee engagement software system as well as in engineering, productivity tools and processes. We also invested significantly in 2016 in very robust internal training initiatives through a network of collaborative global events, as well as in-person and online courses. In result of all (inaudible) we believe that EPAM today is much better position to continue hiring and developing our global talent. Specific to headcount in Q4, we ended with over 19,680 professionals, which is a 22% increase year-over-year. Before I hand the call to Anthony for the update on our financials and 2017 outlook, let me color a few other topics which weren't focused during our previous update three months ago.

First of all, UBS concern. In January, we announced strategic agreement with UBS, which extend our nine-year relationship with them for the next three years. This agreement which is valid at more than [300 million] allows EPAM to continue focusing on innovative end-to-end solutions and should help our client to reduce time to market and improve ROI on technology investments.

Utilization concerns, we have made significant progress in improving our utilization since last quarter. Finishing Q4 at 75.9%, which is almost a 4% improvement in comparison with Q3 (inaudible). It's still not at the level where we would like to be, but we are very confident in our ability to bring into to more normalized level in the first half of 2017. With that let me turn it over to Anthony for detailed financial update for 2016, and our fiscal 2017 guidance.

Thank you, Ark, and good morning everyone. I'll start with some financial highlights, talk about profitability, cash flow and on guidance. As Ark mentioned, we are pleased with the quarter having delivered strong topline performance, generate significant free cash flow and improved utilization. Here are few key highlights from the quarter.

Revenue closed at $313.5 million 20.5% over fourth quarter of last year and 5.1% sequentially, which represents a year-over-year constant currency growth of 22.8% and organic constant currency growth of 20%. From a geographic perspective, North America, our largest region representing 58.7% of our Q4 revenues grew 26.8% year-over-year. Europe representing 33.9% of our Q4 revenue, grew 12.3% year-over-year or 19.3% in constant currency. CIS grew 14% year-over-year and now represents 4.2% of revenue, and finally APAC decreased 2.8% and now represents 2% of our revenue.

Moving down the income statement, gross margin for the quarter was 36.8% compared to 39.2% for the same quarter last year. The primary driver for this decrease was utilization which ended at 75.9% compared to 78.8% in the same quarter last year, but was an improvement from the 72% in Q3 of this fiscal year. Utilization this quarter reflects our continued efforts in balancing supply and demand across our business. Non-GAAP SG&A which excludes stock compensation expense and certain other items, came in at 20.2% compared to 21.3% in the same period last year. We continue to leverage our SG&A spend strategically focusing on talent acquisition, work force planning, balancing the bench and the hiring functional management recurring value to our long-term sustainable growth strategy.

GAAP income from operations increased 17.7% year-over-year to represent 11.9% of revenue in the quarter. Non-GAAP income from operations for the quarter increased 9.7% over prior year to $51.5 million, representing 16.4% of revenue. Our effective tax rate for the quarter came in at 22.7% driven by shift in geographic mix of revenues, and for the quarter we generated $0.46 of GAAP EPS, and $0.77 of non-GAAP EPS, which reflects the tax effect on non-GAAP adjustments and is based on approximately 53.4 million diluted shares outstanding.

Turning to our cash flow and balance sheet, cash from operations for Q4 was $53.7 million compared to $11.8 million in the same quarter last year. Free cash flow came in at $44.3 million resulting in adjusted net income conversion ratio of 108%. Our strong quarterly performance and ongoing DSO improvements were the primary factors in the strong free cash flow performance. This quarter our IR DSO was 59 days and our unbilled DSO was 18 days, for a total of 77 days compared to a total of 95 days in the same quarter last year, which is driving most of the cash flow improvements. We continue to be pleased with the improvements in this area, I would expect DSO to normalize in the low 80s during fiscal 2017.

Let me sum up where we finish the fiscal year. Revenues for the fiscal year closed at $1.16 billion or 26.9% growth over 2015, which represented a constant currency growth rate of 29.4% and makes fiscal 2016 a milestone year for EPAM having crossed the $1 billion revenue mark. Organic constant currency growth for the full year is 24%, further demonstrating our ability to drive growth through an ongoing challenging marketplace. GAAP income from operations increased 26.2% year-over-year to represent 11.5% of revenue for the year.

Our non-GAAP income from operations increased 20.9% over prior year to $191.8 million representing 16.5% of revenue. Our effective tax rate for the year came in at 21.5% and we generated $1.87 of GAAP EPS, and $2.90 of non-GAAP EPS, which reflects the tax effect on non-GAAP adjustments and is based on approximately 53.2 million diluted shares outstanding. Cash from operations was $164.8 million compared to $76.4 million for fiscal 2015, and free cash flow came in at $135.5 million or 88% adjusted net income conversion.

Turning now to the guidance, revenue growth for fiscal 2017 will be at least 20% after factoring in about 3% estimated currency headwinds, meaning we expect constant currency growth will be at least 23%. We expect GAAP income from operations to be in a range of 12% to 14% and non-GAAP income from operations to be in the range of 16% to 18%. We expect our effective tax rate to be at least 19%, this reflects the adoption of the stock-based compensation pronouncement ASU 2016-09, which will be effective January 1, 2017. For earnings per share, we expect GAAP diluted EPS we'll be at least $2.45 for the full year, and non-GAAP EPS will be at least $3.38 for the full year. We expect weighted average share count of 54.8 million fully diluted shares outstanding.

For Q1 of fiscal 2017, revenues will be at least $315 million, reflecting a growth rate of at least 19% after 3% currency headwinds, meaning we expect constant currency growth will be at least 22%. For the first quarter we expect GAAP income from operations to be in the range of 10% to 11% and non-GAAP income from operations to be in the range of 15% to 16%. We expect our effective tax rate to be at least 20% and for earnings per share, we expect GAAP diluted EPS will be at least $0.49 for the quarter and non-GAAP EPS will be at least $0.72 for the quarter. We expect a weighted average share count of 53.9 million fully diluted shares outstanding.

And finally, a few key assumptions, which support our GAAP to non-GAAP measurements, stock compensation expense is expected to be around $55.4 million with $13.4 million in Q1 and $14 million in each remaining quarter. Amortization of intangibles will be about $7.5 million or about $1.9 million per quarter. FX assumptions is expected to be around $7 million loss for the year with $1.6 million in Q1 and $1.8 million each remaining quarter. The tax effect of non-GAAP adjustments is expected to be $18.8 million for the year with $4.2 million in Q1 and $4.9 million in each remaining quarter.

With that let me turn the call back to Ark.

Thank you, Anthony. A few points before we turn to Q&A. Our 2017 outlook reflects a continued strong demand policy [arises], we should expect the market that reserves to be disrupted and go through the natural cycles. At the same time we are very confident that our strategy of combining our traditional technology, and then we need into average with proven capabilities in digital transformation design and emerging consultancy should enable EPAM to mitigate those events responsibly and to derive result from a business which has very solid fundamentals in our view with industry leading growth rates. With that let me turn the call back to operator for Q&A.

Thank you. At this time we'll now be conducting a question-and-answer session. (Operator Instructions) Darrin Peller, Barclays. Our next question comes from the line of Ashwin Shirvaikar, Citi.

Hi, I was wondering Ark if you could provide an update on what you've talked about with regards to the supply demand mismatch on the 3Q call. From your guidance, it seems like it will still have some impact into 1Q and then it should be life as normal. So part of the question is to get better part of it is what can you do in the future so that this sort of thing may not happen.

Thank you Ashwin for the question. So I'll remind what we're showed in the last quarter, and to the mismatch was mostly driven by two components, one of them was UBS change in plans for their future growth and our preparedness to provide services and basically hiring people in specific locations for this client. And the second was our integration processes in US and kind of our new experience of creating the new geography and between these two basically, it was a mismatch and we decided not to do any reduction in headcount because we know that we continue grow -- there is relative pretty strong demand we will need to hire people like one quarter later anyway, so we decided to (technical difficulty) stay as this and continuing investing in the talent. So that was it, this March which starting to happen actually not even last quarter but second part of the last year. As we mentioned already today versus Q4 versus Q3, Q4 actually was outperforming practically 4% better on utilization, at the same time it would take probably another quarter to get to normal or maybe even two quarters, it's very difficult to predict, but definitely there is a right progress.

How to eliminate this kind of things in the future. It's much more difficult question because sometimes not necessary, it completely depends on us, and there is some level of unpredictability in client situation in the market and being honest of this type of things will happen in the past as well that is relatively volatile kind of history in utilization difference on some clients, when it's biggest clients it's more noticeable. So, but on another side as we mentioned, we are paying much more attention to this it's another lesson for us and we also brought additional experienced people from outside who are dealing with these in the past in bigger scales. And we hope that we will be managing this as much more closely right now.

So that's all I can share.

And then the other question, I had one the numbers question. So let me quickly hit with regards to for free cash flow should we expect roughly [90%] conversion rate again this year. But with regards to specific vertical, I've noticed that there is a lot of healthcare-related (technical difficulty) and hiring and capability improvement in your base at the EPAM to some of my checks. I was wondering if you can give us an update on the particular vertical?

You mean like life science, and healthcare?

Correct, yes.

We're pretty optimistic about this when we started like two years ago. As we said, today it's growing pretty strongly right now in excess of 40%. So, at the same time, it's relatively a small business because life science and healthcare only 10% of our business today, but we definitely very interested in this sector and we are planning to invest (technical difficulty) we built in additional expertise, we've built in like considering to build some consultancy around it, so, again all I can say, we think it's one of the growth area for us.

And your question on cash flow at the beginning, we don't give specific guidance at this point around cash flow or cash flow conversion. Clearly 2016 saw improvement, some of that improvement was driven by or most of that improvement was driven by the improvements in the DSO. So we had some pick up in 2016 that was recovery from a kind of late 2015. We're working to stabilize and normalize DSO and maybe at some point in the future we can talk about guidance around that number, but at this point we're just issuing kind of a DSO Guide, which is kind of to be in the low '80s is where we expect, and we're filling our cash flow and then possibly sometime in the future we could talk about guidance around free cash flows and conversion.

Jason Kupferberg, Jefferies.

Good morning guys. I just wanted to start with a question around some of the underlying assumptions in the 2017 guidance specifically for pricing, utilization and revenue growth at UBS.

Sure, pricing, we are anticipating pricing to be low-single digits starting 2% to 3% percentage roughly what we're putting in, and that's in constant currency, in reported it will most likely be zero or possibly less than zero based on what we see as far as the currency assumptions. As far as utilization, our guidance is the same, what we're looking to get us back in range between 76% and 78%. So we need to get ourselves back into that range for the year. And we don't provide specific guidance on customers, so for UBS, we're not giving any specific guidance there.

(multiple speakers) probably there is a deal clearly.

Are you anticipating any share loss within the UBS account.

All we can share is that we, we have this deal which actually brings stability and predictability for us and actually is a flow up, how much would go up, it's very difficult to predict right now. Its looks pretty, pretty stable and we are optimistic.

Okay and then just on the margin front, I think the EPS in Q4 came up just a hair below what you were targeting, it sounded like utilization came in about where you were expecting because you did have that nice quarter-over-quarter improvement. Anything else you would call out in margin that fell short of your expectations in Q4?

No, I mean margins came in pretty close to what we were talking about last quarter. So, nothing else within there.

And just have last very quick for me, how much movement in the top 10 accounts was there during 2016 and what might you anticipate on that front in 2017 just given the way the client concentration is decreasing here?

Movement you mean in what?

Well, in other words, if you look at your top 10 accounts in 2015, how many were still top 10 in 2016, and how many of those top 10 in 2016 are expected to still be top 10 in 2017 or will there be some new high growth accounts that will take the place of others in the top 10?

So there is very, very relatively small volatility there, so basically we might expect that two or three accounts from second [dozen] will go to the top 10 which are very normal and we didn't lose any accounts from this combinations. But clearly there is some replacement it's always happen in like the bottom two, three or four accounts as they kind of moving between top 20.

So nothing outside of the normal course every year, we have movement and we don't expect anything different in 2017.

I think it would be multiple equations and concentration in top client, I just again I would like to remind that we are kind of going back five years, in 2012, when practically each quarter we were talking about Thomson Reuters, and just reminder the Thomson Reuters as time was probably has big proportionally as UBS or maybe even bigger. And then the second largest client was probably two last time smaller than that, and Thomson Reuters actually went out followed top 5 within next several years and we still we're growing and balancing. Again just to remind that Thomson Reuters now number three client back and much declined back and much bigger than it was in 2012. What I mean that we have pretty concentration, client concentration and balancing this so, resolve this volatility it's not some kind of the key body for us.

James Friedman, Susquehanna Financial Group.

Hi and thank you for the incremental disclosures, Anthony, with some of the financials. I just want to ask Ark in some of your prepared remarks, I think, I mean you're going kind of fast, but I think that you mentioned that you completed some milestones at two clients, I thought in the consumer vertical. Did I get that right or could you repeat what you said about that, you use the word milestones if you could revisit that for me.

What I mentioned is some in our view very temporary slowdown in retail and consumer, vertical was as a result of multiple reasons and one of them was two big programs which we finished.

Okay. So would you anticipate that projects return from those customers, or are you moving on, how should we be thinking about that.

So this projects actually continues just kind of increase was slow down, and kind of flatter for these two programs which we potentially might start new programs there or like in new clients. So that's why we said we considering this pretty temporary.

Got it. And then just maybe one more. I thought in your prepared remarks, you called out media and entertainment, life science and emerging, if I could just ask, if we were to overlay those verticals because you had a big surge, this is on page 19 of the slides. You don't have to look at, but it's the one where the $10 million to $20 million accounts you got a big surge in that category, as my question is how much of the opportunity in media and entertainment, life science and emerging would we find in say, the top accounts another top 10 or 20 accounts of the company.

So we already have number of accounts, several accounts which in our categorization below to merge in or to life science which is among the top 10. We have several of them and in our view we -- very far from penetration this account, there is a pretty good opportunity to grow there as the same like across many life science accounts which very light forms, life science accounts, which share very large forms, were our budget share is very, very small still. I think we are having very, very strong opportunities across both segments.

Darrin Peller, Barclays

Thanks guys, just a question, first on the organic assumption versus inorganic in 2017, I guess the bigger picture question around the deal activity around tuck-in specifically around digital capabilities we've always done, it's been a little slow on that front. So, if you can touch on that, high-level what you're looking for other things in the pipeline on that front as well. Then just a follow-up question as well, please.

Okay, I think first of all our guidance for 2017, it is inorganic guidance. So we expect organically grow at least 20%. And in the constant currency it's 23% so it's in our view pretty strong organic growth. So we're not assuming any acquisitions in these numbers. The second thing, I'm not sure I had a comment you mentioned with our digital not growing fast (multiple - speakers).

It was acquisition strategy around digital

I mean, I guess on that note, what's I mean another you bring it up, you guys have called out there being something like 70% plus digital of your revenues before. Maybe if you could just confirm if that's about right, if you've really never talked about that, and I guess it's how much in terms of new acquisitions, we could expect going forward given your point organic is the guidance is organic. It's been a little while since you've seen a pretty good [flow] of tuck-in deals you guys did a bunch, over the last two years, but really the last I think the last year it's a little slower, so where you are on that now?

Our M&A strategy hasn't changed, 2016 was a light year not for lack of blocking, I mean we have a pretty robust pipeline. We went through a number of diligence processes through 2016, nothing just really came to formation and closed for a variety of different reasons. So we are still looking pretty aggressively. We have a pretty healthy pipeline, looking for again capabilities focused and looking for that tuck-in type deals. So that nothing is changed there. Ark going to add?

This is normal. So as Anthony mentioned strategy is same when we ask about acquisitions pland and when they, this is very binary is going to happen on that, so very difficult to talk about probably this year, so we are looking for good opportunities and we have a pipeline so.

Alright, and then I appreciate that and just a quick follow-up on the topic of immigration reform which obviously has been coming up a lot lately. You guys have touched on it being not as material for you and more manageable, given the size of your numbers of H1Bs. Again, can you just refresh us on where you stand on that, if, let's say hypothetically the wage amount were to go up dramatically or anyway, any other changes you could think of that's worth mentioning now would be helpful.

So first of all, we're still seeing this is too early to understand exactly the parameters of these changes. And it's kind of very speculative assumptions in any case but, in our case we have little bit over 100 people who is in H1 from our -- probably such an 100 billable engineers and consultants in United States of 1000 people. So basically, it's less than 10%.

Okay. So I guess you could always manage that. In other words, whether it's through mix shift (inaudible) or other changes if need be.

That's right.

Okay, I'll leave it at that and go back to the queue. Thanks guys.

David Grossman, Stifel.

Thank you. Good morning. So I'm wondering if you could just help us understand the composition of the gross guidance for 2017 and what I mean by that. Just look at the relative contribution of growth from the top 5, top 10, top 20 and beyond and how that compares to prior years, and I realize that the UBS dynamic maybe impacting that significantly beyond UBS or is there any other things we should think about in terms of where the source of growth will be in 2017.

Hi David. Clearly UBS growth is going to be different than it was in previous years. So this probably not a surprise to anybody right now. So at the same time it would be very difficult to talk in parameters like top 10, top 20, top 30 because there is multiple dynamics between different clients. We expect okay, let me rephrase it. We have very strong client base in our top 100 clients, these multiple Fortune 1,000 or Fortune 2,000 clients where we have revenue from couple million to $20 million, $30 million and penetration of this client base in comparison with our competitors is very, very low. So we have dozens of clients which could be double or triple in the revenue from the budgeting kind of capabilities, and from capabilities of EPAM right now is services issues. We can provide. So I think we are pretty confidence that we can grow 20% plus organically during the next years.

So historically when you mix shift it away from the top clients, you've had a favorable margin impact, should we expect the same thing as we migrate through the course of 2017?

I'm not sure that the margin impact directly related to shifting from the top clients and then again I just mentioned couple of minutes ago the history which was slight practically four years ago when we were replacing Thomson Reuters which was growing practically -- again proportionately from the share of our total revenue from gross perspective and it was good account from margins for interview when the shift happened, we were able to mitigate it. Yes, right now we are practically 2.5 times, three times bigger than, but proportions and similar and with our $1 billion revenues you proudly kind of -- talking today we still pretty small company in this series of market.

Right. Your margin assumption or you're such of improving margin next years, primarily driven by the utilization number then?

Well, utilization will contribute definitely. So it was an unusually low in 2016. So we'll get some pick up from utilization, which will help margins, but we also have to balance that against continued investments into the business and where we need to continue to support the growth.

There is main difference in margins impact versus today and three, four years ago is still going to be currency, because if you think what was happening with pounds and euro versus several years ago and base currency base while delivery locations there is -- there is a challenge here. So this is a main impact which we've seen right now. And very low kind of predictability, how these currencies will, go ahead.

And then just quickly back to the kind of visa thing even though you're not heavily dependent on visa and I think we all understand that there are strategic arguments for increasing US staffing levels. I think this is a topic you you've started lot about in the past, how is your thinking evolving on the topic. And what should we expect to see some in the US over the next 12 to 24 months ?

I think I also mentioned on yes, I think we also mentioned already today in our prepared notes that we really focusing on, how to bring EPAM to more welcoming home for different type of people coming from different locations from different cultures and again our investment in talent management and talent acquisition across North America and Europe this is exactly the answer which you -- to your concern. We put it much stronger team for talent acquisition from local perspective, we're going to focus on this and to kind of address and manage this potential risks. At the same time like we also need to, like EPAM for example, historically or versus pretty low proportion of onsite structural resources. We're strategically increasing this but we still very well positioned how to work in this global distributed world and still deliver very complex solutions without necessity to have massively start on-site positions.

Anil Doradla, William Blair.

Hey guys, a couple of questions. So a lot of questions and focus from the 2017 guidance. So if I rephrase the question Ark and Anthony what would you say would be the top one or two challenges in achieving the 20% guidance.

So. I we've -- again in general the business model in services relatively (technical difficulty) there is no miracles here, there is no assumption unusual happening. At the same time there are too many variables and too many parameters you have kind of balanced together. So I still do believe that all fundamentals are pretty strong and challenge in 2017 would be the same challenges you have had in 2016 and 2015 and before and mainly in the future too. Balancing between clients demand and right talent in the right places in the right time. So this is the main challenge and every analysis variations of this. So clearly currency and geopolitical issues, but we living through this already for the last three years of the minimum and if you think about it where EPAM originally coming from so that was a challenge for the last 20 years. So, I think it hasn't really knew really kind of responsibly and carefully managing what's happening, what we can manage and trying to addressing each very quickly when it's more a surprise for us and less predictable. So I don't know what as on (inaudible) put in.

Well, I was hoping that there is something more specific but what you're saying is that it's just business as usual. The same issues are going to play out in 2017.

We do think that with our size of the company today, and configuration of our capabilities and client demands which we're seeing there is a pretty good opportunity for us to grow. That's what we are very confident.

And as a follow up, when I look at the 2017 outlook, obviously hiring is going to be a big component, any particular geographies that you're going to focus on as you build out the year.

So it's also pretty much in line with our previous performance. We still pretty optimistic about capabilities and ability to grow in Eastern Europe. We improving our capabilities in India right now. China for us still mostly in market capabilities, but we do and we started to do some delivery for Global Clients. And clearly in North America and Western Europe would be a focus for us, we still planning to increase proportion of in-market resources. So that would be a focus area and again we're already comment on this.

Joseph Foresi, Cantor Fitzgerald.

Hi, can you provide an update on spending in financial services that particular vertical any impact or change given some of the political changes in either Europe or the US.

I think we provided some comments like in our remark earlier today, where we gave a number, percentage of growth for the vertical result UBS. And this is pretty strong number taken in account that it's not even accounted for FX headwinds so because without UBS I think it was 22% growth, without currency impact. We think it's still pretty, pretty strong with all as you mentioned geopolitical impacts and some things which we can't predict. We're optimistic about it, we also investing a lot of special competency including like payments and block share and experimenting visits and hiring the first projects and actually some of them pretty like. So we optimistic that we will find opportunity to grow in line with our total expectations.

Good and then on UBS I know you're not giving client-specific guidance, but any concessions that were given when you signed a three-year deal, I guess I'm concerned maybe more on the pricing side whether discounts given for minimum volume commitments and things like that that you could provide us with.

Well I can say that our expectation is pretty balanced with our historical metrics around this account. Okay, so clearly, there are more complex deals there, but I think again flexibility to most parts and we're very optimistic from the point of view with the level and quality of the services we provide flexibility which we have now would benefit us in the future.

Okay and then last one from me on a labor side, any trouble finding talent at this point, I think you remain fairly concentrated in Eastern Europe, and how do wage increases in attrition look like in that region at this point, thanks.

I think we -- and again, this is exactly like fundamental question for our business and we probably answering this in each call and my traditional answer would be that there is nothing new in challenging to bring talent to the company. This is growing challenge for the last probably 20 years started like from before that consideration and it's a global challenge. So it's not just about Eastern Europe, it's about Silicon Valley and East Coast US and London, but we're investing heavily in trainings, we investing heavily in education internal people. We expanded during the last several years of geographical footprint so we're addressing this challenge you can see during the last five years and we're pretty comfortable with our current base of only 20,000 people comfortable in comparison with many of our bigger competitors that you would be able to handle this challenge.

Thank you.

Steve Milunovich, UBS.

You mentioned that your pricing will be fairly flat this year, what's going on with wages and are you going to see some margin pressure if wages have to go up.

Yeah, actually, wage inflation is targeted around the same range. We're looking at right now just under 3% wage inflation globally and that's in constant currency. So we do like to see some benefit from currency. So right now it's looking at least based on our planning pricing on wage inflation are fairly balanced.

And any update on the CFO search.

We're in the midst of the search where we we're making some progress, we're seeing a number of candidates and we're just betting the candidates in the pipeline, so nothing more to update at this point.

Alright and then finally on the marketing side, this used to be almost a word of mouth business, but kind of what's involved in terms of maturing your sales and marketing effort.

First of all I do believe that word of mouth and services businesses is not (inaudible) so and because we don't need to have like 1,000 clients, we need to have three or four concrete very good ones. So on another side, clearly I hope it's visible for those who are following us for some time how marketing functioning change , how kind of analyst recognition change during the last several years now our brand pretty, pretty well known. So, and the same happening in business development function as well. So but combination of referrals and actually markets and reports from Forrester and Gartner this is so probably very strong sign of change happening.

(Inaudible)

Yes, hi guys thanks for taking the question. Most of my questions have been answered I have three very quick ones hopefully.

Can you speak up please.

Can you hear me now. Sorry okay. Couple of quick ones from me if I may so first one apology if I missed this. How much of the UBS contract is actually factored in into the FY 2017 guidance, is that something you can share.

How much, full contract backed into the guidance and our expectations to the clients, it's all baked into the guidance

Yes, yes. So basically I'm trying to get a feel of what part of the FY 2017 guidance comes from UBS, and what part comes from outside UBS account.

We don't separate that.

Okay, clear. On the, I was hoping to get your thoughts around the pricing environment. I know that this has been sort of touched upon throughout the call from a couple of other guys, but if we sort of ex out utilization and normalize it would you expect gross margins to be relatively stable or do you see any sort of underlying sort of pricing/salary inflation dynamics playing out. So the question is excluding staff utilizations ups and downs normalizing for that. Would you expect gross margin to be relatively flat year-on-year.

The answer is yes, I would expect to see stability. Right now based on the pricing environment and wage inflation we're seeing those two being fairly balanced and allowing us to keep our gross margin stable, absent utilization moves.

Okay clear and last one from me, I was hoping if you could comment a little bit around the potential impact of the EPAMs effective tax rate if we were to see a change in the corporate tax environment, in the US corporate tax rate. So how would that basically is likely to affect your Group effective tax rate, I know it's very much a guesstimate at the moment, but then people are talking about fuming the corporate tax rate from 35% to 20% or even 15%. I'm just trying to get a feel of what that would do to your numbers.

It's very hard to say. I mean, everything right now is completely speculative. So it's really hard to assess or predict what that impact would be on our business at this point. We're watching the topic, we've seen a number of the proposals and all I can say is, at this stage it's much too early to really assess what that impact would be.

Operator, I think we have time for one more question.

Avishai Kantor, Cowen.

Yes, hi, good morning. My first question is how much of your scope in financial services is related to regulatory and compliance work and what could be the effect from a potential deregulation. And then my second question, will the rate of shifting billable employees between delivery location change in 2017.

On the regulatory piece, about 20% is regulatory and we're not anticipating really any dramatic shift based on the visibility we have right now in that aspect of the business. And I'm sorry can you repeat the second question.

Will the rate of shifting billable, existing billable employees between delivery and locations change in 2017.

You mean like how aggressive any type of the relocation program for people from one country to another sound some queries.

Exactly.

No there is no any shift and it wasn't aggressive in any point in the history as well, so in our case.

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

So first of all, we look forward to seeing you at our Annual Investor and Analyst Day on March 14, in New York City. So I just would like on in general that we're pretty confident and I think we address (inaudible) questions and thanks for attending today's call. And if you have any questions David should be able to help, thank you.

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