Epam Systems Inc (EPAM) 2017 Q4 法說會逐字稿

Greetings, and welcome to EPAM Systems Fourth Quarter Fiscal 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, David Straube, Senior Director, Investor Relations. Please go ahead, sir.

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 fiscal 2017 results. If you have not, a copy is available at epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, our 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 risk and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to GAAP and are available in our fourth quarter earnings materials located in the Investors section of our website.

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

Thank you, David, and good morning, everyone. Thanks for joining us. We finished fiscal 2017 in a strong position, with annual revenue of $1,450,000,000, reflecting 25% year-over-year organic growth or 24% in constant-currency terms. Our revenue growth was broad based both geographically and across the majority of our industry verticals. Additionally, we're delivering strong non-GAAP earnings per share of $3.46, a growth of 19.3% and generated free cash flow of $166 million.

In addition to finishing the fiscal year on the strong footing, we continued to evolve EPAM across 3 major pillars of our business: our people; our capabilities; and our key markets and customers. Combination of those is driving our differentiation powered by our unique core engineering and digital business services strengths.

Let's start from people engagement and talent development. In 2017, we welcomed over 6,000 new employees to EPAM, hiring activity across most of our delivery centers and key end-market locations. We attracted and hired highly skilled individuals to build multidisciplinary hybrid teams which is capable of solving the complexity associated with today's business and technology challenges; and delivering solutions that help our clients stay competitive in the fast-changing current environment and be better prepared for tomorrow changes as well.

We are making ongoing investments in our people function, employee engagement ecosystem as well as in advanced training and educational programs, engineering productivity tools and efficient delivery practices. We also ran over 500 events last year from large regional software engineering conferences to very specialized meet-ups, professional communities gatherings, numerous hackathons and innovative jams across all EPAM locations. All that allows EPAM to continuously raise the bar to maintain our talent advantage in the marketplace.

In 2017, over 4,000 students were enrolled in our university enrichment program, the largest group since we began this initiative almost 14 years ago. And we plan to develop that program further as well as start new educational initiatives in the near future.

To increase our access to talent, we continued to expand our geographic footprint in both established and new locations in Central and Eastern Europe as well as in APAC and Latin America. The diversity of our geographic footprint gives EPAM the flexibility to serve clients from over 25 countries, spanning 4 continents across a number of delivery scenarios. As a result, we ended the quarter with over 22,900 delivery professionals, a 17% increase year-over-year; and a net addition of more than 1,315 production professionals during Q4. Our total headcount ended at more than 25,900 employees.

So it goes without saying, our continuing focus on talent and ability to bring talent in ahead of demand is one of the most important success factors in maintaining our industry-leading organic growth rate.

Capabilities and offerings. In fiscal 2017, we continued to invest broadly across our business, adding more scale in our leadership team, more experience in our industry units and expanding service line offerings to support our current and future growth. In addition, we strengthened our partnership relationship with a number of strategic industry-leading, and in some cases, emerging-technology providers to improve our capabilities in our core as well as in up and coming areas of interest.

Last year, we continued to deliver against strong and increasing demand for digital business services and even stronger demand for digital platform and product engineering capabilities, that EPAM has traditionally been recognized for. That demand pushed us to invest more and to bring to a new level such critical engineering capabilities as continuous delivery, continuous testing, advanced cloud deployment and DevOps to deliver high-quality solutions clients expect us to deliver.

Just to bring some color in here. I would like to share that last week, EPAM was included by InfoWorld into the group of tech companies leading in open source contributions by placing us as #14 of the list of top 30, where we were surrounded by the most respectful global software and technology brands in the world. Worth to note that EPAM was the only one representative of large global software services firms on that list of leading open source contributors.

Looking ahead, we are positioned in EPAM to compete strongly in the increasingly demanding market for disruptive technology services, specifically, in artificial intelligence and intelligent automation area as well as emerging blockchain implementation, services which are going to span the full spectrum of our capabilities from consulting, designing and engineering into operations. A reflection of that, EPAM continues to receive growth recognition across our service offerings, with more than 32 industry innovation awards and recognitions in 2017.

Last time, we shared with you a story of expanded relationship and [registered] specific recognition in response to our contribution to innovative thinking, a new type of solutions we are bringing for the client, Liberty Global. This time, we would like to highlight another similar story.

Working with UBS, one of our top clients, we created and delivered solution around digital wealth management, that is accessible to a wide and diverse audience of their clients. In December, UBS and EPAM were awarded the Best Use of IT Private Bank/Wealth Management for Smart Wealth app at the Banking Technology Award. This application is a great example of helping our customers look at their business differently and to react quickly in a market in which both disruptions and opportunities are growing very fast.

The Smart Wealth app is a testament to our ability to deliver on promise of innovation. Combined with our general wealth management expertise, it becomes a significant and a differentiating part of our offering to financial services clients today. We very much value the opportunities to collaborate closely on our innovation initiative with our clients which is delivering significant benefit to both of us.

Turning to markets and client highlights. As mentioned already, we are continuing to drive a number of strategic digital transformation program for top existing as well as in new clients. A few examples to share. We are currently working with a European multinational corporation that specialize in industrial engineering and automation solutions, spanning hardware, software and services to digitize aspect of their core business, including product offerings, customer experience and partner ecosystem. We are supporting this initiative through the creation of digital factory center of excellence that allows a highly adaptable EPAM-led team to understand and respond to the quickly changes needs of the business. This approach gives our clients quick access to our best-in-class technology skills and provides approaches for rapid response and reliable execution on digital initiatives.

Another example is enterprise digital transformation initiative, which just started with a global health services company, which provides health care product and other related services to people in over 30 countries. We are helping them across a range of key priorities which touch on data analytics, legacy modernization and aspects of consumer engagement, where we are applying services and principles and gamification scenarios to improve outcomes. Most of this engagement started just less than 12 months ago, but we expect them to become a part of our top 20, 30 accounts in 2018.

Let's take a look at our vertical performance in the fourth quarter. Financial Services, our largest vertical, finished the quarter with 31% growth year-over-year, which was broad-based across our major geographies and driven by client responding to high-end product development offerings, digitization and payments optimization.

Travel & Consumer grew 24% for the quarter with demand coming from digital transformation projects, including customer experience and personalization efforts as well as a data-driven insight program.

Software & Hi-Tech grew 18% year-over-year for the quarter, with growth coming from combination of startup and large software and technology companies focused on product development and digital transformation.

Media & Entertainment posted 39% growth year-over-year, driven by engagement in digital services for clients in publishing, information services, and broadcasters.

Life Sciences & Healthcare grew only 6% over the same quarter last year. While well progressing over the last couple years, it's still today our smallest segment and the most impacted by some changes just in few clients. Growth last quarter was influenced by the planned ramp-down and conclusion of a few large engagements with existing customers. At the same time, we are very confident that Life Sciences & Healthcare represent significant opportunity for EPAM and (inaudible) onto much higher growth trajectory throughout fiscal 2018.

And lastly, our emerging verticals delivered another strong quarter with growth of 57%, driven primarily by telco, energy and now also by automotive clients. This growth is triggered by our mainstream digital capabilities, but also by several new IoT engagements.

In regards to customer concentration and opportunities across our client base, year-over-year growth within our top 20 accounts was more than 19%, while growth outside of the top 20 accounts was 34%. To understand our client diversity better, it would be important to note that among our top 100 clients, which at its bottom starts at about $4 million in annual revenue, practically 50% are part of the global Fortune 2000; and obviously, creates, for us, a significant opportunity to grow within such a base.

One last note. This year we will celebrate the 25th anniversary of EPAM. We are proud to enter into 2018 with 25% in organic annual growth, and feel very fortunate to be able to rely on our over 25,000 strong talent base, which is capable to deliver top-notch solutions across 25 countries worldwide. We are very happy to contribute to communities across those countries with our expanding social responsibility programs, including such very relevant to our conversation today is EPAM eKids program. The program, which we're constantly improving further in collaboration with MIT Media Lab and their Scratch Program initiative and which covers now 14 countries globally and represent our very strong commitment to developing the engineering talent for tomorrow.

With that, let me turn it over to Jason for a detailed financial update.

Thank you, Ark, and good morning, everyone. I'll start with some financial highlights, talk about profitability, cash flow and end on guidance for fiscal 2018 and Q1.

In Q4, we delivered continued strong top line performance, grew non-GAAP earnings per share and generated significant free cash flow.

Here are few key highlights from this quarter. Revenue closed at $399.3 million, reflecting a 27.4% year-over-year reported organic growth rate or 23.8% growth in constant currency terms. Sequentially, our Q4 growth rate was 5.8%. From a geographic perspective: North America, our largest region, representing 56.9% of our Q4 revenues, grew 22.5% year-over-year; Europe, representing 35.1% of our Q4 revenues, grew 29.7% year-over-year or 22.5% in constant currency; CIS representing 5.8% of our Q4 revenues, grew 73.8% year-over-year or 64.6% in constant currency; and finally, APAC grew 31.5% or 27.3% in constant currency, and now represents 2.2% of our revenues.

Moving now to the income statement. Our GAAP gross margin for the quarter was 36.4% compared to 36.8% in Q4 of last year. Non-GAAP gross margin for the quarter was 38% compared to 38.1% for the same quarter last year. GAAP SG&A was 21.2% of revenue compared to 22.8% in Q4 of last year, and non-GAAP SG&A came in at 19.6% of revenue compared to 20.2% in the same period last year. Our current level of SG&A reflects our continued investment in talent acquisition, extension of our global footprint and expansion of capabilities, with a focus on supporting our long-term sustainable growth strategy. GAAP income from operations was $52.1 million or 13% of revenue in the quarter compared to $37.4 million or 11.9% of revenue in Q4 of last year. Non-GAAP income from operations was $66.9 million or 16.8% of revenue in the quarter compared to $51.5 million or 16.4% of revenue in Q4 of last year.

Our GAAP effective tax rate for the quarter came in at 159.3%, which includes the impact of the recently passed tax reform legislation. Non-GAAP effective tax rate was 17.6%, which excludes the impact of tax reform legislation. Both our GAAP and non-GAAP tax rates reflect the change in the geographic mix of income and the implementation of certain tax planning initiatives.

Diluted earnings per share on a GAAP basis was negative $0.58, which includes a $74.6 million onetime charge resulting from tax reform legislation. Excluding the charge related to this legislation, GAAP EPS was $0.78, which included a lower tax rate offset by higher foreign exchange losses and stock compensation expense. Non-GAAP EPS, which excludes the onetime impact of tax reform legislation and other adjustments, was $1.01, reflecting a 31% increase over the same quarter in fiscal year '16. In Q4, there are approximately 52.9 million GAAP diluted shares outstanding.

Utilization was 78.8% compared to 75.9% in the same quarter last year and 77.6% last quarter. We landed slightly over the top end of the 75% to 77% range we like to manage to and a higher than historical levels. While we continue to hire for the demand we see in our business, we do expect the utilization will trend more towards the top end of our traditional range of 75% to 77% over the medium term.

Turning to our cash flow and balance sheet. Cash from operations for Q4 was $71.4 million compared to $53.7 million in the same quarter last year. Free cash flow came in at $58.5 million compared to $44.3 million in the same quarter as last year, resulting in 103% conversion of adjusted net income. Total DSO was 81 days compared to 77 days in the same quarter last year. We continue to be quite pleased with our total DSO performance in the low 80s.

Now let me sum up how we finished the fiscal year across a number of financial metrics. Revenues for the fiscal year closed at $1.45 billion or 25% growth over 2016, which represents an organic constant currency growth of 23.9%, underscoring the relevance of our offerings in the market. GAAP income from operations increased 29.4% year-over-year and represented 11.9% of revenue for the year. Our non-GAAP income from operations increased 22.3% over the prior year to $234.7 million and represented 16.2% of revenue. Our GAAP effective tax rate for the year came in at 58.3%, which includes the impact of the recently passed tax reform legislation. Excluding the impact of this legislation and other adjustments, our non-GAAP effective tax rate was 20.5%.

Diluted earnings per share on a GAAP basis was $1.32, which includes a $74.6 million onetime charge resulting from tax reform legislation. The onetime tax reform items included in this year's GAAP EPS results were $64.3 million in provisional transition tax and a $10.3 million provisional charge due to a write-down in deferred tax assets. Non-GAAP EPS, which excludes the onetime impact of tax reform legislation and other adjustments, was $3.46, reflecting a 19.3% increase over fiscal '16. In fiscal 2017, there were approximately 55 million diluted shares outstanding. Cash from operations was $195.4 million compared to $164.8 million for fiscal 2016 and free cash flow came in at $165.6 million or 87% adjusted net income conversion.

Turning now to guidance. Starting with fiscal 2018. Revenue growth will be at least 24% reported or at least 22% in constant currency after factoring in 2% estimated currency tailwinds. We expect GAAP income from operations to be in the range of 12% to 13% and non-GAAP income from operations to be in the range of 16% to 17%. We expect our GAAP effective tax rate to be approximately 15% and our non-GAAP tax rate to be approximately 22%. For earnings per share, we expect GAAP diluted EPS will be at least $3.38 for the full year and non-GAAP EPS will be at least $4.03 for the full year. We expect weighted average share count of 57.3 million fully diluted shares outstanding.

For Q1 of fiscal year '18, revenues will be at least $414 million for the first quarter, reflecting a growth rate of at least 27% reported or at least 23% in constant currency after factoring 4% estimated currency tailwinds.

For the first quarter, we expect GAAP income from operations to be in the range of 11.5% to 12.5%, and non-GAAP income from operations to be in the range of 15% to 16%, which reflects the normal seasonality we expect in Q1.

We expect our Q4 effective tax rate to be approximately 11% and non-GAAP tax rate to be approximately 22%. As we review our tax structure, we think there could be a few discrete onetime tax benefits that will impact our Q1 tax rate.

For earnings per share, we expect GAAP diluted EPS will be at least $0.76 for the quarter and non-GAAP EPS will be at least $0.90 for the quarter. We expect a weighted average share count of 56.5 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 $55.2 million with $13.5 million in Q1 and approximately $13 million to $14 million in each remaining quarter. Amortization of intangibles will be around $6.4 million for the year, evenly spread across each quarter. Foreign exchange is expected to produce a $6.4 million loss for the year, with approximately $1.9 million loss in Q1 and $1.5 million loss in each remaining quarter. Tax effect of non-GAAP adjustments is expected to be around $15 million for the year, with $3.7 million in Q1 and approximately $3.8 million in each remaining quarter. Lastly, we expect excess tax benefits of around $15.9 million for the full year, with approximately $5.3 million in Q1.

Our 2018 outlook reflects continued strong demand for our services, underpinned by the diverse set of industries we serve, which will produce varying growth opportunities as they go through their natural cycles. We remain confident that our strategy of combining core engineering heritage with advanced technology in digital business services positions EPAM well for the future.

With that, let's open the call up for questions.

(Operator Instructions) Our first question comes from the line of Darrin Peller with Barclays.

Just want to start off with the overall environment. Ark, look, I mean, obviously, in the backdrop of tax reform and macro, we're hearing some positive sentiment from some competitors of yours as well as from the end market. I mean, have you seen any inflection in terms of client discussions, in terms of ramp and spend in certain areas that maybe weren't there as much last year? Or -- I think, clearly, you're going well. I just wanted to know if there's certain areas that may have accelerated or not, first?

It's very difficult to evaluate this macro kind of changes. It still seems like for us in line with what you have seen before. Maybe, in 6 or 12 months from now, we will be able to evaluate it better. But right now, I think we're having similar environment which we've had before.

Okay. All right. And then just let me go into more specifics on financials. Just one question is on margins and free cash. I mean, you guys have historically been pretty steady with your margin plans to reinvest in the business and maintain them. Just curious thoughts, high-level, again, just given the growth, are there -- I mean, assuming you wanted to change your investment levels. I guess, given your growth profile, I guess, how much room would you consider discretionary on the margin? We're getting this question from clients mainly because you're growing so well right now. If growth were to ever slow down, would you be able to turn on the margin switch if you needed to? Just curious your high-level strategic thoughts on the margin again, if you're just planning on keeping it roughly flat for the next couple of years and reinvesting?

Yes, certainly, we continue to see strong growth in the market and expect to continue to deliver greater than 20% annual revenue growth. And so as long as those conditions exist, I think, you can look at the profitability that we're delivering in this and the guide for, obviously, 2018 is in the 16% to 17% range. It's certainly where we'll operate in 2018. We'd revisit it over time if growth rates ever changed. But right now, we continue to invest in the business and, in 2018, expect to deliver between 16% and 17% adjusted IFO.

Okay. All right. Just last one quickly on the organic versus inorganic assumptions, that was in fourth quarter and embedded in the outlook. And then, I'll turn it back to the queue.

Yes, it was all organic right now.

Okay. And the 2018 guidance also?

So the growth is all organic, and the guidance that we have for 2018, also, is organic. So if we were to announce anything in the future, it would be (technical difficulty).

(Operator Instructions) The next question comes from the line of Ramsey El-Assal with Jefferies.

I had a question about DevOps and sort of continuous development methodologies which you mentioned briefly. Do these give you a competitive advantage? Or do they reduce internal development costs? How is this -- how will your use of DevOps sort of benefit you in the marketplace?

So it's definitely [important] engineering productivity and predictability of quality of delivering solutions. And we talked pretty regularly about our kind of heritage and experience to build professional software products, and this is one of the components which allow us to differentiate ourselves. So it's a pure differentiation of quality of final deliverables. And with this new kind of growing complexity of the digital solutions, it's a very important component of being on targets.

The next question is from the line of Ashwin Shirvaikar with Citigroup.

Good quarter there. My question's on your headcount expectations. Obviously, you got 24% growth, 200 basis points from FX in that -- in there. Jason, you mentioned higher utilization, so that gets you some help. But you kind of ended the year with 17% headcount growth. Are you going to accelerate your headcount -- your hiring plans? Or is there a pricing component in there? Could you talk about that?

Yes, so -- we're -- we continue to see strong demand, and so we clearly are hiring for that demand. What we have sort of talked about is that we are running a pretty high utilization at this point, at I think, 78.8% for Q4 and talked about that utilization level coming down slightly over time. And so yes, that would reflect the fact that we do intend to be doing some additional hiring to support our revenue growth. One of the benefits of running at slightly lower utilization level is it does give you more opportunity to support upticks in demand. And so the upside of that is that you've got some additional resourcing available for unexpected customer demand. But generally, the slightly lower utilization does have some impact on gross margins and that's part of what drove the guidance for Q1.

Is the level of pricing -- I mean, is the level of demand helping your pricing, I guess?

Yes. So from a pricing standpoint, I think that we've got -- we have opportunities in pricing in part because of the demand and the scarcity of resources in the marketplace. And as we talked in the past, we do get annual increases across a significant subset of our top customers, so -- where there are some opportunities from a pricing standpoint. If you started talking about gross margin more broadly, programs like Ark talked about in terms of our university program that brings additional levels of sort of junior resources into the company, also helps from a pyramid standpoint and that's supportive of gross margin, [kind of] management and improvement.

Our next question is from the line of Maggie Nolan with William Blair.

Just building on that previous question, can you talk a little bit about your ability to move employees across engagements or geographies as demand ebbs and flows?

So I think, it's kind of a regular process with optimization of the teams and finding the best opportunities where you can utilize the talent. So when necessary, there is definitely rotation on the projects, and there is some rotation or some movement across geographies, but it's pretty minor in our environment. So basically, we optimize in team composition and again, internal project rotations. It's part of our model. Moving people from one geography to another, it's more on exceptional basis.

Your next question from the line of Lou Miscioscia with Pivotal Research.

Just a -- first a clarification. I think consensus for EPS for 2018 is around $4.17. Obviously, in the press release, you've given guidance that's below that. Would you say that your guidance is just being conservative? Or maybe just an explanation why EPS is not growing as fast as revenue? And then I have a follow-up, if possible.

I think what we're guiding to is profitability remaining reasonably consistent. What we think that we'll see is, we've talked about is, utilization declining slightly. At the same time, we think that we will see some, let's say, some greater efficiency in SG&A, or what you refer to as SG&A leverage. So we're comfortable with being able to deliver 16% to 17% adjusted IFO while growing the business rapidly and giving ourselves the opportunity to support increments in demand.

Okay. Then that ties into the follow-up question. When you look at utilization, a lot of other IT service companies, maybe ones that are bigger than you, a few years ago, had utilization levels at the same level that you had. And basically, they switched things around and just actually started to get utilization more into the 80s. So is there any chance to rethink that? And I'm not exactly sure how operationally to do it, but others have. So just wondering if the goal should be higher there?

I think we have -- for our environment, for our size and for the type of services which we provide and we have a optimal goal. At least, that's our opinion right now. It's very difficult to compare with larger vendors, especially, not only because of the size, but because of the portfolio of services they're providing too.

But it's something that we do revisit over time. And there's always this balance between making certain that you've got resources available to support sort of upticks in demand; and then, of course, not having -- not kind of over hiring. So there's a sort of a fine balance there.

Our next question is from the line of Moshe Katri with Wedbush Securities.

Couple of questions. CIS was up a lot sequentially and year-over-year. Maybe you can talk a bit about that? Where is the sources of the strength that's coming from that specific region? Is that sustainable? And then the other question is going to be related to expectations for wage inflation that's embedded in the model for 2018.

Sure. On the CIS front, so you've got kind of a -- I guess, kind of several things. So, one, you've had a strong ruble between, obviously, Q4 of '16 and Q4 '17. So you've just got appreciation, sort of, and increases in revenue driven by foreign exchange.

The other thing that was -- we actually had some timing of revenue recognition in Q4 for 2 financial services clients. So you had sort of an uptick in revenue that in part was due to sort of a timing of revenue recognition. So that extremely high level of growth that we saw in CIS countries between Q4 of '16 and '17, is not what I would expect on a go-forward basis. But at the same time, we still see good revenue growth there, and it continues to be a nice piece of our business.

And when you're looking at FX, which is complemented, it's still a reflection of the stronger economy in comparison with a couple of years ago. Because oil prices went up, so basically, economy went up, more business there as well.

Okay. And then the wage inflation...

Can you remind me of the second question?

Wage inflation assumptions for 2018?

So clearly, it's something that we're regularly monitoring. I would say that the wage inflation is still what I would call relatively modest. There may have been a little bit of an uptick in 2017, but we feel that it's something that we're able to manage. And again, if I think about gross margin, it's got multiple components. One is the ability to price, which we talked about in the earlier -- in one of the earlier questions, and we do see some opportunities from pricing standpoint. It's the ability to sort of manage the pyramid, and Ark talked about that in his opening response, where we're bringing in additional university students and that is just sort of a customer mix. And so we feel comfortable with our ability to continue to sort of manage (technical difficulty).

So are we still in that 6% to 7% level in terms of wage inflation for 2018?

Yes. I wouldn't say any higher than that. So yes.

Our next question is from the line of Avishai Kantor with Cowen & Company.

You mentioned strength in the automotive segment. I was wondering if you can elaborate on that. Where's it coming from? Are you gaining share? Which regions? Are you adding new client?

So we mentioned this, because it's part of our kind of other emerging verticals, right now. So we didn't have much business in this segment, probably 24 months ago. Now it's growing, and this is mostly Europe and Asia.

So it's still a modest number, but it's a new revenue stream for us and it is growing.

Do you think you're getting market share from other vendors there?

Again, it's our -- when you're growing, it's always taking share from other vendors. But again, it's relatively insignificant right now. Probably, it will be better to talk, like, in 12 months or even later to understand.

The next question is from the line of Mayank Tandon with Needham & Company.

Ark, could you drill into a little bit more on the drivers in some of the key verticals like banking, financial services and health care? Especially in banking, we've been hearing, obviously, mixed signals. The banks are investing in digital, but they're also condensing their spend on some of the legacy. So maybe how that's impacting you in that vertical? Then, of course, what the drivers are in financial services broadly, and of course, in the key health care segment as well?

I think it is a pretty simple answers. Because like in Financial Services, it always was very IT heavy, specifically on (inaudible) and a lot of big systems, which supposed to be -- have to be supported there. So we always -- when we were talking about our line of services pointed out that our legacy component or kind of traditional maintenance component, it is pretty, pretty small. And right now, for example, and we talked today about it -- (inaudible) delivering mostly on digital side, so type of new engagement systems for Financial Services. Like wealth management is a good example of this, and this is majority of our business. So it's mostly a growing area for us, even today.

So again, our growth relative to maybe some of the others in the market, as Ark said, we've got substantial growth in wealth and asset management, both with existing and new customers, so -- very much of a kind of digital transformation. And we have very limited exposure to what you would call this traditional sort of keep-the-lights-on-business, which maybe is a more challenging kind of revenue stream. So that's a, as Ark said, that legacy work is -- has never been a significant part of our revenue stream.

And on health care, any drivers that you could call out there that are maybe fueling spending there or how we should look at that segment in terms of overall spend levels, of course, as your other verticals?

I also mentioned already today that we do believe that it's very strong vertical, and we have a big opportunity there. While it's still smaller for us and volatility is much bigger than in other segments like couple accounts, couple engagements could actually impact quarterly results. So -- but we are very optimistic on this one, and we've seen a lot opportunities in business for us.

Your next question is from the line of Jason Kupferberg with Bank of America.

I just wanted to ask question actually about the share count forecast for 2018. It looks like share count's going to be growing a little faster in '18 than in '17. I don't know if that's just a function of how the stock has performed or other factors. And as part of that, any thoughts on possibly using some share buyback to soak up some of the ongoing creep? I mean, I think this is one of the big deltas between what the Street may have been forecasting for EPS and what the guidance looks like. And if you can tie that in just with some broader balance sheet deployment comments -- I think you're at almost $600 million in cash now. So I would love to hear your latest thoughts there.

Yes, so that's fair. So we're going continue to use stock as an element of our compensation in retention. But I don't think you really see any significant change there in our guidance in 2018. What you may be seeing is that as our share price appreciates, that does have an impact on the fully diluted shares in that calculation. So maybe that's kind of what's showing up from a capital allocation standpoint.

What we're going to continue to do to is to focus our cash on an inorganic strategy. And we are active. And I think you'll see us be more active in 2018. So I think, for the most part, that's where you'll see cash deployed. There isn't a plan right now to begin using cash for buybacks. But it's certainly -- we are revisiting our capital allocation strategy. And things could change over time. But clearly, in the coming year, we're very focused on our inorganic strategy.

Our next question is from the line of Joseph Foresi with Cantor Fitzgerald.

I was wondering if you could talk about the size of contracts. Are they getting bigger? And are there any large projects that you're working on just given this headcount growth?

Well, definitely, every size of the engagements is growing. So while we still have kind of like approach where we're some time starting from a relatively small engagement and then getting in different areas. You can see it also from rate of growth and level of -- and the rate of kind of concentration of our clients. But it's definitely, bigger and bigger deals we participate in right now.

And at the same time, we continue to be highly diversified across a broad range of customers. So as Ark said, we're getting bigger deals and we're growing our engagements with large customers, which is a significant source of our growth. But we continue to be very diversified across our customer base and very diversified across the industries that we work in.

And examples which we were using today with 2 clients, which we work in less than 12 months, but the speed of growth will bring them probably to 20, 30 top accounts for us in 2018.

Got it. And just on Financial Services. Are you expecting any acceleration in spending now that the tax bill has gone through and your clients will have a little bit more money? And maybe you can give us a little bit of an update on UBS?

So as I mentioned already, we rather will watch what's happening, [than] we'll try to predict the market. So I think, again, while we're growing fast, we're a still relatively small player in this segment. And don't think it's impacting us one way or another significantly. So on UBS, we gave some color on what program we ran in and how successful there. And as we mentioned last time, it's a stable account for us right now, and we align with expectation which we had.

Our next question is from the line of James Friedman with Susquehanna Financial.

Congratulations on your 25th. It's Jamie at Susquehanna. I wanted to ask about the Media & Entertainment observations. Do you anticipate that, that vertical is still expected to grow faster than the company average going forward? And if you wouldn't mind sharing some use cases? I know you did that at the Analyst Day last year about what's resonating in Media & Entertainment.

Yes. During the last call, we were talking about Liberty Global and how we're growing with diverse programs, but with a lot of new things which happening there and how we're helping on innovation side of the business as well. So that would be true for a number of accounts in this segment. I don't think we would be growing faster than we're growing right now, but it's -- probably will be above company growth for some time.

And maybe the same on Life Sciences & Healthcare. It did -- it looked like it decelerated a bit. But any color that you might have there would be helpful.

Difficult to add anything to what I mentioned [earlier] and kind of an answer in as well. So it's still small sector for us. We have some 2 accounts, which we finished some programs. But we do believe that it would go back and probably will be growing at least with the speed of the rest of the company within next 12 to 18 months.

The next question is from the line of Vladimir Bespalov with VBT Capital (sic) [VTB Capital].

Like I have a couple of very brief question. First on your assumptions for growth in constant currency versus growth, at all. What assumptions do you use for USD versus other key currencies? Then the second question is on the margin guidance, your non-GAAP operating margin guidance for 2018. The range has narrowed compared to what you guided before, 16% to 18%. So what is -- is this like competitive pressures or just a trade-off between growth and profitability and things like this? Could you provide some color on that? And the last thing, could you educate me a little bit on this effect of U.S. tax reform on your GAAP earnings? And does it affect cash flow at all?

Sure. So let me start with -- from a foreign exchange assumptions, for the most part what we used for the development of our guidance was spot rates from the [probably] early December. And so rather than trying to sort of forecast rates and what the impact might be in the future, we generally use kind of spot rates. And of course, we've seen strong sort of euro and pound and ruble appreciation between 2016 and 2007 -- excuse me, between 2017 and early 2018. And in part, that's what you see driving that, what we feel would [be] tailwinds from foreign exchange.

From a standpoint of the profitability range, when we got to the second half of 2017, we did narrow our range to 16% to 17%. And so this is not really a change from that. And I think what it just kind of reflects is where we think we'll operate inside of 2018, and so we're not guiding to what we think could happen in 2019. But just it's a reflection of where we think we'll operate as we continue to drive high top line growth.

Finally, from the standpoint of, I guess, the tax reform, we booked at -- obviously, a significant entry in Q4. That's not -- that doesn't impact cash flow. Again, we will need to effectively move payments over an 8-year time period with -- in the early years that's 8% of that total; and then it gets higher over time, particularly, in the last 3 years. And so I don't think you'll see a significant impact on cash flow for us.

The only thing is that it does give -- we do have more flexibility now to sort of move money that we have in various non-U. S. sort of geographies, and we'll be sort of revisiting that. And that gives us some opportunity to move that money back into the U.S. and Western Europe to support our inorganic strategy.

The next question comes from the line of Arvind Ramnani with KeyBanc.

I have a broader question. About 12 to 18 months back, you expanded and refreshed your management team. Can you comment on what you have done with the sales organization? And also, are you doing anything different on the partnerships and alliances side?

Yes, there is -- Arvind, like, you're watching us already for over 6 years carefully. So there is always something changing in the management. And this -- in respect of our 25th anniversary, I would mention that the question about sales was a favorite for the long time. And we do believe that we have great opportunities in our client base. And we're targeting sales actually how to penetrate this, while -- again, about 10% of business coming from new logos today.

So I don't know how in a couple of sentences to actually answer this. But there are definitely improvements in this area. And new logos come in and growth supported, while we look like 4x bigger than we were 6 years ago or something like this. So don't know what else to say in this.

I mean, [if] anything from my perspective, as one of the new management, is that we continue to grow with referrals, right? Customers who worked with us at one account moved to another job and often times they bring us; which, I think, is, both high praise and also, a great source of our growth.

Yes. I mean, whenever I've done checks on EPAM, feedback is always very positive. Clients are really happy with kind of the work that EPAM does, certainly, like enthusiastic kind of client base. And I was just wondering, are you sort of expanding the sales team? Or kind of the sales model that has worked so well for so many years -- is that kind of staying consistent?

Let me answer differently. I think the sales model to deliver good quality services, this is the best sales model. We definitely expanded the number of people in business development function. But I think it's actually driven by quality of delivery and reputation is probably the most valuable asset we have. Then it's much easier job for our business development people too. So we're focusing on the quality; we're focusing on capability. This is #1.

The next question comes from Lou Miscioscia with Pivotal Research.

There you go, a follow-up. So -- obviously, we're hearing a lot about blockchain, automation, robotic process automation, AI. If you could just maybe comment as what you're really seeing out there in the sense of, are a lot of your clients engaging with you with these new types of technologies? Or is it really just still very embryotic and not really kicking into high gear yet and a meaningful portion of your revenue?

Well, what you see in the market right now, that anything related to automation is becoming very, very hard, and there are lot of companies which are betting on this very seriously. And this type of engagement is starting to show up all over the place. So I think it's an interesting area. We didn't [prove] probably completely return on investment, but there are a lot of promise here. With blockchain, it is still probably much more in the beginning, a lot of hopes, but initial experimentation in our view.

Our final question this morning comes from the line of David Grossman with Stifel.

So I just wanted to go back to something that came up earlier about utilization. And I thought I heard you talk about running at the high end of the target range; even though it's coming down, you're still going to run at the higher end of your target. And if that's right, is that a management decision to run at the high-end of the range? Or is it reflecting tight supply? And how should we think about diversification of your supply base over the next few years, including, perhaps an update on kind of what's going on in India with the subsidiary there?

Okay. We run into this higher than before because probably the scale of the company improved. And we're trying to understand what actually optimal and what's possible from this point of view. So if you will see that we can -- and we kind of talked about the result with (inaudible). If it would be possible to increase, we definitely will increase. But we're not going to do it in exchange of the quality of deliverable or preparedness of our teams to do the type of work we need. So again, best effort would be put to -- to keep it higher than before, okay.

On diversification of the workforce, we also mentioned during the last couple of years like 4, 5 years ago, we didn't have any operations in delivery centers outside of Eastern Europe. We invest in a lot, right now, in India. We invested in China. We have the center in Mexico right now. So diversification is happening. Proportion of resources, like 5, 6 years ago, with Belarus was by far the biggest; now it's very, very different. And this is big increase in Central Europe between Poland and Hungary right now as well. So diversification is happening all the time. We are continuously seeing what could be done better in these areas.

Thank you. I'd like to turn the floor back to management for closing remarks.

Okay. Thank you, and we're pleased with our results in 2017. The core of our growth continue to be defined by our ability to deliver the complex programs. So as we mentioned, the focus on the quality of our capabilities and that should drive everything else. In this year, I would like to thank all our 25,000 people globally for helping to make happening what's happening right now. And thank you for today call and talk to you in 3 months. Thank you.

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