Epam Systems Inc (EPAM) 2018 Q3 法說會逐字稿

Greetings, and welcome to the EPAM Systems Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Straube, Head of Investor Relations for EPAM. 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 third quarter 2018 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, Chief Financial Officer.

Before I 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, all references to reported results that are non-GAAP measures have been reconciled to GAAP and are available in our Q3 earnings material 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.

Let me begin with a few financial highlights from Q3. We delivered a strong third quarter with revenue of $468 million, reflecting 24% year-over-year growth or 25.4% in constant-currency terms. Our revenue growth was broad based, both geographically and across all of our industry verticals.

In addition, we delivered strong non-GAAP earnings per share of $1.17, which represents 27% growth from Q3 of 2017.

Our results for the first 3 quarters of fiscal 2018 point to a very consistent story of our ability to execute and grow in the market that demands high-end expertise and ever-changing cutting-edge capabilities spread across multifunctional teams and geographical locations.

With the story of consistencies as a backdrop, I would like to step back from the quarter and share a bit broader perspective. We are now approaching EPAM's 25th anniversary in December, and we started to orchestrate a number of events across the company. Just last month, we hosted our 11th Annual Software Engineering Conference, which brought together our communities of practitioners to connect, learn and exchange ideas about technology trends and define the market we operate in. This year's event was attended by over 3,000 employees as well as guests from our clients and from professional communities. They visited from over 20 countries.

From one side, our message during this conference was kind of a familiar one to practically everyone today. The world continues to be disrupted in a pace and scale that is forcing massive change across all industries and for the clients themselves. And in result, the environment continues to be even more demanding and challenging. Outdated, inflexible IT systems that cannot compete against upstarts, operating on natively digital platforms, a need for a completely new enterprise architecture, simple customer-centric and configurable, but they often lack the right capabilities to do so, and in many cases, the current partners they're relying on don't have the capabilities to comprehend such new architectures either.

And most importantly, the speed of the changes occurring is a real danger because most often, before a client can replace the system or build the new ones at their regular pace, the time will be gone. It's a killer if you don't have the speed. And demand for capabilities and experience become even more challenging because this next wave of digitization, the digital ecosystem, where everything is coming together, people, suppliers, consumers and businesses into scalable and flexible platform environment, brings a completely different level of sophistication in designing, building and delivering of such systems.

So from another side, the question which we really try to address was and still is how to be better prepared for those challenges, how to disrupt ourselves further to be able to solve the speed question for us and for the clients.

We do believe we have a unique advantage by benefiting from our core software engineering product development expertise accumulated over the last 25 years in collaboration with [Strobel] technology and software companies by being their trusted partners both to build software and to deliver the most complex solution around it. That allow us to navigate over the last year's much more intrinsic journey through digital augmentation and digital services works and arriving naturally into the world of much more advanced digital ecosystem enterprise-level challenges.

Still even with such advantage, the realities of speed, agility and the right capabilities at the right place and time forced EPAM to disrupt ourselves further by continuously investigating how to turn the company into a truly digital ecosystem itself. This simply means that to support needed speed and agility, we need to operate on our own advanced and native digital platforms and be able as a result to orchestrate on-demand capabilities across business, technology and experience consultancy in our ways of thinking, internal and external, right in time, educational and training services and also helping the majority of our clients do the same. Otherwise, we wouldn't be able to help them solve their critical business challenges. And with all that, we also have to continue to support and expand the key for us, our engineering advantage even farther.

So that is the set of challenges which we were trying to address during the last few years, and we are sure that is a set of challenges we will have to address in the future, too. All that means we need to understand what are the right investments we have to make to continuously challenge and disrupting ourselves to find the right answer fast or sometimes, in advance.

So far, we do believe that this push is bringing new type of opportunities to EPAM while we are getting into very different competition with much larger and, if you will, much more experienced firms. But by demonstrating a different level of speed and agility and engineering quality, we started to see the engagements now, which include implementation road maps with all aspects of change from organizational strategy, to digital operating models, to future platform architecture, design and build of such platforms and even new ways of running those. And [that thing] started to happen practically across all industry sectors we are playing in.

In addition, we continue our efforts in open-sourced contributions, where we are one of the industry leaders, continuing to focus on our top-tier partnerships. For example, we have now over 2,035 architects and engineers through our various Cloud Competency Centers with over 500 certification for Google cloud platform, which probably make us #1 in such category.

We continue to launch platform accelerators and productivity tools as well as establishing new engineering labs and correspondent initiative to bring above-mentioned speed and agility to ourself and to our clients.

With that, I think it's almost the right time to come back to our consistency story and to pass it to Jason to reiterate it with much more specific data than I did in the beginning. But still, before that, I would like to provide a bit more details on this morning's news, which very much relates to the same topic I mentioned in my earlier comments.

You might have seen it already. We announced the acquisition of TH_NK digital, a U.K.-based consultancy with 3 studios across U.K. TH_NK brings a high level of consulting and customer engagement expertise that expands upon global, digital and organizational consulting capabilities within the U.K. and Europe. This acquisition should further enhance our ability to meet customer demand for dynamic design-led consulting, digital product innovation and advanced business solutions, helping us to build platforms at speed and scale.

So we are the story that continues to evolve. With that said, let me turn finally the call over to Jason for an overview of our Q3 results and business outlook update.

Thank you, Ark. Good morning, everyone. I'll start with some financial highlights and talk about profitability, cash flow and end on guidance for fiscal 2018 and Q4.

In the third quarter, we delivered very strong top line performance, exceeded our profitability expectations and grew earnings per share. Here are a few key highlights from the quarter. Revenue came in at $468.2 million, a year-over-year growth of 24% and 25.4% growth in constant currency. In the quarter, revenue reflected a negative foreign exchange impact of 1.4%, greater than the 1% impact we expected when we set our Q3 guidance in August. Reported revenue would have been approximately $2.1 million higher this quarter applying the same foreign exchange rates to non-USD revenues used for our Q3 guidance.

Looking at revenue growth across our industry verticals in the third quarter. The drivers of growth remained very consistent in the industries we serve and include digital transformation, an increased focus on customer engagement, product development and driving efficiencies and deeper insights through artificial intelligence, machine learning and analytics.

In Financial Services, our largest vertical, we delivered 18.1% growth year-over-year. Growth in Q3 was impacted by an expected ramp-down of activity at a few clients outside of our Top 5, predominantly based in Europe.

Travel & Consumer grew 21.9%. Software & Hi-Tech grew approximately 20.1%. Business information and media posted 27.2% growth. Life Sciences & Healthcare grew 40.3%, reflecting growth in existing clients and quite strong growth in new client revenue. And lastly, our emerging verticals delivered 31.4% growth, driven primarily by clients in industrial engineering and energy.

From a geographic perspective, North America, our largest region, representing 60.7% of our Q3 revenues, grew 30.3% year-over-year or 30.7% in constant currency. Europe, representing 32.5% of our Q3 revenues, grew 12.4% year-over-year or 14% in constant currency. CIS, representing 4% of our Q3 revenues, grew 15.9% year-over-year or 27.8% in constant currency. And finally, APAC grew 67.6% or 71% in constant currency and now represents 2.8% of our revenues.

We continue to deliver growth across a broad range of industries, geographies and engagement types while driving further diversification in our client concentration. In the third quarter, growth in our Top 20 clients was approximately 23%, and growth outside our Top 20 clients was approximately 25% compared to the same quarter last year.

Moving down the income statement. Our GAAP gross margin for the quarter was 35.7% compared to 36.6% in Q3 of last year. Non-GAAP gross margin for the quarter was 37.3% compared to 37.9% for the same quarter last year. The decline in gross margin was primarily driven by a higher level of accrued variable compensation compared to the same quarter last year.

GAAP SG&A was 19.8% of revenue compared to 21.5% in Q3 of last year, and non-GAAP SG&A came in at 18% of revenue compared to 19.8% in the same period last year and at the bottom of the 18% to 19% range we use to manage the business.

GAAP income from operations was $64.6 million or 13.8% of revenues in the quarter compared to $49.2 million or 13% of revenue in Q3 last year. Non-GAAP income from operations was $82.1 million or 17.5% of revenue in the quarter compared to $62.6 million or 16.6% of revenue in Q3 of last year.

Our GAAP effective tax rate for the quarter came in at 0.6%, which includes the impact of a $7.1 million favorable adjustment to the provisional charge for the onetime transition tax under U.S. tax reform originally booked in Q4 2017 as well as a $6.1 million excess tax benefit related to stock option exercises and vesting of restricted stock units. Our non-GAAP effective tax rate, which excludes these and other adjustments, was approximately 20%.

Diluted earnings per share on a GAAP basis was $1.15 and non-GAAP EPS was $1.17, reflecting a 49.4% and 27.2% increase over the same quarter in fiscal 2017.

In Q3, there were approximately 57 million diluted shares outstanding. We ended the quarter with over 25,200 delivery professionals, a 16.6% increase year-over-year and a net addition of more than 900 production professionals during Q3. Our total headcount ended at more than 28,400 employees.

Utilization was 76.4% compared to 77.6% in the same quarter last year and 78% in Q2.

Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was up $102.3 million compared to $62.2 million in the same quarter last year. And free cash flow was $94.1 million compared to $56.8 million in the same quarter last year. DSO was 81 days compared to 83 days at the end of Q2 fiscal 2018 and 82 days in the same quarter last year. We continue to focus on managing our total DSO performance in the low 80s.

Now let's turn to guidance. Our updated full year and Q4 outlook reflect both an acceleration in revenue growth expected for the quarter relative to that achieved in Q3 as well as a modest contribution from the acquisition we announced earlier today.

So starting with fiscal 2018. Revenue growth is now expected to be at least 26.5% reported despite the strength of the U.S. dollar reducing the full year benefit of foreign exchange from 1% to 0.5%. Revenue growth on a constant currency basis will now be at least 26%. As a reminder, our full year revenue outlook continues to reflect an approximate 2% contribution from inorganic revenues.

We expect GAAP income from operations to now be in the range of 12.5% to 13.5% and non-GAAP income from operations to now be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to now be approximately 2%, which reflects our tax planning efforts in response to the U.S. tax reform legislation. We expect our non-GAAP effective tax rate to continue to be approximately 22%.

For earnings per share, we now expect GAAP diluted EPS to be at least $4.22 for the full year, and non-GAAP diluted EPS will now be at least $4.32 for the full year.

We continue to expect weighted average share count of 56.7 million fully diluted shares outstanding.

For Q4 of fiscal year '18, revenues will be at least $500 million for the fourth quarter, including an estimated $2 million contribution from the TH_NK acquisition, reducing a growth rate of at least 25% reported and at least 26% in constant currency after factoring in a 1% estimated unfavorable foreign exchange impact.

For the fourth quarter, we expect GAAP income from operations to be in the range of 14% to 15% and non-GAAP income from operations to be in the range of 17% to 18%. We expect our GAAP effective tax rate to be approximately 19%, and non-GAAP effective tax rate will be approximately 22%.

For earnings per share, we expect GAAP diluted EPS will be at least $1.03 for the quarter and non-GAAP EPS will be at least $1.22 for the quarter.

We expect a weighted average share count of 57.1 million fully diluted shares outstanding.

And finally, a few key assumptions which support our Q4 GAAP to non-GAAP measurements. Stock compensation expense is now expected to be approximately $13 million. Amortization of intangibles is now expected to be approximately $2.7 million. The impact of foreign exchange is expected to be approximately a $0.5 million loss. The tax effect of non-GAAP adjustments is now expected to be around $3.2 million. Lastly, we expect excess tax benefits to now be around $2.3 million.

In summary, we are pleased with the third quarter results, which reflect strong, broad-based growth across all our verticals and geographies. Our unique positioning in the market, combined with our solid fundamentals, positions us well for continued growth in fiscal 2018.

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

(Operator Instructions) Our first question comes from the line of Ashwin Shirvaikar with Citi.

My question is with regards to the acceleration in revenue that you're seeing. If you could maybe break that down into sort of signing new clients versus your contract size is increasing as software engineering and digital transformation just becomes more and more mainstream. I guess let me start there. If you could provide a little bit of color as to what's driving that acceleration and the sustainability of it.

So first of all, the acceleration exists, but it's not so huge. It's probably in line with what we were showing before, but the type of work is slowly -- that's currently starting to change. We see this more platform demand opportunities. And we do believe we have some advantage there, but it is very complex. And there is a lot of demand there, but kind of delivering this is still a challenge for us as well. And that's why I was trying to explain and focusing on a lot of potential challenges we're seeing ahead of this. And this is also -- like I was trying to highlight it, it's on our capabilities, but it's also on the capability of the client, from one point of view. Clients need it from another point of view. Clients are not necessary always ready for this. But again, in short, we see the change in this kind of portfolio, where more demand is coming from more integrated platform lead solutions. I don't know if I can bring more color for this, but that's happening.

Yes. I guess the only sort of subtle add or -- would be that we are seeing somewhat of an acceleration in new customer revenues. So we have a significant demand from new customers. They obviously start small and then grow over time. And that is contributing to the somewhat higher level of demand that we're seeing in Q4.

Got it. And then just to pick at a couple of the areas, the verticals. Obviously, good -- it looks like good sequential acceleration in life sciences, and the emerging verticals are also doing well. Could you kind of talk about sort of -- first of all, what's contained in the emerging verticals? And just talk about -- just trying to link back to the comment on platform, life Sciences & Healthcare, maybe something about the nature of the work you're doing, the reason you're seeing the pickup there.

Okay. It's a lot of questions, a lot.

Part 2, a, b, c and d. Sorry.

So what we qualify under others, it's everything which do not belong to the -- our key line of business right now. But you're right, it's growing fast and it's include, for example, oil, gas, energy, engineering and even telco as well. So basically...

Automotive.

And automotive, right. So -- and it is high-growth, and this is, many of them, new clients for us. And good portion of this is coming with this platform lead opportunities, where we need like to put the best of us to be able to deliver. Okay, so specifically on life science, for example, or some other verticals. Like this quarter, Life Science & Healthcare are showing much better results than before. And again, this is -- relatively, it's only 10%, 11% of our business, so volatility here is happening and will be happening. Because, again 1, 2 clients' start or finish might impact specific quarterly results. This quarter, this look very good. So what we do there, in life science, we're mostly still operating in R&D space and in data space with specialization and focus on some programs around genomic data, for example, or automating the lab processes. So -- but we grew in commercial part as well. So what other questions were there?

No, I think just basically looking for those sorts of examples on life sciences, trying to connect it to your platform comment, but I think I do get that.

Our next question comes from the line of Avishai Kantor with Cowen and Company.

My first question is around pricing. Is the growing consulting -- what seems to be the growing effort and focus around consulting, does that enable you to have a positive impact on the overall pricing plan?

So I think in longer term, we will expect more impact. But at this point, consulting for us is enabled for the total solutions. And for us, there is -- and we share this in the past as well, there is no goal to bring consulting as just a separate service with higher margins. The goal is how to help -- to do end-to-end solutions and help clients and ourselves, actually, to explain ROI in advance and then focus on the things which are necessary. I think it would take some time before maturity of this, the whole operation would grow and we will see much big impact on our margins. There are probably some, but it's very difficult to measure specifically because of -- we're not treating consulting just as a line of business. So it's difficult to understand exactly from where the benefits or problem would be coming from.

And the next question regarding finding the right talent, are you looking for new regions or new countries in order to find the required talent?

So we're always looking for new regions for new talent because all of us is practically -- each time we repeat it that it's one of the key challenges for everybody in -- on global market. And we open in offices -- additional offices in Europe. We're thinking about some additional investments in locations where we have how to improve the quality of talent we can bring, how to train it and how to bring the level which we need. But yes, the simple answer, we're looking all the time.

Our next question comes from the line of Darrin Peller with Wolfe Research.

Maybe just start off with a financial question. Your margin did come in better than we thought, and you're raising EPS guidance nicely now. Maybe you could just give us some building blocks on what's the key drivers of that versus your prior expectations going into the beginning of the year and maybe even into the quarter.

Yes. So we did run at a somewhat higher utilization than we had expected, and we are expected to see higher utilization again in Q4. We're also seeing a stable wage environment, probably getting a little bit of a benefit from customer mix. And then throughout the year, we've had a focus on account profitability, and I'd like to think that, that has produced some benefit. Finally, we're also seeing benefits from our focus on managing SG&A. At the same time, we continue to invest to make certain that we can deliver greater than 20% growth in the upcoming fiscal years.

All right. I mean, that sounds like some of these variables are sustainable in terms of utilization and wage. You tell me -- I mean, not to put words in your mouth, would you say that wage inflation, in your view, is looking like it's pretty stable at this point? Or like for the next few quarters, more than just this one?

It's always hard to predict what will happen with wage inflation. And so what I can say is that wage inflation, let's say, this year has been very much within our expectations and it's been relatively stable and not elevated over levels we've seen in the past. But it would be hard for me to predict the future.

And I would agree that it's difficult to predict how it's going to work out because it's clearly a function of talent availability. And we all know and confirming that it's a global challenge and we will see how next quarter if it'll work. So difficult to predict.

But as always -- but over the years. But certainly, I think with a little bit more focus, we are quite focused on account level profitability and doing what we can do to maintain and improve profitability despite what happens with the wage inflation.

It's good to see that coming through. Just a quick follow-up on the financials vertical. Look, again, I mean, revenue growth is strong, that one vertical looked like it deceled a little bit and I'm just curious if it's something around -- like maybe one of your larger clients. I think it's showing that's sort of running out of steam. Or anything else going on there?

Okay. So -- and I think just a couple of things on that. So if we draw -- if we included foreign exchange, which was a negative, the growth in Financial Services would have been just over 20%. We did see a few Financial Services customers not in our Top 5 that saw declines. So there were a few customer-specific events. We still see very strong demand in Financial Services and expect to see very strong demand in Q4, but we did see a few of our smaller clients with the decline.

Our next question comes from the line of Jason Kupferberg with Bank of America.

I just wanted to add on with the margin question. So obviously, you took the guide up there, 50 basis points at the midpoint here. It's 17% now for the year. I mean, how much headroom is there over time in the margins? I mean, is there still room to drive additional SG&A efficiency over time as you think about the business over the next couple of years? Because it sounds like this is a little bit of a new normal to the extent that the recent range was kind of pegged between 16% and 17% and now we're trending higher than that.

Yes, I think I'd say we're still working on our 2019 plans. So it would be hard for us to comment at this time. We are going to continue to make investments to make certain we can continue to grow the company in excess of 20% per year. I think the one comment I would make, just kind of based on history, is that the first half of the year, you saw us in the low end of the 16% to 17% range. Clearly, in Q3 and in Q4, we're talking about being above the 17% range. So I think what I would say is you can clearly see that we can operate anywhere in that 16% to 17% range, at the high end of the range as well as the low end of the range. But at this time, we wouldn't be able to sort of provide any additional color on what we expect for adjusted IFO in 2019.

Okay. What can you tell us just in terms of attrition, trends in the quarter? I know you don't disclose an exact number, but I think last quarter, the comment was that it had gone up quarter-over-quarter. So what was the direction there in Q3?

So attrition is still the same kind of level, like maybe insignificantly higher than last quarter. But it's mid-teens right now. So -- and again, it's all combination of talent and wage so...

Digital talent is still tight?

It's not decreasing, let's say this.

Our next question comes from the line of Mayank Tandon with Needham & Company.

Jason, as you look ahead into next year and maybe for Ark as well, I just wanted to get your thoughts around how you think about growth from the standpoint of headcount additions versus pricing leverage. And any further improvement in utilization? And then I have a follow-up around -- just over time, do you expect the model to shift more to fixed price, maybe even outcome-based or transaction-based pricing versus currently being much more heavily weighted towards time and materials?

Okay. I think on utilization, we're probably at the level which we're not going to make it higher. I think it's around optimal and we would be probably happy to maintain this as well. Specifically, talent that we continue to grow pretty, pretty fast. So on the model, we're definitely researching and brainstorming what's possible to do here, but like also pointed before and I would like to point it once again, the T&M, it's not just a model issue selected because it's easier to do. T&M is practically a subject of type of work which we do and where we're going and building new stuff, which is dynamically changing from client side and from the client competition side. And it's very difficult to turn this type of work to fixed cost or SLA because, again, fixed cost to SLA, it's something which is very well-defined or you did multiple times. You know how to predict, you know how to cut fat, and this is not the type of work which we usually do. So at the same time, outcome-based might be an answer for this, is there are a right kind of relationship, understanding and readiness not only from us but from the clients. And that's why we were talking about already that we're working and creating these digital ecosystems to run ourself to be more agile and speedy, and we're trying to -- starting to offer this type of consultancy to clients as well because some of them really like an ability to act accordingly. And I think there are some first signs that might be opportunities for us to turn more to different models, but it's still very early to say. But we definitely are thinking and experimenting with this right now.

Great. So it sounds like the growth will be largely driven by headcount additions, at least in the near to medium term, but not the...

So it would be -- yes, it would be both. We clearly -- we have multiple initiatives right now how to separate these 2, but headcount still would be -- the number of quality of engineering staff still would be very important.

Our next question comes from the line of David Grossman with Stifel.

Just a quick financial question to get started. Are you going to disclose the top client percentage and Top 5 anymore? I know you gave the, I think, Top 10 and Top 20 -- or outside, the Top 20.

Yes, we've got the Top 5 out there, but is it...

Yes, David, that is in our fact sheet on our website, the Top 5.

Okay. All right, sorry. I can look there. I didn't see it earlier. And then I think this has come up in a couple of different questions, but if you go back, starting at the end of last year is when the cost of per head started growing at a faster rate than the revenue per head, and I know there's a utilization element to that. But Ark, is that the state of the world that we're in for the foreseeable future given the labor markets? And how much -- historically, I know pricing leverage, to some extent, has been a function of employee -- or customer turnover, but can you give us a sense of kind of what we should be thinking about over the next 12 months in terms of that equation?

In terms of price increases or in terms of work?

Yes, the price/wage dynamic because, historically, you were able to drive revenue per head at a faster rate than cost per head, and that dynamic slipped last year.

I'm not sure it slipped in the last year. So David, it's difficult to answer the question when I'm not exactly understanding the question.

Yes. David, again, as you can imagine, this is one of those it depends questions in terms of the answer, but what we are seeing is the ability to take up rates still. We did see some rate increases across some large customers here in Q3. It is a focus of ours, obviously, to deliver sort of the quality and to make certain that we're getting work done for our clients but, at the same time, to capture some of the value for the firm and for our investors. And so it is a focus of ours to sort of drive account profitability, and there is definitely attention to the pricing element. And so it's hard to say whether or not pricing is going to accelerate at a greater rate than wage inflation, but what I can say is that we do continue to get rate increases and we clearly look for those opportunities with both existing and new customers.

Our next question comes from the line of Jamie Friedman with Susquehanna.

Congratulations on the 25th anniversary. Ark, in your prepared remarks, you had outlined the increased complexity was already used in the technology landscape. I just want to make sure I understand. Is that a good or a bad thing for EPAM? That's my first question, and I'll just get my other one in. Jason, with regard to the DSO, it's a good cash flow quarter and good to see the DSO is stable. Is there any opportunity to improve on that even further? So first, on the complexity; and second, on the cash, the DSO.

Question number one, good or bad, it's -- first of all, that's the reality. And we do believe for the component of the markets which we're playing in is giving us opportunity to potentially win more deals because we believe better prepared for this type of more complex work. But at the same time, more complex work require different combination of capabilities, and all of this is creating challenges as well. So we do think it's good, but it's more challenging as well.

From a DSO standpoint, we took down DSO by 2 days in the quarter. I would not expect to see a further decline. I think we're comfortable with this kind of low 80s, but is an area of focus of ours and we are looking to continue to evolve that. But at this time, I would say just -- to consider sort of the low 80s as an appropriate target for us.

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

Yes, I just had a couple of questions on automation. On the last earnings call, you had kind of explained what you're doing on automation. Just wanted to see if you have an update. And specifically, are there particular vendors that you're working with as it relates to RPA?

I think nothing significantly changed during the quarter. It's still very hot area, and it's a growing area for us. But I don't think there is any specific update over the 3 months, which makes sense to me right now.

Yes, but are there some particular RPA vendors that you're working with? I know WorkFusion is one, but are there others you're working with as well?

No, we're working with the same set of vendors. WorkFusion is one of the top, and we're working with a couple others. Exactly -- again, it's landscape didn't change in 3 months. While I understand you're asking this because it's a very dynamic market and everything can happen, but not so fast.

Great. And just in terms of like the pricing models on your automation projects, is it similar to kind of the other projects you do? Or are the pricing models slightly different?

This is very new. And clearly, automation much more suitable for outcome-based because it's much easier to measure the impact. And there are multiple discussions in our current deals how we're going to do it. So that's a very right question. That's probably the area where we will -- might be going out of T&M in the future much faster.

Great. And just last question on this topic. Are there particular set of clients, either by geography or by industry, where you're seeing higher interest? Or is this kind of an area that has demand across all of your client base?

So definitely, I think insurance and Financial Services are probably champion of this right now because there are a lot of BPO-type of services there, but it's also related to retail as well.

The next question comes from the line of Georgios Kertsos with Berenberg.

I guess a quick, high-level question from me. Are you seeing increasing demand from your clients for near and onshore delivery, i.e. effectively rotating gradually and steadily away from onshore?

So I think we've seen demand for more cross-functional teams and with some of them to be staffed in the markets because of complexity of the programs not because specifically we wanted people here. But to deliver this complexity, we need more subject matter expertise, more vertical knowledge, more consulting skills. And very often, this type of skills should be deployed in the market. So this is happening and this is a trend we're seeing, but we don't see the trend like no global delivery and no offshoring. This is still the play between all capabilities cost and scalability clearly. So we don't think it will -- dramatical change, but it would be some type of evolution, too. And again, in our case, specifically, we have even still only, what, 10%...

11%.

10%, 11% of the people in the market, which is probably at least twice less than most of our competitors.

Our next question comes from the line of Vladimir Bespalov with VTB Capital.

So I have -- my first question is on your client concentration. I see that in the second decile in your Top 20, there is a big increase of the share of those clients. Maybe you could provide some color what was this driven by, acquisition of new clients or ramping up of the existing clients. And my second question is on capital allocation. I ask this question from time to time, but I see your cash pile keeps increasing. So any new developments in this area? How to allocate this cash? How to use it? And could you maybe provide how much of this is in Belarus and outside Belarus?

Yes, that's fair. So from a concentration standpoint -- and it's good point because I saw the same thing, which is the 11 to 20 -- the 11th largest to the 20th largest customers had a very high growth rate in the quarter. And a number of those customers are customers that may not be new customers, but customers that we've acquired within the last 2 years. And what I think it does speak to is just the fact that we are still in a position with our customers and even our larger customers, where many of them are significant wallet share opportunities for us. They're large global companies. We get in, we do work, we're successful with a program, and then they ask us to help out in other areas. And so what you do find is that there continues to be significant growth opportunities even within these large customers. And again, you had a couple of very nice kind of growing accounts in that 11 to 20 range. From a cash flow -- from a cash standpoint, you're right, we have even more cash this quarter than last. About -- and we have taken the opportunity post-U. S. tax reform to bring some of that cash back into the United States. So right now, over 40% of that cash is in the U.S. So we have taken down the balance that we have in Belarus. And from a capital allocation standpoint, still very focused on acquisitions. I think what you might see in the first half of 2019 is see us doing deals at a somewhat accelerated rate. So a couple deals in that time period rather than one. I think you might see us do somewhat larger deals. And so rather than deals that are $30 million or $50 million deals, that would be somewhat larger than that. And so that's where we're going to continue to sort of focus the use of cash. However, we do meet with our board and discuss the evolution of our capital allocation strategy. And we do think about all the obvious, sort of share repurchase to sort of reduce dilution in some of that, but we're not at a point in time where we'll be discussing that and certainly, not with any sort of communication publicly.

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

I was wondering if you could give more color on what type of projects and clients had issues within Financial Services.

Financial Services, clearly, is a very diverse segment, and I think we were telling the story to what were we're doing on more traditional and investment banking side. And we also shared some successes and will continue doing this on the wealth management side and more digital type of projects. So we're working in Financial Services, also incorporate for us a number of clients, which is more in data site for Financial Services. In tech, smaller companies, we share build in new type of banking systems and payment systems. That's another segment which we've seen. And both of this -- like, when I'm saying banking, I'm more referring to retail banking -- online retail banking and everything around payments, which is pretty interesting and a growing area for us. And there are also a number of services we provide for hedge funds as well. So again, it's very diverse portfolio with very different type of projects. And from geography point of view as well, it's pretty much spread across Europe and North America and Asia, too.

So that is where we're -- really where we're seeing the growth with the wealth management, asset management, fintech. Also seeing some nice growth in the insurance area. Still relatively small for us, but growing with a lot of new customer revenues. And so, I guess, maybe you could conclude from that, I guess, the inverse in terms of answering your question.

Okay. That's what I thought, okay. And then just on the platforms and the move to platforms, do those come in at higher margins? Are they a build once and kind of resell opportunity? And how should we think about that as it becomes a bigger piece of your business? Does it extend your comp set? How do we think about that and its impact on margins?

We are kind of answering this already and there is no black-and-white answer here because from one point of view, this platform build-up is a very complicated effort, starting from consultancy and going to architecture and going to -- selecting the right components and then put it together. What I'm trying to say, that it's still in majority a T&M type of job. And you need like -- in some categories, you need much more higher caliber people for this. But at the same time, these high-caliber people, it's also more expensive. So until we will see enough experience doing this and able to bring more our accelerators and some components and we're focusing on this, too, it will be difficult to kind of predict what the margin impact is going to be. But at the same time, it's definitely giving us opportunity to grow fast and to support the investments which we need to do.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Okay, thank you. Thank you, everyone. So it was a good quarter. We hope to deliver the good year in 3 months and share this with you. And also just to share that in December, we're going to celebrate our 25th year anniversary, so it's kind of a special year for us. And I would like to thank all our employees and clients for giving us opportunity and for investors, clearly, too. Thank you very much.

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