Epam Systems Inc (EPAM) 2018 Q4 法說會逐字稿

Greetings, and welcome to the EPAM Systems Fourth Quarter and Full Year 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Straube, Head of Investor Relations for EPAM Systems. Thank you. You may begin.

Thank you, operator. Good morning, everyone. By now, you should have received your copy of the earnings release for the company's fourth quarter and fiscal 2018 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 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 quarterly earnings materials located on the Investor 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. We finished this year in a strong position across several dimensions of our business.

Financially, we delivered on a revenue of $1.84 billion, reflecting 27.1% year-over-year reported growth or 26.9% in constant-currency terms, and non-GAAP earnings per share of $4.38 or 26% increase over fiscal 2017. Additionally, we generated free cash flow of $255 million.

2018 was an important year for us. First of all, at the end of December, we celebrated our 25th anniversary. The real significance of that year for us was to prove that, while we have been in business for 25 years, we still act, change, grow and feel like a very young and dynamic company.

So in 2018, we tirelessly continued to extend our capabilities and are working to drive a deeper connection with clients, and we have done this organically through very selective acquisitions and by growing some of our more strategic partner relationship.

As we look across our portfolio of clients, it's clear to see that the types of engagements we're executing today and type of demand we have seen for the future is broader than pure engineering. This is the change that we have talked about before in terms of how we view our investments and capabilities. 2018 was a remarkable year for us to absorb the shift from pure software product development programs to much more complex scale and business-critical engagements for our clients.

So today, with all our expanding capabilities, many of which have been recognized by industry analysts as increasingly vital accelerators, we are not longer just a software engineering company at the core but also a strong design and experience consultancy, growing business and innovation consultancy, as well as emerging training and educational firm.

While stating that, I would like to stress that a very important if not critical effort across those many still relatively new capabilities for us is that we bring those capabilities to our clients in the form of very aligned multifunctional teams which operate with one common goal: to realize overall value of the solution for our client benefit versus just new and potentially overlapping streams of revenue for EPAM.

This type of integrated change is very challenging to perform predictably in complex enterprise environments because they require careful balance between executing proofed strategies and bringing in new and strategic capabilities. And while we believe that ultimately we can and will grow our share of trust with our clients and, in doing so, grow our top line as well, we're looking at these challenges from the constant perspective of the value-add to clients to keep their interest as a priority.

While it's easy to frame this accomplishment in the context of our last fiscal year, their real progression was of longer journey beyond to continuously disrupt ourselves to meet the complex demands of the digital ecosystem type of engagements, which requires us to respond with speed, agility and the right capabilities at the right place and time.

As we look at our evolution and our ability to deliver the type of growth we expect as a 25 years old start-up, we continue to focus significant efforts on developing our people through investments in our talent management, educational and delivery platforms that help us to scale, engage and retain our engineering, consulting, design and management capabilities globally.

During the year, we added over 4,200 people, having a growth organization in all our delivery centers and key end market locations and significantly strengthened our talent pool across the globe.

Without that and despite some of the macro-level uncertainties, which we constantly are watching and reading about, we are looking at 2019 optimistically. We believe that we can continue to remain very relevant to our diverse and global client base through our ability to execute large-scale digital transformation programs and to help them to make some ambitious innovation programs very real.

I will turn it over to Jason for a detailed financial update of last year and our guidance for this 2019.

Thank you, Ark, and good morning, everyone. I'll start with 2018 financial highlights then talk about profitability, cash flow and end on guidance for the 2019 fiscal year in Q1.

In the fourth 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 $504.9 million, a year-over-year growth of 26.5% on a reported basis and 28.9% growth in constant currency, reflecting a negative foreign exchange impact of 2.4%.

Looking at our fourth quarter revenue growth across industry verticals. The drivers of growth remained very consistent 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.

Financial Services, our largest vertical, delivered 16.9% reported and 21.1% constant-currency year-over-year growth. Growth in Q4 was impacted by continued expected ramp-down of activity at a few clients outside of our top 5, predominantly based in Europe.

Travel & Consumer grew 17.3% reported and 20.6% in constant-currency terms. Growth in Q4 was impacted by slowdown within certain consumer clients in Europe. Software & Hi-Tech grew 26% in the quarter. Business information and media posted 24% growth in Q4. Life Science & Healthcare grew 71.3%, reflecting broad-based growth across both industries in existing and new client programs. And lastly, our emerging verticals delivered 38.1% growth, driven primarily by clients in energy, telecommunications and automotive.

From a geographic perspective, North America, our largest region, representing 61.6% of our Q4 revenues, grew 36.9% year-over-year or 37.5% in constant currency. Europe, representing 31.2% of our Q4 revenues, grew 12.1% year-over-year or 15.2% in constant currency.

CIS, representing 4.4% of our Q4 revenues, contracted 4.8% year-over-year and grew 11.3% in constant currency. Growth in this geography was impacted primarily by an unusual compare from Q4 2017 and foreign exchange. And finally, APAC grew 68.1% or 72.5% in constant currency and now represents 2.8% of our revenues.

In the fourth quarter, growth in our top-20 clients was approximately 22% and growth outside our top-20 clients was approximately 30% compared to the same quarter last year.

Moving down the income statement. Our GAAP gross margin for the quarter was 36.8% compared to 36.4% in Q4 of last year. Non-GAAP gross margin for the quarter was 37.7% compared to 38% from the same quarter last year. GAAP SG&A was 19.3% of revenue compared to 21.4% in Q4 of last year, and non-GAAP SG&A came in at 17.7% of revenue compared to 19.7% in the same period last year. SG&A was somewhat lower than expected due to a onetime benefit in addition to high-level revenue growth during the quarter.

GAAP income from operations was $78.3 million or 15.5% of revenue in the quarter compared to $52.1 million or 13% of revenue in Q4 last year. Non-GAAP income from operations was $93.1 million or 18.4% of revenue in the quarter compared to $66.9 million or 16.8% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 23.9%, which includes onetime tax charges of $1.7 million, partially offset by a $1.2 million excess tax benefit related to stock option exercises and investing of restricted stock units.

Our non-GAAP effective tax rate, which excludes the excess tax benefit and certain onetime items, was 23.2%. Both our GAAP and non-GAAP tax rates reflect the updated tax structure implemented in response to the 2017 U.S. Tax Reform Act.

Diluted earnings per share on a GAAP basis was $1.05, and non-GAAP EPS was $1.27, reflecting a 25.7% increase over the same quarter in fiscal 2017. In Q4, there were approximately 56.9 million diluted shares outstanding.

Turning to our cash flow and balance sheet. Cash flow from operations for Q4 was $123.1 million compared to $71.2 million in the same quarter last year, and free cash flow was $113 million compared to $58.3 million in the same quarter last year, resulting in 156% conversion of adjusted net income.

DSO was 73 days compared to 81 days at the end of Q3 fiscal 2018 and 81 days in the same quarter last year. The lower-than-average DSO this quarter was a result of our ongoing operational focus in this area.

Moving on to a few operational metrics. We ended the quarter with over 26,700 delivery professionals, a 16.4% increase year-over-year and a net addition of more than 1,500 production professionals during Q4. Our total headcount ended at more than 30,100 employees.

Utilization was 80.2% compared to 78.8% in the same quarter last year and 76.4% in Q3. We do expect that utilization will trend somewhat lower and in the range of 77% to 79% over the next few quarters.

Turning to our results for the fiscal year. Revenues for the fiscal year closed at $1.84 billion or 27.1% reported growth over 2017 or constant-currency growth of 26.9%. Our acquisitions in fiscal 2018 contributed approximately 200 basis points to our growth.

GAAP income from operations increased 42.1% year-over-year and represented 13.3% of revenue for the year. Our non-GAAP income from operations was $315.1 million, an increase of 34.3% over the prior year and represented 17.1% of revenue. Our GAAP effective tax rate for the year came in at 3.8%, which includes the onetime impact of our updated tax structure in response to the 2017 U.S. tax reform. Excluding the impact of this legislation and other adjustments, our non-GAAP effective tax rate was 21.9%.

Diluted earnings per share on a GAAP basis was $4.24. Non-GAAP EPS, which excludes adjustments for tax reform, stock-based compensation and acquisition-related costs, was $4.38, reflecting a 26.6% increase over fiscal 2017.

In fiscal 2018, there were approximately 56.7 million diluted shares outstanding. In fiscal 2018, cash flow from operations was $292.2 million compared to $192.8 million for fiscal 2017, and free cash flow came in at $254.6 million, reflecting 102.7% adjusted net income conversion.

Now let's turn to guidance. Starting with fiscal 2019. Revenue growth for fiscal 2019 will be at least 22% reported, and in constant-currency terms, will be at least 23% after factoring in a 1% estimated unfavorable foreign exchange impact.

We expect GAAP income from operations to be in the range of 12.5% to 13.5% 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 16% and our non-GAAP effective tax rate to be approximately 23%, which reflects the full year operating in our updated tax structure implemented in response to the 2017 U.S. tax reform.

Earnings per share. We expect GAAP-diluted EPS to be at least $4.45 for the full year and non-GAAP diluted EPS will be at least $5.06 for the full year. We expect weighted average share count of 57.9 million fully diluted shares outstanding.

For Q1 of fiscal year '19, revenues will be at least $518 million for the first quarter, producing a growth rate of at least 22% reported and at least 25% in constant currency after factoring in a 3% estimated unfavorable foreign exchange impact.

For the first quarter, 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 12% and non-GAAP effective tax rate will be approximately 23%.

For earnings per share, we expect GAAP diluted EPS will be at least $1 for the quarter, and non-GAAP EPS will be at least $1.16 for the quarter. We expect the weighted average share count of 57.5 million fully diluted shares outstanding.

Finally, a few key assumptions that support our GAAP to non-GAAP measurements. Stock compensation expense is expected to be approximately $64.3 million with $18.3 million in Q1 and approximately $15.3 million in each remaining quarter. Amortization of intangibles is expected to be approximately $9.4 million for the year, evenly spread across each quarter.

The impact of foreign exchange is expected to be approximately a $1.2 million loss for the year, spread evenly across each quarter. Tax effect of non-GAAP adjustments is expected to be around $16.6 million for the year with $4.5 million in Q1 and approximately $4 million in each remaining quarter. Lastly, we expect excess tax benefits to be around $23 million for the full year with approximately $7.1 million in Q1, $6.8 million in Q2, $5.6 million in Q3 and $3.4 million in Q4.

In summary, our 2019 outlook reflects continued strong demand for our services, underpinned by the diverse set of industries we serve from which we expect a range of growth opportunities as they grow through their natural cycles. We remain confident that our strategy of combining our 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 Ashwin Shirvaikar with Citi.

My first question is, Ark, you started off mentioning a high degree of confidence entering 2019, and I'm wondering how this translates to the financial model? Is there higher visibility, maybe higher than your normal 80% to 90% range? Or is it a slightly higher starting point for growth? And also how does it factor into your hiring plans?

Ashwin, yes, we have good level of confidence, but it's not coming that it's something unusual. It's more like because it's in line with what you have seen before which, as you would suspect, giving us a good feel. But after growing really highly during the several years before, we're still having the same level of visibility and confidence. I think that's the answer to this. And in regards to talent acquisition, and you probably would suspect my usual answer. It's very challenging, and it was challenging and will be challenging, but we again feel confident that we would be able to support the necessary level of growth with what we see in the labor market.

Got it. And then the follow-up there is on the cash flow. Jason, good job there on the cash flow conversion, the DSO level. Would you say for 2019 that DSO level might be sustainable? Is there a target that you can give us with regards to cash flow conversion? And -- yes.

Yes, certainly, nice improvement as we went to 73 in Q4. What we usually see in Q1 is a certain -- almost a seasonal impact with DSO, where people have got to get paperwork and things in place and our clients do, and that actually results in sort of a delay in some of the invoicing processes. So we usually do see DSO actually creep up somewhat. We are -- I'm expecting that we'll probably end up something approaching the 80 number. So it's going to -- it should be below the levels that we saw in 2018. But it's certainly getting somewhat higher than what we saw as we exited Q4. However, there's a strong focus on DSO, and so we'll kind of keep you posted as we go throughout the year. The other thing I just want to remind you of is we do have kind of a seasonal pattern when it comes to cash flow. We usually have strong cash flow in both Q3 and Q4 of the fiscal year. And then in Q1, we've got that variable compensation element, and that is paid substantially in Q1, and we also have a cash-settled RSU payment that's made. And so you usually see a much lower level of cash flow generation in Q1 and also a somewhat lower level in Q2 because you also have a little bit of a variable compensation element paid there as well. So I just want to remind people of that, that, in addition to having some seasonality on the profitability front, you also see a little bit of seasonality from a cash flow generation standpoint.

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

This is actually Amit Singh. Just quickly wanted to talk about the adjusted operating margins. I mean, this quarter was obviously very strong at 18.4%, I guess the strongest since, I think, the second quarter of 2012. So if you could talk about what led to that strong margins in the quarter? I know utilization has gone up to above (inaudible). So a little bit of color there would be helpful.

Yes. So first off, the beat on the revenue, it clearly helps in other ways, right. It kind of supports the SG&A efficiency, and generally, it leads to higher utilization. So as you point out, we have the higher utilization, high revenue overall. SG&A was somewhat lower than we had expected, and there was kind of a onetime effect that I don't think that you would see in future quarters. And so could be the higher utilization usually have pretty good sort of calendar day availability or bill days in Q4 and then just the overall SG&A efficiency. If I were to kind of take you forward to Q1, usually what you see is you see quite a bit lower bill days for EPAM in Q1. And in the T&M business, bill days will impact your adjusted IFO and that's because you've got a lot more holidays in Russia, Belarus and Ukraine in that time period with kind of the Orthodox Christmas -- or Eastern Orthodox Christmas. But then we'll probably have slightly lower utilization, and then I do want to make certain that everyone understands that we do expect that SG&A will go back to a rate more in our 18% to 19%. So as we exited Q4, we were below 18% as a percentage of revenue. And then I expect in both Q1 and for the remainder of the fiscal year that we'll operate in the 18% to 19% range.

All right, perfect. So just a follow-up to this for fiscal '19 guidance. I mean, you're guiding to 16%, 17% when we look at the full year, and you ended this year for the full year at the higher end of that range. So at the midpoint, why should overall margins decline? And then also, if you're looking at top line at the beginning of the year, so I understand that want to be cautious and see how things play out, but you ended the year at around 27% top line growth in constant currency. And the guidance for next year is 23%. So if you could explain these 2 on margins and top line and also just add to how M&A is contributing sort of next year?

Yes, so let me start with the end. And so first off, with the 27% on the constant currency, we would have had a 2% benefit from M&A, specifically, the TH_NK and Continuum acquisitions. In 2019, we expect that there'll be a 1% benefit. So if I were to look at the constant-currency growth rate, we're guiding to an at least 22% growth rate for 2019, which is actually consistent with the growth rate that we guided to in 2018. From an overall kind of profitability standpoint, we're going to continue to make the investments that we need to, to continue to grow the business at greater than 20% a year. Again, we expect that that'll mean that we'll return SG&A back to an 18% to 19% range, and we continue to get all the price increases, and wage inflation continues to be kind of within our expectations and kind of within our recent history. And so we believe we'll continue to manage the business very much in that 16% to 17% range, again, with the idea that we want to be able to make the investments that allow us to continue to grow the business not just in 2019 but into the future. I guess, the only other thing I'm going to point out is just that we do -- we did have that very strong exit, and it was a great quarter and a great fiscal year in 2018. However, you do have seasonal patterns. And so generally, what we find is the first half of the year has got a lower level of profitability than the second half of the year, and I expect that you'll see that pattern again in 2019.

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

A have a little follow-up to that M&A contribution question. I think you said 1% for the full year '19. What's the contribution in the first quarter specifically? And what was the contribution in the fourth quarter of '18 as well?

Yes, great question. So in the first quarter, we expect 200 basis points of benefit. And in Q4, it would be 250 basis points of benefit, and so we would've had -- Continuum, we acquired in -- on March 15 of Q1 of last year; and TH_NK was November of 2018.

Very helpful. And then you've talked about more complex, larger-scale engagements. Obviously, that's going to get you into competition with some larger and more experienced firms as you engage these new types of opportunities. Can you kind of comment on the competitive environments? Do you expect to see any increase in competitively bid deals or any changes in terms of your ability to bring on higher pricing or drive higher pricing on new engagements?

Yes, we clearly compete with the top firm for some time already and proportion of these deals for us is increasing year by year. And some of them, we've been able to price differently, but I don't think it's impacting the total picture yet. We hope that it would be changing in the future. But as in the past, it's very -- my answer is the same: it's very difficult to predict how it would be happening. And again, that's -- directionally, there is a chance that we will benefit from this.

Okay, so you're talking about change in method of pricing? Or are you talking about...?

It's actually rates in general because complex projects also require different composition of the teams, including teams with consulting skills and in market skills, which also changes the pricing. And on top of this, the method of pricing because when we go into automation projects, there are some opportunities to do it differently. But again, it's relatively a small portion of the revenue, and I think impact might be seen like late in the game.

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

I'm wondering, Jason, could you just help us out and maybe deconstruct the revenue guide? I think you said 1 point from acquisitions in 2019. We still assuming kind of mid-teens-ish headcount with the balance from pricing or a little from utilization. But I think you had mentioned utilization coming down. So yes, maybe you could just help us out to deconstruct the top line growth.

Yes. So from a reported standpoint, we've got a -- at least 22% guide. We've got a constant currency at 23%. We've got the minus 1%, and that's with TH_NK and Continuum only. If we were to do additional acquisitions, that would be additive. And so if you net out the TH_NK and Continuum as 1%, then you end up with a reported growth rate of 21% and a constant-currency growth rate of 22%. I think you'll see the same types of patterns that we've seen in the past, David, and I think you're aware of the fact that we've seen a gradual shift towards on-site capabilities. Those on-site capabilities come in with higher revenues. Also, what we'll see is a certain amount of wage inflation, but we're not seeing any significant changes relative to what we've seen in past years. And we also are, as Ark just indicated, able to get price increases with customers. And the environment seems somewhat more friendly to that just based on sort of the supply constraints in the market. So I think you'll see fairly consistent patterns to what maybe you saw in 2018. And I suspect that -- the gross margin will not be as high as it was in Q4 where we exceeded 80%, or that's not what we're expecting. But I think that you'll find that gross margin levels will be in or around what we did for the full year of (inaudible).

Okay, got it. And then in terms of just thinking more broadly about the business model, I know you guys have talked in the past about broadening the pyramid, particularly given what's going on with supply. Any updates there in terms of your efforts to kind of create a broader platform at the bottom of the pyramid and, perhaps, enhance the available supply that you can use?

David, you know for a long time that we're mentioning how much we invest in education and platforms or how to manage people. We mentioned this today as well. So I think that's our constant focus and constant investment. And that's why we have good level of confidence that we would be able to stop. But you're absolutely right. It's very, very, very challenging and very tough in all markets.

But David, our 2019 plan would include a slightly elevated level of kind of new grads as we kind of focus on the pyramid in certain geographies in which we operate.

And so is that, at this point, Jason... Go ahead, Ark. I'm sorry.

I just wanted to mention that we entered into new markets for talent, like India several years ago. And I think we're in much better shape there as well than we were several years ago. So there are multiple sources now. It's not just Eastern Europe.

Okay, got it. Just one last question. Jason, you mentioned SG&A. There was a onetime benefit in the quarter. Could you just give us a sense of just how large that was?

It was approximately -- approaching kind of $1 million. So it was -- yes, it was somewhat substantial in the quarter. But again, it's approaching that level.

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

Just want to follow up on when I think about the run rate of revenues from fourth quarter. I know you've touched on this, but you're guiding normative because you see something in like financials or in any other vertical and just (technical difficulty) health-care vertical, what's happening there exactly. How sustainable is that kind of (technical difficulty)

Darrin. You're breaking up a little bit, Darrin.

You' broke up a little bit. So you were asking about the guidance for the quarter or the full year, and then it sounded like you specifically asked about health care.

Yes. So can you hear me now? I'm just basically trying to figure out if the health care and the financials vertical, how you're thinking about the 2 of them, health care being very strong at 70% and financials being more of a question given the European side.

From a health-care standpoint, we're seeing extremely strong trajectory as we exit Q4 and also seeing extremely strong demand as we enter Q1. So I expect that that's going to continue to be a very high-growth area for us. From a Financial Services standpoint, a little bit as we talked about a couple customers in the European space which have not been generating growth for us. But we actually are seeing good traction across a number of customers. We've got some payments customers that we're beginning to do some work for. We're also beginning to get some entry into the insurance space, which has been a very kind of underpenetrated -- a very underpenetrated kind of part of the Financial Services area for us. And then I just think that we've got a broad range of, what I'll call, kind of growth engines. And you look at what we've done from an industry vertical standpoint. A year ago, I think that health care was actually the slowest-growing vertical we had, and here we are in this quarter with it being the highest -- the highest-growing vertical. So we've got a broad range of growth opportunities across a range of different industry verticals.

Okay. I mean, is there anything happening within the financial institutions, the 3 or -- 2 or 3 or 4 that you talked about that we should be keeping an eye on that could get worse or potentially -- or are you even embedding the conservatism around those into your guidance, which is partly why you have a deceleration from the fourth quarter run rate?

I wouldn't say that there is anything which we need to worry about from what you mentioned. And I think we are -- and I think you might be thinking about our revenue structure, not only in terms of verticals but what type of work we're doing. And that's why like volatility between verticals is pretty significant from quarter-to-quarter while the growth across the company pretty stable because like, again, this sort of foundational type of programs, digitally led, if you will, they kind of similar across the verticals as well. And because of the size of the company, when you compare us to the really big guys, we still have higher -- much higher volatility across industries while general business and the type of business is sometimes similar in these specific portfolios.

Right. Jason, just a last question is, I understand that you guys have seasonality on the margin side, but I guess, having the margins flattish basically after what we saw year-over-year increase and even, Jason, you talked about last quarter improved contract profitability. I mean, do you still see that improvement continuing through the year despite the puts and takes on a quarterly basis? And then where are you reinvesting the upside?

Yes, so from a contract standpoint, there's a strong focus within the company on account-level profitability, and there is some opportunity for price increases and maybe a little bit more so this year than in past years. But at the same time, we've got cost increases in wages, and we're making investments in certain areas that, probably, if I were to specifically talk about investments in account management, which we think is supportive of future revenue growth but also allows us to sort of manage some of these more complex programs that Arkadiy was referring to. Another example in 2018 of investments would be in capabilities, and you think about the Google cloud capability that we've talked about. And so it's a combination of investments in the infrastructure that's required to continue to support a business growing at this rate. And in then investment in capabilities that allow us to address sort of different markets or different segments of markets and grow with our customers.

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

I just kind of wanted to get a sense of the overall sort of demand environment. You certainly sound fairly positive. But can you kind of cast it in comparison to how you felt about the demand environment last year? Have things incrementally improved? And what have been the sort of underlying drivers?

Arvind, like, sorry for boring answer, but again, it's very similar and because we -- the whole company focus on more fast-growing component of the market in comparison to, again, our larger competitors, we've seen relatively strong consistency this year versus last year versus year before. So there is not much difference in the segments which we play. The demand is pretty, pretty good right now still.

Just from a little bit of color. So as we talked about, we've got good growth in Life Sciences & Healthcare; North American Hi-Tech, particularly in the Bay Area, we're seeing nice growth, and we're being brought into a number of large tech customers there; Financial Services, again, we talked a little bit about a couple of those smaller customers in Europe, but we've got good growth opportunities in Financial Services, including insurance that we talked about. And then we're also seeing a lot of good growth opportunities in North America in the energy space. So again, we feel that the demand environment looks really good in Q1. A little less visibility, obviously, if you look through the end of the year, but as Ark said, the visibility is consistent with probably what we've seen in the past.

Great, great. And yes, on that -- on the last earnings call, you all had talked about automation and some of the work that you're doing with work solution. Can you just give us a little bit more color? And also are you expanding the kind of vendors you're working with and kind of -- has some of that work accelerated? Or -- and any color on the automation side would be great.

Ark, you should...

Yes, we do expand the number of vendors. And as this work is growing for us, it's about right. And this is pretty good, interesting examples where we're able to greenlight the whole entrance to where it started from, underlying consulting engagements back to actual realization of the benefits.

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

In the past, we spoke a bit about wage inflation, and I think you mentioned it today as well. Can we talk about some of those pockets? Where are we seeing those pressures? That's number one. And then I've also noticed, besides the fact that Life Sciences was very strong during the quarter, emerging verticals were also very strong. Maybe you can talk about some of those emerging verticals, where are we seeing that strength. And are we getting to a point where some of those emerging verticals will be reported on a separate basis?

Regarding emerging verticals, I think we talked about automotive in the past. As I just talked about with the last question, the energy has been quite strong for us, and we've got some more, I guess, telco-related business. And so those would kind of be the 3 that kind of -- I think I'd point out. I don't think we're at a point yet where would sort separate any of those. But they continue to be very interesting opportunities in the high-growth areas for us.

Okay, and then wage inflation, different pockets?

Yes, wage inflation would be pretty consistent with what we saw over the last couple years, and it's -- we talked about a number of kind of approaching 5%. Certainly, there may be some geographies where it's somewhat higher, including maybe the Bay Area. But we haven't seen elevated wage inflation at this time.

Okay, and then just final point. You mentioned very favorable environment for pricing. Should we assume what we've assumed in the past, which is kind of low single-digit growth in pricing for the year? Is that a good number to use for modeling?

Yes, and so I think I would -- sort of just to make sure I -- I think I said a somewhat more favorable environment for pricing. Yes, and so I think it would probably be somewhat consistent with what we've seen in the past with maybe a little bit of opportunity.

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

This is actually Kyle Peterson on for Mayank today. Just wanted to see if you comment a little bit -- I know you mentioned the kind of war on talent remains pretty strong. Is that having any impact on attrition? Or is that kind of just bouncing along historical averages?

Yes, I mean, if I just look at the numbers, it would be just slightly elevated over what we've seen in the past. To be fair, we're about to pay out the variable compensation element. And I think for any company, you sort of see things change sometimes after that. But right now, it would just be slightly elevated. Ark, you have any other thoughts or...?

I don't think there's anything else to add to this. Slightly higher on attrition rate, but again, this type of volatility, we saw it before as well. It's nothing new.

Great. And then my only other question would be on the M&A pipeline. Just kind of -- if you can describe qualitatively kind of how -- what you guys are seeing or what you might be looking for kind of appetite for future deals?

I think nothing changing here. We always -- are always looking, always talking, and as soon as something happening, clearly communicating and the strategy there is still the same. It's mostly about client engagement and very specific capabilities. And we building our plans on the same size of acquisitions while if something bigger and interesting will come, so we will be considering this, too.

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

I wanted to ask 2 questions. I'll just get them both in upfront. When I take your headcount from the end of 2017 relative to the end of '18, it looks like it grew about 17%, but the revenue was up about 27% constant currency. Jason, I know there's other inputs like utilization and fixed price, but that's a 10% delta between revenue and headcount, which seems like a lot of pricing relative to what you've trained us historically. So I don't want to get -- one, can you verify the math; and two, is -- you're qualifying the pricing increases for '19. Was '18 just an extraordinary year that way?

Yes, I think the important thing to think about -- okay, when we talk about pricing, I think we're kind of talking about pricing on a like-for-like basis, and so for instance, if you said resource of a certain level, in a certain geography. And so what you're seeing that I think is driving that higher revenue per headcount or whatever language we'd use for that is really a generalized kind of drift towards a higher level of in-market resourcing. And so I think that if you see early in the fiscal year, we would have been -- a little -- the sort of 9% range. And as we exit 2018, I think we're closer to 11% or around that range. And so obviously, an on-site resource has got a much higher bill rate than on offshore resource, but you don't necessarily -- that doesn't translate directly into profitability, right. Because the wages for the on-site are much higher as well. And so I think we certainly are getting some prices I've talked about. But I think a lot of what you see when you do the calculation you're doing is really the shift towards somewhat higher levels of resourcing on-site. And that's relevant for us, as Ark talked about, as we sort of take on more complex engagements with customers, it does help drive larger programs, but it doesn't necessarily drop into a straight improvement in gross margin or adjusted IFO. Does that clarify that?

Yes. No, that's a great answer. Do you disclose that? I'm looking at the fact sheet. Maybe -- I may be forgetting it, but the on-site/offshore mix is...

I think we've talked about it publicly. I'm not certain that we actually sort of put it in a fact sheet, but it is something that we update on verbally.

Okay. And then if I could just ask one more. With the top 5 -- EPAM conversation would be sufficient without the top 5 questions. So the top 5, my calculation, is it grew about 12%, 12.5%, which is about half the corporate average for the quarter, but interestingly, it looks like it was down sequentially. I know there's some currency mix in there, but my calc is that it's down 2.5% sequentially. You were up 7.8% sequentially. So anyway -- and I know there can be movement in the top 5 we can't see, but anyway, does that math sound about right? Any commentary there.

Yes, just 1 of the top 5 customers had a piece of their business was split out, and so now it's an independent entity. And you might be able to guess which one that was, okay. And so now a piece of revenue that would've been part of that customer is now not part of that customer, but we're still doing revenue with both customers. But it has reduced the level of revenue associated with 1 of our top 5 customers. Is that a clear enough answer?

Yes.

So for those that are remaining on the call that we're not able to get to, to the Q&A, we will follow up with you after this call. But why don't we go ahead, Ark, go ahead and proceed to closing?

Okay. As usual, thank you, everybody, for being with us. So I think it was -- 2018 was a very, very good year for us, and we hope to continue growing. Talk to you next quarter, and Happy Valentine's Day for everyone.

Thank you.

Thank you.