EPAM - NYSE

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2024 EPAM Systems Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Straube, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. By now, you should have received a copy of the earnings release for the company's first quarter 2024 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I'd like to remind those listening 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 the comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'd like to now turn the call over to Ark.

Thank you, David. Good morning, everyone. Thank you for joining us today. First, about our guidance change. As you saw from our press release, we are seeing some continuing volatility in our global demand environment. And while there are encouraging signs of new deals in new types of very different domain-specific demands, then even in cyclical nature of 2023 follow as well in 2024, which now leads us to adjust our thinking for both Q2 and for all -- full year outlook. As I mentioned during our fourth quarter earnings call, our initial view was the 2024 environment will be, at least for the first half of the year, a continuation of second part of 2023's trends with a potential demand upturn right after, and that would take us into sequential growth for 2024. This view, which we now believe was optimistic, was supported by broadly anticipated more positive macro assumptions and our active interactions with the clients during the very end of 2023 and the beginning of 2024. That was directing our belief that clients will more quickly come back to growth in re-prioritization for the remainder of 2024. We also believe that once we enter into Q2, we would have much more measurable indicators for the improvements of the demand environment for digital engineering, data, cloud and AI and from which we can build further out 2024 revenue scenarios and plans. What we now understand is that the macroeconomic and geopolitical factors that continue to drive volatility in overall markets and specifically in the IT services and digital transformation sectors are still with us throughout the reminder of the year. While the programs we anticipated to start by now are still in place, and some are in active discussions, many of them have been postponed to future periods or decided to be implemented in much more modest scopes. In addition, we need for -- rebalancing our delivery platform to lower cost locations forced some level of slowdown in our revenue growth, too. And so our expectation for considerably high level of accelerated revenue trends in second part of the year will not be materializing as we anticipated, at least as we see it now. Jason will provide more details in our updated outlook for 2024 but let me share some current highlights of our business from Q1 up to today. Throughout the last quarter, and continuing into now, we've been making progress across all critically important areas for us, which were discussed in depth during our previous call. We are strengthening and repositioning our Italian delivery platform as well as the cost effectiveness of our offerings by rebalancing our Italian distribution from more expensive locations to less expensive ones while maintaining our commitment to our traditionally strong [ years. ] India, our second-largest delivery location is growing rapidly, not only in terms of headcount, but also by creating new capability centers in data, cloud, digital transformation and AI-enabled managed services. We recently opened our Gurugram office and plan to open additional locations to support our client growing needs. LATAM is another of our stated priorities in overall rebalancing. As we refine and expand our locations there, we're expanding our key engineering genAI capabilities and division. In the first quarter, we announced the acquisition of Vates, a multi award-winning software development company with offices in Argentina and Chile. We are continuously investing in our existing and new technical capabilities including, crucial for the future, genAI, data and ML and predictive AI and in corresponding IP development. We also continued to improve our domain industry capabilities in consulting and advisory services. During the beginning of 2024, we have seen encouraging signs of more balanced demand environment across our business with both new and existing logos, equally weighted between cost takeout and business change and modernization. This portfolio-wide perspective, combined with our efforts to establish domain-specific and relevant approaches for go-to-market, both independently and with our partners, leads us to believe that our ongoing reinvestment in consulting experience, cloud data, AI and vertical-led solutions will provide the unique edge we need to secure a long-term growth. Couple of short stories to illustrate the above. EPAM recently teamed up with AWS health and a leading energy company in the U.K. to transform its customer experience, responding to a market that is characterized by the need for enhanced customer expectations, emerging competitors, regulatory demands, smart metering adoption and sustainability growth. Our engagement was built around key transformations of payment channels, customer service frameworks and shift to agile processes to ensure service flexibility. For a new logo, one of the world's best known global car rental brands, we are helping to redesign a critical data platform that will enhance intelligent real-time pricing capabilities and drive better experiences for customers and further increasing their price and market leadership. We believe it is the next iteration of platform engineering into a truly intelligent application empowered by AI that will drive the future of our demand. Finally, and another encouraging sign, our long-term clients are also returning to us with newer streams related to modernization and next-gen support, which now include much expanded engagement footprint with largest shares of India and Latin America, including net new delivery locations in Argentina and Brazil. In general, our focus on domain-led propositions is the reason we believe we saw much stronger growth in some verticals this past quarter. For example, in our healthcare and life science portfolio, we are part of a number of strategic programs helping clients in areas of cloud, data platform, physical digital product development and engineering as well as new genAI-driven initiatives. On another side, in some of our verticals, namely business information and media, we continue to work through the impact of ramp-downs from a few large clients initiated previously. And while we aren't able yet to offset this with revenue coming from new opportunities, we are still seeing a more balanced picture emerging over the course of the next quarters. Across all our verticals and geos, we are seeing more interest and higher level of program starts related to generative AI. In Q1, a number of our key clients formerly selected EPAM as strategic partners for their AI transformation journeys, where EPAM will help to scale AI, including genAI to unlock the power of data and to establish valuable insights. These engagements are often starting today from advisory and from the use of our differentiating IP and then ramping up to specific use cases. We believe that will lead us to a new level of engagement with our buyers by allowing to drive meaningful business breakthroughs with our tools and in combination with our consulting and scaled delivery capabilities. And while the revenue impact of these programs is still limited today, we see it's a very visible progression of the AI-enabled services market for us. To summarize, while in Q1, across our core business, we are seeing a more balanced demand outlook than in the most part of 2023, and a gradual return to modernization and business change programs as well as ramping up genAI-related opportunities. As mentioned already today, by the end of Q1, we realized that the speed and scale of those changes were not in line with our earlier expectations. Moving to how we managing our business in this part of the cycle. As we focus on driving new demand and proactively converting and expanding our wallet share with clients, we're also looking for opportunities to drive efficiency and focus throughout the organization. We have shared our ongoing efforts to rebalance the business from a geographical perspective over the course of last year, and that program is ongoing. Our attention now is tilting towards a more finely-tuned approach to both geographic investment as well as our areas of capability and market, particularly around our stated market segments, AI cloud, data, experience and domain-led consulting. We've gone to market in much more intentional way with key propositions and strategic partners and are now looking to refine some of those propositions and investment as we look to balance near-term and long-term demand with our investments. Throughout the remainder of this year, we will be focusing on driving enhanced efficiency and further rebalancing of our geographical footprint, resizing portions of our in-market and some other teams, enhancing operational efficiencies and engineering productivity through application of AI and automation internally at EPAM and driving a singular focus on client centricity for the entire company. Those continual efforts are critically important as we navigate the current environment while taking the necessary steps for the eventual return for build and transform programs, which have been slowed down during the last 2 years. Our fundamentals are strong, and we are fully confident that EPAM will be in a lead position in this rebound, enabled by our significantly diversified global delivery platform and driven by long-term precious legacy modernization, needs for advanced customer-centric solutions and the significant interest in applying and integrating genAI and genAI capabilities into new and existing enterprise platforms, innovative intelligent applications and new transformative business models. With that, let me pass to Jason to provide details on our Q1 results and our guidance for 2024.

Thank you, Ark, and good morning, everyone. In the first quarter, EPAM generated revenue of $1.165 billion, a year-over-year decrease of 3.8% on a reported basis or 4.3% in constant currency terms, reflecting a favorable foreign exchange impact of 50 basis points. Due to our exit from the Russian market, we will longer generate revenue from Russian clients. The impact of this exit had an approximate 50 basis point negative impact on year-over-year revenue growth. Excluding Russia revenues, year-over-year revenue for reported and constant currency would have decreased by 3.3% and 3.8%, respectively. Moving to our vertical performance. Life sciences and healthcare delivered very strong year-over-year growth of 26%. Growth in the quarter was driven by clients in both life sciences and healthcare. To reflect a more diverse end market, our travel and consumer vertical has been renamed consumer goods, retail and travel. On a year-over-year basis, the vertical decreased 6.9%, largely due to declines in retail, partially offset by solid growth in travel. Sequentially, the vertical grew modestly driven by solid sequential growth in the travel portion of the portfolio. Software and hi-tech contracted 8.3% year-over-year and grew 2.6% on a sequential basis, suggesting some level of stability in the vertical. Financial services decreased 10.3% year-over-year, driven by declines in banking, asset management and the payment sector. Business information and media declined 15.8% compared to Q1 in 2023. Revenue in the quarter was substantially impacted by the previously discussed ramp down of a top-20 client. And finally, our emerging verticals delivered solid year-over-year growth of 12.9%, driven by clients in energy and telecom. From a geographic perspective, Americas, our largest region, representing 59% of our Q1 revenues, declined 2.4% year-over-year on a reported and constant currency basis. Sequentially, growth was 2.4%, reflecting ongoing signs of stabilization in the geography. EMEA representing 39% of our Q1 revenues contracted 3.2% year-over-year and 4.8% in constant currency. And finally, APAC declined 13.1% year-over-year or 11.5% in constant currency terms and now represents 2% of our revenues. Revenue in the quarter was impacted primarily by the ramp-down of work within our financial services vertical. In Q1, revenues from our top-20 clients declined 8.6% year-over-year while revenues from clients outside our top 20 declined 1%. The relatively stronger performance of this latter group was driven by both new logo revenue and inorganic revenue contributions. Moving down the income statement. Our GAAP gross margin for the quarter was 28.4% compared to 29.3% in Q1 of last year. Non-GAAP gross margin for the quarter was 30.4% compared to 31.5% for the same quarter last year. Gross margin in Q1 2024 was negatively impacted by foreign exchange due to strengthening of currencies in certain of our delivery locations. Additionally, the inability to adjust prices after EPAM's Q2 2023 promotion campaign continues to have a negative impact on profitability. GAAP SG&A was 17% of revenue compared to 17.5% in Q1 of last year. Non-GAAP SG&A in Q1 2024 came in at 14.1% of revenue compared to 15.3% in the same period last year. SG&A improvement in the quarter is a result of our ongoing focus on managing our cost base and increasing efficiency in our spend. GAAP income from operations was $111 million or 9.5% of revenue in the quarter compared to $120 million or 9.9% of revenue in Q1 of last year. Non-GAAP income from operations was $174 million or 14.9% of revenue in the quarter compared to $178 million or 14.7% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 6%, which included a higher level of excess tax benefits related to stock-based compensation. Non-GAAP effective tax rate was 23.4%. Diluted earnings per share on a GAAP basis was $1.97. Our non-GAAP diluted EPS was $2.46 compared to $2.47 in Q1 of last year, reflecting a $0.01 decrease year-over-year. In Q1, there were approximately 58.9 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q1 was $130 million compared to $87 million in the same quarter of 2023. Cash flow from operations in the quarter reflected a lower level of variable compensation payout related to 2023. Free cash flow was $123 million compared to free cash flow of $79 million in the same quarter last year. At the end of Q1, DSO was 73 days and compares to 71 days for Q4 2023 and 69 days for the same quarter last year. The uptick in DSO reflects an increase in the time some clients are taking in the review and approval of payments. Share repurchases in the first quarter were approximately 396,000 shares for $121 million at an average price of $304.21 per share. As of March 31, we had approximately $214 million of share repurchase authority remaining. We ended the quarter with approximately $2 billion in cash and cash equivalents. Moving on to a few operational metrics. We ended Q1 with more than 47,050 consultants, designers, engineers and architects, a decline of 8% compared to Q1 2023. This is the result of lower levels of hiring, combined with both voluntary and involuntary attrition as we continue to balance supply and demand. Our total headcount for the quarter was more than 52,800 employees. Utilization was 76.8% compared to 74.9% in Q1 of last year, and 74.4% in Q4 2023. Now let's turn to our business outlook. We are continuing to see a modest improvement in demand. However, client decision-making continues to be cautious, and demand is not improving to the degree expected when we set our original 2024 guidance. At that time, based on the modest sequential growth achieved in Q4 2023 and our forecast of modest growth in Q1, we expected Q2 to show flat to modest sequential improvement, followed by solid sequential growth averaging at least 3% for Q3 and Q4. As a reminder, based on the sequential declines in 2023 quarterly revenue, we needed to generate regular sequential growth in 2024 to produce year-over-year growth. For the remainder of the year, with limited demand improvement, we now expect seasonal factors to have a more pronounced impact on sequential revenue growth with Q2 showing a modest decline, Q3 improving followed by flat to a possible modest decline in revenues in Q4. Additionally, although we are seeing some modest incremental contribution to revenue from recently completed acquisitions, that contribution is largely offset by foreign exchange headwinds, resulting from the ongoing strength of the U.S. dollar. We're maintaining our focus on demand generation and will continue to prioritize revenue growth throughout 2024. In 2024, we will incur incremental costs related to compensation. Additionally, lower utilization for EPAM's in-market resources and some ongoing pricing pressure will continue to negatively impact gross margins. However, we are committed to running the business at a profitability level of at least 15% for non-GAAP adjusted IFO. We are planning to initiate additional cost savings measures to ensure that we can achieve our profit objectives while still focusing on long-term growth. Finally, our operations in Ukraine continue to run at high levels of utilization, a testament to our team's dedication and focus on maintaining uninterrupted quality of delivery. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers at productivity levels similar to levels achieved in 2023. Moving to our full-year outlook. Revenue is now expected to be in the range of $4.575 billion to $4.675 billion, a negative growth rate of 1.4% at the midpoint of the range. The impact of foreign exchange on growth is now expected to have a negative impact of approximately 30 basis points. At this time, we expect approximately 1% of revenue contribution from already completed acquisitions. We expect GAAP income from operations will now be in the range of 10% to 10.5% and non-GAAP income from operations will now be in the range of 15% to 15.5%. We expect our GAAP effective tax rate will now be 20%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will continue to be 24%. Earnings per share, we expect the GAAP diluted EPS will now be in the range of $7.34 to $7.64 for the full year, and we are focused on maintaining non-GAAP diluted EPS so as to remain in the range of $10 to $10.30 for the full year. We now expect weighted average share count of 58.7 million fully diluted shares outstanding. Moving to our Q2 2024 outlook. We expect revenue to be in the range of $1.135 billion to $1.145 billion, producing a year-over-year decline of 2.6% at the midpoint of the range with the expected impact of foreign exchange to be negative 0.6%. For the second quarter, we expect GAAP income from operations to be in the range of 9% to 10% and non-GAAP income from operations to be in the range of 13.5% to 14.5%. We expect GAAP effective tax rate to be approximately 25% and our non-GAAP effective tax rate to be approximately 24%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.52 to $1.60 for the quarter, and non-GAAP diluted EPS to be in the range of $2.21 to $2.29 for the quarter. We expect a weighted average share count of 58.8 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for the remainder of the year. Stock-based compensation expense is expected to be approximately $38 million for Q2, $46 million for Q3 and $47 million for Q4. Amortization of intangibles is expected to be approximately $6 million for each of the remaining quarters. The impact of foreign exchange is expected to be a $1 million loss for each of the remaining quarters. Tax effective non-GAAP adjustments is expected to be around $10 million for Q2 and $11 million for each of the remaining quarters. We expect excess tax benefits to be around $1 million for Q2 and $1.7 million for each of the remaining quarters. We expect incremental restructuring charges in the second half of 2024 and at this time, cannot estimate the amounts with reasonable certainty. We expect to provide detailed estimates during our Q2 call. Incremental restructuring charges are currently not included in our guidance. However, these charges will not impact our non-GAAP results. Finally, one more assumption outside of our GAAP to non-GAAP items. With our significant cash position, we are generating a healthy level of interest income and are now expecting interest and other income to be approximately $15 million for Q2, $20 million for Q3 and $15 million for Q4. While we work our way through the cycle of lower demand, we will continue to run EPAM efficiently, positioning the company to capitalize on a more normalized demand environment. Lastly, my continued thanks to all of our employees for their dedication and focus on serving our clients and driving results for EPAM. Operator, let's open the call up for questions.

[Operator Instructions] Your first question comes from the line of Bryan Bergin with TD Cowen.

Wanted to start with some more detail on the change in the growth outlook here and ultimately trying to unpack attribution here to macro market-driven slowness versus more idiosyncratic factors to your turnaround and your exposure. Can you talk about whether this is really broad-based across the portfolio or more so due to a handful of larger client-specific slowdowns? And is there any attribution to a change in clients' reception to Ukraine or Belarus delivery?

Thank you. I think in our opening remarks, we -- exactly reflecting what was happening from our standpoint. I think, based on the Q4 level of optimism, I would say, and beginning of Q1, we were trying to predict how potential growth for would look like versus conversations and [ standard ] opportunities. So in the second part of Q1, at the same time, we realized that many programs were delayed and some of them were started, but at very different level of the scope. And that was -- put us in a position to not try to predict the future market and economic trends and other things but actually focus on what we see right now and with all this volatility, put our guidance in more realistic scenario based on what we really know. So there is nothing happening kind of -- but we're not losing clients. We're not having some unexpected problems. So there are some more specific trends when we're increasing India share of our delivery. So there are foreign exchange, there are locations and billable hours availability in Q2, and that's -- I can pass to Jason to -- more details.

Yes, Bryan, the -- I think what Ark said is that we're -- at this point rather than trying to predict that there's going to be an improvement in demand, we're just taking kind of what we see today, which is still client decision-making is slow, budgets are being partially released, some programs are being descoped. And so we're just not seeing quite improvement that obviously, we had hoped for. So obviously, it was a miss on our part. The one thing that Ark referenced, which we've talked about over the last couple of quarters, but we've now been able to do some more analysis on it is we still see strong sufficient demand for Ukraine, Poland, locations like that. So utilization is still very good in Ukraine, for instance. However, we are seeing more pronounced growth in India. And so what -- in the calculations that we've done over the last couple of weeks, what we're seeing is that an ongoing mix shift towards India, particularly for new engagements is beginning to produce a bit of a headwind in terms of our revenue growth rate measured in dollars. And so that is beginning to show up in terms of a sequential impact and a somewhat larger impact for the full year. Some of that was anticipated when we did the guidance, but my guess is probably not fully.

Okay. Okay. That's very good detail. I appreciate that. My follow-up here is partly on that. So as you're refining the global operations and rebalancing the delivery platform, if I heard correctly, it sounds like the structure became a bit too distributed across countries, and you're trying to rein that in. Can you just add more color on what -- how long this may ultimately take? And then, Jason, just on that last point, are you able to quantify how much the shift to the lower-cost locations weighs on this year's growth?

Yes. So -- and again, it's a calculation, if we -- think of a constant currency calculation, where we go if the mix were the same as in 2023. In 2024, what would the impact be? Again, I do want to confirm that we still have demand for Central Europe and Eastern Europe, but again, a lot of the incremental demand due to client sensitivity is coming into India. It could be something approaching $100 million if you did a constant currency impact on a year-over-year basis. India continues to -- I'm just going to step ahead to the obvious next questions, how profitable is India? Is that a drag on profitability? The cost structure is lower in India. The bill rates are lower in India, but the profitability in India is still very solid. So it's not dragging down profitability by any means. But what it is doing is beginning to produce some headwinds against revenue growth. Some of that, again, would have been anticipated in our traditional guidance or our guidance that we provided at the beginning of the year. My guess is it wasn't fully anticipated.

Your next question is from the line of Jonathan Lee with Guggenheim Securities.

Given the way you positioned the demand environment in your prepared remarks, what, in your customer conversation, gives you confidence that you're able to achieve sequential growth in 3Q and potentially flat 4Q? And is the 3Q dynamic more of a function of bill days?

You're talking about sequential growth in Q3?

Yes, Jonathan. So just to -- the question about whether or not we see sequential growth in Q3. The way we have laid out the guidance, okay, really is the seasonal factors are going to drive. And so the Q2 to Q3 growth would substantially be driven by seasonality, which is more available bill days in Q3.

And just a follow-up, I want to build on Bryan's earlier question. You've -- you're seeing your India expansion actually take place. And are you comfortable with the level of delivery, quality, harmonization that you're seeing there, given you've highlighted that in the past? And how much more work needs to happen there?

I think we feel quite good about the quality of our India delivery, and we think it's differentiated, okay, our India versus, let's say, our peers or competitors' India. We still feel very good about the quality of our Eastern European delivery. And we clearly have a number of clients who still prefer Eastern Europe, but we feel good about the work that we've done in India to differentiate. And again, we've got good ability to continue to scale the geography, and we have relatively low levels of attrition.

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

I understand the commentary about the rate cards in India and how that's impacting your top line, but it also sounded like there were some delays, some pushouts of projects. It didn't sound like much in the way of cancellations, which is encouraging. But I'm trying to understand were there particular types of projects, particular verticals in that vein that drove your change in expectations?

So I think it's broad -- there is no specific on verticals. We actually highlighted that there are some vertical, which impacted by decisions which were done practically in previous period. There are some verticals which operate better, like we highlighted healthcare, life sciences as well. Energy for example, in the same bucket. So -- but in general, it's pretty broad, cautions, and again, a number of programs, which we were -- expected to jump start in Q2, delayed or again, were put down kind of in the scope of implementation. But conversation happening, there is no cancellations, but rather definitely delays and slowness in decisions.

And the feedback that we're getting is that certain clients, although they appear to have budget are sort of slow to begin to activate the budget. And I would say probably if we were to talk to a specific portion of the portfolio, we have feared that at some point, we may see more caution in Europe, and I think that's where we're seeing kind of a relative change in the business. In North America, it does feel like it's stabilized, and we did see sequential growth as we talked about in our prepared remarks. But we're beginning to see some incremental weakness in our European...

Okay. And then you've obviously made some changes in terms of pricing, in terms of delivery. You've been putting extra attention on some of your largest, longest-duration clients. So is there any notable change in client retention or win rates? Are those progressing differently than they were roughly a year ago when you announced some of the changes that you intended to make?

I think we just kind of repeat the [indiscernible]. In general, there is no any kind of dramatic changes. Mostly, it's attributed to delayed decisions and very specific things like if we're talking about Q2, which we have already shared. Billable hours, it's FX, it's multiple parameters, which is calculated one. So the rest of this is in line with what we were seeing before. But again, decisions slow down, and now we try to project exactly what we see versus what we kind of thinking might happen.

Yes, clearly no longer have the confidence of sequential demand improvement in the second half than we had when we released the guidance.

The next question comes from the line of Surinder Thind with Jefferies.

Is there any color that you can provide on intra-quarter trends in 1Q in the sense of how the quarter started? And then at what point did you kind of start to see clients begin to push off projects? Just any color there would be helpful.

Yes. Maybe what I'll do is unpack, I guess, is the word I'll use, what happened in Q1. So we entered Q1 with the guide that we had, and we expected that we probably could get to the top or maybe a little bit above the high end of the range and had come in with a range that we wanted to make sure that we could make. What we saw during the quarter is that things were a little bit slower than expected, and we did get some benefit from foreign exchange, which I would size at about $2 million and just a modest amount of M&A contribution that was not in our original guide, and that would be about $800,000. To be adjusted for those two factors, we're pretty much closer to the middle point of the range, pretty much at consensus rather than this revenue beat. So things were a little bit slower than we expected in Q1, not much, but somewhat. We have been able to calculate that this India shift even showed up in sort of sequential impact. And as Ark said, at this point, we're just not willing to continue to guide with an assumption that we're going to see improving demand. And we -- but we are seeing stability in the portfolio and probably feel a little bit of improvement if you adjust for the shift towards India.

And then in terms of just understanding trends within the top-20 clients versus those outside the top 20. You called out a pretty material difference in the growth rates. Part of that, I believe you attributed to just the acquisition, but also others to new logo activity. Just any color on how much new logos are contributing to the growth at this point and just where things are within the cycle there?

Yes. And so let me talk about the top 20. So the top 20 does have a significant number of business information and media clients in it. That is a more challenged portion of the portfolio, I would say, due to their end markets, in addition to the client that we talked about over the last couple of quarters that had ramped down in Q1 and again in Q2 as they kind of exit. We -- and again, this is all known, and we've talked about -- okay? But we are seeing some reduction in spend in another business information and media client in Europe, and that is the top 20-client. So those things kind of show up. And then from a new logo standpoint, part of what's going on in North America is, again, stability in the existing client portion of the portfolio, but we are beginning to see growth in North America in terms of new logo revenues. And then Europe, there's an awful lot of activity, but generally, it's kind of smaller in size from a contribution standpoint. Again, encouraging but obviously not enough to drive the type of growth rate that we had originally expected.

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

I wanted to just stay on the India topic for a minute and talk about competition there. Obviously, it's pretty crowded. Just in terms of the vendor landscape and on a relative basis, EPAM is somewhat more of a newcomer. So curious to see how you see the competitive landscape there versus your more traditional service delivery geographies? And then just if we look at headcount mix, I think at the end of last year, Ukraine was still #1 at 19%, India was 15%. I mean, do you think in the not-too-distant future, India could potentially become your largest country?

I think we're very satisfied with our progress in India. So -- and by the end of the year, we might be closer to 20% of the total headcount. So it's still going to be the largest -- fastest growing. And probably we'll be on par with Ukraine or maybe larger than Ukraine. So from the quality perspective, we talked about it in the past many times. We invested there firmly, and we're doing this for a long time and India become fastest growing location. I think even in 2021 or maybe even in 2019, I don't remember it now, but it was one of the fastest one like before market went down. So -- and we're also trying to build, and we mentioned today -- like not trying to build. We built significant data practice or built significant digital engagement practice. So we put in all necessary things there to build genAI practice as well. So it's a location, which [ embodies ] all what we see in EPAM traditionally. And that's a differentiation as well because we don't try to duplicate just kind of scale, but exactly the quality which we [ growing ]. So there is different type of competition. At the same time, we also mentioned that our competition for talents there is mostly captive and technology companies, and that continues to be for us as well. So I think, in general, very positive experience, and we think it will play bigger and more important role. While we are very committed to our kind of talent, which we built over the years in Europe and -- yes. As we said before, we probably will be the most kind of diverse from the talent perspective company in our sector.

The only thing I'll add to that, similar to what we do in Eastern Europe, we don't seek to be the lowest cost provider in any market in which we operate. Again, we -- differentiated quality in India, and we charge a premium relative to other peers' kind of India rates based on what we believe is a differentiated offering there.

Okay. And I think in response to an earlier question, you said that your win rate on new logos is intact, which is good to hear. I'm just curious whether you've seen any material change in your wallet share within, say, your top-20 existing clients?

Like again, there are several clients, which we mentioned already. So -- but in general, I think it's very good, at least from wallet-share point of view. We have visible increase in some of the clients. We have pretty good stability and then saying again, there are some companies, which we mentioned before, which make like long-term decision. And we've seen actually visible slowdown in the execution kind of like when decrease [ capacity ] with us and there are a couple which turned back and starting to growing with us. So I think we're pretty comfortable with what we do in this -- our top 20.

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

So the pipeline is there. It's just not converting at the pace that you guys expected it to be, and you have some deferrals out there. The question here is, and obviously, the environment is pretty fluid, how quickly can these be switched around? Let's say, the Fed cut rates and let's say, the macro volatility kind of maybe is improving. How quickly can these programs get back on board? Just -- again, just what I'm hearing -- is just that the demand environment is pretty fluid and obviously, things can turn on and off pretty quickly. How would you see that? How would you characterize this one?

That's exactly what we say -- we said already, we don't want to predict anymore. So we try to be more kind of pragmatic in this situation. Historically, whether or not -- volatility can change, and demand could be very fast. I'm not sure that it will be very fast in this current environment. But I only can repeat what we were saying before that the whole point for us starting from all this thing during the last couple of years to prepare ourselves well when environment will change. And that's why we very carefully kind of managing all our capabilities necessary for this restart if needed. And I think that's why, in general, we feel very comfortable. The fundamentals then that we're actually becoming a better company from diversification of our risks, from our delivery kind of capabilities and again, the real change will happen when demand will change. And again, that could happen relatively fast, but let's see. I don't have any more opinion right now.

Okay. That's fair. And then just a follow-up. Last quarter, you spoke about some clients that were coming back to EPAM. Originally, EPAM clients, when they expanded scope, they went somewhere else, and they came back. Are you continuing to see the same trend throughout this quarter?

Yes. This is happening, and this is happening not necessarily just when clients come back. It's also happening when clients were going down and now become comfortable with our kind of [ diversification ] of delivery and starting to come back to us. It's again, it's not huge things, but it's a very positive message. And another thing that developments, vision to some new locations where we open as well, and that's again exactly not necessarily optically visible for proportional revenue growth because we're doing more work in India. And I think that's exactly what we were plan to do to make sure that we stabilize and that we're protecting our market share and clients. But exactly to your question, yes, it is continuously happening.

Your next question comes from the line of Ramsey El-Assal with Barclays.

Could you provide some additional color on margins and the margin cadence as we progress through the year? And if you could help us with that, that would be appreciated.

Yes. So in Q2, we've got the lower bill days as we talked about, and that usually does have a depressive effect on margins, and so right now for Q2, I am expecting that we could be at 30% gross margin, or slightly below that, on a non-GAAP basis. I think for the first half of 2024, you'll see gross margins around 32%. And then the second half, I think you'd see margins in the 32% to 33% range, and that would kind of blend us into this sort of 31% to 32%. So again, you'll see somewhat improving margins as we continue to focus on our costs, and at the same time, you get a little bit of benefit from the stronger bill days in the second half.

And a quick follow-up. A lot of your peers who are also calling out big demand headwinds right now, they view these headwinds in terms of sort of discretionary headwinds versus nondiscretionary spend. Do you have a view of your own portfolio in that context? What percentage of your portfolio is sort of discretionary?

Yes. I guess it all depends on how you define that. We've never have -- as I think we all know, we had a large portfolio of multiyear maintenance, multiyear BPO or that type of thing. So a lot of our work generally is kind of newer build, digital. And as we talked about, the modernization programs, which we still believe are generally intact but are slow to ramp, in some cases, as Ark indicated, is that people have kind of descoped some of those programs. So we still think that demand is in the future. But arguably, when it comes to discretion, you can certainly delay those programs and expenditures.

Your next question comes from the line of Ryan Potter with Citigroup.

I wanted to start on pricing. Have you seen any changes to the pricing environment since last earnings? And are you still offering some discounting to when business in certain areas like you were in the past? Just trying to figure out if you're finding a greater presence from certainly lower cost locations like India that's leading maybe to some client pushback on current arrangements or if the pricing pressure is more on net new engagements?

So we believe the pricing environment did not improve. So -- as the only improvement could happen if demand will go up. So -- and with the current status quo, I think pricing environment is pretty tough and challenging continuously in India.

So it's not incrementally worse, but it continues to be challenging. It's one of the reasons why there is kind of a bias towards India at the lower bill rates. And the market is -- yes, with, what I would call kind of an imbalance in supply and demand, it continues to be a less-friendly market when it comes to trying to get rate increases for certain.

Got it. And a follow-up, I guess, on your investment level and kind of net hiring. Now that you're seeing more of a challenging demand environment, will you look to dial back some of the growth investments you were trying to do when you started the year or re-prioritize those? And then from a headcount perspective, are you expecting the headcount to decrease further sequentially off these levels? Are you likely to kind of maintain the bench you have to meet demand as it returns?

I think you'll see us continue to invest in India as we've talked on this call. I think you'll see us continue to increase our position in Latin America. I do think, and I implied this, or I think maybe even stated it in our prepared remarks, is that with this kind of budget caution with clients, we are seeing less demand for in-market resources. That continues to be a place where we do have more bench than we would like. So that's a bit of a challenge for us. And again, I think what you'll see us do, at least for the coming couple of quarters is to continue to invest more in, again, India and Latin America. We still think that there's a demand environment in our future for Central and Eastern Europe and also for that market. But today, it certainly continues to be a challenging environment, particularly for the higher cost in market resources.

Your next question comes from the line of James Friedman with Susquehanna.

Jason, in your prepared remarks, you called out some of the trends in billing and on the DSO. I remember when you first started there, that was a big conversation. You improved that immeasurably. I'm just wondering is what's going on in the DSO? Is this something that we need to watch for like billability and collections?

Yes. So we're really focused on managing that. And again, very careful to make certain that, obviously, our revenue recognition is appropriate and also that we're trying to avoid any potential kind of write-off of AR. So I'm not concerned about that. What we are seeing clients are taking more time to review and make payments and that type of thing. And I assume it's just based on the environment. And so we are trying to manage it, but I suspect that DSO is going to remain above 70 for the remainder of the year. Again, I don't have concerns about it either in terms of revenue recognition or potential write-offs, okay? But yes, I wish we could maintain at 70 or 69 and I think that's a little bit unlikely in today's environment where everyone is kind of managing their cash flow a little bit more carefully.

Got it. And then is there any way to unpack the revenue because you alluded to this -- you both alluded to this in your prepared remarks, the ramp downs versus the sluggishness in everything else. Like how much is the ramp-down dynamic impacting the revenue commentary and guidance?

Well, so we had this -- the BIM customer that we talked about where a competitor has sort of taken over their IT function. And that obviously had a step down on a year-over-year basis as well as a quarterly -- a sequential impact, Q4 to Q1. There'll be another slightly sequential impact associated with that same client between Q1 and Q2. And then we had a large BIM client who is continuing to sort of tighten up their spending. And because they are a large client, if they tighten up their spending, that's certainly reducing the level of revenue that we were generating from them, and it is showing up in our growth rates. I don't know whether I'd call it kind of a ramp down, but certainly, they're reducing the level of headcount that...

Just to kind of -- there is no any real impact from ramp downs, which kind of new to us. There is a redistribution of delivery, and we talked about it when there is a switch to lower-cost locations. There are new business, which are faster growing there as well, and this is all related again to pricing environment. So -- but, no, ramp downs, right now, not as a real factor. It's more like a normal -- like it's always would happen. It's happening as well, but in a very normal way.

The next question comes from the line of James Faucette with Morgan Stanley.

Wanted to ask just in terms of your planning assumptions and kind of given the experiences of the last few quarters, how are you thinking about -- or how are you changing your planning assumptions in terms of pipeline, conversion rates or timing, et cetera, not just in terms of like what you're seeing right now, but are you building in more conservatism from that perspective? And how does that impact your planning from a hiring perspective, et cetera, right now?

We definitely are learning our lessons, and we put much more pragmatic view because, yes, we were a little bit more optimistic in the past when markets will come back. So right now, we're looking at this very pragmatically with a good level of -- strong level of kind of conservatism. And I don't know what to add. So I think that's actually, exactly what is happening. We're looking for the next 90 days, where we can predict it and predict the future based on this. But if by the end of the quarter situation will change, we will start doing this differently. Until, we will say that general conditions is directionally good, more like to one or another direction.

Great. That makes sense. And then in terms of like from a revenue perspective with the mixing geographic shifts and kind of pricing that your customers are asking for, any sense for how long we should think about that being a revenue headwind? Do you have in your mind like, I guess, a distribution of delivery and when we might hit a stable level there?

Let me comment, and then Ark will probably say something much smarter and more insightful. How I think about it is going to be a trend that we're going to see throughout 2024, but I don't see it as a forever trend. At some point, I think it kind of stabilizes. And I think that we've done a good job of sort of creating a balanced delivery with options or optionality for our clients. And at the same time, I still believe that there's demand for Central and Eastern Europe so far.

I'll say -- we said before, we do believe that we will be able to put very balanced global delivery capability, as well as from geographical point of view, and equalize as much as possible the quality kind of component of it. With this, it's, again, in our segment and our IT services and specifically and kind of subsegment, which we believe we plan, which is more transformational platform build, complex enterprise solutions. Right now, difficult to miss GenAI, and GenAI-enabled solutions, which we consider it a -- playing, and we'll be playing in the future. And this situation, it's an old factor of change in demand when actually our client base will feel that modernization is not just a shift to cloud, but actually changes the applications, changes the platforms to actually benefit from this with maximum. And this is very different world to me. As soon as this will be happening, then demand for the talent will be equalized as well. And then it will be growing all over the place. And I think from this point of view, very similar to what Jason just said. I think India will be a very big portion of EPAM, but we will be balanced, and demand will be coming to Central Europe and Eastern Europe and Latin America and it would be all about the quality of delivery and kind of value per dollar versus just dollar per hour. And I think it should happen. Still, we were hoping it would happen in the -- kind of sooner. But I think all of us here and vendor side and investor side, I think we all believe that this will turn around because there is no way right now.

Your next question comes from the line of Arvind Ramnani with Piper Sandler.

I just wanted sort of really better understand when you kind of consider guidance, do you look at like -- do you go account by account? Like just trying to get an understanding of kind of the procedure to basically come up with guidance because kind of clearly things have -- are we just in an environment where things that are just so fluid and the velocity of change is something that's difficult to predict?

Yes. And so it's hard to predict kind of moving quarters at this stage. We've talked about the unevenness or the choppiness or the -- in some cases, we've had programs that we have been awarded and then they either haven't started or as Ark talked about, they've been descoped. We have clients who come back to us and said, "We'd like you to do this, but in a lower-cost geography." And again, all those things kind of impact the revenue growth rate. So again, there is a significant amount of sort of client level and RFP win estimation and all that, but we're just finding that the demand environment continues not to evolve the way we had originally expected.

Okay. That makes sense. And then just with kind of uses of cash as you kind of think about doing additional M&A or basically doing kind of buybacks, or just trying to see -- or is it just one of these things that you'll continue to build?

Arvind, I'm going to be a little short of my response just because we're kind of at the end of the call or past the time. But I would say yes to both. So you will see us continue to do more and more acquisitions that again, are all strategic and do allow us to continue to expand our position, both end markets and in delivery locations. And you will also clearly see us do more buybacks in the coming quarters.

And this concludes our Q&A session. I would like to turn the call back over to Arkadiy Dobkin for closing remarks.

As always, thank you, everybody for joining today. I think we're looking forward for the next call. And I think we're not going to bring surprises next time, at least similar to today. So let's look pragmatically to everything. So fortunately, we didn't have any questions today about genAI and how we're doing there because we're doing pretty good and feel very good about this area, but probably we can spend more time on this topic next time. Thank you very much.