EPAM - NYSE

Good day and welcome to the Fourth Quarter and Full Year 2024 EPAM Systems Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Finally, I would like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Mike Rowshandel, Head of Investor Relations, to begin the conference. Mike, over to you.

Good morning, everyone, and thank you for joining us today. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. By now, you should have received your copy of the earnings release for the company's fourth quarter and full year 2024 results. If you have not, a copy is available on epam.com in the Investor Relations section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I would 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 Investor Relations section of our website. With that said, I will now turn the call over to Ark.

Thank you, Mike. Good morning, everyone. Thank you for joining us today. It's good to share that our first quarter results came in better than expected. It was another quarter of strong execution, thanks to our core differentiation and relevance of our advanced capabilities and service offerings across our new and existing client portfolios. Many of the encouraging themes we shared last quarter have carried through into this quarter. Before discussing our Q4 results and some thoughts on 2025, I would like to step back and reflect on the full year 2024, which was a year of uneven demand, improved stabilization and building some sequential momentum. There are three key points I would like to highlight on our performance over the past year. Number one, we were successfully executing our global business strategy while simultaneously addressing many challenges we have accumulated during the last few years. We have done this both organically and through acquisitions with a continuous focus on becoming the most globally geo-balanced talent company in the world for AI native digital business services. The two most recent acquisitions, NEORIS and First Derivative or FD are good examples of how we are investing to accelerate our strategy. They allowed us to meaningfully expand our existing global client relationship and further penetrate new markets and talent geo hubs. While still early, we see encouraging progress across several net new opportunities with more than dozen joint pursuit that combine EPAM NEORIS and FD capabilities together. Number two, we are pleased to end the year with an underlying improvement on our standalone business, delivering better results than our expectations earlier in the year when we had to adjust our outlook for a weaker than expected H1. And finally, number three, exiting 2024, we feel good about the sequential momentum we've built over the past two quarters and see encouraging signs as we look ahead into 2025. While there is still plenty of caution in growth market sensitivity, we believe we see some fundamental improvements in the business. This gives us optimism that 2025 will be a much more transformative and better year for us than 2024 was. Now turning to our Q4 results. During Q4, we grew mid-single-digits, both year-over-year and sequentially, notably returning to organic revenue growth for the first time since Q1 of 2023. We continue to see improvements in client sentiments and engagements across all our verticals and geographies and particularly around our AI-related capabilities. Our performance in Q4 was driven by our ability to increase our clients' trust and reassure continuous superior quality execution in our key horizontal and vertical domains, while simultaneously offering more globally diversified talent. On a standalone basis, excluding recent acquisitions, we saw four out of six verticals grow year-over-year with five out of six growing sequentially, reflecting strong momentum from last quarter. Key verticals to call out include life science and healthcare, software and high tech, financial services and emerging. Across geographies, we see a similar story to last quarter with Americas and APAC leading growth year-over-year with Europe continued to show organic sequential revenue growth. Now turning to demand, we are encouraged to see a modestly more positive demand environment compared to 90 days ago. Sentiment continues to improve across our existing and newly acquired clients' portfolios. These clients rely on us for our core engineering DNA as well as our advanced generic capabilities. In some cases we are consolidating work from other suppliers as clients shift toward a more engineering-led and scale programs. In our most recent conversations across the C-suite, the underlying tone and buying signals are higher than they were last year with further accumulation of technical and data depth. Over the past 12 months, we are seeing accelerated take up in more scaled and transformational AI programs. Based on the significant backlog of technical and data modernization along with new AI related demand, we believe that 2025 will be the year where we begin to see real generic first mover advantages. While we're relatively optimistic about the midterm outlook with more encouraging client buying signals than 12 months back, we do still see multiple packets of caution driven by broad macro risks, policy specific uncertainty due to a very dynamic geopolitical environment and certain challenges in some of our clients and talent markets. Further cost very much remains in focus and continues to be an important decision factor for many of our clients. So based on these uncertainties in our current vantage point, we are balancing our optimism as clients continue to transition and modestly expand their discretionary spend. Moving into our global delivery approach, we demonstrated strong execution throughout the year as we continue to diversify our global talent pools and bring in more optionality to our clients across all four of our major delivery hubs in Europe, India, Latin America and Western Central Asia. In Q4 we saw sequential improvements of net organic additions which was broader than just India and included some of our traditional European locations. Europe remains core to us as a top talent pool and we believe we will continue to grow in the region as discretionary spend returns to higher levels. Ukraine is an interesting example to share given the geopolitical environment. While production headcount remains mostly in line year-over-year, in Q4 we saw sequential net additions for the first time since the start of the Russian invasion. We believe this is a positive signal of our clients' comfort level and desire to return to some of our traditional locations. In India, we hit an important milestone for the company as it now represents our largest single country delivery location and second as a region. In just 10 years, EPAM has achieved 10x growth in India with now over 10,000 employees. This speaks to our ability to adapt to changing market conditions and our commitment to invest in a globally diverse and talent workforce in line with EPAM core DNA. In Latin America, we significantly strengthened our footprint with new areas making Latin America our third largest delivery region and a very important pillar in our global model. We believe we have now the right mix of talent focusing on delivery for North American clients coupled with a deep local expertise and strong capabilities to engage and deliver in LatAm. In Western Central Asia, as we mentioned last quarter, we continue to progress quite nicely with our still relatively new delivery hub of over 7,300 people now. Back to the two acquisitions we closed in Q4. In overall, with NEORIS and FD, we significantly increased our global footprint with the addition of nearly 6,000 people combined, primarily across Latin America, Canada, Spain, UK and Ireland. We remain committed to executing our global delivery strategy further. Now shifting to GenAI, even with all the recent noise, sometimes the significant level of confusion and debates. We are seeing indicators of positive change and growing impact. Overall, we continue to make significant traction across our client portfolio with now 75% of our top country clients engaged on GenAI initiatives. Our early-stage projects continue to show strong growth year-over-year with 1,000s of new verticals, use cases emerging and turning into Agentic AI pilots. These are now midsized AI projects with more defined outcomes. We are beginning to see more volume and we believe this speaks to the investment and traction clients are making in this space. These programs have the high probability of turning into agentic transformation, plays in key horizontal and vertical domains. Finally, in our larger-scale AI factories, we manage the entire AI portfolio of agents and applications throughout the program lifecycle and generate tens of millions of dollars in value by each such engagements. Our GenAI and AI-driven client engagement could also be presented in three major dimensions. Dimension one, SDLC and other-related areas of individual and team productivity improvements. Dimension two, data and cloud engagements, triggered by the need to enable AI native program at scale. Dimension three, scaled AI native programs and platforms with the goal to drive value against proven business cases and when clients already solve their data and cloud infrastructure challenges. Let me expand a bit on this. Within dimension one, we are addressing the need of complex enterprise-level engagements to orchestrate individual efforts toward total productivity improvements at large teams and programs levels via all latest GenAI advances. Often to have real engagement impact, our hybrid client teams must have the same level of modern engineering maturity as purposely GenAI trained our own teams. That is why we are offering to client GenAI-enabled software development lifecycle for SDLC transformational programs, which utilizes market-leading tools and methodologies along with the EPAM AI/Run framework built on top of our own DIAL, EliteA, Codeme and some other IT assets. It makes significant impact on large complex engagements and helps to advance the adoption of AI in large-scale enterprises by bringing measurable value through both cost optimization and the creation of new revenue streams. While I believe dimension two is very much self-explanatory, dimension three is our go-to-market business transformational programs, natively enabled by GenAI and AI technology. As we move into a more comprehensive agentic propositions, our AI native engagement are starting to be picked up in volume and size. Compared to the first half of 2024, where we were generating single-digit millions of revenue from these AI-native programs, Q4 stands out by generating about $50 million in that category. Let me share two client examples to further illustrate how our efforts are driving client engagement and generating real pragmatic value. Let's start with Canadian Tire Corporation, the largest retail chain in Canada where they have embarked on a journey to standardize and modernize software delivery lifecycle. With the combined power of CTC Product Engineering Center of Excellence and EPAM know-how, we already drive an initial result with very real optimization and efficiency savings. So far EPAM has effectively deployed the EliteA platform across CTC delivery organization, trained more than 700 individuals and ensured comprehensive adoption of new modernized tools. This is a real example of how our approach amplifies organizational productivity, reduces cost and improves in-team and cross-team collaboration and serves as a foundation for the next-generation Agentic platform for SDLC. Another notable example of real progress at scale is our expanded engagements with Baker Hughes, one of the world's largest oil fuel services, industrial and energy technology companies. We are enabling Baker Hughes in building and offering to their clients large AI native digital platforms by combining EPAM best-in-class project engineering capabilities with Baker Hughes' expertise in energy technology. Just a few weeks ago, Baker Hughes named EPAM as a key partner for digital and AI to transform the energy sector by leveraging advanced AI native digital platform implementations at scale. We believe EPAM is one of the few AI-native service providers who can demonstrate scaled programs with proven AI ROI today, which is also well enabled by our growing global partnerships with cloud and data major providers with whom we are expanding our collaborations and focusing on general and Agentic AI growth to marketplace. Now, if we step back and look at the bigger picture more broadly for 2025 and beyond, our thesis remains unchanged. We believe the demand for advanced AI native and agentic software and data engineering services will only increase as engineering productivity gains will be significantly outsized by incremental demand to build new and replace the legacies as clients are quickly expanding their focus to solve more complex tasks more efficiently. Further, the need for security modernization and managing enterprise data platforms will continue to demand skilled expertise that combines critical AI skills with modern engineering and data science capabilities, all areas in which EPAM excels. To conclude, we are pleased with our stronger than expected Q4 results and stabilization achieved during the last year. Our new AI native capabilities, data and core engineering differentiation remained evident, while they are more globally diversified today than ever before. We continue to see clients return to quality and reliable execution and we believe that is putting us into a stronger competitive position today compared to last year. At the same time, we do believe 2025 will be still a challenging and transformative year for the industry with a lot of pressure to navigate two opposite trends across our client base. One is still being driven by cost sensitivity, while another by the need to return to more discretionary spending and addressing accumulated during the last few years backlogs which means also that EPAM will be performing during 2025. This continuous margin pressures triggered by necessity to invest across several important for us in 2025 areas, such as critical skills and talent retention and development, Agentic AI and GenAI IP and tooling advancements, integration efforts of our recent acquisitions and go-to-market strategies. This should allow us to be in the right standard when discretionary demand environment will fully rebound. So while we remain vigilant to potential headwinds, we believe our strategic positioning and ongoing initiatives place us on the trajectory for sustainable performance and growth in 2025 and beyond. Let me now turn the call over to Jason, who will provide additional details on our Q4 results and 2025 outlook.

Thank you, Ark, and good morning, everyone. In the fourth quarter, EPAM generated revenues of $1.25 billion, a year-over-year increase of 7.9% on a reported basis, including revenues from recent acquisitions, NEORIS and First Derivative. On an organic constant currency basis, revenues grew 1% compared to the fourth quarter of 2023. In Q4, we are pleased to return to year-over-year organic revenue growth. Organic revenues exceeded our Q4 guidance due to higher than expected new project starts, indicating modestly improving client sentiment. Due to the quarter's significant inorganic revenue contribution, I will speak to both organic and inorganic revenues as I discuss industry vertical and geographic performance. Beginning with industry verticals, I want to echo Ark's comments that, in Q4, five out of six of our industry verticals delivered sequential organic revenue growth. Only the travel and consumer vertical declined Q3 to Q4. Financial services delivered very strong growth of 15.9% year-over-year, reflecting 4.3% organic and 11.6% inorganic growth, driven by continued strength in the banking, insurance and payment sector. Life sciences and healthcare increased 8.6% on a year-over-year basis, reflecting 5.7% organic and 2.9% inorganic growth. Growth in the quarter was driven primarily by clients in life sciences, including some revenues derived from new logo accounts. Software and high-tech increased 7.7% year-over-year, reflecting 6.4% organic and 1.3% inorganic growth. Consumer goods, retail and travel decreased 3% year-over-year, reflecting a negative 5.7% organic and a positive 2.7% inorganic growth, largely due to declines in consumer products and retail, partially offset by growth in travel. Business information and media declined 3.9% year-over-year, reflecting negative 4.7% organic and positive 0.8% inorganic growth. Revenue in the quarter was impacted by the previously discussed ramp down of the top 20 clients. However, sequentially, we were encouraged to see the vertical return to strong growth as we continue to build momentum. And finally, our emerging verticals delivered very strong growth of 24.8%, reflecting 3% organic and 21.8% inorganic growth. Growth was primarily driven by clients in energy, manufacturing and industrial materials with significant contribution coming from NEORIS. From a geographic perspective, the Americas, our largest region, representing 60% of our Q4 revenues, increased 11.4% year-over-year, reflecting 2.7% organic and 8.7% inorganic growth. EMEA, representing 38% of our Q4 revenues, increased 3.1% year-over-year, reflecting negative 1.4% organic and positive 4.5% inorganic growth. In the quarter, the region continued to show sequential organic revenue improvement. And finally, APAC increased 4.3% year-over-year and represents 2% of our revenues. In Q4, revenues from our top 20 clients grew 4% year-over-year, while revenues from clients outside our top 20 increased 10%. Moving down the income statement, our GAAP gross margin for the quarter was 30.4% compared to 31.1% in Q4 of last year. Non-GAAP gross margin for the quarter was 32.2% compared to 33% for the same quarter last year. Relative to Q4 2023, gross margin in Q4 2024 was negatively impacted by compensation increases, including those resulting from our 2024 promotion campaign, which we were not able to offset through pricing, as well as lower profitability of recent acquisitions. The compensation increases along with lower profitability from acquisitions and negative foreign exchange impact exceeded the benefits of improved utilization and the positive impact from the Polish R&D incentive. GAAP SG&A was 17.4% of revenue compared to 18.5% in Q4 of last year. Non-GAAP SG&A came in at 14.4% of revenue compared to 14.2% in the same period last year. SG&A measured as a percent of revenue is now higher in part due to our recent acquisitions running with higher SG&A levels compared to our standalone business. SG&A expense for Q4 of 2024 reflects SG&A associated with recent acquisitions as well as higher variable compensation compared to Q4 2023. GAAP income from operations was $137 million or 10.9% of revenue in the quarter compared to $122 million or 10.6% of revenue in Q4 of last year. Non-GAAP income from operations was $208 million or 16.7% of revenue in the quarter compared to $200 million or 17.3% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 24.8% and our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $1.80. Our non-GAAP diluted EPS was $2.84, reflecting an increase of $0.09 or 3.3% compared to the same quarter in 2023. In Q4, there were approximately 57.4 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q4 was $130 million compared to $171 million in the same quarter of 2023. Free cash flow was $115 million compared to free cash flow of $161 million in the same quarter last year. We ended the quarter with approximately $1.3 billion in cash and cash equivalents, which is lower compared to the same quarter last year due to our recently completed acquisitions. At the end of Q4, DSO was 70 days compared to 74 days in Q3 2024 and 71 days in the same quarter last year. Share repurchases in the fourth quarter were approximately 53,000 shares for $13 million at an average price of $241.99 per share. Moving on to a few operational metrics for the quarter. We ended Q4 with more than 55,100 consultants, designers, engineers, trainers and architects, a growth of 16.3% compared to Q4 of 2023. This was a result of recent acquisitions, which contributed nearly 6,000 delivery professionals, in addition to solid organic growth, which contributed sequential net additions of around 1,500 employees in the quarter. Our total headcount for the quarter was 61,200 employees. Utilization was 76.2% compared to 74.4% in Q4 of last year and 76.4% in Q3 2024. Turning to our 2024 full year results. Revenues for the year were $473 billion, up 0.8% on a reported basis year-over-year. On an organic constant currency basis, revenues were down 1.7% year-over-year. GAAP income from operations was $545 million, an increase of 8.6% year-over-year and represented 11.5% of revenue. GAAP income from operations benefited from the recognition of $69 million of incentives related to research and development activities performed in Poland and was negatively impacted by $31 million of severance-related costs. Our non-GAAP income from operations was $779 million, a growth of 1.8% compared to the prior year and represented 16.5% of revenue. Our non-GAAP income from operations benefited from the recognition of $45 million of incentives related to research and development activities performed in Poland in 2024. Our GAAP effective tax rate for the year was 22.2%. Our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $7.84. Non-GAAP EPS, which excludes adjustments for stock-based compensation, acquisition-related costs and certain other one-time items, including costs associated with our cost optimization programs, was $10.86, reflecting a 2.5% increase over fiscal 2023. In 2024, there were approximately 58 million weighted average diluted shares outstanding. Cash flow from operations was $559 million compared to $563 million for 2023 and free cash flow was $527 million, reflecting an 83.7% adjusted net income conversion. And finally, shares repurchased in 2024 were approximately 1,854,000 shares for $398 million at an average price of $214.65 per share. Now let's turn to guidance. Before moving to the specifics of our 2025 and Q1 outlook, I would like to provide some thoughts to help frame our guidance. We have been pleased with the progress we are making on demand generation and we'll continue to prioritize revenue growth into 2025. We see stability in client budgets and some degree of shift in spending towards growth and strategic programs. In 2025, we expect flat year-over-year organic revenue growth in Q1, followed by continued improvement throughout the year. In terms of profitability for 2025, we do expect to run the business at somewhat lower levels of profitability than we have in past years. As Ark mentioned, we are investing in retaining our top talent as well as further accelerating investments in our advanced GenAI platforms and tools. Compensation increases to retain talent for future growth, combined with the limited ability to improve client pricing in the near-term and additional pressure from dilutive impact of recent acquisitions will continue to put pressure on profitability this year. However, we do expect to see improvement in our profitability levels from the first half to the second half of the year. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers at productivity levels similar to those achieved in 2024. Now starting with our full year outlook, revenue growth will be in the range of 10% to 14% with an inorganic contribution of approximately 10% for 2025. Foreign exchange is expected to have a negative impact of 0.9%. 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 14.5% to 15.5%. We expect our GAAP effective tax rate to be approximately 24%, our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation will also be 24%. For earnings per share, we expect the GAAP diluted EPS will be in the range of $6.78 to $7.08 for the full year and non-GAAP diluted EPS will be in the range of $10.45 to $10.75 for the full year. We expect weighted average share count of 58.1 million fully diluted shares outstanding. For Q1 of 2025, we expect revenues to be in the range of $1.275 billion to $1.290 billion, producing year-over-year growth of approximately 10%. Our guidance reflects an inorganic contribution of 11.4% with a 1.4% negative FX impact during the quarter. For the first quarter, we expect GAAP income from operations to be in the range of 6.5% to 7.5% and non-GAAP income from operations to be in the range of 12.5% to 13.5%. Our Q1 income from operations guide reflects the impact of resetting social security caps, the negative impact of 2024 compensation increases, which we were unable to offset with better pricing, dilution from recent acquisitions, and a slightly softer revenue in the month of January as clients in certain verticals finalize budgets. For the first quarter, we expect GAAP income from operations to be in the range of 6.5% to 7.5% and non-GAAP income from operations to be in the range of 12.5% to 13.5%. Our Q1 income from operations guide reflects the impact of resetting social security caps, the negative impact of 2024 compensation increases, which we were unable to offset with better pricing, dilution from recent acquisitions and slightly softer revenues in the month of January as clients in certain verticals finalize budgets. We expect a weighted average share count of 57.7 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for 2025. Stock-based compensation expense is expected to be approximately $194 million with $50 million in Q1, $44 million in Q2 and $50 million in each remaining quarter. Amortization of intangibles is expected to be approximately $68 million for the year with approximately $18 million in Q1 and $17 million in each remaining quarter. The impact of foreign exchange is expected to be approximately $1 million loss each quarter. Tax effect of non-GAAP adjustments is expected to be approximately $61 million for the year, was $17 million in Q1, $14 million in Q2, and $15 million in each remaining quarter. We expect excess tax benefits to be around $14 million for the full year with approximately $7 million in Q1, $2 million in Q2, $1 million in Q3 and $3 million in Q4. Severance, driven by our 2024 cost optimization program is expected to be $6 million in Q1 and $1 million in Q2. Finally, one more assumption outside of our GAAP to non-GAAP items. We maintain a significant level of cash and are generating a healthy level of interest income. However, based on the reduction in cash resulting from the recent acquisitions, we are expecting interest and other income to be smaller in 2025 compared to 2024, with around $18 million for the 2025 full year, with $4 million in Q1 and Q2 and $5 million in each remaining quarter. My thanks to all the EPAMers who made 2024 a successful year and will help us drive growth throughout 2025. Operator, let's open the call for questions.

[Operator Instructions] And your first question comes from the line of Maggie Nolan with William Blair. Your line is open.

Thank you. Jason, I was hoping you could elaborate a little bit on the expectations that are embedded in the top end and the low end of revenue guidance and both company specific and from a macro perspective?

Yes. So I think we've been fairly careful about our expectations for NEORIS and FD. We both generally delivered at the level of revenues that we expected in Q4. We have them both with some modest degree of growth as we go from 2024 to 2025. And then as I think we said in the prepared remarks is that we've got effectively kind of a zero to 4% revenue growth for organic. And if you introduce the foreign exchange headwinds, you've got a 1% to 5% growth, again, using an organic constant currency. Right now, what we're seeing is a somewhat slow start in January, but we're seeing substantial program starts and clients are beginning to really get started here in 2025 as we enter February and as we work through the month. If I were to talk about that and Maggie is this for revenue or is this for the revenue and -- the revenue? Okay. So what we would have is clearly some degree of sequential growth Q1 to Q2. We are seeing substantial sort of project starts in certain areas of our business and we've got a couple of clients, one particularly in sort of high tech that we expect to show substantial growth in the year. Again the 4% is clearly some degree is sequential revenue growth in the back half of, yeah, if you were to end up in the middle part of the range, it's kind of a softer sequential growth. So I'm not certain that helps too much, but what we are seeing is, it's very strong sort of program starts in customer demand here in February despite the fact we had sort of a slower start to January.

Thank you. That's helpful. And then on the margin side, Arkadiy, you mentioned that some investments that you are clearly going to be making. I'd be particularly interested in some of the commentary around Agentic AI and IP since IT services companies don't typically retain a significant amount of the IP that they generate? And then how are you thinking about balancing those investments with perhaps the need to drive some cost synergies in these acquisitions that you just onboarded?

Yes. So let me just do a quick bridge on adjusted IFO and then I'll probably let Ark talk a little bit more about the importance of the investments in GenAI. Okay, we've got a 2024 at 16.5% adjusted IFO. At the midpoint of our guided range for 2025, that would be 15%. We've talked about dilution due to the acquisition of FD and NEORIS. Both of them are accretive from an EPS standpoint, but they are dilutive from an adjusted IFO. And so I think that while we've updated our assumption and that's about a 60 basis point dilution, so 16.5% with the 60 basis point dilutive impact of the acquisitions we're down 15.9% and then 15.9% compares to the 15%, which is the midpoint of the 14.5% to 15.5%. And what we're seeing is some incremental investment in GenAI, which is causing both an increase in SG&A and a little bit of decrease in gross margin. And then, Maggie, as we've kind of talked throughout 2024 and I think also as we've talked about what we expected in 2025, we have been focused on retaining our top technical talent. And so we have had some degree of cost increases or increases in compensation in 2024 in a year when it was very difficult to get rate increases. We still expect that this is a more challenging certainly in the first half of 2025. So what we are expecting to have is our traditional promo campaign in the first half of 2025 with limited ability to offset those compensation increases with salary increases. We do expect the pricing environment to improve somewhat throughout the year. Clearly, we're focused on utilization and pyramids and that type of thing. But really what is happening in the 15.9% to 15% is some amount of compression due to price sensitivity with clients. India still runs at better than average profitability. Ukraine still runs at high levels of profitability. So we feel good about the business overall, but just the pricing environment still is kind of pressurizing our gross margin and ultimately our adjusted IFO.

I think this type of investment is not something new for us. Typically when there is a visible transition in technology and we will understand that investment in GenAI is a lot of investment in training, changing the mind of our development team how our new software will be built. And on top of this number of accelerators and some IP as well specifically in this transitional period when market itself is not bringing too many stable solutions to build new type of software. And we did it like when cloud conversion was happening with mobile conversion was happening and it was significant investment, it was better macro environment back then. But we do believe that we cannot miss this investment right now because as soon as the GenAI, AI, Agentic AI starting to drive real transformation, we need to be ready and take advantage there.

Your next question comes from the line of Jamie Friedman with Susquehanna. Your line is open.

Hi. Good morning. I just wanted to ask one question. In terms of your prepared remarks, Arkadiy, you say and I'm quoting, in 2025, clients will balance their cost focus with the need to accelerate their transformational GenAI journeys. That to me sounds like kind of a change the business versus run the business narrative. I'm just wondering, in the context of your pricing commentary, is the pricing, do you have any exposure to the run the business opportunities? Is it all really the change the business transformational side, whether it's GenAI or otherwise? And is the pricing pressure that you're feeling on the new stuff or on the old stuff or both? Thank you.

Well, we definitely have, during the last several years, exposure to run the business and we have a number of engagements. And even this we're trying to do differently than traditionally it was executed, especially with everything what we're seeing in very different level of automation driven by our generic progress. But the pressure, pricing pressure coming still during the last several years and there is a big kind of inertia to change it and that's what we quote it will be start happening in 2025 more visibly, but there is a pricing pressure across run and build as well and change as well until again the change will become much more coming to more traditional levels of demand.

Okay, thank you for that. I'll jump back in the queue.

Your next question comes from the line of Bryan Bergin with TD Cowen. Your line is open.

Hi, guys. Good morning. Thank you. On-demand, I was hoping you could dig in more on how the client spending behavior progressed through each month in 4Q. I'm really trying to dig into commentary on new clients versus existing clients. So can you talk about that in any interesting bookings there or anything like that as you look at new versus existing?

So I don't think I can give you like specific numbers, but definitely we enter in good number of new clients. It's not becoming very large right away, but there are some clients which quickly go into the range of kind of annualized $10 million. So at the same time, there are lot of new clients which are coming through GenAI kind of proof-of-concept and then starting to scale. But I also would probably mention that for us, right now, new clients, sometimes it's our old clients as well because for the time when starting from the beginning of the war, it was a lot of the clients]. We've seen return of these clients. Not fully, but visibly and for example, what Jason mentioned, one of the big tech companies which almost went to zero now starting to really scale. So which we consider in some way a new market that we prove again and prove not only would be prove, but that they come back to us because they need the quality level and understanding of the technology which we possess.

Hey, Bryan. So I'm just going to introduce a couple of numbers here. So the guide was $1.205 billion to $1.215 billion. NEORIS performed as expected. We said that we would do about $54 million with NEORIS. FD would have been incremental to that and I can tell you that, that was about $12 million again as we expected. So if you added the FD to the guide, it would have been 12.17 to 12.27 and we landed 12.48. And so it clearly was in what we call our standalone business where we saw strength. We did see sequential growth in Europe. We did see improvement in financial services, including growth in European financial institutions. And so overall it was quite a bit stronger quarter from a revenue growth standpoint than we had expected, particularly with good revenues in the month of November and December.

Okay, very good. I appreciate all that detail. And Jason actually on the margin too for my follow-up here. So thank you for the bridge. Obviously, a lot of moving parts here with the R&D tax credit, but then the acquisition margin profiles, incremental investment and a different geo footprint. But as we kind of just think ahead, as demand ultimately normalizes, do you anticipate a return to profit levels where you've been before or is it too early to make that call?

Yes. We are definitely expecting to see improved profitability in the second half of the year relative to the first half. And then clearly we're looking to drive profitability back to what I would call more typical. I know some externally think about 17% plus. I've always sort of thought of us as a 16% to 17% company. And so the focus on getting back to a 16% or better would certainly be a goal for the company. And again with a slightly different environment, we think that's achievable.

Thank you.

Your next question comes from the line of David Grossman with Stifel. Your line is open.

Hi. Thank you. Good morning. I'm wondering maybe if you could speak a little bit of your capacity and your ability to accelerate revenue growth once demand improves? And maybe in part of your response, you could help dimension what the headwind we should expect from the bill rate dynamic from geographic mix shift in '25 and how much that may be impacting the growth outlook.

Okay. So in terms of our ability to grow revenue, we have continued to sort of operate with a strong sort of talent capability. So we feel good about our ability to grow in India. We feel good about, obviously, our ability to grow in our traditional Eastern Europe and our ability to grow in the Americas. We are beginning to see some return and we are seeing a little bit of growth even in places like Ukraine, obviously, depending on how things resolve themselves there, that could open up further demand for that geography. And so I think, David, we feel good about the opportunity to kind of grow revenues across a broad range of geographies. I do think you are going to continue to see a little bit of this headwind that we talked about in 2024, whereas you shift into, let's say, Latin America with kind of local to local kind of revenues with NEORIS, some further growth in India and growth in places like kind of [indiscernible] which is an attractive price point where you'll continue to see a little bit of compression. I don't want to say compression, but you'll continue to see some headwinds on the revenue per headcount number as we move through 2025 would be my expectation.

Okay. And did you provide just some color into what you think the mix shift headwind is to revenue growth in '25?

We did not. We talked about it last year. This year, I think it clearly it depends. And I think that the answer is that, what I would say is we are beginning to see somewhat broader demand. Clearly, you continue to see more growth in India, but we are beginning to see demand for our more traditional kind of Eastern European geographies as well. So maybe I would say it's somewhat less of an impact than what I talked about in the middle of 2024, but I would say you'll continue to see some impact from that, but I haven't sized it.

Okay, great. Thank you for that. And then just in terms of the margins, I think you've already given a lot of color there. One thing you didn't mention was, again, any headwinds from diversifying your geographic capacity. I'm just wondering what impact, if any, that's having on the margins currently. And just curious whether there's anything unique about your specific ability to price versus wage increases versus your peers because I don't think your peers are seeing quite as much impression as you may be experiencing currently or in 2024 and your expectation for '25.

Yes. I think one of the things is that we continue to focus on retaining talent and our attrition continues to decline throughout 2024. So our voluntary attrition right now is definitely in the single-digits. As I think Arkadiy could probably talk better than I could that we do think what has made us successful over time is really the ability to deliver base with very high quality talent. We do want to make sure we're able to retain that talent, particularly as we head towards a time where we think there is going to be more transformative programs. We are beginning to see some clients come back to us where they've had either failures or fatigue with other providers. We still think that the quality of execution is important and we do think that there's an opportunity to improve price over some period of time, but I'll let Ark talk about the talent.

Yes. And David this is what we mentioned in our remarks. So there is kind of double movements. And again our exposure changes proportionately much higher than many of our peers. And I think we try to make sure that we have the right talent to come back when demand will be normalized. So and, yes, there is pressure there. When we were relocating people, so we were relocating this to some of them to other countries in Central Europe, some of them to West and Central Asia and there is a very different pricing points. We're trying to keep the right balance and create opportunity to grow in each of these locations.

Great. Thanks for that, Arkadiy. Just any thoughts on the cadence? You said margin is better in the second half than the first half? And any other color you want to provide around that?

Yes. I would just say, probably Q1 to Q2, you wouldn't see a substantial improvement in gross margin, but we are taking the classic sort of steps to improve profitability throughout the year. That's all the things we've been talking about, improvement in utilization, improvement in pyramid and then some amount of scaling. And so we do want to be prepared for us, do we want to exit 2025 with an ability to drive closer or above that class profitability target of 16% or above.

Got it. Great. Thank you.

I'm looking at this previous year where our profitability was increasing.

Okay. Great. Thank you.

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

Good morning, guys. Thanks for taking the questions. The first one is just on revenue. I wanted to dive in a little bit just in terms of what's embedded in terms of assumptions on further improvement in discretionary spending. Obviously, you've started to see some pickup and I'm wondering if the slope of that line, if you will, does that need to improve to get to, say, the midpoint or the high end of the revenue guide? What's the underlying assumption there that you've built in?

So the -- what does it take to get the high end of the range and what's our assumption on improving discretionary environment?

So we -- growth portfolio we see and this is what we were sharing like during the previous call, we see some discretionary change, which very different than 12 months ago. And we saw it in Q4 and we're saying this is right now in Q1. The challenge here that the pricing environment is still challenging. Again we mentioned this. And how is it going to change? We need to see, but on positive side, this is exactly what we expect to the high range if this is starting to happen because there are already interesting proofs of businesses, advantages once they started to do quality transformations, quality scale, more scale programs GenAI related, so that it will drive the others and pricing together with this. So this is more like our high end assumption.

Okay.

We don't count it on a huge change, but we count it on some more pragmatic views of the companies which would like to run change programs. And we saw already when the pricing was actually to the point in many programs where the vendors couldn't deliver. So this is already built up as a very good argument to do it differently.

Just A follow-up on the margin. So I guess wage inflation is eclipsing pricing this year. I think you said margins down about 90 bps on an organic basis. I was curious just which countries are driving some of that wage inflation you mentioned as you're investing to retain the talent?

Yes, I would generally say it's probably more of what I would refer as the offsite countries. Again, it would be hard for me to be specific on one country or another. What you're just seeing is, again, a focus on retaining top technical talent in an environment where it continues to be hard, as Ark said, to pass on price increases. So again, I would generally view it as, we've been fairly careful on the expense of onsite talent, but it really is more in the delivery locations outside of the US and Europe.

And technology talent specifically with ability to understand what's the new SDLC [indiscernible] ability to work in this enabled by GenAI and solutions enabled by GenAI. This is becoming very hard property and again trying to build a company which is prepared for this demand, that's a retention thing which we need like to focus exactly right now.

Thank you, Ark.

Your next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.

Hey, good morning, and thanks, guys. When we exclude the couple of acquisition, it does look like your organic headcount growth inflected for the first time in some time. So maybe a bit more color on your hiring plans for the year, geographies you plan to hire, any maybe specific skill sets? And then just as an attached question to that, geopolitically, obviously, no one knows where things are going from Ukraine, Russia standpoint. But if we were to see any change around the war and any change in terms of abilities for multinational to operate in those areas more, your headcount is still, I mean, you still have a decent headcount in Belarus and Ukraine. Just remind us the mix of where your headcount is going forward for this year? And if that could impact you guys in any way from a margin or labor optimization standpoint of where you guys already have some headcount?

Okay. So just as a reminder, we had net headcount additions that was organic in Q3 of 2024 that was somewhat less than 1,000, but still again a decent number of additions. We're about 1,500, as I indicated in Q4 again on an organic kind of basis. And of course, we had the incremental from FD and NEORIS. And then for Q1 of 2025, we're also expected to be something approaching 1,000, and probably a little bit below based on kind of the slower start to the January month. So we are definitely adding headcount. As I think we've talked about, although I'm not going to be specific about which countries is that we are beginning to see kind of demand return to certain geographies in Europe. We'll clearly still be growing in India, we'll clearly still be growing in [Technical Difficulty]. We still -- we have seen a declining headcount in Belarus on a year-over-year basis and a modest decline in headcount in Ukraine on a year-over-year basis. But actually we did see a little bit of growth played in Q4 in Ukraine. And in a resolution to the conflict, we think that could make clients more open to putting more projects, programs, particularly into Ukraine.

Okay. So I guess we'll have to see how it goes. But I imagine from a margin standpoint, some of those comps, some of those labor forces that you guys have could be helpful from just relative to the mix you had in other markets you've got to build out? And then I guess --

Yes. Let me just quickly -- that's a very good point. Yes. Okay. Ukraine is historically and continues to be one of our most profitable geographies.

Okay. Thanks. Just a quick follow-up. I think you've seen somewhere around 400 basis points or 500 basis points improvement or increase in fixed contract percent, if I'm not mistaken, over the last couple of periods. Maybe just the overall trend, if you could just give us a little bit more color on what you're seeing there and the driving time?

Yes, so we've got probably three things. Okay. One is that we are growing in the Middle East, which tends to be more of a fixed fee environment. And so a little bit of the mix shift there. Okay. We are seeing some more consulting-led programs where there's more of a consulting engagement and then the tail associated with the build. Those oftentimes have kind of a fixed fee component. And we probably have a little bit more kind of managed service or fixed monthly fee. And again that would obviously contribute to the mix of fixed fee business as well.

Okay. Very helpful. Thanks, guys.

Thank you.

Our final question comes from the line of Jonathan Lee with Guggenheim Partners. Your line is open.

Great. Thanks for taking our questions. Can you help us understand what's contemplated across your outlook range from a vertical perspective? Any verticals expected to accelerate versus decelerate throughout the year?

I think it's pretty much in line with what we see during the last year and quarter. So life science and at this point financial services are showing good dynamics. So and we're still not sure about retail, for example, and business information recovery because it was a big hit by the client which we pulled it last year.

And then subcomponents that were emerging, including energy would probably be areas of growth as well.

Yes. In general it seems like across most of the verticals we expect in the growth, yes.

And then I think the only other point is that we do expect to see an acceleration in tech. And we are certainly seeing an improvement there in Q4 and do expect to see an improvement in [Technical Difficulty].

Understood. And look recognize that the pricing environment is somewhat challenging, but what in your view would catalyze a potential return to a better pricing environment?

So we see in some spots where clients are actually starting to focus more on change and in these programs, they also understand that pricing should be changing. And we see in these examples, we just need broader of this. And again that's a previous answer what we're thinking about our high range to achieve. This should be happening by that. So let's see what market will be showing right now.

Appreciate the color.

Okay, thank you very much for joining us today. I think we're really satisfied how we finished the year and each year starting from some new unknown because with that you're feeling much better what's going to happen. I think we have a pretty good -- we -- I would say feeling about how this year is starting from the client communications point of view. We're also trying to be very pragmatic with our annual guidance and let's talk in three months. Thank you very much.