EPAM - NYSE

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the EPAM Reports Results for Second Quarter 2025 Conference Call. [Operator Instructions] I would now like to turn the call over to Mike Rowshandel, Head of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today on our second quarter 2025 earnings announcement. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. We hope you've had an opportunity to review our earnings release we issued earlier today. If you have not, copies are available on epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; Balazs Fejes, President of Global Business and Chief Revenue Officer; 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 Investors section of our website. With that said, I will now turn the call over to Ark.

Thank you, Mike. Good morning, everyone. It's a pleasure to have with us on this call, and thank you for joining us today. I'm pleased to share that our second quarter efforts delivered results ahead of expectations, marking another consecutive quarter of outperformance and further shaping what we believe will be our durable and truly differentiated market proposition, combining best-in-class AI native services with our core engineering and practical consulting strengths. Before we dive in, let me outline today's call. I will begin with our Q2 results and outperformance and then walk through the foundational themes driving our improved growth rates. I will then hand it over to FB, who will share some highlights as the Chief Revenue Officer on how we position ourselves for continued sustainable growth. Finally, Jason will cover our detailed financial results and outlook. After that, the 3 of us will be available for questions during the Q&A session. Now turning to our Q2 results. As we shared it in our last update, we have been focused on sustaining sequential growth momentum even against the complex macroeconomic backdrop. In Q2, we once again delivered double-digit year-over-year revenue growth, while inorganic contribution played a significant role. It's important to note that our organic growth accelerated from the low single digits to the mid-single digits, exceeding the expectations set 90 days ago. This marks our third consecutive quarter of positive organic growth, reflecting steady improvements in our core business and a return to much more consistent performance. Our Q2 growth was broad-based with all 6 verticals growing year-over-year and sequentially. Notable standouts include financial services, emerging verticals and software and hi-tech. Consumer goods, retail and travel as well as the business information and media, both returned to positive year-over-year growth this quarter. Geographically, all 3 regions delivered a strong year-over-year growth, reinforcing our view that while demand conditions remain dynamic, the environment for EPAM is stabilizing and possibly improving across the whole of our core business. Now shifting to our positioning through the first half. While we anticipated earlier in the year that 2025 would remain a transitional period, we are encouraged to see our sequential momentum improved faster than anticipated. This continuous projects ramp up in Q2, driving what we believe is among the strongest organic constant currency growth rate in the industry in this time. As a reminder, our client base is almost exclusively large and midsized private sector enterprises with is no exposure to federal BP and legacy managed services. And although we remain very prudent and mindful of our clients' own end markets in the current climate, we have seen no material impact on our business unlike some of our peers. Our clients remain focused on strategic efficiency and growth with EPAM playing a key role in both. Our investments in domain expertise, AI-enabled delivery, quality standards across our global talent hubs and complex client engagements are helping us to retain and expand wallet share and win new logos, positioning us for stronger growth in 2025 versus 2024. If we take a step back, there are 3 long-term foundational themes, which together should help to explain why we should show in a different trajectory in the current market. We believe these things underpin our improving growth trends and position us for differentiated results in 2025 and beyond. Number one, we continue to see clients refocus on quality as execution matters. EPAM today is known as a trusted strategic partner that consistently delivers quality outcomes. While we are building our own AI-led consulting capabilities, our core focus is still on execution, design, build and deploy of mission- critical enterprise products and platforms. Rooted in our heritage and culture, this differentiation is not easily replicated. The last several years have confirmed that. Our core engineering DNA, which has remained intact through multiple technology cycles will be even more critical in the AI era. In Q2, more clients entrusted us with their most complex ROI-driven programs, often expanding engagements to include new commercial and delivery models. These programs are also growing in scale. As AI becomes more deeply embedded across enterprises platform, complexity will further increase disproportionately, driving even greater demand for the reliable end-to-end AI optimized execution and this specialization we provide. We are seeing some consolidation of demand, and we believe that EPAM is benefiting through our ability to bring a unique combination of AI-native consulting, engineering, organizational enablement and transformational services. We are seeing more new RFPs,, both for AI-ready solutions and for the core system [ migration ] and modernization as the client prepare for AI adoption. Number two, we continue to expand our market-leading positioning as an AI-native transformation company. Our early investments in AI are serving us well and have enabled us to achieve a high level of high AI adoption and to build a highly advanced set of AI and AI native capabilities, platforms, tools and accelerators. We would like to stress that AI adoption alone, while essential, is not enough for long-term success, which is why today, we offer a full range of AI transformational capabilities from engineering to organizational enablement to our own proprietary and open source platform such as DIAL and AI/RUN. As a result, our AI native revenue is growing double digits sequentially, up from strong double digits last quarter. Looking at our top 100 clients, the vast majority continue to be actively engaged with AI initiatives that now have moved beyond experimental PVC to medium and larger scale programs and many adopting EPAM platforms to accelerate those. These platforms go beyond enabling Agentic workflows and data native reasoning. They address the structural challenges of deploying AI at scale across the enterprise. By integrating best-of-breed external products, client-specific tools in both structure and unstructural data, they allow to close the integration gap faster, ensuring reliable, cost-effective [ preparation ] and fostering enterprise-wide use. Importantly, they achieved this without locking clients into proprietary tools, reflecting the open source nature of most of our AI enablement offerings. In short, we are making meaningful progress and gaining significant momentum and becoming an AI native transformation company. And we expect this driver of growth to build further in the quarters ahead. We will be sharing more updates along the way, including showcasing the new high-impact proposition we are taking on the market. Number three, we continue to scale and optimize our global delivery hubs, offering clients more attractive and scalable options than ever before. We remain convinced that talent will be a critical driver of our industry future and growth. In rapidly expanded markets for AI-led transformation, the ability to scale specialized talent is essential. So we are relentlessly training and upskilling our teams, particularly as we deploy AI to enhance both individual and team productivities. Our global footprint spanning for diversified talent hubs in Europe, India, Latin America and Western and Central Asia is connected through a single proprietary delivery platform and unified AI-enabled delivery methodology. This integrated model provides greater resilience and enables us to deliver truly strategic global capabilities to large enterprises that must constantly balance cost considerations and location strategy with business priorities. Each hub operates on the same delivery backbone, supported by advanced training and globally managed technical assessments. Together, they drive collaboration, co- innovation and rated client access to advanced native AI native capabilities. Our operating models also support centers of excellence that strengthen horizontal capabilities such as data cloud and experience engineering and vertical specialization, delivering end-to-end execution from strategy through implementation. These foundational themes are our core differentiators and are essential for our long-term growth. EPAM has taken the necessary steps to address our company-specific challenges over recent years, while simultaneously positioning our underlying business for strong and sustainable organic constant currency growth and putting us in a much stronger position than we anticipated just 6 months ago. Lastly, today is my 52nd and final call as the CEO of EPAM. It was indeed an incredible journey for me from founding EPAM back in 1993 and to our IPO day in 2012 and to this moment with everything in between. So at this point, I would like to state that the CEO transition plan has been going well and is on track to be completed by September 1, 2025, in which FB will become our new Chief Executive Officer and President, and I transition into the role of Executive Chairman. The title changes, but my commitment doesn't. I look forward to continue supporting the long-term success of the company. I want to thank the entire leadership team and all our employees around the world for their relentless drive innovation, commitment to engineering excellence and differentiation and value that they continue to deliver to our clients. With that, I want to welcome FB to provide some additional call. FB, over to you.

Thank you, Ark, and good morning, everyone. It's a pleasure to join you today from my seat as a Chief Revenue Officer. I would like to take this opportunity to walk you through some commercial and operational highlights of the quarter, the evolving market landscape and how our AI investments across go-to-market, partnerships, client engagement and technology are positioning us for continued sustainable growth. Now turning to market trends and demand environment. As Ark mentioned, we are seeing some positive trends in our markets globally. The increasing attention on AI is triggering incremental demand and improving our overall picture, marked by accelerating cloud migration, growing demand for foundational data engineering, decisioning and the need to modernize and operationalize platforms and systems at scale. And because our clients are still focused on optimizing their investments, they are relying on EPAM to ensure their AI initiatives are carried out with the right rigor and accuracy to enable maximum flexibility in deployment methods to meet business objectives. I'm encouraged by the client sentiment, both in North America and in Europe, showing stable and modestly growing demand, especially in our banking and financial services and life sciences and health care verticals, along with really strong growth in emerging sectors, especially in energy and oil and gas, particularly in discretionary transformation programs, but we are seeing differentiation from EPAM bringing in net new opportunities across our portfolio, increasingly realized by our ability to orchestrate across our lines of business in core engineering, cloud, data and experience, led by our Empathy Lab proposition in Europe. Clients remain focused on value realization and speed on innovation, and this is where our reputation for quality evolved commercial models and client-centric hybrid teams continues to be relevant. Shifting to our go-to-market and client-centric initiatives. We believe that the transformation in the IT services market opens new opportunities for us to capture additional market share. To better position ourselves, we have made meaningful progress on our go-to-market motions. Over the past quarter, you may have seen public announcement around our core engineering, cloud and AI initiatives, both independently and collaboration with partners. Today, we partner with over 150 global ecosystem partners and have achieved top-tier strategic partner status with all the core cloud and data platforms. Our partnership strategy is client-centric and has become a cornerstore of EPAM's ability to bring the best-of- breed solutions to our global client base, particularly around complex cloud architecture and operationalization of AI and Agentic workflows. As an interesting example, this is the recent Databricks announcement where EPAM won the ML Growth Partner of the Year award for rapidly expanding Databricks adoption through large-scale data platform modernization and AI/ML innovation. In Q2, we further operationalized our vertical-led sales and account engagement structure with deeper alignment between our industry teams and solution practices. This enabled us to have better visibility into high potential deals and to improve win rates with new and existing strategic pursuits. Over the last couple of quarters, we have also progressively strengthened our field enablement. We rolled out a unified global CRM analytics platforms, giving our sales and marketing teams real-time insights into deal velocity, deal qualification, pipeline health and client behavior. This is already improving our sales cycle efficiency and cross-selling effectiveness. Now turning to our transformation of services and key investments. Our services portfolio continues to evolve. A significantly higher proportion of our programs today are high-impact consultative transformation engagement. The vast majority of our new wins this quarter were anchored in digital product and platform transformation, cloud and AI native services. We have made strategic investments in our key solutions areas, focused on generative AI, industry cloud accelerators, cybersecurity, data factory and customer experience transformation. These solution centers serve as co-innovation hubs with clients and have already contributed to increasing our total wallet share over the same quarter last year. We also deepened our capabilities with 2 recent larger acquisitions, one in regulated industries, including financial services, another in cloud-native engineering and transformations, serving LatAm and Spanish-speaking market. These teams are quickly becoming integrated into selling and operational processes and already supporting our largest clients across most of our verticals. Now turning to our client engagement. Client centricity remains at the core of our operating model. We launched a new client success program this quarter, focusing on our top 100 clients. We continue to experiment and work with clients to provide additional flexibility with new engagement models, which have planned to scale in the future. For example, we have launched platform-based delivery for several AI operational engagements, allowing clients to consume AI as a service through our DIAL platform. This is delivering measurable efficiency gains and helping us to move up the value chain. And finally, moving to AI and data-driven revenue transformation. We are deeply committed to using AI not just for our clients, but also to transform our internal operations. Effectively, we view EPAM as customers zero for anything we want to bring to the market with AI. This gives us a measurable edge in a competitive market. In addition, we have made strategic investment in our data platforms. And we now have a centralized data lake architecture powering everything from client 360-degree views to marketing personalization. This is enabling more [ constructional ] conversations and sharper targeting across all channels. To close, our operating momentum is strong. We are executing with discipline, aligning closely to client priorities and bringing forward innovations that differentiate us in the marketplace. Looking ahead, we see continued differentiation in EPAM's AI native services, cloud and data modernization and Agentic automation. Our commercial and operational foundations are strong, and we remain confident in our ability to capture net new demand and drive sustainable growth in the quarters to come. Jason, over to you.

Thank you, FB, and good morning, everyone. In the second quarter, EPAM generated revenue of $1.353 billion, a year-over-year increase of 18% on a reported basis, surpassing the upper end of our Q2 revenue outlook. On an organic constant currency basis, revenues grew 5.3% compared to the second quarter of 2024. This marks our third quarter in a row delivering positive year-over-year organic constant currency growth, reflecting steady and resilient execution. Additionally, we've returned to growth amidst the macroeconomic climate that remains complex. Our outperformance in the quarter was broad based, driven by improvements across all verticals and geographies. As Ark and FB mentioned, our strong results and continued sequential momentum are being driven by clients turning to EPAM for trusted quality, coupled with accelerating momentum across our AI and AI native offerings. Moving to our Q2 vertical performance. All 6 industry verticals showed encouraging momentum and improvement this quarter. Our recent acquisitions, NEORIS and First Derivative also contributed positively, particularly within financial services and emerging verticals, complementing the strong underlying performance of our organic business. Financial Services continued to deliver very strong double-digit growth, up 34.4% year-over-year on a reported basis, reflecting 6.5% organic growth in constant currency, driven by strength across banking and insurance. Software and Hi-Tech grew 21.2% year-over- year, driven by strong execution and broad improvement across our existing clients as well as new logos. Life sciences & healthcare increased 11.7% on a year-over-year basis. Revenue growth in the vertical continues to be driven primarily by clients in life sciences and med tech. Consumer goods, retail and travel delivered 6.2% year-over-year growth, showing improvement versus recent quarters. The vertical delivered positive organic sequential growth in constant currency across both consumer products and retail as well as travel and hospitality. Business information & media also returned to growth, increasing 2.8% year-over-year. The return to growth within this vertical was driven by strong momentum across several key clients as well as revenue from new logos. Our emerging verticals delivered another quarter of very strong year-over-year growth of 28.7%, with NEORIS continuing to positively impact the vertical's performance. On an organic constant currency basis, growth was 3.3%, primarily driven by ongoing strength within energy, industrial materials and real estate. From a geographic perspective, Americas, our largest region, representing 59% of our Q2 revenues, grew 15.9% year-over- year on a reported basis, reflecting 3.8% organic growth in constant currency. EMEA, comprising 39% of our Q2 revenues increased 21.7% year-over-year, reflecting 7.6% organic growth in constant currency. And finally, APAC, making up 2% of our revenues increased 13% year-over-year, reflecting 8.3% organic growth in constant currency. Lastly, in Q2, revenues from our top 20 clients grew 8.8% year-over-year, while revenues from clients outside our top 20 increased 23%. Moving down the income statement. Our GAAP gross margin for the quarter was 28.8% and compared to 29.3% in Q2 of last year. Non-GAAP gross margin for the quarter was 30.1% compared to 30.8% for the same period a year ago. Somewhat higher variable compensation, combined with lower profitability associated with recent acquisitions, both contributed to the lower gross margin level. The company continues to focus on improving utilization and gross margin, and we'll maintain this focus throughout the remainder of the year. GAAP SG&A was 17.1% of revenue compared to 16.9% in Q2 of last year. Non-GAAP SG&A in Q2 2025 came in at 14.1% of revenue compared to 14.3% in the same period last year. GAAP income from operations was $126 million or 9.3% of revenue in the quarter compared to $121 million or 10.5% of revenue in Q2 of last year. Non-GAAP income from operations was $203 million or 15% of revenue in the quarter compared to $175 million or 15.2% of revenue in Q2 of the previous year. Our GAAP effective tax rate for the quarter came in at 28.9%, and our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $1.56. Our non-GAAP diluted EPS was $2.77 compared to $2.45 in Q2 of last year, reflecting a $0.32 increase year-over-year. In Q2, there were approximately 56.5 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q2 was $53 million compared to $57 million in the same quarter of 2024. Free cash flow was $43 million compared to free cash flow of $52 million in the same quarter last year. Cash and cash equivalents were just over $1 billion as of the end of the quarter. At the end of Q2, DSO was 78 days and compares to 75 days for Q1 2025, and 76 days for the same quarter last year. Share repurchases in the second quarter were approximately 1.1 million shares for $195 million at an average price of $179.23 per share. Moving on to operational metrics. We ended Q2 with more than 55,800 consultants, designers, engineers and architects, reflecting total growth of 18.7% and organic growth of 6.7% compared to Q2 2024. In the quarter, we added approximately 200 delivery professionals. Our total headcount at quarter end was just over 62,000 employees. Utilization was 78.1% compared to 77.5% in both Q2 of last year and Q1 2025, driven by bench optimization efforts. Now let's turn to guidance. Before moving to the specifics of our 2025 and Q3 outlook, I would like to provide some thoughts to help frame our guidance. Our solid financial performance in H1 amidst economic and tariff-related uncertainty continues to be driven by clients who value our strong delivery execution across all our global delivery locations. We are also highly encouraged to see accelerating growth in our advanced AI native offerings, which contributed to our improving revenue growth rates. With good visibility into Q3, we expect further improvement in our year-over-year organic constant currency growth rate in the quarter. With regards to the full year, I would like to remind everyone of the typical seasonal impacts in the second half. Relative to Q2, Q3 benefits from more bill days contributing positively to sequential revenue growth. Compared to Q3, Q4 is negatively impacted by a higher number of holidays, vacations and potential furloughs. EPAM's revenues and our Q3 pipeline have developed nicely throughout the year. But we also realized that we're still operating in a dynamic demand environment. We want to continue to be prudent with our approach to guidance and currently expect Q4 revenue to be predominantly driven by seasonal factors, which will likely result in flat to a modest decline sequentially from Q3 to Q4. We expect to continue to see strong inorganic revenue contributions from NEORIS and First Derivative, particularly in the financial services and emerging verticals. Based on our strong H1 performance and good visibility into Q3, we are raising the bottom end of the range for 2025 full year organic constant currency revenue growth. Additionally, due to further appreciation in the euro and GBP, we will also be increasing the FX contribution to reported revenue growth. While driving top line revenue growth, we will also remain focused on improving gross margin. We are working on improving utilization and we'll continue to reduce isolated pockets of bench while adding net headcount to support growth. Our guidance continues to assume that we will be able to deliver out of our Ukraine delivery centers at productivity levels similar to those achieved in 2024. Moving to our full year outlook. Revenue growth will now be in the range of 13% to 15%, with inorganic continuing to contribute approximately 9% for 2025. Based on today's spot exchange rates, coupled with the assumption of modest strengthening in the U.S. dollar in the second half, foreign exchange is now expected to have a positive impact on revenue growth of 0.9%. We expect year-over-year revenue growth on an organic constant currency basis to now be in the range of 3% to 5%. We expect GAAP income from operations to continue to be in the range of 9% to 10%, and non-GAAP income from operations to continue to be in the range of 14.5% to 15.5%. We expect our GAAP effective tax rate to now be 26%. Our non-GAAP effective tax rate, which excludes the impact of benefits and shortfalls related to stock-based compensation, will continue to be 24%. For earnings per share, we expect the GAAP diluted EPS will now be in the range of $6.48 to $6.64 for the full year, and non-GAAP diluted EPS will now be in the range of $10.96 to $11.12 for the full year. We now expect weighted average share count of 56.4 million fully diluted shares outstanding. Moving to our Q3 2025 outlook, we expect revenue to be in the range of $1.365 billion to $1.380 billion, producing year-over-year growth of 17.6% at the midpoint of the range. Our guidance reflects an inorganic contribution of 10.4%, with a 1.0% positive FX impact during the quarter, producing a 6.2% organic constant currency growth rate at the midpoint of the range. For the third quarter, we expect GAAP income from operations to be in the range of 10% to 11% and non-GAAP income from operations to be in the range of 15.5% to 16.5%. We expect our 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 $1.89 to $1.97 for the quarter and non-GAAP diluted EPS to be in the range of $2.98 to $3.06 for the quarter. We expect a weighted average share count of 55.9 million diluted shares outstanding. Finally, a few key assumptions as part of our GAAP to non-GAAP measurements for Q3 and Q4. Stock-based compensation expense is expected to be approximately $44 million for Q3 and $45 million for Q4. Amortization of intangibles is expected to be approximately $18 million for each of the remaining quarters. The impact of foreign exchange is expected to be an approximate $2 million loss for Q3 and to be negligible for Q4. Tax effective non-GAAP adjustments is expected to be around $17 million for Q3 and $16 million for Q4. We expect minimal excess tax benefits or shortfalls in the remaining quarters. Severance driven by our cost optimization program is expected to be around $9 million for Q3 and $8 million for Q4. And one more assumption outside of our GAAP to non-GAAP items, we now expect interest and other income to be $3 million for each of the remaining quarters. We remain committed to driving revenue growth and improving profitability in the second half, and we are confident in our strong positioning entering Q3 despite the dynamic environment. We will continue to run EPAM efficiently, maintaining our focus on profitability throughout the remainder of the year. Thanks again to all our employees for their dedication and focus on serving our clients and driving results for EPAM. I would now like to take a moment to acknowledge Ark's leadership and the profound impact he has had across the industry, our clients and our company. Ark has successfully led EPAM through multiple tech cycles over multiple decades, and he has positioned the company to capture the next wave of AI-driven growth. Leading the company through a challenging couple of years and a near existential crisis resulting from the Russian invasion of Ukraine, Ark has played an instrumental role in our return to growth. Today, EPAM is better positioned than ever as a truly global company, offering industry-leading delivery execution across all of our geographic delivery hubs. On a personal note, it's been an honor working with Ark, and I look forward to continuing to work with him in his new role as Executive Chairman. Operator, let's open the call up for questions.

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

FB, welcome and congrats to you and to Ark. First question for you, kind of on the workforce here and the intentions. It's good to see the organic growth acceleration. But despite that improved quarter-over-quarter organic growth, I noticed you slowed the net quarter-over-quarter billable increase in 2Q versus 1Q. So I just wanted to reconcile that. Can you just comment on kind of how you're balancing new talent additions versus bench optimization? Are you making any lasting gains in agentic delivery capabilities? Just anything you can give some more detail on there.

Yes. That's a good question. I think I'll take that. This is Jason. So we continue to hire to support revenue growth. And I think you see in our guide that we intend to continue to grow throughout the year. At the same time, I think we have been a little bit more thoughtful about pockets of bench that we have globally. And we, let's say, have been somewhat more active to address the bench issue. So we are seeing an improvement in utilization, and we look forward to continuing to maintain utilization at a somewhat higher level than we did last year. And Bryan, that's generally why you see a somewhat lower headcount addition. I think that you'll see net additions clearly in Q3 and probably greater net additions in Q4 as we exit and prepare for 2026.

Okay. Understood. And then my follow-up. So obviously, a very complex macro environment. In your conversations with client leaders, what do you really think it's going to take for them to lean back in more notably in discretionary areas just to sustainably recover growth? Is it as simple as trade deals and rate cuts? Or do you sense there's just prior levels of outsized discretionary spend where there wasn't an ample ROI that may have changed lasting changes in behavior to discretionary activities?

Bryan, this is FB. I think it's a very good question because what's really happening on the field is clients are -- have to go back to discretionary spending for 2 reasons. One is that they were suspending discretionary investments for a while now, and they're no longer able to do that due to regulatory requirements or due to platform shifts, which they have. Also, most of our clients started to prepare themselves for the AI adoption. In order to do AI adoption, they have to really touch upon their fundamentals. Fundamentals, meaning they have to take a close look at their legacy infrastructure, start doing modernization, going back shifting to the cloud and really addressing the backbone, which is data, which is in order to really adopt AI and actually roll out AI solutions in the enterprise, you need to make sure that your data environment, your core data assets are in good shape. This is very much playing to the sweet spot of EPAM. This is very much playing to our strengths. That's kind of what's happening right now.

Your next question comes from the line of Jonathan Lee with Guggenheim Partners.

Congratulations on your final earnings call. It's been a remarkable journey, and FB looking forward to working with you. Jason, this one is for you. I appreciate some of the context you provided around the outlook. Can you dig into some of the specifics across what's contemplated at the high end and the low end of the range particularly from a macro perspective? And can you help unpack some of your assumptions around the range of your implied 4Q exit rate?

Okay. Excellent. Thank you, Jonathan. And I think I'll give you kind of a bonus. I'll start with the midpoint of the range, and then we'll talk about low end and high end. So from a midpoint of the range for the full year, which would be 3% to 5%, which I guess midpoint would be around 4%. It would require that we achieve the midpoint of the guided range for Q3 and then some sequential decline Q3 to Q4, largely driven by the seasonal factors I mentioned. And so nothing heroic involved in hitting the midpoint of the range. On the low end of the range, that would say you probably achieved the low end of the Q3 guide. And then you see a significant deterioration in demand. And then as a result of significant decline in revenues in Q3 to Q4 due to both the seasonal and the demand impacts. On the high end of the range, that would say you achieved the high end of Q3 guide, and then you see some sequential growth Q3 to Q4. And again, that would -- you'd have to see some improvement in the demand environment because you do have the negative impact of seasonality. On the midpoint of the guide, your Q4 exit would be sort of 3% and change to maybe 4% organic constant currency year- over-year growth rate. On the high end of the guide, again, if you were to exit closer to the 5% for the full year, you would actually exit Q4 at an organic constant currency growth rate in excess of 5%.

That's great color there. As a follow-up, can you provide incremental color on the net new discretionary transformation program that you're seeing, especially given that most peers have cited challenges in discretionary spending? And how are these new wins factoring into the outlook for the back half and perhaps even into '26?

I think it's a kind of continuation of what FB already mentioned because if you think about EPAM, we have pointed to this multiple times. Our client portfolio, portfolio of our engagements is different. And when there is a pressure, for example, on more traditional services, including like large managed service contracts on BPO, usually, it goes because of automation involved and specifically today, AI-driven part. And this is where we're seeing increment for us. And if you remember, we were talking for quarter after quarter that we're waiting when actually AI will start to put additional pressure and drive for the new type of build. And I think this is a sign which we see during the last couple of quarters, which is kind of confirming our growth and discretionary increase, not at the level which we would like to, but at least in the right direction. And I think this is how it shaped right now. So we don't see impact with some other vendors based on their portfolio configuration, and we see some incremental increase.

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

Can you hear me?

Yes, we can.

How are you measuring your progress in upskilling the employee base? And how far are you in this process and the related investments? Is this an outsized investment compared to typical training initiatives? And maybe kind of reconcile that with the impact of your efforts to increase utilization.

Maggie, nice meeting with you. This is FB. So in 2024, we launched the AI upskilling of our employee base which we actually accomplished with 80-plus percent of our employees went through that process. We continue this effort, and we regularly making sure that our or population are being updated with the latest trend. We rolled out a very special program, which is -- provides them the necessary boot camp materials to get started. Also, we are going through the process of having more and more of our engineers AI certified. So going through the process of mastering the skill set itself. But now we're no longer just focusing on our engineering teams, but actually rolling it out to our client- facing organizations and also to our back office teams to be certified and understand how to best use AI. What we are seeing is that we are going to an AI adoption. The curve is accelerating. We're not where we are -- we want it to be, but clearly, it is improving as we go along. And we try to -- because it takes 2 to play this. It's also we need to work with our clients to allow us to adopt AI in our deliveries. But we are progressing quite well, and we are hoping to really have the full population continuously uplifted to the right level.

And Jason, you mentioned some efforts to improve gross margin and profitability, operating margin as well. Can you give us a sense of where you would like to exit the year on some of those metrics compared to maybe an early look at where you're expecting 2026 to be?

Yes. So from a utilization standpoint, which is one of the big areas of focus right now, it's to exit the year at, let's say, 77% or maybe a little above. And again, Q4 is usually a quarter when you've got a lot of vacation, and that does impact utilization. So if you look back to last Q4, that shows improvement. We are somewhat more focused on account margin, making sure that we're taking deals with kind of appropriate kind of pricing and profitability. And so it continues to be a work in progress, but it's certainly part of our focus as we work through the second half of 2025.

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

Wondering if I could just quickly follow up that last question on margin at Jason. Just looking at the exit rate, given all the moving pieces in 2025, can -- is it fair to use the fourth quarter exit rate as a base to build upon for next year? Or are there other dynamics that we need to consider as we look out beyond the fourth quarter? And maybe you can weave in any updated commentary on kind of the pricing wage dynamic that you've been experiencing over the last several months?

Okay. So I think it's sometimes hard to use Q4 because usually the second half has got somewhat better profitability than the first half. I do think for the full year, you're looking at us hitting kind of the midpoint of our guided range of 14.5% to 15.5%. And clearly, there's focus on trying to improve profitability as we enter the next year. I think right now, what you've got is, again, a focus on utilization. We are seeing an environment where clients are looking for EPAM to either take over troubled programs or to help them execute as FB said on kind of foundational kind of data or AI-related programs. Generally, clients are willing to pay us for that. And so the profitability is probably improving somewhat from a deal standpoint. But at the same time, it's still, let's call it, a somewhat kind of cautious environment. But I would say that we feel better about the pricing environment today than we would have felt 6 months ago.

Got it. And then I think everybody on this call and everyone in the team knows the narrative is weighing pretty heavily on the group, and I think you understand those concerns as it relates to productivity gains and revenue. You've provided some information in your prepared remarks, but are there any other trends or data points that you can share that may provide better insight in both the opportunities and the risks. I think you talked a lot about the opportunities. So maybe more on the risks, at least in terms of the market's perception versus what you think are the realities.

Yes. I think, it's correct. So let me clarify. You're basically directly asking how scary we are about the future because of AI will take our jobs, correct? And I think we are definitely very carefully watching everything what's happening. And as you know, we have pretty strong part of our portfolio, which is very much hi-tech product companies. Some of them actually is the driver for what's happening in adopting of AI, not only for building new solutions, but also how to build it, basically how it deals work. We're investing in a tremendous amount of time in this. And I think we understand and see it's pretty well, specifically for the complex enterprise market. And with all of this, we do believe that the complexity of the new landscape of enterprise enabled by AI would be so high that it would require very good engineers solutions people. The type of work they are going to do again, I'm not telling anything going to be different, but this would be slightly developed over the next years and amount of people who can do something like this would be in very, very high demand. We really do believe this, and we do believe this even from what we're seeing right now. Like a lot of clients, we wanted to do it themselves, they are picking our brands and then say you guys, we will do it ourselves, then 3, 6, 9 months later, coming back to us and engaging us back for both for the DLC itself and the new solution. This is practically the trend, and this is part of the sequential increases as well.

I just wanted to add, we just made a public press release a case study, which we released with Wolters Kluwer. Just I think yesterday, we released that, which kind of points out where we're working with the core clients to help their adoption and actually do the education itself, which is not as easy. I know that everybody believes that watching the YouTube videos that you can white code ERP application, but that's not how it works.

So I would -- I see more optimistic -- we're very, very in the beginning of the enterprise transformation, and it's very difficult to predict. Most of the predictions today, it's kind of individual productivity or very specific use cases, not a complexity which we will see or already actually see today.

Right. And if I could -- just a quick follow-up there to that -- your comments, just to clarify, Ark. So I think you said that you're seeing a trend to clients trying to do it themselves, but then coming back to you to do the work correctly?

Yes. That's like -- because like initial think it's easy because it's a very easy use case. Like I'm comparing this, again, sorry for my history, a long time being here. I'm comparing this to -- and I know people argue that it's not comparable because AI will be thinking and all of this. still, I cannot like hold myself, but when it will come up, a lot of applications were starting to build by junior people and inside of preparation. And then when it's supposed to go to real production to scale to provide scalability and flexibility and performance and maintainability in some way. All of this come back to very complex platforms, very strong professional leaders, very complex architecture. And again, work draft was changed by back then. It just wasn't so much popular in media that this transition happened. And I'm pretty sure it will be different this time. But directionally, I think it would require a lot of very professional people who understand how it's works.

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

I guess Ark, just big picture. When we think about all of the change in the organization and all the adaptability to the new tools and technology, how are you thinking about the shape of the actual delivery footprint itself? Are we thinking about more senior people, less senior people being used? And how is that going to shake out as we look in the years ahead?

So thank you for the question. And I'll pass it to FB because he's smiling, wanted to answer.

So we'll have -- so I think right now, where we are is that everybody still believes that in order to really use the AI tooling, you only need senior people, but that's not sustainable. That's not sustainable proposition. We're all observing how our kids are using AI in their studying efforts. Imagine that a couple of years out, all those kids are using AI not just for 1 or 2 years, but now 5 years in they have experience. They have their instincts how to ask the right question and how to actually do the right project. So we do believe that we need to continue investing into our people. We need to continue building a balanced setup. Yes, you need to make the right hires, but maybe the hires going forward are not going to be based on coding skills, but it's going to be based on engineering skills. Engineering remains, coding is changing. That's how we think about this. Going forward, our delivery teams are going to be probably different media and shape. But the challenges, what they are -- need to tackle them. The number of features they need to deliver is going to be much, much more. So we are not seeing a dramatic shift in terms of population or size of our delivery team. We continue to believe that we should be investing into it. We continue to believe that the future is to create a right shape pyramid, if this is what you're asking and the right setup. It's not just seniors and not just the most senior people who can really use it. It's the key to the education and have the right engineering background to be able to understand the basics, understand the concepts and then use AI for the most effective way to actually deliver the solution for you. And I would add that -- and from this point of view, it's also not much change from the past. The same was happening in the past. And sometimes with the right education and the right desire that junior people were outperforming senior people very, very quickly. And at the same time, experience matters. So it's all balanced. I don't think there is -- yes, we are reading the same stuff you read, but we're also doing this with thousands of people, and we have the ground to understand what was happening like 10 years ago and 20 years ago.

That's helpful. And then when we think about this idea of building these new products and solutions, how do you think about the idea of being a pure play engineering firm. I felt you went out of your way to say that you don't do managed services. And yet one of the thesis out there is this idea that you have to be -- because [ Agentic ] starts to get into the workflow itself that you need some component of managed services, like other companies are going with a much more integrated approach. How do you feel like you fit into this? Can you just do the engineering and walk away?

Yes. Let me clarify one point. When we're talking about we don't do managed services, we mean we don't do much of traditional managed services and there are different how things happen. And for example, in platform buildup, managed kind of products, we do this, but it's very different than traditional legacy stuff. That's what we -- okay? And we're definitely building this expertise because when we help clients to build very often, we continuously maintaining this, but it's a very big mix of manage and build constant exchange. That's what we're doing, and this is much more kind of exist in our services. So I think it's important. And I think that's an answer to your question.

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

I wanted to touch on how much of your business that sequentially incremental revenue we're seeing is coming from these existing clients or pre-existing customers returning now? Like how much does that make up of the actual incremental dollars that's new business for you today? And then maybe just help us a little more on where they're choosing delivery out of, whether it's more India now or it's still a mix between India and Eastern Europe. Just curious kind of what the demand is for from them.

Okay. So let me take the first half. So you get a little bit of benefit with the additional build days in Q2 to Q3. Certainly, we think some of the improvement in our revenue versus our earlier expectations and probably versus peers has to do with this return and quality. It's hard for us to sort of turn that into a dollar figure but we think it is what is likely separating us from an organic constant currency growth rate relative to peers. I don't know if either Ark or FB want to take the question about where the demand is coming, India versus Europe versus...

I think the demand right now is quite balanced, right? It is broad-based. So we are clearly able to serve our client base with the 4 large geography where we are delivering from Latin America, from Central and Eastern Europe, from Western Central Asia and from India. And depending on clients' needs and their own location strategy, we are equally serving them from all 4 locations right now. So we are seeing growth. We're seeing demand going into all our 4 major centers.

Okay. That's helpful. So you guys are -- so do you think you're at the end of your repositioning geographically and then versus what you were trying to do over the last few years? And then maybe just a quick one on attrition. Where are the trends recently? Have they been stable year-to-date?

I'm going to let Ark talk about positioning, but let me just say on the attrition, involuntary is up a little bit for the reasons that I talked -- we talked about earlier. But the voluntary attrition is actually in very good shape and actually running below 10%.

And you answered already kind of, yes, we are focusing on pretty well and trying to see where there is a right talent globally, and I think we believe we're in good state right now between all major hubs. Still Central Eastern Europe is the biggest one, if you combine all of this and then India, Latin America, Western Central Asia. So I think from this point of view, it's not going to be any additional kind of news. We're growing in all of them, and we do believe that we're in good shape. And we also do believe that with the increasing in demand, we cannot predict whether it's really. So all very much position from the quality of talent and our ability to, which we invest in all the time to make sure we're ready for...

We have time for one more question. And this question comes from the line of Puneet Jain with JPMorgan.

Good quarter, guys. Are there any differences in AI adoption and across different verticals like financial services, like that vertical has been doing better than others. Is that in any way driven by AI adoption, like the different level of AI adoption in that vertical?

Well, I think right now, we see adoption across all the different verticals. It's a broad-based adoption for each vertical. It has its own champions. I think there are -- in each vertical, there are players who are front running it, and there are players who are still waiting to start off. We don't see the differences between verticals right now, yes.

I don't think it's any connection right now between the vertical performance. The vertical performance, I would say, is mostly attributed to differences in macro, like the tariffs and macro-related factors? Appreciate it. And then as you include more proprietary or third-party AI solutions in your delivery, could there be like a change in delivery models perhaps to a model that encourages your sales team and the account teams to include more AI models.

So we're continuously experimenting with engagement models. And in my opening remarks, I kind of talked about it as we are working with our clients. We see certain subscription models already taking up with our EPAM platforms. I think it's not settled yet. It is changing as we go, and we continue to see how we can best adapt to our client needs and also able to really capture the benefits of our AI and share the benefits with our customers.

I will now turn the call back over to Arkadiy Dobkin for closing remarks.

Thank you, again, as always, for the last 50-plus times. So it was very good to have this call. And I guess we're doing, as we mentioned, better than we expected. This third quarter of growing organically is an important kind of milestone for us to continue. And I [indiscernible] to be to see you next time in the call. Thank you very much.