Lilya Chernova – Investor Relations Arkadiy Dobkin – Chief Executive Officer and President Anthony J. Conte – Chief Financial Officer.

Moshe Katri – Cowen and Company, LLC Mayank Tandon – Needham & Company, LLC Steve M. Milunovich – UBS Securities LLC David M. Grossman – Stifel, Nicolaus & Co., Inc. .

Greetings and welcome to the EPAM Systems First Quarter 2014 results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.

Lilya Chernova for EPAM Systems. Thank you, you may begin. .

Thank you and good morning everyone. By now you should have received your copy of the earnings release for the Company’s first quarter 2014 results. If you have not, a copy is available on our Web site epam.com. The speakers on today’s call are Arkadiy Dobkin, Chief Executive Officer and Anthony Conte, Chief Financial Officer.

Before I begin I’d like to remind you that some of the comments made in today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company’s earnings release and other filings with the SEC.

Arkadiy?.

Thank you, Lilya. Good morning to everyone and thanks for joining us today. I’m pleased to report that our first quarter results were better than we planned. Financially, we exceeded both guidance and consensus. EPAM revenue in Q1 was $160.4 million, a sequential increase of 2% and 29% year-over-year.

Non-GAAP net income was up almost 30% year-over-year and non-GAAP operating margin was in the range of 16.4%. Anthony will review the quarterly results in more details a bit later, and provide you our guidance for Q2 and the full year.

During the last earnings call, we gave a good level of details about EPAM’s history, and its 20 year long transition from being a strictly software engineering services company to a much more solution oriented provider with specific industry focus. We analyze the reasons why today EPAM is focusing on a particular subset of the overall ITO market.

We also provided multiple highlights on a number of reasons why this specific segment is growing faster than the rest of the market and why EPAM has a better position to serve the segments in comparison with a number of other players.

We list the type of challenges and requirements with the providers to successfully serve the segment and talked about EPAM investments to shave the company accordingly and to better address the clients’ needs.

We also used the example of a large North American retailer to illustrate how the investments we made helped prepare EPAM for these new types of engagements, which would have been practically impossible for us to deliver just several years ago.

Finally, we stated that one of the indications of the positive results of all our efforts was the increased attention from the industry analysts in the second half of 2013 when over 20 different reports mentioned EPAM. We are great to see that this strength is continuing in 2014.

In March Forrester, a leading independent research analyst firm, published it’s Forrester Wave report to Deloitte for its first time the vendors for the emerging market recalled software for the development services, or DVS.

First, I would like to stress that this report further confirms the strategic market opportunity we consider a focus area for us.

Using this report, many of the concept discussed during our last call were reinforced, including such as many companies in traditionally non-software related markets, a decline in software vendors currently and software is become an important part of their brand.

Another one that developing software enable products present a new set of challenges for nontraditional software companies. And finally to meet the challenges, these companies are looking for certain partners that have the skill set necessary to address their needs.

Second, and I think it’s important to mention this report in line with the Forrester Wave general methodology was conducted during transparent approach of comparing the players in specific software market so the potential clients of those players can make well informed decisions without spending months of their own research.

Such revelations both included assessments by many, 14 in this specific case, criteria and a number of extensive customer interviews, all of which were performed anonymously. For the study, 11 of the most significant providers in this emerging market were selected and a portion of their clients were interviewed.

As a result EPAM emerged as the leader, one of only two in their evaluation. EPAM scored the highest of all providers on driving innovation and helping to create innovative new products. We also have the highest score on customer reference and user experience design capabilities.

While we do understand that all such reports have some subjective component. We’re clearly very pleased with our rating especially considering we have emerged against some very strong competition. In addition, this recognition reinforces that EPAM is well positioned to take advantage of the current market trends.

Now, let us cover two important acquisitions, which closed since our last call, and explain how they’re going to play in the overall EPAM strategy. First about Netsoft. In March EPAM acquired Netsoft, a technology consulting firm based in the United States and Armenia, specializing in the healthcare and health insurance industries.

Netsoft has experienced work in some of the leading health plans in the United States on the medical management and claim systems, accountable care organization, telemedicine, healthcare analytics, personalized medicine, health information exchanges and online self-service capabilities.

As we all know healthcare and health insurance are moving forward quickly to transition it sales into much more consumer oriented environments. That we believe that they are becoming very software dependent industries, right in line with what we are seeing happening in the retail, media, and business information sectors.

As a result, there is growing demand to build many new software solutions where large number of insured individuals and patients are engaging as direct users of those solutions in a day-to-day healthcare and health insurance procedures.

As we discussed last time those solutions should satisfy a very new set of characteristics and require very special set of skills to build and to implement. That is why this is clearly one of the most interesting IT segments in the United States and globally as well.

Netsoft’s deep strategic and technological expertise in healthcare combined with EPAM scale our own experience in that field, strong knowledge of how to build consumer centric software solutions and many new enabled green technologies for those solutions position us very well to take advantage of the future opportunities in this space.

The consideration for Netsoft was a mix of cash and stock. Total potential consideration included an earn out is $6 million payable over the next 12 months. Second view, just yesterday we announced another important acquisition of Jointech, which expands EPAM’s presence in the APAC region in the financial services vertical.

The company is based in Hong Kong and has its engineering centers in Shenzhen, China and presence in Singapore. It currently employees over 215 employees focused on solutions for multinational organizations in the investment banking and office management industry. This is important step for EPAM.

It is definitely outside of our traditional geographies in Europe and North America where we have significant presence and have extensive operational experience. So it wasn’t an easy decision for us to proceed.

At the same time our large global clients were asking us for sometime to consider providing services in the APAC geographies in addition to what we did in North America and Europe, especially when we were getting involved in two new large global programs. As we know, to address that, we opened EPAM offices in Hong Kong and Singapore last year.

But in addition we were trying to identify the right potential partner in the region to scale faster locally. We do believe that Jointech, with its focus on quality software engineering and their long-term experience of service in very demanding large global investment banking clients is a right one.

In addition, we also had an opportunity to work together with Jointech for service client during the last month, which made us even more comfortable in making the final step. While the initial focus of our operations in China will be to continue service the investment banking clients.

We plan to extend the services to some customers operating in the APAC region and other verticals as well. The acquisition consideration is $20 million in mix of cash and stock. The total potential purchase price might be increased based on the future performance during the earn out period in the range from zero to $25 million.

To conclude on this topic, I would like to say that currently our M&A pipeline remains strong and we continue to focus on opportunities that will bring us into new vertical markets or improve our position in existing markets, expand our geographic presence from both perspective; serving local clients and providing global delivery services or enhance our horizontal service offering across multiple industries.

As you can see the two acquisitions we talked today, formally fit into these categories and in general, are helping us to shape the company to better address the market we focus on. The future targets will be consistent with that direction. I am sure you all have seen the retirement announcement for Karl Robb.

I am very sorry that Karl will be stepping down from his day-to-day operational role. Karl has been a strong leader and available member of the management team at EPAM over the past 10 years. And while he will be missed we expect Karl to continue contributing as a Board member in the long run.

We are currently working on the transition plan and we will roll it out over the next month. Lastly I’m sure you all expecting our comment on the situation in Ukraine and Russia.

How it is affecting or could potentially affect our business? We will provide some color on the situation after presenting to you results of our quarterly performance together with regular financial details, and after showing our guidelines for Q2 and to the end of the year. Therefore I would like now to turn over to Anthony to do that.

Anthony?.

Thank you Ark and good morning everyone. I am going to spend a few minutes taking you through the first quarter results. Then I will talk more about our Q2 and full year outlook. As usual the full details of our results can be found on our press release and the quarterly fact sheet located on the Investor Section of our Web site.

As detailed in our press release the first quarter revenues grew 29.1% over last year and 1.8% sequentially to $160.4 million, above the top end of our guidance. The overall performance in the quarter was driven by continued momentum from Q4, primarily in Europe, thereby offsetting the normal Q1 slow down.

Europe was up 48.7% year-over-year and 20% sequentially, representing 42% of revenue in the quarter. North America remains our largest segment representing 49.3% of revenue up 25.8% year-over-year. CIS did experience some Q1 slow down, decreasing 17.8% year-over-year and representing only 7.5% of revenue.

However, about 14% of this drop is related to the devaluation of the Russian ruble in Costange with the balance attributed to a slower than normal budget cycle in the region.

Looking at service lines we experienced no significant change in our revenue mix, software development and application testing services continue to be our largest service offering, representing 69% and 20% of revenue respectively.

Our top 20 clients accounted for 57.3% of total revenue and grew 31.2%, while all our clients below the top 20, grew 26.2% year-over-year. Our customer loyalty remains high with over 90% of customers working with us for at least a year and 80% coming from those who have been with us for at least two years.

Each of our verticals grew year-over-year, led by banking and financial services, our fastest growing vertical, which increased 45.9% from prior year and represents 29.6% of our Q1 revenues. Travel and Consumer increased 33.4% and was 22.7% of revenue, Business Information & Media was up 19.2% accounting for 13.1% of total revenue.

ISV & Technology grew 8% accounting for 21.7% of revenue and the other vertical group 43.1% year-over-year and represents 11.7% of Q1. The Travel and Consumer vertical led our sequential growth with 9.3% growth over Q4. Business Information & Media continued the recovery seen in 2013 growing sequentially 5.8% over Q4.

GAAP income from operations increased 40.7% year-over-year to represent 13.6% of revenue, included in our operating results on a GAAP basis, where our stock-based compensation expenses, amortization of purchase intangible assets, acquisition-related costs and certain other one-time items are included from our non-GAAP measures.

Full details on these can be found on our press release. Non-GAAP income from operations increased 39.5% over the prior year to $26.3 million, representing 16.4% of revenue. GAAP net income increased 36.9% year-over-year. And non-GAAP net income grew 39.7% year-over-year.

We completed the quarter with 9,759 IT professionals, an increase of 12%, compared to Q1 of 2013 and 5% sequentially. Utilization for the quarter was at 79.6% about 5% higher than the Q1 2013, further supporting that 29% growth in revenue. For the quarter, we generated $0.47 of non-GAAP EPS, also above the top end of our guidance.

And $0.35 GAAP EPS, based on approximately $49.2 million diluted shares outstanding. Turning now to our balance sheet, we finished the quarter with approximately $174 million of cash, up approximately $5 million from December 31. During the first quarter operating activities generated approximately $16.2 million of cash.

This is the first Q1 with positive cash flow in many years. Unbilled revenues were $59 million at March 31, an increase of $16 million, compared to the end of 2013. This sequential increase is normal for Q1 as many of our 60 projects restart on a calendar year. However, as a percentage of revenue, this is lower than our normal Q1 trends.

Accounts receivables were at $90 million at the end of Q1, down 6%from year-end. And DSO ended the quarter at 55 days. Turning to our guidance for the full year 2014 based on current conditions and including the impact of the Netsoft and Jointech acquisitions, EPAM expects year-over-year revenue growth to be 25% to 27%.

Non-GAAP net income growth for 2014 is expected to be in the range of 23% to 25% year-over-year with effective tax rate of 20%. The full year weighted average share count is expected to be just over 50 million diluted shares outstanding.

For the second quarter of 2014 EPAM expects revenues between $168 million and $170 million, representing a growth rate of 26% to 27% over the second quarter 2013 revenues. Second quarter of 2014 non-GAAP diluted EPS is expected to be in the range of $0.47 to $0.48 based on an estimated second quarter weighted average shares of $49.7 million.

GAAP diluted EPS is expected to be in the range of $0.30 to $0.32. I will now like to turn the call back over to Arkadiy.

Ark?.

Thank you, Anthony, so I would like to return to current situation in Ukraine and what we see there. So first of all, I would like to say that all EPAM locations continue to operate normally.

We are monitoring daily and our daily reports show that attendance rate in the offices in the region is all at above normal in comparison with 12th month from today. So in the first quarter of 2014 EPAM grew Ukraine delivery capacity by 5% sequentially.

And this reflects our commitment and opportunity – and also commitment and optimism from majority of our clients operating in the region. It is EPAM, not any of our clients have initiated disaster recovery or started to execute business continuing to program steps.

It’s also worth mentioning again that the majority of our clients engaging in multiple locations and those which operate only in Ukraine, monitoring situation together is observed very, very closely to make sure that we can react together if necessary. Recently these sanctions don’t affect EPAM.

Those sanctions were introduced and later expanded with a target to the Russian government or government control in some enterprises, and don’t confirm EPAM as being not related in any way to government working. Production protests in eastern Ukraine have not disturbed EPAM operations.

We have two offices in the region in Kharkiv and Dnipropetrovsk, and both of them operate normally without disruption during all this time. I think the next important milestone is election is scheduled right now for May 26, and clearly the situation changes daily there. As usual, we are monitoring this very closely.

We will be happy to answer some questions from you, but that’s all we can share with you right now. Thank you, and I would ask operator to start Q&A session..

Thank you. At this time, we’ll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Moshe Katri with Cowen and Company. Please proceed with your question..

Thanks. Good morning. Nice quarter, guys. Arkadiy and Anthony, can we get a feel on the revenue contribution or expected revenue contribution for both acquisitions this year? So we’re trying to figure out how much of that guidance raised for revenue growth came from those acquisitions and how much of that is organic. Thanks..

Moshe, as you know historically, we don’t really separate out the revenue for the acquisitions. Our plan is to integrate them quickly. So the revenue raised is really a blended number with some synergies built into it. So we don’t disclose the separate trend for the acquisitions.

Consistent with how we’ve done acquisitions in the past we’ll integrate them very quickly..

So, I mean, this is a very valid question, and typically companies start integrating acquisitions and don’t disclose an organic number a year after the acquisition. So I think it’s a very valid question to understand whether the top line growth guidance raised is predominantly coming in from those acquisitions or not..

We didn’t decrease our organic growth projections, which we said it before. So, we cannot grow – we’re not planning to grow this specific number, but again our organic projections stay in line..

Okay. So, that’s fine. And then, you mentioned 250 headcount for the Hong Kong-based acquisition.

How about the first acquisition that you mentioned? How much would that add in terms of headcount?.

Very small. It’s less than 50..

Okay.

Can we get an update on your ramp up in terms of sales personnel, which is something that you started doing I think a year, a year and a half ago?.

So this number is increasing, but, again, it’s like single-digit numbers. In percentages, it’s relatively significant increase. In absolute numbers, again, it’s single-digit numbers for our increased indirect sales personnel..

So how many people do we have right now?.

Less than 20 at this point still..

Okay. But it’s still a pretty nice increase..

Yes..

And final question, can we talk a bit about the existing pipeline of new deals, talk about the recent new wins, if you will? Which areas have you seen strength? Which areas have you not seen strength? And some color here is going to be helpful..

So you can probably get it even from the growth numbers. We’ve had some good success in banking and financing, in retail and we have got our investments outside of our kind of key industries, but we can share names. Anyway, let me say that there are some (indiscernible) and excited wins for Fortune 100 companies as well. .

Just final question here for Anthony. You mentioned the unbilled. How closely do you typically watch the fixed price contracts in terms of delivery, in terms of milestones? And then also can you give us the free cash flow number for the quarter? Thanks..

Sure. On the unbilled and the fixed fee specifically, we actually watch them quite closely. So we are constantly monitoring that on a month-to-month basis to determine how much we have in unbilled, how much work is being delivered, and just making we’re hitting the milestones and making sure we understand the collectability of that unbilled.

So that’s a regular monthly activity for us. As far as the free cash flows go, free cash flows for the quarter were at $12.5 million. .

Thanks..

Welcome..

Thank you. Our next question comes from the line of Mayank Tandon with Needham & Company. Please proceed with your question..

Thank you. Good morning. Congrats on the strong quarter. I just wanted to piggyback off of Moshe’s question.

Anthony, just to get some clarity on the first quarter performance, was that all organic or was there any contribution from the Netsoft deal?.

It was all organic. Netsoft closed in early March, so it had a very immaterial impact on the quarter..

Okay. So the $22 million increase in the revenue guidance off the initial guidance, there obviously was upside in the first quarter.

Did you say that the increase was a blend of M&A and organic growth? Did I hear you right?.

You’re taking on the full year I assume?.

Yes..

Yes. It’s a blend of – and as Ark mentioned, our organic guidance did not change..

Didn’t go down. .

Did not go down, and it is a blended number between the acquisitions and organic growth, taking into account the synergies that we expect to benefit from the integration of the two acquisitions..

Okay. I think I understand.

And then in terms of margins, could you just comment on where you expect the margins to fall for the year based on the current guidance? And are there any incremental costs associated with any spending related to the Ukraine situation?.

The incremental cost that we’ve incurred regarding to Ukraine is relatively immaterial. It’s been a few advisors and a few consultants that we brought into just help us flush out some plans, but it’s not really having any impact on our margins.

So, we expect our margins for the year to coming in the same, the 16% to 18% range that we consistently speak of. That’s still our target range..

Okay.

And no incremental expenses associated with the acquisition as well?.

No. We exclude them from the adjusted margin numbers, so there are obviously some pro-fees, legal fees, things of that nature that we do incur through the acquisition process, but we carve them out when you look at the adjusted numbers..

Okay. And a few other questions. I wanted to get some clarity on the metrics around hiring attrition and wage increases.

Could you remind us when you give annual wage increases, and what is the magnitude of that that is reflected in the numbers? And also where was the attrition in the quarter and then what are the hiring plans for the remainder of the year to get to your growth targets?.

Well, we have annual increases occur in the first quarter. So they are reflected within our Q1 numbers. The production wage inflation offshore came in around 5% and sellable attrition was at 10%. And what was the third metric you asked? I’m sorry..

Let me get some sense of the hiring plans for the remainder of the year to get to your growth targets..

Hiring plans remain the same. We’re talking about a 15%, 16% growth in our overall headcount..

Okay..

IT production headcount..

All right, great. I’ll jump back in queue if I have anything else. Thank you..

Okay. .

Thank you. Our next question comes from the line of Steve Milunovich with UBS. Please proceed with your question..

Thank you.

Could you comment on the gross margin, which, at 36.1%, was a little bit lighter than recently?.

The gross margin would be impacted in the quarter by some of the wage inflation pressures that we experienced in the first quarter. So, that would have brought that down a bit..

So, do you expect that to bounce back up in the future?.

It will be improving a little bit when we will start to bring new people to our organization. .

Okay. A couple of your large competitors, IBM, Accenture, have talked about some application maintenance pricing pressure.

I know it’s a small part of your business, but do you have any comments on that? Are you seeing anything in the marketplace? Are you perhaps causing some of that?.

As you stated, it is very little part of our business today. And given maintenance and support issues and we talked about it in our previous calls. It’s different from regular maintenance and support for large legacy systems. We practically don’t have this business.

Why it’s happening, probably exactly because a lot of this replacing and competition for this business becoming more stronger, because of it’s kind of eventually going down, but it doesn’t impacting us?.

Thank you. And regarding the pipeline longer-term, obviously you’ve got pretty good confidence in the year.

But what’s the tone of your conversations with your customers in terms of their longer-term concerns about the political unrest in the region? Do you feel like they are less likely to spend with you and new customers as well, or do you think there’s going to be a little bit of hesitation over time?.

At this particular point, we didn’t see any specific kind of consolation or strong hesitation. Like everybody is hoping the country to be stabilized are going away with time. And most of our large clients have experienced separation in different geographies then to through a lot of different situations.

Like just as anecdotal evidence, I would say that one recently become on the vendor list for one of the very big Fortune 500 companies, and went into a scenario, and actually the situation come up. His answer was yes, I’m worried about it but I’m worried about any emerging countries and global occasion.

And at this point, my risk is much higher from the kind of proportion of doing business like in India, and any conflict in India, who is bringing us down very quickly because of some large portion of aggression is there. So even we know what’s happening in Eastern Europe, it would still be considered an integration of the global scale.

And it’s difficult to call it right now. We didn’t see anything like clearly if escalation in the region would increase, it might change. That’s the degree factor and clearly what it was..

Okay.

Then finally, are you in the process of looking for a new marketing head, and is that slowing you down at all?.

It’s not slowing us down. So it’s unfortunate that it didn’t work out but at the same time, it was practically for six months and right now we are filling this position internally and now understand, what we can get externally in some cases, and we will be looking for opportunities to bring somebody in, but it’s not a critical thing right now..

Okay. Thank you Ark..

Thank you. Our next question comes from the line of David Grossman with Stifel. Please proceed with your question..

Thank you.

Could you just help us understand what percentage of your clients that are operating in the Ukraine are currently using you in other areas outside of the Ukraine?.

So, you first practically only one client reach. Not 100%, but large percentage dedicated to Ukraine. The rest of the clients, who each operate in Ukraine, they also are working without developments unforeseen, Hungary, or Belarus, or Poland or Russia..

Okay.

And is that one client one of the top two or is it one of the smaller clients?.

No. It’s one of the top two..

It is, okay.

And just if you could maybe at a very high level help us understand what it takes to migrate work out of the Ukraine into another geography?.

It depends on clients and that’s why our plan is very much client oriented. While, as Anthony mentioned, we clearly tune in right now, our business continues to plan and developed the required plans based on what we have seen on the ground, but again it’s very much client-dependent.

And for very large clients, there’s clearly not an easy solution if something were to happen. Okay. And then real starvation would happen then, yes, I think there would be a lot of problems outside of that thinking about specific clients of theirs, and it’s basically people problems..

Right.

And then I think this came up in a prior question, but is there anything – I guess just thinking about the pipeline more than anything else, I assume you have active conversations, and they’ve got – the potential customers or the existing customers looking to expand their business with you have a pallet of options in terms of where they can put the work.

So as you kind of outline kind of the capacity in the Ukraine, what’s the dialogue around just let’s wait and see, is it let’s go forward and wait and see, or just let’s not talk about that and think about one of your other facilities? Just trying to get some insight into how customers in the pipeline are really thinking about the region right now?.

And I would say that it’s practically all over the country, as you mentioned. So, some clients lead slate, all action some clients really spread some console and kind of delaying decisions. Some clients do increase their staff in Ukraine.

Again, it’s a broad spectrum of situation, because it depends on clients’ kind of connection to the region because some of them traveling often and seeing by their eyes what’s happening on the ground. Some of them at the region based on integration policies on corporate level, so it is very different.

The only thing I can say right now is to – and I cannot say what exactly it will be in Q2 but in Q1 despite already some call it escalation we still grew headcount in Ukraine by 5% on quarter-by-quarter basis, which is exactly in line with our growth on the corporate level..

All right..

We’re obviously considering different options. We have Hungarian operations we just need to scale, but we are very much focused on expanding in Poland right now, so Belarus is growing, so we can see the impact on new locations in Eastern Europe. And you see China happen to be now on EPAM delivery route as well.

So we plan to mitigate risk I have to say for the Ukraine, but in long-term, we are absolutely committed to Ukraine operation..

Right.

And just last on this, and I know these are all difficult questions to answer, but is there been any concern just more broadly about the region so that the Belarus, while not an issue today, where people are kind of just lumping the former Soviet countries or pieces into the entire equation, or has that really not come up as an area?.

It would be naive to say that there is no risk in the region in general. And I assume you’re talking about it from the first IPO date. And I lived in this environment for a long, long time, so there’s always risk. And right now risk increased, so I cannot tell you this..

.

:.

So, some clients prefer in Belarus today, but I think it’s still kind of very much fuzzy and cannot give you like exact opinion because there is no enough information from my point of view for this. So, with those clients growing in Ukraine, some of them, clients still considering Russia as well..

All right. Okay. And just one last question, just on the Jointech acquisition.

Are the financial characteristics of that business, I know it’s relatively small, but the margin profile of that business, is that similar to your own or does that have different characteristics?.

The smaller business, it’s lower profitability today, but we very clearly see the rate, how to be increased and how the separation would be used to scale our operation in APAC region. So, we do believe that, by the end of the year, we will bring them to our normal profitability. .

Okay. And so as you think of scaling that business, that includes scaling the delivery capacity in the region as well.

Is that correct?.

Yes..

Okay, great. Thank you..

Thank you. We’ve come to the end of our time for questions. I’d like to turn the floor back over to Mr. Dobkin for any closing comments..

Thank you everyone for joining us today. And you see Q1 gave us a strong start to the year, but clearly we still have some challenges, and we understand not all of them different from us. We look forward to speaking with you in three months at the end of our second quarter and thank you. And have a nice day..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. We thank you for your participation and have a wonderful day..