David Straube - Senior Director, IR Anthony Conte - SVP, Treasurer & CFO Arkadiy Dobkin - President & CEO Jason Peterson - SVP, Finance.

Moshe Katri - Wedbush Securities Inc. Anil Doradla - William Blair & Company Michael Reid - Cantor Fitzgerald & Company Arvind Ramnani - Pacific Crest Securities, Inc.

Benjamin Wilson - UBS Avishai Kantor - Cowen & Company Alexander Veytsman - Monness, Crespi, Hardt & Company Vladimir Bespalov - VTB Capital James Friedman - Susquehanna Financial Group.

Greetings, and welcome to EPAM Systems First Quarter Fiscal 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now turn the conference over to Mr. David Straube, Senior Director of Investor Relations. Thank you, Mr. Straube, you may begin..

Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's first quarter of fiscal 2017 results. If you have not, a copy is available at epam.com in the Investors Section.

With me on today's call are Arkadiy Dobkin, CEO and President; Anthony Conte, Chief Financial Officer; and Jason Peterson, Senior Vice President of Finance. Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward-looking statements.

These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP numbers have been reconciled to GAAP and are available in our investors materials in the Investors Section of our website.

With that said, let me turn the call over to Ark..

Thank you, David, and good morning, everyone. Thanks for joining us. Let us start with the main highlights on EPAM overall performance in Q1. Revenue for Q1 was growing strongly across our business, coming in at $324.7 million representing a 22.7% year-over-year growth and 23.9% constant currency growth.

From a vertical perspective, all our industry segments with the exception of financial services were up more than 20% organically in constant currency terms.

In reporting currency, Software and Hi-Tech grew 21.4% for the quarter, with demand coming from high-end product development services we provide across a number of our key clients in this vertical as well as fast-growing startups. Media and Entertainment grew 50.9%.

Due to the demands related to enhancing end-user capabilities as well as extending the consumer e-commerce experience fault lines. Life Sciences and Healthcare had growth of 28.7%, which was driven by the expansion of our engagements into commercial and enterprise IT environments.

Additionally, our expertise in data sciences and genomic data continues to make us a partner of choice across all life science clients, which increasingly focus on translational informatics and precision medicine. Travel and Consumer finished the quarter at 18.9% or 21.8% in constant currency.

This demand coming from digital transformation projects as well as data-driven insight programs. Financial services finished the quarter with 4.9% growth, which as you understand reflects the effect of the UBS revenue trends we discussed during our last couple of calls.

Finally, emerging verticals had 45.1% growth driven mostly by energy and telecommunications. From geographical points of view, in both North America, which represents 58% of EPAM market today; and Europe, which is 35.2%, our organic growth was over 24% in constant currency.

And in CIS region, revenue was growing over 20% in constant currency terms as well. It'd be also worth to mention that in Q1, our client portfolio across Fortune 2000 companies reached 120 customers, and now, is the most diverse it has ever been at EPAM.

This reflects our ongoing focus on the well balanced growth of our client base across the industries and geographies. For this quarter, our growth rate outside the top 20 accounts was 34%. Growth in the top 20 accounts was 12% and, excluding UBS, top 20 growth was 20.1%. Several other points I would like to address upfront.

On UBS, we do believe the account is stable at this point and we saw a slight sequential growth this quarter. It also worth to mention that excluding the effect of UBS, our financial services would be growing 19.7%. Utilization and people. As we said before, we plan to focus on utilization during the first half of 2017.

Today, we can say that we are on the right track with 77% utilization, which is where we expect it to be. Specific to headcount in Q1. We ended with over 19,678 professionals, a 15% increase year-over-year, bringing our total employee headcount to 22,400 people. Raising headcount reflected our ongoing focus on driving utilization improvements.

On profitability, upsetting our strong revenue performance in Q1, we did have a few unanticipated items, which weighted on our margin and overall profitability. Anthony will provide more details in his comments. Overall, our Q1 results have placed us on solid start for the fiscal year.

It also demonstrated broad-based growth across our verticals, which underscores the relevance of our capabilities to the clients and EPAM continues focus on investing in the quality of our technology practices, engineering productivity, industry accelerators and maturity of the delivery processes and tools as well as broadening the overall service verticals we bring to the market.

In short, this result reflect well our ability to respond to such market demand as a professional product development needs enabled with EPAM unique core engineering and delivery capabilities.

Digital transformation needs for large enterprises to re-envision their existing businesses as well as to develop new lines of businesses to sustain the current position, while being able to continue addressing the attacks of disruptors in their respective markets. Lastly, constant search for partners for innovation.

In an effort to create differentiated IP and new software driven to enable products and business models, and applying the technology to radically optimize today's operational environment. In other words, to become disruptors in their own or new markets.

The market trends we generated those demands continue to be the backdrop of both our growth and what is driving our clients' agenda. As they transform their businesses to remain competitive in the fast-paced and dynamic environment.

Moreover, in turn, it's forcing us as a company to transform ourselves to satisfy such demands even faster than we ever expected to do before. And I think we'll talk on this topic in more details during our Investor Day next week in New York.

With that, let me turn it over to Anthony for detailed financial update for our Q1 results and our fiscal 2017 guidance..

Thank you, Ark, and good morning, everyone. I'll start with some financial highlights, talk about profitability, cash flow and end on guidance. As Ark mentioned, we delivered strong top line performance and generated significant free cash flow in the first quarter. Here are a few key highlights from the quarter.

Revenue closed at $324.7 million, 22.7% over first quarter of last year and 3.5% sequentially. Year-over-year, constant currency growth of 23.9%, reflecting 1.2% of headwinds less than anticipated. Actual revenues compared to our Q1 guidance benefited from stronger revenue production of $5.1 million and more favorable currency impact of $4.6 million.

From a geographic perspective, North America, our largest region, representing 58.3% of our Q1 revenues, grew 24.2% year-over-year; Europe, representing 35.2% of our Q1 revenue, grew 19.6% year-over-year or 24.9% in constant currency; APAC grew 3.5% and 6.1% in constant currency and now represents 2% of our revenue.

And lastly, CIS grew 43.1% and 20.3% in constant currency and represents 4.5% of our revenue. Moving down the income statement; gross margin for the quarter was 36% compared to 36.7% for the same quarter last year.

The 70 basis point year-over-year decline was primarily driven by 1% impact from foreign exchange, meaning in constant currency terms, gross margin would have been 37%. Utilization ended at 77.5% compared to 76.7% in the same quarter last year and 75.9% in Q4. GAAP SG&A was 24.2% compared to 23.3% of revenue in Q1 fiscal 2016.

Included in this quarter's SG&A was an unexpected $1.9 million facility construction-related expense as well as higher stock compensation expense related to the recent growth in the stock price. Non-GAAP SG&A excludes all stock compensation expense and certain other items came in at 20.8% compared to 20.5% in the same period last year.

We continue to leverage our SG&A spend strategically, focusing on talent acquisition, workforce planning, balancing the bench and hiring functional management, who can bring value to our long-term sustainable growth strategy. GAAP income from operations growth was 2.1% year-over-year, representing 9.5% of revenue in the quarter.

Non-GAAP income from operations for the quarter increased 14.6% over prior year to $49.3 million, representing 15.2% of revenue.

Our effective tax rate for the quarter came in at 17.3%, the lower-than-expected tax rate was a result of the adoption of the new pronouncement, which generated a greater than expected tax benefit to the higher level of exercised options. Our non-GAAP effective tax rate is 21.9%, which excludes the impact of this pronouncement.

For the quarter, we generated $0.44 of GAAP EPS, which reflects a higher-than-expected stock compensation expense related to the increase in our stock price in addition to higher FX losses than planned. Non-GAAP EPS was $0.72 based on total shares outstanding for Q1 from approximately $53.9 million. Turning to our cash flow and balance sheet.

Cash from operations for Q1 was $31.2 million compared to $10.9 million in the same quarter last year. Free cash flow came in at $25.5 million, resulting in an adjusted net income conversion ratio of 65.5%. Total DSO was 77 days compared to 94 days in the same quarter last year. AR DSO was 49 days and our unbilled DSO was 28 days.

We continue to be pleased with the improvements in these areas and would expect DSO to normalize in the low 80s during the fiscal 2017. Turning now to guidance. Revenue growth for fiscal 2017 reflects an updated foreign exchange headwinds assumption of 2% and revenue growth will now be at least 21%.

We expect constant currency growth will continue to be at least 23%. We expect GAAP income from operations will continue to be in the range of 12% to 14% and non-GAAP income from operations will continue to be in the range of 16% to 18%. We expect our effective tax rate will continue to be at least 19%.

For earnings per share, we continue to expect GAAP-diluted EPS will be at least $2.45 for the full year and non-GAAP EPS will continue to be at least $3.38 for the year. We expect weighted average share count of $54.8 million fully diluted shares outstanding.

For Q2, revenue will be at least $340 million for the second quarter, reflecting a growth rate of at least 20% after 2% currency headwinds, meaning we expect constant currency growth will be at least 22%.

For the second quarter, we expect GAAP income from operations to be in the range of 11% to 12% and non-GAAP income from operations to be in the range of 16% to 17%. We expect our effective tax rate to be at least 19%. For earnings per share, we expect GAAP diluted EPS will be at least $0.55 and non-GAAP EPS to be at least $0.80 for the quarter.

We expect a weighted average share count of 54.3 million fully diluted shares outstanding, a few key assumptions which support our GAAP to non-GAAP measurements. Stock compensation expense is now expected to be approximately $14 million in Q2 and $12 million in each remaining quarter.

Amortization of intangibles is now expected to be approximately $1.9 million in each remaining quarter. FX losses are now expected to be approximately $2 million for each quarter. And the tax effects of non-GAAP adjustments is now expected to be approximately $4.6 million in each remaining quarter.

Lastly, with the recent adoption of ASU 2016-09, as a result of moment on our stock price, we expect future volatility in our effective tax rates and GAAP EPS. With that, let me finish with a few thoughts. As most of you know, this is my last earnings call with EPAM. I've enjoyed meeting many of you and appreciate your interest and the support in EPAM.

I'm very proud of all the accomplishments, our employees and all the work that we do for our clients. While this will be my last earnings call, I will remain in EPAM working closely with my successor, Jason Peterson, for a smooth CFO transition as he takes on the role May 10. Thank you. And now let me turn the call back to Arkadiy..

Thank you, Anthony. At this time, I'd like to thank you for your dedication, commitment and leadership over the last 10 years. Speaking on behalf of the global EPAM team, we wish you all the best in your future endeavors. That said, I think we're ready to take some questions.

David?.

Thanks, Ark. I'd like to ask that each of you keep to one question and a follow-up to allow as many participants as possible to participate.

Operator, would you provide instructions for those on the call, please?.

[Operator Instructions] Our first question is from Moshe Katri of Wedbush. Please go ahead..

Hey guys, thanks. Good solid start for the year. Can we just get some color on what sort of assumptions that we have in the model right now for the year in terms of pricing and then wage inflation, these are the two assumptions.

And then, as a follow-up, what should we expect for UBS and then the dilution from the India-based acquisition this year?.

Sure. Pricing, basically, we're seeing kind of stable pricing in line with the expectations and what we've seen over the past couple of years. So no real change in our pricing assumptions from anything we've discussed in the past.

And wage inflation, we are talking about approximately 4% is the wage inflation figure that we were figuring in for the year..

Yes. And then….

And then, Moshe, what was the second half of that question?.

What should we look for UBS this year. You said it was slightly up sequentially.

And then are we getting to that inflection point where the dilution from India kind of subsides or not yet?.

We don't give specific guidance on any clients. So we're not really giving any specific guidance around UBS. And as far as India....

So India, like Indian part already taken in account in our guidance, so I don't think we can add anything. So we're working together with growing accounts and bringing services from India brought into to EPAM, but I don't think we can give any specifics or numbers or whatever..

It's all baked into our model and our guidance..

Alright. Thanks, Anthony and good luck..

Thank you..

Thank you. The next question is from Anil Doradla, William Blair. Please go ahead..

Hey guys, congrats from my side too. So one big picture question, Arkadiy and Anthony; you started off a good quarter.

Sounds like the tone is pretty positive, why not raise the full year guidance on the top line?.

First of all, as you can see, we have this quarter positive impacts from FX and its part of our revenue -- our overall performance. Second, it's still beginning of the year. It's still enough of volatility in the market. It's still a lot of unknown and that's exactly what we're comfortable at this point to guide. So nothing else..

So just a degree of conservativeness and you just want to see how the year plays out?.

It's our regular degree of being realistic, so let's not talk about conservative at this point..

And just to point out, the Q1 over performed, Anil, is really only 1.5%. So you're not talking about, if you exclude the currency, you're not talking about a huge over perform that would drive some really higher expectations for the full year beyond what we've already put in there..

And as a follow-up, Arkadiy, UBS seems to be stabilizing, at least that's what you said. If I heard correctly, you saw a little sequential growth.

Now, what is the visibility into UBS for the year? Do you think the business -- you have more visibility now, what gives you confidence that this has stabilized at this stage?.

First of all, all we can share on UBS in more or less certain terms, is that what we shared in press release when we said about our $300 million plus contract over the next three years. This has worked more or less certain.

So right now, we do believe that the account stabilized because we're seeing like that we're not dropping revenue anymore, and we have some good visibility. But at the same time, let's not forget that last year, all this happened just in one month, and we were thinking about one scenario for H2, and then this happened, completely different scenario.

So that's why I'm reporting back to being realistic at this point at this stage of the -- phase of the year..

Alright, good. And congrats and Anthony, best of luck on the next feat..

Thank you, Anil..

The next question is from Joseph Foresi of Cantor Fitzgerald. Please go ahead..

Hi, this is Mike Reid, on for Joe. Thanks for taking our question.

Did you give the client concentration this period for the top clients or UBS?.

We did not. UBS is now below 10%, so it's not a disclosable item. So we're not going to be talking about that top concentration or any concentration below 10%..

Okay. And then the next two levels, 5% and 10%, look like they went up a little bit during the period.

Is that due to just a little bit of growth in those clients or just -- were there other things involved there?.

Really just little bit of growth in those clients. And it wasn't that significant of a move. So moderate growth in there..

Okay. One last one, if you don't mind.

The headcount was barely up from the previous period, is that signaling anything or is that just kind of showing that you're getting the workforce better re-optimized and better utilization?.

It's definitely second. And we talked about it during the last two calls that we were a little bit light on utilization. So we're just bringing this to normal state..

Okay. Great, thanks guys..

Thank you. The next question is from Arvind Ramnani of Pacific Crest Securities. Please go ahead..

Thanks. I appreciate you taking the question. Clearly, very good results for Q1, really good beat on revenues.

Can I ask what you had may have already partially answered, but in the second half, are you expecting any specific headwinds from UBS or anything else? And also kind of what kind of pricing uplift have you baked into your guidance?.

There is nothing specific that we can kind of talk about in the second half, as Ark said. There's still obviously -- we are looking out. And as you look at the second half of the year, there are still some uncertainties out there, so we're comfortable with the guidance that we put out. We're not guiding to any specific accounts.

And as far as pricing, what I said earlier was that we're seeing basically stable pricing with a little bit of modest uptick in line with what we've seen in the past couple of years..

My follow-up is for the kind of second quarter guide, kind of what operating margin have you assumed in the at least $0.80 EPS guidance?.

For second quarter, the guide for operating margin was 16% to 17%..

Okay. Great. Anthony, it's been really good working with you. Good luck and I hope you can -- I mean, continue to stay in touch..

Very good. Thank you. I hope so as well..

Thanks..

Thank you. The next question is from Steve Milunovich of UBS. Please go ahead..

Het guys, thanks for taking the question. This is Ben, in for Steve this morning. Maybe just one for me, Anthony, on the margin front. Kind of what are your expectations from here going forward. I guess, it was lower than it typically is in margin.

What takes the margin from here, what are the factors that we should be thinking about?.

Are you looking at operating margin, just so I'm clear with the margin we're addressing?.

Operating margin..

Well, I mean operating margin in Q1 was -- it was in range. I mean, we had guided Q1 to be between 15% and 16%, and it was a little bit lower in that range mainly because of the unexpected expense that we mentioned, roughly $1.9 million construction-related expense.

So other than that, we guided for Q2 to be in the 16% to 17% range, and for the full year, we still expect it to be in kind of the 16% to 18% range. So really we're not seeing any change beyond what we expected. And Q1 was, yes, a little bit lower in the range than we thought..

Okay.

And just on the utilization side; would you characterize that as being kind of fixed and in a place where you're happy with going forward?.

Yes, I think, we're in the range which we were talking about. And we'll try to maintain as much as possible with the regular volatility, ability [ph] and all of this..

Alright, thanks. And good luck Anthony..

Thank you..

Thank you. The next question is from Avishai Kantor of Cowen. Please go ahead..

Yes, good morning. Thank you for taking my question. So you're saying that you continue to invest in your consulting capabilities.

What type of consultants you are really referring to? Are you talking about Accenture type management strategy consultants or more like digital technology consultants?.

We're talking about business consultancy, which means like industry knowledge and understanding. And we're talking about both digital consultancy and technology consultancy, which we definitely need to bring to higher improved levels..

Okay.

And my follow-up question, with all the large Tier 1 Indian offshore vendors saying that they're planning to increase their presence in the U.S., any signs of wage inflation or -- coming out from that?.

Not at this point, but at the same time, again, that's exactly what we don't know..

Thank you so much..

Thank you. The next question is from Alex Veytsman of Monness, Crespi, Hardt. Please go ahead..

Yes, hello, good morning guys. Thank you for taking my questions and best of luck to Anthony. I just wanted to understand the trends for the financial services throughout the year. Obviously, you guys mentioned UBS, there's Barclays out there, which was also kind of sort of flat lately.

Could you help us understand what the trajectory is for the remaining few quarters of the year?.

So I think, it would be similar to what we're seeing right now. We still have a lot of opportunities around this account, but again, it's very difficult to predict what would happen. And there are a lot of opportunities around the second line of our account in financial services and some technology companies plan in tech area as well.

So we're optimistic on this, and as you see the result effect of UBS. We're very close to 20% growth there..

That's helpful. And then can you update us on your labor sourcing trends in Eastern Europe right now? If that's been decreasing in Ukrainian dollars or potentially increasing in other regions.

What are the latest dynamics there as far as your -- with your engineers?.

We don't see, right now, any specific differences from what we were seeing during the last several years. So -- and we expect it will be very much in line with those previous trends -- we don't know again. That's again one of the unknown in the future..

Okay, thank you..

Thank you. [Operator Instructions] The next question is from Vladimir Bespalov of VTB Capital. Please go ahead..

Hello, congratulations on good growth. I have a couple of questions today. The first is basically on your cash position, which is pretty large share, how you're going to use it? And are there any M&A deals in the pipeline, if you could tell us about. And the second one is, on your SG&A expenses. The growth appears to be quite significant.

So how should we look at this expense going forward?.

Cash, yes, the primary purpose for the cash buildup is for M&A. And we do have a pipeline of M&A deals that we're looking at. Nothing obviously, I can specifically talk about. But we do have a pretty robust pipeline of deals. And the second part of the question on SG&A. The first quarter, it was a little bit higher. We had a $1.9 million expense hit SG&A.

That was an unplanned and unforeseen expense that pushed us up -- pushes up about half a percent -- little more than half a percent of revenue when you look at SG&A. So that is not going to be recurring. So we will continue to focus on managing SG&A and continue to bring that down as a percentage of revenue, is our main focus..

Okay, thank you..

Pleasure..

Thank you. The next question is from Jamie Friedman of Susquehanna Financial Group. Please go ahead..

Arkadiy, a question we get a lot and we don't know how to answer, so I have to ask you. Could you give us some perspective as to where we are in the digital journey.

How do you measure that? How would you know if it was ending? What's the client appetite look like for digital purchases?.

I'm not sure I can make a picture more clear for you. But in general, it's definitely what's driving the growth. There are lot of hungriness for delivery of good transformational digital services. And for us, it's clearly an area of focus.

We have a number of internal metrics which we're testing, hard to measure this, but it's not -- it's a very fragile line for everybody.

So -- and on the kind of operational front, we're trying to improve our capability in front offices, and we're putting a lot of efforts to integrate them with our engineering capabilities because we really believe that's what brings the differentiation for us.

It's a strong digital transformation of UX skills, together with engineering of complex solutions. And we're trying to get consultancy for components on top of it. But I think, it's a very generic answer, which you probably would expect..

Yes. And Jason, I was just wondering if you could share with us, I know its early days on the job, but your last job worked out pretty well.

What do you see as the, I guess to out phrase it generally, what is that attracted you to EPAM, what sort of skill sets do you think that you can bring to enhance their operations?.

As you indicated, I'm still counting my time in weeks rather than months. As to why I came to EPAM, Cognizant is a really good company, but there is just something really exciting about EPAM. As Ark was talking about here, you've got the software heritage, you've got the focus on digital engagement.

So the company just really has strong capabilities and you sense that, even in your first couple of weeks on the job. So you got the opportunity to address these growing markets and demand trend and business transformation, and it just looks like it's a really exciting place to be.

From an experience standpoint, there's a lot of ways to get to high-growth. EPAM has obviously shown that it has got a lot of capabilities in that area. As you indicated, I bring my experience from Cognizant.

I've been there for -- was there for about nine years in various finance roles; before that, I worked for a series of technology companies in Silicon Valley. So I bring some interesting perspectives as well..

Thank you. And best of luck Anthony. Thank you..

Thank you..

There are no further questions in the queue at this time. I'd like to turn the conference back over to management for closing remarks..

Thank you. We look forward to seeing you all at our scheduled Annual Investor Day, on May 9, in New York City. And thanks for attending today's call. And if you have any questions, David here always to help. And one more time, thank you to Anthony and good luck..

Thank you..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation..