Greetings, and welcome to EPAM Systems' First Quarter 2020 Earnings Conference Call. [Operator Instructions]. At this time, I'll turn the conference over to David Straube, Head of Investor Relations. You may now 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 2020 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Ark Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer.

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 measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark..

Thank you, David, and good morning, everyone. I do hope that all of you are staying safe and healthy during this global crisis, and I want to thank you for joining us.

While it has been only 3 months since we shared our 2019 results and provided our somewhat expected by now 20%-plus annualized growth outlook for 2020, the COVID-19 pandemic has made it clear that everything we thought we knew then, just a few weeks later, started to be very much changing on a daily basis.

In real terms, the impact we are seeing all over the world is immediate, serious and localized for each and every one of us and for our clients. And more importantly, we believe that we are far from the end of this event. In fact, in the view of many, we are somewhere near the end of just the first period of disruption.

So while we do understand that significant uncertainty is with us for some time, we wanted to give you a perspective of how EPAM is adapting to this new reality and where we think we might be going in the near future. Since January, we've been responding to the COVID-19 crisis, and its -- all the impacts in our APAC region.

To our benefit, we were able to take advantage of a good amount of work done over the past years to put in place realistic actions for business continuity as well as of investment in our internal platforms, which enable us to support truly agile global delivery environments, including readiness for remote workplaces and enhanced productivity measurements.

Because of these efforts and combined with our early learnings from our APAC experiences in January and February, already in March, we were able to move nearly all of EPAM to a productive and safe work-from-home environment practically in a matter of days.

This transition, which represented a pretty significant effort, was noticed by many of our clients for its speed and reliability of service continuity.

So at this moment, I wanted to share my deep appreciation to the thousands of EPAMers who are doing everything possible to support each other, to our customers for trusting us with their most critical issues and to our communities around the world, which we are supporting constantly with a different means for fighting the pandemic on the front lines.

The health of our people continue to be a top priority for all of us during this time.

With that in mind, let me switch to our Q1 performance and then cover some of the changes we are making in order to support customers as we navigate this challenging environment and end with how we see the forces shape in the next few quarters of demand before turning the call over to Jason.

First of all, I am pleased to share that we delivered a stronger-than-expected first quarter results with revenues of $651 million, representing 26% in constant currency growth.

Despite some of the early COVID-19 reactions in APAC and the first global pandemic impacts in March, Q1 came in $9 million higher than our initial guidance, underscoring the value of our diverse and high-quality portfolio and our ability to continue providing relevant and mission-critical services to our clients.

Q1 marked also EPAM's 37th consecutive quarter of 20%-plus organic growth, the rate of growth we plan to return to postcrisis.

Starting from the end of Q1 and through the current quarter, the effect of the coronavirus on our customers has been significant and wide-ranging, with more than 1/3 of our portfolio having experienced some form of revenue impact and some industries experiencing never-before-seen disruption in their end markets.

Customers in our travel and consumer verticals have taken a variety of serious steps to protect their people and to ensure a continued liquidity and viability of their businesses. And we believe that we may see several ways of impact as the crisis continue to unfold across other market segments as well.

It is important to note that across our portfolio, even while discussions are taking place about ways to manage cost during the crisis, many customers still have continued to move forward with programs or, in some cases, have chosen to accelerate the pace of their digital transformation in order to support radically changed demands for how they engage and serve their clients.

We have supported some of these changes in a very, very short period of time, from virtual shutting down of brick-and-mortar operations for a major retailer and the move to pure-play online commerce to the massive, scaled infrastructure and demand needed to support virtual entertainment events for a major gaming platform.

Throughout the past several months, we are certain that the pace and scale of the pandemic is taking EPAM into new territory, both from the challenges of shifting our own way of thinking and doing things to really key directions in our offerings, ranging from how we imagine new digital platforms to what it means to be cloud-first.

To date, our success in managing the disruption has been due to our ability to leverage our product engineering heritage and expertise and to push ourselves to move and adapt even faster.

Internally, this means an even more serious push to break down silos towards increased investments into knowledge management [indiscernible] and productivity platforms and to establish new faster processes, which enable our teams to address much more seamlessly and productively the challenges we are facing.

Supported by all the investment in our network and security infrastructure, much of each has been stress-tested by our own hybrid delivery centers for the past years. We have and continue to develop new ways of working and helping our customers to respond to the crisis now.

All these demands for continued operations and faster and more reliable service offerings bring us back to our top priority as an organization, to be ready for the postcrisis time. And that is to retain, find, attract and develop our top talent.

By continuing to invest in our delivery, collaboration, education and community platform and by focusing on our people, we are fulfilling a critical aspect of current and future demand for what is going to be an even more digital world. Now I want to say a few words about the outlook for our industry segment and for EPAM, specifically.

As most of you know, the digital service segment in which we operate was generally seen as a high-growth market, and it is. Unfortunately, in the current environment, it is nearly impossible to count on previous business-as-usual trends and prior period data assumptions to establish near-term models.

This is why today, we are relying on very different and often close to realtime indicators and signals, first reviewing at our daily standard the changes that are occurring on the ground across our specific market and delivery geographies, industries and individual accounts.

We are also looking at the market trends in general, competitors' disclosures, industry and financial market analyst projections. For example, we looked into financial modeling across a number of publicly traded companies.

And so the projection -- projected revenue ranges for many of them, just for the current Q2 of 2020, could vary very significantly, sometimes up to 20%. That is just another confirmation of how unpredictable the situation is. Just 3, 4 weeks back, we also didn't think we would be able to guide even for the second quarter.

But today, we are more comfortable and ready to provide a range for our Q2 results, and Jason will share those details shortly. At the same time, we still think it is extremely challenging to say with acceptable level of confidence what would be happening in Q3, as we are seeing high volatility in the client potential behavior.

At this point, we are open for all types of scenarios, including another sequential revenue decline. That is why we decided not to provide a guide for the whole of 2020 at that time.

Our key priorities right now are to continue to protect our people and our financial position as well as to make continuous investment into our core capabilities and platforms in order to be better prepared for the comeback.

And while these actions may have temporary impact on our profitability, we are absolutely confident of our ability to resume our leading position in the turnaround.

In our view, now more than ever, the fundamental case for digital product and platform engineering services, combined with the ability to bring integrated consulting on the front end, is very much intact.

And our proven ability to adapt ourselves and our company to a completely new operating environment in such a short period of time has given us the confidence to say that EPAM will come out of this challenging time a more value- and result-driven company and continue growing in a postpandemic environment with our somewhat expected by now 20%-plus rate.

With that, let me hand the call to Jason..

Thank you, Ark, and good morning, everyone. I'll start with our first quarter financial highlights, follow with industry vertical performance and then touch on a few operational metrics, ending with thoughts for Q2.

Revenue for Q1 came in at $651.4 million, a year-over-year growth of 24.9% on a reported basis or 26% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.1%.

Q1 revenue was higher than expected due to a greater-than-planned level of availability across our client teams, along with stronger performance from a few of our acquired companies. During the quarter, we delivered consistent growth across the majority of the industry verticals.

Business information and media, which in Q1 became our largest industry vertical, posted growth of 46%. Life science and healthcare grew 26.4% in the quarter, reflecting a tougher year-over-year comparison given the exceptionally strong performance in Q1 2019. Software and Hi-Tech grew 21.9% in the quarter. Financial services delivered 16.2% growth.

Travel and consumer grew 14.6%. And our emerging vertical delivered 30.3% growth, driven primarily by clients in telecommunications and energy.

From a geographic perspective, North America, our largest region, representing 59.9% of our Q1 revenues, grew 23.1%year-over-year [indiscernible] of our Q1 revenues grew 28.6% year-over-year or 30% in constant currency. CIS, representing 3.8% of our Q1 revenues, grew 36.8% year-over-year and 45.8% in constant currency.

And finally, APAC grew 4.7% and now represents 2.1% of our revenues. In the first quarter, growth in our top 20 clients was 30.5%, and growth outside our top 20 clients was 21% compared to the same quarter last year. Now moving down the income statement. Our GAAP gross margin for the quarter was 34.9% compared to 33.9% in Q1 of last year.

Non-GAAP gross margin for the quarter was 35.5% compared to 36.3% for the same quarter last year. GAAP SG&A was 19.2% of revenue compared to 19.5% in Q1 of last year, and non-GAAP SG&A came in at 17.6% of [Technical Difficulty]..

Ladies and gentlemen, please stand by. We're experiencing technical difficulties..

Rob, this is David Straube. We have had some technical problems with our webcaster. We are going to go live to reading our script. Can you just confirm that your [Technical Difficulty]..

Ladies and gentlemen, thank you for standing by. We've experienced some technical difficulties. David, please proceed..

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 2020 results. If you have not, a copy is available on epam.com in the Investors section. With me on today's call are Ark Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer.

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 measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark..

Thank you, David, and good morning, everyone. I do hope that all of you are staying safe and healthy during the global crisis, and I want to thank you for joining us.

While it has been only 3 months since we shared our 2019 results and provided our somewhat expected by now 20%-plus annualized growth outlook for 2020, the COVID-19 pandemic has made it clear that everything we thought we knew then, just a few weeks later, started to be very much changing on a daily basis.

In real terms, the impact we are seeing all over the world is immediate, serious and localized for each and every one of us and for our customers. And more importantly, we believe that we are far from the end of this event. And in fact, in the view of many, we are somewhere near the end of just the first period of disruption.

So while we understand the significant uncertainty is with us for some time, we wanted to give you a perspective of how EPAM is adapting to this new reality and where we think we might be going in the near future. Since January, we've been responding to the COVID-19 crisis and all the impacts in our APAC region.

To our benefit, we were able to take advantage of a good amount of work done over the past years to put in place realistic actions for business continuity as well as of our investments in internal platforms, which enabled us to support truly agile global delivery environments, including readiness for remote workplaces and enhanced productivity measurements.

Because of those efforts and combined with early learnings from APAC experienced in January and February, already in March, we were able to move nearly all of EPAM to a productive and safe work-from-home environment, practically in a manner of days.

This transition, which represented a pretty significant effort, was noticed by many of our clients for its speed and reliability of service continuity.

So at this moment, I wanted to share my deep appreciation to the thousands of EPAMers who are doing everything possible to support each other, to our customers for trusting us with their most critical issues and to our communities around the world, which we are supporting constantly with different means for fighting the pandemic on the front lines.

The health and well-being of our people continue to be a top priority for all of us during this time.

With that in mind, let me switch to our Q1 performance and then cover some of the changes we are making in order to support customers as they navigate the challenging environment and end with how we see the forces shape in the next few quarters of demand before turning the call over to Jason.

First of all, I'm pleased to share that we delivered a stronger-than-expected first quarter results with revenue of $651 million, representing 26% in constant currency growth.

Despite some of the early COVID-19 reactions in APAC and the first global pandemic impacts in March, Q1 came in $9 million higher than our initial guidance, underscoring the value of our diverse and high-quality portfolio and our ability to continue providing relevant and mission-critical services to our clients.

Q1 marked also EPAM's 37th consecutive quarter of 20-plus percent organic growth, the rate of growth we plan to return to postcrisis.

Starting from the end of Q1 and throughout the current quarter, the effect of the coronavirus on our customers has been significant and wide-ranging, with more than 1/3 of our portfolio having experienced some form of revenue impact and some industries experiencing never-before-seen disruption in their end markets.

Customers in our travel and consumer verticals have taken a variety of serious steps to protect their people and to ensure continued liquidity and viability of their businesses. And we believe that we may see several ways of impact as the crisis continues to unfold across other market segments as well.

It is important to note that across our portfolio, even while discussions are taking place about ways to manage cost during the crisis, many customers still have continued to move forward with their programs or, in some cases, have chosen to accelerate the pace of their digital transformations in order to support radically changed demands for how they engage and serve their customers.

We have supported some of these changes in a very, very short period of time, from a virtual shutting down of brick-and-mortar operations for a major retailer and the move to pure-play online commerce, to the massive scaled infrastructure on demand needed to support virtual entertainment events for a major gaming platform.

Throughout the past several months, we are certain that the pace and scale of the pandemic is taking EPAM into new territory, both from challenges of shifting our own way of thinking and doing things to really key directions in our offerings, ranging how we imagine new digital platform to what it means to be cloud-first.

To date, our success in managing the disruption has been due to our ability to leverage our product engineering heritage and expertise and to push ourselves to move and adapt even faster.

Internally, this means an even more serious push to break down silos towards increased investments into knowledge management and collaboration, productivity platforms and to establish a new faster processes, which enables our team to address much more seamlessly and productively the challenges we are facing.

Supported by all the investments in our network and security infrastructure, much of which has been stress-tested by our own hybrid delivery centers for the past years, we have and continue to develop new ways of working and helping our customers to respond to the crisis now.

All these demands for continued operations and faster and more reliable service offerings bring us back to our top priority as an organization, to be ready for the postcrisis time. And that is to retain, find, attract and develop our top talent. We are continuing to invest in our delivery, collaboration, education and community platform.

And by focusing on our people, we are fulfilling a critical aspect of current and future demand for what is going to be in a more digital world. Now I want to say a few words about the outlook for our industry segment and for EPAM, specifically.

As most of you know, the digital services segment in which we operate was generally seen as a high-growth market, and it is. Unfortunately, in current environment, it's nearly impossible to count on previous business-as-usual trends and prior period data assumptions to establish near-term models.

This is why today, we are relying on very different and often close to realtime indicators and signals, first reviewing with our daily standards the changes that are occurring on the ground across our specific market and delivery geographies, industries and individual accounts.

We are also looking at the market trends in general, competitors' disclosures, industry and financial market analyst projections.

For example, we looked into financial modeling across a number of publicly traded companies and saw the projected revenue ranges for many of them, just for the current Q2 of 2020, could vary very significantly, sometimes up to 20%. This is just another confirmation of how unpredictable the situation is.

Just 3, 4 weeks back, we also didn't think we would be able to guide even for the second quarter. But today, we are more comfortable and ready to provide a range for our Q2 results, and Jason will share those details shortly.

At the same time, we still see it is extremely challenging to say with acceptable levels of confidence what would be happening in Q3. And we are seeing high volatility in the client potential behaviors. At this point, we are open for all types of scenarios, including another sequential revenue decline.

That is why we decided not to provide guide for the whole of 2020 at this time. Our key priorities right now are to continue to protect our people and our financial position as well as to make continuous investment in our core capabilities and platforms in order to be better prepared for the comeback.

And while these activities will have a temporary impact on our profitability, we are absolutely confident of our ability to resume our leading position in the turnaround.

In our view, now more than ever, the fundamental case for digital product and platform engineering services, combined with the ability to bring integrated consulting on the front end, is very much intact.

And our proven ability to adapt ourselves and our company to a completely new operating environment in such a short period of time is giving us the confidence to say that EPAM will come out of this challenging time a more value- and result-driven company and continue growing in postpandemic environment with our somewhat expected by now 20%-plus rate.

With that, let me hand the call to Jason..

Thank you, Ark, and good morning, everyone. I'll start with our first quarter financial highlights, follow with industry vertical performance and then touch on a few operational metrics, ending with thoughts for Q2.

Revenue for Q1 came in at $651.4 million, a year-over-year growth of 24.9% on a reported basis or 26% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.1%.

Q1 revenue was higher than expected due to a greater-than-planned level of availability across our client teams, along with stronger performance from a few of our acquired companies. During the quarter, we delivered consistent growth across the majority of the industry verticals.

Business information and media, which in Q1 became our largest industry vertical, posted growth of 46%. Life Sciences and Healthcare grew 26.4% in the quarter, reflecting a tougher year-over-year comparison given the exceptionally strong performance in Q1 2019. Software and Hi-Tech grew 21.9% in the quarter. Financial services delivered 16.2% growth.

Travel and consumer grew 14.6%. And our emerging vertical delivered 30.3% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 59.9% of our Q1 revenues, grew 23.1% year-over-year.

Europe, representing 34.2% of our Q1 revenues, grew 28.6% year-over-year or 30% in constant currency. CIS, representing 3.8% of our Q1 revenues, grew 36.8% year-over-year and 45.8% in constant currency. And finally, APAC grew 4.7% and now represents 2.1% of our revenues.

In the first quarter, growth in our top 20 clients was 30.5%, and growth outside our top 20 clients was 21% compared to the same quarter last year. Now moving to the income statement. Our GAAP gross margin for the quarter was 34.9% compared to 33.9% in Q1 of last year.

Non-GAAP gross margin for the quarter was 35.5% compared to 36.3% for the same quarter last year. GAAP SG&A was 19.2% of revenue compared to 19.5% in Q1 of last year, and non-GAAP SG&A came in at 17.6% of revenue compared to 17.7% in the same period last year.

GAAP income from operations was $87.5 million or 13.4% of revenue in the quarter compared to $64.7 million or 12.4% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 11.3%, which includes a lower-than-expected level of excess tax benefits related to stock-based compensation.

Our non-GAAP effective tax rate, which excludes excess tax benefits, was 22.8%. Diluted earnings per share on a GAAP basis was $1.47. And non-GAAP EPS was $1.43, reflecting a 14.4% increase over the same quarter in 2019. In Q1, there were approximately 58.1 million diluted shares outstanding. Turning to our cash flow and balance sheet.

Cash flow from operations for Q1 was $63.3 million compared to a negative $0.2 million in the same quarter for 2019. Free cash flow was $34.2 million compared to negative $13.6 million in the same quarter last year, resulting in a 41.2% conversion of adjusted net income.

As a reminder, our cash flow in Q1 is impacted by payments related to our annual variable compensation programs, a portion of which will be paid in Q2. EPAM ended the quarter with over $1 billion in cash and available borrowing capacity, made up of $916 million in cash and cash equivalents and $270 million of available credit.

DSO was 76 days compared to 72 days at the end of Q4 2019 and 78 days in the same quarter last year. Moving on to a few operational metrics. We ended the quarter with more than 33,100 engineers, designers and consultants, an 18.7% increase year-over-year and a net addition of 550 production professionals.

Our total head count for Q1 was more than 37,300 employees. Utilization was 79.5% compared to 79.9% in the same quarter last year and 77.9% in Q4 of 2019.

Before moving to our outlook for the second quarter, I would like to spend a few minutes talking about the steps we've taken to improve EPAM's responsiveness to our rapidly changing business environment.

By staying close to our customers and updating expected demand on a daily basis, we have developed a detailed and realtime demand view for each customer around the world.

This heightened view of demand has been used to drive a tighter connection between our supply and demand, allowing us to deliver revenues while dramatically reducing incremental hiring.

In addition, we continue to evaluate our cost structure and reduce a substantial amount of discretionary spending while improving efficiency and retaining capacity in order to respond to future improvements in the demand environment. Now let's turn to the guidance.

As we mentioned in our April 9 preannouncement, due to heightened uncertainty related to the potential impacts of COVID-19 on our business results, we have suspended our full year 2020 financial outlook.

However, our current thinking is to provide guidance for Q2, adopting ranges which we think is more appropriate than our historical and latest guidance. Revenues will be in the range of $590 million to $605 million, producing a year-over-year growth rate of 8.3% at the midpoint of the range.

For the second quarter, we expect GAAP income from operations to be in the range of 11% to 13% and non-GAAP income from operations to be in the range of 14% to 16%. We expect our GAAP effective tax rate to be approximately 13% and non-GAAP effective tax rate to be approximately 23%.

For earnings per share, we expect GAAP diluted EPS to be in the range of $0.93 to $1.12 for the quarter and non-GAAP EPS to be in the range of $1.12 to $1.31 for the quarter. We expect a weighted average share count of 58.4 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q2.

Stock compensation expense is expected to be approximately $16.1 million. Amortization of intangibles is expected to be [indiscernible]. The impact of foreign exchange is expected to be approximately a $3 million loss for the quarter. Tax effect of non-GAAP adjustments is expected to be around $4.5 million.

We expect excess tax benefits to be around $7.2 million. And lastly, one more assumption that is not part of our GAAP to non-GAAP measures. We expect interest and other income to be $1.4 million in Q2.

While we have seen some stabilization in our portfolio, we believe that certain of our end markets will continue to absorb the effects of the global pandemic.

At this time, we feel confident we have the right focus on the things that matter in our business, including taking the necessary steps to position EPAM for a future that will demand higher levels of consulting, digital engagement and software engineering services. Operator, let's open the call up for questions..

[Operator Instructions]. And our first question is coming from the line of Ashwin Shirvaikar with Citigroup..

I guess my first question is with regards to expense flexibility, if you can kind of walk through the components. Jason, you mentioned some control over discretionary expense.

If you can kind of quantify how we should think about it, how metrics such as utilization might trend? And also not just the flexibility you have, but also your willingness to use it versus keep focusing on growth..

Yes. So I mean maybe I'll start with the high-level point that our focus really is on controlling costs, including labor costs, while minimizing the impact on the employee base.

And so we do want to make certain that we've got sufficient sort of capacity and capabilities to respond robustly to what we expect the improved demand environment in the future. So if I were to provide a little bit more descriptive color, late in Q1, we put significant cost controls in place related to discretionary spending, okay, including hiring.

As we saw a slowdown in demand and that became more apparent, we dramatically reduced production hiring as well. We also began to evaluate whether or not we had the right staff in the right roles and began taking some performance-based actions.

And then clearly, relocation, travel events, hiring-related expenses are well controlled just as a result of everything going on with COVID-19 and the related restrictions.

And so as we move forward, we're going to make certain that we have as minimal impact on employees as possible but, at the same time, being kind of mindful of overall profitability. And I think that's implicit in that 14% to 16% profitability range that we guided to for Q2..

Got it. Yes. No, that answers it. There was a specific question with regards to utilization trends in there. But let me loop my second question in as well, with regards to -- you have obviously a lot of cash on the balance sheet.

There's a general expectation that a number of assets that might have been attractive previously but, from a financial standpoint, maybe not accretive to make the deal, things like that. How do you think of M&A in the current situation? So that and the -- maybe the utilization thing from the previous question..

We're clearly trying to find any bright spots in any situations. And in this situation, clearly, there are multiple opportunities, including M&As. But at the same time, it's probably too early -- like we didn't kind of cut any of our activities. We're looking at this. But probably, again, it's too early to see how attractive results is going to be.

And also, as you understand, besides price attractiveness, there is -- for some of them, they're really changing the business. And we need to evaluate both criteria, how much impact was there and how price correspond to this. So -- but we will be definitely watching this..

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

This is Damian on for Ramsey. I just wanted to ask a little bit more about the sales productivity. And I know it's probably really difficult to kind of get a read on this. But just maybe first, on a logistical perspective, now that everything is virtual, maybe some details on the sales opportunities there.

And then on the demand side as well, what's your confidence level in your ability to refill that pipeline once some of the existing engagements that you're seeing now start to end?.

So I'm sorry, I missed part of the question.

So you're asking about demand, supply, kind of management after coming out of the crisis?.

And kind of the process when you're all remote..

So I think from comfortability of remote operation, I think we are pretty comfortable. I think people -- in general, EPAM is a much more distributed company by design. And the number of delivery centers and size of this is very different from many other companies.

So distribution wasn't like any real problem when we were moving to work from home very quickly. And I think it is pretty effective.

And as you know, also from other sources, people are working in this environment unexpectedly productively, at least, that's what happened even in our engagement with the clients, even in consulting engagement, which now is starting to be performed completely remotely. So I think it's -- that's not much problem right now..

Yes. I think that, Ark, you may have missed the first portion of our script, which we're still trying to figure out how to resolve. But we've talked about the fact that we've been able to even do kind of business development remotely.

We've got daily kind of war rooms with each of our business units, which we're talking about, not only some of the downsides to demands but also the upside and potentials that are made available by this kind of unique environment.

And we continue to see opportunities, including kind of new engagements and in some cases actually potentially new engagements with new customers during this environment. With that said, obviously, there's clearly challenges in the environment. But kind of longer term, we feel very good about the expectations for the business.

And again, in Ark's script, he talks about the fact that we look forward and expect to return to the greater than 20% growth over time once we come out of this crisis..

Yes. And we cajole that our work-from-home at the moment is working much better than this call today. So -- because like -- and we're relying on an external agency for this. So I have to say this, too. Sorry about some inconvenience. It seems like you didn't hear a big portion of my introduction to the results in the quarter. Okay.

We will try to address it through the Q&A. Sorry about it..

Great. Yes. No. I apologize if I missed anything. I just had one follow-up, which is on pricing. It's historically been an advantage for EPAM, but we've seen some of your peers talk about the deterioration in the pricing environment.

Are you seeing any changes in your ability to command the sort of premium prices that you had in the past in order to secure engagements?.

Yes. I would say that I don't think that there's, let's say, a difference in terms of our ability to command a premium. But we've got clients in, for instance, the travel space who are seeing revenue declines of 70-plus percent. And then we also have retailers who got a slow start in China and now have a higher percentage of their stores closed.

So the pricing environment certainly isn't the same today as it was at the end of the Q4 call, where I would usually talk about kind of regular price increases as a result of a scarcity in the market. But we're responding to our customers' challenges, okay, and doing so in a way that won't have a long-term impact on our profitability..

I think that there is like -- the situation, in general, what we call and everybody call business-not-as-usual, and this creates completely different variety of demand.

There are some situation when there is [indiscernible] and independently from pricing for new programs because some of the clients trying to prepare themselves was going to be after the crisis, and they understand that this period of time could be just extra availability of the talent and opportunity to build something in advance just for a couple of quarters.

So -- and then there are some industries which is under huge pressure. So the variability of the different situation is pretty broad right now. But fundamentally, we're very, very confident that it would come back. We don't know when, 1, 2, 3 quarters. But the demand would be probably even higher than what was the end of last year.

And because of everything that's happening. Again, it's pretty odious right now, and we're trying to prepare ourselves exactly for this comeback. And we're pretty sure that pricing is not going to be an issue afterwards..

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

This is Kathy on for Jason. First, just wanted to clarify a comment you made in your prepared remarks. You mentioned that EPAM could potentially see quarter-over-quarter decline in 3Q.

Are you seeing this as more of a base case in your scenario runs? Or is it more of a worst-case scenario? And have you seen any stabilization in any of the markets yet?.

I think if we would be able to estimate it better, we will share it. I think as soon as we know, we will know. But that's exactly what we see all scenarios right now possible..

Yes. So to be clear, we just did want to put that out there as a possible scenario. We see a little bit of stability as this evolves. But at the same time, we realized that we're not out of the woods yet. I just wanted to acknowledge that as a possible scenario..

Got it. Got it. And just wanted to ask a little bit more about the verticals. Are there any -- obviously, travel and leisure and retail are obviously seeing some more pressure. But are you kind of -- and then financial services sort of slowed a bit in 1Q.

Are you expecting similar trends going forward? And have you seen any like reversal in trend so far at this point and now we're in early May?.

Yes. I'd say, for instance, travel and hospitality, you can imagine is going to be a challenged space. And for us, that includes both retailers and consumer goods companies. All that would be impacted. Our emerging includes energy. And so clearly, that will have some impact.

We continue to see very strong demand in business information and media, as you expect, saw a very strong demand in Q1 and are still seeing good, strong demand in Q2. In financial services, it's probably a little bit mixed, still seeing some good growth there.

We do have another one of the European banks which is showing some declines, and we expect to see some declines in Q2..

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

You mentioned that more than 1/3 of the portfolio has experienced some form of revenue impact. Can you give a little more granularity on what you're seeing? Is it pushout of contracts, outright cancellations, extended time lines for contracts or changes to payment terms? Anything there would be helpful..

Yes. It would probably be kind of E, all of the above. And so what you see in some cases is companies that need to sort of just tighten their belt a little bit. In some cases, you see companies that are suspending certain programs. In some cases, you see companies that are actually accelerating programs or starting new programs. So it's not all negative.

Some companies and clients are somewhat more concerned about their cash flows and are asking for what I would call sort of relatively modest extension of payment terms. And so it kind of varies. And again, it's kind of embedded in our expectations for Q2 in the reference to potential sequential decline in Q3.

And again -- and what we're trying to do is make certain that we respond to our customers' needs but do so in a way that doesn't sort of permanently impact the business or the business model over the longer term..

And then in terms of the guidance that you were able to put together for Q2, what types of assumptions have you made in that guidance in terms of the level of utilization that we may see? And do you expect any changes to productivity either in Q2 or kind of as we go forward, as you continue to adapt to this environment?.

Yes. Maybe I'll just answer this super tactical question around utilization, and then I'll let Ark talk about productivity and how our workforce is performing in this new environment. From a utilization standpoint, this is going to be a quarter where the utilization is going to be very much informed by the revenue number.

And so as we tried to communicate is that we want to be highly productive of the workforce. I think it's the right thing to do. And longer term, it's important for us to maintain our capabilities for what we expect to be very robust renewed demand in the future.

And so if we end up at the low end of the range, we'll have lower utilization, as you can imagine. And if we end up the higher end of the range, the utilization will be pretty solid. Ark, do you want to talk about....

And on productivity side, so we operate in like in this environment probably for a little bit more than months because like somewhere at the end of March, we moved practically everybody. Right now, it's 98% of our people working from home, and all of this was done just in several days.

So first of all, infrastructure and level of distribution, EPAM traditionally was working on, was prepared for this. And the level of distribution traditionally was very high. We have multiple delivery centers, and it was historically to be able to reach out to maximum talent we can.

So from this point of view, when it moved to home, it was kind of the next extension of the traditional model we have.

And we didn't -- on top of this, you can understand, when we're talking about platform and everything else, there are a lot of things which we're trying to -- tried in the past how to measure productivity and how to make sure that in this distributed environment, it works.

So that's why I think we didn't see, at least so far, any impacts on day-to-day operation. Opposite, we have seen a lot of compliments from our clients about how speedy we are and how productive we are in this environment, specifically in comparison to many others. So that's why from the model point of view, we don't see any significant changes..

The next question is from the line of Bryan Bergin with Cowen..

I wanted to ask on the top customers. Can you talk about your views and your interaction specific to your top 10? You had a very strong 1Q with those.

Can you give us a sense of what type of mix those top 10 may be in more pressured industries?.

So top 10 is a still pretty broad group. We have some travel companies there. We have financial companies. We have technology companies. In general, actually our top 10 are doing pretty well, but there are exceptions there as well..

Yes. So increasingly, we're seeing more business information and media customers in the top 10 as well..

Okay.

And then just as we think longer-term, structural changes that you think stem from the pandemic here for the service industry? And any insight you can share of what you're thinking about as far as changes to your potential delivery model?.

You mean how we're providing services?.

Right..

Yes. I think there are multiple assumptions how everything is going to change or a portion of this, how much a work-from-home or an additional level of distribution and delivery model would be accepted. We actually were doing some experiments before and tried to ask clients if they would be open for this.

And in general terms, it was pretty negative reaction. And then everything changed with this event.

So I think the level of acceptance of distribution are a different level of acceptance of the much more distributed talent, and how to orchestrate and originate this type of work will be very different after the event -- or again, it's very different already. So I think it would have impact on how we're working in the future..

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

One question I'd like to start out with is just the difference in visibility between Q2 and Q3. Obviously, you guys were comfortable enough to provide guidance for Q2.

Can you talk about the difference in your level of confidence? How wide, I guess, a range of outcomes does there have to be for you to not provide guidance for Q2?.

Yes. I'm going to actually just talk about some of the processes that we use just so that we've always had a very robust kind of process around our pipeline. And we have a system that we use and a set of daily updates. And so we have an updated sort of daily pipeline.

In addition, we have instituted processes during this more variable time where we have sort of a daily series of sort of business unit stand-up meetings where we talk about potential ramp-downs, potential opportunities, other sort of sharings around areas of opportunity in the business.

And so we've got a very sort of regular updating of activity around clients. And then we're staying as close with clients as possible and connecting with them on very regular or maybe even daily basis to get inputs as to kind of what their plans are and importantly where we can help them.

And so that's the reason why we can give you a very good sense for kind of Q2 because we are running an even tighter process than usual, and we've got very good processes in place around demand.

But the challenge is you just don't know what's going to happen, I would say, more kind of macroeconomically and kind of what happens kind of, I think, as economies and cities and states and countries try to reopen. And so I think that's why we've been more careful about any guidance around Q3..

That's helpful.

And then one follow-up related to -- if you can talk a little bit about the mechanics of the pipeline or the visibility in the sense that how much of an advance notice are you getting if projects get put on hold from your clients? And then maybe related to the delta in the growth rate between obviously what was a really good normalized number versus where you are now.

Is that primarily just the new clients not coming onboard at this point? Or is it just existing clients putting some projects on hold? Can you talk a little bit about the relative color there as well?.

Let me bring a little bit color like let's start with what's really happening. Let's try to think what happened at the end of March or second part of the March when suddenly, governments starting to issue very special conditions how to operate.

If you think about it, like at the beginning of April, we didn't think we could even guide because nobody knew what's happening. Clients didn't know how they could -- can they create their production lines kind of starting, they didn't know what's happening with their clients.

Like, for example, at the beginning of April, we saw that it would be much worse than it is. That's how dynamically everything happened, with clients starting to communicate very different things. Then 1 week later, they're starting to change their views. Then another week, they're starting to change their views.

That's why when you're asking these questions, you can say that everything was on the table and everything was happening. Why we could guide at the end eventually for Q2, because with our daily standup, with our kind of realtime signals from clients, from the market, we saw that the core for this change become much more predictable and stable.

That's why we decided to share a guidance for Q2. But at the same time, it's still pretty volatile. It's volatile enough that we don't know what will be in Q3. And that's exactly what we're sharing. So what we also understand is that if clients saying something today, good or bad, it doesn't mean that it would be the same position 2 weeks later..

I understood that. I think that, that's the key point from my perspective, it's just the uncertainty at the client level given that within such a short period of time that things can change..

Our next question comes from the line of Kyle Peterson with Needham..

Just wanted to get a little more insight and try to parse out the detail in the 2Q outlook. Obviously, there's a deceleration in growth.

Is this due to the kind of volumes on some project work in existing clients? Is it less -- fewer expectations for new logo wins or pushing out price increases? Or is it a little bit of all of that? I just want to get a sense of the puts and takes driving the deceleration that's expected next quarter?.

Yes. I mean, it would encompass the range of that, right? Certainly, you've got customers, as I referred to earlier, in the travel and hospitality space who are seeing 70%, 90% reduction in their revenues. And those customers are clearly having to make the types of decisions that you would make if you saw that type of reduction in revenues.

And so you've got some ramp-downs or sort of need to sort of reduce expense there. We obviously wouldn't have the same sort of pricing ability that we would have in other quarters. But at the same time, we also are seeing some demand increases.

And in some cases, we're seeing clients come to us who are maybe having trouble with other vendors and looking for us to sort of support them with both their existing programs and with new programs..

And just to give you like another color like how difficult to answer these questions because there is no simple answer to express like in 1 minute. But let's say, consumer goods or retailers, which one of the industries which is damaged mostly because all stores closed.

And the first reaction for them, to save money, and that's what they do in the first reaction. Then second reaction, we need to increase e-commerce. The third reaction, our e-commerce already increased, our systems were not designed for this volume. Can you help? So -- and there's a variety.

That's why it is an opportunity from a business standpoint because the most damaging industries actually tomorrow will be the most demanding industries because they will have to prepare ourselves -- themselves. And that's happening as we speak. But again, they need to mitigate a lot right now.

Their profitability, usually, like adidas, for example, states that their profitability dropped 95%..

Okay. That's good color. And then I guess just a quick follow-up. You guys noticed, there's a few areas you mentioned in -- that are actually seeing upticks in demand and potential for new logos getting added in this environment.

I just want to see if you guys can provide a little more color whether it's -- is that concentrated in specific verticals or specific areas of expertise in delivery that you guys have? Just any more detail that you can provide on the stronger demand in some pockets would be really helpful..

Probably the industry which we will feel better is health care and life science. They're more stable. They understand the demands right now. So at the same time, it's pretty volatile across -- even inside of the industry, depending on the company, we're seeing a little bit longer term versus short term and ability for them to invest right now.

We're seeing like some demand coming from the -- exactly, as I mentioned before, industries which is damaged. But they understand in 2 or 3, 4 quarters, they might have very interesting advantages and start to invest now.

So it's more like, in some cases, company by company, and -- while clearly travel and hospitality and retail under pressure, and oil and gas, if you will, as well because you understand what's happening in energy right now, too..

Our next question is from the line of Edward Caso with Wells Fargo..

I was wondering if you could talk about any issues with clients around compliance and security challenges with your workforce now remote, if that's impacted any of your demand?.

Yes. As I mentioned before, we are preparing for this for some time. We were running special scenarios for business continuity for a long time because that was a key area for us. And so far, we didn't have any issues.

We actually have, again, some benefits because it seems like our clients are thinking that we're doing better and some opportunities triggered by that and by some problems across different other vendors. But it's one of the key areas, and I don't think anybody protected here fully..

And the other question is, do you have sort of a large number of clients beyond the top 20 here? Is there sort of a cleaning of the clients? I mean, are you firing any clients or any dropping off? Are there any sort of credit issues, particularly in the tail of clients?.

Yes. I would say not from a firing standpoint or anything. And from a credit standpoint, we're trying to be very mindful of sort of credit risk in this environment.

And what I would say, if you're referring to the growth rate in the other than top 20, is that we've had very strong growth, particularly in some of the customers in the BIM space, which have increasingly moved up into the top 20 and continue to grow very rapidly.

I would say that a lot of our, let's say, other than top 20 are very large global companies that do have sort of large potential wallets. But we do also have a large number of small and midsized companies in the other than top 20.

There's a fair concentration of travel and hospitality companies in that space, and we probably have seen some slowdown in those customers, as they obviously sort of recognized that they were seeing a slowdown in their business.

And so I don't think it's a trend, but I think you did see a little bit of slowdown in the other than top 20 in Q1 and probably somewhat related to the economic circumstances of the overall sort of global marketplace..

Our next question comes from the line of Vladimir Bespalov with VTB Capital..

I would like to ask you about your working capital evolution. How do you expect this to -- in the coming quarters, do you say it will be quite natural to expect that some clients will progress to delay payment or reduce advance payment? And maybe a little bit more color on the client.

If we look at your current business and the business -- compare it with the business as usual, are you losing any clients? Or maybe vice versa, you are gaining more clients just with smaller engagements? Could you provide some color?.

Yes. So good question. I'll just take the more tactical cash question, and I'll let Ark talk about customers. And so from a cash standpoint, cash collections were pretty strong in Q1 and actually, so far, in Q2, look very solid. But we do expect some slowdown.

And as you stated, is that we do have some customers that are looking for sort of temporary payment term extensions, and we do want to be mindful of their business environments. And so I do expect that cash collections would slow down somewhat in Q2. We were over $900 million in cash and cash equivalents in Q1.

I would expect that we'll see a modest decrease in our cash position by the end of Q2, and that's probably somewhere in the high 800s. And so again, still a very strong cash position but somewhat lower than in Q1 in part because of the somewhat slower cash collections, as you call out.

And I think Ark can talk about customers and kind of what we see from new customers, existing customers kind of....

So can you like -- sorry, to clarify exactly what you're asking about customers like?.

Basically, my question is, are you losing any customers in general, let's say, more than you usually lose in your regular business? Or maybe you are gaining more customers in the current environment, and the slowdown of the revenue growth is just because of like lower engagement, smaller engagements at the moment.

Could you maybe provide some color on this?.

in numbers. I don't know how to bring additional color on this. And I think that would be different in a quarter. And that would be different in a couple of quarters because as we mentioned, volatility across client base is very high right now. Some of them are very active, some of them under-reactive even to the situation.

So we will see what will be happening with the next quarter or two..

The next question is from the line of Michael Yang with Susquehanna..

I just had a quick question about your business media and information services vertical. And I know you guys had said that this is a particularly strong vertical, but I had heard from a number of competitors that this was actually under pressure because of ad budget compression. So I was wondering if you could speak about the dynamics there..

Compressions?.

Ad budget compression..

Okay. Yes. So far, it feels more normal. So -- and also, telco and media are so -- like it's also pretty different businesses in some respect like. And in our case, it's the same category. Clearly, telco is right now having a lot of growth opportunities. So -- but so far, it's performed for us relatively well..

Yes. And still looks good in Q2 as well. So I don't think we're seeing quite what was described..

Because in addition to just advertisement, all of them considering a huge number of opportunities to provide online services and new type of services as well. Some of -- nobody from us even was thinking about it like a couple of months ago..

At this time, we've reached the end of our question-and-answer session. I'll turn the call back to Ark Dobkin, CEO and President, for closing remarks..

Thank you, everybody. Again, sorry for some technical problems with our provider for the call, and it seems like you didn't hear part of message which was delivered. So I think David will comment on this after me. So -- but thank you for joining. Yes, it's a different time. So we went already, in our history, through multiple recessions.

So -- and when we're thinking about -- I'm thinking about this, it seems like it was relatively long period of problems when I was refreshing my memory and looking in the specifics. It usually was maximum for two quarters, and then we were seeing demand coming back. It's very difficult to say if the same pattern would happen here.

It is a different type of crisis. But I think it's pretty obvious that this type of crisis is actually putting on digital services very, very different demand. And this is the core of our business. And all we're doing right now, preparing ourselves for comeback. That's the goal #1.

And this is a talent, and this is financial stability on the exit of this. And I think on both of this, we're doing pretty well. So with this, I'll come -- yes..

So as Ark mentioned, we did have some technical challenges with the initial replay of our call. The entire replay will be available on our Investors section within the next hour. I want to thank you for your patience and your time today..

Thank you..

Thank you..

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation..