Good day and thank you for standing by. Welcome to the EPAM Systems Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Straube, Head of Investor Relations. Please go ahead..

Thank you, operator, and good morning, everyone. By now you should have received your copy of the earnings release for the company’s third quarter 2021 results. If you have not, a copy is available on epam.com in the Investors section. With me on todays’ call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer.

I would like to remind those listening that some of the comments made on today’s call may contain forward-looking statements. These statements are subject to risks and uncertainties, as described in the company’s earnings release and SEC filings.

Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I’ll now turn the call over to Ark..

Thank you, David. Good morning everyone and thank you for joining us today. I think it would make sense to start today from the same reference point we used exactly 12 months ago, when we began to see the first positive turning signs after the pandemic hit us earlier in 2020.

The difference point was our investor and analyst day which took place November 2019 in Boston, which was still done in the old fashioned in person setting.

On that day, we were reminded about EPAM history during our post a few years, and our transformational journey from -- software engineering services firm to much more diverse, digital and product consultancy with a strong engineering culture.

Beginning in 2016, we set an aspirational goal to become one of the global leaders in product development services. Three years later, in 2016, we set out another one to become one of the global leaders in product and platform engineering services.

We said that practically every three years we focused on the way of our means to evolve as an organization without earnings [ph] as the specific elements that were essential to transforming the company. This undertakings enable us to innovate, remain relevant and stay ahead in the ever changing market during those initial post IPO times.

Each aspirational mission was done as a legend forehand in a longer journey of transformation, and was validated by external views, namely industry analyst versions, a sector and our ability to grow significantly faster than the market, which has resulted in doubling the company revenue practically every three years.

In result, with our Investor & Analyst Day in 2019, we shared our aspiration for the next three years, target and actually the end of 2021 and softly indicated that we might be able to double the size of the [indiscernible].

We also stated then that to achieve this goal, we will need to continue transforming EPAM into a different company with a strong ability to adapt people platforms and processes into those that quickly respond to change built in bring to life the digital platform that connects our people to work seamlessly, and enables us to be efficient and effective in all what we do, extend our leadership across integrated consulting and engineering services, and in result, open opportunities for transformation for everybody, anywhere through lead generation deliver educational, social, and innovation problems.

In short, we set our sights on becoming the transformation platform for those clients who would like to become adaptive enterprises themselves, with events [ph] indeed, our current undertaken today as well.

So last year, on our Q3 earnings call, we were reminded of all that and shared a good level of optimism, or self-confidence, if you will, that we would be returning to our traditional 20 plus percent organic growth rate in post pandemic environment. But we also were almost certain at that point.

That doubling our 2018 revenue by the end of 2021 would not be a realistic target anymore, is everything we experience in Q2 and Q3 of last year, and how the in general saw the situation for 2021 -- in November of 2020.

Now as we sit here today, we see how naive our post pandemic assumptions were just a year ago, especially regarding the post pandemic term itself. I guess, we will be aligning today that we can drop the post portion for this term for some time in the future.

But on the other side, we are now realizing that EPAM is an exciting crossroads in his 28 year journey because we're looking at the present. We have clear line of sight to the fiscal year we should be one of the fastest growing revenue years in our post IPO history.

That includes also breaking through to our first million dollar revenue quarter at the end of 2021. And actually, still reaching out our aspirational goal of doubling the company for the third time since 2012. This result is intersection of many factors that have led us to our current state and the next phase of our journey.

It is a journey that has been as much about transforming EPAM as it has been about helping our clients refer themselves. It is exactly through this latest ambition, this research and wisdom that we are developing ourselves to be one of the best in the areas of innovation and design, consulting, education and social responsibility.

In addition to driving even higher levels of excellence is one of the strongest engineering companies in our space. And today, EPAM is substantially different company than you were just six eight years ago. One of the much more diverse foundations to drive the next level, so value to the clients and our growth result.

So along the way, we said to and will continue to solve for the challenges of scaling for growth, geographical expansions and attracting new types of talent, the means different experiences and different types of syncing to EPAM, while complementing our strong technical and engineering teams.

Additionally, at each conference, with identify and compare capabilities that we needed to strengthen or build, in order to transform EPAM to serve the market needs. And to be done in both ways organically and through acquisitions, which continue to be an important part of our capability extension strategy.

As we turn to the future, and set our sights on growing to $10 billion revenue company, our growth will come from the foundational building blocks we have assembled over the last few years. Some of each include an integrated consulting and engineering questionings.

This brings together business and strategy, technology and experience consultant growth to the market through our EPAM continue [indiscernible]. High value cloud services focused on cloud native development, application of the organisation enabling the data driven enterprise helping our customers modernize, grow from inside out.

Data and AI everywhere, leveraging our strong advances, engineering and data heritage, billions of massive data structures and leveraging API technologies to drive fast insights.

And enabled is our global talent pools, connected by our digital platforms, guided by our next generation delivery methodologies and supported by educational, social, and innovation initiatives.

Lastly, we will continue to focus on expanding our partner record system aligned with our vision and map with our vertical and geographical focus developing joint solutions and go into market together. So pivot into the current moment.

As I mentioned a short time ago, acquisitions will continue to be a prominent part of EPAM capabilities and geographical extension strategy. This year, we have already closed on five acquisitions, which are enabling us to expand our current -- in Salesforce cybersecurity, analytics, strategic consulting, and our presence in Latin America.

You also might have seen recent regulatory filings about our intentions to acquire in Emakina Group.

Emakina is globally recognized digital marketers and experienced agency or how they call themselves the user agency specializing in a range of areas, including commerce and retail, media planning and buying, service design, branding and content production across a number of others, headquartered in Belgium, and has more than 1100 employees and studios across 18 countries in Europe, the Middle East, Africa and North America.

This acquisition will intensify my ability to deliver creative solutions, personalized experience and next generation digital products, which are increasingly working into our global clients.

So worth noting that while EPAM is already listed among Ad Age’s top 25 largest agencies in the world, Emakina will add very new capabilities to our agency working and significantly strengthen EPAM in market positioning across Europe and Middle East.

It seems like it's the right moment now to mention that just a few days ago, Fortune Magazine published the hundred fastest growing companies list for 2021 and included EPAM in the first time and third consecutive year, ranking us 25th overall and the number one in the Information Technology Services category.

Of not, we are actually the only IT services company on the list. And in addition, Newsweek included EPAM for the first time in the 2021 America's Most Loved Workplace position us as the number 49 on the list.

So before turning to Jason to provide an update on our third quarter results and our 2021 outlook, while I would like one more time to state, the demand for our services continues to be very strong. And we see this across all market segments. We also very well understand this is an overall strong demand requirement.

And this is precisely why we feel we cannot become overly confident. We need to continuously build in on our breath and continuously investing in our strong engineering culture, while constantly expanding our services into real end to end, higher complexity engagements across the globe to bring unquestionable loyalty to the clients.

We understand that everything about our future high growth is [Indiscernible]. But as before, we are not shy to push into new areas, because they are challenging. And we are committed to do so in a very thoughtful and sustainable way.

So it's not to compromise on the quality of the delivery as EPAM is known for, and if anything, we are constantly looking for ways to establish through differentiation for not only our customers, but also as importantly for EPAM. With that, let me turn the call over to Jason..

Thank you, Ark. And good morning everyone. In the third quarter, EPAM delivered very strong results, reflecting continued significant demand for the company's services across a wide range of industry verticals and geographies.

During the quarter, EPAM generated revenues of $988.5 million, a year-over-year increase of 51.6% on a reported basis, and 50.7% in constant currency terms, reflecting a positive foreign change impact of 90 basis points.

A continued robust demand environment, combined with our ability to recruit at record levels, while retaining talent drove a higher than expected revenue result for the quarter. Customers continue to turn to EPAM for help transforming their businesses.

We continue to support our customers across a range of initiatives, including, modernizing and transforming applications across the full range of industries we serve, creating new digital products and businesses and harnessing the resulting data to improve revenue growth, supply chain operations and customer experiences, and finally merging physical and digital to create superior retail experiences.

Turning to the performance of our industry verticals. Travel and consumer grew 79.3% driven by very strong growth from both our consumer and retail clients. In addition, we saw renewed demand and return to growth across our travel customers.

Financial Services grew 68.9% with very strong broad based growth coming from asset management, insurance, payments, and banking. Software and hi-tech grew 46.6% in the quarter. Life sciences and healthcare grew 29.5%. Business information and media delivered 23.6% growth in the quarter.

And finally, our emerging verticals delivered 61.5% growth driven by clients and telecommunications, energy, manufacturing and automotive. From a geographic perspective, North America our largest region representing 60% of Q3 revenues grew 51.6% year-over-year, or 51.4% in constant currency.

Europe representing 33% of our Q3 revenues grew 50.9% year-over-year, or 49.5% in constant currency. CIS, representing 4% of our Q3 revenues grew 49.7% year-over-year, and 44.6% in constant currency. And finally, APAC grew 60.4% year-over-year or 58% in constant currency terms, and now represents 3% of our revenues.

In Q3, revenues from our top 20 Customers grew 29% while revenues from clients outside our top 20 grew 69% resulting in greater diversification across our revenue base. Moving down the income statement, our GAAP gross margin for the quarter was 33.9% compared to 35.1% in Q3 of last year.

Non-GAAP gross margin for the quarter was 35.1% compared to 36.8% for the same quarter last year. Gross margin in Q3 2021 was impacted by higher levels of funding for our variable compensation programs, given the company's outperformance versus targets established at the beginning of the 2021 fiscal year.

GAAP SG&A was 17.1% of revenue compared to 17.9% in Q3 of last year. And Non-GAAP SG&A came in at 15.3% of revenue compared to 15.9% in the same period last year. GAAP income from operations was $144.1 million, or 14.6% of revenue in the quarter, compared to $96.4 million or 14.8% of revenue in Q3 of last year.

Non-GAAP income from operations was $179.6 million, or 18.2% of revenue in the quarter compared to $123.3 million or 18.9% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 14.6% versus our Q3 guide of 13%.

Due to a lower than expected level of excess tax benefits related to stock-based compensation, and a one-time benefit related to certain tax credits. Our non-GAAP effective tax rate, which excludes excess tax benefits, and includes the one-time benefit of the tax credit was 21%. Diluted earnings per share on a GAAP basis was $1.95.

Our non-GAAP diluted EPS was $2.42, reflecting a $0.77 increase or 46.7% growth over the same quarter in 2020. In Q3, there were approximately 59.2 million diluted shares outstanding. Now turning to our cash flow and balance sheet, cash flow from operations for Q3 was $206.1 million, compared to $175.6 million in the same quarter of 2020.

Free cash flow of $184.9 million produced 129% conversion of adjusted net income compared to free cash flow of $165.8 million in the same quarter last year. We ended the quarter with approximately $1.3 billion in cash and cash equivalents, which did not include the restricted cash related to the acquisition of the Emakina Group.

Additionally in October, we updated and expanded our unsecured credit facility, which will allow for up to 700 million in funding plus an additional 300 million via Accordion, giving us access to a total of 1 billion in borrowing capacity.

This new credit facility replaces the 2017 facility, which allowed for borrowing up to 300 million with an additional 100 million via Accordion. At the end of Q3, DSL was 70 days and compares to 70 days for both Q2 2021 and the same quarter last year. We expect to maintain DSL around the same level or somewhat lower in Q4.

Moving on to a few operational metrics, we ended the quarter with more than 47,050 consultants, designers and engineers, a year-over-year increase of 39.4%. Our total headcount for Q3 was more than 52,650 employees. In the first three quarters of 2021, we had approximately 11,500 net additions, a record number for EPAM over a nine month period.

Utilization was 77.1% compared to 78.2% in Q3 of last year, and 82.2% in Q2, 2021. Now let's turn the guidance. Based on a year-to-date results combined with a robust demand environment and continued confidence in our ability to scale production headcount, we are raising our business outlook for 2021.

So starting with our full year outlook, revenue growth will now be at least 40% on a reported basis, and in constant currency terms will now be at least 38% after factoring in an approximate 2% favorable foreign exchange impact. On an organic constant currency basis, revenue growth will be at least 34%.

After excluding an approximate 400 basis points of revenue contribution from acquisitions we closed in the last 12 months, including Emakina. This compares to the previous full year revenue growth outlook of 37% reported, 35% in constant currency and 32% in organic constant currency terms, which we provided during our Q2 earnings call.

We expect GAAP income from operations to continue to be in the range of 13.5% to 14.5% and non-GAAP income from operations to continue to be in the range of 17% to 18%. We expect our GAAP effective tax rate to continue to be approximately 11% which includes the benefit of certain tax credits I mentioned previously.

Our non-GAAP effective tax rate which excludes excess tax benefits related to stock-based compensation will now be 22%. For earnings per share, we expect the GAAP diluted EPS will now be in the range of $7.86 to $7.93 for the full year, and non-GAAP diluted EPS will now be in the range of $8.72 to $8.79 for the full year.

We expect weighted average share count of $59.1 million in fully diluted shares outstanding.

For Q4 of 2021, we expect revenues to be in the range of $1.075 billion to $1.085 billion, producing a year-over-year growth rate of approximately 49% at the midpoint of the range, with the favorable impact of foreign exchange on revenue growth expected to be minimal.

Lastly, we expect approximately 800 basis points of revenue contribution to come from acquisitions closed over the last 12 months, including Emakina. For the fourth quarter, we expect GAAP income from operations to be the range of 13.5% to 14.5%, and non-GAAP income from operations to be in the range of 17% to 18%.

We expect our GAAP effective tax rate to be approximately 14%. And our non-GAAP effective tax rate which excludes excess tax benefits related to stock-based compensation to be approximately 22%.

For earnings per share, we expect GAAP diluted EPS to be in the range of $2.11 to $2.18 for the quarter, and non-GAAP diluted EPS to be in the range of $2.44 to $2.51 for the quarter. We expect a weighted average share count of 59.3 million diluted shares outstanding.

Finally, a few key assumptions that support our GAAP to non-GAAP measurement in the fourth quarter. Stock-based compensation expense is expected to be approximately $31.4 million. Amortization of intangibles is expected to be approximately $5.6 million. The impact of foreign exchange is expected to be approximately $1.5 million loss.

Tax effective non-GAAP adjustments is expected to be around $8 million. And finally, we expect excess tax benefits to be around $13 million in the quarter. In summary, we are pleased whether Q3 results and the record growth we are producing in our 2021 fiscal year.

While it is too early to give a detailed view of our business outlook for 2022, we believe that demand environment continues to support an elevated annual growth rate in excess of our traditional guidance greater than 20%.

However, we also believe that it is important to establish and maintain a more sustainable growth rate in the coming year than that achieved in 2021. As we have done in the past, we will provide our detailed view of 2022 guidance in February on our Q4 earnings call. Operator, let’s open the call up for questions..

Thank you [Operator Instructions] Our first question comes from Bryan Bergin with Cowen. Your line is open..

Hi, good morning. I wanted to ask about the spread between your headcount growth versus revenue growth. It's really widened here, despite the utilization normalizing.

Can you talk about some of the key drivers there as well as sustainable level for that difference?.

Yes, I think that we continue to see some improvement in pricing, as I think we've discussed over the last couple of calls. And then probably there's a little bit of shift from a geographic standpoint in different geographies, to have somewhat the higher rate rates associated with them.

And so I think you might continue to see some improvement over time. And as I think we've sort of talked about, we feel like we've definitely increased our capacity to add headcount and more specifically to retain headcount. And so we expect that we, we will continue to add headcount at greater than historic rates.

But currently we're guiding to a somewhat lower increase in headcount in Q4 relative to Q3, based on what we think will be a little bit of slowdown in people joining the company in the month of December..

Okay. And then just on the growth outlook, so really looks quite broad based across the business.

Just any thoughts on how 2022 growth may progress considering the level of comps you continue to put on board here in 21? And, more specifically, how do you feel about headroom to grow in some of your largest clients?.

The demand environment continues to be strong. We see quite a bit of growth from existing clients. We also have a number of engagements that we have entered into more recently that have a lot of growth potential. So that demand environment is obviously quite solid. We also feel that we have increased our ability to support organic growth rates.

At the same time, I should say that we don't expect that 36% organic growth rate become a normal sort of multiyear sustainable norm..

Okay.

And the largest accounts, headroom and those, do you still feel strong there?.

Yes, there's definitely there's, there's there's potential in the larger accounts..

Thank you..

Thank you. Our next question comes from Jamie Friedman with Susquehanna. Your line is open..

Hi, let me echo the congratulations. Two questions, I was I guess I'll ask him, maybe for Ark. In your prepared remarks Ark you asked -- I mean, you were just discussing experienced consultants, and you use that word experience.

I was just wondering, how are you doing? What verticals especially are you drawing talent from with the experience consultants? And then the second thing is Jason, is there any call out about Q4 seasonality or ideally 2022 budgets? Thank you..

So the equation I'm sorry, the question about where we take in people where we kind of bring in people from or in what markets we are applying the paper? Because I especially….

Especially the second one Ark..

Okay. Oh, I simply, I don't think there is in here much difference with us and with other companies playing in the market right now. This is pretty much corrosion. Most of the articles clear. I think consumer goods travel retail, definitely leading this what it would be relevant for my journey to financial services on definitely entertainment.

And publishing, so I think it's pretty much corrosion all and healthcare and life science. All of it..

Yes, I guess I'll answer the second question. So good morning. And from the standpoint of budgets, budgets intact as we sort of execute for clients are looking to invest and continue to, drive digital transformation. So right now it continues to be a market where probably supply constraint is the greater issue rather than demand.

And we enter 2022, which looks with what looks like a pretty intact demand environment..

Got it. I'll drop back in the queue. Thank you..

Thank you..

Our next question comes from Ramsey LFO with Barclays. Your line is open. Our next question comes from Ashwin Shirvaikar with Citi. Your line is open..

Thank you. Congratulations on the quarter. I guess the question and in the past, you guys have spoken about sort of the risk to corporate culture from growing too fast and the ability to grow too fast.

So as you scale has that ability changed? Or has your view changed?.

Alright, so I think Ashwin I think it’s definitely a very relevant concern. And we are paying a lot of attention to this.

At the same time, like things changing from the point of view how we were thinking about general decoration, level of distribution, how people work in just two years ago, so I'm just reminded exactly about kind of our late 80s [ph] sometimes, and we've put during the last couple years and even starting to do before a lot of efforts to make sure that we create an environment from digital ecosystem perspective as well, to see how we can support the culture better in, in what we were thinking will be relevant, probably not during the 2020 2021 but later.

It's all accelerated like we always talking about it. But at the same time, that's exactly what Jason already mentioned. We don't believe that it's sustainable to grow as the growth reaches, which is happening right now for a relatively long period of time.

So I think it might be better than what we were expecting a couple years ago, when we were talking about our growth 20 plus percent organic growth, maybe it will be better in the future.

But it's definitely the rate which we brought in today, because in this case, we will be kind of 50%, 60%, 70% of people who will be new to the company, which is very difficult to sustain culture and quality of the delivery. And we were very, very much focusing on the quality levels..

Understood, understood, no. So you focused on the right things as far as that that type of growth is concerned, which is, which is good. I guess, one separate question that goes with Emakina, which I guess that process has been on-going since August.

Just to clarify is the acquisition now complete in terms of just the for public share repurchase and stuff like that? And is this an area where you would see yourself continuing to scale in terms of acquiring a lot of local talent in many different geographies?.

Yes, so from I guess, the acquisition standpoint, over 98% of shareholders have agreed to tender their shares and cash has been transferred, we're still going through a little bit of a, I guess, what's called a squeeze out process here for the remainder of the shareholders.

And so, for all practical purposes, we would control the company, as of I guess, yesterday. And I guess that's kind of what I'd say about that..

And we definitely focusing on expanding in, in the market, and in making acquisition bring in, like 1100 people to us, specifically in European markets. It's definitely improving our experience consultancy, digital consultancy, marketing, related consultancy skills, which is a little bit new to EPAM but very complementary to what we're doing.

But it's also very reasonable improvement of our presence across European and in some Middle East organisation. And we are planning to continuously doing this, but again, with right proportion, and with consistent focus on delivery and engineering, and engineering and quality..

And just to clarify, and I think I said that in my prepared remarks, but we've got two months of Emakina results built into the guidance that we communicated for the Q4 quarter..

Understood. Okay. Great, thank you..

Thank you..

Our next question comes from Maggie Nolan with William Blair. Your line is open..

Thank you.

I'm wondering what is the level of seniority of the employees that you've been hiring so rapidly in the last couple of quarters here and has the pyramid of makeup shifted in the last couple of years?.

I think we are definitely doing very specific analysis on this part. And while we are growing faster than we expected, we keep inching new at parameter infact right now. So this is kind of short term. We're clearly there's a singularity we bring in more new people. And that's a little bit more challenging.

That's kind of related to the previous question is, Ashwin was asking, we are carefully doing this. But again, seniority parameter is supported, as needed for the type of services we deliver..

Thank you. And then in previous quarters, you've discussed putting through an additional number of price increases compared to prior years.

How widespread is this across your client base? And what is the magnitude and how receptive has clients been to these conversations?.

Yes, we continue to have discussions and negotiations with clients around rate increases, some of those are coming in the second half of 2021. At the same time, we're also beginning to have the discussions around rate increases for the beginning of 2022, which is kind of the more traditional period for rate increases.

Obviously nobody's likes to absorb a rate increase but I think based on everything that people are seeing from a wage inflation standpoint, from, I guess, a global inflation standpoint, and just the continued strong demand for resources. These are relatively easier conversations than we've had in the past.

And I expect that we will see better price increase or rate increase in 2022, than we've seen in previous years..

Is that pretty widespread across their client base Jason?.

Yes. So, every client is probably a little bit different. But yes, I think that, there's a, there will generally be greater increases across clients that we've seen in the past. Some clients will have higher rate increases than others depending on where they've kind of been historically.

We are trying to make certain that we are growing our business responsibly, and sort of able to maintain sort of as a stable sort of level of profitability the way we've run the business over the last couple years..

Thank you. Congratulations..

Thank you..

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

Hey, guys, this is Kathy on for Jason, great set of results here. I wanted to ask about margins. I mean, obviously, your margin performance has been very impressive year-to-date. I think you're already tracking to the upper end of your full year guidance range of 17% to 18%.

Just curious, is there a reason you didn't take up the full year margin guidance? Is it just conservatism? Or are there other factors that we should be aware of thing?.

Sure. So we believe that the 17% to 18% guidance that we maintained for adjusted income from operations is the appropriate kind of guidance. Q3 was a quite strong quarter, which did some of the profitability improvement was a result of the sort of the upside and revenue that was somewhat unexpected in the quarter.

For Q4, we expect that SG&A will come up a little bit between Q3 and Q4 will maintain gross margins kind of in and around the range that we saw in Q3. And then I think the other thing I should point out is that, our recent acquisitions have somewhat lower levels of profit than our traditional EPAM business.

So all of those things kind of pushes you more towards a Q4 exit in the middle of that 17% to 18% range. And so that's that's kind of what forms that 17% to 18% guidance for the full year..

Great, very helpful. And just a quick follow up. Just wanted to ask about utilization. Obviously, the Q3 number was mostly came in about two years now. So is that just due to timing of on-boarding, this obviously had a very sharp hiring quarter or, obviously, demand remains very strong.

So just wanted to know is there any factors contributing to that thing?.

So utilization in Q3 is traditionally the seasonal low quarter. And so if you think about a world, I guess, pre 2020, it's a time when people go on vacation. And if you're lucky enough to be in Europe, maybe it's a two or three week vacation. And so utilization is relatively low.

Last year, when people couldn't leave their homes and countries, we saw higher utilization than is typical. The 77.1% that we saw in Q3 is actually pretty good. And sort of again, sort of seasonally consistent. We expect utilization might come up a little bit in Q4 but not unhappy with the 77.1% that we had in Q3.

And I guess the other thing I should point out is no, we usually think about the businesses kind of running in maybe a 77% to 79% utilization. And again, it is somewhat seasonal. There are quarters when we run, at or above 80%. But we generally consider that on the hotter side..

Great, very helpful. Thanks, guys..

Thank you..

Thank you. Our next question comes from Surinder Thind with Jefferies. Your line is open..

Hi, Jason. Just I was hoping for a bit more color on your commentary around when you mentioned looking towards a more sustainable growth rate, what you currently generated.

Is that commentary around the scale which EPAM is currently operating at or is that also some commentary on the industry growth that's occurring and maybe ultimately some expectations of slowdown as we as we look ahead?.

I think it's difficult to comment about the industry as a whole. At this point, we think there is a very strong demand and there is no really sciences is the way to go go down.

At the same time from our internal assessment we really would like to make sure that we bring in -- to the clients, and supporting the reputation we should build during previous couple of decades. And from this point of view, we're talking about sustainability of our growth.

Because like, if you're going to grow in like 50%, for a couple years, it's, it's our size.

We don't believe that it's possible to do in the complexity of the business, we're referring to the complexity of the engagements or so basically, sustainability was referring exactly to, to our understanding what's possible, in reality, with keeping the quality and culture of the company now, similar reply to what we already did to them as well..

Understood. And then related to the commentary around expectations of strong and demand outlook.

As you look over the next X number of years, you made a comment earlier about the negativity of predicting demand about a year ago, and where you thought things were, can you maybe provide some color around what gives you confidence that the current level of demand from an industry perspective is sustainable at these levels? And then if we look at past cycles, it seems like demand, where it's spiked will persist for a couple of years.

But then there's generally a quick draw down, any color you can provide their and your conflicts obviously?.

I think our point was exactly how difficult to predict the future and how just couple of years ago, we didn't understand that it would be the turnover, which happened. And even 12 months ago, we saw the impact of pandemic will be different than then just one or two quarters later is changed.

And that's why from your question, we do believe that it would be strong demand during the next several years, what would be after this and how this wave will be working? And it's interesting question because everything changes. So unfortunately, I cannot give you the uses kind of assurance for the next decade or so..

Understood, that's helpful. Thank you..

Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open..

Thank you very much. And thanks for all the detail today. I'm wondering, you mentioned in prepared remarks that you're making some progress on standing up new delivery centers, in different regions.

Can you give a little more detail on that? How is hiring going in those regions? And how are you being able to build and, and the EPAM brand which seems to serve to really well to date in your existing geographies?.

I think you will be very consistent with our comment to the sides. I don't remember in what quarter we were saying that it's easy to breed talent. And I'm pretty sure all of us were confirming that it's also very global. There is no practically spaces in the world today where you can come and start into hire like talent without, without challenges.

And I think each quarter is demand is becoming more challenging. At the same time, our investments in education and our recruitment processes, and automation and everything becoming more impactful and allowed us to support what we're doing today. I don't know what else to say.

I think war for talent is like in all media, no websites everywhere, like everybody talking about it. And we're pretty proud to this point to be able to sustain the level of net additions which you have in level of kind of relatively manageable attrition rates..

And certainly have good reason to be proud and impressed with what you've done to date on a hiring. You also talked about I just want to talk a little bit of brass quickly on customer growth and contribution. It seemed like there was pretty material sequential growth across your top customers.

But how much is that the result of have their own demand versus you turning away, maybe other business and, and so that's resulting in more concentration? And how should we think about that going forward? Do you think we can get far enough ahead of the hiring curve to be able to take on some of that work that maybe you've been turning away recently? Or is that going to be an on-going challenge?.

Yes, so I think that we're actually kind of de-concentrating. What I would say is that, if you looked at that cohort, in the 11, to 20, you did have pretty elevated growth rates in that cohort. And maybe some of that speaks to sort of the trends we're seeing in the market.

So you've got a few clients, one in the asset management space, that was probably somewhat unprepared for that the new digital kind of operating world, the pandemic, sort of encouraged them to make investments, and now there's a significant amount of investment around updating their infrastructure and the way they connect with their end clients.

And so you've got, I would say, a number of companies who probably got additional religion, the via the pandemic, and you are seeing quite accelerated investment. And then EPAM continues to bring that sort of trusted partner to the table.

And so, clients who are looking to make certain that their transformation journey is successful, oftentimes are working with EPAM, because of the track record that Arkadiy have spoken about. So we did see some really strong growth in the 11 through 20. But we're also seeing very strong growth in the customers below 20.

I would say, probably, if you're an existing customer with strong demand, you probably have a little bit more of a say at the table. And so probably they are getting a little bit more their share of resources in brand new customers.

And again, we continue to be constrained by supply and are expecting that, we'll continue to have very, very solid net additions in Q4, but at a somewhat lower level than in Q3, okay. And of course, that excludes the 1100 additions coming through in Emakina. So I said a lot.

Was that relatively clear or?.

Yes, that was that was perfect. Just the one clarification that and I think you touched on this in terms of the lower net addition in the fourth quarter.

Do you think that is that seasonal or is there some other aspects that are impacting that?.

I mean, I think generally, what we're thinking is that December is a time when most people don't change jobs. And so we'll have maybe fewer joiners in December. But it might be a reflection that things could get a little bit harder over time. But, as Ark just talked about, we've really improved our capability to attract.

I think our hiring brand continues to improve quarter-after-quarter, year-after-year. We've also improved our ability to staff projects and to match supply and demand. So I think that we've improved our capabilities around organic growth rates. But, again, are expecting a somewhat slower level of net additions in Q4..

That's great, thank you..

And our next question comes from Arvind Ramnani with Piper Sandler. Your line is open..

Hey, congrats on a terrific quarter. I just want to go back to a comment Ark made in the prepared remarks in talking about kind of pushing into new areas and capabilities.

So, a couple of questions around this, what are you doing in terms of figuring out which areas to invest in, just given the breadth of tech innovation kind of across the space, which areas -- how are you deciding which areas to really kind of focus on and, and build capabilities in before there's commercial, or revenue opportunity? And the second question is, how are you deciding what areas to, to kind of de-emphasize, are they are there certain areas where you're, you don't see much growth? How are you deciding what areas to say, like, we're going to focus less on these areas?.

Yes, like, I appreciate your questions, like, all the stress, trying to understand the future and how are we doing this? And so like, what simple solid question which like, really complex.

I just would like to remind like, I'm not going to go to specific topics, but we do believe that one of the advantages which we feel that around, probably 30% or 40% of our business is still working with software companies and technology companies and platform companies.

And we're doing significant kinds of sometimes significant portion of the development of new products and platform for this type of clients, which is giving us like very different exposure to what's happening in different areas, like sometimes we do a new product, or new concept like wide shoulders and is going to the market, but then we are forced to help this type of clients to do implementation of this.

So we have kind of organic internal barometer if you will, to help us to select some areas, and we build this capability sometimes in very organic. [Technical difficulty] quick, and as we designed, we trying to keep this proportion of this of such clients in our in our business portfolio to be able to continuously do business.

This is from technology standpoint. And then from end to end solutions don't quit. We definitely is everything what we were sharing about consultancy. We're going up and up in the chain and expand in our business perspective of what we building and how we can help clients.

And first consulting was for us [Indiscernible] technologies, and we added experience components. And we were talking about business now, talking about strategy in my keynote part of this but we also did couple more positions in this area. And this is when we're talking about new areas.

It's not only about new technologies, it's also was the whole end to end story..

Perfect, perfect. Another question, certainly in the last few years, we have expanded our consulting capabilities, which makes a lot more sense. Given that now you're doing close to a billion dollars in revenue per quarter.

Can you just talk maybe about the competitive set who are you winning business from? Are you is -- a competitive set changed now versus three, four years back?.

I think you understand our competitive base very, very well. And I think we just get in proportionally more to the situation when consultant becomes much, much more important part to start the business to open the door. From this point of view, I think we see the difference from general competitive on kind of what exactly companies we compete against.

I think it's largely the same because most of the large vendors had these capabilities before. We’re just trying to bring different values through integrating better with delivery and generic..

Perfect, thank you, and good luck for rest of the year..

Thank you..

Our next question comes from Steve Enders with KeyBanc Capital Markets. Your line is open..

Okay, great. Thanks for thanks for taking my question. I just wanted to talk a little bit more about the macron kind of where budgets are at this point. Good to see, I guess travel and consumer specifically, recovery here.

But are you still seeing some of that depressed funding levels from COVID? So I've been across some of the verticals in your client base..

I don't believe we see any of this exists at this stage. I’ve seen practically and it's not only about rolling consumers, it’s practically about all indices. We do believe that everybody understand that preparation for something new or even like changes which this pandemic trigger splitting constant.

And when I was saying before, like it's difficult to predict what would be two years or three years from now, it is difficult and anything can happen and we all understand it. But mostly I was referring to level of demand which is happening specifically right now.

The level which was seeing and prediction for longer term like before pandemic I think is definitely will be there for longer term as well. So but direct answer to your equation, no we don't see any type of sign of partial depression still from the pandemic right now as a market, in our market..

Okay perfect. I guess as a follow up, just as you kind of think about the biggest challenges that you are now trying to solve for today is still the biggest thing, the ability to bring in more talent.

And we're just going to kind of gross margin were that that today is the disability to bring in talent and pass on some of the some of the costs there and deal with the higher hiring levels or kind of what's the biggest challenge here you're still solving for today?.

In a very simplistic way here the biggest challenge is a brilliant talent. But I think it's a overall huge oversimplification of what's happening. Because talent is a very broad term, like in general, you can it's possible to hire a lot of people.

The point is, what type of people, how to orchestrate the complex complexity of the end game, how to connect with the clients in the right way.

I think orchestration of the kind of integrated teams working together, specifically when you growing like 30 plus percent when you have a lot of new people, and you need to kind of bring them up to what's happening and understand the type of engagement which we do in the scale, which is happening right now. That's the real challenge.

So the net acquisition, important enabler of this value should be there, but the real concern how we deliver it, and that's should be some kind of very well understood..

And I'm going to step in and kind of respond to that sort of more tactical question on gross margin. So we talked about earlier in this call that we do continue to see elevated wage inflation.

We are getting somewhat better increases in rates, okay, but probably not fully able to offset wage inflation, wherever the one important point is, this year, we've had our performances, I think you've seen as we've taken apart guidance, I think every quarter.

And so we have a variable compensation element that is the expense is based on the strength of the company's performance and revenue growth and profitability. So we're, you're booking the expense associate with variable compensation at a much, much higher level this year than we have in past years.

So next year, you think that that, I would think that would normalize. And so that will have a positive impact on gross margin. And then you may continue to have some pressure with wage inflation and, hopefully those two kind of offset each other.

And just to sort of round it out, the variable compensation expense shows up throughout the year and that is generally paid in the form of a variable payout to employees in at the end of Q1 quarter and the beginning of the Q2 quarter..

Perfect. Thanks for taking the question, very helpful..

Thank you. Our last question comes from Vladimir Bespalov with VTB Capital. Your line is open..

Hello, congratulations on very good number. And thank you for taking my question. I would like to ask you about your M&A pipeline and -- of the M&A market since Ark mentioned that this is a part of your strategy going forward and important part.

So do you feel like the competition on this market is growing? Because there have been a lot of activity in the sector in general? Do you feel like the that it's getting more and more difficult to find the proper targets the valuations are going up and things like this, so could you provide some color? Thank you..

I think it's definitely known fact as the answer will be yes, yes, and yes and so basically there are a lot of companies on the market, but competition is growing and price is growing as well. So that's very natural in the markets situation which you described.

And we still go into to find the right companies to, to bring on board and to improve our capabilities. So we like everybody else to a number opportunities right now..

Okay. Thank you very much..

Yes, absolutely. Thank you..

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

As always, thank you very much for attending the call today. You know that if you have any equations days, data is available and again, see you in three months. Thank you very much..

This concludes today’s conference call. Thank you for participating. You may now disconnect..