Title

Presentation

EPAM Systems, Inc. beats earnings expectations. Reported EPS is $3.12, expectations were $2.7.

Operator: Thank you for standing by my name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to the EPAM Third Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn over the call to Mike Rowshandel, Head of Investor Relations. Please go ahead.

Mike Rowshandel: Good morning, everyone and thank you for joining us today. As the operator just mentioned, I’m Mike Rowshandel, Head of Investor Relations. By now, you should have received your copy of the earnings release for the company’s third quarter 2024 results. If you have not, a copy is available on epam.com in the Investors section. With me on today’s 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 will now turn the call over to Ark.

Arkadiy Dobkin: Thank you, Mike. Good morning, everyone. Thank you for joining us today. It’s good to share today that our third quarter results came in better than expected, reflecting our strong execution, core differentiations and continued value and relevance across our global portfolio of clients. Further, we have been busy since its forecast is signing two large acquisitions announced on Friday of last week we closed NEORIS, which is the most significant addition in our history. From a strategic perspective, the acquisition of NEORIS does three things for us. Number one, it gives us an entry point into attractive new markets in Latin America and parts of Europe. Number two, accelerate net new growth opportunities with our joint clients and brings significant new logos to our clients’ portfolio.

And number three, creates a powerful and unified NEORIS delivery platform in the region, which we believe will be highly regarded across Latin American and Spanish and Portuguese speaking world in general while strengthening our services with local and near-shore value propositions. We will be talking more about it a bit later today, but first, let me share some key highlights across our business. During Q3, we delivered revenue growth both year-over-year and sequentially. We saw broad improvements in client engagement across all our verticals and geographies, which we believe demonstrate what we hope to be a more stable overall market outlook. The level of our performance in Q3 was driven by increased client trust and are now much more globally diversified capabilities and in our ability to continuously execute with a high level of quality.

That triggered a better-than-expected client willingness to increase their budget share results. Key verticals to call out includes life science and healthcare, emerging markets and notably financial services and software and biotech, which both returned to sequential growth this quarter. In addition, we are seeing further signs of stabilization within business information and media and consumer goods, retail and travel, while clients still continue to navigate mix dynamics in their own end markets. Today, we are encouraged to see first a more positive demand sentiment in both our existing portfolio and new acquired clients in comparison with 90 days ago. Secondly, we are very pleased with our ability to maintain our reputation as a go-to partner for technology-led optimization and transformation programs while continuously expanding our unique offering in product and platform engineering services and advanced data cloud and general capabilities.

To summarize, we remain optimistic about certain sectors of our target market and about our broader portfolio as well to return to higher levels of growth over the coming quarters. So we are continuing to strategically invest in referencing capabilities and capture increased market share in global demand returns in full. However, currently, we do still see broaden up caution and some delayed decision-making with a continued focus on cost optimization. With all of that, we are staying very close to our clients and adapting ourselves to meet their most critical needs, while they continue to assess the investment appetite, prioritize transformational efforts, address their own end market conditions and most likely think about a variety of [indiscernible] navigating around the world as we speak.

As we stated many times in the past, our global delivery strategy is focused on becoming the most diversified company in our industry from a global talent perspective. And based on that, on enabling us further to support our global clients and their new transformative business models realization around the world. We believe we are successfully executing this strategy by investing both organically and through acquisitions, into building new advanced capabilities and service reference is key for us, talent markets. As a result, currently, we focus on four major global delivery hubs in [indiscernible]. In Europe, we continue to remain highly differentiated in helping our clients to address their most complex business and technological challenges.

Our core engineering DNA remains very strong and intact. As you can see with our better-than-expected Q3 results, we continue to deliver this high quality across existing clients as well as the new logos from our European delivery hub which operates around more than a dozen countries, including our largest in Ukraine and mainly with European Union zone. With the recent signing for derivative will further strengthen our future footprint in Europe with addition of user resourcing, especially for our financial services clients, but not limited to just those. We will be ready to talk about it in more details when we close the transaction later in Q4. In India, we are very pleased with our level of growth based on demand for differentiating services and division which has more product engineering focus compared to majority of other service players.

Our investment dating back to 2015 are paying off now. Today, we see robust growth in the country. And just this year, we added over 2,000 professionals and expect India to reach the 10,000 people by early 2025. In Latin America, we are following the similar process as India, investing in building for the future from 2015 as well. As mentioned already, on November 1, we completed the acquisition of NEORIS. This acquisition represents a significant milestone for our company and will really scale up our global capabilities with local leadership, knowledge, depth and expertise. Now with NEORIS, we immediately doubled our delivery footprint to approximately 7,500 people, notably expanding our presence in Mexico, Colombia, Argentina and Brazil among other countries in LatAm, but also in Spain and Portugal.

Really strong client portfolio and therefore relationship clearly demonstrate the market differentiation in the region. In addition to strong application development system implementation, cloud migration and automation NEORIS as well has developed very strong data AI and SAP practice. Today, NEORIS is recognized in Latin America, a regional market leader in SAP. It brings over thousand practitioners globally to our current effective practice and further enhancing our core enterprise platforms value proposition. Finally, they bring strong local capabilities across many of our key verticals and also in manufacturing and telco globally. In Western Central Asia, we’re continuously building a relatively new delivery hub in addition to the previous three.

Today, we have nearly 7,000 people in the region who are representing all our major global technology practices. We have a very healthy mix of strong senior talent along with a more junior energetic young population, hungry for new opportunities and future growth. Now let’s turn to important target that remains top of mind for many, Gen AI. Last quarter, we talked about how our AI transformation approach is a three-dimensional. We mentioned one is internally focused and represents what we do for ourselves. It’s a parenteral transformation of generate talent using our own skill-based organization tools and methodologies, which is a key differentiator for us and deliver to our highly advanced and mitigated trainings, boot camps and other upscaling efforts.

In this category also everything related to our efficiency and productivity advanced in back office and internal processes. Dimension 2 is also centered around client transformation opportunities and Gen AI-enabled client Solutions, which encompasses our Gen AI platforms and methodologies, such as EPAM DIAL, EPAM AI/Run and EPAM EliteA. And finally, dimension 3 is all about partner ecosystem network, helping us to enable life transformation of Gen AI-driven programs when closed preparation is cloud data and other type of major digital partners, must be in place for success. All those dimensions are closely interconnected. And currently, we continue to make very solid progress across all three of them. However, for today, we would like to focus a bit on combination of dimension 2 and 3 to illustrate how our efforts are driving client engagements and generating real pragmatic value.

Throughout 2024, EPAM has seen very strong arrangement with most of our clients across the full spectrum of Gen AI initiatives. For such programs cover all our core capabilities in engineering, including our specialized AI enabling services, internal and external platforms and accelerators. Such programs also often include business consulting services with our approach to holistic business redesign and optimization, an experienced consulting including implementation of our Gen AI interactive assistance by helping to bring AI to customer service operations across all our major verticals. When you look across our top 100 clients, we are directly engaged with about 70% of them on different type of Gen AI initiatives. If we look at those from the size and maturity perspective, we will see inconsistent and expected picture.

So far this year, we saw a doubling of what we call Stage 1 of early-stage projects compared to last year, where we are demonstrating our ability to help our clients start their journey and quickly get to Stage 2 or midsized AI projects with defined outcomes. This engagement are characterized by a more clear road map and defined top and bottom line outcomes based on vertical horizontally driven requirements. Stage 3 is where we are starting to see the readiness to focus on Gen AI and AI enable transformations more broadly. These engagements are multiyear and multimillion dollar programs and combines our data factory construct with new Gen AI capabilities to scale. Our most transformative work this year has involved establishing large-scale AI ecosystems or AI factories within our client organization.

Those are comprehensive enterprise-level solutions where we might manage the entire product life cycle, which includes complete separation of models and integrated services. During this year, we have already been engaged in a few of these programs which are sizable and could be in terms of millions of dollars range, which we believe will grow much faster in 2025. Now let me share a few client examples. Let’s start from the story, which was being fished just a few days before almost in real time on the main stage as regarding [indiscernible] in Barcelona, where our team presented jointly with our client Record, a global manufacturing of health and nutrition products. This program is a large multiyear data transformation story that started with an organization ready for a variety of AI use cases.

We really covering the full life cycle transformation from data foundation to data governance, platform strategy and the construction of responsible AI framework, setting the stage on operating and business model transformation for this 200 years old, 50,000-person company. Another story that we briefly mentioned 3 months ago is different. It is continue making strong progress into the future. In collaboration with International Monetary Fund back in 2023, we built the first version of StatGPT the platform that allowed users to talk about world economic and financial data using major language. It was developed based on our EPAM DIAL and EPAM Quanthub IP. As a cornerstone for the next-generation conversational data exploration and little solution for economists and statisticians.

Since then, StatGPT was presented in numerous global SDMX events, where SDMX is a set of technical standards established by European Central Bank, Eurostar, IMF, United Nations Statistical Division, World Bank and other government and semi-government agencies. This month, we delivered the next version of StatGPT 2.0, which significantly improves the way users access the world global economic data and can seamlessly guide users to the specific data they need. Just now StatGPT went over the evaluation process, which included eight large publicly available data sets from international and national statistical agencies and was conducted by more than 100 representatives from SDMX sponsored institutions and national statistical organization. In result, this month, it will be presented as a 2024 IMR statistical forum in DC in the session called Measuring and Implication of AI on the Economy.

As an alternative data access simplification platform for SDMX user’s community globally. To conclude, we are pleased with our stronger-than-expected Q3 results. Our core differentiation remains evident. We continue to deliver value, quality and excellence for our clients. We are successfully executing our global growth and our main strategy while expending market and capabilities at the same time. Finally, we continuously and rapidly upskilling ourselves in the most advanced engineering and generic capabilities. We strongly believe EPAM continues to be well positioned to capture rebound in market demand and share. Let me now turn the call over to Jason, who will provide additional details on our Q3 results and outlook.

Jason Peterson: Thank you, Ark, and good morning, everyone. In the third quarter, EPAM generated revenue of $1.168 billion a year-over-year increase of 1.3% on a reported basis or 0.9% in constant currency terms, reflecting a positive foreign exchange impact of 40 basis points. Excluding the impact of our exit from Russia, Year-over-year revenue for reported in constant currency would have increased by 1.5% and 1.1%, respectively. In addition to returning to year-over-year revenue growth, the company also saw 4 out of 6 reported industry verticals contribute positively to this growth. Along with the revenue growth, EPAM also delivered solid operating performance and profitability. Additionally, the company recognized a benefit from Polish government incentive program to further improve the company’s profitability in the quarter.

During the third quarter, the company recognized $52 million of benefit resulting from government incentives the company expects to receive for qualifying research and development activities conducted in Poland. This benefit reduced cost of revenues, improving GAAP gross margin and IFO by 450 basis points. $22.9 million of the benefit pertains to incentives for activities conducted in 2023 and this amount has been adjusted out for non-GAAP purposes. The remaining $29.1 million in benefit derived from 2024 year-to-date R&D activities in Poland, improved non-GAAP gross margin and adjusted IFO by approximately 250 basis points. We expect the incentive to be recurring and estimate that the company will receive a further benefit of approximately $9 million in Q4 2024 as well as benefits in 2025 and other future fiscal years.

While the poll and R&D incentive is reflected as a benefit to operating expense for GAAP reporting purposes, the effective tax rate during the 3 and 9 months ended September 30, 2024, was negatively impacted by the accounting with respect to the receipt of the incentive. Therefore, the positive impact of the Polish R&D incentive on IFO, net of the increase in the GAAP effective tax rate contributed $0.62 to Q3 GAAP EPS. For non-GAAP EPS, the contribution was $0.35. Moving to our vertical performance. Financial Services increased 3.3% year-over-year, driven by an improvement in demand from clients across fin-tech and banking. As well as continued strength in the insurance sector. The vertical also delivered solid sequential growth this quarter.

Life sciences & healthcare delivered very strong year-over-year growth of 14.6%. Growth in the quarter was driven by clients in life sciences, pharmaceuticals and med-tech. Consumer goods, retail and travel decreased 4.5% on a year-over-year basis, largely due to declines in consumer products and retail, partially offset by solid growth in travel. Software and hi-tech grew 2.1% year-over-year. Business information and media declined 9% compared to Q3 2023. Revenue in the quarter was substantially impacts ramp down of up 20 clients. However, in the quarter, the vertical returned a slight positive sequential growth. And finally, our emerging verticals delivered solid year-over-year revenue growth of 8.5%, driven by clients in energy and manufacturing.

From the geographic perspective, Americas, our largest region, representing 60% of our Q3 revenues, grew 2.9% year-over-year on a reported basis and 2.9% in constant currency terms. EMEA representing 38% of our Q3 revenues contracted 0.3% year-over-year and 1.3% in constant currency. However, the region showed ongoing signs of stabilization returning to sequential growth in the quarter. And finally, APAC increased 1.8% year-over-year or 0.6% in constant currency terms and now represents 2% of our revenues. In Q3, revenues from our top 20 clients grew 0.6% year-over-year, while revenues from clients outside our top 20 increased 1.7%. Moving down the income statement. Our GAAP gross margin for the quarter was 34.6% compared to 31.1% in Q3 of last year.

Non-GAAP gross margin for the quarter was 34.3% compared to 32.9% for the same quarter last year. Both GAAP and non-GAAP gross margin benefited from the Polish R&D incentive. For non-GAAP gross margin, the benefit associated with 2023 activities has been excluded. GAAP SG&A was 17.7% of revenue compared to 16.9% in Q3 of last year. Non-GAAP SG&A in Q3 2024 came in at 14% of revenue compared to 14.4% in the same period last year. SG&A improvement in the quarter is a result of our ongoing focus on managing our cost base and increased efficiency in our spend. GAAP income from operations was $177 million or 15.2% of revenue in the quarter compared to $114 million or 9.9% of revenue in Q3 of last year. Non-GAAP income from operations was $223 million or 19.1% of revenue in the quarter compared to $196 million or 17% of revenue in Q3 of last year.

Both GAAP and non-GAAP income from operations include a positive benefit from the Polish R&D incentive. For non-GAAP income from operations, the benefit from the 2023 activities has been excluded. Our GAAP effective tax rate for the quarter came in at 28.1% and our non-GAAP effective tax rate was 24.1%. As mentioned earlier, the Polish R&D incentive had an adverse impact on both GAAP and non-GAAP effective tax rate. Diluted earnings per share on a GAAP basis was $2.37. Our non-GAAP diluted EPS was $3.12 compared to $2.73 in Q3 of last year reflecting a $0.39 increase year-over-year. Both GAAP and non-GAAP EPS were positively impacted by the Polish R&D incentive. For non-GAAP diluted EPS, the benefit associated with 2023 activities has been excluded.

In Q3, there were approximately 57.4 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $242 million compared to $215 million in the same quarter of 2023. Free cash flow was $237 million, compared to free cash flow of $211 million in the same quarter last year, representing our highest level of free cash flow in our history. At the end of Q3, DSO was 74 days and compares to 76 days for Q2 2024 and 73 days for the same quarter last year. Share repurchases in the third quarter were approximately 245,000 shares for $50 million at an average price of $204.32 per share. Cash and cash equivalents were $2 billion as of the end of the quarter. Moving on to a few operational metrics. We ended Q3 with more than 47,750 consultants, designers, engineers and architects, a decline of 1.5% compared to Q3 2023.

However, we returned to sequential growth for the first time in nine quarters with net additions of 750 employees. Our total headcount for the quarter was more than 53,250 employees. Utilization was 76.4% compared to 72.7% in Q3 of last year and 77.5% in Q2 2024. Now let’s turn to our business outlook. In Q4, we expect demand in North America to continue to drive year-over-year revenue growth in the region. Additionally, we are beginning to see a degree of demand stability emerging in our European geography. As a result, we now expect Q4 2024 revenue to be approximately flat year-over-year, excluding the contribution from the NEORIS acquisition. Our guidance assumes that we will continue to deliver from Ukraine and productivity levels consistent with previous levels throughout 2024.

As mentioned earlier, we expect further benefit in Q4 related to Polish R&D government incentives. We expect our production headcount will continue to grow in Q4 and anticipate finally returning to year-over-year headcount growth after seven quarters of decline. Moving to our full year outlook. Revenue is now expected to be in the range of $4.685 billion to $4.695 billion, effectively flat year-over-year. The impact of foreign exchange on growth is expected to have a positive impact of approximately 0.2%. Our guidance reflects both improvement in organic revenues in the second half of our fiscal year plus a $54 million contribution from NEORIS for the months of November and December. We expect GAAP income from operations to now be in the range of 11% to 11.5%.

And non-GAAP income from operations to now be in the range of 16% to 16.5%. We expect our GAAP effective tax rate to now be 23%, our non-GAAP effective tax rate will continue to be 24%. For earnings per share, we expect the GAAP diluted EPS will now be in the range of $7.78 to $7.86 for the full year and non-GAAP diluted EPS will now be in the range of $10.73 to $10.81 for the full year. We now expect weighted average share count of 57.9 million fully diluted shares outstanding. Moving to our Q4 2024 outlook. We expect revenue to be in the range of $1.205 billion to $1.215 billion, producing a year-over-year increase of 4.6%. On a constant currency basis, we expect Q4 revenue to increase 4.3% year-over-year. Similar to our full year outlook, our Q4 guidance reflects a $54 million contribution from NEORIS for the months of November and December.

For the fourth quarter, we expect GAAP income from operations to be in the range of 10.5% to 11.5% and non-GAAP income from operations to be in the range of 16% to 17%. We expect our GAAP effective tax rate to be approximately 26% and our non-GAAP effective tax rate to be approximately 24%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.73 and to $1.81 for the quarter and non-GAAP diluted EPS to be in the range of $2.70 to $2.78 for the quarter. We expect a weighted average share count of 57.2 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q4. Stock-based compensation expense is expected to be approximately $44 million. Amortization of intangibles is expected to be approximately $9 million.

The impact of foreign exchange is expected to be a $1 million loss. Tax effective non-GAAP adjustments is expected to be around $14 million. We expect a tax shortfall related to stock-based compensation of around $1 million. Severance driven by our cost optimization program is expected to be $9 million. Finally, one more assumption outside of our GAAP to non-GAAP items. We maintain a significant level of cash and are generating a healthy level of interest income. However, we expect interest income to decline in Q4 due to the acquisitions of both NEORIS and First Derivative. Based on the reduction in cash resulting from these two acquisitions, we are now expecting interest and other income to be approximately $6 million for Q4. While we work our way through this cycle of stabilizing demand, we will continue to run an EPAM efficiently, positioning the company to capitalize on a more normalized demand environment.

Lastly, my continued thanks to all our employees for their dedication and focus on serving our clients and driving results for EPAM. Operator, let’s open the call for questions.

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

Bryan Bergin: Hi, good morning. Thank you. It’s good to hear the broad improvement here that you noted in client behavior over the last 3 months. Are there particular areas that are leading that recovery that you’re most optimistic about and as you just think about the discussions with these clients in recent weeks, any color you can share on early ‘25 budget discussions?

Jason Peterson: Yes. I think clearly, we’re seeing improvement in financial services. And obviously, it shows up in the results for Q3, and it’s something we would expect to see as we exit the fiscal year. It does feel like those clients have reached a point where they do need to make investments and are beginning to recognize that they’ve got to start spending again. We’re obviously seeing improvement in hi-tech and then we continue with our domain investment in life sciences and health care, we continue to see good improvement there. I don’t know that, that’s necessarily budget improvement with those clients, but probably relative success on our partner company. Probably still a little bit too early to sort of comment on what we see for 2025. But again, I think we just reiterate that there’s certainly a degree of stability and conversations feel incrementally more constructive.

Bryan Bergin: Okay. And then a follow-up, just on the Poland R&D incentive benefit here. Understanding this is expected to continue. Just all else equal, can you give us a sense of how much this will help on gross margin and just then the headwind as well on the effective tax rate as we think about refreshing ‘25 forward?

Jason Peterson: Yes. So how I think about it is that the entire benefit I guess, the $29 million for Q3, which was kind of a year-to-date number and the $9 million that we talked about Q4, all of that impacts gross margin. And so I think one of the quick takeaways is that if you just looked at Q3 and if you adjusted out Poland, we’d be at about 31.8% for gross margin on the post tax benefit, sorry, and then the adjusted IFO would still be at a quite strong 16.6%. As we look ahead, we do expect to have a, let’s call it, a similar level of kind of benefit but we continue to have that challenge where we’ve got wage inflation and the pricing environment hasn’t gotten worse I mean we do think there may be some opportunity for very modest price increases next year, but we still think we’ve got a disconnect between wage inflation and price improvement in 2025.

So I think that’s still going to kind of pressurize 2025 profitability. Somewhat consistent with what I’ve been talking about over the last couple of earnings calls.

Bryan Bergin: Okay, thank you.

Arkadiy Dobkin: Operator, we will take the next question.

Operator: Next question comes from the line of Bryan Keane with Deutsche Bank. Your line is now open.

Bryan Keane: Hey, guys. Congrats on the progress here. It’s good to see. Can you just talk a little bit about revenue per head, what you’re seeing there and what the outlook is going into 4Q and any kind of hiring and pickup in the European region that you guys are seeing that might be helping with the revenue perhaps.

Jason Peterson: Yes, you’re asking just about the mix is that we’ve talked about increases in headcount in Q3 and also said that we expect to see increases in headcount again in Q4, which is generally, as we’ve talked about, a positive leading indicator. We also think we’re at a point now where we’re beginning to see hiring more broadly globally. So not just in India or Latin America, but also in other geographies in Eastern Europe and Western Asia. So I think you’re beginning to see something that is beginning to kind of broaden.

Bryan Keane: And then just looking at the guidance organically. The third quarter came a little bit better than the fourth quarter guide at the midpoint. Third quarter basically being flat fourth quarter. I mean, just down slightly in the midpoint, maybe a decline of like 1.5% or so. Just thinking about the plus and minuses going from third quarter to fourth quarter, is there any things to think about or call outs in terms of tougher comps or just some conservatism as we go into the fourth quarter versus the improvement we saw in the third? Thanks.

Jason Peterson: Yes, you’ve got a significant seasonality impact between Q3 and Q4. So you’ve got more vacation, you’ve got more just classic holidays and then you also have for low impact. So that’s kind of what’s sort of in a sequential growth where you see a modest decline. The one thing I think I would call out, though, is that we have seen improved results in – clearly in Q3 versus our guidance but our Q4 results are stronger as a stand-alone business than we originally expected. So if you think about the guide that we did pre NEORIS, we talked about 45.90 to 46.5. If we adjust out the NEORIS the updated guidance would be 46.31 to 46.41. So again, with the stand-alone business, clearly, we saw better-than-expected Q3. At this time, we’re also expecting to see a stronger Q4 than we had expected when we did the Q2 earnings call.

Bryan Keane: Got it. Appreciate all the disclosures especially in organic growth. Thanks.

Operator: Your next question comes from the line of Ramsey El-Assal, Barclays. Your line is now open.

Ramsey El-Assal: Hi, thank you for taking my question. I wanted to follow up on the R&D incentives from Poland. And I just I’m trying to understand, is that an amount that we should think will flow into the model from here on out, I suppose, in other words, does the amount change quarter-to-quarter or year-to-year? And then secondarily, is there any other opportunity to look for incentives like that from other jurisdictions?

Jason Peterson: No, that’s a great question. And we have taken this year to evaluate opportunities, particularly as we’ve moved into somewhat more expensive geographies in Central Europe and there are some incentives that we have begun to take advantage of. And obviously, we will continue to look at that. Poland, we do think we will offer a, let’s say, a similar level of kind of benefit next year, okay? I do think at the same time, what I said earlier with Bryan is that there continues to be, I would say, not a worsening in the pricing environment, but just not an improvement in the price environment. And at the same time, we have wage inflation. So I have kind of been talking for a while about thinking about profitability in somewhat below our 16% to 17% range in 2025.

So again, somewhat below 16% to 17% and I think that even with the Polish incentive, I would still encourage people to think about our business in that way, again, just because I think what you’ll see is a modest price improvement environment next year and at the same time, we will still be exposed to some degree of wage inflation.

Ramsey El-Assal: Okay. A quick follow-up for me. On M&A, you mentioned continuing to strategically invest in capabilities. You guys have obviously been pretty active lately. Should we expect a similar level of activity in the quarters ahead and sort of what types of assets are you looking for?

Arkadiy Dobkin: I think I don’t think we expect the same level of size impact. And in general, our approach for acquisition didn’t change much. We will also assess related to [indiscernible] but it’s function of components. It just happens that Polish just play right in our opinion during the last quarter. But in the future, we will be focusing as we lead into best [Technical Difficulty] that would be more in line with what you said before, it would be small acquisitions with specific purposes on capabilities or very specific leaders.

Ramsey El-Assal: Okay. Thank you.

Operator: Your next question comes from the line of Jonathan Lee with Guggenheim Securities. Your line is now open.

Jonathan Lee: Great. Thanks for taking our questions and tremendous to see the improvement in demand here. Historically, you have talked about expecting a reversion back to delivery in Eastern and Central Europe as demand picks back up. Have you seen any meaningful evidence of that in your customer conversations just yet?

Jason Peterson: We begun to see some recovery in demand for Eastern Europe.

Arkadiy Dobkin: Yes. I think as Jason mentioned already, we are starting to carry across all locations. During the previous quarters, India was absolutely champion and Latin America was probably the second. Right now, Eastern and Central Europe becoming – is the focus for us to increase capacity, because it’s what we see in some clients, 2022 kind of trust, we stabilize it, majority ‘26, and they also much more right now for the diversified teams not only India. So, we will see how it works. Again, as we mentioned before, we don’t want to pay the infusion to large, but that’s a trend which we are seeing right now.

Jonathan Lee: Thanks for that and a follow-up. It’s good to see improvement across your top accounts. Are you seeing any shifts in the makeup of that cohort? And have there been any other changes to the type of work or again, delivery geographies that you are seeing pursued from those accounts?

Arkadiy Dobkin: Yes. We are seeing positive changes in general from just stabilization to activation of more transformational programs. And we have seen not necessarily consistently, but much more offer when programs started to go to realization much faster than we saw several quarters ago. So, it’s again, positive movement from our side. Even now we, given a situation when suddenly plan to start as to accelerate much faster than we would expect if anyone go to it like again during the next or last couple of quarters. There is positive opinion while, again, we all need to understand that it even changes quickly, plus there are too many external factors which we foresee then we go ahead with those [Technical Difficulty] have more projections, but it’s much better, Jon.

Jonathan Lee: Thanks for that detail.

Operator: Your next question comes from the line of Maggie Nolan with William Blair. Your line is now open.

Maggie Nolan: Thank you. Could you talk a little bit about any underlying profitability improvements you have seen this quarter, either sequentially or year-over-year when you exclude the Poland related benefit?

Jason Peterson: Yes. When we have been working to obviously improve utilization, and that’s had a positive impact. You have also seen, obviously, the improvement in SG&A as a percentage of revenue. So, I think those are the two positives. And as we have been talking about, we continue to have not a pricing impact that is changing, but just we have a promotion campaign. Early in the fiscal year, we haven’t seen much price improvement throughout the year. And so when you do year-over-year comparisons, that still shows up. But we still have an opportunity to work on pyramid. And again, we are beginning to introduce more juniors as well as beginning to as Ark talked about staff a little bit more broadly globally.

Maggie Nolan: Thank you. And then could you spend a little time on your plans for integrating these acquisitions, and in particular, driving synergies, maybe some commentary around the margin profiles of these acquisitions and your plans for the trajectory there?

Jason Peterson: Yes. So, let me first say that with NEORIS, we have been specific that we expect a contribution of $54 million in Q4. And then we have not provided any direction for First Derivative, which has not closed yet. We do expect that it would close later in the quarter. But we don’t have any contribution from that acquisition in today’s guidance. From an integration standpoint, the clear focus right now is really on revenue opportunities and we are already pursuing quite actively a number of engagements where we are kind of jointly working with NEORIS as sort of NEORIS-EPAM combined to meet the needs of some existing clients and some newer opportunities. And so I would say that the first focus really is on, again, revenue growth and that’s one of the things that we think is very exciting about the combination of EPAM and NEORIS.

Just to pick up the profitability question, we do expect that both of these acquisitions will have somewhat lower profitability than EPAM standalone. And so whereas we have talked about historically sort of 16% to 17%, and I have said, we would probably be a little bit below that in 2025 both First Derivative and NEORIS would likely to contribute more in sort of the low-teens. And so we will have a modestly negative impact on adjusted IFO [ph]. But again, when I guide in this sort of slightly below 16%, most of the impact really is floor in this sort of pricing, wage inflation disconnect.

Arkadiy Dobkin: I think I would add that what you guys collect is these companies, we are focusing very much on the quality of probably, capabilities and quality of engineering in most cases. So, because from integration perspective, we are also very carefully focusing right now to understand deeper capabilities, deeper characters of the company because when you do the due diligence under pressure, to win these deals, time is very compressed. So, at the same time, we know there are some areas where we definitely have the business, and we understand the risk on how to improve all the financial parameters as well because like in a broad market, this company is placed today more traditional capabilities and capacity we can bring to their clients.

It’s all – we will be working our opinions we have [ph] next year, because it’s not, again, right after on its kind of one plus one equal something you can collect it, but the core synergies being realized in the next couple of years.

Maggie Nolan: Thank you.

Operator: Your next question comes from the line of Surinder Thind of Jefferies. Your line is open.

Surinder Thind: Thank you. Jason, can you maybe comment on margins more from a structural perspective as you think about a more diversified global delivery footprint. Anything we should be aware of there, versus maybe having a more concentrated footprint in the past?

Jason Peterson: Yes. We have talked about this, I think throughout if this is a question about India versus Eastern Europe versus Western, but is that the margin profiles of the businesses are, I think more similar than I think people understand or have believed. And so I don’t think a shift into one geography or another produces a radical change or a significant change in the profitability levels. I think what really has been kind of impactful has been both the increasing sort of seniority pyramid globally. And then just this environment that has, again, has us still do it from us in appropriate wage increases without being able to pass those done to clients. And so what Ark and I were talking about yesterday, is it with a change in the demand environment, clearly, the first thing that you would see is an improvement in revenue.

And then you might see a lag in terms of the ability to also improve pricing. But we do think that, that comes eventually with a future improvement in the demand environment.

Surinder Thind: That’s helpful. And then in terms of just the pyramid at this point and the reshaping of the pyramid, is there a way that you can perhaps quantify the opportunity in terms of the seniority versus the general employees, or how we should think about that on a go-forward basis?

Arkadiy Dobkin: I think we need to think about it on a going basis. And the simple answer is that even pyramid, I know there is someone else, that it might depend on how demand market will change, how much it will be accelerated and across good locations, because we definitely wish a seniority, and we are doing whatever we can encouraging environment. But we think exactly how it will be benefit like 12 months from now. We need to understand how the next 12 months will look like from the demand perspective. But we have [Technical Difficulty] We have different models to address it. And we never stop our kind of educational and recruitment improvement for development. So, comfortable that we would be able to start hiring and scaling better, whether it will be necessary, specifically in the near-term component.

Jason Peterson: It is a dial that takes time to show benefit. Both the demand environment needs to be somewhat better, and then it takes some time.

Arkadiy Dobkin: But we definitely had an opportunity because our pyramid right now is more senior than in traditional back in the time. So, we have opportunity to benefit.

Surinder Thind: Thank you.

Operator: Question comes from the line of David Grossman with Stifel. Your line is now open.

David Grossman: Good morning. Thank you. And I know you have talked quite a bit about the overall demand environment. And sorry if I missed the nuance here, but perhaps you could just repeat how much of the improvement you are seeing is macro demand-related factors as opposed to clients just becoming more comfortable with the new diversified delivery platform?

Arkadiy Dobkin: That’s a great question and almost impossible answer because mantra and geopolitics play huge work in direct. And at the same time, like any total level, I can say that what we were talking about it enterprise, then all benefits from new technology whereas of GenAI introduction that’s what we implied to understand that they need to do something now to believable for the benefits in the future. And some clients really starting to pay much more attention to data and general cloud infrastructure, not so easy and started to invest in this. We see a change versus several quarters ago, but how to quantify, it’s ready to go.

Jason Peterson: I mean there is a lot of different things that are kind of moving the needle. And maybe in some of the markets, financial services are a little bit in hi-tech. It feels like there is maybe some improvement in budget. One of the other things we are seeing, David, and we have talked about over the years is that we are beginning to see some clients return to us based on quality challenges they have had with other vendors. It’s still again on the margin. But as we do our own internal channel checks, we have multiple examples of accounts that are beginning to grow again or new logos that are growing because of clients being somewhat exhausted with the experience they have had with other vendors, or return to quality method.

Arkadiy Dobkin: Yes. And in total basis, visibly more clients come back to us. I didn’t bid the clients to start working with those clients who decrease to a lot, starting to come back with visible level of growth, one point. And then we started to see clients which we started relatively recently and scaling up vintage [ph] for us at least kind of tens of millions in revenue annually, which wasn’t really often for us during the last 12 months, 18 months to 24 months.

David Grossman: Got it. And I just – I know you have talked quite a bit about Poland and margins and sorry again to ask this question. But just to be clear, Jason, do you want us to start slightly below the 16% to 17% level next year and then add the benefit from Poland, which would be roughly equivalent to the $38 million we got in ‘24?

Jason Peterson: So, I am glad we are having this very explicit opportunity to clarify is that we do expect to see benefits from Poland. And at the same time, I would prefer that you continue to use something slightly below 16% as you think about 2025.

David Grossman: So, slightly below 16%, inclusive of the $38 million that you would get from Poland next year, is that correct?

Jason Peterson: That is correct.

David Grossman: Got it. And sorry, just if I could sneak one last one in here. Just the headcount, I did see the headcount grew 600 people sequentially. However, it looks like 550 of those were non-IT people. Did I read that right with only 50 being IT, if I got that right, is there a reason there is such a big increase in non-production folks?

Jason Peterson: I thought we had 750 headcount that were production. So, we can go back over that with you, but now we have production headcount increases, most of the increase. And again, we expect the production headcount increase again in Q4.

David Grossman: Got it. Okay guys. Thanks very much.

Jason Peterson: Sure.

Operator: Line of Jason Kupferberg with Bank of America/Merrill Lynch. Your line is open.

Jason Kupferberg: Thank you, guys. I just wanted to come back on organic year-over-year growth. So, you were flat in Q3, you are down, call it, 1.5% in Q4 at the midpoint, but it does sound like demand is getting better. I mean is there any reason to think that you won’t return to meaningfully positive organic revenue growth year-over-year in 2025?

Jason Peterson: We would definitely expect to return to organic revenue growth in 2025. I guess the question is what’s the definition of meaningful, but yes, we are looking to return to growth next year.

Jason Kupferberg: Okay. And then just on NEORIS, can you clarify what the organic revenue growth profile of that asset is as well as the client concentration, I think from CEMEX there, just given the captive model.

Jason Peterson: Yes. So, we talked about $54 million in November and December. December is usually a somewhat soft month just because of the holidays and vacations and that type of thing. And so I think if you go to take those two months and multiply it by six, you probably add a little bit to the two months to kind of get to a number. It is a growing business. CEMEX obviously is a significant customer for NEORIS and will be a significant customer on NEORIS. But it’s not a huge percentage of their business, right. It’s just a significant customer. They have got other customers in that same kind of space, let’s call it, manufacturing or materials, they also have some presence in financial services. So, again, it’s not as if CEMEX is a majority customer or anything.

Jason Kupferberg: Okay. Sorry, how fast is with CEMEX – I am sorry, how fast was NEORIS growing on its own organically before you bought it?

Jason Peterson: I don’t think we have talked about that yet. And I probably won’t do it right now, but we will decide what we discuss probably as we get into next year. But again, it’s a growing business, and we have talked about in excess of $300 million, you can take the November-December. And as I said, add a little bit to it and probably multiple by six to kind of get a $0.01. But again, we are not only excited about the growth of the business, but also specifically our opportunity to grow in aggregate as we combine our two capabilities and address markets that EPAM has not historically addressed.

Jason Kupferberg: Okay. Thank you.

Operator: At this time, I would like to inform everyone that we still have one time for one more question. Your next question comes from the line of Puneet Jain with JPMorgan. Please go ahead.

Puneet Jain: Hi. Thanks for taking my question. So, earlier this year, you talked about improving employee productivity in new regions, which were still slightly below what you had in Eastern European countries. Can you update us on LatAm, specifically with NEORIS acquisition there, LatAm being like a much larger region for you? And India, like how is employee productivity there?

Arkadiy Dobkin: So, essentially would be much more comfortable to talk about it like in a couple of quarters. But based on our current assessment, we expect that engineering well is region and in many areas comparable to what we see across our centers as well. So, when you talk about productivity is how we manage these basic investments [Technical Difficulty]. This is very different metric and the best very much from the market were separate. And as you know, duration the revenues coming from Latin America, which is different markets. We hope that we will be able to impact this, but we also hope we will be served together on joint client basically of global companies operating in Latin America and of course increase opportunity and impact on our North American clients is very scalable now. So, then that’s what I feel we will need to talk about this [Technical Difficulty].

Puneet Jain: Got it. And as we think about 2025, are there any client-specific headwinds that we should consider or most of them are behind you by now?

Arkadiy Dobkin: We – as we mentioned, again, those want to predict mostly what we cannot right now. There are too many new factors even today, okay. At the same time, like we think about like what exchange reach – in the calculations like very visible to us even for Q4 right after election. So, there are a lot of sales which is unpredictable. There are [Technical Difficulty] which didn’t happen 1 year ago when we were a little bit more optimistic and we are trying to predict the future. So, let’s say, what would happen, how we saw global politics will be shaped, how it’s going to impact the market and what will pressure our plants will have to actually starting to fight the technical that which is, in our opinion, still very, very deep.

Puneet Jain: Thank you.

Arkadiy Dobkin: Thank you very much for listening to us today. I think in summary, we would like to say again, that we reached best our Q3 results. We are also realistically optimistic how Q4 is shaping which is good. And we would like to remind, we definitely believe that EPAM continues to be well positioned and to capture rebound in market demand in the future as well. So, with this, let’s say, three months from now. Thank you very much.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.