Thank you for joining us. My name is Eric, and I will be your conference operator today. I would like to welcome everyone to the First Quarter 2024 EPAM Systems Earnings Conference Call. I will now turn the call over to David Straube, Head of Investor Relations. Please proceed.

Thank you, operator. Good morning, everyone. By now, you should have received a copy of the earnings release for the company's first 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'd 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'd like to now turn the call over to Ark.

Thank you, David. Good morning, everyone. Thank you for joining us today. First, about our guidance change. As you saw from our press release, we are experiencing some continuing volatility in our global demand environment. While there are encouraging signs of new deals in different domain-specific demands, the cyclical nature of 2023 follows us into 2024, which leads us to adjust our thinking for both Q2 and for the full-year outlook. As I mentioned during our fourth quarter earnings call, our initial view was that the 2024 environment would be, particularly for the first half of the year, a continuation of the trends from the second half of 2023, with potential demand upturn following into sequential growth for 2024. This view, which now seems optimistic, was supported by widely anticipated more positive macro assumptions and our active interactions with clients towards the end of 2023 and the beginning of 2024. We believed that clients would rapidly return to growth and re-prioritize projects for the remainder of 2024. However, we now understand that the macroeconomic and geopolitical factors causing market volatility, especially in the IT services and digital transformation sectors, persist throughout the year. While the programs we anticipated to start by now remain in place and some are in discussions, many have been postponed or scoped down significantly. Furthermore, our need to rebalance our delivery platform to lower-cost locations has also contributed to a slowdown in our revenue growth. Hence, our expectation for a considerably accelerated revenue trend in the second half of the year will not materialize as we previously anticipated. Jason will provide more details on our updated 2024 outlook, but let me share some current highlights of our business from Q1 up to today. Throughout the last quarter, and continuing now, we've made progress across all critical areas for us that were discussed in detail during our previous call. We are strengthening and repositioning our Italian delivery platform to increase the cost-effectiveness of our offerings by reallocating our distribution from higher-cost to lower-cost locations, while maintaining our commitment to traditionally strong regions. India, our second-largest delivery location, is growing rapidly in both headcount and new capability centers focused on data, cloud, digital transformation, and AI-enabled managed services. We've recently opened our Gurugram office and plan to establish additional locations to support our clients' growing needs. LATAM is another priority for our overall rebalance. As we refine and expand our locations there, we're also enhancing our key engineering GenAI capabilities and divisions. In Q1, we announced the acquisition of Vates, a multi-award-winning software development company with offices in Argentina and Chile. We continuously invest in existing and new technical capabilities, crucial for the future, including GenAI, data, ML, predictive AI, and corresponding IP development. We also continued to improve our domain industry capabilities in consulting and advisory services. At the beginning of 2024, we observed encouraging signs of a more balanced demand environment across our business, with both new and existing clients equally represented between cost takeout and business transformation and modernization. This portfolio-wide view, combined with our efforts to establish relevant domain-specific go-to-market approaches, leads us to believe that our ongoing reinvestments in consulting experience, cloud data, AI, and vertical-led solutions provide us with a unique edge for long-term growth. A couple of short stories to illustrate the above. EPAM recently collaborated with AWS Health and a leading UK energy firm to revamp their customer experience, responding to a market characterized by heightened customer expectations, emerging competitors, regulatory demands, smart metering adoption, and growth in sustainability initiatives. Our engagement focused on crucial transformations of payment channels, customer service frameworks, and shifting to agile processes for enhanced service flexibility. For a new client, one of the world's most recognized global car rental brands, we are redesigning a critical data platform to enhance intelligent real-time pricing capabilities, improving customer experiences and boosting their pricing and market leadership. We believe this represents the next iteration of platform engineering into genuinely intelligent applications powered by AI, shaping future demand. Additionally, another positive development is that our long-term clients are returning to us with new streams focusing on modernization and next-gen support, expanding the engagement footprint with significant shares in India and Latin America, including new delivery centers in Argentina and Brazil. Overall, our emphasis on domain-led propositions is why we believe we've observed robust growth in certain verticals this past quarter. For example, in our healthcare and life science portfolio, we contribute to various strategic programs supporting clients in cloud, data platform, physical digital product development, and new GenAI-driven initiatives. Conversely, in some verticals, such as business information and media, we are still addressing the impact of ramp-downs from a few large clients initiated previously. Although we have yet to offset this with new revenue opportunities, we are seeing a more balanced picture emerging in the coming quarters. Across all our verticals and geographies, we notice increasing interest and higher levels of program initiations related to generative AI. In Q1, several key clients selected EPAM as their strategic partner for AI transformation journeys, where we will help scale AI, including GenAI, to unlock the power of data and establish valuable insights. These engagements often commence with advisory and leveraging our proprietary IP before expanding to specific use cases. We believe this leads to a new level of interaction with our clients, enabling meaningful business breakthroughs through our tools alongside our consulting and scaled delivery capabilities. While the revenue impact of these initiatives is currently limited, we see visible progression in the AI-enabled services market for us. To summarize, while in Q1, across our core business, we observed a more balanced demand outlook than in the majority of 2023 and a gradual return to modernization and business transformation programs, alongside the growth of GenAI-related opportunities, we recognized by the end of Q1 that the speed and scale of these changes were not in line with our earlier expectations. Regarding how we manage our business in this phase of the cycle, we are focused on driving new demand while proactively expanding our share of client wallets. We are also seeking to enhance efficiency and focus throughout the organization. Last year, we shared our ongoing efforts to rebalance the business geographically, and that program continues. Our focus is now shifting towards a more finely tuned approach to both geographic investment and capability areas, particularly around our targeted market segments: AI, cloud, data, experience, and domain-led consulting. We have gone to market more intentionally with key propositions and strategic partnerships, and we are now looking to refine some of those propositions and investments as we seek to balance near-term and long-term demand against our investments. Throughout the rest of the year, we will prioritize enhancing efficiency and further rebalancing our geographical footprint, resizing certain portions of our teams, and improving operational efficiencies and engineering productivity through the application of AI and automation within EPAM, all while maintaining a client-centric focus across the company. These continued efforts are crucial as we navigate the current environment, taking necessary steps towards the eventual return of build and transformation programs, which have been slowed over the past two years. Our fundamentals remain robust, and we are confident that EPAM will be in a strong position during this rebound, backed by our diverse global delivery platform and driven by enduring modernization needs of legacy systems, the demand for advanced customer-centric solutions, and the significant interest in integrating GenAI capabilities into new and existing enterprise platforms along with innovative business models.

Thank you, Ark, and good morning, everyone. In the first quarter, EPAM generated revenue of $1.165 billion, a year-over-year decrease of 3.8% on a reported basis or 4.3% in constant currency terms, noting a favorable foreign exchange impact of 50 basis points. Due to our exit from the Russian market, we will no longer generate revenue from Russian clients, which had an approximately 50 basis point negative impact on year-over-year revenue growth. Excluding Russian revenues, the year-over-year revenue for reported and constant currency would have decreased by 3.3% and 3.8%, respectively. Moving to our vertical performance, life sciences and healthcare delivered very robust year-over-year growth of 26%. Growth in the quarter was propelled by clients in both life sciences and healthcare. To reflect a more diverse end market, our travel and consumer vertical has been rebranded as consumer goods, retail, and travel. On a year-over-year basis, the vertical decreased 6.9%, primarily due to declines in retail, which were somewhat offset by solid growth in travel. Sequentially, the vertical saw slight growth driven by strong sequential performance in travel. Software and hi-tech contracted by 8.3% year-over-year but grew 2.6% sequentially, suggesting some stability within the vertical. Financial services saw a 10.3% decrease year-over-year, driven by declines in banking, asset management, and the payment sector. Business information and media declined by 15.8% relative to Q1 2023, with revenue in the quarter heavily affected by the ramp-down of a top-20 client. Finally, our emerging verticals achieved solid year-over-year growth of 12.9%, led by clients in energy and telecommunications. Geographically, the Americas, our largest region, accounting for 59% of our Q1 revenues, declined by 2.4% year-over-year across both reported and constant currency. Sequentially, however, growth was 2.4%, indicating signs of stabilization in this geography. EMEA, which represented 39% of our Q1 revenues, contracted by 3.2% year-over-year and 4.8% in constant currency. Lastly, APAC experienced a 13.1% year-over-year decrease, or 11.5% in constant currency terms, now accounting for 2% of our revenues. This decline was primarily due to work ramp-downs within our financial services vertical. In Q1, revenues from our top-20 clients dropped by 8.6% year-over-year, while revenue from other clients outside this group decreased by 1%. The stronger performance of the latter was driven by both new logos and inorganic revenue contributions. Regarding income, our GAAP gross margin for the quarter stood at 28.4%, compared to 29.3% in the same period last year. Non-GAAP gross margin for the quarter came in at 30.4%, down from 31.5% a year ago. Gross margins were negatively impacted by foreign exchange fluctuations due to the strengthening of currencies in certain of our delivery locations, alongside a failure to adjust prices post our Q2 2023 promotional efforts. GAAP SG&A represented 17% of revenue, a slight decrease from 17.5% in the previous year. Meanwhile, non-GAAP SG&A in Q1 2024 was 14.1% of revenue compared to 15.3% in the same period last year, reflecting our ongoing focus on managing our cost base and enhancing efficiency. GAAP income from operations reached $111 million or 9.5% of revenue this quarter, compared to $120 million or 9.9% from the prior year. Non-GAAP income from operations was $174 million or 14.9% of revenue, compared to $178 million or 14.7% for the same quarter last year. In terms of taxes, our GAAP effective tax rate for the quarter was 6%, including a higher level of excess tax benefits related to stock-based compensation, while the non-GAAP effective tax rate was 23.4%. Diluted earnings per share on a GAAP basis stood at $1.97, with our non-GAAP diluted EPS at $2.46, slightly down from $2.47 last year, reflecting a $0.01 decrease. We had approximately 58.9 million diluted shares outstanding in Q1. Moving on to cash flow and the balance sheet: cash flow from operations for Q1 reached $130 million compared to $87 million in the same quarter of 2023, reflecting a lower level of variable compensation payouts related to the previous year. Free cash flow was $123 million, an increase from $79 million in the same quarter last year, with DSO at 73 days, an uptick from 71 days in Q4 2023 and 69 days in the same quarter last year, reflecting an increase in the time clients are taking to review and approve payments. In terms of share repurchases, approximately 396,000 shares were bought back in the first quarter for $121 million at an average price of $304.21 per share. As of March 31, we had about $214 million of share repurchase authority remaining, and we ended the quarter with approximately $2 billion in cash and cash equivalents. Moving on to some operational metrics: we ended Q1 with over 47,050 consultants, designers, engineers, and architects, which is an 8% decline compared to Q1 2023. This decline is due to lower hiring levels, coupled with both voluntary and involuntary attrition as we continue to balance supply and demand. Our total headcount for the quarter was over 52,800 employees, with utilization at 76.8% compared to 74.9% in Q1 of last year, and 74.4% in Q4 2023. Turning to our business outlook, we continue to see modest demand improvement; however, client decision-making remains cautious, and demand has not improved as expected. When we set our original 2024 guidance, we anticipated Q2 would show flat to modest sequential improvement, followed by solid growth averaging at least 3% for Q3 and Q4. However, we now expect seasonal factors to have a more significant impact on sequential revenue growth, with Q2 projected to show a modest decline, Q3 improving, and Q4 potentially remaining flat or declining slightly. While we are observing some incremental revenue contributions from recently completed acquisitions, that impact is largely offset by foreign exchange headwinds resulting from the strengthening U.S. dollar. We remain focused on driving demand generation and will prioritize revenue growth throughout 2024. In 2024, we anticipate incurring additional costs related to compensation. Furthermore, lower utilization for EPAM's in-market resources and ongoing pricing pressure will continue to negatively affect gross margins. Nevertheless, we are committed to achieving a profitability level of at least 15% for our non-GAAP adjusted IFO. We plan to implement additional cost-saving measures to attain our profit objectives while still focusing on long-term growth. Our operations in Ukraine are running at high utilization levels, showcasing our team's commitment to maintaining consistent delivery quality. Our guidance assumes we will continue to deliver from our Ukraine centers at productivity levels similar to those achieved in 2023. For our full-year outlook, revenue is now projected to be between $4.575 billion and $4.675 billion, reflecting a negative growth rate of 1.4% at the midpoint of the range. The impact of foreign exchange on growth is now forecasted to be a negative approximately 30 basis points. We expect about 1% of revenue from already completed acquisitions. Our GAAP income from operations is anticipated to be between 10% and 10.5%, while our non-GAAP income from operations is expected to range from 15% to 15.5%. Our GAAP effective tax rate is now expected to be 20%, whereas our non-GAAP effective tax rate, excluding excess tax benefits related to stock-based compensation, will remain at 24%. For earnings per share, we expect GAAP diluted EPS to be in the range of $7.34 to $7.64 for the full year, while maintaining non-GAAP diluted EPS within the range of $10 to $10.30. Our predicted weighted average share count stands at approximately 58.7 million fully diluted shares. In terms of the Q2 2024 outlook, we expect revenue to lie between $1.135 billion and $1.145 billion, indicating a year-over-year decline of 2.6% at the midpoint of the range, with the anticipated foreign exchange impact being negative 0.6%. For Q2, we project GAAP income from operations to fall in the range of 9% to 10%, while non-GAAP income from operations is expected to be between 13.5% and 14.5%. Our GAAP effective tax rate is forecasted to be around 25%, while the non-GAAP effective tax rate is estimated at approximately 24%. We anticipate GAAP diluted EPS to be in the range of $1.52 to $1.60 for the quarter and non-GAAP diluted EPS to lie between $2.21 and $2.29. Our expected weighted average share count stands at approximately 58.8 million diluted shares outstanding. A few key assumptions that support our GAAP to non-GAAP measurements for the rest of the year include an expected stock-based compensation expense of approximately $38 million for Q2, $46 million for Q3, and $47 million for Q4. The anticipated amortization of intangibles remains at approximately $6 million for each of the remaining quarters. We expect the foreign exchange impact to be around a $1 million loss for each quarter. Tax-effective non-GAAP adjustments are expected to be around $10 million for Q2 and $11 million for each of the remaining quarters. Finally, we anticipate excess tax benefits to be around $1 million for Q2 and $1.7 million for each of the remaining quarters. We are planning for incremental restructuring charges in the second half of 2024, although these amounts cannot be estimated with reasonable certainty at this moment. Detailed estimates will be provided during our Q2 call. It's important to note that these charges will not impact our non-GAAP results. Additionally, with our significant cash position, we anticipate generating a healthy level of interest income, expecting interest and other income to be around $15 million for Q2, $20 million for Q3, and $15 million for Q4. As we navigate through this period of lower demand, we will continue to manage EPAM effectively, positioning the company to take advantage of a normalized demand environment. I would like to express my continued thanks to all of our employees for their dedication and focus on serving our clients and achieving results for EPAM. Operator, let's open the call for questions.

Your first question comes from the line of Bryan Bergin with TD Cowen.

I wanted to start with some more detail on the change in the growth outlook here and ultimately trying to unpack attribution here to macro market-driven slowness versus more idiosyncratic factors to your turnaround and exposure. Can you talk about whether this is really broad-based across the portfolio or more due to a handful of larger client-specific slowdowns? Is there any attribution to a change in clients' reception to Ukraine or Belarus delivery?

Thank you. I think in our opening remarks, we reflected exactly what was happening from our perspective. Based on the Q4 level of optimism, I would say, and the beginning of Q1, we were attempting to predict how potential growth would look like versus ongoing conversations and standard opportunities. However, in the latter part of Q1, we realized that many programs were delayed and some had started but at a reduced scope. Hence, we focused on our current observations rather than attempting to predict future market and economic trends.

Yes, Bryan. As Ark mentioned, at this point, rather than hoping for demand improvement, we are relying on what we observe today, which indicates slow client decision-making. Budgets are being partially released, and some programs have been descoped. Consequently, we are not seeing the level of improvement that we had anticipated. This was indeed a miscalculation on our part.

Okay. That's very good detail. My follow-up here is partly on that. As you're refining the global operations and rebalancing the delivery platform, if I heard correctly, it sounds like the structure became a bit too distributed across countries, and you're trying to rein that in. Can you provide more color on how long this may ultimately take? Additionally, Jason, on that last point, can you quantify how much the shift to lower-cost locations weighs on this year's growth?

Yes. If we consider a constant currency calculation and assess if the mix were the same as in 2023, we estimate that this could represent an impact approaching $100 million on a year-over-year basis. India continues to grow rapidly; however, the cost structure is lower, and while its profitability remains solid, it does present headwinds to our revenue growth. While this was anticipated in our guidance, it may not have been fully accounted for.

Given the way you positioned the demand environment in your prepared remarks, what in your customer conversations gives you confidence that you're able to achieve sequential growth in Q3 and potentially flat in Q4? Is the dynamic for Q3 more a function of bill days?

Are you referring to sequential growth in Q3?

Yes, Jonathan. The guidance for Q3 growth is heavily influenced by seasonal factors; thus, the growth from Q2 to Q3 would be driven primarily by the increased availability of bill days in Q3.

Just as a follow-up, I'd like to build on Bryan's earlier question. You’ve noted the expansion in India. Are you confident in the quality and harmonization of delivery you're seeing there, and how much more work remains?

We are confident about the quality of our India delivery; we believe it is differentiated compared to our competitors. We continue to have strong quality in our Eastern European delivery as well, but we are pleased with the differentiating work we have achieved in India. We maintain a capacity to scale this geography and are experiencing low attrition levels.

I understand the commentary about the rate cards in India and how that's impacting your top line, but it also seemed there were some delays and pushouts of projects. It didn't sound like much in the way of cancellations, which is encouraging. Were there particular types of projects or verticals that drove your change in expectations?

It's fairly broad; no single vertical is to blame. Certain verticals, like healthcare and life sciences, are performing well, while others, such as business information and media, are facing various challenges. The general trend is one of caution; several programs expected to launch in Q2 have either been postponed or reduced in scope. However, conversations continue, with no cancellations to report.

Feedback indicates that some clients are slow to activate budgets, despite having them available. This caution seems to be particularly present in Europe, while North America appears to have stabilized, as we noted during our prepared remarks.

Regarding pricing, we haven’t observed any dramatic changes. Generally, slower decision-making, particularly in Q2, is impacting various elements such as billable hours and foreign exchange rates.

Demand remains challenging, and pricing expectations have not improved, as the pricing environment continues to be tough in India. However, it hasn't worsened from our previous experiences.

As you assess the pricing environment, are you seeing any significant pushback from clients on current arrangements, particularly as the competition from lower-cost locations like India increases?

While we see competitive pressure, it has not yet resulted in significant changes to pricing arrangements. However, we believe the pricing environment will need to improve in line with demand growth.

We will focus on strategic investments in India as outlined in previous discussions. As demand increases for in-market resources, we may see more pressure on bench levels. However, we will continue our investments in both India and Latin America. Our DSOs are a bit higher now due to clients taking more time to review payments. We believe this turnaround will remain above 70 days throughout the year, but we do not have concerns regarding revenue recognition. Unquestionably, the ramp-down of certain projects has an impact on our growth rates, particularly regarding our BIM clients and their corresponding adjustments to spending. These adjustments, while expected, have influenced our top-20 client revenue streams.

We believe strategies to enhance client delivery quality and diversify our geographical capabilities will serve us well, leading eventually to improved demand.

Regarding competition in India, what are your observations of the vendor landscape? Are there any notable dynamics you're seeing compared to more established service delivery locations?

We’re pleased with our progress in India, which is expected to grow rapidly in terms of headcount, potentially rivaling that of Ukraine. While our competition includes several established companies, we continuously enhance our quality and offerings, which allows us to retain our differentiation.

We do not strive to be the lowest-cost provider in any region; we prioritize differentiated quality, which enables us to command higher rates in India compared to others.

In terms of client retention, we see stability within our top 20 clients, with visible growth from some of them and a few that are beginning to ramp up their engagements with us.

While the pipeline exists, conversions are slower than anticipated. How quickly might programs ramp up if macroeconomic conditions improve?

The demand environment is uncertain, and while we are preparing ourselves for potential changes, we do not expect this shift to be immediate. We aim to maintain robust operations to support a future rebound when demand shifts in our favor. Yes, some clients who previously left or downsized are beginning to re-engage with us for projects, which is a positive sign for our growth.

Could you provide insight into your margin projections as we progress through the year?

We anticipate lower gross margins in Q2, around 30%, but expect improvements in the second half of the year. The industry environment plays a role, and we are making strides in managing costs accordingly.

What percentage of your portfolio do you consider discretionary versus nondiscretionary spend, given your recent demand trends?

The nature of our portfolio, particularly in modernization and new builds, means much of it could be classified as discretionary spending, which clients may opt to delay in a cautious environment. In our market, we anticipate a broad stabilization, but the exact timeline remains uncertain. What remains clear is our commitment to maintaining quality across all delivery locations. Yes, we will pursue strategic acquisitions and share buybacks to complement our investments and create value for shareholders moving forward.

Thank you for joining us today. We look forward to our next call, aiming to provide pragmatic insights into our operations. It's encouraging that we are not facing inquiries about our GenAI strategies, which we believe are progressing positively.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.