EPAM Methods (EPAM) Q3 2022 Earnings Name Transcript

November 3, 2022

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EPAM Methods (EPAM -5.85%)
Q3 2022 Earnings Name
Nov 03, 2022, 8:00 a.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Individuals

Ready Remarks:

Operator

Good day, and thanks for standing by. Welcome to the EPAM Methods third quarter 2022 earnings name. [Operator instructions] Please be suggested that at the moment’s convention is being recorded. I’d now like handy the convention over to your speaker at the moment, David Straube, head of investor relations.

Please go forward.

David StraubeHead of Investor Relations

Thanks, operator, and good morning, everybody. By now, it is best to have acquired your copy of the earnings launch for the corporate’s third quarter 2022 outcomes. When you’ve got not, a duplicate is accessible on epam.com within the traders part. With me on at the moment’s name are Arkadiy Dobkin, CEO and president; and Jason Peterson, chief monetary officer.

I might wish to remind these listening that a number of the feedback made on at the moment’s name could include forward-looking statements. These statements are topic to dangers and uncertainties as described within the firm’s earnings launch and SEC filings. Moreover, all references to reported outcomes which might be non-GAAP measures have been reconciled to the comparable GAAP measures and can be found in our quarterly earnings supplies situated within the Traders part of our web site. And now I might like to show the decision over to Ark.

Ark DobkinPresident and Chief Govt Officer

Thanks, David. Good morning, everybody. Thanks for becoming a member of us this morning. Let me start at the moment with a easy assertion that we’re very happy with all the pieces EPAM achieved over our almost three a long time and that we’re very grateful to the individuals of EPAMers for his or her super contribution over these years.

And I would really like additionally so as to add another thought, which feels crucial to carry to the highest of our dialog. Whereas everyone knows that the conflict in Ukraine continues to be dominating world headlines and we’re seeing this ripple impact throughout many sectors and geographies, for us at EPAM and many individuals round us, this conflict continues to be a really central a part of our lives, deeply private and a continuing precedence. With that, I wish to begin with an replace on our progress throughout our four-phase method, which we shared with you six months in the past again in Might, in addition to an replace on some changes we’re making because of newly accessible info. Our first part, the protection of our workers and stabilization of our operations in Ukraine.

The work has been ongoing for eight months already. Final time we met, we indicated that we thought that it was going to be longer than anyone was pondering when it started. And all of us perceive the scenario continues to be very critical, and likewise the protection is a really relative time period for individuals inside Ukraine border at the moment. With all of that, we’re continually and proactively serving to our workers, their households and the individuals of Ukraine as a lot as we will by offering the suitable vary of help, together with regional allocations and all types of native help, making it doable for our individuals, their households and sometimes business colleagues to proceed to dwell and work in Ukraine.

We’re additionally frequently creating methods to handle new and unpredictable just-yesterday challenges and we are attempting to additionally assume proactively about what we will do at the moment to make it simpler and safer for tomorrow. And with all of that, we’re working collectively throughout our personal areas to keep up the very best degree of service doable for our clients throughout all of our supply areas inside Ukraine. Even with the current degree of infrastructure instability, the productiveness of our groups in nation stays excessive, which make us imagine that we will depend on this degree of resilience in our supply operations after we are sharing our steerage with the market at the moment. Thanks to our Ukrainian workforce and all EPAMers for making this doable.

It is merely simply unimaginable. Thanks. Transferring to our second part, the acceleration of our world diversification efforts and continued progress of our various capabilities. During the last eight months, we now have accelerated key elements of our world technique, in some ways a completion what we had deliberate to do over a number of years.

Our supply location geographies grow to be increasingly more balanced. Final quarter, we reported that impacted areas accounted for 40% of our expertise, whereas at the moment, this virtually associated from Russia. Roughly 30% of our expertise stays within the rapid areas. One thing we plan to realize nearer to the top of this 12 months.

So our presence in Europe outdoors of these areas, in Central and Western Asia, India and Latin America are rising proportional. Briefly, the variation of our enterprise as a place of our supply group is shifting ahead at unprecedented tempo. We’re very grateful to the numerous 1000’s of EPAMers and their rapid households for his or her loyalty, belief and their resolution to maneuver to new nation areas whereas staying resilient and proceed to work at EPAM. Whereas it has been achieved undertaken, we’re encouraging by our total ranges of engagement and productiveness we now have seen in our many new hubs and satellite tv for pc areas.

A lot of these workers herald years of expertise, expertise and data with them and are key to our world enlargement efforts. And we additional see, combine and scale a globally resident workforce, now working in additional than 50 nations. Please be aware that throughout the time, we virtually doubled the variety of areas, which ought to allow us to determine extra lives, for us means over 5,000 individuals, expertise hubs throughout the subsequent few years. And a few of these hubs did not even exist at EPAM in February of 2022.

As you’ll be able to see, we’re enthusiastic about creating know-how hubs and increasing our funding in lots of the geographies. In consequence, our world supply platform and new methods of working ought to place us to grow to be some of the geographically balanced and value-added companies firm available in the market. Transferring to part three of continuous to serve and increase demand for our companies for our rising world buyer portfolio and place for our concentrate on profitability. These two are very related.

We’re working carefully with our clients to reposition sizable parts of our program portfolio with our disruption and partly on high quality. And whereas our enterprise proceed to progress have been essential to plan for contingencies and allow uninterrupted companies high quality. Our buyer portfolio is now higher diversified and extra resilient, giving them a brand new degree of engagement and new expertise choices that ought to set up a broader, extra useful partnership framework for us submit conflict. Immediately, we’re staying near our clients and dealing by means of totally different challenge plans and contingencies and what has begun for us a brand new regular.

That additionally contains our efforts round coming again to the revenue ranges which might be consistent with our historic numbers. As you’ll be able to see, we now have some intermediate success in that course already. Whereas it’s nonetheless too early to say that we now have overcome the problem to make it sustainable. On that sort of navigation and unpredictable, I would really like additionally to share right here that throughout the current Gartner Symposium on October, EPAM was a future case examine on labor and world expertise resiliency precisely based mostly on our efforts over the past eight months to adapt, to offer security to our individuals and help with relocations and for frequently investing in our capabilities and future progress whereas navigating the unpredictable.

We imagine that many of the efforts highlighted by Gartner have put us onto a brand new trajectory or establishing basis, if you’ll, that can place EPAM for continued future progress and market differentiation. Right here, I wish to point out three extra on high of what we now have already shared. Progressing EPAM persevering with our built-in consulting portion, which opens new market entry factors and prolong the depth and breadth of our present relationship with clients to cowl much more strategic set of patrons in our portfolio, additionally mirrored by our elevated on-site manufacturing headcount ratio, which is now 13.6%, the very best in our historical past, furthering our ecosystem partnerships enabled by our product and platform engine heritage and new scale and market to carry them in related options to clients going through more and more company enterprise and know-how environments. Lastly, considerably investing on our instructional platforms, which retains our workers on the innovative and permit us to draw and work to develop and deploy world expertise for EPAM, in addition to supply compossible schooling companies to our clients.

In a extra easy approach, with all above efforts, we’re very targeted on sustaining our engineering and know-how benefit and status throughout all our new and already established areas. Sure, we do perceive that it’s precisely one of many key questions you, as traders, and all our shoppers are asking at the moment and likewise most likely about our potential to proceed shifting greater within the worth chain, one thing we began 10 years in the past and what we’re very desirous to proceed doing now and sooner or later, proving to the market that we’d have the ability to navigate the subsequent transformation of EPAM to have the ability to supply to our shoppers one thing, which is uncommon available in the market: technique and competitors concurrently and at scale and doing that higher than most of our opponents can. With that, let’s discuss a bit about our Q3 outcomes. Whereas Jason will share as at all times the total degree of detailed write-up.

Within the third quarter, EPAM delivered $1,230 million in revenues, a 24% year-over-year progress and non-GAAP per share of $3.10, a 30% improve over Q3 2021. I feel it is vital to say that in fixed forex phrases and with correct adjustment on discontinued income in Russia, that progress could be about 35%. Additionally throughout this quarter, the corporate generated $234 million of free money circulate and now has roughly $1.5 billion of money available. We’re proud and grateful to all our groups for constantly managing the enterprise at this degree whereas responding to fixed strain to plan and execute numerous tactical changes in an more and more full geopolitical and financial setting and particularly grateful to our groups in Ukraine.

As you might have probably heard over the past month, a few of our companions and clients have been messaging the expectation for a worldwide slowdown in demand, they usually lead to actions to higher align their companies to this new setting. So for us, whereas the demand setting continues to be energetic throughout quite a lot of our finish markets, together with consumer second transformational applications, merchandise, platform growth and modernization efforts along with the alternatives triggered from the current acquisitions, we will verify that there was an rising focus for applications which might be tied to driving the short-term price financial savings, different opex efficiencies and progress vary of optimization applications. [Inaudible] EPAM can be correctly positioned at the moment. Nonetheless, even with all confidence that our companies stay extremely related and in demand we’re starting to see indicators of progress degree for the — so whereas we’re taking steps to reasonable our high-income spending and response, we’re additionally reminded of earlier downturns, out of which we grew at unprecedented fee.

As such, we’re working to fastidiously collaborate our provide and demand outlook to seize the demand up since — when it returns as we did it previously. As we wrap up 2022, we imagine that we are going to have contained the preliminary impression of the work throughout the fiscal 12 months, together with the discontinuation of our operations in Russia. However total, we all know that we’re nonetheless in the course of ongoing disaster in Ukraine. And sadly, it would not appear that proper now it will likely be doable to include the total a part of the world simply inside 2022 as we now have beforehand known as.

What has modified over the previous two quarters is that after we say we will and can modify our operations, we’re assured that beneath circumstances we will accomplish that reliably and rapidly. And precisely that for us is an important affirmation, that after nearly 30 years of our existence after 10 years of being a publicly traded firm and after turning into a S&P 500 member, we nonetheless can show our sturdy entrepreneurial DNA and we nonetheless can profit from it by performing as a start-up because it ensures our potential to adapt and to develop additional whereas for the present time, we’re nonetheless taking part in for various kinds of mitigation situations in response to ongoing conflict occasions to guard EPAM and our workers who stay within the area. Nonetheless, we’re assured that the steps we now have taken to reposition and diversify the corporate have created a good stronger basis for future progress as we concentrate on EPAM as a $10 billion firm, very a lot consistent with what we shared with you in early 2022 earlier than the phrase we go. Now let me flip the decision over to Jason, who will discuss our Q3 outcomes and extra perspective as we have a look at This fall and past.

Jason PetersonChief Monetary Officer

Thanks, Ark, and good morning, everybody. Earlier than masking our Q3 outcomes, I needed to remind everybody that along with our customary non-GAAP changes, expenditures associated to EPAM’s administration and dedication to Ukraine, the exit of our Russian operations and prices related to accelerated worker relocations have been excluded from non-GAAP monetary outcomes. We have included extra disclosures particular to those and different associated gadgets in our Q3 earnings launch. Within the third quarter, EPAM delivered one other set of sturdy outcomes throughout each high and backside line along with sturdy money circulate technology.

Throughout Q3, EPAM generated revenues of $1.23 billion, a year-over-year improve of 24.1% on a reported foundation and 29.8% in fixed forex phrases, reflecting a unfavourable overseas change impression of 570 foundation factors. Moreover, the discount in Russian buyer revenues ensuing from our resolution to exit the market had a 470 foundation level unfavourable impression on income progress. Adjusting for the exit of our Russian operations, reported income progress would have been roughly 29%. Wanting on the efficiency of our business verticals in geographic areas within the quarter.

Progress was negatively impacted by the continued exit of our Russia operations and the impact of overseas change on our U.S. greenback reported outcomes had been useful. I am going to present an adjusted year-over-year comparability. Starting with our business verticals, journey & client grew 41.9%, pushed by sturdy natural progress, primarily from our retail clients, in addition to income contributions from current acquisitions.

Life sciences & healthcare grew 35% with sturdy progress coming from the healthcare business along with progress in life sciences. Monetary companies grew 10.4%, with progress coming from asset administration, banking, and to a lesser extent, in insurance coverage. Excluding our Russia clients, progress would have been 25.4% and 29.9% in fixed forex. Enterprise info & media delivered 20.8% progress within the quarter, pushed primarily by clients within the enterprise info business.

Software program & Hello-Tech grew 17.8% within the quarter. And eventually, our rising verticals delivered 26.6% progress pushed by shoppers in power, manufacturing and automotive. Excluding our Russia clients, progress was 29.5% or 39.4% in fixed forex. From a geographic perspective, Americas, our largest area, representing 61% of our Q3 revenues, grew 26.3% 12 months over 12 months or 27.7% in fixed forex.

EMEA representing 36% of our Q3 revenues, grew 35.3% 12 months over 12 months or 50.3% in fixed forex. EMEA efficiency was pushed by sturdy natural progress, mixed with an incremental contribution from current acquisitions. CEE representing 1% of our Q3 revenues contracted 77.2% 12 months over 12 months or 80.2% in fixed forex. Income within the quarter was impacted by our resolution to exit Russia and the ensuing ramp-down of companies to Russia clients.

And eventually, APAC grew 10.5% 12 months over 12 months or 15.4% in fixed forex phrases and now represents 2% of our revenues. In Q3, revenues from our high 20 shoppers grew 22% 12 months over 12 months whereas revenues from shoppers outdoors our high 20 grew 25%. Transferring down the earnings assertion. Our GAAP gross margin for the quarter was 32.6% in comparison with 33.9% in Q3 of final 12 months.

Non-GAAP gross margin for the quarter was 34.4% in comparison with 35.1% for a similar quarter final 12 months. In comparison with Q3 2021, gross margin in Q3 2022 displays the unfavourable impression of decrease utilization, in addition to a profit from overseas change and the optimistic impression of a extra normalized expense associated to variable compensation. In Q3 2021, expense associated to variable compensation was unusually excessive based mostly on the sturdy backside line and very sturdy high line efficiency throughout that 12 months. Q3 2022 was additionally negatively impacted by the timing distinction related to EPAM’s ongoing efforts to align invoice charges based mostly on worker relocations.

Nevertheless, we now have made higher progress adjusting charges than initially anticipated. In consequence, the unfavourable impression on profitability was extra restricted than initially anticipated. GAAP SG&A was 16.1% of income in comparison with 17.1% in Q3 of final 12 months. And non-GAAP SG&A got here in at 14.1% of income in comparison with 15.3% in the identical interval final 12 months.

SG&A efficiency within the quarter mirrored a decrease degree of prices associated to each variable compensation and services and likewise features a optimistic good thing about overseas change. GAAP earnings from operations was $180 million or 14.7% of income within the quarter, in comparison with $144 million or 14.6% of income in Q3 of final 12 months. Non-GAAP earnings from operations was $232 million or 18.9% of income within the quarter, in comparison with $180 million or 18.2% of income in Q3 of final 12 months. Q3 non-GAAP earnings from operations displays a decrease degree of variable compensation and a optimistic impression from overseas change, offset by a decrease degree of utilization.

Our GAAP efficient tax fee for the quarter was 18.4% primarily pushed by extra tax advantages associated to stock-based compensation. Our non-GAAP efficient tax fee, which excludes extra tax advantages, was 23.1%. Diluted earnings per share on a GAAP foundation was $2.63, reflecting a $0.68 or 34.9% improve 12 months over 12 months. GAAP EPS contains the impression of Ukraine humanitarian expenditures, bills associated to accelerated workers relocations and prices associated to the deliberate exit of our Russian operations.

Our non-GAAP diluted EPS was $3.10 and reflecting a $0.68 improve or 28.1% progress over the identical quarter in 2021. In Q3, there have been roughly 59.4 million diluted shares excellent. Turning to our money circulate and steadiness sheet. Money circulate from operations for Q3 was $252 million, in comparison with $206 million in the identical quarter of 2021.

Free money circulate was $234 million, in comparison with free money circulate of $185 million in the identical quarter final 12 months. We ended the quarter with roughly $1.5 billion in money and money equivalents. On the finish of Q3, DSO was 69 days and compares to 71 days for Q2 2022 and 70 days for a similar quarter final 12 months. In This fall, we historically skilled an extra enchancment in DSO and count on the same end result this 12 months.

Transferring on to a couple operational metrics. We ended the quarter with greater than 53,900 consultants, designers and engineers, a year-over-year improve of 14.5%. Our whole head depend for Q3 was greater than 60,250 workers. In comparison with Q2, we noticed a internet lower of roughly 1,000 head depend.

The web lower in head depend is a results of the discount in Russia-based head depend, mixed with a decrease degree of hiring throughout the group attributable to better-than-expected productiveness in Ukraine and with a concentrate on shifting utilization towards greater ranges. Utilization was 73.5% in comparison with 77.1% in Q3 of final 12 months and 78% in Q2 2022. Utilization continues to be impacted by the conflict in Ukraine. Now let’s flip to our enterprise outlook.

As we have finished in earlier quarters, let me present some context that’s informing our steerage for the fourth quarter. We count on a stable demand setting, together with demand for applications, serving to shoppers drive extra income, modernization and optimization. In a number of instances, within the retail and client house, we’re seeing indicators of moderation in demand attributable to delays in decision-making or extra scrutiny on program budgets as sure clients grow to be extra cautious relating to shifting demand of their finish markets. As a reminder, the exit of our Russian operations and the discount in Russia buyer revenues produces a harder year-over-year income comparability, significantly in This fall, which has usually been a seasonally sturdy quarter in Russia.

Thus far, our operations in Ukraine haven’t been materially impacted by the current escalation of the tax. And our groups stay extremely targeted on sustaining uninterrupted manufacturing. Our steerage assumes that we are going to proceed to have the ability to ship from our Ukraine supply facilities at productiveness ranges at or considerably decrease than these achieved in Q3 and in step with our expertise within the month of October. By September 30, EPAM spent greater than $39 million as a part of the corporate’s $100 million humanitarian dedication to our Ukranian workers and their households.

We count on additional humanitarian expenditures can be made in This fall and through 2023. Now shifting to our This fall 2022 outlook. We count on revenues to be within the vary of $1.220 billion to $1.230 billion, producing a year-over-year progress fee of roughly 11% on a reported foundation and 15% in fixed forex phrases, each on the midpoint of the vary. Included in these progress charges is roughly 100 foundation factors of income contributed from acquisitions closed over the past 12 months.

Moreover, the ramp-down of Russian buyer revenues attributable to our resolution to exit this market has a unfavourable impression, lowering our anticipated income progress fee by roughly 500 foundation factors. For the fourth quarter, we count on GAAP earnings from operations to be within the vary of 12% to 13% and non-GAAP earnings from operations to be within the vary of 16% to 17%. We count on our GAAP efficient tax fee to be roughly 21% and our non-GAAP efficient tax fee, which excludes extra tax advantages associated to stock-based compensation to be roughly 23%. For earnings per share, we count on GAAP diluted EPS to be within the vary of $2.02 to $2.10 for the quarter and non-GAAP diluted EPS to be within the vary of $2.62 to $2.70 for the quarter.

We count on a weighted common share depend of 59.6 million diluted shares excellent. Lastly, a number of key assumptions that help our GAAP to non-GAAP measurements within the fourth quarter. Inventory-based compensation expense is predicted to be roughly $33 million. Amortization of intangible gross sales is predicted to be roughly $5.7 million.

The impression of overseas change is predicted to be negligible. Tax impact of non-GAAP changes is predicted to be round $9.6 million. And eventually, we count on extra tax advantages to be round $4.3 million within the quarter. Along with these customary GAAP to non-GAAP changes and in step with the prior quarters in 2022, we count on to have ongoing non-GAAP changes in This fall ensuing from Russia’s invasion of Ukraine.

Please see our Q3 earnings launch for an in depth reconciliation of our GAAP to non-GAAP steerage. Our fourth quarter outlook displays a stable demand setting, mixed with bettering working efficiency, permitting EPAM to return to its conventional 16% to 17% adjusted IFO vary earlier than anticipated. Though we nonetheless face ongoing challenges, this can be a important achievement given the quantity of disruption that the corporate is managing by means of because of the conflict in Ukraine. We’ll proceed to carefully handle the operations of EPAM whereas remaining attentive to any adjustments within the demand setting.

Lastly, I might wish to thank our workers for his or her continued dedication and concentrate on our clients. Operator, let’s open the decision for questions.

Questions & Solutions:

Operator

Thanks. [Operator instructions] Our first query comes from the road of Bryan Bergin with Cowen. Your line is now open.

Bryan BerginCowen and Firm — Analyst

Hello, guys. Good morning. Thanks. I hope your colleagues stay protected right here.

Simply first, I hoped you possibly can simply dig into extra on the element on the way you’re forecasting that 4Q progress simply as we take into account a 30% adjusted fee of progress on a continuing forex natural foundation this previous quarter and we attempt to bridge that to the implied degree in 4Q. Are you able to simply discuss a number of the places and takes you issue there? Is it actually only a combo of decrease utilization and a few macro uncertainty on demand?

Jason PetersonChief Monetary Officer

Yeah. I imply I feel there’s a number of issues. Firstly, there’s a decline in revenues related to construct days. So it is simply the pure algebra as there are fewer construct days in This fall than there are in Q3.

And that might net-net would form of truly cut back income by 2% between Q3 and This fall, if all issues elsewhere held equal. On the identical time, I feel that we proceed to be ok with the expansion that we generated in Q3. And I feel the opposite factor, Bryan, to level out is that we now have the identical impression on our progress fee from the exit from Russia. So we had a $50 million This fall final 12 months, and we’ll have a single digit — mid- to low single-digit Russian income contribution in This fall of this 12 months.

So it is a mixture of these two issues. After which once more, we proceed to see progress — we proceed to see spending and investments on the a part of our shoppers, but it surely’s most likely at a considerably decrease progress fee than we now have skilled earlier within the 12 months.

Bryan BerginCowen and Firm — Analyst

OK. OK. After which on the supply footprint, understanding you had the Russia exit this quarter that actually impacted that workforce degree. Are you able to simply remark in your consolation ranges ramping in these different areas? Have there — and are there any notable adjustments within the supply combine plan that you just count on to exit this 12 months at?

Ark DobkinPresident and Chief Govt Officer

So I feel we’re form of illustrating that we had been speaking like a few quarters in the past about our rebalance in our supply capability. We truly precisely on the plan or development a bit bit. And I feel by the top of the 12 months, most likely a pair extra proportion factors can be down from impacted areas, which signifies that we’re constantly constructing our operations in Western, Central Asia, India and Latin America as effectively. However proper it is all balanced out.

Once more, within the corporate, most likely we are going to go from present 30%, 31% to 27%, 28% tendencies [Inaudible].

Bryan BerginCowen and Firm — Analyst

All proper. Thanks, guys.

Operator

Thanks. Our subsequent query comes from the road of David Grossman with Stifel. Your line is now open.

David GrossmanStifel Monetary Corp. — Analyst

Good morning, and thanks. Simply a few fast follow-up questions on a number of the feedback that you just made in regards to the dynamic between when you have a look at the quarter, you had a sequential decline in head depend. You beat the revenues modestly but margins carried out with utilization down. You talked about fee.

Is there anything that form of helps to reconcile all these totally different variables with the end result?

Jason PetersonChief Monetary Officer

Yeah. There’s a few alternative ways to have a look at this from a pricing standpoint related to the realignment of pricing for the relocation of workers. We did higher than we anticipated. So we had anticipated that to have a extra unfavourable impression on profitability in Q3 than it truly did.

Nevertheless, on a year-over-year foundation, that would not actually present up as a profit. What we noticed was a few issues. We’re getting some profit from overseas change, so overseas change is clearly having a unfavourable impression on income progress fee. However we now have quite a lot of nations through which we ship from the place the currencies clearly have devalued extra considerably than the devaluation of the euro or the pound, and in order that’s had a considerably optimistic impression on profitability on a year-over-year foundation.

Then the opposite factor, which I attempted to name out within the script is that we had an enormously profitable 12 months final 12 months relative to expectations, which drove the next variable compensation prices. And this 12 months, the place we’re successfully form of reserving a bonus, if you’ll, at 100%. It is decrease than it could have been final 12 months. And so final 12 months, I assume you possibly can say we’d have been much more worthwhile.

And this 12 months, we’re form of reserving at a extra constant degree of variable compensation based mostly on our efficiency. So I am not sure if that will get to the guts of it, however overseas change would undoubtedly be one of many issues that is a optimistic.

David GrossmanStifel Monetary Corp. — Analyst

Proper. And also you had mentioned, Jason, I feel final quarter that you just count on to get to extra normalized margins within the first quarter clearly, subsequent 12 months, you’ve got clearly form of exceeded that this quarter. As you concentrate on subsequent 12 months and also you form of get rid of a few of this noise, is form of a 17% — I do know you do not wish to give steerage earlier within the 12 months, however I assume I am simply making an attempt to get a way, are you continue to comfy with that? Remark of getting again to normalized margins and sustaining that subsequent 12 months? Has something modified?

Jason PetersonChief Monetary Officer

Yeah. So I feel that if I remind, I mentioned we get — we count on to get again towards, proper, which is — and proper now, I really feel truly that the corporate has finished an outstanding job with not solely the profitability in Q3, but in addition the information getting again to the 16% to 17% in This fall. And a part of that has to do with all of the work we have finished on the geographic transformation and the realignment of charges. However I feel it is too early proper now to speak about what profitability could possibly be in 2023 simply because there’s nonetheless loads of shifting items with what is going on on in — with the conflict and another issues.

However I undoubtedly — I’m inspired by the truth that we have generated such a robust degree of profitability in Q3. And once more, our confidence in with the ability to information to 16% to 17% in This fall.

David GrossmanStifel Monetary Corp. — Analyst

Proper. And only one final one, if I may. Within the demand setting, you give us a superb perception into form of how that knowledgeable your fourth quarter steerage. And also you known as out, I believed, client.

Every other verticals that you just’re seeing related dynamic? Are you simply anticipating based mostly on qualitative commentary out of your clients that they are planning for a slowdown past the patron vertical? Simply any extra shade you may give us there could be very useful.

Ark DobkinPresident and Chief Govt Officer

David, you are wishing and studying precisely what we do. And on the whole, I feel I do not know when you use noise as form of qualifier, however there are sufficient messaging in the marketplace that many industries are very cautious proper now and looks like, in fact, saving precedence turning into No. 1 versus transformation. That is not less than what we have seen.

It is not essentially seen available in the market from particular actions throughout the industries. However I feel it could be honest to imagine that retail most likely normally reacting a lot sooner, typically a lot sooner recoveries as effectively. That is what we noticed in 2021, however another fall and I feel it would not be stunned. So I feel all people way more cautious, clearly, in comparison with simply a number of quarters in the past.

David GrossmanStifel Monetary Corp. — Analyst

All proper. Nice. Very useful. Thanks very a lot.

Operator

Thanks. Our subsequent query comes from the road of Darrin Peller with Wolfe Analysis. Your line is now open.

Darrin PellerWolfe Analysis — Analyst

Thanks, guys. When occupied with the place we are actually by way of the transformation you needed to be in by this time within the 12 months round Russia and all of the sourcing and the labor facet and the relocating, are you able to simply give us a fast replace by way of the odds extra you continue to should go to finalize plans on that entrance? And after we take into consideration the brand new geographies, clearly, you talked about how pricing in these new markets helps the income facet to some extent versus the pinnacle depend progress. However I am curious what you count on your head depend progress capabilities to be from right here simply being in a few of these new markets.

Ark DobkinPresident and Chief Govt Officer

So I feel by way of plans, we form of shared fairly detailed plans throughout our Investor’s Day. I feel we’re very a lot heading in the right direction with this plan. On the identical time, as you perceive, every month, not even speaking about quarter however typically every week making some changes to this. So at this level, we do imagine that we do it a current doable based mostly on the real-time info occurring and at giant our plans nonetheless stays the identical.

So we will grow to be most likely essentially the most balanced from a supply perspective firm in our sectors. And we very strongly trying how we develop it and going to develop expertise market throughout new for us location. So it is all in plan, and that is very a lot shifting ahead. So what else we can be crucial we’ll be doing if totally different sort of state of affairs can be developed, we now have solutions for this.

I do not assume we can be saying in all particulars, however we now have plans for this. However once more, proper now, we’re going virtually with the identical plan, which we shared and we’re very a lot heading in the right direction for this, which we share at traders day.

Jason PetersonChief Monetary Officer

So we really feel fairly good about our potential so as to add head depend within the areas through which we’re at the moment increasing in Latin America and India and in different geographies outdoors of what we name the impacted area. And so I feel we very a lot can reply to future upticks in demand and once more, really feel comfy with our potential to proceed to generate progress in extra of 20% based mostly on accessible demand. OK, proper now, there’s a bit bit extra concentrate on taking over utilization once more. And in order that’s form of what you see across the head depend additions.

Ark DobkinPresident and Chief Govt Officer

So the query was comfy that we will discover the suitable expertise in new areas. Then the brief reply, sure. Proper now, we much more comfy than we had been a few quarters in the past as a result of now we now have way more expertise by way of find out how to do it as we perceive find out how to reapply the expertise, which we developed throughout our progress in our form of comfy zone in Jap Europe that could be very a lot relevant to new areas as effectively.

Darrin PellerWolfe Analysis — Analyst

Simply — thanks. Simply in a short time, once you consider the macro and the demand setting for a minute, I imply, it is fairly clear that corporations are taking a bit bit longer to make choices, however for the suitable know-how, the demand continues to be very excessive. Have you ever seen a shift to price takeout plans or efficiencies by your shoppers but? Or is it nonetheless very a lot targeted on like digitization and differentiation competitively and different initiatives prefer it?

Ark DobkinPresident and Chief Govt Officer

I’d characterize this like if two, three quarters in the past, the expansion and — it is at all times been caught for me no matter individuals means by digital transformation and broad sense of this. It was completely No. 1 precedence. I feel proper now, it’s totally a lot balanced with price financial savings and what can be tomorrow.

I feel it is seen. So it is fairly balanced from our viewpoint. Digital transformation continues to be there and continues to be one of many two priorities, but it surely’s now one of many two.

Darrin PellerWolfe Analysis — Analyst

Understood. All proper. Thanks, guys.

Operator

Thanks. Our subsequent query comes from the road of Ashwin Shirvaikar with Citi. Your line is now open.

Ashwin ShirvaikarCiti — Analyst

Thanks, and good quarter, guys. I needed to simply form of take a peek on the planning assumptions as you are going by means of that course of for subsequent 12 months and as we expect by way of granular modeling. Once more, not asking for steerage, however how are you pondering of the setup for subsequent 12 months by way of the underlying demand for digital transformation. Clearly, Q1 is a tricky comp or issues like that.

Might you simply stroll by means of your thought course of as you do your individual budgeting?

Jason PetersonChief Monetary Officer

We’re within the midst of it at the moment. And so we — the usual course of that we’d use the place we have form of an aspirational mannequin after which a really detailed account degree planning, and we’re starting to get suggestions from every of the enterprise items as to form of what they’re anticipating on the account degree. Then as you’ll be able to think about, we form of take into account funding priorities and all of that, and we come again with a information by way of each income progress and profitability. And so clearly, we’re not at a stage but the place I can discuss that based mostly on the place we’re within the planning cycle and we’re additionally not guiding to 2023, however I’ll present some shade on the income progress.

And in order we have talked about, we do count on that we are going to return to a fee of progress better than 20% sooner or later sooner or later. At the moment, based mostly on what I am seeing with our numbers, I’d not count on that to happen within the first half of the 2023 fiscal 12 months. And as an alternative, I feel that might be extra prone to happen someday within the second half.

Ashwin ShirvaikarCiti — Analyst

Understood. Received it. And thanks for that. The opposite query I had was, clearly, as we see all people else’s outcomes coming by means of, loads of weak spot within the high-tech vertical.

How does that have an effect on form of your pondering by way of — pondering or expectations by way of your individual consumer base and the work you are doing? And are you starting to see any particular impression in that or different verticals?

Ark DobkinPresident and Chief Govt Officer

I feel that you just already form of introduced shade on this, that on the whole, all people way more cautious than earlier than. And I feel I do not assume wish to loudly say this such as you open any media all people speaking about it. And there’s no very clear signal what would occur, however once more, all people way more cautious in making choices. And it isn’t solely within the retail.

Retail reacted a lot weaker than client response as effectively. The remainder of this, fairly steady proper now, however once more slower from a gross viewpoint, undoubtedly gradual.

Jason PetersonChief Monetary Officer

So we nonetheless see spending. We nonetheless see funding on the a part of shoppers. Simply the speed of progress seems to be considerably slower and a number of the decision-making is a bit bit slower.

Ark DobkinPresident and Chief Govt Officer

And when you ask in like broader longer-term, then I feel — as some other comparatively giant firm, we now have a historical past of going by means of troublesome instances and we undoubtedly analyze this. And in our particular case, we all know that every time after this, it was time of huge progress. And once more perhaps quiet scenario was the closest illustration if thought of as a quiet or slowdown. Once more, it was for a number of quarters, we do not know.

However then it was large form of come again. Related was in 2008, 2009 for us. And we’ll be taught our classes find out how to navigate by means of this and find out how to undergo this to guarantee that we save, and in Western is the very proper a part of the corporate to return again accurately, and that is what we’re focusing. And in brief, we talked about it already a number of instances.

Consulting built-in with engineering. We’re increase this piece it doesn’t matter what, and we perceive find out how to scale up the expertise. That is one other space which we hold intact on a regular basis. Even when the numbers of head depend is slowed, the entire machine find out how to carry expertise again, it is nonetheless working and retuning this very fastidiously.

Ashwin ShirvaikarCiti — Analyst

Thanks. Respect that. Thanks.

Operator

Thanks. Our subsequent query comes from the road of Ramsey El-Assal with Barclays. Your line is now open.

Ramsey El-AssalBarclays — Analyst

Thanks for taking my query this morning. I had a query on the pricing setting. And it looks like there’s some places and takes. On the one hand, you might have loads of inflation, which could provide you with some air cowl to go pricing by means of.

However, you are speaking about some softening macro, perhaps some warning on the facet of your shoppers. Are you able to discuss in regards to the places and takes in pricing and whether or not you are seeing any adjustments within the setting?

Jason PetersonChief Monetary Officer

I feel what I’d simply touch upon, on what we have seen, as an instance, over the past perhaps 5 months after which it is a bit more durable to foretell as to what you may see sooner or later, however I may discuss to form of what we’re anticipating for This fall. One of many issues that was a optimistic shock from each a income standpoint and profitability in Q3 was that we had been capable of execute on our realignment of charges for the entire relocations that we have finished to higher-cost geographies. And so we made higher progress than anticipated. Already, I feel that as we finish Q3, we expect that we have already gotten realignment of about two-thirds of the positions which were shifted to different geographies.

We nonetheless have ongoing work to do there. And in addition, we nonetheless are relocating individuals from nations to higher-cost nations, however we do count on to proceed to see value enchancment related to realignment. After which as well as, there most likely is a few extra pricing form of happening within the second half of the fiscal 12 months. Exhausting to postulate form of what may occur subsequent 12 months.

Actually, within the setting that we have been in the place there’s been very excessive demand and a few disconnect between provide, that is supportive of pricing discussions and we’ll should see what pricing discussions seem like in 2023.

Ramsey El-AssalBarclays — Analyst

OK. Nice. And one final one for me, a query on M&A and related overlay with the form of macro cycle. In previous cycles, do you guys pull again on deal exercise because the macro setting will get a bit choppier? Or as an alternative is it the other the place you perhaps see some alternatives that weren’t round when instances had been higher? How do you concentrate on M&A in that context?

Ark DobkinPresident and Chief Govt Officer

I do not assume we had been like adjusting our M&A actions based mostly on particular like financial local weather setting. I feel we had been searching for the suitable additions on a regular basis and we proceed doing this at the moment as effectively. And I feel it is perhaps a greater alternative for us in a few quarters from pricing viewpoint. However on the whole, we take into account to be engaged on this and it isn’t occurring proper now largely as a result of we do not see the suitable issues.

However undoubtedly, we now have — perhaps with all the pieces else, sure, we now have another priorities earlier than this. However once more, there isn’t a particular slowdown on the M&A.

Ramsey El-AssalBarclays — Analyst

Received it. All proper. Thanks a lot. Respect it.

Operator

Thanks. Our subsequent query comes from the road of James Faucette with Morgan Stanley. Your line is now open.

James FaucetteMorgan Stanley — Analyst

Thanks very a lot. A few follow-up questions for me. Jason, going again to form of your define for 2023, I feel it is smart, significantly given the comps that you just confronted with Russia and its contribution not less than within the early a part of the primary half of this 12 months, are there different drivers or issues that we should always consider as you concentrate on like that form of return to twenty%-plus progress within the second half of the 12 months? And form of what are your planning assumptions? Are you taking a look at new capability coming on-line, supply capability coming on-line? Or simply the way you’re occupied with form of the evolution of the present demand setting. Simply any incremental shade on what’s main you to form of take into consideration that cadence.

Jason PetersonChief Monetary Officer

Yeah. So that you’re proper that we’d have nonetheless generated important revenues from Russia, significantly in Q1 of 2022. In order that can be a harder comp. We nonetheless assume overseas change goes to have some headwind related to it.

After which I feel there’s — proper now, we proceed to form of consider the demand setting, as we have talked about. However I simply assume the opposite factor is that when you have a look at our head depend additions over the past couple of quarters is that oftentimes you must have form of ongoing sequential progress to then proceed to form of produce sturdy year-over-year progress two or three quarters out. And so we really feel very comfy with our potential so as to add head depend over time. And once more, as Ark talked about, we really feel that we have rising form of operational expertise within the newer geographies.

And proper now, I simply assume as I form of have a look at the numbers and the probably head depend provides this quarter, it simply seems that your trajectory would form of provide the alternative for a better than 20% progress within the second half fairly than within the first half. And I feel you guys most likely do the identical sort of math that we do, and also you probably may see that as effectively.

James FaucetteMorgan Stanley — Analyst

Nice. Respect that, Jason. After which the second a part of my query is like — after which I feel it ties a bit bit into what you had been saying round workers and the place you are including heads geographically. However I feel you had made the remark about wanting to extend utilization, and so on.

Is it proper to imagine that you just’re most likely working greater utilizations in your extra established geos together with perhaps these which might be impacted nonetheless by the conflict within the Ukraine and that the enhancements in utilization are prone to come primarily from the newer geographies? Or is there extra nuance than that?

Jason PetersonChief Monetary Officer

It could be combine. So we’re undoubtedly working with decrease utilization in what I am going to name the impacted form of geographies. However there’s additionally some alternative for us to tighten up utilization in a number of the newer geographies that we have expanded into. And so once more, the objective in This fall could be considerably improved utilization, however nonetheless perhaps a bit under our goal.

After which as we enter the primary half of subsequent 12 months is to make sure that we’re persevering with to concentrate on improved utilization.

Ark DobkinPresident and Chief Govt Officer

However on the whole, what you requested, James, it’s appropriate as a result of in new areas we now have new individuals and utilization firstly of this space continues to be under. And in quarter two, it will likely be improved as a result of it will likely be steady up, I assume.

James FaucetteMorgan Stanley — Analyst

That is nice. Thanks, Ark. Thanks, Jason.

Operator

Thanks. Our subsequent query comes from the road of Surinder Thind with Jefferies. Your line is now open.

Surinder ThindJefferies — Analyst

Thanks. I might like to begin with a query about simply form of the supply footprint that you’ve at this level. Are you able to perhaps discuss in regards to the degree of consolation that shoppers even have with the present publicity to the area? So are they anticipating you to keep up backup in case of additional disruptions? Are they taking over a number of the threat? How ought to we take into consideration that steadiness that you’ve with shoppers at this level?

Ark DobkinPresident and Chief Govt Officer

So principally query how effectively the making occurring between what areas shoppers main to think about and the place we’re rising proper now from a expertise viewpoint, appropriate?

Surinder ThindJefferies — Analyst

Properly, extra about the concept that proper now, I feel the goal is to have 30% of your supply from the uncovered areas the place the conflict is, proper? Is there a chance to additional cut back that? Or it looks like shoppers are comfy with that degree of threat. And so how ought to we take into consideration — do it’s important to make suggestions by way of shoppers if there’s additional disruption? Or how ought to we take into consideration you guys managing to this new world supply footprint, like why not cut back it additional?

Ark DobkinPresident and Chief Govt Officer

That is a really dynamic parameter. And I feel shoppers — as a result of the chance is a really dynamic parameter. And on the whole, shoppers comfy with it, however as quickly as the chance will elevate, that this distribution can be occurring. That is a way — that is the primary problem that is what we’re residing by means of.

And at this particular level, I feel there’s a form of established order is a few concern and what can be one month from now or two months from now, it is a bit bit various things. Once more, that is precisely the problem available. However one other facet, we now have a number of new areas, and we now have, as we talked about, a big variety of EPAMers who transfer from one location to a different and got here to new areas, which form of appears to speed up the EPAM data and high quality requirements and rising new areas and likewise make shoppers comfy in these new areas as a result of some good focus of individuals they already know moved there. So from this, we handle the entire as a rebalancing of the expertise.

However proper now, we now have 30% and it is individuals with fairly good degree of utilization proper now.

Surinder ThindJefferies — Analyst

Thanks. After which as a follow-up, are you able to perhaps discuss — I perceive there’s been loads of questions on demand. However are you able to perhaps discuss in regards to the degree of visibility that you’ve with clients? And what I am making an attempt to get right here is are you able to perhaps discuss in regards to the fee that perhaps initiatives are being delayed or canceled relative to historicals? And is there incremental threat within the sense that after 2023 budgets get established, it is actually then that shoppers should make choices. So perhaps present conversations could also be productive, however when it actually — the rubber hits the street, they’re extra hesitant to begin initiatives.

So simply form of making an attempt to grasp the chance within the numbers because it looks like some commentary from everybody else, issues are simply slowing sooner than anticipated. And so the query is, why cannot that proceed?

Ark DobkinPresident and Chief Govt Officer

I feel our typical reply at this stage it is too early to say as a result of it is form of not even center of This fall and that is very, very true in any very regular 12 months. With a form of not what’s a traditional 12 months, most likely after I’m seeking to our income tendencies or the outcomes of regular 12 months the final time we noticed most likely on the finish of 2019, which was a very long time earlier than COVID and earlier than — then it was like large decelerate after which enormous acceleration. Then in our case was began, however then the entire basic financial pattern like going totally different than we noticed simply six months in the past most likely, OK. In order that’s why such as you’re asking a query, however even the traditional 12 months, we’re not commenting on this.

And this particular 12 months, I do not assume we will say like, it is vitally dynamic.

Surinder ThindJefferies — Analyst

That is useful. Thanks. That is it for me.

Operator

Thanks. Our final query comes from the road of Jamie Friedman with Susquehanna. Your line is now open.

Jamie FriedmanSusquehanna Worldwide Group — Analyst

Hello. Ark, in your ready remarks, you known as out the rise within the on-site composition, the very best within the firm’s historical past. So I simply wish to get some context on that, why now? After which — effectively, let me simply begin with that, any perspective. After which I had a query in regards to the $10 billion remark as effectively.

However how in regards to the on-site first?

Ark DobkinPresident and Chief Govt Officer

I feel we’re speaking about EPAM persevering with growth as a model. It virtually did not exist three years in the past. Now that is a reputation which began to be acknowledged in the marketplace and advisor discipline. So — and with all the pieces, particularly acquisition throughout 2019 — oh sorry, 2021 — throughout the 2021, finish of 2021, we had been rising this and to help the brand new sort of engagements, which we anticipate in and which we’re doing already.

So we actively had been hiring available in the market. So it isn’t particularly why now, it is simply continuation of what is occurring.

Jamie FriedmanSusquehanna Worldwide Group — Analyst

OK. Thanks. After which by way of your remark in regards to the $10 billion, I do not wish to level to a selected time, however how are you occupied with that journey in mild of all the pieces that is happening, the $10 billion goal.

Ark DobkinPresident and Chief Govt Officer

So most likely it perhaps sounds a bit bit unusual, particularly taken precisely in account what is going on on proper now. However on the identical time, whereas this can be a very, very particular scenario and we are going to perceive it, so all our expertise from the previous quarters goes to finish — goes to ramp in a single quarter and three quarters. On high of this, there’s a potential financial slowdown. I am truly speaking about it.

If you concentrate on our numbers over the past a number of quarters, based mostly on financial setting, based mostly on our opponents, if conflict would not occur, these numbers is perhaps thought of even regular. Not very a lot totally different from what others are displaying, that I am simply bringing all [Inaudible] simply to substantiate that we’re undoubtedly trying into what is going on to be with the subsequent couple of quarters, so six months. However we’re undoubtedly taking a look at what we’ll be right here in two years or three years. And from this viewpoint, $10 billion seems to be like a really sensible objective for us.

Nonetheless aspirational, however sensible. Three years in the past, most likely $10 billion could be sound very a lot aspirational. Proper now, it is only a pragmatic goal for us. That is all.

Jamie FriedmanSusquehanna Worldwide Group — Analyst

Received it. Thanks. I am going to bounce again within the queue.

Operator

Thanks. I’d now like handy the convention again over to Arkadiy Dobkin for closing remarks.

Ark DobkinPresident and Chief Govt Officer

Once more, thanks very a lot for becoming a member of us at the moment. Thanks to your help, which we’re listening to from all people. I feel it is vital to at least one extra time state that EPAM as an organization, we’re supporting Ukraine 100%. So we’re very dedicated to our individuals within the nation.

We do imagine that Ukraine could be a part of our operation for a few years. And whereas we’re going by means of the troublesome half, I feel we’re nonetheless seeing a really brilliant future for EPAM and the expansion. And we perceive that it is a difficult time. So we’ll discuss in three months, and we’ll see what’s occurring.

And thanks very a lot.

Operator

[Operator signoff]

Period: 0 minutes

Name individuals:

David StraubeHead of Investor Relations

Ark DobkinPresident and Chief Govt Officer

Jason PetersonChief Monetary Officer

Bryan BerginCowen and Firm — Analyst

David GrossmanStifel Monetary Corp. — Analyst

Darrin PellerWolfe Analysis — Analyst

Ashwin ShirvaikarCiti — Analyst

Ramsey El-AssalBarclays — Analyst

James FaucetteMorgan Stanley — Analyst

Surinder ThindJefferies — Analyst

Jamie FriedmanSusquehanna Worldwide Group — Analyst

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