Q2 2020 Epam Systems Inc Earnings Call
Welcome to the fan systems second quarter 2020 earnings conference call.
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question answer session.
So that's a question Darren sessions in the press star one or your telephone.
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I'll now like to hand, the call so to speak today, Dave its Robby.
Installation. Thank you. Please go ahead sir.
[music]. Thank you operator, good morning, everyone. By now you should have received a copy of the earnings release for the company's second quarter fiscal 2020 results. If you have not for copies are available on it you pound dot com and new investors section.
With me on today's call or Cadiz outcome, CEO, and President and Jason Peterson Chief Financial Officer.
Before we begin I'd like to remind you that some of the comments made on today's call may contain forward looking statements. These statements are subject to risks and uncertainties I was describing the company's earnings release and FCC filings.
Additionally, all references to reported results what our non-GAAP measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the Investor section of our website.
With that said I'll now turn the call over the arc.
Thank you David and good morning, everyone.
I called it all of your stance safe and skills. He was a time Seneca for joining us today.
Before I go into the second quarter highlights I would look to reflect on the worldwide have been physic on Turkcell football business.
With all.
So what's going to go Susan's it begins.
There's a lot evans's defenses to realized across all clients what sort of.
As old customers, where responded to the money disruptions and in some cases certainly in changes there and smoking.
For the same time machine learning is what they should do to know the queue up we're going to school they bought.
Saying, he's very immediate shooters and localized for each and every you want to watch.
Okay.
More importantly, as well it's not can use anymore. We knew what do we do understand Cisco still fall from the end of the wells.
It's to do dynamic environment continues to be influenced daily by global health crisis, social unrest and economic exactly.
You also can state there are many examples where is it going into two years from is changing the way all clients are doing business.
Can get use their customers and do didn't deserve and mark.
As a result, this change because it requires them to accelerate digital programs and projects where in some cases new models engagement.
We also have taken the challenge of quoted to drive much farther.
Oh, well not Dr program, but really if somebody just to close it was a field and make it was I feel depreciation should grow supermarket locations collaborating with much higher levels.
This close in this has taken our giudici to the next level, enabling us to be more responsive to all classmates you'd be a support to an interest as well as making first ammonia apologies.
Yes, you would then went also has been see what though to filter that was good and much more real time insights be able to with the nation global supply to.
The clogs needs and took two months business if it.
She is going to add to direct results.
And as he was working well, though this quickly become.
Except the through and wait to soap <unk> glory.
We believe this we're working through will serve us well into the future.
We continue to manage the downside season, but also take advantage of spend assumptions, but its cost as a starting to position themselves.
In the results we are working very closely because all that seems to do fine and respond to demand in much more can do thanks.
This new partnerships with engagement that's important work.
<unk> increased investment in knowledge management collaborations and from the two platforms and they wouldn't get access to information includes business purposes to follow teams to connect foster for information seamlessly and be more productive with responded to lift this the first place but.
Today. This is one of the most important areas of focus for us.
We're going to all second quarter results, we diluted with revenue of six Congress suited to meet handled represented 15.5% in constant currency gross and non-GAAP bps, one dog food to success, if youve to put central and it year over year increase.
Oh, the Q2 results reflect and if you can see an execution on the low levels of demand so focusing on driving higher levels of performance across the call.
He does it go to zero by a few highlights the divorced from entering into Britain went inside to what they'll do the stupid things in okay.
Is there sort of previous is there is a little studied it you know and fuck because a lot. When you have all customer studies you forward.
Huge growth.
And number of old customers are focusing wants to learn onions, a afford us because they didn't use a number of service providers and consolidate the cruise fuel before Cuba.
And then you'll see pieces, we had been if it's too but being asked to do more in silicon physics critical business from promotional efforts.
To ones is the Russell indices and specific customers, which remain significantly bucketed was a global funded.
We don't know well the ability to into business as usual level to succeed.
There's over that there are some cases feature so im not stuck in gross you wouldn't have caught up.
For example, if it didn't achieve that no odds of given companies because before the digital ecosystems that provides a infrastructure and series is needed to fall gaming. Unfortunately, my subscale whatever they do we'll put to access across any platform and in store.
Combined visits and people I, but it'll give sort of the if you gave store as well as a fund the real engine. The world's most open ended with real time three due to.
We are proud to have been part of it didn't give story since before the keys. Unfortunately.
He's only been data, so things and you didn't and a double yes expertise bunkers calibrated it the games to provides the flexibility reliability and scalability needed to continue to pools involved are used to fund lend given in the field force nice growing from 1 billion slabs in 2017 to come to 50 meter.
Today.
In Q2, we also began working with several large new customers.
Undertaking the multiyear transformation of the business.
You bump because it's been engaged to feel because application development and enhancement efforts across several key areas of the organization.
Well, it's still 40.
Is there to listen to be believe there is a potential did want him to the too tough to when you customer freeze over the next 12 24 months.
They also proud to share a recent partnership Union. So resulted into developing in Malta featured held a Buddy queries 19 information all designed to put their children favoritism conveniences across Europe with Central Asian, My displayed in the music and who wants associated to squeeze night.
And lastly, probably as a result of everything you just fair.
In recent quarters, except at all and look forward to services, we did not gotten it provides its competitive assessment because if you have to legislate you service providers highlighting the problem is one of the phone due to companies bishop with position for quite enough to quit types.
Because it looked Mister car the old can it's the second half for policies, California 20.
Do you expect some continuing disruption and all in flock is this result in lower gross and if you industries will be so.
Well some of those are what I did it you know blind be too because if it used to still believe it's challenging to talk about our business also beyond the next quarter.
BJ some little color write off.
Similar because we started because you didn't know if he was running school all the key prodigiously when things change, we will continue to protect our people and our financial position.
As opposed to my continuous investment.
You know caught up by religious and what for to be put it for virtual come back.
We certainly believe all position as a leading provider of digital put a complex wasn't reading surface is combined is all integrated that much who didn't consultant expertise is oh, we could do see true.
This is why they're very confident in our ability to come out of this challenge in time via their mobile you tend to result, even company and continued good enforced funding that could vitamin just wouldn't put since loss rate.
Now, let me sends a cool Jason.
Thank you dark and good morning, everyone.
During the second quarter, you Pim focused on supporting our customers need and operating organization efficiently in an uncertain demand environment.
The result of this effort was a quarter, where we delivered better than expected results across multiple financial and operational metrics.
In the second quarter revenue came in at 632.4 million.
A year over year increase a 14.6% on a reported basis and 15.5% increase in constant currency terms.
Lucky a negative foreign exchange impact of approximately 1%.
Revenue for the quarter was higher than our previously guided range due to somewhat better than expected demand combined with greater availability across our delivery organization and therefore higher billable utilization.
Moving to our industry verticals in Q2, we saw greater variability across the portfolio through the impact of the pandemic on certain customers and their end markets.
Business information media, which delivered very strong results posted 42.9% growth in the quarter and continues to be our largest industry verticals.
Life Sciences, and health care grew 16.4%, reflecting a lower level growth for both industries. The vertical was impacted by a tougher year over year comparison.
Software in high Tech grew 13.2% in the quarter.
Financial services grew 6.3% in Q2.
The quarter was impacted in part by an expected ramp down at the European banking clients.
Traveling in consumer was flat in the quarter growth in this vertical was impacted by declining travel into a lesser extent retail.
Offset by growth across some consumer branded goods customers.
And our emerging vertical delivered 11.9% growth.
<unk>, primarily by clients and telecommunications offset by a slowdown in the energy sector.
From a geographic perspective, North America, our largest region, representing 60.4% ever Q2 revenue.
Grew 14.1% year over year or 14.4% in constant currency.
Europe, representing 33.4% over Q2 revenues grew 19% year over year were 19.8% in constant currency.
See I, yeah, representing 3.5% over Q2 revenues declined 12% year over year.
3.3% in constant currency.
And finally, APAC grew 20.5% year over year or 21.9% in constant currency terms and now represents 2.7% of our revenue.
[noise] Kobe 19 appears to have had a greater impact on clients were midsized and as the business environment improves we anticipate the revenue contribution from these clients to increase.
I'm moving to an income statements are gap gross margin for the corner was 33, 7% compared to 35, 5% and cute of last year.
Non gap gross margin for the corner was 35.1%.
Compared to 36, 8% for the same quarter last year.
Most margin in the corner was impacted by Cove at 19 related customer concessions that will provided on a limited and temporary basis.
[noise] gap SG&A was 18, 1% of revenue compared to 23% and cute you of last year.
And non gap SG&A came in at 16 per cent of revenue compared to 18, 5% in the same period last year.
Are reduced SG&A levels in the corner, where substantially driven by a lower level of activity related to hiring.
[noise] locations travel and marketing events.
Gap income from operations was 83 $4 million or 13th 2% of revenue in the quarter compared to 72 $9 million.
13, 2% of revenue Q2 of last year.
Non gap income from operations with 108 $2 million for 17, one per cent of revenue in the quarter compared to 92 $6 million for 16 80 per cent of revenue in Q2 of last year.
Ah gap effective tax rate for the quarter came in at 12, 4%.
Which includes a greater than I expected level of excess tax benefits related to stock-based compensation.
Non gap effective tax rate, which is excludes access tax benefits was 22 three per cent.
Diluted earnings pressure on a gap basis was $1.14.
Non gap EPS was one dollar and 46 cents, reflecting a 14, 1% increase over the same quarter and physical 2019.
[noise] and cue to where there were approximately 58 $2 million diluted chairs outstanding.
Yeah, I'm, turning to our cash flow and balance sheet cash flow from operations for Q2 was 146 $2 million compared to $44 million in the same quarter for 2019.
Free cash flow with 134 $7 million compared to $32.4 million at the same corner last year.
Resulting in 158% conversion of adjusted net income.
E M ended the quarter with more than one 2 billion in cash and available borrowing capacity.
Made about 993 $7 in cash in cash equivalents $60 million in short term investments and $275 million available on a revolver.
D. S. L was 73 days compared to 76 days at the end of Q1 2020.
79 days in the same quarter last year.
Moving onto a few operational matrix, we ended the corner with approximately 32300 engineers designers and consultants.
Nine 7% increase year over year, and a sequential declined from Q1.
A turtle head down for Q2 was 36400 employees.
Utilization was 83, 9% compared to 78, 4% in the same for last year and 79 five per cent and Q1 2020.
The high level of utilization and Cutie was was the result of a greater capacity across the delivery organization.
Given stay at home restrictions and limitations on travel during the quarter.
We expect utilization to return to levels and the high seventies during the second half a physical 2020.
Now, let's turn the guidance.
With the continued uncertainty in the market to the current pandemic, we will continue providing a quarterly business outlook, while holding off on a full year view.
[noise] Dark mentioned, we seen a stable level of activity in our portfolio over over the last 90 days.
As our customers are adjusting to changes in there and markets.
Looking forward, we expect continued stability in Q3 with some improvement in the demand environment.
Capacity to generate revenue in Q3 will again be dependent on our ability to add head count to meet improvements in demand while operating it more typical utilization level.
Four Q3 of fiscal year 20 revenues will be in the range of 633 to 643 million producing a year over year growth rate of eight 5% at the midpoint of the range.
For the third quarter, we expect gap income from operations to be in the range of 13% to 14%.
And non gap income from operations to be in the range of 16, five to 17, 5% <unk>.
We expect her gap effective tax rate to be approximately 16% and non gap effective tax rate to be approximately 23%.
Burnings for sure we expect gap diluted EPS to be in the range of $1.15 to $1.24 for the quarter.
And non gap diluted EPS to be in the range of one dollar and 40.
To one dollar and 49 for the corner.
We expect a weighted average sure counted 58 6 million diluted chairs outstanding.
Finally, if you <unk> assumptions as sport are gap to non gap measurements for Q3.
Stock compensation expenses expected to be approximately $19 million.
[noise] amortization required intangible assets is expected to be approximately $3 million <unk>.
The impact of foreign exchange is expected to be approximately a $3 million loss for the quarter.
Tax effective non gap adjustments is expected to be around five $6 million.
We expect to excess tax benefits to be around five $9 million.
Oh, no we delivered a good quarter successfully navigating a challenging business environment.
I would like to think our employees across the globe for their hard work and dedication D. P. M success.
Operator, let's open to call up for questions.
That's a reminder to ask a question do you need to pet star wanting your telephone.
To withdraw your question press the pound key.
Please send that won't be compiled Q&A roster.
My first question comes from Ramsey Allissa Barclays. Your line is open.
Hi, guys and thanks for taking my question I was wondering if you could comment on the kind of competitive environment in the context of this pandemic them and you mentioned consolidation vendors among clients and that could potentially be a tailwind for you guys. If you could just give us a little bit more color on that particularly on that process in terms of vendor consolidation how strong of that forced you can get.
It is in the market happy that change the competitive environment.
[noise] I've used it would be easy to answer a question because like as we mentioned so to ask when there's not stable at all but definitely.
One of the reaction of the clients whether this change was consolidation and V. As soon as is.
Clearly specifically gross lodge clients. So it's not Thompson really knew about it was accelerated you didn't as a lost.
Plus.
Two quarters practically.
And.
I don't know how exactly two quantified.
Definitely.
It's a number of much clients.
Okay.
And then I wanted to ask.
About the do you had mentioned kind of limited and temporary concessions I'm just curious how much of an impact that might have had in the quarter and and and expectations. There about around that continuing into next quarter is that a headwind we should sort of expect again or is that really just sort of a one and done phenomenon this past quarter.
Yeah, so in the quarter in Q too and then I'll talk about Q3 as well.
What it had a modest impact on revenue, but it did did show up in our gross margin number and to be clear.
Do you think about clients, particularly for instance, midsized airline that is doing 10% of the revenue that they had expected to do and like.
Asking their employees to where two days a week and take a 60%.
Or greater sorta pay cut.
You wouldn't have a discussion with that type of client and it's very hard to say, hey look we're not going to do something to support you and so we had a series of those types of conversations again.
For Ah definitely had a minority of our customers that those who had very challenged kind of revenue models gave the discounts are definitely sort of temporary intended to sort of bridge through a cobin period, we expect that the impact will decline between Q too and Q3, and then again in Q4.
And again it said, it's a temporary Ted just be a supportive partner of certain of are more challenged clients.
Alright terrific. Thanks, so much I appreciate it.
Sure.
Thank you. Our next question comes from Jason Katzenberg with Bank of America. You line is open.
Hey, good morning, guys I just wanted to ask a question about the Q3 revenue guide I know what the midpoint, you're looking for 8.5% constant currency growth versus a 15 in the App. We just saw on the second quarter. So understandable you'd want to continue to be conservative in this environment, but I'm wondering if there's some specific call outs that we drive.
The slow down how much of it is supply driven and do you think that Q3 will be the trop for year over year topline growth.
Yeah. So.
We feel.
Clearly much better about the demand environment, what we saw it and cute too I think consistent with what some of our peers have said is sorta stabilization kind of in the middle of the quarter and then we are also seen some really interesting growth opportunities both with existing clients and actually we've had some nice new logo wins, even during the pandemic when we couldn't meet with clients and they couldn't come visit us.
Our delivery centers. So clearly the demand environment is improving at the same time, you'll note that we really didn't add any headcount actually head count declined between Q1 in Q too.
And so so we've turned back the recruiting engine we've turned their recruiting interim back on but we've had a quarter, where we we didn't add head count and so that is going to have an impact on the growth rate is a percentage growth rate.
Clearly back hiring relatively aggressively at this time to support what we see is.
A solid improvement in the demand environment.
Okay.
Okay.
Yeah, no. Okay, I think I got it. So you should so maybe you Gotta you Gotta think about the fact that we usually would've hired.
1500, plus employees and those are always aren't here right now right. So that is going to have an impact on so again it is very much much more so supply driven.
Alright, right now we are but we're back in.
Time, where.
<unk> feels feels certainly improving and now it's all about putting supply in place.
Right right, Yeah, a few months ago, obviously things felt worse and you were less willing to keep the recruiting and now your grand theft back up I say I.
I guess as part of that any issues finding the right Cowan in the right Geography's.
Issues, finding the right talented rent geography.
Hi, I'm smiling because he when is this situation like.
Can you repeat what pieces for the last several yes [laughter].
And so many different environments in general, but for the talented very similar because like.
With this situation as you as you see.
Kind of competition for Italians on global level only grow.
So and while.
Raising your impact because of specifically rolls his budget and also some sort of Interscope.
Gave kind of.
Release for relief for some period of time, it seems like in the future it will be.
Very very competitive fan.
Feeling feasibly, even right now.
So we feel comfortable with our ability to higher to support the demand, but as art said in the market continues to be somewhat challenging.
Right.
Just a follow up on margins I guess to the extent, but those stabilize or or even creep higher with that more likely be driven by improved topline growth or SG&A leverage recognizing that you'd utilization coming down in the second half of the year.
Yeah, correct. So we had very high utilization in Q2.
We expect that that utilization level will decline between keto in Q3 at the same time I expect you are going to see a solid improvement and gross margin between cute you in Q3, and that's driven by a number of factors one as I said the discounts our time based in temporary so the level of discount.
Klein between Q2 in Q3, we had some revenue recognition impact in Q2, largely related Russian financial institutions and again, it's something that we occasionally experience, where we start work, but we don't have assigned contract and so we're not able to recognize revenue will have less of that impact in Q3.
Then we usually use.
[noise] usual impact of Q3 is there's more of available workdays.
In Q3, so that has a positive so those three positives will will exceed the impact of lower utilization and I expect a solid improvement and gross margin between Q2 in Q3, and that's part of the reason for the guide of 16, 575%. Despite the fact, we also expect.
Elevated SG&A as a percentage of revenue relative to the 16% we booked in Q too.
Got it alright, thanks for the commentary.
Thank you how next question comes from Brian Burgeon with Kelly Your line is open.
Hi, good morning, Thank you.
Wanted to ask here just took you outperformance. The bridge then to the three Q view. So can you just talk about some of the drivers of the better <unk> results versus your expectation was there was there any shorter term work benefits there that contributed any industries that posts something's forward. So I'm, just I'm trying to get a sense on <unk>.
Pipeline told me out here and whether three Q is the trough from growth so to speak.
So the queue too.
Q2 cities and just reflects so volatile.
The call.
ZIP code is a lot of into us.
Beginning of Q2 coats ended up.
Hello, all of.
There's a liberal of unsweetened tea between clients and usually was very very different.
A quota so because I understand your question you always can Y Q2 results were so much fries him fixed breakfast right.
Yeah.
Obviously solid outperformance relative to where we stood three months ago.
And understanding you, we're giving a relatively.
I guess prudent view here for three Q, giving you uncertainty. So I'm just trying to understand that it wasn't everything's pull forward that caused you to outperform here and that's why you're.
You're <unk>.
Down.
This is just very volatile and worry them into our clients where we can.
Kind of okay.
One assumptions at the beginning of the quota and change it to them. So.
So that's exactly I assume reflection of <unk>.
<unk> like communication is disciplined and right now as we mentioned already.
And the vitamins.
Much more stable. So is there is no like daily changes so deeply changes in client.
It's much more predictable.
Why we feel that Q3.
It feels but but.
No it's still.
Not business as usual.
By the.
We will not comfortable too pretty due to what good.
Go into <unk> into for Yeah. So are kind of talked about market and customers and the fact that we didn't pony thing and I think I'll just answers simply from an algebraic standpoint.
We had this when I call a slightly perverse impact of the pandemic demand with somewhat better than we expected as Ark said, but we people couldn't go on vacations in many cases.
Those of US who are in major cities.
Go outdoors to do anything other than the grocery shop and walk your dog and so you had people who would've had booked vacations that did not take those vacations and instead they worked and so we saw a much higher levels that utilization and that helped in a Tina in business that helped drive some of the wrote the revenue overage.
And we expected the utilization levels will will returned to normal which again is high seventies and so part of what you're seeing is.
Arguably a supply constrain that's that's a result of people beginning to take vacations in Q3, when they didn't take vacations in Quito, if that's clear.
Okay, Yes. Thank you for a color there and then just to follow up here.
Just as revenue growth does recover are there aspects of what you've done in the cost structure that will enable you did a sustained margins at a higher level understanding utilization is going to come back down but anything on our corporate side anything like that that helps you have more confident thelion unprofitability going forward.
So I wanted to first.
Thing comment on the negative so we ran at 16% SG&A and we do expect that to head back towards the 18th 19% range that I've got at two in the past it will take some time. So I don't expect to end up in that range in Q3, but.
Probably would end up in the 17% to 18% range.
I do think though.
Clearly have have learned just during this process right and so we did a lot more.
A lot better job to be honest, probably of matching supply and demand and being very nimble to respond to changes in individual clients. So for instance, you had a ramp down on one client and a ramp up in another rather than hiring to support the ramp up we were very careful to try to match.
Staff, they were coming up one one customer to it and then to put them on the ramping account.
So I think we got more nimble there, so who knows what impact that could have on bench and utilization.
And I think that what you'll you'll continue to see now, particularly in both the.
SG&A into a certain extend the gross margin line is is renewed investment to support that in excess of 20% growth rate that we expect.
Returned to and did not overly distant future.
But again, so I think they'll probably be things that are be kind of on the on the margin in terms of positive impact, including probably less travel and some of that but I think I would still sort of articulate that are greater than 20% growth rate.
With a profitability range of 16% to 17% sort of consistent profitability is how we intend to land once we kind of get through.
The challenging economic times.
Okay I'm gonna start thank you.
Thank you.
Our next question comes from Maggie Melon with William Blair Yellin is open.
Hey, it isn't that Ted on for Maggie Thanks for taking the questions.
Arkan, Jason could you could you talk a little bit about the hiring in this type of environment and how many how that differs.
Two a year ago.
Large ice skating work from home environment.
So I think it would be more appropriate to talk about it like next quarter because like if you understand like what was happening dynamically into mark isn't Q too wasn't exert as a quota way people don't cut in a lot. So that's why it's difficult to answer does equation.
It's definitely it was very different lost here it was myself to labor market, but again cue to probably will be an exception. So I assume because it's let's creation would be interesting to kind of.
T V you next quarter when.
Some stabilization Zappa and people, you'll start to to kind of cutting again and bigger bigger numbers.
Okay. Thanks.
I I understand that a little bit confusion, because we were saying, it's still very competitive market and it is a very competitive luck, okay, but cue to again was it was an exception and.
It wasn't much cutting was happening so mostly like numbers was neutral attrition, which is also law.
Involuntary attrition was higher than usual okay. So that's all changes demand from clients was clearly lower them.
Previous quota nobody would understand cue to still huge different versus Q.
Okay, but right now seems to.
Stabilized right now.
The labor market starting to be.
Getting Carter as well, so and I think next was able to show the differences.
And we kind of ran the recruiting engine and kind of idle mode.
<unk> turn that back on as I think you've seen in the past.
We've been able to add.
In some cases I think in excess of 2000 net additions and so clearly it'll take us a little bit of time to go from from Idaho to sort of fully running but.
Clearly doing work that we've always done with universities were.
Beginning to lateral hires again, our brand as a higher or is it continues to improve in so.
I think you'll you'll see us sorta turn it on and certainly.
Pushing harder as we go from Q3 Q for.
Okay. Thanks, that's helpful.
And then you mentioned are demand for digital transformation accelerated so I guess coming out of Covid do you believe I guess, just qualitatively speaking that E. P M could see.
A period of time, where growth kind of exceeded that historical like 20 per cent organic growth sorry, not necessarily looking for specific guidance. There's more in terms of kind of a growth trajectory and maybe if it if the floor for that revenue growth.
Medium term here it may be moved up at all.
Sure just thoughts on that.
I assume.
Was there as a controller T shirt, it's over into today.
You know kind of January 11th date, the tools would like to see how you do to onto 20 plus percent growth and I assume because radioactive usable because.
Hi grows.
This size very difficult to accomplish because all of this component.
Reality music sushi and you'd like to to provide that nobody's fresnel to.
Talk to in the past many many times. So I think the goal right now to return to normal for US, 20% growth and I think of the market definitively also support surprises that it's a different issues and just market demand.
And so is art said.
<unk> been operating at the greater than 20% growth. So I think those types of growth rates, which I think historically been more than that sort of 22 23 to even 25 per cent.
Okay. Thank you very good quick follow up question, what was the organic growth rate this quarter and what's included in guidance for three correct. Thank you.
Yeah sure they organic growth rate, so I'm going to decompose. So we got 14th 6% reported on a constant currency base, we've got 15, 5%.
And then we've got about 2% benefit from inorganic and so that was the 13th 6% organic constant currency growth rate.
We expect to get.
At less of a benefit from from let's say M&A related or inorganic. So we think that that contribution is going to go from 2%.
Both Q1 in Q2 to 1% or or maybe slightly above in Q3.
So again.
I think we feel pretty good about the birth rate considering the market.
And again.
Very little of that is acquisition driven.
Okay. Thank you very much.
Thank you. Our next question comes from Sir.
Jeffrey you line is okay.
Good morning.
Just just visiting kind of comments sort of an earlier comments about revenues and growth if I was to parse your comments about supply constraints.
Are you, suggesting that three Q marks the bottom for revenue growth how should we think about that.
Yeah I mean.
<unk> without my sorted doing that the algebra on the phone call, which I'm going to avoid is but I'm going to maybe help you with that.
I have to probably go back and look at how many.
How much head count, we we're adding let's say in 2019 on a quarterly basis.
And then and then look at what we added an and cute you which was negative.
And think that.
That comes out of the revenue number for awhile.
Until we can sort of catch that back up and so.
Naturally thing going to take you to a place where you realize that it's hard to get in excess of 20% growth rate in the near term because you've got a lot of hiring catch up that you need to do.
Again, Sir all the demand environment, we're continuing to hire.
But we have a quarter, where we were appropriately responded to have a very unclear and is argh said sorted declining demand environment. As we went from Q1 to cue to argue.
Okay.
And then.
Follow up can.
Can you help me understand the comments about the supply constraints and the fact that adding headcounts still remains quite challenging if I if I understood correctly.
Going back to last year.
Obviously, when you were growing above 20% head count was growing mid teens.
And so is there any reason you can't grilled mid teens, plus or a lot faster than that at this point like what you.
Yeah, I think we've.
Missing the point of.
The whole process working and what it means.
In terms of supply chain, when you need to hurry like thousands of people so when Samson like.
We're starting to happen in March and April.
<unk>.
And that will go, though and glines reactions as well so you have to start with the whole engine of.
Bring in people in okay.
And this engine you kind of stuff just in the one day or in the last week and that's what we're talking about there is no.
Soon systematic like probably of each.
North Dakota, but we need to like probably.
And as a quarter to the store.
So cool engine to work properly.
So and maybe.
It wasn't clear enough is that in the case, a Q too.
Running it very very little bench right. So when we entered the quarter and we gave guidance we said that day.
Demand slacked.
We were going to maintain our workforce and maintain our capacity for for for a return and guided to 596 O five and here we ran at 632.
So you can so there's not a lot of inventory left in the form a bench and so we've got to build our inventory back up again.
It means that we feel good about the demand environment. It means that we expect ongoing revenue growth, but it's arcs at it just takes a while to hire the thousands of employees that you need to get back to an in excess of 20% revenue growth rate.
Henderson so.
Plus it until it because there is like from the market for it to you it's not the markets clue, even from the word for some quota, 20%, let's not forgiveness as well, it's not likely and normally Nevada.
And we will understand that volatility.
Strong and like even like even look scope in cute to a law. It's stabilized at the same time many of US were simkins physical pandemic kind of situation going to improve and then the second wave started and we still don't know saw the second wave Ville.
Come up like.
And another month or two.
What it means actually for business and business still saving attempts to the second wave that's why we talking about.
Bye.
Not business as usual too.
It's much more stable.
Three months ago everywhere.
Talking about what we seen in way, it's much more stable, but it's.
Comfortable his last year.
I think I understand in since that.
Given the uncertainty you have two obviously it takes time to ramp up but you also have to be cautious in the sense that there may be a second wave or something.
Hello, there too because we we don't want to around pop with them.
Up against the tuition like we were for you chose as the beginning of cute too.
<unk>.
That's helpful and then as a follow up.
Maybe a little bit more color on the demand environment and kind of the sales strategy. It seems like revenue concentration your top five customers.
Continues decline.
I'm, assuming this is simply a function of them continuing to spend these are larger clients and the downturn, whereas maybe your client you're smaller clients I've gotten more defensive.
So how our claims outside of the top 20th solving at this point from a demand perspective.
You to mix of new clients versus.
Is the vast majority of your growth at this point coming from existing clients of that 55%.
So I think during my kind of general.
Oh, he would have you I was trying to bring specifically reports like assume.
Yes, like ledges clients preschool yourself.
Strunk relationship level of trust, but we've been <unk> for all of a consolidation okay.
There are lots of opportunities for growth in large glass, which few but.
More strategically jumping to prepare themselves for.
Kind of.
He'd expected situations like help with already.
Because.
Somebody with us can evolve.
You as soon as it's always digital transformation will allow us to grow buses and 20% from this point until you I think everybody understands it.
Digital of you'll be reading and he was more into went through it'll be even more and nobody's horoscope pushing us like 45 10 years accept.
Then we expect at like six months ago, So well all of this covenant so.
Specific pause.
There are companies like is around new clients and have yourself, a number of new clients.
<unk>, which is we mentioned simkins it probably in another <unk> in 24 months might become top top 20 is there are some grows in.
Below 20th across the number of client at the same time is there are some impact on smaller clients tuition.
Not certain off or do you do have financial resources to put together or actually Z industry issues.
Buddy.
Very much impacted so that's great is this a little bit increase in concentration.
So but like in general.
Zen at all we don't see any specifics local substance unusual from reaction across the port, Florida I assume goods.
You too.
Pretty good feeling about miniature.
Florida.
Thank you.
Thank you.
Our next question comes from Ashwin Shoemaker with city.
Okay.
X.
Good morning, when gay.
Hi.
Where do you think.
Yeah. Good to hear from you guys. Thank you for all the comments and Dick test.
One thing I wanted to understand was sort of neat of change if you win so.
Which worthy clothes or your conversations in lake worth it clothes are getting better and in which 40 clothes are they getting worse in other words is there any kind of the.
I guess, the initial North Dakota, Sedena things like salad and get hit.
It's like where Thanksgiving incrementally better later, they getting into my cable.
Yeah. So the funny thing, even travel which would have had an immediate impact.
Come into April.
Bye, let's say late in the corner you began to see certain of the travel customers.
Come back and say, Hey, look we need to do certain things to be able to respond to the changes in the market.
And so I would say it's.
In some cases, maybe maybe better better at the same time, we clearly expect that that's going to continue to be challenged from an annual growth rate perspective, we continue to see strong and expect to see strong growth in the business information and media.
Large companies looking to modernize their technology.
Large technology budget. So we think that continues to be a strong opportunity for us healthcare is Ark has talked about not only feel good about health care, but also we've got.
Some new opportunities there in new logos.
And then I think the financial services might be a little bit mixed as we talked about we had a ramp down.
The European Bank.
And.
That'll that'll show up again in the cute regret threats.
But.
And again that technology, so is a little bit mixed for us we've got some some large technology clients, including the one that are talked about and his.
At the beginning of the conversation that continues show good growth and then we've got some some smaller tech clients that probably continue to taken more defensive stance.
So.
I think like.
In general it's almost like.
Articulate each industry right now looking what do they need to do next to put you in this situation that's why I like.
It's really feel deserve opportunities across all.
Industries, you is the most impacted exactly because they were most importantly, sink and what to do.
During the next time.
The problem is still there that nobody understand.
Lay economy going to be in six months.
So.
Jacqueline decision jump right now or wait a little bit or some of the health resources some of them.
So, but my short answer would visit opportunities practically although was the place and this is like beginning of cue to some of them completely stopped.
And then Zan Z.
The divorce decisions.
Understand so as I kind of as you can try to try to figure out.
Some of these quotes and K and.
Clearly galen.
Your new outlook TQ here.
Bending came there I'll Cook for two cute there was a lemonade with the ability N as in it went through that quarter. It looks like museum increased.
And visibility what's the visibility. Thank you very soon with the same time two Q how are you feeling about that.
In terms of the potential Florida.
Yeah. So I think we've talked about the fact that we've always had a series of systems Indian processes that are supported by the systems that we used to track demand an update on a daily basis.
At the beginning of Q too.
We also initiated a series of what we call standup meetings Europe in the morning, North America in the afternoon, where we were very carefully.
Collecting feedback on customer behavior, and certainly there was an awful lot of ramp down activity.
At the beginning of cute too, which informed or guidance okay.
Right now obviously the tone of those conversations radically and I would say kind of 180 degrees different.
And so.
Clearly now we have have much more comfort we've talked about.
Proving demand.
I'd say, maybe strangely more of the uncertainty is around supply and again this is going to sound kind of funny, but true it depends on.
On to a certain extent on how much available work, we have whether or not employees are on vacation or whether they're they're staying at home and working and you understand how that dynamic would work in a tnn business.
Yeah, Yeah, absolutely no got it now that can connect policies will thank you.
Thank you. Our next question comes from James Faucet Morgan Stanley. Your line is open.
Hey, this is Jonathan on for James Congrats on the corner you guys.
You you mentioned being the beneficiary vendor consolidation, but have you seen a pressure from larger diversified competitors or a customer still looking for best in class partners.
And.
Customers, who can burst in class partner, specifically right now because of it it would understand again, Kevin work too.
Houses.
Crisis sure how important.
Digital good to be.
In the future.
And.
From our point of view.
We need and some consolidation game exactly because of considered to be worse than cloth right.
Oh.
Got it that's helpful. And then you touched on the on the Springs and demanded environment, but can you provide color or the pace of project starts bye bye vertical so so which verticals are seeing sorta okay.
Sure.
After upstart that others.
Honestly in my in my view, it's two more.
Specific customer to Brandon.
See if it vertical depend it.
Probably at least <unk> feel.
Side of our portfolio, but but definitely.
See some acceleration.
Gross couple clients and Costcutter lifesize.
And.
And we do communication as well.
But there is still a lot of volatility so it's very difficult to.
To us question.
This is certain so it sounds as this industry good much faster than others.
Because like I mentioned like several of them in Fox and some of them when it can strategic decision, sometimes we surprised.
That's helpful. Thank you.
Thank you. Our next question comes from David Grossman with Stifel. Your line is open.
Thank you.
I'm wondering if you could just talk a little bit about what's.
Clients perspective, as well as your own the dynamic of work from home how that.
How you would expect that to evolve in the back half of the year.
Whether the percentages things stay at an elevated level, even when the pandemic hesitated.
Well I think it's.
Kind of the second.
The most interesting outcome of the whole situation. In addition to acceleration of a digital like the acceptance of <unk>.
Working from home environment.
And.
Okay.
At some point, we expect is is clarksville would be much more demand into.
Re toward too.
More normal.
Normal setup.
But against the second wave practically stipends this.
Turned into much longer.
Exercise working from home.
I assume.
We still we.
We will get lessons from this.
Because <unk> when people.
Considering okay I need to do is look for three six months and then another like changing for almost permanent.
But.
In short.
Going to say this a new here.
[noise] understand that it was much much better than anybody expected and companies waibel too.
Two onto this environment stay productive.
Much better than expected and it's.
For sure that this is about him is going to be with us.
Hello.
The proportion those as it is good to be 22, <unk> two of you'll still have to see <unk>.
Probably like in another six months Hill.
Save as much better, but we definitely.
But as soon as kids Nicole infrastructure right now in College works, while we were pretty put in for this appropriate invention before that we probably one of them was distributed.
Company, a is a novel a small offices.
In comparison to any.
Oh, a competitor so better prepared for this navigate in good like too.
Improve into the system.
Blood work to support it was higher level of distribution and I think we'll be benefit to improve this.
But again.
Proportion, so you'll still have to see.
And what is your preference what is the best outcome for your parents and your mind.
The best.
It's definitely give you an addition, though.
Level of flexibility so finding the best salad.
Independently of it's location and so it can work for them workers with lots of amorphous licensee to a small city from this point of view is additional dimension.
For Thailand, but it's not going to benefit justice Bottlings can benefit tainted with regular you'll be able to.
<unk> alright infrastructure, we do believes that yourself advantage here.
Right.
Okay. Thank you for that and then just I want to go back to the customer cohort question about.
So much of your growth historically has come outside that top twenties. So I I did hear your explanation. So you don't need to repeat that but is there an element of supply here also where.
You are redirecting the limited supply that you just have and the quarter too.
Your bigger clients as well as all the other things that you mentioned and the only reason I ask is just so much of your growth historically, it's coming from outside the top 20 accounts I'm. Just wondering if there is this a temporary shifts or.
Something more permanent.
We do believe that.
Outside 20th you'll start grow and you'll be growing.
Chili faster.
In this very dynamic Nevada.
It's a little bit different because.
If you surf establish relationship and opinion change and quickly and.
You understand what you're doing so sometimes it's easier to focus on.
Relationship with known Situps.
Alright, alright got it so okay.
It's part of this.
But but in general like.
Let's not be confused about cup toward ever yourself like inside of top chief Tilt-up top hungry, we have so many opportunities.
To grow with that we absolutely sure that it would be rebels to get.
123% up and down between offices.
Right.
Okay, and then just one last thing I mean, Jason I think you indicated he did a lot to go to the algebra, which I understand but that's just back of the envelope. If I just kind of look at historic head count growth. It looks like the absence of growth and head kind of kind of hurts you.
About 5%.
Assume that the pricing is offset by utilization.
Yeah, It looks like your about 500 basis appointment <unk>.
Impact from the head count issue does that does that sound about right to you.
Let me just look at it for a second here.
Yeah I'm.
Concerned about maybe what conclusion, you might draw, but my rough math kind of would be somewhat consistent with that.
Got it alright, guys. Thanks very much.
Thank you. Our last question is from Edward Castle with Wells Fargo. Your line is open.
Hi, Good morning. Thank you I was just could you just remind us how you hire people.
Historically, how many are in person interviews, how much it's done virtually how many from recent grads versus ladder roles.
It just trying to get a sense of how you did it in the past and I assume most hiring at the moment is virtual and I'd be curious about the school cycle of recent grads, how that my impact your ability to re accelerate hiring thanks.
Yeah different locations is different work.
<unk> scalable locations.
Probably 50% of.
People coming from.
Probably universities, but we feel special infrastructure too.
Go through.
Good first two brynza level of people to the red level.
It could be hundreds of thousands of people would cups and this part of the style, which was kind of slow dogs as well.
And that's why we exploit as a whole logistic but.
We do we can like almost each quarter about.
Blood for when the system.
Include liquidity distributed blood for them to interview in process.
Cold work Floorage as part of our ecosystem. So from this point of view do is this will surely is.
Very much part of the.
Culture as well.
So any other questions Oh can I prove this point of view, we should be able to.
Three in Gaza Cola, Andrew relatively quickly, but it's still textile taken into account called much is distributed across multiple develop incentives.
We need to look to put airforce around bootcamp so.
Alright, my other question around us.
Mmk efforts, what the pipeline looks like I assume you're kind of put it on hold and the last few months. So you back looking again, and then giving you a significant balance sheet capabilities.
And sort of what area. So you're looking thank you.
Oh.
Therefore until you I don't think there are any changes so it's never was food's on quote so.
It's actually I was I would say that is probably with accelerated.
Ariel focus exert very very similar to what.
So is there is no change here the sink as usual so whereas it would be happening. So we will will announce but I guess.
Less and less than changed your lemonade.
Alright, thank you.
Thank you that concludes the question and answer session or with no I'd like to turn the call back over there.
And for clothing remarks.
Okay. Thank you for zoning for joining us.
Cause everybody.
Save for this interest interest in time and.
We're pretty.
Positive about.
Was happening in right now, it's much better than weird. So it will be like three months ago, So again environment and stabilizing hopefully it will be continuously stabilizer that.
Let's see let's see what we can share in three months. So thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may know disconnect.
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