Q2 2022 Epam Systems Inc Earnings Call
Yeah.
2022 conference call at this time, all participants are in a listen only mode.
Could you speak his presentation there'll be a question and answer session to ask a question at that time. Please press star one one on your Touchtone telephone.
As a reminder, today's call is being recorded I would now.
I think absolutely house, Mr. David Straube head of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. By now you should have received your copy of the earnings release for the company's second quarter 2020 results. If you have not.
Not a copy is available you can have Dr.
Com in the investors section.
On today's call are cutting <unk>, CEO , and President and Jason Peterson Chief Financial Officer.
I'd like to remind those listening that some of the comments made on today's call may contain forward looking statements. These statements are subject to risks and uncertainties as described.
Earnings release.
Sir.
Additionally, all references to reported results that are non-GAAP measures.
Reconciled to the comparable GAAP measures.
Available in our quarterly earnings materials, located and you invest.
<unk> section of our website.
With that said I'll now turn the call over to art.
Thank you David.
Yes.
Yesterday.
I want to start.
Thank you.
Two months ago.
And the other.
90 days.
You said it right.
Okay.
Okay.
At this time.
It would.
And as a result.
Dozens of companies.
Based on Cvs.
Yes.
Yeah, we are still very much.
Got it.
And we just.
Steve indicated your conclusion.
Well, if we can get there.
Yeah.
That means.
As expected we are continuing to address no expirations.
Digitization and ways of working towards it.
Normal though.
So let's go quickly what is the progress we are making across those spaces.
Firstly with a focus on safety.
Louis and stabilization of our operations in Ukraine.
At this time all our employees.
IMC locations.
Currently we have countries.
And our teams continue to work towards customers that levels of productivity.
Very good question.
All right.
In addition, as you'll know.
Continuing to support our employees.
As well as the increase in people related measures.
ASPD.
Our systems.
Now.
Consistent commitment.
That much.
I would just add.
What did we do.
And employees and you want to take one more opportunity to save them.
The incredible commitment level.
Okay.
The second phase of our framework.
Proposal <unk> is increasing their efforts and continued growth.
University of banking business.
This includes first of all you have difficulty because patients are all dilutive.
But this also includes.
As a critical piece of all explanations and several key investments efforts.
Tourism weighs upon delivery.
<unk> rapidly corresponds to 12 years.
Yes.
Yes. It is included.
India, Latin America and Central Asia.
Solutions several newly created two earlier.
As expected many existence.
Gross capital of Europe .
In late September .
In Asia as well.
This is also supported by the activity moving towards menu called back employees, who decided to explore opportunities outside of their home countries and simultaneously.
So, let's talk about cultural condition as those locations to possibly relative to the local.
Market.
And felt good.
On costs.
It's got a global footprint.
Now sales customers for more than a few two countries around the world, which means featured double telecom to come in the last three years.
And as a result, we will install a dilutive.
Gross now prudently yogurts, which includes central and eastern Europe .
Sure.
Since the laser.
Great.
So each almost didn't exist for us just a few years back.
Okay.
Brazil surplus in consideration grow sales cycles, but confusions.
We've used our delivery capacity from roughly 60% in February of 2012.
Two to four 2% now.
And we expect to reach a level close to 6% due to the second half.
Sure.
Part of this process well.
Well underway and our commitment of exiting our operations in Russia.
Oh it was quickly.
Bass completions of course to swiftly.
We are still working through a number of Google to requirements as a currency.
Since the time and the ambition is still difficult to do.
Besides.
You can say.
We're from over 900 people.
You want to just under 1000 today.
Deliberately legislated.
Too many people, even the bulk of global delivery management and financial accumulation.
And are ready to continue at the levels, we're enabling the dismissal expenditure submission efforts.
Simultaneously and until they can chose airlines. Thank.
Thank you.
Within two hours.
This is the framework.
Continuing to serve as expected demand for our services.
<unk> global customer base with.
Over the last five months.
The position of solution majority followed by <unk>.
What can be located with some sort of sense of litigation costs.
As we also know the size because we will continue to happen into the future.
The question on the dividend.
Developing external factors.
We just feel at this point to be a much better place now towards U S distribution needs.
This I would like to state as well as we continue to be open.
Portland, and reports to our customer needs and preferences yesterday and today have a union kind of enjoyment.
Uhm.
With a significant proportion of our clients even as increased global diversification can be cut.
Attunity discussed from Ukraine.
Another indication of our success and also at pace could we expect with the growth of our top 20 top future client portfolio.
Most of that is us and stayed with us through multiple phases of change and growth.
And thanks to the support to date students as a huge intangible disruption as a credit score and that's great.
Finally, the last element of our playbook is a focus with evidence of wasteful.
Look I have visited by discontinued yoga.
The effort to.
Researchers and optimize the performance of Youtube relocation if you will.
Continues for all of them this year.
Please.
While it's still too early to provide specifics.
Our focus in this space, we believe due to the return to previous levels approaching coupon historical ranges due to depressed levels.
In addition to that we've continued to progress our investment agenda across several key Las Vegas, Dupont continued with now the consultant and coconut seasonality Assembly supporting our growth focus are more conscious of NUPLAZID NDA.
Oh.
Our cloud and data analytics, our preparation until launch.
Programs enable vials transunion relationship with these key partners in this space.
And we are continuing to see drops music efforts now.
Integration initiatives as well as online.
Let's do more supply model enabled by our previously.
Due to the platforms.
In short we feel good right now about our progress to date, if you're willing to in our global delivery and moving forward with all other uses these should allow us to maintain a sequential constant currency revenue growth rate. Despite the massive disruption Youssef it's called.
Does that I would like to provide some equipment on the current demand environment.
We introduced <unk> for a while right.
Oh the rating.
Today than we expected.
We like our competitors an overview then you.
Drilling on local economies.
Economic indicators.
A portion of the market.
At the same time, we still believe that.
Near term demand environment remains intact.
We believe the medium term.
The maintenance.
I'm curious to know industry.
We will continue to support our ability to drive through and prevent growth.
Way above.
Normal 20% Todd.
So while we are not immune to it.
Part of the global recovery.
Yeah.
If youll be in a much better position today.
The address any future ships.
<unk> also believes in property remains well positioned for long term growth and value creation.
Our people our clients and colleagues.
So somewhat.
Our priority remains to contribute as much as possible the impact of the current disruption was awarded in 2022.
We have made significant progress in this area over the last five months.
In addition to basically complete.
<unk> key elements of our overall strategy.
Because if you could step us.
It is deployed in oil exploration and production.
What is happening right now and what's been outgrew our new normal.
Pretty much lithium related effort.
Several strategic directions, which had been part of our medium to longer term plans.
The resilience of our people.
Estimates and the creation, particularly creative executives this new normal.
And then silence differently.
To acuity and I agree with you with the business due to our future growth through disciplined strategic activity.
So put it all this challenging time and helping us to deal with better and more adaptive and pump.
And fast.
And in Colombia, as I mentioned on our Q1 earnings call.
And it was easy.
He founded the company put intense with UK.
Since it began to absorb our top priority.
Continues to be the safety and wellbeing of our employees and their families.
Onetime temporary tool Lewis with this effort.
We will also do disease at all.
In good times.
Now, let me turn the call over to Jason.
Talk about our Q2 results and additional perspective.
Uh huh.
Okay.
Thank you Ark and good morning, everyone.
Second quarter <unk> delivered another set of strong results, including a fewer than anticipated return to sequential revenue growth.
These results were produced at a time when the company was experiencing unprecedented disruptions across all the major delivery locations.
As we mentioned during our Q1 earnings call. In addition to our customary non-GAAP adjustments.
Insurance related dpm's humanitarian commitment to Ukraine.
Exit of our Russian operations and costs associated with accelerating employee relocations have been excluded from non-GAAP financial results.
We have included additional disclosure specific to the east.
The other related items and are keeping your earnings release.
During Q2, you have generated revenues of $1 9 billion a year over year increase of 35, 6% on a reported basis and 41% in constant currency terms, reflecting a negative foreign exchange impact 430 basis points.
Looking at the performance of our industry verticals and geographic regions in the quarter growth was negatively impacted.
The ongoing activity of our Russia operations and the effect of foreign exchange on our U S dollar reported results.
We're helpful. I will provide an adjusted year over year comparison.
Beginning with our industry verticals travel and consumer grew 61, 1% driven by strong organic growth primarily from our retail customers as well as revenue contributions from recent acquisitions.
Life Sciences, and healthcare grew 41% with strong growth coming from the health care industry and.
In addition to growth in life Sciences.
Financial services grew 29, 4% with growth coming from asset management payments and banking.
Excluding our Russian customers growth was 41, 5% or 45, 7% in constant currency.
Business information and media delivered 25, 4% growth in the quarter.
Driven primarily by customers in the business intervention industry.
<unk> Hi Tech grew 22, 7% in the quarter.
And finally, our emerging verticals delivered 36, 1% growth driven by clients in telecommunications energy manufacturing and automotive <unk>.
Excluding our Russian customers growth was 46% or 49, 1% constant currency.
The geographic perspective, the Americas, our largest region, representing 60% of our future revenues grew 36, 8% year over year or 37, 9% constant currency.
EMEA represented 35% of our Q2 revenues grew 45, 2% year over year from 58% in constant currency.
Performance was driven by stronger organic growth combined with an incremental contribution from recent acquisitions.
CBE, representing 2% of our future revenues contracted 46, 7% year over year.
From 58, 2% in constant currency.
Revenue growth in the quarter was impacted by the Rand kind of services to our Russian customers.
And finally, APAC grew 28% year over year, 25% in constant currency terms and now representing 30% of our revenues.
Q2 revenues from our top 20 clients grew 27% year over year, while revenues from clients outside our top 20 grew 41%.
Moving down the income statement, our GAAP gross margin for the quarter was 29, 2% compared to 33, 8% in Q2 of last year.
non-GAAP gross margin for the quarter was 31, 5% compared to 35% from the same quarter last year.
Compared to Q2 2021 gross margin from Q2 2022 was negatively impacted by the ongoing transition of customer work to higher cost geographies as well.
Well as lower utilization in Russia.
GAAP SG&A was 19, 5% of revenue compared to 17 two.
2% in Q2 of last year.
And non-GAAP SG&A came in at 15, 2% of revenue compared to 15, 6% in the same period last year.
GAAP income from operations was 93 million or seven 8% of revenue in the quarter compared to $125 million of.
14, 2% of revenue in Q2 of last year.
Our level of profitability was primarily driven by cost associated with the exit of our Russian operations relocation of our employed manocherian expenditures in support.
Place.
non-GAAP income from operations was $177 million or 14, 9% of revenue in the quarter compared to $155 million or 17, 6% of revenue.
Last year we.
We are pleased with our operating profit in the quarter. When the company was also executing a significant geographic transformation.
Yes.
Our GAAP effective tax rate for the quarter was negative 114, 9%, primarily driven by excess tax benefits related to stock based compensation as well as a one time deferred tax benefit associated with tax planning.
Our non-GAAP effective tax rate, which excludes excess tax benefits as well as a onetime benefit from tax planning was 22, 9%.
Diluted earnings per share on a GAAP basis was 32.
Reflecting a negative $1 62 or <unk>.
83, 5% decrease year over year.
GAAP EPS includes the impact of Ukrainian manager and expenditures expenses related to accelerated staff relocations.
Costs related to the planned exit of our Russian operations.
And the FX impact of Russian ruble appreciation on intercompany payables denominated in rubles.
In U S dollar denominated assets held by our Russia entity.
Our non-GAAP diluted EPS of $2 38.
Reflecting a 33% increase from 16, 1% growth over the same quarter of 2021.
In Q2, there were approximately 59 million diluted shares outstanding.
Turning to our cash flow and balance sheet.
Cash flow from operations for Q2 was $78 million compared to $69 million in the same quarter of 2021.
Free cash flow was $59 million compared to free cash flow of 46 million in the same quarter last year.
We ended the quarter with approximately $1 3 billion in cash and cash equivalents.
At the end of Q Q2, DSO was 71 days compared to 69 days for Q1, 2022, and 70 days for the same quarter last year.
<unk> maintained DSO in and around this level throughout 2022.
Now moving onto a few operational metrics.
We ended the quarter with more than 54850 consultants designers engineers, a year over year increase of 28, 1%.
Our total head count for Q2 was around 61300 employees.
Compared to Q1, we saw a net decrease of approximately 300 head count.
Significant additions in India, Central Europe , and Latin America were offset by the reduction of head count in Russia.
Utilization.
<unk> was 78% compared to 82% in Q2 of last year and 78, 4% in Q1 2022.
Our Q2 utilization includes dose employees, who have been assigned and a backup capacity to support project substantially delivered from Ukraine.
Although these employees were counted as utilized for the purpose of our utilization calculations. This work is largest anvil.
Additionally, during the quarter utilization of Russia was significantly lower compared to the same quarter.
Utilization in Ukraine remains steady and at levels similar to but somewhat lower than 2021.
Now, let's turn to our business outlook.
As a reminder, on February 28, we withdrew our full year business outlook due to the uncertainties related to Russia and patient in Ukraine.
For the remainder of this year, we plan to provide guidance for the next quarter only.
And expect to resume our full year guidance of any of the 2023 year.
However, I will provide some additional insights on assumptions, which will help frame our Q3 guidance.
And expectations for the second half of 2020.
At this time, we continue to see stable demand environment, which combined with the progress in repositioning our workforce and portfolio.
We expect will drive continued sequential revenue growth throughout the second half of 2022.
However, with a reduced Washington customer revenue, we expect to see the impact of tougher year over year revenue comparisons in both Q3 Q4, we.
We will continue to provide color regarding the impact of Russia.
In terms of growth rates.
We continue to see relatively high levels of productivity from our Ukrainian staff were substantially located in favorable paper portions of the country.
Our Q3 guidance assumes that we will maintain Ukrainian utilization levels.
Only slightly lower than Q1 levels.
This Russian employees, who wanted to relocate we have relocated the majority of that population during the second quarter.
Therefore, we expect a lower level of employee relocations in Q3.
In parallel with the repositioning of our people we are working through the process to align our cost and rate structures.
The prevailing economics in the geographies, which demand has been redirected for men.
Any cases are resolved will be increased billing rates to reflect higher cost.
Although we expect some lag in the establishment of these higher bill rates.
The movement of customer projects and people, we expect some short term inefficiencies, including a high level of bench and therefore somewhat lower utilization as we scale new accepting delivery locations.
The combination of these factors will in television continue to weigh on our profitability. However, we expect to see an improvement in profitability between Q2 Q3.
Right.
And are currently forecasting profitability in Q4.
Similar to those we expect to achieve in Q3.
And finally to date, we have spent over $34 million as part of the company is about $100 million.
<unk> commitment to our Ukrainian employees and their families.
We expect further management expenditures multimedia throughout 2022 and into 2023.
Now moving to our Q3 2020 outlook, we expect revenues to be at least one to one zero billion, reducing year over year growth rate of at least 22%.
Instant currency terms revenue growth is expected to be at least 26%.
Included in these growth rates is approximately 400 basis points of revenue contribution from acquisitions closed over the last 12 months.
I will also point out that we expect.
Customers based in Russia to contribute less than $10 billion in revenues for the quarter compared with a $44 million in Russia based customer revenues generated in Q3 of 2021.
So the third quarter, we expect GAAP income from operations to be in the range of nine 5% to 10, 5%.
And non-GAAP income from operations to be in the range of 15% 16%.
Expect our GAAP effective tax rate to be approximately 19% and non-GAAP effective tax rate, which excludes excess tax benefits related to stock based compensation to be approximately 22%.
For earnings per share, we expect GAAP diluted EPS to be at least $1 65 for the quarter.
And non-GAAP diluted EPS to be at least $2.48 for the quarter.
We expect a weighted average share count of $59 4 million diluted shares outstanding.
Finally, a few key assumptions that support our GAAP to non-GAAP measurements in the third quarter.
Compensation expense is expected to be approximately $38 million.
Amortization of intangibles is expected to be approximately $5 7 million.
The impact of foreign exchange is expected to be negligible.
Tax effective non-GAAP adjustments is expected to be around $13 6 million.
And finally, we expect excess tax benefits to be around $5 9 million in the quarter.
In addition to these customary GAAP to non-GAAP adjustments and consistent with Q2, we expect to have ongoing non-GAAP adjustments in Q3 flowing from Russian invasion of Ukraine.
Please see our Q2 earnings release for a detailed reconciliation of our GAAP and non-GAAP guidance.
We're pleased with our Q2 performance, which is the result of a lot of hard work by our employees around the globe.
I want to thank for their dedication and the world class services, they provide to our customers.
Operator, let's open the call for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone again to ask a question. Please press star one line.
Thank you.
Our first question comes from Bryan Bergin Cowen Your line is open.
Hi, Good morning. Thank you I wanted to start with the growth composition question. So can you comment on how the attribution of growth between new clients versus existing clients turned out in <unk> and how you see that progressing over the course of the second half just trying to understand if you're seeing a return to new client inflow versus servicing.
That existing base amid all of this global transition.
And really just trying to understand how you think about the recovery of new logo below if you haven't gotten back toward alrighty, yes.
Yeah, Hey, Brian This is Jason and thanks for the question.
From a demand standpoint, and revenue growth we continued to seek.
Solid growth in the existing customers.
And probably with a little bit of a slowdown in new customers in Q2, because I think you'll remember that our focus certainly in March probably April and May was really focused more on retaining existing customers. So we continue to grow significantly with the existing customers as you can see by our revenue beat and then probably by the time you got to the second.
Half of Q2, we began to focus again on new logo activity and so right now you've got quite a bit of.
New logo driven demand that we expect to come in the second half.
But again I think I'd, probably just say at the top line I would say that we continue to see growth in both our.
New and our existing customers.
Okay that makes sense and then just on the workforce. If you excluded the workforce attrition from Russia can you give us a sense of how the sequential billable head count landed in the second quarter and really just how youre thinking about your ability to return to the pre-war quarter over quarter head count levels across the broader global footprint as you go through the second half.
I'll, let our talking about head count, but let me just mentioned attrition. So if we exclude Russia, where we've had higher bolt.
Voluntary and involuntary attrition our attrition rates have remained very consistent.
Q4, Q1 Q2 <unk>.
Mark you want to talk about head count.
Yes.
<unk>.
I assume was definitely the total total numbers impacted by.
Exited.
And in Russia for example, but in general just to ensure that we're pretty comfortable that we will be able to do to them.
Sure.
The war situation I think is difficult to compare <unk> 2021 which was a special year for you there, but from a gross perspective.
Sometimes.
Good it could cause against looking at 'twenty, two like in switching plus subtypes, 14% per quarter.
On an annual basis. So I don't think it will do will be coming back.
But definitely towards the way experience yet.
Well, it's a very cool examples.
Annual gross.
By a team for example in <unk>, we will be coming back to the same speed.
And to be comfortable or is this based on what we were expecting.
Analyst day.
Yeah.
Uh huh.
And position ourselves outside of this.
Additional eastern European landscape.
Let's go page with Gov.
Latin America was.
Retrofits are later in the day as well so let's.
Sure.
We cannot speak to comfort the Basel II, we will be able to us as it develops.
Okay. Thank you very much.
Thank you.
Our next question comes from Darrin Peller of Wolfe Research Your line is open.
Thanks, guys good to see the execution and I really just wanted to hone in on the actual head count changes that you've been making over last couple of quarters, how it's playing out into new markets.
The new three centers now and really just give us a quick update on.
What kind of performance Youre seeing out of those newer locations, whether it's where you move people or you've been really growing you have.
So increase was between 25%.
So 200 people in Q2.
All of this clearly was.
Outside of Ukraine, and Russia.
Gotcha.
So we share <unk>.
Great.
Explain why we feel comfortable that we'll be able to continue to grow it.
In the future as well.
Similar rates.
Please go ahead.
Okay, and so when we think about the execution and the utilization of those.
Where do you see in terms of timeframe than being at more of a full run rate. So they could actually produce the same types of revenue.
And then as a quick follow up I mean, the newer regions you were talking about at your Investor Day.
Some of the Latin American areas and some further incremental areas even in eastern Europe . If you could just give us a quick update on how it's progressed.
And so from a utilization standpoint, if I talk about Q2, what we saw as you would expect is quite low utilization in Russia, but one of the reasons. We got the revenue beat that we had as our utilization was quite a bit higher than the rest of the world than we had originally expected so utilization levels have remained pretty solid and particularly.
Quite solid in Ukraine, considering everything that's going on there we are.
We're expecting as we go from Q2 to Q3 that we may see somewhat lower levels of utilization because thats transition work from one country to another you might end up with a somewhat larger bench and let's say that donating country and then we're building up capacity in these newer countries.
And again, you have a little bit more bench, there, but as Ark said I think we feel really good about our ability to add head count to support demand. We've made really good progress in.
In in both transitioning resources to some of these newer geographies and adding resources in these geographies as Ark said work for around sort of 40% of our delivery capacity in the traditional sort of CIS region.
So I think we feel good about not only our execution in Q2, but our ability to support ongoing demand in Q3 and Q4.
Alright, thanks, guys.
Thank you.
Our next question comes from Maggie Nolan of William Blair. Your line is open.
Thank you.
I wanted to check in on how the conversations regarding does adjusting this rate card to the new delivery locations are calling.
As well as obviously wage inflation is probably a complicated mess.
And then on the kind of new delivery locations aspect of it do you expect resolution by 2023 or will there be an impact of that kind of adjustment phase that persist over the next year.
Yes, maybe I'll, let <unk> comment on customers, but just in terms of the algebra, what we see as we transitioned resources to new geographies that you have a change in compensation almost immediately and then theres a lag as you know Maggie in terms of our ability to get rate increases and so we have some customers where the rate increases are immediate.
Some customers, where there might be a quarter lag and some customers, where we might not see rate increases until.
We entered 2023.
Traditional <unk> operating structure, we collect data on all of this which is updated on a daily basis, we run dashboards and so we can see that we're making good progress both in terms of the conversations.
In some cases, we actually already have that.
Rate changes in place and other cases, we have agreement to have the rate changes in place later in the year. So I think we're making really good progress and I would expect let's say the vast majority of those conversations to complete the completion, but with higher rates.
As we enter Q1 of 2023 and art you want to talk about conversations with clients.
So good exactly like Jason said, we're still in this approach.
Art do you want to talk about conversations with clients are.
I feel good exactly like Jason said, we still ended the process.
Right so.
Feel is.
DTE optimistic from as a result of this process we know.
Significant bump of clients politically difficult umpqua clients validity agreed to rate adjustments.
As delays for the <unk>.
Next.
One two or three so that's what's been landfill OLED today is that we expect up ratios.
That's it.
Similar to <unk>.
Few more conditions.
And pointed waste stream.
Again, a fruition of this.
Two when it wouldn't plus <unk> was it related to the U S. Because as I spoke about with scope.
Put in exchange for example, indolent subtypes, it's Buck.
Bucket situations relative to the euro.
So with what's got access with bed concession in the future. So it's more difficult discussion plus rates adjustments both of the way.
We are optimistic.
Yes.
Thank you that's helpful and then.
Jason how does the cash you generated this quarter compare with your expectations going into the quarter just given all of that a typical expenditures you've had of late and then what's the expectation for how cash closer to trend from here.
Yes, I would say that cash flow was pretty good I think we tried to hold DSO to 70 and it did end up at 71 into that May have had a modestly negative impact and we're trying to sort of keep DSO in and around or maybe slightly lower than 71 on a go forward basis, we do expect cash flow conversion to be over 100%.
In Q3, which is kind of more consistent with historical patterns.
And right now are in both our cash position and our ability to generate cash is it's pretty encouraging.
Thank you Bob.
Yep.
Thank you. Our next question comes from Jason Kupferberg of Bank of America. Your line is open.
Good morning, everyone. This is Tyler on for Jason.
Last quarter, you had suggested that it could be back to pre war normalized growth in margins by the first part of 'twenty three.
But based on the <unk> results and <unk> guidance. So far do you feel that this could happen even sooner and can you just quantify what your benchmark sorry for those prewar levels.
So I think when we were guiding to a 15% to 6%.
15% to 16% in.
In Q3, and what I said just in case it wasn't clear in the fixed portion of the call here today is that we expected that we could.
See profitability in a similar level in Q4.
So that's already trending back towards that traditional sort of 16% to 17% range and when we kind of talked about our historical range.
That's more what we mean rather than the elevated.
Profitability that we would've seen.
Very very high demand periods.
Last year.
But again I feel that the progress to date I think is pretty good as you can see by the guide.
And as art said, we're continuing to work through the pricing and the other adjustments, but it's still a little too early to sort of communicated exactly where we expect 2023 to end up.
Okay perfect. Thank you and just one more as you continue.
On your path for head count diversification can you maybe discuss some of the regions that have been relatively easier to build out versus the ones that have been a bit more challenging.
And on that line do you feel that you are past the riskiest space with your head count diversification efforts.
Yes, Okay, yes from the standpoint of the ability to add head count.
We feel that we've actually.
Ahead of our own goals in terms of.
Building out Latin America, and we've seen strong growth in India seem very strong growth in central Europe and so.
Yeah.
The market continues to be a bit of a challenge, but I don't think we've had any real difficulty hiring to meet demand and to create the capacity that we wanted to have outside of the what we call the impacted region.
So not to say that things couldn't change in the future, but right now I think we feel pretty good about our ability to build out capacity outside of the region through both relocations and through the additional head count effectively hiring in the region.
Alright, perfect. Thank you very much.
Okay.
Thank you. Our next question comes from James Pocket of Morgan Stanley . Your line is open.
Okay.
Mr. <unk> your line is open.
Oh thanks.
The operator cut out at the exact moment that she was pronouncing the name. So thanks for taking a few minutes.
Here I wanted to dig in again.
On demand and client relationships obviously.
The client retention has been quite good et cetera.
As you're moving resources around is there.
Are you still having customers decide and indicate that they want to change delivery locations.
What are the trends around that and how quickly do you expect customers. If they are doing that to get settled on their preferred delivery regions.
Assume concern.
So whether that equation as I say, there's no simple answer out of each well drilled.
Awesome.
Everybody kind of approached.
There are subgroups of clients materially drive through integrated Houston.
The zip.
Region in danger, there are some clients reaches continuously working almost.
In.
And kind of reward scenarios.
Some new glass coating as well so but.
Hey, guys.
As you progress.
Two.
So a little bit fluid target we work in.
By months.
<unk> is sometimes seen subs and as expected, but in general I think we.
We said it has exhibited a level of speech, we kind of aggregate yield.
Good.
We clearly nordson.
Business as usual injectables situation, so when we have to.
Move thousands of people.
First of all business continue to.
Approach.
And hopefully our size a lot of diluting capacity.
Lesson.
Business as usual, but.
If you assume that we are still growing.
And especially if you assume.
Gross company has resolved Russia, because this is where we are disconnected.
Okay.
Constant currency growth outside of Russia in Q2 with Lake.
<unk>, 7%.
So which means that there is normal new wind you can taken into account let's be exiting.
So I know im not giving you a precise answer but.
There is no precise answer our clients' features.
Trying to completely change the proteins that our clients would be cherry picking up on this capacity which is in process.
And often sublease 50 little bit similar to what we were experiencing in 2014 second time.
Got it got it.
Really helpful. Though.
And then on <unk>.
Top of everything else.
What have been the macro related conversations with your clients both in terms of existing and potential.
And are you seeing any.
Indications of softening, whether it be lengthening sales cycles or having clients approach and say hey, these are projects that we'd like to put off because we're a little uncertain.
And are you having those conversations at all and how it is macro contemplated in and euro outlook if at all.
Are you.
I would relate into situations in eastern Europe .
Just the economy, yes.
More generally okay yeah.
I assume to us.
First of all for us, sometimes it's difficult to distinguish one to the other because it's not necessary client said exactly why it was because it was patient might step up so just because utilization can go.
<unk>.
Stephanie.
But again.
The way a company like 12 months ago.
I put in 24 months ago, it puts a little bit more often may be but its still difficult because of the two is volatile by quarter.
By quarter end.
So the reason for this could be.
Is this a situation where julian so protein sources.
So it's very difficult to distinguish for us.
Yes, that's understandable.
Thanks for that Mark I appreciate it.
Thank you.
Again, ladies and gentlemen that you'd like to ask a question. Please press Star then one everyone. When you touched on telephone again, Please press star one one and you touched on telephone our next question comes from.
<unk> of Jefferies. Your line is open.
Thank you.
Following up on the earlier question.
About just the clients desire for that delivery model.
Are those are the client conversations continuing to evolve in the sense that there were clients last quarter that request to the change in there.
Where delivery is from and.
This quarter there is new sets of clients that are asking for delivery changes or how should we think about the potential for your year end target to kind of evolve like I realize you kind of said, it's fluid, but I just wanted to make sure I understand all the push pull factors here.
Oh I think.
Again, I think we repeated ourselves but.
So this one is a little bit moving targets of clients.
I think in last quarter.
Settled.
Some clients might be asking to date.
We will be asking tomorrow as well.
So at the same time.
If you aggregate the efficacy.
We see in the future, we do lift into whether it's a prolonged locations to three two.
Due to stroke.
So.
This was aviation, which is not exactly Red Cup various subsets.
Similar to what we experienced eight years ago with some clients were completed just evens adhesion and some other clients were picking up.
We see.
Mr Vince as well.
It would be because it will see broken into three core dosing with social deferred because those would be separate.
Well it would be actually sampling in the is it easing and what would be the result of the cost cutting credit toward as well.
But on.
On top of loose unless what we've communicated we pretty comfortably.
Speeds of growth outside of those any of them, whether you're talking about with Latin America.
West and central.
We are pretty comfortable that we would be able to.
Grow from.
Applied point of view in light of these would be neat.
Understood and then in terms of just a clarification on Russia. It sounds like all of the individuals that you wanted.
To relocate or have requested relocation are done so what is left in Russia. At this point and is it assumed that all of that work will be transitioned within the next quarter or two.
Any color there or any additional color there.
Woodward level.
We.
Finalize in.
Finalizing the conditions call.
Exit to the rash of completely.
And I mentioned today is that there are some regulatory <unk>.
Requirements that we go through lease rates all each might take another.
Yeah.
Moths or so and after this.
The rest will could cost issues in.
In Russia today will view.
Outside of the bundle.
Got it.
The <unk> people.
Thank you.
Thank you. Our next question comes from Ramsey El <unk> of Barclays. Your line is now open.
I was wondering if you could update us on your thinking around M&A and the degree to which potentially you could leverage M&A too.
To help you.
So in some of the gaps her address some of the challenges that have come out of the geopolitical situation you find yourself then.
I think approached.
Does it change for us much.
Ladies similar like in <unk>, and Lanier for us institutional capabilities.
Sometimes the beginning of the growth in southern Europe .
From the influence of the current delivery.
Blood flow.
Diluted locations, we already feel pretty profitable.
These all foundations, featuring idose and when they will be <unk>.
Quickly important for this book.
We are supposed to get to a decent bill payment capabilities.
Get that industry expertise and maybe sometimes in new locations, but it's not critical for us because we already established a pretty good footprint growth.
Okay.
And then my follow up is just on a question around sort of the macro resilience of the business and again I'm not referring to eastern Europe and the military conflict there I'm, referring more to just the.
The economic environment more broadly can you talk about you know how.
How you think about <unk> in the context of dealing with cyclical pressures recessionary pressures I think.
Typically historically, our it services have been somewhat cyclical I think some of the digital tailwind today may provide sort of a secular.
Tailwind that might help quite a bit through a recessionary period, but I'm just curious your view about how the business fares during a hypothetical recession.
So I assume.
<unk> experienced but it's always difficult to predict go experience was a bust is applicable for the future and how do fields with Nexus there some good to me.
In the past, we used a new web practically.
Last for two three quarters as those started to grow again I think in general It does this with you.
I've mentioned as well in our industries, all with scoping and I assume.
We will be able to.
Okay.
<unk> had to call it for couple of quarters.
Yes.
Yes.
We'll.
And the challenges in 2020, 2021.
Specifically in 2020 to make us actually March Moody's <unk> much more adaptive to address.
Potentially SSAT adjustments, so I think.
Thank God.
<unk> already talked about it.
Today about the two fuel hours felt much more comfortable electrical you put it well some elements of adult.
As we progress during this last couple of years.
Can we talk about it.
It's not totally.
This law as well as physician facility was due to the last couple of years.
Today that throughput it better than anybody else knows the market very well.
A decision as well.
That makes a lot of sense you guys do you have a lot of practice with crisis management at this point and pivoting the business successfully so thanks for your answer I appreciate it.
Thank you.
Thank you our next.
Question comes from Puneet Jain of Jpmorgan. Your line is open.
Thanks for taking my question good quarter guys.
I have a question on gross margins.
Given that your delivery profile is changing.
<unk> gross margins.
Go back to the prior P Vara 35, 36% level.
Sure.
Maybe like the new locations the pricing dynamics labor dynamics there.
Mike.
A different gross margin profile over the medium term compared to what it used to be before.
Envision.
Yes. So this is Jason.
And so from the standpoint of gross margin I think gross margin in Q2 came in somewhat better than we had expected due to our ability to continue to deliver a certain locations.
And just kind of manage that.
<unk> demand, we are expecting a bit of an improvement in gross margin between Q2 and Q3.
And as we've talked about we think there is a temporary impact and we shift people into new geographies, some of which are more expensive than the geographies in which they are leaving and so there would be a temporary impact that we expect to largely address.
By the time, we enter 2023, but there could be a little bit.
A little bit.
Compression on margin relative to the very high levels that we were running at.
When we were running at 18% IPO or something right and so when we talk about kind of our return to profitability, we all really sort of thinking more about the traditional 16% to 17% range.
We continue to see good efficiency from an SG&A standpoint, and so again I think I'd, probably would sort of guide us towards.
The adjusted the ISO.
Got it and just assume that what kind of manage it between the two components, but again feel good about our ability to head back towards the higher levels of gross margin, but they could be slightly lower than they've been.
During that particularly hot quarters.
<unk> thousand 21.
Understood and then.
Obviously, you mentioned macro remains healthy.
Uh huh.
And all the good comments there.
Has there any has there been any change in client priorities.
In terms of the type of projects.
Have you seen any changes.
The type of projects or.
Tim.
Cycles or the speed that quick.
They are what new projects.
I know some people are talking about maybe an eventful shift towards efficiency or cost efficiency, we have not seen that at this time, so we still see the traditional drivers.
Application modernization cloud migration.
Data and then all the platform engineering.
Pam is well known for.
So we still see those as underlying drivers and part of the reason why I think we feel comfortable guiding towards sequential growth both.
Both in Q3, and as we talked about at the unexpected in Q4 as well.
But does that answer that question.
Yes. It does it does thank.
Thank you.
Thank you.
Our next question comes from Arvind ROM 90.
Piper Sandler your line is open.
For taking my question I just wanted to ask about your.
Kind of.
Kind of roughly maybe six months looking at these new geos and kind of taking a closer look at scaling.
Ah patients in.
Interesting.
Jared across the globe.
As you kind of digest, what you've looked at in terms of local talent.
In markets with rich <unk> I would say.
I would say, Belarus, and Ukraine and Russia.
And looking kind of promising to kind of scale up as you look out over the next couple of years.
Well I think it's difficult to.
Samson.
Substantial in a couple of minutes answer versus would be sort of diluted due to that.
Others day in <unk>.
And I think what we were.
I'm curious.
To some level of details.
I guess the only.
These.
For example, what's happening.
The last six months.
And somebody has picked was throughput and due to the previous like Es.
We were specifically talking about <unk>.
During the last couple of years has become one of the process.
So it is a growing market for us as we continue to do this.
We're starting to focus here on <unk>.
Uh huh.
Before work.
And we are <unk>.
Impressed with the level of studies.
And now both countries gross.
Western or central.
Asia, which we started to focus in 2020 2021.
Some of them like after the or when we see it as a good potential as well so that's why again.
OLED was.
I was answering several times today, we pick up a proposal we will be able to.
Scale is a pilot.
Outside of our traditional locations and don't forget that we still growing pretty significantly in central Eastern Europe .
Which we.
Very strong experience and hopefully beyond oil dislocations, because people who decided to relocate them. This.
Noticeable level.
So basically it's worth that Youll cleanup.
Bob <unk> Bob.
Experience is new.
<unk>.
Yeah.
Perfect and just one.
Quick follow up.
In terms of your gross margin you have clearly clearly it's been impacted by this transition.
To provide some color on how much of the impact was due to utilization in Russia versus the transition to higher cost deals.
Oh.
Let me think.
Sure.
And whenever we sorted.
Give you a description of the impact there is a whole series of different things that are impacting profitability.
And so I don't know.
The change in as many geographies as probably having it at least the impact in our more so than that the Russian utilization.
It is going to we're going to continue to move people into new geographies. We did that in Q2, we're going to do that in Q3, and so you're going to see stomach cumulation of people, who are still sort of in a holding pattern waiting to get rate increases even though their costs have gone up so that's why.
I think that Youll see profitability in Q3, and Q4 be more similar rather than an increase in profitability between Q3 and Q4, but again, we're working through at Arb and again I think we feel relatively comfortable that we're making good progress with clients around.
Appropriate rates for the geographies and then we continue to have the same menu of options. We've always had and that we also have relatively lower cost centers.
In central and Western Asia, India other until we offer a full range of opportunities for clients.
Oh.
Perfect. Thank you very much and good luck for rest of the year.
Thank you.
Thank you. Our next question comes from David Grossman Stifel. Your line is open.
Hi, Thank you good morning, I just wanted to follow up a couple of things you said earlier in the call. The first was I think you said you expect about 30%.
Your delivery capacity.
To come from the impacted regions in the back half of the year and that's down from 60% I believe.
And over the last year. So when you look at that change is that the way to think about the distribution of work.
Secondly, it seems so about half of that decline came from closing down in Russia, I just want to make sure that that got those numbers right.
Yes at the beginning.
This year, we were a little bit under 60% between two countries right.
If it was four 2%, whereas in <unk>, we expect to be.
Closer to 20%.
This is approximately.
Collusion.
Presents distribution award work.
As well yes.
As the second half.
Well it looks like about half of that decline of that 30% change 15% of that was shutting down.
Russia I just wanted to it seems like the math works that way.
That's right.
Okay and then the second question I had was just.
About the new geographies that Youll credit are you opening is the percentage of employees that are being paid in U S. Dollars is that changing at all with the opening and expansion of.
The new geographies.
So it's a mix and we still will have novel geographies reach will be limited.
U S used juice, which make them clearly.
So close to the end user was complicated when you try to go politically, but it's still good to be a factor because in some new locations to be true.
We entered especially it was specifically in west and Central Asia.
We will be planned.
So it isn't.
You decouple issue yeah, David So it's mixed but the Russian populate the Russian.
Employees were paid in rubles.
And.
Some of them are going to end up in countries that are paid in local currency and some of them are going to end up in countries, where we are using a U S. Dollar.
Yes.
The currency for compensation.
Okay.
Any idea of just of your cost of goods what percentage is in USD.
I can't do that off top my head.
And it would also be hard for me to do it.
But let me see what we can do to <unk>.
<unk> information to the market, but.
I think we've historically talked about actually.
I want to say there is some.
You can't do that off top my head. So let me try to provide some of.
On that later, okay. That's fine yeah, we could take that offline great. Thank you very much.
Thank you.
Showing no further questions at this time I'd like to turn the call back over to Arcata, Dobkin, President and CEO for any closing remarks.
Thank you operator, and thank you everybody who joined us today.
As always if you have any questions David is available to help.
In general we.
Good question.
Would you expect like four five months ago.
We're still in.
Challenging time, but again.
We.
We see that to be kind of stabilizing.
We are comfortable too.
To say that we know how to do this.
We design caller dilutive dilutive whatsoever.
It works.
Salary before we close out the call I'd like to acknowledge we experienced some auto auto quality issues with the management commentary a portion of the call. We have posted a copy of our prepared remarks in the Q2 quarterly earnings section of our Investor Relations.
Right.
Dot com.
Please go there.
Further clarifications on our prepared remarks.
Ladies and gentlemen, this does conclude ladies and gentlemen. This does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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