EPAM Systems Inc. Q1 2023 Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the E. P. M systems first quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there will be a question and answer session.
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Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, David Straube head of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. By now you should have received a copy of the earnings release for the company's first quarter 2023 results. If you have not a copy is available on <unk> dot com in the investors section.
With me on today's call are Ekati, Dobkin, CEO , and President and Jason Peterson Chief Financial Officer.
I'd like to remind those listening that some of the comments made on today's call may contain forward looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release and SEC filings.
Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measure and are available in our quarterly earnings materials located in the investors section of our website.
With that said I'll now turn the call over to Ark.
Thank you David for joining us today.
Two months ago, the fed has some detail so what.
I feel good about 2023, and how these factors and trends driving their equivalents during the year.
As you recall, we anticipated some level of market slowdown in general demand, but not silicon.
But the level of this slowdown.
Portfolio yet.
We also saw that several of our customers the way, we mitigate them idiots.
Due to the avoid Ukraine in the way of showing signs of many of those suites, but difficult to plan work streams to some other questions.
With the status of all of that.
We are proactively investing in building a scalable quality delivery locations outside of our traditional comfort zone to consistently delivering comparable ingredient quality across all of our broad global delivery markets.
And you also said that we were expecting to continuously optimize operations across our global delivery locations to bring the cost structure work towards.
Additionally, metrics near and medium timeframe.
Okay.
And despite the number the specific challenges we believe the market for our services continues to be strong and our proposition remains extremely relevant. So we're broadly expecting a general uplift in demand going into the second half of 2023.
Two days three months later, we understand that because the visibility of effects in future quarters.
Under stimulated the breath of the macroeconomic slowdown and the depth of the impact specifically in the transfer of national character of the it services market.
And as you know, we always stated that our customers are almost exclusively global 2000 enterprises, leading global platform companies and venture with emerging.
Forbes.
The problem to design engineer and deploy exactly a large scale transformation and digital engineering programs.
Helping them to grow and to differentiate themselves based on technology advanced solutions.
Our work largely support.
Disruptive business model accelerates growth and specifically targets, new product data and cloud platform development and modernization programs.
Thanks work was and is in our focus area and represents a very significant share of our revenue, especially in comparison with most deposit companies. This is a global issue services segment.
This is exactly the type of work was largely responsible for a significantly stronger growth rates during the.
Last few decades.
Unfortunately, it is reckless those programs.
All currently showing visible signs of weakness.
Instead during the last three months it becomes politically.
Economic environment is more focused than it has been for decades, when cost optimization, which will now benefit from more traditional outsourcing firms with strong cost take out or savings.
We understand this is likely to come.
Continues to it as the market adjusts to the new economic conditions and the investment climate changes.
It means.
That was all global unusual impact on demand.
The headwinds associated with the must accept the picture.
It's more complex and nuanced and yes visit.
Visibly changed today from what we will share it with you just three months ago.
But before I go into what we do to address the immediate challenges and to share some of our.
Tactical priority to scenarios.
I want to restate, our view on our mid and long term position in the future beyond 2023 growth perspective.
Let me start with Samsung.
<unk>.
Technology change and disruption of traditional business models was the main growth driver during the last decades unions. Those decades, we saw only three relatively short recessionary periods was the technology sector.
There is simple evidence that those companies who invested in their digital transformation during the slow periods and those who have adapted to new tech and applied new business models.
Right.
The cluster versus those who just focused on straight cost cutting becomes the new leaders in their markets.
Plus each of those short downturns led to a resurgence in demand for retail.
Retail services, and secondly to our historical growth rates of 20 plus percent and on a very consistent long term basis.
We believe that nothing changed from that trend.
We're in the middle of another term.
The board to adopt a new wave of technology impact.
This is why we believe the current situation is temporary and that's in line with the past we will see a similar pattern bushnell companies, we strive to lead for accelerated investments in new and disruptive conflict solution with some rapid adoption with new advanced technologies.
With that we also believe that we will continue to benefit from while traditional capabilities and our delivery track record and does give us.
The confidence that we have.
<unk> is better positioned for future accelerated growth than most of other market players.
Those critical problem.
This concludes.
Includes.
Our continuous focus on differentiated product and platform development versus.
More traditional outsourcing to be pure and break it implementation deals.
And our engineering DNA built over decades.
Those make us the best partner to learn understand and implement new solutions, which are licensed generation technologies.
Yes, we don't do want to share it with you in anticipation of the likely equation, there's a public adaption of generative and widespread use.
Language models or LLS, we already to half dozen types of use cases across a global network of practitioners in all our verticals.
And kudos also functional areas.
Actively proceeding with both internally and with our customers.
Second.
Our investments and broad deployment of the pump continuum integrated consulting services boosted the user experience even closer with renewed an integral is accelerating and will you can bring from investments.
In data and machine learning.
Jen AI technologies by advising on what is possible tomorrow, and what can be made real today.
And third all of our customer engagements and our people are enabled by our own digital platforms.
We put in as much.
Stronger floorplan insurance capabilities of NII.
LLS to drive increased well productivity and only selling it as a new global scale.
For us.
Yes.
To sum up in our view, even with complicated microeconomic headwinds the market still points toward disruption and demands company.
Companies to transform again to address the challenges.
Those by many emerging technologies, including such as generative AI, which everyone is talking about it today.
But what is difficult to predict right now is where does this come work you'll start at full speed.
I believe that to be happening rather sooner than later in quarters not years.
Still the right now the obviously have an immediate and different challenge. So let us talk about our last quarter and are thinking about the rest of 2023.
With all the complexities of current environment, our performance in the first quarter was sorted.
Well as it gives us a better start to move plaza into complex 2023 environment, we have to acknowledge that.
The combination of conditions, we talked already today with a general pull back.
And delays on transformation spend and the <unk> concerns taken by our customers.
Is now translated into a revision to our initial drilling your expectation for the year.
Does this new view Jackson reasonably full year revenues and EPS outlook and during the year to be thinking more about sequential growth metric. We also sell traditional year over year trends.
Jason will talk about all the relevant details in his section.
I will now.
As long because we are still contracted budgets for new builds business, we will be adopting a three pronged approach to navigate the current environment.
First Fujian all possible efforts to address our current customers' most pressing tactical items, including the mix of engagement models cost takeouts and consolidation priorities, while protecting our share of wallet and long term relationships.
All possibly leading to lower short term profitability metrics.
Second.
Convenient and currently growing new business through increased focus on sales and GCM motions and partnerships, especially across those champions, who would like to use this slow time to build a competitive advantage.
The last two to three quarter, So global business field organization and specialized practice teams have focused on developing new offerings, new engagement models and new ways of working with our customers.
And have done so with.
With some success and new.
The momentum in new logo acquisition.
We feel still take some time to realize as larger revenue impact down the line.
Especially in the current economic climate.
And.
Third.
Continuously investing in our strategic priorities.
We shall stay in line with what we communicated before.
Expressions of differentiated consulting agency data umbrella and cloud capabilities building, improving or worsening by delivered strategy implementation simultaneously expanded our engineering DNA across all strategic global Liberty location.
All in anticipation for the sharp return of demand for the next generation transformation.
Yes.
Visit as part of our continuous investments throughout the year.
I wanted to share some updates on our global delivery expansion programs.
During the past quarter, we have made good progress in both maintaining the level of delivery quality and eastern and central Europe , and strengthening <unk> quality in central and Western Asia.
Both years benefited from integration strong coupon talent move into many new locations across the regions.
As part of our heritage.
Our core differentiation eastern and central Europe delivery, and most notably our Ukrainian accretion will continue to be and cornerstone about proposition.
While we accelerate our investments in new center of excellence and while we continue to hire across our global footprint.
For high demand Skus.
As part of the global delivery strategy, we continue to focus on building.
Power Plaza, our two currently fastest growing regions, India and Latin America.
In addition to opening several new locations across those geographies, we are happy to see sizable work streams starting in expenses there.
Now not only from our existing clients, but also with brand new logos.
<unk> has demonstrated very pumped and dosages.
It's also important to mention that.
The configuration of our client footprint.
And though still relatively new for us geographies now very price represents our traditional client mix with some of our top 10 customers, but also.
New ones across multiple vehicles from large corporations two technology platforms.
Firms and two software product companies.
In our view, it's a very good illustration of the quality of the services, we are diluted and throughout the region.
And that continued investments into engineering excellence programs application and integrated delivery platforms bring the results we expected to achieve to date.
Also his experience of the past few years, we are now able to stand up new locations across upon global footprints in months where associates.
We're leveraging all elements of our digital platform ecosystem and strong talent acquisition capabilities.
We believe during the next few years, we will be able to build the most geo balance delivery talent platform on the market.
To conclude we believe that while we're experiencing and address them accordingly, very specific but still temporary challenges fundamentally we are moving in the right direction.
Our strategy for future accelerated growth is based on delivering complex business solution, driven by advanced disruptive technology and quality engineering.
Many of those solutions require unique alignment of consulting and implementation services and Thats, specifically attracted to the client base consistent of leading global crisis was market driven and disrupted the continuous technological transformation.
We do believe that such enterprises will have to come back to.
We continue restaurants into technology builds component to lead and disrupt causes a respectful markets and they will need partners like <unk> to progress.
With that I would like to pass to Jason to share more details and numbers for Q1, and finally changing outlook for the rest of the year.
Thank you Ark and good morning, everyone.
Covering our Q1 results I wanted to remind you that in addition to our customary non-GAAP adjustments expenditures related ttm's manager and commitment to Ukraine and costs associated with the exit of our Russian operations business continuity resources and accelerated employee relocations have been excluded for non-GAAP financial results we have.
Included additional disclosures specific to these and other related items in our Q1 earnings release.
In the first quarter <unk> delivered solid results. The company generated revenue of $1. Two 1 billion a year over year increase of three 4% on a reported basis and four 9% in constant currency terms.
Selecting a negative foreign exchange impact of 150 basis points.
Additionally, the reduction in Russian customer revenues, resulting from our decision to exit the market had a 220 basis point negative impact on revenue growth.
Excluding Russia revenues year over year revenue growth would have been five 6% reported and over 7% on a constant currency basis.
Beginning with our industry verticals travel and consumer grew four 9% driven by solid growth in travel and hospitality and muted growth in retail.
The ongoing exited Russia operations also impacted growth in this vertical.
Absent the impact growth would've been six 7%.
Financial services grew four 1% with strong growth coming from asset management and insurance services.
<unk>, Russia customer revenues growth would have been 12, 5%.
Business information and media delivered four 2% growth in the quarter.
Software and Hi tech produce milk growth lack of growth in the quarter reflected a reduction in revenue from our former top 20 customer we mentioned on our Q4 earnings call.
Generally slower growth in revenues across a range of customers in the vertical.
Life Sciences, and healthcare declined 10, 1%.
Growth in the quarter was impacted by the ramp down of a large transformational program mentioned during our Q4 earnings call and finally, our emerging verticals delivered strong growth of 14, 7% driven by clients in manufacturing automotive and energy.
From a geographic perspective, the Americas, our largest region, representing 59% of our Q1 revenues grew three 4% year over year or 4% in constant currency.
EMEA, representing 38% of our Q1 revenues grew 10% year over year or 13, 3% in constant currency.
CE, representing 1% of our Q1 revenues contracted 68, 8% year over year or 78% in constant currency.
Revenue in the quarter was impacted by our decision to exit our Russian operations, and the resulting ramp down in services to Russia customers.
And finally, APAC declined nine 4% year over year or six 7% in constant currency terms.
And now represents 2% of our revenues revenue in the quarter was impacted primarily by the ramp down of work at our financial services client.
In Q1 revenues from our top 20 clients grew five 3% year over year, while revenues from clients outside our top 20 grew two 3%.
And moving down the income statement, our GAAP gross margin for the quarter was 29, 3% compared to 33, 4% in Q1 of last year non.
non-GAAP gross margin for the quarter was 31, 5% compared to 33, 3% for the same quarter last year.
Gross margin in Q1, 2023 reflects the negative impact of lower utilization and some year over year compression and account margins.
GAAP SG&A was 17, 5% of revenues compared to 23% in Q1 of last year.
non-GAAP SG&A came in at 15, 3% of revenues compared to 15, 6% in the same period last year.
Both GAAP and non-GAAP SG&A expense in Q1 2023.
Include $9 5 million in severance related expense incurred as the company works to better align its cost structure with the current demand environment.
GAAP income from operations was $120 million or nine 9% of revenue in the quarter compared to $129 million or 11% of revenue in Q1 of last year.
non-GAAP income from operations was 178 million or 14, 7% of revenue in the quarter compared to $189 million or 16, 1% of revenue in Q1 of last year.
Our GAAP effective tax rate for the quarter came in at 19, 6% versus our Q1 guide up 18%, primarily due to lower excess tax benefits related to stock based compensation.
Our non-GAAP effective tax rate, which excludes excess tax benefit was 29%.
Diluted earnings per share on a GAAP basis was $1 73.
Our non-GAAP diluted EPS was $2 47.
Reflecting a <unk> <unk> decrease compared to the same quarter in 2022.
In Q1, there were approximately $59 3 million diluted shares outstanding.
Turning to cash flow and our balance sheet cash flow from operations for Q1 was a positive $87 million compared to a negative $52 million in the same quarter of 2022.
Q1, 2022 cash flow was negatively impacted by an increase in DSO and the payment of a higher level of companywide variable compensation based on our 2021 performance.
Free cash flow was $79 million compared to a negative free cash flow of $75 million in the same quarter last year we.
We ended the quarter with over $1 7 billion in cash and cash equivalents.
At the end of Q1, DSO was 69 days and compares to 70 days for Q4, 2022, and 69 days for the same quarter last year.
<unk> ahead, we expect DSO will remain steady throughout 2023.
Now moving onto a few operational metrics. We ended Q1 with more than 51100 consultants designers engineers trainers and architects production head.
Head count declined seven 1% compared to Q1 2022.
The net decrease in head count as a result of the reduction in Russia based head count.
The level, a lower level of hiring across the organization and have largely completed program designed to produce modest levels of encourage attrition.
Our total head count for the quarter was more than 57450 employees.
Utilization was 74, 9% compared to 78, 4% in Q1 of last year.
And 73, 6% in Q4 2022.
Now, let's turn to our business outlook, we are beginning to see the results of our focus on generating demand from new programs and customers.
We are also seeing a continuation in the uneven demand environment that began in Q4 2022 and.
And the global economic environment has not yet stabilized sufficiently to support client confidence.
The demand environment continues to be characterized by slower decision, making caution around spending and program ramp downs due to uncertainty in certain clients and markets.
As a result, our overall level of demand is not improving sufficiently to support our initial revenue outlook.
As highlighted in our Q4 earnings call our operations in Ukraine have not been materially impacted and our teams remain highly focused on maintaining uninterrupted production.
Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers that productivity levels at or somewhat lower than those achieved in 2022.
Consistent with previous cycles, we will continue to thoughtfully calibrate our expense levels, while investing in our capabilities and focusing on the preservation of our talent in preparation for a return of demand.
We expect headcount will continue to decline somewhat in Q2 due to limited hiring and more typical attrition and we will limit hiring in the second half until we see improving demand.
We expect utilization in the mid 70 throughout the remainder of the year.
As a reminder, the exit of our Russian operations the reduction in Russia customer revenues produces a tougher year over year revenue comparison, primarily in the first half of 2023.
Moving to our full year outlook, we now expect revenue will be in the range of $4 $95 to $5 billion, reflecting a year over year growth rate of approximately 3%.
On an organic constant currency basis, excluding the impact of the exit from Russia, We expect revenue growth to be just over 3% both at the midpoint of the range.
We're currently expecting sequential growth in both Q3 and Q4, however, we no longer expect to be able to generate double digit year over year growth in other quarter.
We expect GAAP income from operations to continue to be in the range of 11, five to 12, 5% and non-GAAP income from operations to continue to be in the range of 15, 5% to 16, 5%.
We expect our GAAP effective tax rate to continue to be approximately 21% or.
Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock based compensation will also continue to be 23%.
Earnings per share, we expect GAAP diluted EPS will now be in the range of $8 11 to $8 31 for the full year and non-GAAP diluted EPS will now be in the range of $10 60 to $10 80 for the full year.
We now expect weighted average share count of $59 4 million fully diluted shares outstanding.
Now moving to our Q2 2023 outlook, we expect revenues to be in the range of $1 195 to $1 205 billion producing year over year growth rate of less than 1%.
On an organic constant currency basis, excluding the impact of the exit from Russia, We expect revenue growth to also be less than 1% both at the midpoint of the range.
For the second quarter, we expect GAAP income from operations to be in the range of 10% to 11% and non-GAAP income from operations within the range of 14% to 15%.
We expect our GAAP effective tax rate to be approximately 20% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock based compensation to be approximately 23%.
For earnings per share, we expect GAAP diluted EPS to be in the range of $1 82 to $1 90 for the quarter and non-GAAP diluted EPS to be in the range of $2 38 to.
To $2 46 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 second quarter and remainder of the year stock based compensation expense is expected to be approximately 33 million for Q2 and $38 million for each of the remaining quarters.
Amortization of intangibles is expected to be approximately $6 million for each of the remaining quarters.
The impact of foreign exchange is expected to be negligible for the remainder of the year.
Tax effect of non-GAAP adjustments is expected to be around $9 5 million for Q2 and $9 million for each of the remaining quarters.
We expect excess tax benefits to be around 6 million for Q2 4 million for Q3 and $2 million for Q4.
In addition to these customary GAAP to non-GAAP adjustments and consistent with the prior quarter and 2022.
We expect to have ongoing non-GAAP adjustments in 2023, resulting from Russia's invasion of Ukraine. Please see our Q1 earnings release for a detailed reconciliation of our GAAP to non-GAAP guidance.
Finally, one more assumption outside of our GAAP to non-GAAP items.
With our significant cash position, we are generating a healthy level of interest income.
Expected an elevated level of interest income relative to past years, when we developed our original full year guidance. However, due to the larger positive impact on EPS. In 2023, we are updating our assumptions regarding interest income and making them explicit.
The remainder of the year, we expect interest income to be $8 million for Q2 and $7 million for each of the remaining quarters.
Lastly, I'd like to thank our employees for their continued dedication and focus on our customers.
Operator, let's open the call for questions.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Your question. Please press star one one again, please standby, while we compile the Q&A roster.
The first question will come from James.
By asset with Morgan Stanley Your line is open.
Yes.
Great. Thank you very much I appreciate all the color and detail so far this morning.
It sounds like most of your.
Revision and view for the rest of the year is attributable to macroeconomic environment.
Just wondering if you can kind of give more detail on the underlying assumptions there.
I know back in the previous quarter, you had talked about.
There was some engagement.
Reengagement that you need to do with clients. So I'm just wondering how that has gone in that engagement and those kinds of conversations are impacting your outlook at all right now.
Good morning, David.
I think youre asking that because.
It's.
Kind of two trends one of them.
Consumers countries clients because of <unk>.
Conditions.
And then the second was.
<unk> economy.
So what does that mean.
And I assume.
Definitely.
Is it all.
I think at this point.
C J.
Right.
Okay.
Yes.
10 Bucks.
Sure.
Our guidance.
Guidance question, what's happening.
On top of this if you go to.
Our previous guidance was.
<unk> began in March.
We always get introduced.
Sector.
Okay.
Got it.
From Europe as well.
This translated to <unk>.
Increased pushing vessels.
Was very visible.
Specific deals.
As I mentioned.
At this point we believe.
It'll slow down as port.
Political dimension.
Sales.
Got it thank you for that and then.
I guess from.
The ramp downs and Saul.
Softness.
Any sense of how much of that it sounds like you feel like that that is probably.
Broad based but any clarity on those ramp Johnson.
How much of that maybe idiosyncratic D Pam given delivery challenges or or it sounds like you think it's more really macro driven at all and make sure I understand that yes.
Sure.
Clearly.
Our previous call.
So.
Since were evident.
No.
Bye.
Good question.
Got it.
Great Thanks for that art.
Please standby for our next question.
Our next question comes from Darrin Peller with Wolfe Research. Your line is now open.
Hey, Thanks, guys.
If we could help just by maybe dissect a little bit more around the demand environment versus what youre seeing thats more specific to some of the regions Youre in now.
Some of the newer regions, but I mean by that is really just whether or not there isn't anything that is tougher to execute from some of the regions. You will get you close to Russia post.
Ukraine.
Or is that really not a factor and instead, it's really just about at the end of the day you have all the talent you need executing the way you should.
And then I guess, a quick follow up related to that is just pricing dynamics to pass through whats the latest thought.
The wage environment in those newer regions that how youre executing on that.
Your ability to pass through our pricing around that.
Alright.
Thank you Brian .
Yes.
I do too.
This morning.
This morning.
<unk> Ed.
I feel like with the economy.
Yes.
Clients.
Okay.
Of course, just price isn't just cost will come into play.
This is Brian .
Part of July right now.
Several quarters ago.
Well is it.
It's because.
Well, specifically today and Thats exactly whats good try to highlight.
Execution.
Well it's simple.
Well to both approaches.
Yes, we do it sounds a ph.
Our traditional approach be glad too.
Put ourself in Glenn Schorr, just trying to understand what we can do.
Sure.
Scott.
Can you just talk models.
Yes.
Focus is on.
We are maintaining that relationship.
Sure.
And let's say a big portion of what's happening today.
Two questions while at the same time.
Phil.
National deals is still happening.
It's all a geo.
The level it was like 12 months ago.
We are focused on that list as we continue just do us.
Hey, guys.
The future is dimension, but definitely a cost pressure this year.
No real challenges in terms of delivery or the ability to add head count in order to get work done, but as art said, it's really an issue.
The uncertain macro environment.
Clearly more uncertain than we expected by the time, we kind of get this summer and we think thats, having an impact on customers investment decisions from a wage standpoint, we did do our promo campaign here in Q2.
And as we talked about we clearly were seeing wage inflation over the last year, but I think youre going to see a more muted wage inflation environment.
The remainder of the year.
Accelerating environment is.
It's clear.
Clearly.
Not one that is super supportive of price increases and we're finding both clients are cautious in terms of spend and in terms of rates and even sort of new engagements.
We're requiring that we sort of sharpen our pencils a little bit.
Just a very quick follow up you guys have always done a good job of having more ability there.
And you try to take that into accounting guidance being conservative it oftentimes I mean, how.
How do we feel about it now I know you've probably given the macro uncertainty wanted to take as much of this data being conservative as possible. In this case is that fair or.
Listen.
Yes.
Yes.
What you're asking.
Alright and last question.
Last quarter.
Okay.
Yes.
Understood and.
Okay.
Alright.
Right.
This is <unk>.
I don't simply.
<unk>.
Second quarter of 2020.
Different Jackson those declines.
So right now.
Is it different.
That's what we see it.
I assume.
Well, it's one quarter.
Quarter adjustments because.
What we will do the next quarter.
Okay understood. Thanks, Eric Thanks, Jason.
Please standby for our next question.
The next question comes from Bryan Bergin with Cowen Your line is open.
Hi, guys. Good morning, Thanks for taking the questions first.
First one is a follow up on budget behavior. So I am curious if youre seeing clients caught an outright canceled programs or if this is more so deferral and delay of spend so more like a wait and see approach I'm trying to understand if there is potential pent up recovery that could actually form later this year or if that potential budget.
Are more or less out for 2023.
I think we also try to educate.
Obviously.
And.
But it would be.
Sure.
Slides Westwood to be seen.
And it is.
Alright.
Okay.
In terms of quarters, but that's the question is how many quarters 234 quarters less in terms of E. S.
That's.
That's our belief.
Because Mr fixes.
But.
In this case still this quarter.
Yes he is.
And so we saw those couple of ramp downs that we talked about which one of the health care space and one in that space.
And those were largely largely there.
Very much sort of economy based.
Im making a decision just based on kind of how they were looking at there.
Future revenues and profits.
What we're seeing today is more trying to let's say, a trimming or adjustment to spend which is generally <unk>.
<unk>, so Brian its not people, saying I'm not going to do any more work, it's just people sort of.
Reducing their spend and as Ark said eventually we think that that.
People returned to a need to make the investments to make their businesses.
And successful in the future and it's definitely good afternoon, Chris.
Hello.
Some of it.
Bill.
Delayed one quarter it will start.
Thanks.
We have to do list with us.
This company is the solo.
Glen.
Okay.
Sure.
Yes.
Installation, but it's definitely.
What's allowing us to call it.
Okay. That's helpful. Okay, and then just shifting over to margin here. So can you just talk about and any update around your thoughts on structural margin as the business does recover and then near term levers to balance profitability and our global diversification efforts just trying to get a sense on how you're expecting gross margin really.
Such a trend forward.
Yes, so I think with the updated guidance.
We're probably thinking that utilization has kind of remained more in the mid seventies, rather than the high 7% in the second half. However, we do have characteristics in the second half, which generally the higher build rates in Q3, as social security caps and a little bit of a trend up in utilization, so I am expecting that.
Gross margin MLP, maybe somewhere around the 33% for the second half SG&A.
SG&A and other areas.
Variable expense, we are definitely working to control and so SG&A will likely be below 15% as a percentage of revenue and then what we're looking to do is still run the business at sort of close to 16% for the full year, but what that means is the second half will probably be closer to the top end of our traditional <unk>.
6% to 17% range.
Okay. Thank you.
Please standby for the next question.
Okay.
Okay.
The next question comes from David Grossman with Stifel. Your line is now open.
Thank you good morning.
I Wonder if I could just go back to a question that was asked a little bit earlier.
If I look at your guidance for the year and just take the midpoint of about $5 billion that looks like.
You are.
Kind of guiding to sequential increases in revenue.
In the back half of the year.
So I think Archie said youre guiding to what you see so does that imply that you have.
Some visibility on backlog or new ramps that give you confidence that revenue growth will kind of accelerate sequentially in the back half of the year.
I simply.
C program switch.
Starting to show up and because utilization.
Yes.
And based on what we've seen from.
The rate increase.
Quint.
Especially like if you think about.
<unk> technology.
But thats really changing as we speak a lot of patients such as we've seen lots of conversation across practically all.
Industry outflows.
So.
That's all.
Alright.
Each too.
And whether it includes yes in the spike.
Obviously the guidance for Q2 and 70 gross figures you see in the top 20 and below top 20, as we aren't seeing a significant amount of new logo activity.
So there is a fair number when saltwater msas being signed the challenge right now David is it most of those new programs are relatively small.
They're not contributing to the same extent revenue growth as they might have in past years, but we are hopeful that they will grow over time.
And then just a quick comment on the growth rates that we saw with the top 20 in the below top 20 is with the movement of clients between those cohorts and particularly the two clients we've talked about in technology and healthcare when they move from the top 20 out of the top 20, it tends to distort the growth rates, particularly in the below top 20.
That's why we're seeing a somewhat lower level of growth.
Our top 20 clients.
Got it.
And.
Just to go back to your comments I guess 90 days ago.
I think you talked about.
Client.
Shifting workloads to another vendor and you just.
They didn't get notification I guess until late last year.
Have you seen any other major clients shift workloads.
The other vendors.
<unk> the last 90 days.
Activity that would suggest that's still a possibility this year.
I don't simply saw.
Due to the loss.
<unk> typically as we saw more delays.
<unk>.
The length of this.
As delays.
The statutes and program to issue.
But obviously at the same time, so it is a <unk> consolidation efforts across the industry.
And specifically consolidation efforts.
Good.
Right.
Cost cuts.
Okay.
Savings.
No.
It could be.
It could be two months.
Yes.
Hello.
So just to be clear our Ken.
This is Nicole plateaus depression.
Alright.
To explain this morning.
Well first of all progresses of.
Let's be cognizant lands.
And so there is a distribution of the budgets.
But.
And yet that's why.
I wish it was just <unk>.
Got it.
Another side.
Strategically.
And Thats, what we believe is vision.
Now in both quarters.
I'll be changes as we.
Thanks.
I'll just redistribution of work.
Because then you'd you'd like us to do.
Deliveries.
Diluted due to claw some of this is chip.
Okay.
Fortunately, we have to share.
And so as these exactly because.
Because of the cost.
So Jason in linear decisions, which Glenn.
Right.
Alright, I think I got it thanks very much.
Please.
Please standby for our next question.
The next question comes from Maggie Nolan with William Blair. Your line is now open.
Thank you, Jason you're starting to get into this a little bit but.
Mentioned in past quarters that new client additions were kind of a big focus area for the <unk>.
<unk> 2023, after focusing more on delivery in 2022 is that an area that you're really focused on investing in Q4 for 2023 or is that sort of changing alongside the demand environment.
That continues to be a really significant.
Southern company right. So in addition to maintaining the existing relationships and growing in existing accounts. Yes. There is a huge focus on on new logo activity and just the only challenge right now in past years might have initiated a new relationship and seen millions of dollars of revenue in the first quarter and maybe over time.
$10 million in the second or third.
Right now just give a little more cautious about their budget. So the relationships are starting with kind of smaller projects.
But I think over a period of quarters may take into 2020 for I think a number of those new relationships are going to produce.
And I think it will begin to show up in our numbers and at the same time and I think I've talked with something you kind of face to face.
Got a little bit of a two steps forward one step back.
<unk>, where we are having some of the larger clients.
Not not.
Continuing our relationship our shift work to another another vendor, but what they are doing is they are trimming their budgets and so while we get some of these.
Incremental revenues from new clients. Then we also have these offsets that are coming from larger clients that looking to sort of trim their spend and thats kind of the behavior that we see in Q2 and was more pronounced than we had expected when we guided.
In February .
Okay, and then can you comment on how much of a priority M&A is right now our share repurchase.
Yeah. So M&A continues to be a priority as always we want to make certain that we're acquiring assets that we think can be integrated successfully and will help us to sort of drive and evolve our business and so we have active discussions going on today.
I can't comment on what we're going to close when but certainly we've got some some active conversations.
Occurring likely.
Likely see something in the future and then from a share buyback standpoint, we.
Get initiate our program in Q1, it was modest less than $10 million bought back I think 30000 shares and I would expect that we would.
<unk> to move forward with that.
With participation, although we don't have a predetermined level.
For Q2, but expect to be active in terms of share buybacks in the quarter.
And all in one day.
I would.
Yes.
It's PT <unk> statement fluids.
Therefore, we will look at for.
<unk> features.
Along with that was strategic and there is no any specific help us too.
Yeah.
Link situations.
So all of those look good.
What will be happening.
In a year or two visibility.
Okay. Thanks, Mark Thanks, Jason.
Please standby for our next question.
The next question comes from Ramsey El <unk> with Barclays. Your line is now open.
Hi, Thanks for taking my question.
Good morning, I wanted to ask about the some comments you made about clients, obviously shifting tomorrow kind of cost takeout focused work how much of an internal pivot is required for you to address and meet that shifting demand do you have to re skill or invest.
Or is it just.
Does it take time to get there or is it just a matter of you have the skills on hand, you just have to sort of change the orientation and a little bit in terms of.
Kind of getting there with your clients.
So we do believe we said.
Yes.
As you know.
<unk> communicated.
I will focus of.
Okay.
Our services lines, so but at the same time the skills, who if you will.
Sure.
It should be.
Understood.
What to do in this area.
Oh just skills.
It's substitutional.
<unk> differentiated capabilities to <unk>.
<unk> solid engagements, so we put our efforts around it.
<unk> specific <unk>.
Okay.
It's still <unk>.
It's relatively small portion of the award to be doing in general.
There is no.
<unk> two <unk> company acquisition.
So this is much more tactical efforts for us.
Those quarters to each we believe this type of threat.
Wasn't markets Louisville complex, so it's still <unk>.
It is a very specific area for the future growth.
Okay.
Could you also provide a little more color on the pipeline right. Now is it has there been a shift to any particular type of deal a large versus small or is it more new logo versus expansion.
They're easier.
Is there a path of least resistance there how does the composition of the pipeline evolving.
I mean, there are still.
A handful of large deals that are out there that we expect to generate revenues in the second half of it are significant.
<unk>.
Mainframe to cloud type of engagements that will have significant revenues, but.
And I think we talked about this in the last conference call as well which is that.
Most of that new work that we're seeing is generally smaller in size. There are relatively fewer clients, who are kicking off large scale transformation programs. At this time. They are looking for a kind of nearer term.
Return on their investment they are looking for modifications updates.
Existing platforms, rather than sort of creating new platforms.
And again, it's back to that.
Let's say the instability in the macroeconomic view as long as people arent certain whether the bottoms is going to be in Q3 Q4 Q1 of 2024. It just makes it more difficult for people to make investments in larger scale transformation progress.
Got it thanks, so much.
Standby for the next question.
The next question comes from Ashwin <unk>.
<unk> with Citi. Your line is now open.
Thank you.
Folks.
Okay I appreciate the thoughtful comments at the top of the call.
Question does to Jason.
Is the idea Jason.
The line on operating margins, because you kind of mentioned quarter to quarter variability and the need to be flexible based on based on revenues.
Not having visibility into revenues. So is that the idea that you will hold the line on on margins.
Yes so.
Our focus continues to be on a return which is stronger demand.
Some of you at a time as that are talked about whether thats, two or three or four quarters.
And to make sure that we're making investments in the business that will allow us to.
We continue to advance our capabilities and be successful in the market and at the same time, we are being very careful in terms of spending really addressing.
Discretionary discretionary costs.
Trolling anything that's more variable in nature.
Ashwin trying to drive the business at least to that.
Two at around 16, or maybe slightly below that range, so trying to maintain profitability throughout the year at 16%.
And what you'll find that in the second half we will have stronger profitability just because there are characteristics that make the risk margin stronger and then with the.
Continued focus on SG&A efficiency I expect that SG&A will go below 15%.
Again, it'll be a focus on the longer term. So we don't want to do anything.
<unk> ourselves.
To return to growth.
At the same time, we want to be careful about our discretionary spending.
I understand.
And.
As it relates to.
The portfolio of services and your delivery.
Do your clients, particularly the older more.
The more tenured clients did they all understand at this point that you have.
More diversified delivery than before that its not primarily.
T central and eastern European countries.
Does that come up as a factor and I just wanted to also clarify from arc.
Yeah.
Is that an intent here to get into things like application management and so on more deeply broadened our service portfolio and response to what's going on.
So we.
Julian.
Yes.
As we speak.
Same time.
Okay.
As we begin.
Absolutely.
We have a difference.
Delivery.
Yes.
<unk> today.
So just what the wholesalers.
Just wanted to quote that we bring in new clients and existing clients.
Two <unk> experienced before.
Pretty good progress because it's not over the last two quarters.
<unk>.
Almost like Egypt, Egypt was.
Yes.
We have a dual glass, which is very typical clients.
We choose right.
<unk> differentiation.
Technology services, which come into locations with us as well and I appreciate your engagement with choice because again as I have mentioned.
<unk> was taken before.
Before I started.
Paul.
When you think about businesses and investments.
You can see users.
Thanks.
Yes.
Absolutely.
Well.
Right.
As for successful with Asia, which is <unk>.
Sure.
So welcome deferrals it doesn't grow allows for additional.
Historical locations as well so it's just a little bit.
More predictable at this point to go for clients to because of some projects.
Because of the.
Tyler.
So.
From this list of users.
With the added was that just a direction.
So from the portfolio of the business.
Definitely reduced <unk>.
So it really just tough you also.
Yes.
Patient management, coupled with it as well, but it's still relatively.
Small portion of the work we do.
It's a decent usually introducing two additional work you can do it.
As soon as we do it.
Jacob.
In keeping up with it.
Application.
Let agents as well.
It's still focused on transformation.
Uh huh.
As I mentioned.
What we see is right now does it delay so we do believe.
While Q2.
It wasn't Fox Pitt.
I think samples that youll start to give you a license is.
Each to in this way we believe.
This outgrowth of that because.
Our two lead programs.
<unk> believes that clients will be able to afford to delay the full look at it.
Therefore.
Multiple quarters.
If you will.
In Florida.
Each too.
Understood.
Thank you for that.
Please standby for the next question.
The next question comes from Jason Kupferberg with Bank of America. Your line is open.
Good morning, Archon, Jason This is pilots part on for Jason Thanks for taking the question.
Tom Selleck tried to try to be quick I think you briefly touched on this but maybe just to ask it in a different way and just to clarify on my end if.
If you could benefit of time talking about the linearity of the quarter. For example, the last point was in the second week of February and at that time.
Talking about some positive green shoots did the demand picture fall off significantly in March, particularly and if so is that fully attributable to the banking sector crisis or just any clarity there would be helpful.
Alright.
Believe that.
Sure.
Hey.
Use.
Kids.
In the block.
Got it.
And it's not necessary.
Got it.
With kids all financial services.
But most of the other industries, which luckily.
Focus on quote.
And you can see you can see what Scott when you look at $1, but the other technology driven companies.
Due to the last couple of couple of months so.
That's all part of the same.
Got it.
Sure.
As of today.
Florida.
I'll ask vivek.
Or was it services, which we provide.
Okay.
As majority to be popular as OSB, though.
Yeah.
Okay, great. Thanks, Mike I appreciate that and then just as a follow up it seems like while financials and travel seem to put up pretty solid growth numbers ex Russia.
Was it a little bit more surprised to see the life sciences and to a lesser degree Hi Tech.
First a bit of a slowdown so I was just wondering if you could parse out what you're seeing in those verticals like how much of that decline for example, whats from the ramp down of those large clients mentioned on the last call compared to I guess this is Jason described as more of a trimming of spend across the client base.
Yeah. So quickly on the life Sciences healthcare, it's largely.
Significant sort of ramped down it specifically.
They put a program effectively sort of ended a program.
We started some work, but not specific to that program and there has been a very significant difference in the revenues we generated last year from that client from the revenues, we expect will generate this year.
And then from a high Tech standpoint, again <unk> got the one client, but then you also just have a generalized slowdown in spend and I think we all see in the news from the high Tech sector.
Yes.
If you're available. So this is in some ways.
We'll be sometimes accidental driven by a couple of clients, but in some ways really electrical industries, if you slip because.
Alright.
Well, obviously Houston, how much investments.
There.
Due to its liquidity.
And how much OLED investments.
Got it situations sub six <unk> done a lot to say it.
With Westwood.
So a lot of symptoms and signs of life science industry right now after huge spend due to zone.
Nick.
<unk>.
A portion of the update.
Okay great.
Okay.
Sure.
At this time I would now like to turn the call back to art for closing remarks.
Thank you again for joining us.
Sure.
Yes.
Sure.
Unusual Tds.
In our lives.
<unk>.
Significant growth.
<unk> now seen digital different world, but again, our believes that technology will drive it.
Future, we didn't talk to why issue bodes well with this nice conversation about <unk>.
But we do believe that a lot of engagement.
Digital ecosystem, we will have to be rebuilt.
Okay.
It will be in clients or competition, and those who led tubes.
The future will come to us for help as well.
Sure.
Two and three months.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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