Q3 2023 EPAM Systems Inc Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to <unk> third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would.
To ask a question during this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press star one again I'd now like to turn the conference over to Steve Its Robbie 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 third quarter 2023 results. If you have not copies are available on <unk> dot com in the investors section.
With me on today's call are <unk>, CEO, and President and Jason Peterson, Chief Financial Officer.
I would 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 the comparable GAAP measures are available in our quarterly here.
And in the investors section of our website.
With that said I'll now turn the call over to Ark.
Thank you David and good morning, everyone.
Before I introduce also post third quarter I would like to take up to a certain degree goes two O expectation for Q3 fiscal year look three months ago during our last call.
As stated the 12 the current business environment is more focused on cost optimization. So you can see it has built into.
We do believe the demands with what's been listing service this will come back and as a service with market you'll be moving from quarter.
Two accelerated digitization to teams.
Doug business models, and we're still working.
Yes.
The core or is it just that much.
We expect this new demand to be underpinned and it was more driven exactly where traditional lenders to grow is equipped with Virginia data analytics and AI capabilities.
At the same time, we said, we still expect and you'll get some dynamic to continue into the second quarter 2023.
<unk> begins to normalize.
We stated that we are focused in on toward user experiences, but I'm very challenging plus with us into watching glass and auction items. Please.
We will be uploaded to our business throws at us to <unk> 23 and into 2024.
These changes it does have national for us.
Already better positioning us in preparation.
With the return of stronger market demand.
That was the first part of our plans.
The second critical part was about our efforts to further globalize and stabilized our delivery ecosystem put up a great point engineering quality standards and up two months of operation of our turns into locations while closely focusing on our gross margin improvement efforts.
What was there to continue throughout the remainder of this year.
And I expect it to go throughout 2024.
Okay.
Is that do you mind us, let's talk about three key topics to address our demand environment.
Global capabilities and key investments.
Okay.
We believe this as well as the demand for the new deals for platforms applications remained slower than historic levels.
Part of Dropdowns and Dakota continue to work through specific loss, but I'll, let Kristy result, Glenn to sign of stabilization in our business.
Most of new logos.
And Dan has expanded programs in our existing portfolio, we are seeing signs of renewed interest, particularly in our life.
<unk>, all seen insurance and energy.
Noteworthy is that.
What is important to highlight in todays business environment, we have put in all possible efforts, so address alcoa and current priorities, including adjusting in mix of engagements models cost take outs and consolidation initiatives, while protecting our share of wallet and looked at our relationship.
Well this factors.
Sometimes too like the lower short term profitability metrics. We are seeing signs that clients are returned into well under between cost and quality and the pump continues to be well positioned.
We will say is required today increased focus on demand led sales and go to market motions and investments in global partnerships too lenient.
Quickly growing new business.
It was the last quarter as our global sales organizations and our specialized practice teams focused on developing new offerings in key verticals and horizontals expand into new engagement models and extending our client portfolio to include new logos across a broader spectrum of grips formulation comprises two mid market players.
The new and exciting startups is key for us yet.
As more and more often we are engaging with clients as a C level awards and business functions.
One of the examples of those relatively new for us ways to engage is translating our partnerships.
We should have taken on a greater momentum recently this key collaborations driving net new go to market propositions, new IP and new client wins.
Last quarter, you said it our global partnership with Google Cloud to help our clients fast track the development of artificial intelligence machine learning and data solutions to help them accelerate the transformation.
<unk> business.
Earlier this week, we announced an expanded strategic collaboration agreement.
With AWS.
We will aim to accelerate modernization adapt cloud native.
Texture and leverage artificial intelligence and advanced analytics to create customer value in key industries, such as <unk> financial services insurance.
Energy.
Furthermore, we expanded our partnership with Microsoft the Cummins globally managed enterprise system integrator.
Enhanced platinum status and the problem in the U S closed nature.
Its expertise.
Enable us to help our clients modernize transform and simplify complex enterprise plus applications and processes to accelerate business growth powered by Azure open air assets.
That is a result of these efforts are showing up and increasing number of conversations with clients and growing numbers of opportunities and while it's still too early to say when we can show significant results in revenue growth.
Reduction load is starting to come back to the levels comparable with Q1.
And we hope to see this trend takes shape.
In the next quarters.
Still.
Despite signs of improving demand conditions in the global macroeconomic environment in Venezuela.
And we see certain trends, reflecting in our own b notes.
Notably Europe.
The contraction in the third quarter is likely to take a few quarters to believers.
Now we are known to global capabilities.
India and Latam for Us a key gross delivery agents, while central Eastern Europe, and central Asia or areas of stabilization after a microfueler case in Atlas.
And we.
<unk> future growth opportunities.
Part of the effort regarding globalization stabilization of delivery is a right sizing and cost optimization across multiple locations based on current and future demand outlook and specific location capabilities seniority of Jeremy It's an office infrastructures.
Some identical efforts are also relevant.
Several locations in Western Europe, and North America.
While we're optimizing some locations we continue to invest in new talent in key initiatives to expand our engineering G&A across all strategic global delivery locations. This continuous per musician and Upskilling efforts enabled by our own use of AI in the pump productivity.
Platforms.
Those sources.
As a way as we speak and we're already seeing first results and expect to have additional benefits to materializing in 2024.
Okay.
<unk> brings us to the tactical conditional investments, which we mentioned in the past multiple times.
We are continuously investing in our strategic priorities such as.
Expansion of differentiated consulting agency.
KML AI.
Cloud capabilities this focus on vertical expertise.
Development of go to market offerings and solutions, which now includes propositions related to us who face possible across a broad range of business and technology use cases.
Our strong cloud engineering data and then well core services profile should position the pump to benefit in the medium and long term from the impact of both current pent up demand for modernization and also from the fundamental skills shortages Congress technological transformations.
We still persist today.
The impact will become even more real in terms of complexity future applications.
But <unk> not just currently available elements of G&A and requirements for trust reliability and security management.
But also very closely integrated.
With new classes of composite and adapter for air platforms, as well as foundational models and specific industry cloud platforms.
One of the key propositions pottery barn is our ability to make a real as part of this focus and number of follow ups and centers of excellence have created IP that we're using to prototype our earnings and to share them with our clients throughout.
Open source initiatives.
As I mentioned, our work with dial our registration workbench in our previous call and today, we see a number of extensions of this platform into specific use cases in specific industries based on real life problems. This graduation is a growing variety of integrated air tools and data sources.
One of our most significant investments related to that.
Is the development and internal rollout of coupon responsible air Chromebook and abroad employee training to adopted.
Today, we are confident that the problem has the necessary capabilities.
And to help our clients to rule in the general adoption of AI and also in modernization of applications and broker data engineering effort to drive earlier Gi products to bring.
Conversations with our clients they will again.
As has become generally understood that fundamental capabilities and readiness and cloud Indonesian conductor unnecessary prerequisite for success.
<unk> interest continues to indicate the demand for related services, we will build momentum into 2024 and beyond.
I believe that provides good level overview of current state.
And our key areas of focus.
To summarize I would like to say that.
Exciting opportunities in front of US we are still facing the complex demand environment, we are working to invest for the future, while balancing supply and demand for skills and capabilities across a much more diverse delivery footprint.
The challenge continues as the war in Ukraine extends into the third year as well as a new disruptions.
Middle East Escalations.
<unk> two continues to adapt the company and appropriate manner.
Good thing at this point this will be in well trained to manage all of that.
So with that I would like to request to Jason to share more details and numbers three and four an update for our business outlook for the reminder of 2023.
Thank you Ark and good morning, everyone in.
In the third quarter <unk> generated revenue of over 115 billion a year over year decrease of six 1% on a reported basis or 8% in constant currency terms, reflecting favorable foreign exchange impact of 190 basis points.
Revenue in the quarter continued to be impacted by reduced program spending across a number of our clients as well as ongoing client caution unrelated new project starts.
The reduction in Russian customer revenues, resulting from our exit from the market had an approximate 50 basis point negative impact on year over year revenue growth.
Excluding Russia revenues year over year revenue for reportedly constant currency would have decreased by five 6% and seven 6% respectively.
Beginning with our industry verticals on a year over year basis financial services decreased three 3% driven by declines predominantly in banking, partially offset by growth in asset management.
Consumer decreased by six 2%, primarily due to declines in consumer goods, partially offset by solid growth in travel and hospitality.
Life Sciences, and healthcare declined four 2% the year over year growth rate was negatively impacted by the ramp down of a large transformational program in late 2022, which we had mentioned during our previous earnings calls.
On a sequential basis gross in life Sciences, and healthcare was a positive eight 6% and we expect to return to positive year over year growth next quarter.
Business information and media declined 12% in the quarter revenue in the quarter was impacted by a reduction in spend across a number of large clients based on uncertainty in their end markets, particularly in the mortgage data space.
Software and Hi Tech contract and 15, 1% the year over year growth rate was negatively impacted by the reduction in revenue from our former top 20 customer we mentioned during our previous earnings calls and.
And generally slower growth in revenue across a range of customers in the vertical.
And finally, our emerging verticals delivered solid growth of eight 5% driven by clients in energy manufacturing and automotive.
Monty declined 4.9%.
<unk> <unk>.
Moving down the income statement or gap gross margin for the quarter was 31.1%.
To 32.6% in Q3 of last year.
non-GAAP, Chris Martin for the quarter was 32.9%.
To $34 four per cent for the same quarter last year.
Gross margin in Q3, 2000 twenty-three reflects the negative impact of pricing pressure and lower utilization, partially offset by a lower level of variable compensation expense.
<unk> name was 16.9% of revenue compared to 16.1% in Q3 of last year.
non-GAAP SG&A in Q3 2023 came in at 14.4% of revenue compared to 14.1% in the same period last year.
GAAP income from operations with $114 million from 9.9% of revenue in the quarter compared to $180 million or 14.7% of revenue last year include.
Included in a gap results in the quarter is the 25.9 million dollar loss on the sale of the company's remaining ball holding some Russia.
Eight $4 million of severance as we take steps to reduce our cost structure to better align with demand.
Gap income from operations was $196 million or 17% of revenue in the quarter compared to $232 million or 18.9% a rabbit in Q3 of last year.
Gap effective tax rates for the quarter came in at 26.3%, which includes a one time tax charges connected to the disposal holdings in Russia, and lower than expected excess tax benefits related the stock based compensation.
non-GAAP effective tax rate was 23.2%.
Diluted earnings per share of a gap basis with the dollars and 65 cents.
non-GAAP diluted EPS was $2.73, reflecting a 37% decrease compared to the same quarter of 2022.
In Q3, there were approximately 58.9 million diluted shares outstanding.
Turning to our cash flow and balance sheet cash flow from operations for Q3 with $250 million compared to $252 million in the same quarter of 2022.
Free cash flow was $200 and 11 million compared to free cash flow of $234 million the same quarter last year.
At the end of Q3 D. S. L was 73 days and compares to 71 days for Q2, 2023, and 69 days for the same quarter last year.
Uptake in DSL reflects an increasing my time some clients were taking in the <unk> in the review and approval of payments combined with the last day of the quarter falling on a weekend.
Share repurchases in the third quarter, where approximately 318000 chairs for $78.5 million at an average price of $246.44 per share.
As of September 30th we had approximately $372 million a share repurchase authority remaining.
We ended the quarter was approximately $1.9 billion in cash and cash equivalents.
Moving onto a few operational metrics.
We ended Q3 with more than 48500 consultants designers engineers trainers and architects.
Including the impact of our extra from Russia production head Count has declined 10% compared to Q3 2022.
As a result of lower levels of hiring combined with both voluntary and involuntary attrition as we continue to balance supply and demand.
Total head count for the quarter was more than 54600 employees.
Utilization with 72.7% compared to 73.5 per cent in Q3 of last year and 75.1% in Q2 2023.
Now, let's turn to our business outlook.
We are encouraged by the results of our demand generation efforts and new customer revenues, resulting from these efforts.
The level of new customer revenues being generated it's still not enough to offset the impact from existing project Graham downs and reduce spending from our top 20 clients.
We are beginning to see a degree of demand stability emerging in our north American portfolio, but we are also expecting an impact from plan ramp down several of our European customers.
Although there are encouraging signs demand remains somewhat uncertain.
In addition to the negative impact the queue for seasonality usually has on revenue. We've also had a large number of employees relocate to countries that celebrate December holidays.
Q for we're also expecting unfavourable foreign exchange headwinds in comparison with Keith right.
These factors are producing sequential decline in queue for revenue despite the stabilizing demand environment.
Are you, creating delivery organization continues to operate efficiently and our teams remain highly focused on maintaining uninterrupted production or.
Our guidance assumes that we will continue to deliver from Ukraine that productivity levels consistent with previous levels throughout 2023.
During the third quarter, we elevated.
Elevated our focus on a lining our cost structure with the near term demand environment initiating a cost optimization program designed to reduce operating costs by 2.5% to 3%.
This effort is clearly more intentional than our previous supply and demand balancing efforts.
We think it is necessary to take this action in part to allow for further investment across our strategic initiatives demand generation efforts and people programs.
As I mentioned earlier, we at $8.4 million in severance related costs in Q3 of which $71 million related to the cost optimization program.
Q for we expect to recognize a further $15 million in expenses as a result of disgust optimization program.
We expect headcount will continue to decline in queue for due to limited hiring and managed nutrition, which will drive utilization slightly higher on the quarter.
Moving to our full your outlook, we now expect revenue to be in the range of $4 and 663 million to $4 billion $673 million, reflecting a year over year decline of approximately three per cent on.
On an organic constant currency basis, excluding the impact of the exit from Russia. We expect revenue to also declined by 3%.
We expect gap income from operations to now be in the range of 10% to 11% and non-GAAP income from operations to continue to be in the range of 15% to 16%.
We expect our gap effective tax rate to continue to be approximately 22%.
non-GAAP effective tax rate, which excludes excess tax benefits related to stock based compensation is expected to continue to be 23 per cent.
Burning per share, we expect that gap diluted EPS will now be in the range of $7.07 to $7.15 for the full year and non-GAAP diluted EPS will now be in the range of $10.31 to $10.39 for the full year.
We now expect weighted average share count at 59.1 million fully diluted shares outstanding.
Moving to R. Q4, 2023 outlook, we expect revenue to be in the range of 1132 $114 billion, producing a year over year decline of 8%.
And organic constant currency basis, excluding the impact of the extra from Russia. We expect revenue to also declined by approximately 8%.
For the fourth quarter, we expect gap in from operations to be in the range of 10% to 11% and non-GAAP income from operations to be in the range of 15% to 16% we.
We expect our gap effective tax rate to be approximately 24% and are non-GAAP effective tax rate to be approximately 23 per cent.
Sure, we expect capital G. P S to be in the range of 167 cents to one dollar and 75 cents for the quarter and non-GAAP diluted EPS to be in the range of $2.47 to $2.55 for the quarter. We expect a weighted average share count of 58.8 million diluted shares outstanding.
Finally, a few key assumptions that support adapted <unk> measurements in the fourth quarter.
Stock based compensation expense is expected to be approximately $36.3 million.
Amortization of intangibles is expected to be approximately $5.7 million.
Back to foreign exchange is expected to be minimal.
Tax effect of non-GAAP adjustments is expected to be around $12 million.
We expect to excess tact benefits to be around $1.3 million and we expect to recognize approximately $15 million in expenses related to our thoughts optimization program.
In addition to these customer gap to non-GAAP adjustments and consistent with prior quarters. In 2023, we expect to have ongoing non-GAAP adjustments in queue for resolving from Russia's invasion of Ukraine.
<unk> Q3 earnings release for detailed reconciliation of our gap to non-GAAP guidance.
Finally, one more assumption outside of our gap to non-GAAP items with our significant cash position, we are generating a healthy level of interest income and are now expecting interest and other income to be $14 million in the fourth quarter.
Looking beyond 2023, we intend to provider 2024 business outlook during our fourth quarter earnings call scheduled for February.
However, I would like to provide some commentary at this time to help frame our initial thoughts.
Aren't mentioned the demand environment remains uneven and we believe this will persist at least into the first half of 2024.
We have been pleased with the progress we're making on demand generation and will continue to prioritise revenue growth in the 2024, which in some pursuits include some degree of discounting.
Additionally, in 2024, we expect to incur incremental costs due to more normalized variable compensation as well as salary increases from our annual compensation cycle, which typically occurs in Q2.
Although the cost authorization program or better a line or 2024 cost structure, we still expect wage pressure combined with a limited ability to improve client pricing to continue to put pressure on margins.
Four 2023 has been a challenging year for the I T sector and <unk>, we remain confident in our ability to drive historical levels of revenue growth and profitability and a more normalised demand environment.
Operator, let's open the call for questions.
If I can ask a question press star one on your telephone keypad, we ask that you. Please limit yourself to one question and Duane follow up so that we can take as many questions as time permits. Our first question woke up in the line at Brian <unk>. Please go ahead.
Hi, Good morning, guys. Thank you I guess, let's start on the demand stabilization transit you highlighted here again, you mentioned production load that Ain't coming back toward one Q levels can you dig in a bit more there is that prevalent across industries and as a consistent across the large clan cohort and just anything how that.
Informs early 2024 client tech budget discussions.
Okay.
Mmm winning.
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What do you mean.
We're trying to see the <unk> transaction.
How much what can we do it.
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Issues influence.
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To discuss your notices but.
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<unk> <unk> <unk>.
Well, if you're both doing production work.
<unk>.
So I suppose it means it means that in Virginia.
Oh, we'll find.
And as a way to stabilize Oh sure.
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Businesses.
Declining as us but.
Three seven you up at seven inches.
<unk> back to us.
So from the <unk> and this is what you mentioned as well.
Local news station about arose.
<unk> it is but.
As we mentioned.
<unk> there is no clear.
Australia.
So it's still difficult to say, but it seems like pressure.
To do work.
And.
Yeah.
No lettuce.
<unk>.
Difficult, especially music medicine Geopolitically William.
<unk> <unk>.
So.
Patients will help out with interest to discuss tangible but so just noticed list 10 days.
Okay understood and then my follow up on the cost optimization plan, the Jason what what's the time frame on achieving that savings target and can you talk about how you're balancing efficiency here in the near term versus global diversification investments for future growth.
Yeah. So the program is designed Ted.
Cheever someone over $100 million or S. We talked about it in the prepared remarks 2.5 to three per cent of our cost structure.
Most of the actions will be taken by the end of the year and then I would say there'll be some residual actions that would take place early in 2024 with the idea of giving US said effective at 100 plus billion dollars in savings.
To allow us to further in best in 2024, and so that's in demand generation programs, you know things like partnership programs, it's and capabilities.
I further consulting and then it also will allow us to.
Effectively sort of fun to more normalized variable compensation and salary campaign next year and so again I expect much of the savings to be achieved by the end of this year and there'll be probably old still some actions taken in Q1 truly.
Truly the cost that we talked about in the.
In Q3, and Q4 truly are incremental costs.
Related to either severance pay outs in different countries.
<unk> police exits.
The other costs that are incremental and again allow us to achieve it.
A certain amount of savings as we enter 2024.
Thank you.
Your next question will catch on the line, it's Marsha category with Wedbush Securities. Please go ahead.
Hey, Thanks, Thanks for taking my question I wanted to focus a bit about your sterling efforts and using India is one of those I guess <unk> senators to be able to kind of pitch those those new engagements. Maybe you can talk about some of their successes here.
And that's on top of that how does that differ in terms of your ability to generate.
Perhaps stability compared to what you have pre I guess hostilities in eastern Europe, maybe you can talk a bit about that.
So I think.
As a nation multiple times <unk>.
Yes two.
In the basement.
Well <unk>.
Interested in too.
<unk> <unk>.
<unk>.
Relatively new location that you are at this fastest growing through the last three years.
So <unk>.
Purposefully.
Types of practices.
Global is digital engagement two.
<unk> data plan to consult purchases so.
<unk> integration is a difficult one in general is this environment because of pressure everywhere.
And your location speech mucus so.
But I think we should definitely opportunity to to <unk>.
I went back and we I can relate to that a lot of experience.
A very sizeable program Sir.
So we also have to be concerned.
People and.
Arizona.
Visa.
Visa comfortable comfortable quidditch should we get to read you some of those restaurants issue.
So I seem to be pretty optimistic about this and you'll notice in Wisconsin as a nation.
Several times I think Israel becomes proportionally much bigger part.
Yeah, and always fall in on the profitability so.
As we've talked about it and the last call in again and we will continue to talk about here today is that we continue to have some characteristics with.
Heavier pyramid than we have traditionally operated with.
Ongoing kind of pressures on pricing and then some amount of wage inflation.
So.
It's hard to sort of returned or typical profitability.
As we entered the next.
Quarters, or maybe through most of 2024, but when we look at India.
You know given some time and particularly mood board demand, we think the ability to sort of run that geography at levels of profitability consistent with what we did in history in eastern Europe, It's certainly.
Possible and more than slightly.
So it just right now we're still working through as our access some of the imbalances on pricing and again, a heavier delivery permitted.
Understood and then in that contacts can you just remind us your head down next by Eastern Europe, Latin America in India, where are we today and where do what what what sort of a mixture of what you want to get too down the road.
Yeah. So we're.
Early less than 30%.
Eastern Europe, and heading towards kind of low twenties.
India is currently.
And the lesson.
26, 27% between Ukraine, and <unk>, Okay, Houston, Eastern Europe, or central Europe, institutional because we.
Three two significantly present.
And the Angel.
Becoming switching.
Which of the 2% second largest delivery locations.
Right that was second largest are too great.
Alright, thank you.
Your next question comes from the line it <unk> with Citigroup. Please go ahead.
Uhm.
Yeah.
Can you hear me now.
Okay.
Okay. So I guess the question is when I when I look at your van Okay results, either by geography or by.
They call.
And on a sequential basis and kind of compared to rotate what they were two Q autistic rotating P. Q.
Almost everything is either D sell a relatively unchanged you have obviously be very idiosyncratic thing going on with life scientists.
And wondering does that.
So I have that with the.
What I.
<unk> is a little bit more positivity in terms of commentary.
You know because of stabilization. So can you comment on how.
The the environmentally conversations with clients have.
Have have evolved over the course of the quarter was September.
You know radical.
Radically different than July things evolving in October and a little bit more color of where we are going in terms of what what seems to be stabilization in in more areas that could be useful.
Okay. So in case.
Hey, guys the digital numbers.
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But it was all ourselves it's actually.
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Last year, that's what you'll see is so viewpoints.
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The future.
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Transaction load is kitchen.
More stable astronauts or if you looked at him clearly on a year over year basis, the number's still don't look right.
Quench Holly.
<unk> declined between Q2, and Q3 that decline was less than the coin we had in Q2.
Q for we still have a modest decline, but I would say, that's largely sort of foreign exchange to a certain extent as we talk about the availability or the available builders in queue for and so if you just for that it does feel like our demand stabilising, particularly in North America as we talked about.
<unk> remarks assumption to mention.
I know others.
Consumer it wouldn't be able to deliver.
Locations.
<unk> <unk> <unk> <unk>.
As well, because we're getting more and more experienced with scales.
Outside always traditional students in eastern Europe.
In Eastern Europe.
Western Central Asia.
Also stipulate.
Well in general geopolitical environment too.
Since.
<unk>.
Last point is really good to hear in terms of pricing because any any kind of.
Talk about transaction load in volume verses results.
Does that does that imply.
And fly soft pricing environment, and if he can break that down into.
How much of that is a G. L mix type of the issue as opposed to apples to apples pricing.
Price clenching.
And then <unk> over the last two quarters, you have mentioned obviously that.
Because of the war in Ukraine.
You had to move.
<unk> equal to any other geographies and there was a pricing impact that the client needed to absorb because of that.
He passed.
The impact of that on client decision.
Yeah. So let me quickly do on a year over year basis, you would have had the impact of those movements turn people from Russia, and Ukraine and moved into a higher cost geography's, but.
But if you begin to look at what's happening here in Q3, and what we think we see in Q4 is that <unk> got both the facts and I. Unfortunately, I can't give you the exact percentage, but certainly want any effects is that we are seeing more demand for India based resources, where the rates are lower so that would speak to the mix shifts that you talked about and then the other.
The thing is our kiss indicated.
Mentioned as well as the pricing environment still is.
It's somewhat challenging with in some cases concessions provided to existing customers and then with newer engagements also starting with a sharp pencil and so you've got both impacts and I think that you'll see them show up more cell.
Four and probably in the first half of 2024, which again it's.
Part of the discussion around what.
Obviously for profitability an incoming quarters.
Understood and that's what he had adjusting for that okay I got it. Thanks.
Your next question will come from the line of data careless bandwidth Stifel. Please go ahead.
Thank you.
I was wondering if I could just follow up a couple of points that were just made in the last question.
I guess I'm, just trying to reconcile and you've.
Given us a lot of good information about production Ah about.
Yeah.
Headwinds from customer losses, some of the larger customers or you can talk to you about over the last several quarters.
Other dynamics, so I guess I'm, just trying to reconcile all of that because I think chasing you said that when you back out FX and seasonal kind of workdays or work hours that.
Shields flattish so it sounds like the.
The newer work that's coming on us offsetting those headwinds is that a reasonable way to think about things as we kind of <unk> to 2024, I know you don't Wanna get guidance, but.
Does it feel like those headwinds that you've been experiencing the last couple of quarters that had been dragging sequential declines in revenues.
Pretty much a base by the end of this year.
Yeah.
Obviously, the world is a very complicated place at this time and so I want to be careful not to make it.
Absolute assertion, but certainly at this time.
We are seeing or stability in customer programs and budgets and so, particularly as we look in North America. It does appeal that feel like we achieve some degree of stability less of these unexpected sort of surprises and ranch downs and we believe that we're seeing similar.
As we entered Q4.
I did mentioned in my prepared remarks, we do have a couple of customers in Europe.
Already notified us and we've been aware of it for a little while but will cease brand downstairs.
But again it feels right now.
We're seeing less of these sort of unexpected surprises.
<unk>, the mess and Q2 and tests.
Resulted in in in sequential decline then so.
Absolutely if you adjust it out the builder impact.
You would have flat revenue as you as he goes for Q3 Q for.
And maybe a similar question on the Mark.
Margins in terms of it looks like your utilization went down again sequentially.
And you've got again, the wage price and dynamic work sounds like the timing.
Into.
24 so.
And then you factor in you've taken some some cost cutting actions so.
When you roll up all those different elements is it is it reasonable to think that.
You're still targeting your historical range, because we go instead of 2024 with that.
Kind of what the objective is based on the actions he's taken thus far in 2000 2023.
So I think with some of the actions we're taking in some destabilising stabilization demand I think you'll see.
Better utilization in queue for and we clearly oetken from utilization in the first half of 2024, however, with the lower Bill days.
You'll still have southern compressed gross margin in queue for which is why we've started guided the way we have.
With with.
The 15% to 16%.
What I what I do think as we entered 2024 is there is still an imbalance between customer pricing and dot N wage inflation and it's I think you've noticed before David.
We do expect to return to have more normalized variable compensation and so.
As we entered 2024 and we haven't done all the work on this yet we don't quite know what wage pressures that are gonna be next year.
And again, we're still trying to assess what happens with some deals for clubs here in Q4, and how that will impact feature pricing as we enter 2024, but.
Sentences, it's possible that we could we could see <unk>.
The ability declined somewhat as we move from 123 to 2024, and then as I've been talking about over the last couple earnings calls <unk>.
2024 is a transitional year, where we get the opportunity to work through a few things.
We expected some rational sort of supply and demand and then that'll give us opportunities thunderbolt pricing.
And with a return to more traditional profitability more likely in 2025.
Great. Thanks for that just one quick follow up that though so that.
Kind of wage price and dynamic is that the biggest.
Headwind too too gross margins as we go onto the next year is just letting that play out.
Yeah, I would say that that that continues to be that the other way to pricing dynamic.
The uncertain element, which is why it's harder for me to sort of comment on it right now, but I will be able to you. The next time, we talk but yeah, I would say that that the ongoing imbalance between sort of customer pricing in sandwich.
Got it.
Great. Thanks, very much appreciate that.
Yeah.
Your next question comes from the lineup Ramsey Alice solid Barclays. Please go ahead.
Thanks, so much for taking my question.
Wanted to ask about booking conversion trends and if you could just comment on things like average <unk>.
Portfolio duration is trending or timeline to convert bookings to revenue or pipeline erosion trend I'm just.
Kind of curious are you seeing <unk>.
Consistency and stability when it comes to conversion or is it more of a moving target still kind of in this in this type of environment.
Cynthia is still second.
The same time.
If you took a <unk> was it a relationship.
I think that's what you say as it is.
Which.
Stabilising.
We don't see is the same.
That's the way to fence like this was July situation okay.
Okay.
I think it's.
It's.
But whether you go.
<unk> <unk>.
Okay. Thank you and a quick follow up from me I wanted to ask about follow up on a prior question about the head count numbers globally and in particular I'm just curious.
The absolute head count numbers in Ukraine, and Belarus should we think about those is relatively stable at this point or do you have plans to further draw down I'm thinking, particularly in Belarus.
Especially given kind of the way, Russia kind of ended this quarter officially.
I'm just curious whether we should think about the absolute numbers is that sort of watermark, that's going to be persistent or whether we could see more declined on an absolute basis in the region.
As soon as soon as it is very simple.
We believe.
Great would be more stable.
And Gurus list here will just.
The situation of supply and demand pressure.
And.
Absolute relatives.
<unk> the last several years.
Much much more significant.
Great.
Since this trip might be.
The defendant.
<unk> said clients reactions.
Okay. Thank you very much.
Your next question comes from the line, if Jason Kupferberg with Bank of America. Please go ahead.
Good morning, guys I, just wanted to come back to some of the commentary around quarter over quarter growth rates I know, that's what you guys have been watching most closely just to assess <unk>.
Demand and you've talked about the stabilization here. So just looking ahead to the first quarter of.
2004, do you think we get back to positive quarter over quarter revenue growth, then I think that the streets looking for about three per cent growth. So I just wanted to get your take on that I mean, putting any potential moves and effects on the side.
Given some of the stabilization and parts of the business that did you think we're back in positive territory in the first quarter.
Quito's with experience.
Oh also spills.
The screen loads.
But.
We've seen visits you into right now but.
Okay.
We will check those three months.
Right, Okay and.
And just to follow up Jason on some of your margin commentary I Wanna make sure. We've got the messaging right there because because I. It sounds like most of the cost optimization is gonna get.
Reinvested so it sounds like what you're suggesting is in 2024, non-GAAP margins or or perhaps down versus 2023, and then 25 your credit back to a quote unquote normal range like 16, or 17% is that right.
Still haven't worked through pricing we were.
Oh go through what we think is going to happen from the wage environment I think in certain markets is.
Pressures are not as pronounced but then there's other markets, where there is very very high cost of living inflation.
<unk>, so what I'm, saying is.
Haven't worked through yet, but I think it's it's certainly possible that you can see us talk about 2024 with lower probability that was just in response to the question around.
Do we think that will maintain profitability in 2024, I just want to make certain that there is an indication that we could be.
Lower as we entered the fiscal year and again working to get ourselves back into a position where we could operate in the 16% to 17% range of 2025.
Very helpful. Thank you.
Your next question comes from the line of Maggie Nolan with William Blair. Please go ahead.
Hi, Good morning. This is Jesse one for Maggie thanks for taking our questions.
So first how do you feel <unk> performing compared to the market do you think that you're starting to take Sir.
Since you started to.
321 taken some sure.
Okay, I assume can exist and glides stabilized well the restaurant looked up slowly.
<unk>.
We'll switch some clients <unk> mentioned several slices of Europe.
<unk>.
Would go into.
Another side is existing clients and to stabilize it that settles it Lazarus touch it too Sir.
Sure.
Got it okay. Thanks, sorry, and then.
Where are you going to say something else.
Oh.
Okay.
Okay, and then for my follow up Europe appears to be a bright spot.
But Jason you mentioned the incremental ramp down there.
Have you seen any changing behaviors or sentiment from clients and that G. O or are there just some clients specific challenges that caused those ramp down.
Yeah, we saw.
Actually.
Clients somewhat sequentially between Quito accused right.
And so we are seeing.
Europe's a little bit or mixed but generally it has been positive relatives in North America and then we've got a couple of these customers that we talked about so it's not what I would call a broad based and I would call it bar customers per se.
I think we'll look into this.
Oh yeah.
Two year comparisons.
Because I mean less.
Convenient for it as well because it is so big change between two years so.
It was it was a comparison.
Sure It was scripted.
<unk> got it.
Five children.
<unk> okay.
Got it thank you both.
You're welcome thank you.
Your next question will come from the line of Jamie freed named Susquehanna. Please go ahead.
Hi, I had.
The longer term question, Alright, I was wondering.
How how.
How would you compare the relevance of and the mindshare.
Some of the.
Key services that you're known for especially application development.
In terms of the Tech stack is application development.
More or less meaningful relevant.
In today's technology architecture, how do you see that evolving if at all.
Okay.
I think.
So this is.
Trying to predict.
Illegal visa future.
And Moses Fuchsia.
I assumed application development and bill function.
<unk>.
So it's.
Alright, <unk> it took two months yourself too.
In time environment.
<unk>.
Mmm.
<unk>.
Ooh Ooh.
A couple of years ago.
And from this point of view is still believe this is good.
Oh.
So this conversation's this morning.
<unk> <unk>.
Will function.
<unk> will be extremely visible.
You're just changing now.
Oh well.
But but but even.
And then some multiple times I do believe that there is a huge shift.
<unk>.
Mmm.
And gloat.
Environment.
And right now.
It's taken care of second priority as as in ladder.
But.
Be done for too long because.
Then some some companies, which no to the list and we will be.
So I think it will come back and then <unk>.
The changes will.
Okay piece of infrastructure you opportunity we.
We also have to be rebuilt again, so this way I think it's.
For us to devoted to about two weeks Kansas.
Got it thanks for that I'll drive back and acute give someone else a chance. Thank you.
Your next question will come from the line of Jamestown set with Morgan Stanley. Please go ahead.
Great. Thank you very much I wanted to ask quickly a couple of questions first on pricing, Jason you mentioned, a little bit of discounting et cetera can you help us think through kind of the the longer term implications I know you've alluded to it in terms of you know at some point being able to recover that but could you just <unk>.
Help us think through what that mechanism typically would look like and and what would make sense over the medium to long run.
Yeah, and there's one more probably using arts.
Parts of it you know it was barrier independence is probably.
Appropriate, but I'll just give you some fish and versions of it.
Certainly as you if people wanted to be more cost efficient India has been a more attractive place, we do think that that will.
Will continue to be an important delivery location for us, but you'll also see more demand over time in our in our in our other geographies and so what you may see in the next couple of quarters is still a more pronounced mix.
Delivery, but we don't think that that's necessarily permanent at the same time from a pricing standpoint oftentimes. It does take probably a year to reset and so it's hard to kind of go with demand is higher tomorrow and now your prices higher.
Often times of relationships are sort of set.
A year and so that's why some of the earlier calls I've said I think you're gonna enter 2024, with an environment that where it's difficult to take up price.
And then we'll probably end up somewhat locked in during 2024, okay not in our clients that not at all all roles.
And then we've got more opportunity to adjust price probably later in the year.
And of course will be exposed to waste inflation during our traditional compensation campaigning Q too.
I appreciate that Jason then.
My second question was just how do you think about this for Ark and or Jason obviously, but.
How do you think about any changes that you need to adjust to longterm if we're in a higher <unk>.
Interest rate for longer environment, I, I guess I'm, just thinking that historically <unk> has been really good at doing acquisitions in acquiring new technologies to stay at kind of leading edge, but.
With the cost of capital now being higher do you have to adjust how do you think about the importance and role of acquisitions in future strategy in capability development.
Yeah.
Oh.
Yeah, I think we were.
Still continue with the same strategy that we've had with doing acquisitions that allow us to expand capabilities.
And then he started help further opportunities grow organically and so certainly will be will be careful as we have been but I think that you'll still see significant focus on.
Acquisitions that are probably more and that sort of small to mid sized stuck in.
Mmm.
Yes, <unk> financial disappear.
This drug.
Listen to the most reliable.
All set.
Do exactly what you're gonna do is I'm surprised because it was relatively smaller pieces because it gives us the specific <unk>.
Okay.
Good shape too <unk>.
It's going good.
Look might change.
Great I appreciate those comments.
Absolutely. Thank you.
Your next question will come from the line up and he came with J P. Morgan. Please go ahead.
Hi, Thanks for taking my question.
I wanted to ask unconventional some of your peers talked about to some mmm there and also.
Mentioned banking.
Within financial services is <unk>.
So can you double click on what to assume that like other headwinds rock-faced within banking or or the client specific.
Yes.
Or us clearly we have one large client where it's probably clients specific and we have see some some I guess some reduction in revenues there and then there's.
A number of other banks.
Work with that where we've also seen declined so.
So what I would say, it's probably relatively.
Broad for banking.
But other elements of the financial services practices are are also second row.
And so some banking certainly somewhat soft with opportunities and asset management in other areas in financial services include insurance.
And that's that's great and then like it was nice to hear that some of the programs.
<unk> coming back.
Is that incremental volk, driven by clients need to modernize their school systems, maybe because of the T V I O.
Oh.
Or are these more cost optimization type of deal.
<unk>.
Users.
<unk>.
It's a program square.
So is it just use a levels.
Which is still used in retail because they could do it.
To start with the you also.
Let's use it as a <unk> physician.
It's activated to begin open.
Hopefully new opportunities to choose us as well.
Well.
<unk> the last several quarters with it.
So.
<unk>.
We talked about the <unk>.
The directive boxes.
<unk> is not going to be exactly.
But.
A lot of activities just as long as we're supposed to be should we do with it.
Oh, Yeah, definitely <unk> <unk> C as a client.
So it started to create.
<unk>. So I think we will see you.
You do elephant due to the news.
Got it thank you.
With that I'll turn the call back over to you Mr. Dobkin C E O and president for any closing remarks.
Again, thank you for doing it.
Today so.
<unk> all kind of.
That must be <unk> to Lucas.
<unk> to the situations.
Several.
With us.
Unfortunately, <unk> is still continues to be very unpredictable place and that's why it's difficult to to wig.
Local Lewis fitness subtypes, so let.
Let's let's meet is three miles and see what we will be able to share of that thank you very much.
And that will conclude today's call me. Thank you all for joining you may now disconnect.
[music].