Q3 2024 EPAM Systems Inc Earnings Call
Thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to the EPAM 3rd Quarter 2024 Earnings Conference Call.
All lines have been placed in mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you.
Speaker Change: I would now like to turn over the call to Mark Rochandol, Head of Investor Relations. Please go ahead.
Speaker Change: Good morning, everyone, and thank you for joining us today. As the operator just mentioned, I'm Mike Reschendel, Head of Investor Relations.
Speaker Change: By now you should have received your copy of the earnings release for the company's third quarter 2024 results. If you have not, a copy is available on epam.com in the investor section.
With me on today's call are Arkadiy Dobkin, 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 risk and uncertainties as described in the company's earnings release and SEC filings.
Speaker Change: Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the investors section of our website. With that said, I will now turn the call over to Ark.
Ark: Thank you, Mike. Good morning, everyone. Thank you for joining us today. It's good to share today that our third quarter results came in better than expected.
Speaker Change: reflect on our strong execution, core differentiations, and continued value and relevance across our global portfolio of clients.
Speaker Change: Further, we've been busy since we spoke last, with signing two large acquisitions and now since Friday of last week, we closed new orders, which is the most significant condition in our history.
Speaker Change: From a strategic perspective, the acquisition of New Orleans does three things for us.
Number one.
Speaker Change: Give us an entry point into attractive new markets in Latin America and parts of Europe. Number two, accelerate net new growth opportunities with our joint clients and bring significant new logos to our clients' portfolio.
Speaker Change: And number three, create a powerful and unified EPAM New Aries delivery platform in the region.
Speaker Change: We will be talking more about it a bit later today, but first, let me share some key highlights across our business.
During Q3, we delivered revenue growth both year-over-year and sequentially.
Speaker Change: We saw broad improvements in client engagement across all our verticals and geographies.
Speaker Change: which we believe demonstrates what we hope to be a more stable overall market outlook.
Speaker Change: The level of our performance in Q3 was driven by increased client trust in our now much more globally diversified capabilities and in our ability to continuously execute with a high level of quality.
Speaker Change: That triggered a better-than-expected client willingness to increase their budget share with us.
Speaker Change: Key verticals to call out include life science and healthcare emerging markets, and notably financial services and software and high-tech, which both return to sequential growth this quarter.
Speaker Change: In addition, we were seeing further signs of stabilization within business information and media and consumer goods, retail and travel. Our clients still continue to navigate mixed dynamics in their own end markets.
Speaker Change: Today, we are encouraged to see first and more positive demand sentiment in both our existing portfolio and new acquired clients in comparison with 90 days ago.
Speaker Change: Secondly, we were pleased with our ability to maintain our reputation as a go-to partner for technology-led optimization and transformation programs while continuously expanding our unique offering in core product and platform engineering services and advanced data cloud engineering capabilities.
Speaker Change: To summarize, we remain optimistic about certain sectors of our target market and about our broader portfolio as well, to return to higher levels of growth over the coming quarters.
Speaker Change: So, we are continuing to strategically invest in key offerings and capabilities and capture increased market share when global demand returns in full.
Speaker Change: However, currently we do still see broad enough caution and some delayed decision making with a continued focus on cost optimization.
Speaker Change: With all of that, we are staying very close to our clients and adapting ourselves to meet their most critical needs while they continue to assess their investment appetite.
Speaker Change: prioritize transformational efforts, address their own and market conditions, and most likely think about a variety of plans when navigating around the world as we speak.
Speaker Change: As we stated many times in the past, our global delivery strategy is focused on becoming the most diversified company in our industry from a global talent perspective.
Speaker Change: And based on that, on enabling us further to support our global clients and their new transformative business models realization around the world.
Speaker Change: We believe we are successfully executing this strategy by investing both organically and through acquisitions. Interbuilding new advanced capabilities and service offerings is key for us in the talent market.
Speaker Change: As a result, currently we focus on four major global delivery hubs within EPUB.
Speaker Change: In Europe, we continue to remain highly differentiated in helping our clients to address their most complex business and technological challenges.
Our core engineering DNA remains very strong and intact.
Speaker Change: As you can see, these are better than expected Q3 results. We continue to deliver this high quality across existing clients, as well as the new logos from our European Delivery Hub.
Speaker Change: which operates around more than a dozen countries, including our largest in Ukraine and many within the European Union zone.
with a recent signing of the first derivative.
will further strengthen our future footprint in Europe.
Speaker Change: is the addition of new service offering, especially for our financial services clients, but not limited to just those.
Speaker Change: We will be ready to talk about it in more detail when we close the transaction later in Q4.
Speaker Change: In India, we are very pleased with our level of growth based on demand for differentiating services in the region, which is more product engineering focused compared to the majority of other service players.
Our investments dating back to 2015 are paying off now.
Speaker Change: Today we see robust growth in the country and just this year we added over 2,000 professionals and expect India to reach the 10,000 people by early 2025.
Speaker Change: In Latin America, we are following a similar path as India, investing and building for the future from 2015 as well. As mentioned already, on November 1st, we completed the acquisition of Neurys.
Speaker Change: This acquisition represents a significant milestone for our company, and will really scale up our global capabilities with local leadership, knowledge, depth, and expertise.
Speaker Change: Now with Neurys, we immediately doubled our delivery footprint to approximately 7,500 people, notably expanding our presence in Mexico, Colombia, Argentina, and Brazil, among other countries in LATAM, but also in Spain and Portugal.
Speaker Change: Neurythron Client Portfolio and Depth of Relationship clearly demonstrate their market differentiation in the region.
Speaker Change: In addition to strong application development, system implementation, cloud migration, and automation, Neoris has developed very strong data, AI, and SAP practices.
Speaker Change: Today Neurys is recognized in Latin America as a regional market leader in SAP. His dreams of a
Speaker Change: thousand practitioners globally to our current SIP practice and further enhancing our core enterprise platforms value proposition.
Speaker Change: Finally, they bring strong local capabilities across many of our key verticals, and also in manufacturing and telco globally.
Speaker Change: In Western Central Asia, we're continuously building a relatively new delivery hub in addition to the previous three. Today, we have nearly 7,000 people in the region who are representing all our major global technology practices.
Speaker Change: We have a very healthy mix of strong senior talent, along with a more junior and energetic young population, hungry for new opportunities and future growth.
Speaker Change: Now let's turn to an important topic that remains top of mind for many, GNI.
Last quarter, we talked about how our AI transformation.
Approach is three-dimensional.
Speaker Change: Dimension One is internally focused and represents what we do for ourselves. It's a parmenterial transformation of GNI talent using our own skill-based organizational tools and methodologies.
which is a key differentiator for us.
Speaker Change: and deliver it over highly advanced and sophisticated trainings, bootcamps, and other upskilling efforts.
Speaker Change: In this category, also, everything related to our efficiency and productivity, advanced in back office and internal processes.
Speaker Change: Dimension 2 is all centered around client transformation opportunities and GenAI-enabled client solutions, which encompasses our GenAI platforms and methodologies such as EEPAM Dial, EEPAM AI Run, and EEPAM Elita.
Speaker Change: And finally, Dimension 3 is all about partner ecosystem network helping us to enable large transformational gen-AI driven programs when close cooperation with cloud data and other type of major digital partners must be in place for success.
Speaker Change: All those dimensions are closely interconnected, and currently we continue to make very solid progress across all three of them.
Speaker Change: However, for today, we would like to focus a bit on the combination of dimension 2 and 3.
Speaker Change: Throughout 2024, IPAM has seen very strong engagement with most of our clients across the full spectrum of GNI initiatives.
Speaker Change: For us, such programs cover all our core capabilities in engineering, including our specialized AI-enabling services.
internal and external platforms, and accelerators.
Speaker Change: Such programs also often include business consulting services with our approach to holistic business redesign and optimization.
Speaker Change: and experienced consulting, including implementation of our GENI Interactive Assistance by helping to bring AI to customer service operations across all our major verticals.
When you look across our top 100 clients,
Speaker Change: We are directly engaged with about 70% of them on different types of GEN-AI initiatives.
Speaker Change: If we look at those from the size and maturity perspective, we will see a consistent and expected picture.
Speaker Change: So far this year, we saw a doubling of what we call stage one.
Speaker Change: early stage projects compared to last year where we are demonstrating our ability to help our clients kickstart their journey and quickly get to stage two for mid-size AI projects with defined outcomes.
Speaker Change: This engagement is characterized by a more clear roadmap and defined top and bottom line outcomes based on vertically or horizontally driven requirements.
Speaker Change: Stage 3 is where we are starting to see the readiness to focus on GNI, GNI-enabled transformations more broadly.
Speaker Change: These engagements are multi-year and multi-million dollar programs and combines our data factory construct with new generic capabilities at scale.
Speaker Change: Our most transformative work this year has involved establishing large-scale AI ecosystems for AI factories within our client organization.
Speaker Change: Those are comprehensive enterprise level solutions, where you might manage the entire AI product life cycle, which include complex operational models and integrated services.
Speaker Change: During this year, we've already been engaged in a few of these programs, which are sizable and could be in tens of millions of dollars range, which we believe will grow much faster in 2025.
Now, let me share a few client examples.
Speaker Change: Let's start from the story, which was being featured just a few days before, almost in real time.
Speaker Change: on the main stage at the Gartner IT Symposium in Barcelona, where our team presented jointly with our client, Racket, a global manufacturing of health and nutrition products.
Speaker Change: This program is a large multi-year data transformation story that started with getting organizations ready for a variety of AI use cases.
Speaker Change: really covering the full life cycle transformation from data foundation to data governance platform strategy and the construction of responsible AI framework.
Speaker Change: setting the stage for an operating and business model transformation for this 200 years old, 40,000 person company.
Speaker Change: Another story that we briefly mentioned three months ago is different, but it's continue making strong progress into the future.
Speaker Change: In collaboration with International Monetary Fund, back in 2023, we built the first version of StatGPT, the platform that allowed users to talk their world economic and financial data using natural language.
Speaker Change: It was developed based on our EPUB Dial and EPUB One Hub IP.
Speaker Change: as a cornerstone for the next generation conversational data exploration and analytical solution for economists and statisticians.
Speaker Change: Since then, STAT-GPT was presented in numerous global SDMX events, where SDMX is a set of technical standards established by European Central Bank, Eurostat, IMF, United Nations Statistical Division, World Bank, and other government and semi-government agencies.
Speaker Change: This month, we delivered the next version, StatGPT 2.0, which significantly improves the way users access the whole global economic data and can seamlessly guide users to the specific data they need.
Speaker Change: Just now, StatGPT went over the evaluation process, which included data like publicly available data sets from international and national statistical agencies.
Speaker Change: and was conducted by more than 100 representatives from SDMAT sponsoring institutions and national statistical organization.
Speaker Change: In result, this month it will be presented at the 2024 IMF Statistical Forum in D.C. in the session called Measuring the Implication of AI on the Economy as an Alternative Data Access Simplification Platform for SDMX Users Community Globally.
Speaker Change: To conclude, we are pleased with our stronger than expected Q3 results. Our core differentiation remains evident. We continue to deliver value, quality, and excellence for our clients.
Speaker Change: We are successfully executing our global growth and domain strategy while expanding market and capabilities at the same time.
Speaker Change: Finally, we are continuously and rapidly upscaling ourselves in the most advanced engineering and engineering capabilities. We strongly believe EPAM continues to be well positioned to capture rebounding market demand and share.
Speaker Change: Let me now turn the call over to Jason, who will provide additional details on our Q3 results in our tool.
Jason Peterson: Thank you, Ark, and good morning, everyone. In the third quarter, EPM generated revenue of $1.168 billion, a year-over-year increase of 1.3% on a reported basis, or 0.9% in constant currency terms.
reflecting a positive foreign exchange impact of 40 basis points.
Speaker Change: Excluding the impact of our exit from Russia, year-over-year revenue for a reported and constant currency would have increased by 1.5% and 1.1%, respectively.
Speaker Change: In addition to returning to year-over-year revenue growth, the company also saw four out of six reported industry verticals contribute positively to this growth.
Speaker Change: Along with the revenue growth, EPAM also delivered solid operating performance and profitability.
Speaker Change: Additionally, the company recognized a benefit from a Polish government incentive program that further improved the company's profitability in the quarter.
Speaker Change: During the third quarter, the company recognized $52 million of benefit, resulting from government incentives the company expects to receive for qualifying research and development activities conducted in Poland.
Speaker Change: This benefit reduced cost of revenues, improving gap gross margin and IFO by 450 basis points.
Speaker Change: $22.9 million of the benefit pertains to incentives for activities conducted in 2023.
and this amount has been adjusted out for non-GAAP purposes.
Speaker Change: The remaining $29.1 million in benefit derived from 2024 year-to-date R&D activities in Poland improved non-gap gross margin and adjusted IFO by approximately 250 basis points.
Speaker Change: We expect the incentive to be recurring, an estimate that the company will receive a further benefit of approximately $9 million in Q4 2024.
Speaker Change: as well as benefits in 2025 and other future fiscal years. While the Poland R&D Incentive is reflected as a benefit to operating expense for GAAP reporting purposes,
Speaker Change: The effective tax rate during the three and nine months ended September 30, 2024, was negatively impacted by the accounting with respect to the receipt of the incentive.
Speaker Change: Therefore, the positive impact of the Polish R&D incentive on IFO, net of the increase in the GAAP effective tax rate, contributed $0.62 to Q3 GAAP EPS.
For non-GAP EPS, the contribution was $0.35.
Speaker Change: Moving to our vertical performance. Financial services increased 3.3% year-over-year, driven by an improvement in demand from clients across FinTech and banking.
as well as continued strength in the insurance sector.
The vertical also delivered solid sequential growth this quarter.
Speaker Change: Life Sciences and Healthcare delivered very strong year-over-year growth of 14.6%. Growth in the quarter was driven by clients in Life Sciences, Pharmaceuticals, and MedTech.
Speaker Change: Consumer goods retail and travel decreased 4.5% on a year-of-a-year basis.
Speaker Change: largely due to declines in consumer products and retail, partially offset by solid growth in travel.
Software and high-tech grew 2.1% year-over-year.
Speaker Change: Business information and media declined 9% compared to Q3 2023. Revenue in the quarter was substantially impacted by the previously discussed ramp down of a top 20 client.
Speaker Change: However, in the quarter, the vertical returned a slight positive sequential growth.
Speaker Change: And finally, our emerging verticals delivered solid year-over-year revenue growth of 8.5%, driven by clients in energy and manufacturing.
Speaker Change: From the geographic perspective, America's largest region, representing 60% of our Q3 revenues, grew 2.9% year-over-year on a reported basis and 2.9% in constant currency terms.
Speaker Change: AMEA, representing 38% of our Q3 revenues, contracted 0.3% year-over-year and 1.3% in constant currency.
Speaker Change: However, the region showed ongoing signs of stabilization, returning to sequential growth in the quarter.
Speaker Change: And finally, APAC increased 1.8% year-over-year, or 0.6% in constant currency terms.
and now represents 2% of our revenues.
Speaker Change: In Q3, revenues from our top 20 clients grew 0.6% year-over-year, while revenues from clients outside our top 20 increased 1.7%.
Speaker Change: Moving down the income statement, our gap gross margin for the quarter was 34.6%, compared to 31.1% in Q3 of last year.
Speaker Change: Non-GAAP gross margin for the quarter was 34.3%, compared to 32.9% for the same quarter last year.
Speaker Change: Both GAAP and non-GAAP gross margins benefited from the Polish R&D incentive. For non-GAAP gross margin, the benefit associated with 2023 activities has been excluded.
Speaker Change: GAAP SQ&A with 17.7% of revenue compared to 16.9% in Q3 of last year.
Speaker Change: Non-GAAP SG&A in Q3 2024 came in at 14% of revenue, compared to 14.4% in the same period last year.
Speaker Change: SG&A improvement in the quarter is a result of our ongoing focus on managing our cost base and increased efficiency in our spend.
Speaker Change: Non-GAAP income from operations was $223 million, or 19.1% of revenue in the quarter, compared to $196 million, or 17% of revenue in Q3 of last year. Both GAAP and non-GAAP income from operations include a positive benefit from the Polish R&D incentive.
Speaker Change: For non-GAAP income from operations, the benefit from the 2023 activities has been excluded.
Speaker Change: Our gap effective tax rate for the quarter came in at 28.1%, and our non-gap effective tax rate was 24.1%.
Speaker Change: As mentioned earlier, the Polish R&D incentive had an adverse impact on both GAAP and non-GAAP effective tax rates.
Diluted earnings per share on a gap basis was $2.37.
Speaker Change: Our non-GAAP-deleted EPS was $3.12 compared to $2.73 in Q3 of last year, reflecting a $0.39 increase year-over-year. Both GAAP and non-GAAP EPS were positively impacted by the Polish R&D incentive.
Speaker Change: For non-GAP diluted EPS, the benefit associated with 2023 activities has been excluded.
In Q3, there were approximately 57.4 million diluted shares outstanding.
Speaker Change: According to our cash flow and balance sheet, cash flow from operations for Q3 was $242 million, compared to $215 million in the same quarter of 2023.
Speaker Change: Free cash flow was $237 million, compared to free cash flow of $211 million in the same quarter last year.
Speaker Change: representing our highest level of free cash flow in our history.
Speaker Change: At the end of Q3, DSO was 74 days and compares to 76 days for Q2 2024 and 73 days for the same quarter last year.
Speaker Change: Shareware purchases in the third quarter were approximately 245,000 shares for $50 million at an average price of $204.32 per share.
Speaker Change: Cash and cash equivalents were $2 billion as of the end of the quarter.
Speaker Change: Moving on to a few operational metrics. We ended Q3 with more than 47,750 consultants, designers, engineers, and architects, a decline of 1.5% compared to Q3 2023.
Speaker Change: However, we returned to sequential growth for the first time in nine quarters, with net additions of 750 employees.
Speaker Change: However, we returned to sequential growth for the first time in nine quarters with net additions of 750 employees.
Speaker Change: Our total headcount for the quarter was more than 53,250 employees.
Speaker Change: Our total head count for the quarter was more than 53250 employees.
Speaker Change: Utilization was 76.4% compared to 72.7% in Q3 of last year and 77.5% in Q2 2024.
Speaker Change: Utilization was 76, 4% compared to 72, 7% in Q3 of last year and 77, 5% in Q2 2024.
Speaker Change: Now let's turn to our business outlook. In Q4 we expect demand in North America to continue to drive year-over-year revenue growth in the region.
Speaker Change: Now, let's turn to our business outlook in Q4, we expect demand in North America to continue to drive year over year revenue growth in the region. Additionally.
Speaker Change: Additionally, we're beginning to see a degree of demand stability emerging in our European geography.
Speaker Change: Additionally, we are beginning to see a degree of demand stability emerging in our European geography.
Speaker Change: As a result, we now expect Q4 2024 revenue to be approximately flat year-over-year, excluding the contribution from the New York acquisition.
Speaker Change: As a result, we now expect Q4 2020 for revenue to be approximately flat year over year.
Speaker Change: Excluding the contribution from the <unk> acquisition.
Speaker Change: Our guidance assumes that we will continue to deliver from Ukraine at productivity levels consistent with previous levels throughout 2024. As mentioned earlier, we expect further benefit in Q4 related to Polish R&D government incentives.
Speaker Change: Our guidance assumes that we will continue to deliver from Ukraine at productivity levels consistent with previous levels throughout 2024 as mentioned earlier, we expect further benefit in Q4 related to Polish R&D government incentives.
Speaker Change: We expect our production headcount will continue to grow in Q4 and anticipate finally returning to year-over-year headcount growth after seven quarters of decline.
Speaker Change: We expect our production head count will continue to grow in Q4, and anticipate finally, returning to year over year head count growth after seven quarters of decline.
Moving to our full year outlook.
Speaker Change: Moving to our full year outlook.
Speaker Change: Revenue is now expected to be in the range of $4.685 to $4.695 billion.
Speaker Change: Revenue is now expected to be in the range of $4 605 to $4 $6 95 billion.
effectively flat year-over-year.
Speaker Change: Actually flat year over year.
Speaker Change: The impact of foreign exchange on growth is expected to have a positive impact of approximately 0.2%.
Speaker Change: The impact of foreign exchange on growth is expected to have a positive impact of approximately <unk>, 2%.
Speaker Change: Our guidance reflects both improvement in organic revenues in the second half of our fiscal year, plus a $54 million contribution from Neoras for the months of November and December.
Speaker Change: Our guidance reflects both improvement in organic revenues in the second half of our fiscal year, plus a $54 million contribution from <unk> for the months of November and December.
Speaker Change: We expect gap income from operations to now be in the range of 11% to 11.5%.
Speaker Change: We expect GAAP income from operations to now be in the range of 11% 11, 5%.
Speaker Change: and non-GAAP income from operations to now be in the range of 16% to 16.5%.
Speaker Change: And non-GAAP income from operations to now be in the range of 16% to 16, 5%.
Speaker Change: We expect our GAAP effective tax rate to now be 23%, our non-GAAP effective tax rate will continue to be 24%.
Speaker Change: We expect our GAAP-effective tax rate to now be 23%. Our non-GAAP-effective tax rate will continue to be 24%.
Speaker Change: For earnings per share, we expect GAAP diluted EPS will now be in the range of $7 78 to $7 86 for the full year and non-GAAP diluted EPS will now be in the range of $10 73 to $10 81 for the full year.
Speaker Change: Earnings per share we expect the gap-diluted EPS will now be in the range of $7.78 to $7.86 for the full year and non-gap-diluted EPS will now be in the range of $10.73 to $10.81 for the full year.
Speaker Change: We now expect weighted average share count of 57.9 million fully diluted shares outstanding.
Speaker Change: We now expect weighted average share count of $57 9 million fully diluted shares outstanding.
Speaker Change: Moving to our Q4 2024 outlook, we expect revenue to be in the range of 1.205 to 1.215 billion, producing a year-over-year increase of 4.6%.
Speaker Change: Moving to our Q4 2024 outlook, we expect revenue to be in the range of $1 two zero or five to one to one 5 billion.
Speaker Change: Are you seeing a year over year increase of four 6%.
Speaker Change: On a constant currency basis, we expect Q4 revenue to increase 4.3% year-over-year.
Speaker Change: On a constant currency basis, we expect Q4 revenue to increase four 3% year over year.
Speaker Change: Similar to our full-year outlook, our Q4 guidance reflects a 54 million dollar contribution from Neoris for the months of November and December.
Speaker Change: Similar to our full year outlook, our Q4 guidance reflects a $54 million contribution from <unk>.
Speaker Change: For the months of November and December.
Speaker Change: For the fourth quarter, we expect gap income from operations to be in the range of 10.5% to 11.5%.
Speaker Change: For the fourth quarter, we expect GAAP income from operations to be in the range of 10, 5% to 11, 5%.
Speaker Change: And non-GAAP income from operations to be in the range of 16% to 17%.
Speaker Change: We expect our GAAP effective tax rate to be approximately 26% and our non-GAAP effective tax rate to be approximately 24%.
Speaker Change: We expect our gap effective tax rate to be approximately 26% and our non-gap effective tax rate to be approximately 24%.
Speaker Change: For earnings per share, we expect gap-diluted EPS to be in the range of $1.73 to $1.81 for the quarter, and non-gap-diluted EPS to be in the range of $2.70 to $2.78 for the quarter.
Speaker Change: For earnings per share, we expect GAAP diluted EPS to be in the range of $1 73.
Speaker Change: The $1 81 for the quarter.
Speaker Change: And non-GAAP diluted EPS to be in the range of $2 70 to $2 78 for the quarter.
Speaker Change: We expect a weighted average share count of 57.2 million diluted shares outstanding.
Speaker Change: We expect a weighted average share count of $57 2 million diluted shares outstanding.
Speaker Change: Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q4.
Speaker Change: Finally, a few key assumptions that support our gap to non-gap measurements for Q4. Stock-based compensation expense is expected to be approximately $44 million.
Speaker Change: Stock based compensation expense is expected to be approximately $44 million.
Amortization of intangibles is expected to be approximately 9 million.
Speaker Change: Amortization of intangibles is expected to be approximately $9 million.
Speaker Change: The impact of foreign exchange is expected to be a $1 million loss.
Speaker Change: The impact of foreign exchange is expected to be a $109 loss.
Speaker Change: Tax effective non-GAAP adjustments is expected to be around $14 million.
Speaker Change: Tax effect of non-GAAP adjustments is expected to be around $14 million.
Speaker Change: We expect a tax shortfall related to stock-based compensation of around $1 million.
Speaker Change: We expect a tax shortfall related to stock based compensation of around $1 million.
Speaker Change: Severance driven by our cost optimization program is expected to be 9 million.
Speaker Change: Severance is driven by our cost optimization program is expected to be $9 million.
Speaker Change: Finally, one more assumption outside of our gap to non-gap items.
Speaker Change: We maintain a significant level of cash and are generating a healthy level of interest income.
Speaker Change: However, we expect interest income to decline in Q4 due to the acquisitions of both Neoras and First Derivative.
Speaker Change: Based on the reduction in cash resulting from these two acquisitions, we are now expecting interest and other income to be approximately $6 million per Q4.
Speaker Change: While we work our way through this cycle of stabilizing demand, we will continue to run E-PAM efficiently, positioning the company to capitalize on a more normalized demand environment.
Speaker Change: Lastly, my continued thanks to all our employees for their dedication and focus on serving our clients and driving results for ePAM.
Operator, let's open the call for questions.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star, then the number one in your telephone keypad. We asked for one main and one short follow-up question. We will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Brian Bergen with the TD Cowen.
Your line is now open.
Speaker Change: Yeah, I think clearly we're seeing improvement in financial services, you know, and obviously it shows up in the results for Utrecht and it's
Speaker Change: It's something we would expect to see as we exit the fiscal year.
Speaker Change: It does feel like those clients have reached a point where they do need to make investments and are beginning to recognize that they've got to start spending again.
Speaker Change: We're obviously seeing improvement in high-tech. And then we continue with our domain investment in life sciences and health care. We continue to see good improvement there. I don't know that that's necessarily budget improvement with those clients.
but probably relative success on our part as a company.
Speaker Change: probably still a little bit too early to sort of comment on what we see for 2025. But again, I think we just reiterate that, you know, there's certainly a degree of stability and conversations feel incrementally more constructive.
Speaker Change: Okay, and then a follow-up just on the Poland R&D incentive benefit here, understanding this is expected to continue, just all else equal, can you give us a sense of how much this will help on gross margin and just, you know, then the, you know, the headwind as well on the effective tax rate as we think about refreshing 25 forward?
Speaker Change: Yes, so how I think about it is that the entire benefit, I guess the $29 million for Q3, which was kind of a year-to-date number, and the $9 million that we talked about for Q4, all of that impacts gross margins.
Speaker Change: And so, you know, I think one of the quick takeaways is that if you just looked at Q3 and if you adjusted out Poland we'd be at about 31.8% for gross margin on the Polish tax benefits, sorry. And then the adjusted IFO would still be at a quite strong 16.6%.
Speaker Change: As we look ahead, we do expect to have what's called a similar level of benefit, but Brian, we continue to have that challenge where we've got wage inflation and the pricing environment hasn't gotten worse.
Speaker Change: I mean, we do think there may be some opportunity for very modest price increases next year, but we still think we've got to disconnect between wage inflation and price improvement in 2025. So I think that's still going to kind of pressurize 2025 profitability.
Speaker Change: somewhat consistent with what I've been talking about over the last couple earnings calls.
Thank you.
Thank you for joining us.
Speaker Change: This question comes from the line of Brian Keane with Dutch Bank. Your line is now open.
Brian Keane: Hey guys, congrats on the progress here, it's good to see.
Brian Keane: Can you just talk a little bit about revenue per head, what you're seeing there, and what the outlook is going into 4Q, and any kind of hiring and pickup in the European region that you guys are seeing that might be helping with the revenue per head?
Speaker Change: Yeah, if you're asking just about the next, is that, you know, we've talked about increases in head count...
Speaker Change: Q3 and also said that we expect to see increases in headcount again in Q4.
Brian Keane: which is generally, as we've talked about, a positive leading indicator. We also think we're at a point now where we're beginning to see hiring more broadly globally.
Brian Keane: So not just in India or Latin America, but also in other geographies in Eastern Europe and Western Asia. So I think you're beginning to see something that is beginning to kind of broaden.
The End.
Speaker Change: Got it. And then just looking at the guidance organically, the third quarter came in a little bit better than the fourth quarter guide at the midpoint.
Speaker Change: Third quarter basically being flat. Fourth quarter, I mean, just down slightly.
and the Midpoint.
Speaker Change: maybe a decline of like one and a half percent or so.
Speaker Change: Just thinking about the pluses and minuses going from third quarter to fourth quarter is there any things that think about our call outs in terms of tougher comps or Just some conservatism as we go into the fourth quarter versus the improvement we saw in the third. Thanks
Speaker Change: Yeah, you've got a significant seasonality impact between Q3 and Q4. So you've got more vacation. You've got more just classic holiday
Speaker Change: And then you also have furlough impact. So that's kind of what sort of in a sequential growth where you see a modest decline. The one thing I think I would call out, though, is that we have seen improved results in
Speaker Change: clearly in Q3 versus our guidance, but our Q4 is also stronger as a standalone business than we originally expected. So if you think about the guide that we did pre-NEORIS, we talked about 4590 to 4625. If we adjust out NEORIS,
The updated guidance would be 4631 to 4641.
Speaker Change: So again, with a standalone business, clearly we saw better than expected Q3. At this time, we're also expecting to see a stronger Q4 than we had expected when we did the Q2 earnings call.
Speaker Change: Got it. Appreciate all the disclosures, especially on organic growth. Thanks.
Speaker Change: Your next question comes from the line of Ramsey L. Ossal, Barclays. Your line is now open.
Speaker Change: Hi, thank you for taking my question. I wanted to follow up on the R&D incentives from Poland, and I just am trying to understand, is that an amount that we should think will flow into the model from here on out, I suppose? In other words, does the amount change quarter to quarter, year to year? And then secondarily, is there any other opportunity to look for incentives like that from other jurisdictions?
Speaker Change: Now that's a great question, and we have taken this year to evaluate opportunities, particularly as we've moved into somewhat more expensive geographies in central Europe, and there are some incentives that we have begun to take advantage of, and obviously we'll continue to look at that.
Speaker Change: All in we do think will offer a let's say a similar level of kind of benefit
Speaker Change: thinking about profitability in the somewhat below our 16 to 17% range.
Speaker Change: in 2025, so again, somewhat below 16.7. And I think that even with the Polish incentive, I would still encourage people to think about our business in that way. Again, just because I think what you'll see is a modest price improvement environment next year, and at the same time, we'll still be exposed to some degree of wage inflation.
Brian Keane: Okay, a quick follow up from me on M&A. You mentioned continuing to strategically invest in capabilities. You guys have obviously been pretty active lately. Should we expect a similar level of activity in the quarters ahead? And sort of what types of assets are you looking for?
Brian Keane: I think, I don't think we expect the same level of...
sites for impact and in general our approach for acquisition.
It didn't change much. We always withstand it.
are ready to entertain either of us, but it's...
Thanks for the great interview
Speaker Change: components. It just happened that all this played right in our opinion during the last last quarter, but in in the future we will be focusing, as we did in the past, on
Speaker Change: or focus on expectations that would be more in line with what
Speaker Change: You saw before, it would be school acquisitions with specific purposes on capabilities or very specific reasons.
Okay, thank you.
Speaker Change: Your next question comes from the line of Jonathan Lee with Göttingen Securities. The line is now open.
Speaker Change: All benefits from new.
Speaker Change: Thank you Jim.
Speaker Change: All of the leading brands to understand that they need to do swaps.
Speaker Change: Really most of the benefits in the future.
Speaker Change: Yes.
Speaker Change: Some clients really start into.
Speaker Change: They are much more Samsung too.
Speaker Change: Data.
Speaker Change: I'll close.
Speaker Change: Structure maturation as pathogen.
Speaker Change: We have since changed.
Speaker Change: Several several quarters ago, but hard to quantify.
Speaker Change: Okay.
Speaker Change: I mean, there's a lot of different things that are kind of moving the needle and maybe in some of the markets financial services are a little bit in <unk> and it feels like it's maybe southern proven.
Speaker Change: But one of the other things we are seeing David is when we've talked about over the years and we are beginning to see some clients return to us based on quality challenges they've had with other vendors and still again on the margin, but as we do our own internal channel checks, we have multiple examples of it.
Speaker Change: <unk> center, beginning to grow again or new logos that are are growing because of clients.
Speaker Change: Being somewhat exhausted with the experience they've had with other vendors.
Speaker Change: Okay.
Speaker Change: I'll, then return to quality message.
Speaker Change: Total basis.
Speaker Change: Yes.
Speaker Change: Is it really more clients.
Speaker Change: <unk> to us.
Speaker Change: The clients, who stopped working with those clients decreased a lot starting to come back.
Speaker Change: Reasonable level of growth.
Speaker Change: One point and then you started to see clients, who choose to us relatively recently.
Speaker Change: Good enough for us to at least kind of tens of millions of revenue annually.
Speaker Change: Many of them, which wasn't really awesome for students.
Speaker Change: <unk>.
Speaker Change: Got it.
Speaker Change: And then just I know you've talked quite a bit about Poland and margins and sorry to ask this question, but just to be clear, Jason do you want us to start slightly below the 16% to 17% level next year.
Speaker Change: And then add the benefit from Poland, which would be roughly equivalent to the $38 million you got 24.
Speaker Change: Yes, so I'm glad we're having this very explicit.
Speaker Change: Opportunity to clarify would you expect to see a benefit from Poland and at the same time I would prefer that.
Speaker Change: You need to use something slightly below 16% as you think about 2025.
Speaker Change: So slightly below 16% inclusive.
Speaker Change: The 38 million that you would get from Poland next year is that alright.
Speaker Change: That is correct.
Speaker Change: Yes.
Speaker Change: Line of Jason Kupferberg with Bank of America Merrill Lynch. Your line is now open.
Speaker Change: Thank you guys I just wanted to come back on organic year over year growth. So you were flat in Q3, you're down call. It one 5% in Q4 at the midpoint.
Speaker Change: Does sound like demand getting better I mean is there any reason to think that you won't return to meaningfully positive organic revenue growth year over year in 2025.
Speaker Change: Yes, we would definitely expect to return to organic revenue growth in 2025, I guess the question is what's the definition of meaningful.
Speaker Change: Yes, we are looking to return to growth next year.
Speaker Change: Okay and then.
Speaker Change: Just on <unk> can you clarify what the organic revenue growth profile of that asset is as well as the client concentration I think from some X. There just given the captive <unk> model.
Speaker Change: Yes so.
Speaker Change: You talked about $54 million.
Speaker Change: November and December December is usually a somewhat soft month, just because of <unk>.
Speaker Change: North American client who is a very scalable, now, near-shore offering. So, then, that's what I mean we will need to talk about this productivity problem later.
Speaker Change: Are there any client specific headwinds that we should consider or most of them are behind you by now?