Q2 2019 Earnings Call
Greetings welcome to you pump systems second quarter 2019 earnings conference call.
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A brief question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
At this time I'll turn the conference over to David Stroppy head of Investor Relations.
You may begin.
Thank you operator, and good morning, everyone. By now you should have received your copy of the earnings release for the company's second quarter 2019 results. If you have not a copy is available on M dot com in the Investor section.
With me on today's call are caught a dotcom CEO and president and drinks, who Peterson Chief Financial Officer.
Before we begin I would like to remind you that some of the comments made on today's call may contain forward looking statements.
These statements are subject to risks and uncertainties as described in the company's earnings release and FCC filings.
Additionally, all references to reported results that are non-GAAP measures have been reconciled to GAAP.
And our available and our quarterly earnings materials located in the Investor section of our website.
With that said I will now turn the call over to arc.
Thank you David and good morning, everyone. Thanks for joining us.
I would like to start with a few financial highlights from our second quarter.
We delivered revenues of $552 million, reflecting an approximate 24% year over year growth well, 25% in constant currency pips.
Additionally, we delivered strong non-GAAP earnings per share of one dollar.
28 cents.
Reissue presents approximately 27.
But some growth from Q2 of 2002.
Oh gross during the first half.
2018 that reflects our position in the markets we serve.
We continue to transform with extremely costly disruption.
Because I couldn't it grows every industry did you mean the blades in parts of new technologies from one site and very dynamic changes in the competitive landscape led by digitally native companies that operate in a different speeds of levels from an awesome.
We do believe that this trends carefully we will continue to create opportunities for you Bob and they feel yeah, well positioned to continue to sort of folk lines in north of solutions to solve the increasingly complex business Chile.
All that as long as we are able to kill inch Oh cells to adopt olefins and now on the organization to new markets.
So all Jordan here to drive our own relevancy in the market is non stop it.
As you push it grows a bomb to challenge and change the ways in which we operate instead of clients.
They will all lots because we'll follow a good operations, including all the talent acquisition strategy expansions in new geographies and additions to our was hitting some good bye.
Everything is done to increase will you well bring in our corporate as it comes and you didn't digital engagement and consulting services to the next level.
Our recent acquisition of convert them to be sure I announced in July is a good illustration of our detection.
Well it is a small company in terms of revenue and then blame ways can pretend to allow us to extend coupon integration unloading capabilities as part of our digital proposition that goes both all clients portfolios and all internal needs.
We believe professional development and the digital transformation space is becoming just as important as the thread you reach guides.
As a platform that follows the enterprise.
The organization should become quite adept different nature and really require cross functional teams go month to each there was a digital product.
Lifecycle.
We have an enterprise wide digital first mindset and the real hunger.
For cornerstone skills and capabilities upgrades.
This approach is critical for successful people suddenly referred once you're fearful and another example of how we bump continues to wolf itself well help our clients across different parts of the organization to we will too.
Before I turn the call over to Jason I would love to highlight if Utica Avenue. Since you bunkers received in the first half of 2018, which I've looked at a situation. So what types of changes happening to us.
He says when you sensitive, but the pumps historically.
As you can say that the sale was drunkenly practices. We do believe it's still a critical area of focus for us to be able to keep up this way well still grow into other credibility detergents.
In an age.
2019 Annual Agency report you bought was recognized among the top 50 largest end use users in the United States.
Oh from a position of one so it is just several years ago.
In the UK, we already among the top 10 for some time.
Plus Forrester listed among the top largest digital experience agencies, whereas to know demonstrated market presence and capability just gross customer marketing cut corners, and public service with Phoenix.
He is also for different definitions that context.
So lets us lenders to reference for us to sort itself over 10000 relevant leased skilled employees and be able to do more through the delivery of experienced architectures that combines blakey software and custom core truck loads of data in content.
Coax, two quarters, and transactional systems, and insights and old days and to integrate all these parts and infuse them. These creative sort and the execution to exposed you didn't see it in the Lewis.
Brent Wilkes.
Well in short to analyze Cree design build and manage your digital customer experience is the context of your digital business transformation.
And on another side of the spectrum you bought was recognized by Forrester is one of the more significant application modernization. The immigration service providers capable of addressing the divorce said needs in both legacy and cloud native architectures.
We think it's important to point out that of all those large companies listed the unit is the smallest and also the fastest growing blip because of our much higher proportion of those in the world series as well thanks.
I also would love to remind everyone.
About two points, we talked about during previous calls, which remains very important for us to support our growth story.
We continue to build our consulting with it in two blend together industry experience and technology capabilities and to enable our global engineering services to deliver smarter.
And then turn to bring the real value to our clients.
And we continue investing in our internal digital platforms to make our operations not only our job, but also through the adaptive allowing us to better applied the talents, we serve as well to attract new talent and to grow and retain it smartly.
And that is also a continuous effort.
So to summarize despite some of the merger label uncertainties, which we talked about it before and it seems like there is here to stay with us for.
An undefined time.
We delivered another quarter of consistent.
High quality results, which underscore course, our ability to execute and grow into market. This continues to do insight and expertise and ever changing people's religious.
With that said I will now turn the call over to Jason to give more details in our second quarter results.
Jason.
Thank you Ark and good morning, everyone.
In the second quarter, we produced strong results in both revenues and profitability, while delivering across several key operational metrics here are few highlights from the quarter.
Revenue came at five came in at $551.6 million a year over year growth of 23.8% on a reported basis and 25.1% growth in constant currency, reflecting a negative foreign exchange impact of 1.3%.
Our demand patterns this quarter were relatively consistent with those of previous quarters.
We saw strong broad based growth across most industry verticals balance by slower growth in a few specific industries.
Looking at Q2 revenue across our industry verticals.
Financial services, our largest vertical delivered 16.9% year over year growth.
We can continue to see increasing demand for offerings and asset management and payment processing. In addition insurance, which currently accounts for a modest share revenues represents a rapidly growing part of our financial services portfolio.
Traveling consumer grew 6% reported an 8.2% in constant currency terms growth in Q2 reflected the continued ramp down of projects at a few consumer clients in Europe , along with lower growth in North America.
Software and high Tech grew 24.1% in the quarter and business information and media posted 26.4% growth in Q2.
Rounding out our vertical performance, we saw very strong growth.
In both life Sciences, and healthcare, which grew 53.7%, reflecting broad based growth across both industries and in existing and new client programs.
As well as emerging verticals, which delivered 51.3% growth driven primarily by clients and telecommunications and energy.
From a geographic perspective, North America, our largest region, representing 60.7% over Q2 revenues grew 26.6% year over year or 26.9% in constant currency.
Europe , representing 32.2% over Q2 revenues grew 18.4% year over year or 21.1% in constant currency.
See I asked representing 4.5% over Q2 revenues grew 29.3%.
Were 32.4% in constant currency.
And finally, APAC grew 19.9% or 23.3% in constant currency and now represents 2.6% of our revenues.
In the second quarter growth on our top 20 clients was 14.8% in growth outside our top 20 clients was approximately 31% compared to the same quarter last year, our revenue results from the quarter underpinned by a diverse set of growth drivers across the portfolio of clients we serve.
Moving down the income statement, our GAAP gross margin for the quarter was 35.5% compared to 35.1% in Q2 of last year.
non-GAAP gross margin for the quarter was 36.8% compared to 36.7% for the same quarter last year.
GAAP EPS DNA was 20.3% of revenue compared to 20.9% in Q2 of last year and non-GAAP EPS Geneight came in at 18.5% of revenue compared to 18.9% in the same period last year.
Our estimate spending Q2 was focused primarily on investments in facilities and our employees and is intended to support our longer term growth.
GAAP income from operations was 72.9 million a 13.2% of revenue in the quarter compared to 54.2 million or 12.2% of revenue in Q2 of last year.
non-GAAP income from operations was 92.6 million or 16.8% of revenue in the quarter compared to $72.3 million or 16.2% of revenue in Q2 of last year.
Our GAAP effective tax rate for the quarter came in at 16.6% which is.
Includes a 4.7 million excess tax benefit related to stock option exercises investing in restricted stock units.
The actual benefit was lower than the 10 million forecasted at the beginning of the quarter.
Which was the result of the substantially lower number of stock options exercised in the quarter.
Our non-GAAP effective tax rate, which excludes the excess tax benefit.
And includes the tax effect of non-GAAP adjustments was 22.5%.
Diluted earnings per share on a GAAP basis was one dollar and two cents, which reflects the lower than expected tax benefit in the quarter.
non-GAAP EPS was $1.28 cents, reflecting a 26.7% increase over the same quarter in fiscal 2018.
In Q2, there were approximately 57.6 million diluted shares outstanding.
Turning to our cash flow and balance sheet.
Cash flow from operations in Q2 was $44 million compared to $59.5 million in the same quarter last year.
And free cash flow was $32.4 million compared to $50.9 million in the same quarter last year.
Reflected in our cash flow this quarter.
We're payments related to our annual variable compensation program and the ongoing support of our inorganic growth strategy.
DSO was 79 days compared to 78 days at the end of Q1 fiscal 2019, and 83 days in Q2 of last year.
We remain focused on managing our DSL at these levels.
Moving onto a few operational metrics, we ended the quarter with over 29400 delivery professionals, a 21% increase year over year and a net addition of more than 1500 production professionals.
Driven primarily by new hires in our global delivery locations and low attrition in the quarter.
Our total head count ended at more than 33100 employees.
Utilization was 78.4% compared to 78% in the same quarter last year and 79.9% in Q1.
Now, let's turn to our business outlook.
Starting with fiscal 2019 based on continued strong demand revenue growth will now be at least 23% reported and at least 24% in constant currency terms factoring in a 1% estimated unfavorable foreign exchange impact.
We expect GAAP income from operations to continue to be in the range of 12.5% to 13.5%.
And non-GAAP income from operations to continue to be in the range of 16% to 17%.
We expect our GAAP effective tax rate to now be approximately 14%, which includes an updated assumption for a lower level of excess tax benefit.
And our non non-GAAP effective tax rate will continue to be approximately 23%.
Earnings per share, we now expect GAAP diluted EPS will be at least $4.43 for the full year, which reflects the impact of the higher GAAP effective tax rate.
non-GAAP diluted EPS will now be at least $5.25, reflecting a modest improvement and expected profitability for the full year.
We now expect weighted average share count of 57.7 million fully diluted shares outstanding.
For Q3, Fynineteen revenues will be at least $579 million.
For the third quarter, producing a growth rate of at least 22% reported in at least 24% in constant currency terms factoring a 1% estimated unfavorable foreign exchange impact.
We expect GAAP income from operations to be in the range of 12.5% to 13.5%.
And non-GAAP income from operations to be in the range of 16% to 17%.
We expect our GAAP effective tax rate to be approximately 15% and non-GAAP effective tax rate will be approximately 23%.
Earnings per share, we expect GAAP diluted EPS will be at least one dollar and 14 cents for the quarter.
And non-GAAP EPS will be at least one dollar and 32 cents for the quarter.
And lastly, we expect a weighted average share count of 57.9 million fully diluted shares outstanding.
Finally, a few key assumptions that support our GAAP to non-GAAP measurements.
Stock compensation expense is expected to be approximately 16.2 million in Q3 and $15.5 million in Q4.
Amortization of intangibles is expected to be approximately $2.8 billion for each of the remaining quarters.
The impact of foreign exchange is expected to be approximately 2 million loss for the second half was a 1 million loss in each of the remaining quarters.
The tax effect to non-GAAP adjustments is expected to be around 4.5 million in Q3, and approximately 4.4 million in Q4.
We expect excess tax benefit to be around $6 million in Q3 and $4 million in Q4.
And lastly, one more assumption that is not part of our GAAP to non-GAAP assumptions, we expect interest and other income to be $2.6 million for each of the remaining quarters.
In summary, we are pleased with our second quarter results, which reflect continued strong demand for our services underpinned by a diverse mix of projects and offerings across the industries we serve.
Our first half of 2019 positions DPM well for continued success in the second half of the fiscal year.
With that let's open the call for questions.
Thank you.
We'll now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you.
Our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
Good morning.
I wanted to talk about the digital transformation skills that you touched on our Katy.
How much of the employee base do you feel like is adequately trained in those types of digital transformation skills and then can you talk about how you're defining that internally, what Scott that I truly consider digital or maybe asking in a different way.
What's more in focus now then what has perhaps been roughly three or so years ago.
Hi, Mike.
Yes, it is actually a very difficult question because.
No just to be not certainly reporting with his own digital data new versus not digital ecosystem.
Very difficult classification.
And so I can refer back to first quarter.
Profile, each saying look here, we see some category, where there's more than 10000 employees versus.
Even if it's just 10000 they sold it to at least so 2% to five people there so.
So.
As a company is on the release, which probably much less but.
We were saying is that the majority of our work opportunity is.
Thank you Cody because our core will all legacy in.
For all the software product engineering coverages.
Most of the wartime region from other classifications.
I would say of goods. This type of service is too.
Digital as well.
Inside the hoop 'em, we definitely focus in on the engagement platform analytics platform.
Very quarter digit, though but.
Modernization for example.
Or a lot of.
I was actually just like at a P series is like.
Sometimes could be put in different categories.
Because of the reserve true again in short I would say that we considered as a digital its majority to majority. So what we are doing today.
And similar on the train and so a majority of those people trained on this and.
This was another coupon for.
Fourth we were shown to be ready to another location and to the builds in pretty strong integration, how serious not only focused internally, but also helping our clients.
Two goes it was a sale.
Level of transformation.
And as I said my view it is obvious by John sort of what it is a difficult question.
Okay. Thank you and then you talked about kind of the the efforts to continue to drive relevancy in the market and you've been a little bit more acquisitive in the last two years. So should we start thinking about a more consistent acquisitions acquisition engine going forward.
And then does occurring.
M&A funnel support that.
And then also Jason just what was the organic growth in the quarter and now the expected to add organic contribution for the full year with the recent acquisition that you did thank you.
So I assume from consistency upwards zone to consistency is as a to be constantly looking for the right Keith.
And to look and how to improve our capabilities.
Well there is no any kind of blends to due to acquisition for quarter four acquisitions like because the next year, that's not part of what's called the sinking it was but we constantly are looking for opportunities in terms of how it's impacting our gross I think is very minimal because we were looking for small competency OLED companies not.
Kinda for rollout.
Our approach reached notes, excluding that we might see some big ones as well into the future, but so far that was a 4% Jason can comment on numbers. Yes, now are exceptionally correct. So when we guided at the beginning of the year. We had included an assumption that we get.
You know up to or approximately 1% of revenue from inorganic contribution that has not changed at all these are relatively modest sized acquisitions. However to just answer the question on Q2, So the reported growth rate was 23.8%.
If you adjust for foreign exchange, we had about about a 1.3% impacts to the constant currency growth rate would be 25.1.
And the inorganic contribution was actually just below 1% for the quarter. So from a constant currency organic growth rate, we would be at 24.2% for Q2 2019.
All right. Thank you guys.
Thank you.
The next question is from the line of Ashwin Shirvaikar with Citigroup. Please proceed with your question.
Thank you Hi, Jason.
Hey quarter, yes congratulations.
Thank you.
Yeah, Hey, good question I have is.
You spent obviously a lot of time and effort and investment in creating a.
Oh, much better diversified business 10, Qs could be across many verticals.
As we go past that phase and it becomes more about continued at this scale what you have been.
Should we expect some operating leverage do creep into the financial model in the next.
Next year.
Yes.
Yes, so here's how I would think about the business I think I'll talk more about what's happening this year and maybe we'll have that assumes some maybe big discussion around next year.
We're very focused on continued to make investments that allow us to grow the business.
In excess of 20%.
Annually and so what we've been looking at is a is a range of 16% to 17%.
We think we're clearly going to operate very firmly in that range and I think if you've looked at your model. It probably show that we can operate in the in the upper half of that range in in 2019, and we're going to continue to focus on the 16, 17%. What you will see in the second half is we're going to continue to make investments some of the investments that are talked about in learning for platforms and professional development.
And so again I think you probably should continue to think about the business more in the 16% to 17% range.
Understood.
And then the.
Good work Nicole can you remind us when the wind down of the European clients and.
In another.
Sort of numbers question unrelated is that can you remind us TQ in Fourq do you have any ups and downs as it relates to billing days.
Yes, so I didnt hear the first part of the question.
The first part of the question was with regards to the travel vertical.
Even facing the wind down.
Awesome European clients can you remind us when that ends.
Yes.
I'm not certain I understand the wind down I know that we've seen some some degree of let's say softness.
What's our European sort of consumer and yes, I would I don't know its a specific wind down as much as it's kind of a mixed performance, where we've got some growing accounts and we've got some accounts that are either sort of flat to declining and that's producing.
Yeah, well lower than that.
A lower rate than you've seen in that area in the past.
But I think what you see is that.
In any given quarter, we were able to drive high levels of growth because of the diversified sort of demand portfolio.
From a Q3 Q4, it's a little bit complicated, but ensure your fall this which is that we have more generally build days in Q3, but we also have more holidays more summer vacation, if you will and so generally what you see is.
Maybe a little bit of improvement in gross margin in that time period.
And then Q4 is usually a strong quarter for us.
But we've been operating at.
Quite high level of profitability here in the first half so I don't expect a big uptick in gross margin or profitability in the second half.
What I would do what you would normally see though is some positives in the gross margin because of the additional bill days in Q3.
So basically Ashley and ensure that all this volatility more in line of his.
Usual volatility for us for different verticals is a fast and so yes, there are some softness and specifically on the UK their lives, but again it means that we can attribute to more regular stops and substance question.
Okay, the regular ups and downs of Okay got it understood. Thank you guys.
Sure.
Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed with your questions.
Thanks, Good morning, guys I actually just wanted to follow up on Ashland's question, just just to clarify on traveling consumer are you expecting any re acceleration in the second half I mean, I think your comps get easier, but obviously there is maybe some.
Lingering macro headwind so I just wanted to make sure we've got the right.
Framework for how to think about.
The second half there do we do we move up from the 8% constant currency, there or should we assume kind of stabilization and then maybe just while you're on the topic of verticals any incremental commentary on financial services had a nice rebound in re acceleration in the quarter is that sustainable in the back half.
Yeah, So I think kind of echo what art said.
In the in the last comment is that the business has got a it's broadly diversified both in terms of industry verticals in terms of customers, both new and longer term end customers and so in any given quarter, you're going to see one vertical might drive more of the growth and another a couple of years ago. We were talking about single digit growth in healthcare and life Sciences and here in this year you've been over 50%.
From a growth rate standpoint last quarter as you point out financial services was single digit in this quarter you were back firmly in a in a high teens growth rate and so we continue to see strong demand overall, if I were to talk about travel and consumer.
Yes, I think potentially the demand could increase a little bit in the second half but.
Again, I think we are seeing a little bit of mix result in that portfolio from a financial services standpoint.
We're seeing very strong growth in cards and payment processing and asset management and insurance is still small for us, but it's growing quite rapidly and so.
I'm I'm hopeful around financial services and an overall, we feel good about the demand in the market.
Okay.
How does the composition of your top 10 client list look today versus say 12 to 18 months ago and would you expect material changes in that list, let's say over the next 12 to 18 months as some newer clients continue to scale their work with the Sam because obviously the the growth in the non top 20 continues to be very strong.
And we've seen a little bit of movement.
Here and maybe the last couple of quarters is says companies may be slightly change position. One thing that's noteworthy and I think I talked about this in the last call is one of our top five customers split into two customers and so what used to be you know 10 customers and our top 10 is really effectively nine.
And so that probably changes a little bit some of those comparisons as you look at our concentration overtime.
But again I would say a little bit of movement, but reasonably consistent.
Okay. Thank you.
The next question comes from the line of Bryan Bergin with Cowen. Please proceed with your question.
Hi, Good morning. Thank you I wanted to ask on the acquisition competitor.
Talking about this does for you internally as far as the strategy goes on is there a function of any internal savings or benefits worth quantifying.
And then just more broadly how should we think about.
Software and platforms as an offering as it does this signal a move toward more of that as we go forward.
Yes, any additional capabilities.
Mike in some.
Embarked internally as well, but we invest in this area constantly so we don't think it would be any specific as DNA.
Savings and especially the the company is pretty pretty pretty small so its agent some capabilities reach we will be will serve to build.
Our sales, but again.
It's.
Pretty pretty dismal so for all generally software platforms.
We.
More conservatism as accelerated us because in our business, we do believe that differentiation, Kevin fro right integration custom extension and build up so it will not really considering that it will be a very strong separate lines of business is license revenues subscription later.
With this today as.
Could you just small and reducing that this would be the validity modest percentage of our war, but at the same time was giving us a good so.
Jumpstart in money.
Large implementations.
And that's the goal how to.
Builds the right portfolio of consolidate those two starts faster but.
Because of technology change and how to upgrade this accelerates us very fast as well.
Instead of food Beanstock visa, some milestones of software, which would become legacy regulator Cleveland.
Okay. That's helpful.
And then I want to ask on healthcare brick was obviously very strong can you comment on the mix of the work that is in that vertical currently and then are you believe you're taking share in that market.
So we blend is this for some time.
Initially it was mostly around.
Randy Life Science now as soon as we expanded to commercialize SaaS component and we expand expanded to close care insurance component as well so so basically if.
Four or five years ago.
It was practically Juan.
Kind of concentration fluent for growth right now it's at least three yes. We're also seeing more consulting business in the healthcare space as well and I think as it is a good company mentioned between them because they're in GB Gavin So integral part to Paul Ginocchio Financial Life Science and also there are a lot of overlap with healthcare providers from both sides from Payors and providers.
Away it sold becoming much more real time and understanding of bio informatics and specific data set. So it's very important so I think it's helping us to grow.
Okay, great. Thanks, guys.
The next question is from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.
Hi.
Your growth seems to be fairly well balanced and I think historically within IP services, I mean, well balanced across all your verticals I think historically, an ITC services.
Thats fairly rare. So my first question is can you just describe for US the strategy in some of your newer verticals and maybe why you.
You think your acceleration in those verticals has been above what we've seen sort of historically in other areas and from other companies.
I think it's goes to.
Our Houston as well and will be repeated this many times. So we started as a product engineering extension to our clients like a lot of technology companies, where our clients unusually and 10 years ago. It was a major source of our revenue.
And so as this we also.
We started to understand the industries, but specifically for all worked.
People would call today digital transformation for until you confidence we are adopting new software platform. So they need to be extended.
Let me quickly NVS of good quality.
And as we were building those skills and when we came into new verticals today, we clearly brians understanding how to build the right products, but we also do tons of lost.
So in the us and that's what we put into dollar today build through two strong digital strategy consultative components and integrating this is Larry close even though engineering services kind of to not just to read wise what to deliver on our otherwise well visit again with the ability to put it in production with rice scalability and performance couple of those and I think.
This is an Indian heritage, which we now blend in the visa consultative approach.
For all which is helping us to be a little bit more consistency.
Got it okay.
And then just as a follow up.
On the margin outlook, obviously, you gave guidance for this year, but maybe you could talk about your thoughts about margins over the long term.
And some of the lever levers that you have in place that.
Could drive them up or down how should we thinking about.
Any margin opportunity over the long run thanks.
And I think we're we've proven that we can run I would say kind of anywhere in that 16% to 17% range I think a couple of years ago, we were sort of closer to the bottom end of that range. In here you see us in these quarters running near the top or sometimes just over that range and I think thats, probably the thing about us able to comfortably sort of run into 16% to 17% range and there will be volatility by quarter.
Based in part on utilization and bill dates and some of that but but I think probably just to continue to think of us as a 16% to 17% adjusted income from operations is the is really what we're looking to drive and in part because we are going to continue making the investments at our cottage and talking about to continue to drive the greater than 20% annual revenue growth.
Got it thank you.
Our next question comes from the line of Andrew Baum with Wolfe Research. Please proceed with your question.
Hey, good morning, guys.
Just wanted to touch on the segments once again.
Europe showed some pretty solid growth in the quarter.
Despite.
You guys, calling out in the past some uncertainty and clients around Brexit and such so maybe you guys could just give an update on what you're seeing in the market there and your expectations for the rest of the year.
Okay.
So I assume.
And this is probably very much in line with what we shared it before so there is some certain level of volatility across different verticals and even geographies here as well because we're working also with the global accounts and sometimes.
This global accounts.
Growing faster in one one region versus another region. So its really extremely difficult for us to predict volatility in specific segment, while in general like we've given the guidance like on on the total total numbers. So.
And I think I think it's getting getting better than last quarter, we clearly, but its still very unclear what would be in.
Q4 for example.
In it is also for Brexit, which nobody knows what how companies will react what to eat more comfortable too.
Share and how are we thinking about is that you will have some softness in some subset of our markets. There is enough demand for the type of services, which we provide that we will be able to balance and delivered for the kind of aggregated numbers.
Got it thanks and then.
I guess my follow up digging into the gross margin numbers and they seem to be pretty consistent here and you guys have called out before.
The strategy to implement more more near shore and capabilities, which.
From our perspective could.
Eventually way on on margin, but maybe you guys could just update us on your strategy towards near shoring and.
How you kind of expect that to weigh on our on the gross margin side.
So the trend is still there we go into two improve our own yard.
When you say in your sure you mean.
In the Montney North let me make a north American more end market, yes, okay. Okay, because so a near shoring, it's a little bit.
Yes, if we took an in market presence and we.
Definitely real expensive because the complexity of the services, which we deliver in we need like mall local presence from expertise and the dynamics of the engagements point of view and consultative voluntary so we will be increasing.
So how is going to impact gross margin again, it's a we'd like to to wait and see exactly because there are different series here the ts might be profitability in general lower into the market at the same time, we've seen that we would be able to improve.
Our increased total value to the clients, we will be able to balance this as well and we do believe that we will be able to do it.
And we're so we're very focused on margin at the account level and sort of.
Maintaining.
Profitability in the gross margin area and so as we've talked about in the past is that we we clearly are focused on pricing and.
And sort of maintaining or improving account profitability.
Given the opportunity.
Great. Thanks, guys congrats on the quarter.
Thank you.
Thank you.
Our next question is from the line of Moshe Katri with Wedbush. Please proceed with your question.
Hey, Thanks, good morning, good quarter, our two follow up questions and I guess, they're all kind of related also to margin trends.
Maybe we can talk about about wage inflation trends and the various regions that you're focusing on in eastern Europe anything out of the ordinary there that we should kind of focus on.
And then maybe talk in general about pricing trends for some of the new deals that are coming on board.
Oh thanks.
Yes from a head count growth standpoint.
We've seen growth obviously in our traditional regions. We've also seen seeing.
Further growth in our India operations from a wage inflation standpoint, I would say that it's in a little changed from the past.
Actually we've seen a decline in utilization as it began in attrition year over year. So we feel quite good about that and an argument to talk about new deals and pricing or.
I think it's again it's a.
Interface, so very much in line with what we were seeing before I don't think I can recall in addition to the Sampson Verde newer or extraordinary happening. So although the dollar size of the company and our subset of the market is your focus and I think it's.
Still pretty pretty consistent.
Okay. Ross this blog as we can we can repeat those is scary stories about Brexit and all over this and yes, it's making some softness here and there, but as I mentioned before we do believe that we will be able to navigated through refocusing.
Our focus across different geos and segments.
Okay, Great and just a follow up.
Some of the looking at some of the legacy vendors that made some strategic moves to get into this space.
And is there anything different competitively or is it still kind of a handful of companies that are able to do this kind of work.
And that obviously gives you guys.
Pretty big competitive advantage.
In general market is pretty competitive and stuff so as the same time.
It is big as a subset of the market, we should be focusing grower.
Much faster than.
Global IC market. So I don't think mice change for a milestone for us.
In the.
Is it is clearly a big big guys focusing more on these smaller guys more excited to see how are we progressing for example.
But again market is growing very fast and they went to zero so the challenge how to.
How to build right capabilities and how to upgrade.
Our self kind of pretty dynamically that's why when all these questions when do expect about.
Future gross margin can you look at the size too.
Benefits from this I'll answer or like.
And since.
Pretty trivial so we will have to do in the west to constantly kind of great ourselves.
Understood. Thanks.
The next question is from the line of Vladimir Bespalov with VTB capital. Please proceed with your question.
Hello, Thank you for taking my question and congratulation on good results.
I have a pretty specific one on your guidance now we can do you can punch you decompose your full year guidance.
In two quarters and when I look forward to some point non-GAAP EPS guide on where I see a clear a slow down somewhere at 13% year on year growth in the fourth quarter and 10% year on year growth in the fourth quarter and very thoughtful.
Previous significant slowdown.
Implied by your non-GAAP operating margin. So maybe you could provide some color on what is behind it the high base effect your reinvestment.
Into developing to be if necessary and accident.
So Steve it's fun on the hiring and have accelerated maybe you're hiring more people and this also affects your margins.
This is the first question and the second question I have front, maybe you could you provide us some color. If you talk to a to your clients right now and probably is shaping up to be profile for for growth for the next yeah. What I'd be curious to what are the key concerns from your clients that you see right now.
Thanks, So I'll take the second half profitability questions.
So really no change from what we've been thinking about the second half since we began providing guidance in terms of the overall levels of profitability, we've seen a little bit better profitability in the in the first half.
And you know we for those of you doing models and probably its all of you.
We're clearly expecting to to operate in the top half of our 16% to 17% range.
If you'll remember Q4 of 2018, we actually ran it.
18.4%.
non-GAAP adjusted FFO were our adjusted I felt that was at a time when we actually were over 80% from a utilization standpoint, and so it was you know some outsized demand that popped in the quarter and so we do not expect to be running at 18.4% adjusted IPO in Q4, So probably that's what you see when you see that change in let's say growth rate of S., but again, we continue to expect that will run in the high end of that of the.
Of our 16% to 17% range for the full year and again, we feel quite good about.
Profitability in the second half.
And how about next year and demand or risk or.
Yeah from client concern assassins, they're very much in line with the industry concerns, so where to find the right capabilities and.
And not just ride capabilities, but scalable us.
Scalability and.
Changing skills profiles is a an ability to.
To quote right teams together, so one concern the second console ocular too and this is again sort of consolidation between clients and we enter this included a bomb and for US it's very important how to actually build toward should bring the value versus just deliver engineering centers.
A lot of clients are actually looking at us and asking us for so its leadership come for us to bring to the equation to help them actually to find the right solution not just of those are excellent and I think we feel kind of this three way influence.
This one and again more to reveal a historically a.
But he piece of wells scalability and capabilities as well.
Okay. Thank you very much.
The next question is from the line of Arvind Ramnani with Keybanc. Please proceed with your question.
Hi, Thanks for taking my question.
I really wanted to ask about the recent acquisition of fat.
Hi, Dan.
Certainly seems like a good strategic acquisition I'm not sure of the Valley do you expect to extract a based on using it internally for your own on getting to.
Well this is a selling it.
Due to clients.
So as a main focus it's a improve for okay by villages in additional in publishing segments. These guys have some competencies, which are very complimentary to what we have.
And we hope that we will be able to penetrate this market.
Much more aggressively than before.
I think that we've had so already goods.
Good or sitting in this area, but again that would really fill plus a this company has a content development capabilities and learning platform development capabilities, which we.
Potentially will enhance our internal or external and internal here you can soon can grow the cells in turn off all employees and kind of internal external for potential candidates.
Oh.
Beach, we train externally to put into the company as well so that's.
Uh huh.
That should impact us as well, but again the primary goal was to.
Go to market.
Great and how does that.
How are you looking to kind of sell it and that's it.
Well, let me sort of the distinct offering or will it be back into something else.
And second part of the question is how does.
Yeah, how does that from actually generated its its content installed in Canadian internally developed or are they kind of using external auditors to develop the content.
So I would say the I would think about it as that.
Uh huh.
Improving our competencies Ian I do caution, though population space because now they say Jeff.
Added capabilities to go and build solution created because now we serve.
Extend into the outlook.
If if you will or external expert in this field, who build platform in this space and that's what we're going to offer to their clients.
We just can't tell you there is some again think about it's more in the competency.
Competence yourself now these are people, who will be able to orchestrate some internal effort, but whether you build content you can utilize number of external capabilities as well. So it was a special network. So we just would be able to get traded better.
More scalable environments.
Great. Then just last question on this is that did you did you say that you made some extent on external folks.
Some competitors such as Florida side does scale soft or was this mostly just a.
Okay, you really haven't looked at some of the other vendors.
So first of all these guys not compete visit companies, which you went with this company has provided specifically engineering services when I'm talking about external focus external focus and the dedication in general around different areas. For example, one of those offerings, which we now call for its around police got compliance.
When you're talking about this company is which you mentioned then we have our internal offerings to the market.
Kind of comparable with them because we already train thousands of people to create additional talent source for yourself and we were looking at them and sometimes we are utilizing well pre tautona july's, an external content as well.
When you're talking about specifically software engineering glass or sensor.
Great.
Thank you and good luck for remainder of the year.
Thank you.
Thank you as a reminder to ask a question today you May press star one from your telephone keypad.
Our next question is coming from the line of David Grossman with Stifel. Please proceed with your question.
Hi, Thank you. Good morning, just a couple of very quick follow ups here just on the utilization rate you know I know youre running hot in the back half of last year.
Your back down a couple of hundred pets is this about where you're comfortable or are you looking to bring it down even further.
Yes, I think you know we utilization is going to vary based on on a quarter to a certain extent and so again when you've got a quarter with more vacations, which is coming up I think you know we've shown that we can kind of run around 77% to 78% pretty pretty comfortably there maybe quarters and we're above that as youll remember that Q4 at 80%, it's a pretty hot number and probably takes a quarter, where you get some unexpected demand.
I'm not expecting that utilization would would decline.
And again I think probably this range in the you know 70 778 generally is probably a good way to think about the business.
All right great. Thanks for that and then just on the head count adds just on a percentage basis. It just looks like over the last 12 months.
You know, adding more in the Ukraine, and Russia, just you know.
If there's anything to call out there or this is just the natural ebb and flow of just client demand on where are those available resources.
Yeah. So it's a good good.
Question, you know so we would have been growing in the Crs and Ukraine region. We also would be growing in India, where we're seeing good traction.
And so you know this was a quarter, where we didnt see so much of a shift towards in market kind of talent it with a more balanced kind of growth for us.
And actually you know I'm quite pleased by the additions that we were able to make here in the quarter because I think it does show that we can continue to sort of you know.
Produce the supply that we need to drive the business end to meet the demands of the marketplace.
You are pretty satisfied with the current geography is no need to add anything.
Soon in terms of new supply center.
And the global I think you'll see us continue to evolve the business is ARQ always talks about in that that could include.
You know incremental geographies, but I don't think you'll see any substantial or let's say radical change anytime in the future. So so pretty consistent you know where you are seeing substantial growth in Mexico as we talked about we've got a delivery center in Spain, that's growing.
Both of those are still relatively small, but we're seeing good uptake of resources in those centers.
Great. Thanks, and then just lastly, you know arc you made some comments about consulting I think in your prepared remarks, I'm, sorry, I I missed some of that so is there is it's just the natural evolution of the business were integrating consulting into the offering as opposed to running it as a separate business line or is there more to it than that.
Oh, it's a consistent with what you said is before we build into this capability is working we still wants to focus on how to 2 billion integrated solution to two outliers Lotus up or not this is kind of completely separate lines of business that all of us are some.
Projects, we just focus on one specific area, but again.
The girls out to 2 billion complete.
And to add up.
Story.
Okay got it that's it for me thank you.
Thank you.
Our next question is from Mikes comment with Needham and company. Please proceed with your question.
Thank you Ed good morning, Congrats on the results early a couple of quick ones here, Jason that you may have already mentioned this but I just wanted to ask about the shift on the PNM side is that just a trend we should look for as the work becomes maybe more sorry, a shift towards fixed price as the work becomes more iterative with digital type work and then I'd like to also ask just about the onsite offshore mix over time, given the nature of the work is that going to result in more onsite centric.
Effort or dozens of models stay pretty much put where you have it today.
Okay. Yeah. Good questions. So from the standpoint of I guess the shift towards onsite.
As we continue to be increasingly relevant to clients as we are.
Take responsibility for larger programs.
As we know it.
Have larger more strategic engagements said I think that NASA to necessitates.
Higher end market presence and so I think you you won't see it shift dramatically in any given quarter, but I think you're going to see a constant sort of uptick in the end market head count.
We talked a little bit about what we think that looks like we will you know we think that probably that's that's positive for us in terms of the relationships, we have with our with our clients.
But you know maybe remains to be seen in terms of the overall impact on the on the PNM, but again, it's a very gradual shift so I wouldn't expect anything you know test sort of pop up.
You know again in the next couple of quarters or anything and they will just kind of an ongoing March.
And then from a fixed fee versus TNM most of the the acquisitions that we've done have have generally been.
Companies that are more consultative in nature in most of their engagements or are fixed fee, but they are generally very short term projects right. So it's not a multi year kind of fixed fee it might be a project with three months or six months or maybe up to a year and so a lot of what you've seen over the last maybe six quarters has been just the layering in of revenues from continuum and think in some of these companies from time to time, we do have a client that might ask us to adjust some of the business from TNM to fix fee, but that's not a it's not a significant trend for us. So it's mostly driven by the inorganic.
Got it then one last one on pricing I don't know if you already commented, but what type of pricing tailwind are you building into your revenue guide for the year.
No I don't think there's any change in to what we've talked about in the past. So you know we continue to sort of.
I think do a good job of sort of.
Price versus versus wage inflation, and so we haven't seen any significant changes in the last 90 days in that.
And we continue to work.
Not to be quite focused on on account margin. So it's a it's a focus of the entire company and certainly as the executive leadership team.
All right great. Thank you for taking my questions.
Right. Thank you.
Thank you.
We have reached the end of the question and answer session I will now turn the call over to Arkadiy Dobkin for closing remarks.
Thank you everyone for joining us today.
Are we pretty pleased with Q2 results and recall that we will continue doing this.
I'm going to the challenge as we mentioned the cloud to Cupo in shape and.
Chilling showself to to run to run faster than.
Thanks to all of our.
So two plus thousand people around the globe.
To help physicists and the talk to next time and.
As usual David is here to help is any additional inquiries.
Thank you.
Thank you.
This concludes today's conference.
You may disconnect your lines at this time, thank you for your participation.