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Edited Transcript of EPAM earnings conference call or presentation 2-Nov-17 12:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 EPAM Systems Inc Earnings Call

Newtown Nov 6, 2017 (Thomson StreetEvents) -- Edited Transcript of EPAM Systems Inc earnings conference call or presentation Thursday, November 2, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arkadiy Dobkin

EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President

* David Straube

* Jason Peterson

EPAM Systems, Inc. - CFO

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Conference Call Participants

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* Amit Singh

Jefferies LLC, Research Division - Former Equity Analyst

* Anil Kumar Doradla

William Blair & Company L.L.C., Research Division - Analyst

* Arvind Anil Ramnani

Pacific Crest Securities, Inc., Research Division - Senior Research Analyst, Technology-Enabled Business Services

* Ashwin Vassant Shirvaikar

Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst

* Avishai Kantor

Cowen and Company, LLC, Research Division - VP

* Darrin David Peller

Barclays PLC, Research Division - MD

* Georgios Kertsos

Berenberg, Research Division - Analyst

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Moshe Katri

Wedbush Securities Inc., Research Division - MD and Senior Equity Research Analyst

* Ramsey Clark El-Assal

Jefferies LLC, Research Division - Equity Analyst

* Steven Mark Milunovich

UBS Investment Bank, Research Division - MD and IT Hardware and EMS Analyst

* Vladimir Bespalov

VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the EPAM Q3 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. David Straube, Investor Relations for EPAM. Thank you, Mr. Straube. You may begin.

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David Straube, [2]

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Thank you, operator, and good morning, everyone. By now, you should have received your copy of the earnings release for the company's third quarter fiscal 2017 results. If you have not, a copy is available at epam.com in the Investors section. With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. Before we begin, I'd 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 SEC filings. Additionally, all references to reported results that are non-GAAP numbers have been reconciled to GAAP and are available in our third quarter earnings materials located in the Investors section of our website. With that said, I will now turn the call over to Ark.

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [3]

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Thank you, David, and good morning, everyone. Thanks for joining us. Our third quarter revenue is a result of continued high demand for our services. It was the industries we serve and the geographies in which we operate. We also delivered a strong profitability in the quarter and generated significant free cash flow. Revenue for Q3 came in at $378 million, representing year-over-year organic growth of 26.6% reported or 24.6% in constant currency. Across all verticals, the trends of transformation, digitalization, and competitive disruption in our clients and markets are main drivers for our growth. Financial Services, our largest vertical, finished the quarter with 15 growth in, which was broad-based across our major geographies and driven by client responding to regulatory changes, digitalization and the drive to optimize payments. Excluding the impact of UBS, Financial Services grew 27% % in Q3. Travel & Consumer grew 20% in the quarter with growth coming from the continued focus on (inaudible) customer experience and personalization efforts among clients in North America and Europe. Software & Hi-Tech grew 22% for the quarter, driven by diversified portfolio of mature software companies and emerging startups technology companies growing through digital platform transformations. Media & Entertainment was 42% growth in the quarter. The continued evolution of direct-to-consumer trends, which include enrichments of (inaudible) end user experience across multiple platforms help drive growth in this vertical. Life Science & Healthcare grew 24% over the same quarter last year. Trends driving the growth of this quarter were Life Science clients focused on new ways to engage with doctors and patients in addition to having GIT initiatives.

And lastly, our emerging verticals delivered another strong quarter with growth of 78%, driven primarily by telecommunications and energy clients. The diversification across our client continues to progress, with growth outside of the top 20 accounts coming in at 37% and growth in the top 20 accounts at just over 15%, or more than 20% excluding the effect of UBS. As usual, growth this quarter came from combination of existing and new clients. We ended this quarter with over 21,680 IT professionals, an increase of over 13% year-over-year bringing our total employee headcount to more than 24,500. Net addition of more than 1,200 production professionals during Q3 is a level we have not seen in 6 quarters.

Taking it a bit away from numbers, I would like to bring just one customer story. We should illustrate well the journey we are experiencing today with some of our key clients. The journey, which is very much in line with what we've shared during our Investor Day in regards to unique relationships and (inaudible) service horizons, which include core engineering services to make sure we build things right, complex solution design and delivery to improve our clients systems of engagement and innovative creative thinking and experimentation with new technologies and business models to predict how those critical solutions might look like for our customers tomorrow. And what is important is the ability to materialize, bring to the market those solutions sooner than most of our competitors can due to our core engineering advantage. Or in short, makes those solutions real. We do believe the right complement in balance of [levers] across those horizons differentiate EPAM on the market today.

So back to the story. Liberty Global is one of the largest cable companies in the world. We started to work with Liberty over 5 years ago and it was one of our first digital strategy engagements which brought us an innovation award at their technology summit back then. Nothing unusual is there. What is more unusual that during the past 3 years, EPAM received at Liberty Global technology summits another 3 awards in the innovation and breakthrough [illumination]. For example, we are focused on an augmented reality hologram solution for formula e-racing which allows user to reach multiple race scanners at one time and also see the circuit with the current position of the driver. And just last week, Liberty Global was named as the winner of the best wireless broadband solution at the Broadband World Forum awards with the new connect up, which EPAM team helped to develop and was honored to be invited to the stage together with our client to accept the award. That allows user to check their usage monitor device, devices connected to their home Wi-Fi network and automatically connect to about 10 million Wi-Fi hotspots internationally.

What is interesting that during those 5 years, in addition of those innovation awards, Liberty became for us one of the top clients we just confirmed that we are bringing balanced value across all 3 horizons and driving that value from the innovation angle to real tangible results to the client. With that, I think would be appropriate to share a news about another relevant recognition for our digital capabilities. Last month, EPAM was ranked, for the second year in a row, the U.K. top 100 digital agencies, raising in rank to #5 agency in U.K.

And lastly, in Q3, we held our annual software engineering conference that brings together [e-commerce] from around the world, from engineers to designers to data scientist and functional leaders. This year a large group of clients joined us for the first time to share from one side and to hear from another the latest trends in technology and engineering and how those 3 revenue business models can bring new value. This is as a global event that helps us to develop our talent and forge stronger relationship with our customers. And just another components which illustrates how important for us to maintain our engineering DNA, which is a key goal across all services of our business. So with that, let me hand the call over to Jason for additional details on the quarter.

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Jason Peterson, EPAM Systems, Inc. - CFO [4]

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Thank you, Ark, and good morning, everyone. As Ark mentioned, we delivered strong top-line performance, drove higher profitability and generated significant free cash flow in the third quarter. Let me start off with some financial highlights, talk about profitability, cash flow and end on guidance. Getting with revenue, on a reported basis, we closed the third quarter with $377.5 million, 26.6% growth over the same quarter last year and 8.2% growth sequentially. Year-over-year, constant currency growth was 24.6%, reflecting a currency benefit of 2%. Actual revenues, compared to our Q2 guidance, benefited from a combination of stronger revenue production of $8.2 million and a favorable currency impact of $2.3 million. From a geographic perspective. North America, our largest region, representing 57.8% of our Q3 revenues, grew 28.4% year-over-year and 27.6% in constant currency.

Europe, representing 35.9% of our Q3 revenue, grew 22.8% year-over-year and 19.8% in constant currency. Absent the effect of UBS, growth in Europe was 26.4% in constant currency. CIS grew 44.6% year-over-year, with 34.7% in constant currency, and now represents 4.2% of our revenue. And lastly APAC, grew 12.6% year-over-year and 12.2% in constant currency, and now represents 2.1% of our revenue.

Moving down the income statement, our GAAP gross margin for the quarter, was 36.6% compared to 36% in Q3 of last year. Non-GAAP gross margin for the quarter, was 37.9% compared to 37.6% for the same quarter last year. The 30 basis point year-over-year increase in non-GAAP gross margin resulted from the higher utilization offset by the negative impact of foreign exchange. GAAP SG&A was 21.5% of revenue compared to 22.6% in Q3 of last year and non-GAAP SG&A, which excludes stock-based compensation expense and certain other items, came in at 19.8% compared to 19.5% in the same period last year.

Our level of SG&A reflects the continued investment in our talent acquisition, extension of our global footprint and expansion of our capabilities with a focus on supporting our long-term sustainable growth strategy. GAAP income from operations was $49.2 million compared to $33.9 million in Q3 last year, representing 13% of revenue in the quarter. Non-GAAP income from operations was $62.6 million compared to $49.7 million in Q3 last year, representing 16.6% of revenue. Our GAAP effective tax rate for the quarter came in at 15.7% and our non-GAAP effective tax rate was 20.4%. For the quarter, we generated $0.77 of GAAP EPS. Non-GAAP EPS was $0.92, a 22.1% increase when compared with non-GAAP EPS of $0.76 in the third quarter of last year.

Total shares outstanding for Q3 were approximately 55.2 million. Utilization was 77.6% compared to 72% in the same quarter last year and 79.6% last quarter. We will end up slightly over-the-top end of the 75% to 77% range we like to manage to and a higher than our Q3 historical levels. We will continue to hire for the demand we see in our business with an expectation that utilization will trend more towards our traditional range of 75% to 77% over the medium term. Turning to our cash flow and balance sheet. Cash from operations for Q3 was $64.9 million compared to $61.8 million in the same quarter last year. Free cash flow came in at $59.4 million compared to $55.4 million in Q3 of last year, resulting in 116% conversion of adjusted net income. Total DSO was 82 days compared to 83 days in the same quarter last year. We continue to be pleased with our total DSO performance in the low 80s.

Turning now to guidance. Starting with fiscal 2017, revenue growth will now be at least 24% and we expect constant currency growth will continue to be at least 23%. For the full year, we now expect the impact of foreign exchange would be a positive 1%. We expect GAAP income from operations will continue to be in the range of 12% to 13% and non-GAAP income from operations will continue to be in the range of 16% to 17%. We expect our GAAP effective tax rate will continue to be approximately 16% and our non-GAAP effective tax rate will now be approximately 21%. For the full year earnings per share, we now expect GAAP diluted EPS to be at least $2.68 and non-GAAP EPS will now be at least $3.41, substantially driven by stronger revenue performance in fiscal 2017. We now expect weighted average share count of $54.9 million fully diluted shares outstanding. For Q4, revenues will be at least $395 million for the fourth quarter, reflecting a growth rate of at least 26% after 3% currency tailwinds. We will expect constant currency growth will be at least 23%. For the fourth quarter, we expect GAAP income from operations to be in the range of 13% to 14% and non-GAAP income from operations to be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate will be approximately 17% and our non-GAAP effective tax rate would be approximately 20%. Earnings per share, we expect GAAP diluted EPS will be at least $0.78 and non-GAAP EPS to be at least $0.96 for the quarter.

We expect a weighted average share count of 55.8 million fully diluted shares outstanding. 2 key assumptions with support our GAAP-to-non-GAAP measurements in the fourth quarter. Stock compensation expense is now expected to be approximately $11.4 million. Amortization of purchased intangibles is now expected to be approximately $1.8 million. Foreign exchange losses are now expected to be approximately $1.5 million. Tax effective non-GAAP adjustment is now expected to be approximately $2 million. Lastly, with recent adoption of ASU 2016-09 as a result of movement in our stock price, we continue to expect future volatility in our effective tax rate and GAAP EPS. In Q4, we expect excess tax benefit of approximately $2.3 million. Thank you, and now let me turn the call back to David.

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David Straube, [5]

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Thanks, Jason. (Operator Instructions) Operator, would you please provide instructions for those on the call?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Darrin Peller with Barclays.

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Darrin David Peller, Barclays PLC, Research Division - MD [2]

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Let me just start off with the talent -- ability to acquire talent for you guys. I mean it's obviously becoming a much more competitive space overall around digital and you've done well there. I just wanted to hear a little bit more about how -- what type of supply there is for talent? If it's changed in terms of the dynamics from a competitive standpoint? And then maybe just follow-up to that on pricing, it -- obviously the price you're paying for this talent probably is higher, if you can talk to a little bit about the pricing environment? If you could pass that through? Anything is changing on that front? Just a quick update there.

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [3]

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You probably remember that each time we answer this question our reply is pretty consistent. It's never was easy and it's not easy too right now and probably would be even more challenging in the future. So and with each kind of stage in our development and growth, we were finding it very hard to train people, hard to attract people and we put in a lot of effort to make sure that there is enough opportunities inside of EPAM for people to realize and stay here. So we just mentioned, for example, Software Engineering Conference and there a couple of components on talent and so on the engineering side and on creative side and how to make sure that this type of people can work together, which is create also a unique environment for them to stay. Basically, on engineering side, we are doing this for very, very long time so we put in very efficient program how to train people at the same time how to explain life from different and why opportunities is different here. But again, it is very challenging and it's just generally industry a huge challenge. And on more creative digital part of -- which is part of people we have to retain and attract, it's also a little bit changing from geographical point of view, it's more in client-facing locations, while it's still pretty significant and very competitive in our development centers as well. So there is no simple answer but we invest in heavily in recruitment, in training, in opportunity building across our platform.

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Darrin David Peller, Barclays PLC, Research Division - MD [4]

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To be clear, it seems fine this quarter but I just want to be sure I mean there's nothing that's changing around the ability for you to maintain both the split of the cost of that labor to pricing. In other words the margin implications on it, nothing's changed there. Is that fair? I just want to make sure going forward we model that correctly.

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [5]

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I think you touch on very right points and this is definitely challenged but again, the challenge for everybody when you engage in this for a long time as you can see during the last 6 quarters, we had some volatility in recruitment because of utilization and different type of impact but for example, in Q3, we had the largest number of new employees joining the company through different sources. So I think we don't have simple answer but we know how to kind of address the challenge.

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Operator [6]

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Our next question comes from the line of Ramsey El-Assal with Jefferies.

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Ramsey Clark El-Assal, Jefferies LLC, Research Division - Equity Analyst [7]

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I was wondering if you can give us kind of your latest thoughts on M&A. How active is your pipeline? Whether you're evaluating deals? What type of deals might be most interesting to you?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [8]

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Yes, I think you expect our usual answer here too. So we have a pipeline, we have deals in discussions right now. I don't think we can comment on specifics but in general, we are always looking how to improve our client-facing capabilities and how to extend specific capabilities from industry expertise to digital to engineering takes long time. Again, I don't think we would comment on specifics until it's happened.

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Ramsey Clark El-Assal, Jefferies LLC, Research Division - Equity Analyst [9]

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Okay. I have -- can you give us some idea about in terms of your kind of revenue growth algorithm, how much of your organic growth is from cross-selling or up-selling existing clients versus signing new logos? Which is the more important driver? Is it evenly split there?

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Jason Peterson, EPAM Systems, Inc. - CFO [10]

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I guess when we look at the growth. I think we're quite pleased with the fact that we're generating growth from I guess both pieces of that equation. So we're seeing growth in our top 20 customers once we've got sort of long-established relationships with growing at 15% a year in Q3 and actually if you net out UBS, it would be over 20%. And then in our other than top 20, I believe the growth rate is actually 37%. So what you're seeing is continued growth in customers that we have long-standing relationships with and then you're seeing quite robust growth from customers that we're adding in growth with those newer customers.

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Ramsey Clark El-Assal, Jefferies LLC, Research Division - Equity Analyst [11]

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Okay. Just to be clear, it's pretty even split between those 2 drivers?

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Jason Peterson, EPAM Systems, Inc. - CFO [12]

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I think that's fair.

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Operator [13]

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Our next question comes from the line of Anil Doradla with William Blair.

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Anil Kumar Doradla, William Blair & Company L.L.C., Research Division - Analyst [14]

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So Arkadiy, you rightly pointed out never seen so many engineers being hired in this one particular quarter. Was it from any particular geography? Was it focused for any particular client? Some -- any color on that.

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [15]

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No, it was -- (inaudible) it was equally spread across geographies and there is no any specific client which was driving us. So this is again, a reflection of diversification of our client base as well that you talked about.

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Anil Kumar Doradla, William Blair & Company L.L.C., Research Division - Analyst [16]

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And as a follow-up, Arkadiy, as we look into 2018, I know you guys are not giving in any formal guidance right now, but any kind of qualitative color on kind of the demand environment what you're seeing?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [17]

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(inaudible) we would like to be consistent. So all we can say is that we believe that we can continue growing over 20% organically. So and -- that's how we trying to design the future from clients to delivery capabilities.

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Operator [18]

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Our next question comes from the line of Ashwin Shirvaikar with Citigroup.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [19]

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Ark, questions on some of the solution development that you guys are doing with regards to working with clients on A.I. projects, IoT projects and so on so forth. I would imagine the demand for those kinds of projects is pretty high. And this is a topic again we've discussed before to some extent but anytime I look at the growth of A.I, it seems to be a company like yourself which has very strong software development capabilities might actually do well with having your own software-focused approach in a little part of your business. Can you provide us with the logic of how you're thinking on that? I know the bulk of your business is always services focused but there are parts that might be better suited for software.

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [20]

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So we -- I think we assured during the Investor Day as well as that we are really focusing on developing number of accelerators for our solutions. We're still are not going to -- not planning to go with product strategy -- for the product strategy but solution accelerators around specifics, including what you mentioned because it's becoming really interesting drivers when you -- clients and is becoming very important part for them to compete. And -- kind of solution accelerators around engineering productivity and we are also focusing right now on some specific solutions around talent management, talent growth because that's what we can apply to ourselves. In regards to how we see artificial intelligence and automation we partner with some of our clients as and with market leaders but again, we are considering how to put accelerators on top of this to be faster.

And Ashwin like in this category and this is typical, most of the products not necessarily mature today because it's all experimentation. Which are giving us additional advantage and that's why we need these accelerators because very often we need to cover for the lack in functionality or stability of this type of product and that's exactly where we think our competitive advantage is.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [21]

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Understood. As one other thing as we try to break down the elements of EPAM's growth which now began one more quarter of fairly robust growth here what I'm trying to think of is sort of same-store sales metric how you're increasingly penetrating existing clients? And how your salesforce is positioned to do that on an ongoing basis. Could you provide maybe sort of hunting versus farming type of a breakdown with regards to your sales force?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [22]

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So we getting new logos and we have the team, which is focusing exclusively on hunting. At the same time, our growth completely impossible result very good farming and this is what, historically, is the main driver of our growth and is still probably the most important part. So we mentioned that we have right now 200 clients with $2 million plus revenue which is great huge opportunity for continue this lend and extend approach. For both business development in both the segments, I think consultative approach is becoming much more important and we talked about our vision to build relatively efficient consulting communication and (inaudible) centers kind of to grow and do this in very good orchestration. So I think that's kind of like very high-level leverage possibly on this call.

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Jason Peterson, EPAM Systems, Inc. - CFO [23]

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As you know we are certainly seeing an acceleration in the revenues that we're generating from our new customers and so as Ark indicated, we continue to see quite a bit of revenue growth from farming but the hunting is increasingly generating growth as well.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [24]

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Got it. Can I squeeze in one more question just a clarification on the tax rate...

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [25]

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Ashwin even here I would call it on top of what Jason mentioned, our client still a large referral which we were out of this because that's reputational type of extension to new logos and that's what we would like to make sure that we are kind of keeping out because I think our delivery reputations should be main drivers for new sales.

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Jason Peterson, EPAM Systems, Inc. - CFO [26]

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You can squeeze in your question.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [27]

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Yes. So the tax rate question that I had was if the clarification on the lower tax rate entirely due to -- it's not mix on anything, it's entirely due to one factor, which is stock-based compensation that will change this and why should that not be your go-forward assumption not just for one quarter but going forward?

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Jason Peterson, EPAM Systems, Inc. - CFO [28]

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Yes. If you look at the GAAP tax rate, that clearly is in there. If you look at the non-GAAP tax rate, obviously, that's not part of that. I would say that in terms of the -- somewhat of a decline we've seen in the tax rate that is a little bit due to the greater revenue profits that we're producing in offshore centers as we sort of driven the headcount increase that Arkadiy talked about and the higher utilization. And so I think in the second half of this year, you've seen a somewhat greater percentage of our revenue profits come from those locations where the tax rates the generally are lower. I do think next year, what you'll see is maybe a little bit of our return back as we pursue our strategy of greater sort of client pacing resources and delivery teams.

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Operator [29]

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Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch.

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Amit Singh, Jefferies LLC, Research Division - Former Equity Analyst [30]

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This is Amit Singh for Jason. Just a quick question on your constant currency revenue growth as we look at it seems like it's growing around 2x your sort of client-serving headcount in third quarter and it was similar in second quarter. Just trying to understand the drivers here and is that sustainable?

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Jason Peterson, EPAM Systems, Inc. - CFO [31]

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Yes, so I'd say we have a couple of factors when I think about the growth. So you've got one which is the growth in the headcount and so we had a very robust addition of headcount in Q3, which included both talent acquisition so talent from outside the market and then also our resource development capability, which is to take younger recent university graduates and sort of train and develop them and to bring them into our development organizations as well. So you've got the 2 pieces of let's call that headcount or resource addition. The other piece is that you have is the utilization improvement and the combination of those 2 have had helped drive revenue growth. But as I think we have discussed we have a very strong demand across all of our geographies across our pretty much all of our industry verticals and then both from new and existing customers and we feel that we've very much got a series of engines in place to continue to add the headcount that we need to grow revenue in 2018.

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Amit Singh, Jefferies LLC, Research Division - Former Equity Analyst [32]

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All right, perfect. And then just quickly I mean, if I look at your full-year guidance, adjusted operating margin guidance, it seems like you would probably need some ramp-up in your and adjusted operating margin in fourth quarter to get to around the middle of that guidance range, so just your confidence level in that. I know historically, I mean last quarter the fourth quarter adjusted margin was slightly below third quarter but in the prior year, they've been higher. So just trying to understand how the dynamics play out this year?

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Jason Peterson, EPAM Systems, Inc. - CFO [33]

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There were some challenges last year that were specific to a single customer maybe -- pretty much a single customer. This year, I think we would see a more traditional pattern and historically, what we have seen is an improvement in utilization as we go from Q3 to Q4. And so again, that's an historic pattern that you see as you come out of the summer quarter, which has higher vacations and as a result, lower utilization. And so higher utilization, historically, would produce both higher revenue and higher profitability.

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Operator [34]

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Our next question come from the line of Joseph Foresi with Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [35]

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Can you talk about growth in Europe and its drivers and maybe give us an update on UBS?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [36]

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I think update on UBS is pretty straightforward. It's stabilize, it's a little bit growing but in general, it's not important so much that overall it should be closer to 10% for several quarters and thereof. So in general, demand coming from traditional sectors, it's still coming and you see it and we provided numbers outside of UBS in part from Financial Services and from retail from media. So practically pretty equally distributed across segments.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [37]

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Got it. And then the second question, can you talk about a little bit about the pipeline. Are you working on any large deals? The reason why I ask is usually headcount additions like this imply that there's some demand out there that needs to be addressed? Or is it more balanced?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [38]

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It is pretty balanced and don't try to recruit too deeply in this situation just remember that we have at some point very low utilization last year just 12 months ago and then we have to utilize people who slow down and hiring can for several quarters utilizing the people very well in branch and now we're just getting back to normal talent acquisition processes and clearly, the biggest size 12 months ago and this is just natural reflections.

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Jason Peterson, EPAM Systems, Inc. - CFO [39]

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And demand is very broad-based across our large number of customers and industry segments.

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Operator [40]

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Our next question comes from the line of Moshe Katri with Wedbush Securities.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD and Senior Equity Research Analyst [41]

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Was there any sort of pricing tailwind during the quarter? And then what are you embedding in terms of your guidance for pricing? And then going back to Darrin's question earlier in terms of recruiting, is there any change in terms of wage inflation assumptions by region? Or by some of the major regions in your numbers?

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Jason Peterson, EPAM Systems, Inc. - CFO [42]

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When you say pricing tailwinds, are you referring to foreign exchange or something else?

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Moshe Katri, Wedbush Securities Inc., Research Division - MD and Senior Equity Research Analyst [43]

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I am talking some of the bill rate increases that we're embedding in our models.

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Jason Peterson, EPAM Systems, Inc. - CFO [44]

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I think what we continue to see is sort of the stable pricing and as I think we've talked about in the past, we do have brave customers who we are getting annual price increases, but again the pricing environment is stable. Back to the question around the wage inflation as Ark said, it's a competitive market. But there's a number of levers to maintain gross margin that includes utilization, that includes pyramid and so yes, I think we're generally comfortable.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD and Senior Equity Research Analyst [45]

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So the wage inflation is still kind of roughly somewhere in the mid-single digits, is that still the right number to use? On a blended basis?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [46]

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Mid-single-digits -- I think it's a.

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Jason Peterson, EPAM Systems, Inc. - CFO [47]

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Yes they are varied by geography I think we're seeing a slight increase in wage inflation to be fair but at the same time, what I'm trying to communicate early is we do have the ability to sort of mitigate that through adjustments and pyramids to made adjustments and where and how we deliver.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD and Senior Equity Research Analyst [48]

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And then bill rate increases is still also kind of somewhere in the low-single digits?

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Jason Peterson, EPAM Systems, Inc. - CFO [49]

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Yes, it's sort of consistent with what we talked about in the past. If you're looking to sort of updated the model yes we keep the assumptions the same as what we've communicated in prior quarters.

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Operator [50]

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Our next question comes from the line of Arvind Ramnani with Pacific Crest Securities.

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Arvind Anil Ramnani, Pacific Crest Securities, Inc., Research Division - Senior Research Analyst, Technology-Enabled Business Services [51]

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I just wanted to get your view on the overall environment and if you could contrast it to last year. Last year we had a bunch of uncertainties around directions and UBS and given that the environment is much better, how should we start thinking about kind of -- as we enter into next year, not looking for guidance just trying to get a sense of what your view of the environment is?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [52]

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You see with all respect to elections, I think the last year the main impact was still from UBS for us and results with our kind of market penetration. I think if you take UBS out, now we see that it was pretty specific situation to this specific client. I think it's pretty consistent. The demand for -- this -- again overused, but there is reason why term like digital transformation is very strong and it's driving a lot of new client engagements today. And with relation to this a lot of vacant (inaudible) in utilization activities. So I don't see big difference with exceptions that Q3 of last year was really one specific client.

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Operator [53]

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Our next question comes from the line of Steve Milunovich with UBS.

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Steven Mark Milunovich, UBS Investment Bank, Research Division - MD and IT Hardware and EMS Analyst [54]

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I just wonder how you're thinking about OpEx going forward. You've been hiring consultants, so in terms of SG&A investments, do you see any lumpiness or surprises there? If you look out a year, what do you think would be more at the high or low end of this 16% to 18% range?

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Jason Peterson, EPAM Systems, Inc. - CFO [55]

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Yes, I don't think we're ready to guide yet on where we're going to be in the 16% to 18% range over the coming year. I think we need a little bit more time here to think about that here in Q4. From your question on SG&A, we are making investments in our consulting capability to advance our ability to sort of deliver and to work and deliver solutions to our customers but it's not going to show up as a significant SG&A spend and then the other thing is that the portion of this resources will be billable and so if you go to the P&L, say they'll show up in core and they'll generate revenues that will offset their costs. And so I don't think you should expect a material increase in SG&A coming from some of those shifts.

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Steven Mark Milunovich, UBS Investment Bank, Research Division - MD and IT Hardware and EMS Analyst [56]

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Okay. And on the competitive front, the Indians are always trying to move up toward your capabilities, do you see any excess there and is your price premium relative to the Indians changed at all?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [57]

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It's very difficult to comment on the price comparisons because that's usually not open information. So everybody trying to build these digital capabilities and to -- you see in our acquisitions there's global service providers and companies like Accenture do on a more and more regular basis. So at the same time, I think market's still growing faster than capabilities and there is big demand and I don't think it's a very visible that something changing on the market. I mean there are good opportunities the main challenge is still to have right capabilities and right balance of the capabilities for this type of deals.

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Jason Peterson, EPAM Systems, Inc. - CFO [58]

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Just so I just might add that when you look at our growth in certain segments where obviously there is a high digital component we grew 42% year-over-year. So I think that speaks to the strength of our capabilities and the work that we're doing for our customers.

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Operator [59]

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(Operator Instructions) Our next question comes from the line of Vladimir Bespalov with VTB Capital.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [60]

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I have a follow-up question on UBS. I made some calculations and it looks like in the last quarter, these accounts started to grow sequentially after like several years of pretty flattish performance. If that's the case and can we speak about the turnaround with this account and in general like with the overall situation of the Financial Services et cetera, going pretty good but do you see any improvement in the industry as a whole?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [61]

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Vladimir, first of all, UBS was a have been exactly 1 year ago so before, that it was pretty strongly growing account for us. So -- but all we can comment that it's much more stable, we can predict better like this level of stability because, if you remember, our comments before we were always saying like let's take a look at the next quarter. So -- and I would kind of answer this type of comment right now. So general stability you're asking about general stability of financial industry, again, for us its stable, for us it's growing. And again UBS part was an exception. Financial Services with exception of UBS grew 27% and that was practically through during the last periods as well.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [62]

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Thank you and maybe you can provide some comments on Life Sciences & Healthcare as well because there was a pretty good acceleration of growth year-on-year after (inaudible) like previous quarters?

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [63]

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You see, for us, it's very difficult to kind of single out one vertical against another because as what we're trying to explain, majority of our services are in new development. We don't have a lot of legacy support and maintenance activities. And practically all sectors on which we focus in its high growth sectors for us for the type of engagement. And Life Sciences is a good example of this as well.

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Operator [64]

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Our next question come from the line of Georgios Kertsos with Berenberg.

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Georgios Kertsos, Berenberg, Research Division - Analyst [65]

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Thinking of growth, have you seen in the last this last quarter or based on the visibility that you have as of now. Do you expect to see any sort of divergence between volume and pricing in any of your sectors are geographies? Anything that you can sort of comfort and recall out there?

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Jason Peterson, EPAM Systems, Inc. - CFO [66]

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So -- yes so in the near term, I'm not sure we see divergent between volume and price. I think longer term, we've talked about the fact that we will likely see more of our work come out of our customer-facing geographies and so for the midterm to longer term what you could see is a divergent between volume and price just because the onsite or customer facing geographies would have higher rates than the offshore geographies.

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Jason Peterson, EPAM Systems, Inc. - CFO [67]

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Just as a reminder, we are a T&M business 90% -- slight over 90% of our revenues come from T&M and so you don't see significant changes based on things that could be happening with the large fixed engagement again, we are substantially sort of a T&M.

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Operator [68]

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Our next question is a follow-up from Vladimir Bespalov with VTB Capital.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [69]

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I would like to talk about with the cash which you had on the balance sheet. It keeps growing and growing you have answered this question quite a number of times in this call but I mean you have much more than you can start on exhibition probably but what is your longer-term strategy for using cash.

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Jason Peterson, EPAM Systems, Inc. - CFO [70]

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As we are well over $500 million in cash, we had very strong cash production in Q3 as you are aware. A 75% of that cash is offshore and so what we feel this time is the cash we have in place very much is there to support our acquisition strategy and our growth strategy. And we do have discussions around what we might do longer term but I wouldn't comment on that at this time and instead, we just continue to focus on, I guess, the question that was asked by at Oracle while back, which is about our acquisition strategy and we continue to be active.

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Operator [71]

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Our next question comes from Avishai Kantor with Cowen and Company.

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Avishai Kantor, Cowen and Company, LLC, Research Division - VP [72]

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Can market share or gain at large existing or relatively new clients explain the nice delta between headcount and revenue growth in recent quarters?

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Jason Peterson, EPAM Systems, Inc. - CFO [73]

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I mean we're certainly seeing that clearly ongoing growth in our existing customers. As I think we have talked about 15% excluding UBS for our top 20 customers and over 20% if you exclude UBS. I think probably it's still a combination of things, which probably is more headcount growth and utilization, as well as obviously, expanded revenue across the host of clients including our new customers.

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Operator [74]

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There are no further questions at this time. I would like to turn the call back over to Arkadiy Dobkin for closing remarks.

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Arkadiy Dobkin, EPAM Systems, Inc. - Co-Founder, Chairman, CEO & President [75]

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Thank you. We are clearly pleased with our results in Q3 and kind of excited about how end to year into our (inaudible) the right now so looking forward to update you in 3 months what really would happen. See you here in 3 months. Thank you very much.

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Operator [76]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.