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EPAM Systems Inc (EPAM) Q2 2019 Earnings Call Transcript

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EPAM Systems Inc (NYSE: EPAM)
Q2 2019 Earnings Call
Aug 8, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the EPAM Systems Second Quarter 2019 Earnings Call. [Operator Instructions].

At this time I'll turn the conference over to Mr. David Straube, Head of Investor Relations.You may begin.

David Straube -- Head of Investor Relations

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 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 measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the Investors section of our website.

With that said, I'll now turn the call over to Ark.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

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 approximately 24% year-over-year growth or 25% in constant currency terms. Additionally, we delivered a strong non-GAAP earnings per share of $1.28, which represents approximately 27% growth from Q2 of 2018. Our growth during the first half 2019 reflects our position in the markets we serve, which continue to transform with extremely fast pace. Disruption is occurring across every industry driven by the impact of new technologies from one side and very dynamic changes in the competitive landscape led by digitally native companies operate in a different speed of levels from another.

We do believe that this trends have and will continue to create opportunities for EPAM, and we feel we are well positioned to continue to serve our clients and offer solutions to solve, the increasingly complex business challenges.

All that as long as we are able to challenge ourselves to adapt our offerings in our own organization to new market needs. So our journey to drive our own relevancy in the market is nonstop, as we push across EPAM to challenge and change the ways in which we operate and serve clients.

That was all aspects of our operations, including our talent acquisition strategy, expansions in new geographies, and additions to our offerings and capabilities. Everything is done to increase value by bringing our core project engineering digital engagement and consulting services to the next level.

Our recent acquisition of Compententum, which we announced in July is a good illustration of our direction. While it is a small company in terms of revenue and then play base, Compententum allow us to extend EPAM education and learning capabilities as part of our digital proposition across boards. Our clients' portfolios and our internal needs.

We believe professional development in the digital transformation space is becoming just as important as a strategy, which guides, as a platforms that follow the enterprise. New organization should become highly adaptive different nature, and will require cross-functional teams who master each step for the digital product life cycle. We have an enterprisewide digital first mindset and the real hunger for constant skills and capabilities upgrades.

This approach is critical for successful transformative efforts and another example of how EPAM continues to evolve itself, will help our clients across different parts of the organization to evolve too. Before I hand the call over to Jason, I would like to highlight a few recognitions EPAM had received in the first half of 2019, which are good illustrations of what types of changes are happening to us.

As we said, many times in the past, EPAM historically has differentiated itself by strong convenient practices. We do believe it's still a critical area of focus for us to be able to keep it this way, while still growing into other [Indecipherable]. In at age, 2019 annual Agency Report, EPAM was recognized among the top 50 largest agencies in United States.

Out from our position of [Indecipherable] just several years ago. In the UK, we already among the top 10 for some time. Plus Forrester list EPAM among the top largest digital experience agencies, within our demonstrated market presence and capabilities across customer, marketing cut -- corners and product service proceedings.

Agencies also have a different definition in that context. So, let's take [Indecipherable] to reference Forrester should have over 10,000 relevant key skilled employees and be able to demonstrate the delivery of experience architectures that combined quickie software and custom-core track loads of data in content, hooks to corners and transcational systems, and in size, in all days and to integrate all these part and Infuse them with creative sort and execution to expose, differentiate, and alleviate brand values. All in a short to analyze, credit design, build and manage your digital customer experience in the context of your digital business transformation.

And on another side of the spectrum, impact organized by the Forrester is one of the more significant application with their Modernization and Immigration service providers. Capable of addressing the diverse set of needs in both legacy and cloud native architectures. We think it's important to point out that of all those large companies listed, we are usually the smallest and also the fastest growing player because of our much higher proportion of those in demand services offering. I also would like to remind everyone about two key points we talked about during previous calls, which remains very important for us to support our growth story.

We continue to build our consulting offerings to blend together industry experience and technology capabilities and to enable our global engineering services to deliver smarter and then turn to bring real value to our client.

And we continue investing in our internal digital platforms to make our operations not only agile, but also truly adaptive, allowing us to better apply the talents we have as well to attract new talent and to grow in retain it smartly and that is also a continuous effort.

So, to summarize, despite some of the macro level uncertainties which we talked about it before and it seems like they're here to stay with us for and in defined time. We delivered another quarter of consistent, high quality results which underscores our ability to execute and grow in the market, this continues to demand high end expertise and early change in capabilities.

With that said, I will now hand the call over to Jason to give more details on our second quarter results. Jason?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

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 $551.6 million, a year-over-year growth of 23.8% on a reported basis in 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, balanced by slower growth in a few specific industries.

Looking at Q2 revenue across our industry verticals, financial services is our largest vertical, delivered 16.9% year-over-year growth. We continue to see increasing demand for offerings and asset management and payment processing.

In addition, the insurance, which currently accounts for a modest share revenues represents a rapidly growing part of our financial services portfolio.

Travel and consumer grew 6% reported an 8.2% in constant currency terms, growth in Q2 reflected the continued ramp down a projects at a few consumer clients in Europe, along with lower growth in North America.

Software, and hi-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 in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 60.7% of our Q2 revenues grew 26.6% year-over-year or 26.9% in constant currency. Europe representing 32.2% of our Q2 revenues grew 18.4% year-over-year or 21.1% in constant currency. CIS representing 4.5% of our Q2 revenues grew 29.3% or 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 in our top 20 clients was 14.8% and growth outside our top 20 clients was approximately 31% compared to the same quarter last year. Our revenue results from the quarter are 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 SG&A was 20.3% of revenue compared to 20.9% in Q2 of last year and non-GAAP SG&A came in at 19.5% of revenue compared to 18.9% in the same period last year.

Our SG&A spend in 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 or 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 a 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 $1.02 which reflects the lower-than-expected tax benefit in the quarter. Non-GAAP EPS was $1.28, reflecting a 26.7% increase over the same quarter of 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 payments related to our annual variable compensation program in the ongoing support of our organic 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 DSO at these levels. Moving onto a few operational metrics, we ended the quarter with over 29,400 delivery professionals, a 21% increase year-over-year and a net addition of more than 1,500 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 33,100 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 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-GAAP effective tax rate will continue to be approximately 23%. Our earnings per share, we now expect GAAP diluted EPS to 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 FY'19 revenues will be at least $579 million for the third quarter, producing a growth rate of at least 23% reported and 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 $1.14 for the quarter and non-GAAP EPS will be at least $1.32 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 million for each of the remaining quarters. The impact of foreign exchange is expected to be approximately $2 million loss for the second half with a $1 million loss in each of the remaining quarters. The tax effective 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 EPAM well for continued success in the second half of the fiscal year.

With that, let's open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions]. Thank you. Our first question comes from the line of Maggie Nolan with William Blair. Please shoot your question.

Maggie Nolan -- William Blair -- Analyst

Good morning. I wanted to talk about the digital transformation skills that you touched on Arkadiy. 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 skill sets are truly consider digital or may be asking in a different way, what's more and focus now then would have perhaps been roughly 3 or so years ago?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Hi, Maggie. Yeah, it is actually very difficult questions, because you noticed we're not sharing the report and what is our digital revenue versus non digital, because it's very difficult classification. And I can refer back to first, profile which saying, OK, well, at least one category where we have more than 10,000 employees versus even if it's just 10,000 it's already at least 30% of our people, we are so -- some as a companies on released which probably much to it, but we think that the majority of our work actually in this category, because our core, while our legacy product Software Product Engineering, which is most of the, what I'm reading from other classifications -- attribute this type of services to digital as well, inside of EPAM we definitely focusing on engagement platform and analytics platform as a very core digital, but modernization for example or a lot of other activities like [Indecipherable] which is like, sometimes could be put in different categories, could be considered as that . Again, in short, I would say that we consider is a digital, it's majority of what we do today.

And similar on training, so majority of other people trained on this and it was another key point for what we have assured, and we very key on education, and we build in pretty strong educational status, not only focused internally, but also help in our clients to go through the same level of transformation.

And as I said, might be a little bit spicy answer, but it is a difficult question.

Unidentified Participant

Okay. Thank you. And then, you've talked about kind of 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 acquisition engine going forward. And then does the current M&A funnel support that. And then also, Jason, just what was the organic growth in the quarter, and now the expected organic contribution for the full year with the recent acquisition that you did. Thank you.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So, I assume from consistency points, the only consistency is there that we constantly looking for the right fit, and to looking how to improve our capabilities. There is no any kind of plans to do two acquisitions per quarter or four acquisitions like the quarter the next year, that's not part of with [Indecipherable] can evolve, but we are constantly looking for opportunities .

In terms of the -- how it's impacting our growth. I think it's very minimal because we are looking for small competency led companies, not kind of roll up approach, which not excluding that we might hit some big ones as well in the future, but so far that was a 4%. Jason can comment on the numbers.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah. Now what Ark said exceptionally correct. So, when we guided at the beginning of the year, we had included an assumption that we get, up to or approximately 1% of revenue from inorganic contribution that has not changed at all, these are relatively modest sized acquisitions.

I were to just answer the question on Q2, so the reported growth rate was 23.8%, if you adjust for foreign exchange, we had about a 1.3% impacts of 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 of 2019.

Unidentified Participant

All right, thank you, both.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Thank you.

Operator

The next question is from the line of Ashwin Shirvaikar with Citigroup. Please proceed with your question.

Ashwin Shirvaikar -- Citi Groups

Thank you. Hi Ark. Hi Jason. Very good quarter here, congratulations. The question I have is, you spent obviously a lot of time and effort, investments in creating a much better diversified business then it used to be across many verticals. As we go past that phase and it becomes more about continuing to the scale what you have built. Should we expect some operating leverage to creep into the financial model in the next year or two?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah. So here's how I would think about the business and I think I'll talk more about what's happening this year, and then maybe we will have a -- some maybe big discussion around next year. We're very focused on continue 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 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 model had probably show that we're going to operate in the upper half of that range in 2019. And we're going to continue to focus on the 16% to 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 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.

Ashwin Shirvaikar -- Citi Groups

Understood. And then, the travel vertical, can you remind us when do you wind down of the European clients ends, in another sort of numbers question unrelated is, can you remind us if 3Q and 4Q have any ups and downs as it relates to billing days.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah, so I didn't hear the first part of the question.

Ashwin Shirvaikar -- Citi Groups

The first part of the question was with regards to the travel vertical, you're facing the wind down of some European clients. Could you remind when that ends?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah, I'm not sure I understood the wind down. I know that we've seen some degree of let's say, softness which are -- with the European and sort of consumer. So, I don't know, it's 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 a lower than -- a lower right and 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 I'm sure you followed 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 a quite high level of profitability here in the first half so, I don't expect a big uptick in gross margin. Our profitability in the second half what I do -- what you would normally see that was is -- some positives in the gross margin because of the additional build days in Q3.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So, basically Ashwin, in short all this volatility more in line usual volatility for us for different verticals in the past. And yes, there are some softness and specifically on the UK, retailers. But again, even that we can attribute to more regular stops and some [Indecipherable].

Ashwin Shirvaikar -- Citi Groups

Okay. Regular ups and downs. Okay. Got it. understood. Thank you guys.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Sure.

Operator

Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed with your questions.

Jason Kupferberg

Thanks. Good morning guys. I actually just wanted to follow up on Ashwin's questions, just to clarify on travel and consumer. Are you expecting any reacceleration in the second half. I mean, I think your comps get easier, but obviously there is maybe some lingering macro headwinds. 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 move up from the 8% constant currency there, or should we assume kind of stable, and then maybe just while you're on the topic of verticals any incremental commentary on financial services had a nice rebound and reacceleration in the quarter, is that sustainable in the back half?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah. So, I think kind of echo what Ark said, in the last comment is that the business has got, it's broadly diversified both in terms of industry verticals in terms of customers, both new and longer term EPAM customers. And so in any given quarter, you're going to see one vertical might drive more of the growth than another. A couple of years ago, we were talking about single-digit growth in healthcare and life sciences in year, and in this year, you've been over 50% from a growth rate standpoint.

Last quarter, as you point out, financial services with single digit in this quarter, you were back firmly in a -- high-teens growth rate. And so, we continue to see strong demand overall, if I were to talk about travel and consumer, 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 mixed result in that portfolio.

From a financial services standpoint. We're seeing very strong growth in cards and payment processing, in asset management and insurance is still small for us, but it's growing quite rapidly. And so, I'm hopeful around financial services, and overall I think we feel good about the demand in the market.

Jason Kupferberg

Okay. How does the composition of your top 10 client list look today versus say 12 months to 18 months ago. And would you expect material changes in that list, let's say over the next 12 months to 18 months as some newer clients continue to scale their work with EPAM, because obviously the growth in the non-top 20 continues to be very strong.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

So, we've seen a little bit of movement here, and maybe the last couple of quarters is -- as companies, maybe 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 in the two customers. And so what used to be 10 customers in 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 over time. But again, I would say a little bit of movement but reasonably consistent.

Jason Kupferberg

Okay. Thank you.

Operator

The next question comes from the line of Bryan Bergin with Cowen. Please proceed with your question.

Bryan C. Bergin -- Cowen and Company -- Analyst

Hi, good morning. Thank you. Wanted to ask on the acquisition companion. Talk about this does for you internally as far as the strategy goes. 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 is, does this signal a move toward more of that as we go forward?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Yeah. any educational capabilities making some impact internally as well, but we in invested in this area constantly, so we don't think it would be any specific SG&A savings and especially the company is pretty small. So it's adding some capabilities which we would be, would have to build ourselves, but again it's pretty, pretty small . So from generally software platforms with more conservatism as accelerators because in our business, we do believe the differentiation coming from right integration customer extension and build up. So it, we're not really considering that it will be very strong separate line of business is license revenue subscription-revenue.

We have this today and it's pretty small, and we do think that it would be very modest percentage of our work, but at the same time is giving us a good jump-start in many large implementations, and that's a goal how to build the right portfolio of accelerators to start faster, but then because of technology changing how to upgrade the accelerators very fast as well, instead of being stuck with some more standard software which would become a legacy very, very quickly.

Bryan C. Bergin -- Cowen and Company -- Analyst

Okay, that's helpful. And then I want to ask on the healthcare. Vertical is obviously very strong, can you comment on the mix of the work that is in that vertical currently, and then you believe you're taking share in that market?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So we planning this for some time. Initially it was mostly around R&D life science. Now, I think, we explained it to commercial life science component, and we explained to healthcare insurance component to dwell. So basically if 4, 5 years ago, it was practically one kind of concentration point for growth right now, it's at least 3. And we're also seeing more consulting business in the healthcare space as well. And I think there is good compliment in between them because coming so integral part of general commercial life science, and also there are lot of overlap these healthcare providers from both sides from payers and providers, where it's all becoming much more real-time and understand the bio-informatics, and specific data sales. So it's very important. So I think it's helping us to grow.

Bryan C. Bergin -- Cowen and Company -- Analyst

Okay, great, thanks guys.

Operator

The next question is from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.

Joseph Dean Foresi -- Cantor Fitzgerald & Co -- Analyst

Hi, your growth seems to be fairly well balanced. And I think historically within IT services. I mean, well balanced across all your verticals. I think historically in IT services, that's 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 think your acceleration in those verticals has been above what we've seen sort of historically in other areas and from other companies?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

I think it's -- that goes to our history as well and we repeated this many times. So we started as a product in rendering extension to our clients like a lot of top technology companies where clients initially and 10 years ago, it was a major source of our revenue. And through this we also -- we started to understand the industries, but specifically from what people would call today digital transformation point of view companies were adopting new software platforms and they need to be extended very quickly and with a good quality, and we were building on the skills and when we came into new verticals today we clearly believe to understand and how to build right products, but we also during the last 6, 7 years, and that's what we have pointed out today, build pretty strong digital strategy consultative components, and integrating this very closely with our engineering services kind of to, not just to advise but to deliver on our advise, well.

Again with the ability to put it in production with right scalability and performance component. And I think this engineering heritage, which we now blend in with consolidated approach, probably helping us to be a little bit more consistence.

Joseph Dean Foresi -- Cantor Fitzgerald & Co -- Analyst

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 you have some of the levers that you have in place that could drive them up or down. How should we be thinking about any margin opportunity over the long run? Thanks.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

I think we're 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. And here you see us in these quarters running near the top or sometimes just over that range, and I think that's probably to think about us able to comfortably sort of run in the 16% to 17% range and there will be volatility by quarter, based in part on utilization and bill days 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 really what we're looking to drive and in part because we are going to continue making the investments that our colleagues have been talking about to continue to drive the greater than 20% annual revenue growth.

Joseph Dean Foresi -- Cantor Fitzgerald & Co -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Andrew Bauch with Wolfe Research. Please proceed with your question.

Andrew Bauch -- Wolfe Research

Hey, good morning guys. I 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 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?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So I think and this is probably very much in line with what we stated before, there is some certain level of volatility across different verticals and even geographies as well, because we working also with global accounts and sometimes this global accounts growing faster in one region versus another region.

So it's really extremely difficult for us to predict volatility in specific segment, while in general, like we are giving the guidance like on the total numbers. So I think, I think it's getting -- getting better than the last quarter. We clearly, but it's still very unclear what would be in Q4 for example. In the results of Brexit which nobody knows what, how companies will react. What we more comfortable to 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 deliver for the kind of aggregated numbers.

Andrew Bauch -- Wolfe Research

Got it, thanks. And then I guess my follow up, digging into the gross margin numbers. There seem to be pretty consistent year, and you guys have called out before the strategy to implement more near shoring capabilities, which from our perspective could eventually way on margin. But maybe, you guys could just update us on your strategy toward near shoring and how you kind of expect that way on the gross margin side?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So the strategy is still very early. We're going to improve our -- when you say near shore -- you mean?

Andrew Bauch -- Wolfe Research

Meaning make a North American more in market.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Okay. Because so near shoring, it's a little bit yeah, if we took in market presence and we definitely real expense there because with the complexity of the services which we delivering and we need like more local presence from expertise and dynamics of the engagements point of view and consultative point of view. So, we will be increasing. So how is going to impact gross margin again, it's, we need like to to wait and see exactly, because there are different series here, that is might be profitability in general, lower in the markets, at the same time we are seeing that it would be able to improve, increase the total value to the clients, we will be able to balance this as well. And we do believe that we would be able to do it.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah. And we're certainly 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, we clearly are focused on pricing and sort of maintaining our improving account profitability, given the opportunity.

Andrew Bauch -- Wolfe Research

Great, thanks guys, congrats on the quarter.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Thank you.

Operator

Thank you. Our next question is from the line of Moshe Katri with Wedbush. Please proceed with your question.

Moshe Katri

Hey, thanks, good morning. Good quarter. Two follow-up questions, and I guess they're all kind of related also to margin trends. Maybe we can talk 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. Thanks.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah, from a head growth standpoint. We've seen growth obviously in our traditional regions. We've also seen further growth in our India operations, from a wage inflation standpoint, I would say that it's a little changed from the past. Actually we've seen a decline in utilization as be in attrition year-over-year. So we feel quite good about that.

I don't know, Ark. You want to talk about new deals and pricing?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

I think it's, again -- it's very much in line with what we were seeing before. I don't think you and call anything -- that something very new extraordinary happening, so, it's our level at our size of the Company and our subset of the market which we focus and I think it's still pretty, pretty consistent.

Moshe Katri

Okay. And just a follow up.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Okay, and there are some more, again, we can repeat all this scary stories about Brexit and all of this, and yes, it's making some softness here and there , but as I mentioned before, we do believe that we would be able to navigated through refocusing, our focus across different geos and segments.

Moshe Katri

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. 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?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So in general market is pretty competitive and tough,so at the same time it is big as a subset of the market, which we focus on growth much faster than global IT market. So, I don't think my change from our standpoint in this clearly big guys focusing more on this, smaller guys more excited to see we progress for example. But again market is growing very fast and demand is there so, the challenge how to build right capabilities and how to upgrade our self kind of pretty dynamically, that's why when all these questions, what do you expect about future gross margin, can you look with the size to benefit from this, I'll answer like and since pretty trivial. So, we will have to reinvest to constantly kind of upgrade our self.

Moshe Katri

Understood, thanks.

Operator

The next question is from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question.

Vladimir Bespalov

Hello. Thank you for taking my question and congratulations on good results. I have a three specific one on your guidance. Now we can decompose your full year guidance into quarters and when I look for example at non-GAAP EPS guidance. I see a clear slow down somewhere it is 15% year-on-year growth in the third quarter and 10% year-on-year growth in the fourth quarter. And there is also pretty significant slowdown implied by your non-GAAP operating margins. So, maybe you could provide some color what is behind this, the high base effect, your reinvestments into developing the business. And I also see that the hiring and have accelerated maybe you are hiring more people and this also affects your margins. This is the first question.

The second question I have maybe you could you provide us some color, if you talk to your clients right now and probably shaping up the profile for growth for the next year, what are the key risks, what are the key concerns from your clients that you see right now. Thank you.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

So I'll take the second half profitability question. So, really no change from what we've been thinking about the second half since we began providing guidance in terms of overall levels of profitability, we've seen a little bit better profitability in the first half and we've -- for those of you we doing models and probably it's all of you. We're clearly expecting to operate in the top half of our 16% to 17% range. If you remember Q4 of 2018, we actually ran at 18.4% non-GAAP adjusted IFO, our adjusted IFO that was at a time when we actually we're over 80% from a utilization standpoint. So, it was some outsized demand that popped in the quarter and so, we do not expect to be running at 18.4% adjusted IFO in Q4. So probably that's what you see when you see the change in, let's say, growth rate of EPS. But again, we continue to expect that we'll run in the high end of that -- of our 16% to 17% range for the full year. And I feel quite good about profitability in the second half. And about next year and demand or risk there.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Yeah. From client concerns. I think they are very much in line with the industry concerns, so way to find the right capabilities and not just write capabilities but scalable ones, and scalability and change of skills profiles is and ability to put right teams together is one concern. The second concern actually to and this is again second concern between clients and vendors including EPAM and for us, it's very important, how to actually build toward should bring value versus just deliver engineering centers. And a lot of clients actually looking at us and asking us for sort of leadership components to bring into their equation to help them actually to find the right solutions, not just to build their excellence. And I think we have kind of this three million for us . This one I got more trivial historically repeatable scalability and capabilities as well.

Vladimir Bespalov

Thank you very much.

Operator

The next question is from the line of Arvind Ramnani with KeyBanc. Please proceed with your question.

Arvind Ramnani

Yeah, thanks for taking my question. I really wanted to ask about the recent acquisition of a Competentum, which certainly seems like a good strategic acquisition. How much of the value do you expect to extract based on using it internally for your own, own talent versus selling it to to clients.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So the main focus -- its improve our capabilities in educational in population segments. So, this guys have some competencies, which very complementary to what we have, and we hope that we will be able to penetrate this market much more aggressively than before. I think as we said, already good question in this area, but I guess that would really help, plus this Company has a content development capabilities and learning platform development capabilities which we potentially will enhance our internal offerings and internal here you can see it in the product sales internal for our employees and kind of internal, external for potential candidates of which we train externally to bring into the company as well. So that's should impact this as well, but again the primary goal was still go to market.

Arvind Ramnani

Great. And how does that -- how are you looking to kind of sell it, with -- will be sold as the distinct offering or will it be packaged with something else. And second part of the question is, how does, how does form actually generate its content. Is it all internally developed or are they kind of using external alternatives to develop the content?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So, I would, I would think bought it as a improving our competencies in educational and publishing space, because now we have added capabilities to go and build solutions quicker, because now we have extended the like, if you will, external expert in this field who build platform in this space and that's what we're going to refer to the clients. With content, there is some, again, think about it's more in the competency competencies sense.

Now we have people who will be able to orchestrate some internal efforts, but whether you build content you can utilize number of external capabilities as well through the special metrics. So we just would be able to orchestrate it better and more scalable environment.

Arvind Ramnani

Okay. And just last question on this is, did you also evaluate some external folks or some competitors such as Pluralsight or Skillsoft or was this mostly just, you really haven't looked at some of the other vendors?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

So, first of all, these guys not compete with the companies which you mentioned. This companies providing specifically engineering services when I'm talking about external focus, external focus and education in general around different areas. For example, one of offerings which we now have is around recent compliance. When you are talking about these companies which you mentioned then, we have our internal offerings to the market kind of comparable with them because we already train 1000 of people to create additional talent source for ourselves. And we were looking at them, and sometimes we utilizing -- we too utilizing external content as well, when you're talking about specifically software engineering classes and so on.

Arvind Ramnani

Great, thank you and good luck for remainder of the year.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Thank you.

Operator

Thank you. [Operator Instructions]. Our next question is coming from the line of David Grossman with Stifel. Please proceed with your questions.

David Grossman

Thank you. Good morning. Just a couple of very quick follow-ups here. Just on the utilization rate, I know you're running hot in the back half of last year. You're back down a couple of hundred bps, is this about where you are comfortable or are you looking to bring it down even further?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yes, I think you know where utilization is going to vary based on quarter to a certain extent. And so, again, when you've got a quarter with more vacations which is coming up, I think we've shown that we can kind of run around 77% to 78% pretty, pretty comfortably, there may be quarters and we're above that. As you'll remember that Q4 at 80% is a pretty hot number and probably takes a quarter where you get some unexpected demand. I'm not expecting that utilization would decline. And again I think probably this range and 77%, 78% generally, is probably a good way to think about the business.

David Grossman

All right, great, thanks for that. And then just on the headcount adds, just on a percentage basis. It just looks like over the last 12 months adding more in the Ukraine and Russia. Just, I don't know if there's anything to call out there or this is just the natural ebb and flow of just client demand and where there is available resources?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Yeah. So it's a good question. So we would have been growing in the CIS and Ukraine region. We also would be growing in India, where we're seeing good traction. And so this was a quarter where we didn't see so much of a shift toward in-market kind of talent, it was a more balanced kind of growth for us. And actually, 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 produce the supply that we need to drive the business and to meet the demands of the marketplace.

David Grossman

So, you're pretty satisfied with the current geographies no need to add anything soon, in terms of new supply center in the global -- ?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

I think you'll see us continue to evolve the business as Ark always talks about and that could include incremental geographies. But I don't think you'll see any substantial or let's say radical change any time in near future. So pretty consistent. We 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, though we're seeing good uptake of resources in those centers.

David Grossman

Great, thanks. And then, just lastly Ark, you made some comments about consulting, I think in your prepared remarks. I'm sorry I missed some of that. So is there, is it just the natural evolution of the business we're integrating consulting into the offering as opposed to running it as a separate business line or is there more to it than that?

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

No, it's consistent with what we said before. We build in this capabilities but we still mostly focus on how to bring integrated solution to our clients, not a separate -- not a kind of completely separate line of business. There are always some projects, which is focusing on specific area, but again the goal how to bring in the complete end to end story.

David Grossman

Okay, got it. That's it from me. Thank you.

Unidentified Speaker

Thank you.

Operator

Our next question is from Mayank Tandon with Needham & Company. Please proceed with your question.

Mayank Tandon -- Needham & Company -- Analyst

Thank you. Good morning and congrats on the results. Really 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 T&M side, is that just a trend we should look for as the work becomes maybe more, sorry, the shift toward fixed price as a work becomes more iterative with the 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 does the model stay pretty much put where you have it today?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Okay. Yeah. Good questions. So from the standpoint of, I guess, the shift toward onsite, as we continue to be increasingly relevant to clients. As we take responsibility for larger programs, as we have larger and more strategic engagements, I think that necessitates higher end market presence. And so I think you won't see a 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 think that probably that's positive for us in terms of the relationships we have with our clients. But maybe remains to be seen in terms of the overall impact on the P&L, but again it's a very gradual shift. So I wouldn't expect anything to sort of pop up in the next couple of quarters or anything. And it will be just kind of an ongoing march.

And then from a fixed fee versus T&M, most of the acquisitions that we've done have generally been companies that are more consultative in nature and most of their engagements are fixed fee, but they're generally very short-term projects. Right. So it's not a multi-year kind of fixed fee. It might be a project with 3 months or 6 months or maybe up to a year. And so a lot of what you've seen over the last maybe 6 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 T&M to fixed fee. But that's not a -- it's not a significant trend for us. So it's mostly driven by the inorganic.

Mayank Tandon -- Needham & Company -- Analyst

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?

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

I don't think there's any change into what we've talked about in the past. So 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, to be quite focused on account margin. So it's a focus of the entire company and certainly of the executive leadership team.

Mayank Tandon -- Needham & Company -- Analyst

Great. Thank you for taking my questions.

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Thank you.

Operator

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.

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Thank you everyone for joining us today. We are pretty pleased with Q2 results and we hope that we will continue doing this. And again, the challenge as we mentioned how to keep out in shape and challenge ourselves to run, to run fast. And thanks to all of our 30 plus thousand people around the globe to help with this. And talk to you next time. And as usual, David is here to help if any additional inquiries. Thank you.

Operator

[Operator Closing Remarks].

Duration: 61 minutes

Call participants:

David Straube -- Head of Investor Relations

Arkadiy Dobkin -- Co-Founder, Chairman, CEO & President

Jason Peterson -- Chief Financial Officer, SVP & Treasurer

Unidentified Speaker

Maggie Nolan -- William Blair -- Analyst

Unidentified Participant

Ashwin Shirvaikar -- Citi Groups

Jason Kupferberg

Bryan C. Bergin -- Cowen and Company -- Analyst

Joseph Dean Foresi -- Cantor Fitzgerald & Co -- Analyst

Andrew Bauch -- Wolfe Research

Moshe Katri

Vladimir Bespalov

Arvind Ramnani

David Grossman

Mayank Tandon -- Needham & Company -- Analyst







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