Epam Systems Inc

NYSE:EPAM

Good day, and welcome to the Fourth Quarter and Full Year 2024 EPAM Systems Earnings Conference Call. [Operator Instructions] Finally, I would like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Mike Rowshandel, Head of Investor Relations to begin the conference. Mike, over to you.

Good morning, everyone, and thank you for joining us today. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. By now, you should have received your copy of the earnings release for the company's fourth quarter and full year 2024 results. If you have not, a copy is available on epam.com in the Investor Relations section. .

With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to 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 the comparable GAAP measures and are available in our quarterly earnings materials located in the Investor Relations section of our website.

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

Thank you, Mike. Good morning, everyone. Thank you for joining us today. It's good to share that our fourth quarter results came in better than expected. It was another quarter of strong execution. Thanks to our core engineering differentiation and relevance of our advanced capabilities and service offerings across our new and existing client portfolios. Many of the encouraging themes we shared last quarter have carried through into this quarter. Before discussing our Q4 results and some thoughts on 2025, I would like to step back and reflect on the full year 2024, which was a year of uneven demand, improved stabilization and building some sequential momentum.

There are 3 key points I would like to highlight on our performance over the past year. Number one, we were successfully executing our global business strategy while simultaneously addressing many challenges we have accumulated during the last few years. We've done this both organically and through acquisitions. There is a continuous focus on becoming the more globally geo-balanced training company in the world for AI native digital business services.

The 2 most recent acquisitions, NEORIS and First Derivative, or FD, are good examples of how we are investing to accelerate our strategy. They allowed us to meaningfully expand our existing global client relationship and further penetrate new markets and talent geo-hubs. While still early, we see encouraging progress across several net new opportunities with more than a dozen joint pursuits that combine EPAM, NEORIS and FD capabilities together.

Number two, we are pleased to end the year with an underlying improvement on our stand-alone business, delivering better results than our expectations earlier in the year, and we had to adjust our outlook for the weaker-than-expected H1. And finally, number three, exiting 2024, we feel good about the sequential momentum we've built over the past 2 quarters and see encouraging signs as we look ahead into 2025.

As there is still plenty of caution and broad market sensitivity, we believe we see some fundamental improvements in the business, which gives us optimism that 2025 will be much more transformative and better year for us than 2024 was. Now turning to our Q4 results.

During Q4, we grew mid-single digits both year-over-year and sequentially. Notably, returning to organic revenue growth for the first time since Q1 of 2023. We continue to see improvements in client sentiments and engagements across all our verticals and geographies and particularly around our AI-related capabilities. Our performance in Q4 was driven by our ability to increase our clients' trust and reassure continuous superior quality execution in our key horizontal and vertical domains, while simultaneously offering more globally diversified [ target ].

On a stand-alone basis, excluding recent acquisitions, we saw 4 out of 6 verticals grew year-over-year with 5 out of 6 growing sequentially, reflecting strong momentum from last quarter. Key verticals to call out include life sciences and health care, software and hi-tech, financial Services and emerging. Across geographies, we see a similar story to last quarter with Americas and APAC leading growth year-over-year, with Europe continued to show [ organic situation ] revenue growth. Now turning to demand. We are encouraged to see a modestly more positive demand environment compared to 90 days ago. Sentiment continues to improve across our existing and newly acquired client portfolios. These clients rely on us for our core engineering DNA as well as our advanced GenAI capabilities.

In some cases, we are consolidating work from other suppliers as clients shift toward a more engineering led and scale programs. In our most recent conversations across the C-suite, the underlying tone and buying signals are higher than they were last year. With further accumulation of technical and data debt over the past 12 months, we are seeing accelerated take-up in more scale and transformational AI programs.

Based on the significant backlog of technical and data modernization, along with new AI-related demand, we believe that 2025 will be the year where we begin to see real GenAI first-mover advantages. While we are relatively optimistic about the midterm outlook, there is more encouraging client buying signals than 12 months back. We do still see multiple packets of caution driven by broad macro risks, policy specific uncertainty due to a very dynamic geopolitical environment and certain challenges in some of our clients and talent market.

Further, cost very much remains in focus and continues to be an important decision factor for many of our clients. So based on these uncertainties, in our current vantage point, we are balancing our optimism as clients continue to transition and modestly expand their discretionary spend. Moving into our global delivery approach, we demonstrated strong execution throughout the year. As we continue to diversify our global talent pools and bring in more optionality to our clients across all 4 of our major delivery hubs in Europe, India, Latin America and Western and Central Asia.

In Q4, we saw sequential improvements of net organic additions which was broader than just India and included some of our traditional European locations. Europe remains core to us as a top talent pool, and we believe we will continue to grow in the region as discretionary spend returns to higher levels. Ukraine is an interesting example to share given the geopolitical environment. Our production headcount remained mostly in line year-over-year.

In Q4, we saw sequential net additions for the first time since the start of the Russian invasion. We believe this is a positive signal of our clients' comfort level and desire to return to some of our traditional locations. In India, we hit an important milestone for the company as it now represents our largest single country delivery location and second as a region. In just 10 years, EPAM has achieved 10x growth in India with now over 10,000 employees. This speaks to our ability to adapt to changing market conditions and our commitment to invest in a globally diverse and talent workforce in line with EPAM work DNA.

In Latin America, we significantly strengthened our footprint with NEORIS, making Latin America, our third largest delivery region and a very important pillar in our global model. We believe we have now the right mix of talent focusing on delivery for North American clients, coupled with deep local expertise and strong capabilities to engage and deliver in LatAm. In Western Central Asia, as we mentioned last quarter, we continue to progress quite nicely with our still relatively new delivery hub of over 7,300 people now.

Back to the 2 acquisitions we closed in Q4. In overall, with NEORIS and FD, we significantly increased our global footprint with the addition of nearly 6,000 people combined, primarily across Latin America, Canada, Spain, U.K. and Ireland. We remain committed to executing our global delivery strategy further. Now shifting to GenAI. Even with all the recent noise, sometimes the significant level of confusion and debates, we are seeing indicators of positive change and growing impact. Overall, we continue to make significant traction across our client portfolio with now 75% of our top 100 clients engaged on GenAI initiatives.

Our early-stage projects continued to show strong growth year-over-year with hundreds of new verticals, use cases emerging and turning into agentic AI pilots. Within our midsized AI projects with more defined outcomes, we are beginning to see more volume, and we believe this speaks to the investment and traction clients are making in this space. These programs have a high probability of turning into agentic transformation plays in key horizontal and vertical domains.

Finally, in our larger scale AI factories, we manage the entire portfolio of agents and applications throughout the program life cycle and generate tens of millions of dollars in value by each such engagement. Our GenAI and AI driven client engagement could also be presented in 3 major dimensions. Dimension 1 is DOC and other related areas of individual and team productivity improvements.

Dimension 2, data and cloud engagements triggered by the need to enable a AI-native programs at scale. Dimension 3 scale AI-native programs and platforms as a goal to drive value against proven business cases and when clients already solve their data and cloud infrastructure challenges. Let me expand a bit on this. Within Dimension 1, we are addressing the need of complex enterprise-level engagements to orchestrate individual efforts toward total productivity improvements at large teams and programs levels via all latest GenAI advances.

Often to have real engagement impact, our hybrid client teams must have the same level of modern engineering maturity has purposely GenAI trained our own teams. That is why we are offering to client GenAI-enabled software development life cycle or SDLC transformational programs, utilizing market-leading tools and methodologies along with the EPAM AI/Run framework built on top of our own DIAL, EliteA, [indiscernible] and some other IP assets. It

may significantly impact on large concrete engagement and helps to advance the adoption of AI in large-scale enterprises while bringing measurable value through both cost optimization and the creation of new revenue streams. While I believe dimension 2 is very much self-explanatory, Dimension 3 is our go-to-market business transformation programs, natively enabled by GenAI and AI technology. As we move into a more comprehensive agentic proposition, our AI native engagement are starting to be picked up in the volume and size.

Compared to the first half of 2024, where we were generating single-digit millions of revenue from this AI-native programs, Q4 stands out by generating about $50 million in that category. Let me share 2 client examples to further illustrate how our efforts are driving client engagement and generating real pragmatic value. Let's start with Canadian Tire Corporation, the largest retail chain in Canada, where we have embarked on a journey to standardize and modernize source to deliver life cycle. With the combined power of CTC Product Engineering Center of Excellence and EPAM know-how, we are already driving initial results with very real optimization and efficiency savings.

So far EPAM has effectively deployed the EliteA platform across CTC delivery organization, trained more than 700 individuals and ensures comprehensive adoption of new modernized tools. This is a real example of how our approach amplifies organizational productivity, reduces costs and improves in team and cross-team collaboration and serves as foundation for the next-generation agentic platform for SDLC.

Another notable example of real progress at scale is our expanded engagements with Baker Hughes, one of the world's largest oil field services, industrial and energy technology companies. We are enabling Baker Hughes in building and offering to their clients, larger AI native digital platforms by combining EPAM PAM best-in-class product engineering capabilities with Baker Hughes expertise in energy technology. Just a few weeks ago, Baker Hughes named EPAM as a key partner for digital NAI to transform the energy sector while leveraging advanced AI-native digital platform implementations at scale.

We believe EPAM is one of the few AI-native service providers who can demonstrate scale programs with proven AI ROI today, which is also well enabled by our growing global partnerships with cloud and data major providers with whom we are expanding our collaborations and focusing on general agentic AI road to marketplace.

Now if we step back and look at a bigger picture, more broadly for 2025 and beyond. Our thesis remains unchanged. We believe the demand for advanced AI native and agentic software and data engineering services will only increase as engineering productivity gains will be significantly outsized by incremental demand to build new and replace the legacies as clients quickly expand in their focus to solve more complex tasks more efficiently. Further, the need for security modernization and managing enterprise data platforms will continue to demand skilled expertise that combines critical skills with modern engineering and data science capabilities, all areas in which EPAM excels.

To conclude, we are pleased with our stronger-than-expected Q4 results and stabilization achieved during the last year. Our new AI-native capabilities, data and core engineering differentiation remained evident. While we are more globally diversified today than ever before, we continue to see clients return to quality and reliable execution, and we believe that is putting us into a stronger competitive position today compared to last year.

At the same time, we do believe 2025 will be still a challenging and transformative year for the industry, with a lot of pressure to navigate 2 opposite trends across our client base. One is still being driven by cost sensitivity, while in other, by the need to return to more discretionary spending and addressing accumulated during the last few years backlog, which means also that EPAM will be performing during 2025. This continuous margin pressures triggered by necessity to invest across several important for us in 2025 areas such as critical skills and talent retention and development, agentic AI and GenAI IP including advancements, integration efforts of our recent acquisitions and go-to-market strategies. That should allow us to be in the right standing when discretionary demand environment will fully rebound. So while we remain vigilant to potential headwinds, we believe our strategic positioning and ongoing initiative place us on the trajectory for sustainable performance and growth in 2025 and beyond.

Let me now turn the call over to Jason who will provide additional details on our Q4 results and 2025 outlook.

Thank you, Ark, and good morning, everyone. In the fourth quarter, EPAM generated revenues of $1.25 billion, a year-over-year increase of 7.9% on a reported basis, including revenues from recent acquisitions, NEORIS and First Derivative. On an organic constant currency basis, revenues grew 1% compared to the fourth quarter of 2023. In Q4, we are pleased to return to year-over-year organic revenue growth. Organic revenues exceeded our Q4 guidance due to higher-than-expected new project starts, indicating modestly improving client sentiment. .

Due to the quarter's significant inorganic revenue contribution, I will speak to both organic and inorganic revenues as I discuss industry vertical and geographic performance. Beginning with industry verticals, I want to echo Ark's comments that in Q4, 5 out of 6 of our industry verticals delivered sequential organic revenue growth. Only the travel and consumer vertical declined Q3 to Q4.

Financial Services delivered very strong growth of 15.9% year-over-year, reflecting [ 4.3% ] organic and 11.6% inorganic growth, driven by continued strength in the banking, insurance and payment sector. Life Sciences and Health care increased 8.6% on a year-over-year basis, reflecting 5.7% organic and 2.9% inorganic growth. Growth in the quarter was driven primarily by clients in life sciences, including some revenues derived from new logo accounts.

Software and Hi-Tech increased 7.7% year-over-year, reflecting 6.4% organic and 1.3% inorganic growth. Consumer goods, retail and travel decreased 3% year-over-year, reflecting a negative 5.7% organic and a positive 2.7% inorganic growth largely due to declines in consumer products and retail, partially offset by growth in travel. Business information and media declined 3.9% year-over-year, reflecting negative 4.7% organic and positive 0.8% inorganic growth.

Revenue in the quarter was impacted by the previously discussed ramp down of the top 20 clients. However, sequentially, we were encouraged to see the vertical return to strong growth as we continue to build momentum. And finally, our emerging verticals delivered very strong growth of 24.8%, reflecting 3% organic and 21.8% inorganic growth. Growth was primarily driven by clients in energy, manufacturing and industrial materials with significant contribution coming from NEORIS.

From a geographic perspective, the Americas, our largest region, representing 60% of our Q4 revenues, increased 11.4% year-over-year, reflecting 2.7% organic and 8.7% inorganic growth. EMEA, representing 38% of our Q4 revenues increased 3.1% year-over-year, reflecting a negative 1.4% organic and positive 4.5% inorganic growth. In the quarter, the region continued to show sequential organic revenue improvement. And finally, APAC increased 4.3% year-over-year and represents 2% of our revenues.

In Q4, revenues from our top 20 clients grew 4% year-over-year, while revenues from clients outside our top 20 increased 10%. Moving on to the income statement. Our GAAP gross margin for the quarter was 30.4% compared to 31.1% in Q4 of last year.

Non-GAAP gross margin for the quarter was 32.2% compared to 33% for the same quarter last year. Relative to Q4 2023, gross margin in Q4 2024 was negatively impacted by compensation increases, including those resulting from our 2024 promotion campaign, which we were not able to offset through pricing as well as lower profitability of recent acquisitions.

The compensation increases, along with lower profitability from acquisitions and negative foreign exchange impact, exceeded the benefits of improved utilization and a positive impact from the Polish R&D incentive. GAAP SG&A was 17.4% of revenue compared to 18.5% in Q4 of last year. Non-GAAP SG&A came in at 14.4% of revenue compared to 14.2% in the same period last year.

SG&A measured as a percent of revenue is now higher in part due to our recent acquisitions running with higher SG&A levels compared to our stand-alone business. SG&A expense for Q4 2024 reflects SG&A associated with recent acquisitions as well as higher variable compensation compared to Q4 2023. GAAP income from operations was $137 million or 10.9% of revenue in the quarter compared to $122 million or 10.6% of revenue in Q4 of last year.

Non-GAAP income from operations was $208 million or 16.7% of revenue in the quarter compared to $200 million or 17.3% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 24.8%, and our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $1.80. Our non-GAAP diluted EPS was $2.84, reflecting an increase of $0.09 or 3.3% compared to the same quarter in 2023.

In Q4, there were approximately 57.4 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q4 was $130 million compared to $171 million in the same quarter of 2023. Free cash flow was $115 million compared to free cash flow of $161 million in the same quarter last year. We ended the quarter with approximately $1.3 billion in cash and cash equivalents, which is lower compared to the same quarter last year due to our recently completed acquisitions.

At the end of Q4 DSO was 70 days compared to 74 days in Q3 2024 and 71 days in the same quarter last year. Share repurchases in the fourth quarter were approximately 53,000 shares for $13 million at an average price of $241.99 per share. Moving on to a few operational metrics for the quarter.

We ended Q4 with more than 55,100 consultants, designers, engineers, trainers and architects, a growth of 16.3% compared to Q4 of 2023. This was a result of recent acquisitions, which contributed nearly 6,000 delivery professionals. In addition to solid organic growth, which contributed sequential net additions of around 1,500 employees in the quarter, our total head count for the quarter was 61,200 employees. Utilization was 76.2% compared to 74.4% in Q4 of last year and 76.4% in Q3 2024.

Turning to our 2024 full year results. Revenues for the year were $473 billion, up 0.8% on a reported basis year-over-year. On an organic constant currency basis, revenues were down 1.7% year-over-year. GAAP income from operations was $545 million, an increase of 8.6% year-over-year and represented 11.5% of revenue. GAAP income from operations benefited from the recognition of $69 million of incentives related to research and development activities performed in Poland and was negatively impacted by $31 million of severance-related costs.

Our non-GAAP income from operations was $779 million, a growth of 1.8% compared to the prior year and represented 16.5% of revenue. Our non-GAAP income from operations benefited from the recognition of $45 million of incentives related to research and development activities performed in Poland in 2024. Our GAAP effective tax rate for the year was 22.2%. Our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $7.84. Non-GAAP EPS which excludes adjustments for stock-based compensation, acquisition-related costs and certain other onetime items, including costs associated with our cost optimization programs was $10.86, reflecting a 2.5% increase over fiscal 2023.

In 2024, there were approximately 58 million weighted average diluted shares outstanding. Cash flow from operations was $559 million compared to $563 million for 2023 and free cash flow was $527 million, reflecting 83.7% adjusted net income conversion. And finally, shares repurchased in 2024 were approximately 1,854,000 shares for $398 million at an average price of $214.65 per share.

Now let's turn to guidance. Before moving to the specifics of our 2025 and Q1 outlook, I would like to provide some thoughts to help frame our guidance. We've been pleased with the progress we are making on demand generation, and we'll continue to prioritize revenue growth into 2025. We [ ceased building client budgets ] and some degree of shift in spending towards growth and strategic programs. In 2025, we expect flat year-over-year organic revenue growth in Q1, followed by continued improvement throughout the year. In terms of profitability for 2025, we do expect to run the business at somewhat lower levels of profitability than we have in past years.

As Ark mentioned, we are investing in retaining our top talent as well as further accelerating investments in our advanced GenAI platforms and tools. Compensation increases to retain talent for future growth combined with the limited ability to improve client pricing in the near term and additional pressure from dilutive impact of recent acquisitions will continue to put pressure on profitability this year. However, we do expect to see improvement in our profitability levels from the first half to the second half of the year.

Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers at productivity levels similar to those achieved in 2024. Now starting with our full year outlook. Revenue growth will be in the range of 10% to 14%, with an inorganic contribution of approximately 10% for 2025. Foreign exchange is expected to have a negative impact of 0.9%. We expect GAAP income from operations to be in the range of 9% to 10% and non-GAAP income from operations to be in the range of 14.5% to 15.5%.

We expect our GAAP effective tax rate to be approximately 24%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation will also be 24%. Earnings per share, we expect the GAAP diluted EPS will be in the range of $6.78 to $7.08 for the full year, and non-GAAP diluted EPS will be in the range of $10.45 to $10.75 for the full year. We expect weighted average share count of 58.1 million fully diluted shares outstanding. For Q1 of 2025, we expect revenues to be in the range of $1.275 billion to $1.290 billion, producing year-over-year growth of approximately 10%. Our guidance reflects an inorganic contribution of 11.4% with a 1.4% negative FX impact during the quarter.

For the first quarter, we expect GAAP income from operations to be in the range of 6.5% to 7.5% and non-GAAP income from operations to be in the range of 12.5% to 13.5%. Our Q1 income from operations guide reflects the impact of resetting social security caps, the negative impact of 2024 compensation increases, which we were unable to offset with better pricing, dilution from recent acquisitions and a slightly softer revenue in the month of January as clients in certain verticals finalize budgets.

For the first quarter, we expect GAAP income from operations to be in the range of 6.5% to 7.5% and non-GAAP income from operations to be in the range of 12.5% to 13.5%. Our Q1 income from operations guide reflects the impact of resetting social security caps, the negative impact of 2024 compensation increases, which we were unable to offset with better pricing dilution from recent acquisitions and slightly softer revenues in the month of January as clients in certain verticals finalized budgets.

We expect a weighted average share count of 57.7 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for 2025. Stock-based compensation expense is expected to be approximately $194 million with $50 million in Q1, $44 million in Q2 and $50 million in each remaining quarter.

Amortization of intangibles is expected to be approximately $68 million for the year, with approximately $18 million in Q1 and $17 million in each remaining quarter. The impact of foreign exchange is expected to be approximately $1 million loss each quarter. Tax effective non-GAAP adjustments is expected to be approximately $61 million for the year was $17 million in Q1, $14 million in Q2 and $15 million in each remaining quarter. We expect excess tax benefits to be around $14 million for the full year, with approximately $7 million in Q1, $2 million in Q2, $1 million in Q3 and $3 million in Q4.

Severance driven by our 2024 cost optimization program is expected to be $6 million in Q1 and $1 million in Q2. Finally, one more assumption outside of our GAAP to non-GAAP items, we maintain a significant level of cash and are generating a healthy level of interest income. However, based on the reduction in cash resulting from the recent acquisitions, we are expecting interest and other income to be smaller in 2025 compared to 2024.

With around $18 million for the 2025 full year with $4 million in Q1 and Q2 and $5 million in each remaining quarter. My thanks to all the EPAMers who made 2024 a successful year, and will help us drive growth throughout 2025.

Operator, let's open the call for questions.

[Operator Instructions] your first question comes from the line of Maggie Nolan with William Blair.

Jason, I was hoping you could elaborate a little bit on the expectations that are embedded in the top end and the low end of revenue guidance, both company-specific and from a macro perspective?

Yes. So I think we've been fairly careful about our expectations for NEORIS and FD, who both generally delivered at the level of revenues that we expected in Q4. We have them both with some modest degree of growth as we go from 2024 to 2025. And then as I think we said in the prepared remarks, is that we've got effectively kind of a 0% to 4% revenue growth for organic.

And if you introduce the foreign exchange headwinds, you've got a 1% to 5% growth again, using an organic constant currency. Right now, what we're seeing is a somewhat slow start in January, but we're seeing substantial program starts and clients beginning to really get started here in 2025 as we enter February and as we work through the month. If I were to talk about that and Maggie, is this for revenue? Or is this for the revenue? Revenue? Okay. So what we would have is, clearly, some degree a sequential growth Q1 to Q2. We are seeing substantial sort of project starts in certain areas of our business, and we've got a couple of clients, one particularly in sort of high tech that we expect to show substantial growth in the year, again, at 12% is clearly some degree of sequential revenue growth in the back half if you were to end up in the middle part of the range, it's kind of a softer sequential, growth. So I'm not sure that helps too much. But what we are seeing is very strong sort of program starts in customer demand here in February despite the fact that we had sort of a slower start to January.

That's helpful. And then on the margin side, Arkadiy you mentioned some investments that you are clearly going to be making, I'd be particularly interested in some of the commentary around agentic AI and IT since IT services companies don't typically retain a significant amount of the IP that they generate. And then how are you thinking about balancing those investments with perhaps the need to drive some cost synergies in these acquisitions that you just onboarded?

So let me just do a quick bridge on [ adjusted IFO ] and then I'll probably let Ark talk a little bit more about the importance of the investments in GenAI. We've got 2024 at 16.5% adjusted IFO at the midpoint of our guided range for 2025, that would be 15%. We've talked about dilution due to the acquisition of FD and NEORIS, both is then more accretive from an EPS standpoint, but they are dilutive from an adjusted IFO.

And so I think that we've updated our assumption and that's about a 60 basis point dilution. So 16.5% with a 60 basis point, dilutive impact of the acquisitions we're down 15.9% and then 15.9% compares to the 15%, which is the midpoint of the 14.5% to 15.5%. And what we're seeing is some incremental investment in GenAI, which is causing both an increase in SG&A, a little bit of decrease in gross margin.

And then, Maggie, as we've kind of talked throughout 2024. And I think also, as we've talked about what we expected in 2025, we have been focused on retaining our top technical talent. And so we have had some degree of cost increases or increases in compensation in 2024 in a year when it was very difficult to get rate increases. We still expect that this is a more challenging, certainly, in the first half of 2025, so what we are expecting to have is our traditional promo campaign in the first half of 2025 with limited ability to offset those compensation increases with salary increases.

We do expect the pricing environment to improve somewhat throughout the year. Clearly, we're focused on utilization, impairments and that type of thing. But really what is happening in the 15.95 to 15% is some amount of compression due to price sensitivity of the clients. India still runs at better-than-average profitability. Ukraine still runs at high levels of profitability. So we feel good about the business overall, but just the pricing environment still is kind of pressurizing our gross margin and ultimately our adjusted IFO .

This type of investment is not something new for us, typically, when there is a visible transition in technology, and we all understand that investment in GenAI, a lot of investment in training, changing the mind our development team, how our new software will be built. And on top of this number of accelerators and some IP as well, it's specifically in this transitional period where market itself, not bringing too many stable solutions to build new type of software.

And we did it like when [ cloud transitioning was happening with mobile transitioning ] was happening, and it was a significant investment. It was better macro environment back then. But we do believe that we cannot miss these investments right now because as soon as the GenAI, AI, agentic AI starting to drive real transformation we need to be ready to take advantage there.

Your next question comes from the line of James Friedman with Susquehanna.

I just want to ask 1 question. In terms of your prepared remarks, Arkadiy, you say and I'm quoting in 2025, clients will balance their cost focus with the need to accelerate their transformational GenAI journeys. That, to me, sounds like kind of change the business versus run the business narrative. I'm just wondering in the context of your pricing commentary, is the pricing -- do you have any exposure to the run the business opportunities? Is it all really change the business transformational side, whether it's GenAI or otherwise, and is the pricing pressure that you're feeling on the new stuff or on the old stuff or both?

So we definitely have during the last several years, exposure to run the business, and we have a number of engagements. And given this, we're starting to do differently than traditionally, it was executed, especially with everything what we see in very different levels of automation driven by GenAI progress. But the pressure -- pricing pressure I mean, still during the last several years, and there is a big kind of inertia to change it. And that's what we quote it will be start happening in 2025 more [ reasonably]. But there is a pricing pressure across run and built as well and change as well. Until again, the change will become much more coming to more traditional levels of demand.

Your next question comes from the line of Bryan Bergin with TD Cowen.

On demand, I was hoping you could dig in more on how the client spending behavior progressed through each month in 4Q. I'm really trying to dig into commentary on new clients versus existing clients? Can you talk about that? Any interesting bookings data or anything like that as you hit new versus existing?

I don't think I can give you like specific numbers, but definitely, we enter good number of new clients. It's not becoming very large right away. But there are some clients which quickly go into the range of kind of annualized $10 million. So at the same time, there are a lot of new clients, which coming through GenAI kind of proof of concept and then starting to scale. But I also would probably mention that for us, right now new clients, sometimes it's our old clients as well because for the time when starting from the beginning of the war, it was lot of the clients. We see in each one of these clients, not fully, but reasonably and for example, Jason mentioned one of the big tech company, so which almost went to 0 now starting to bring scale, so which we consider in some way new clients that we approve again and proof not -- only would we be proof, but as they come back to us because they need the quality level and understanding of the technology, which we [ possess ].

Brian, I'm just going to introduce a couple of numbers here. So the guide was [ $1.205 billion to $1.215 billion ]. NEORIS has performed as expected. We said that we would do about $54 million with NEORIS. FD would have been incremental to that. And I can tell you that, that was about $12 million, again, as we expected. So at the end of the FD to the guide, it would have been [ $1.217 billion to $1.227 billion ], and we landed [ $1.248 billion ]. And so it clearly was in what we call our stand-alone business where we saw strength. We did see sequential growth in Europe. We did see improvement in financial services, including growth in European financial institutions. And so overall, it was quite a bit stronger quarter from a revenue growth standpoint than we had expected, particularly with good revenues in the month of November and December.

Okay. Very good. I appreciate all that detail. And Jason, actually on the margin too for my follow-up here. So thank you for the bridge. Obviously, a lot of moving parts here with the R&D tax credit, but the acquisition margin profiles, the incremental investment and different geo footprint. But as we kind of just think ahead, as demand ultimately normalizes, do you anticipate a return to profit levels where you've been before? Or is it too early to make that call?

Yes, we are definitely expecting to see improved profitability in the second half of the year relative to the first half. And then clearly, we're looking to drive profitability back to what I would call more typical. I know some externally think about 17-plus. I've always sort of thought of us as a 16 to 17 company. And so the focus on getting back to a 16% or better would certainly be a goal for the company. And again, with a slightly different environment, we think that's achievable. .

Your next question comes from the line of David Grossman with Stifel.

I'm wondering maybe if you could speak a little bit of your capacity and your ability to accelerate revenue growth once demand improves. And maybe in part of your response, you could help to mention what the headwind we should expect from the bill rate dynamic from geographic mix shift in '25 and how much that may be impacting the growth outlook.

Okay. So in terms of our ability to grow revenue, we have continued to sort of operate with a strong sort of talent capability. So we feel good about our ability to grow in India. We feel good about, obviously, our ability to grow in our traditional Eastern Europe and our ability to grow in the Americas. We are beginning to see some return, and we are seeing a little bit of growth even in places like Ukraine, obviously, depending on how things resolve themselves there that could open up further demand for that geography. And so I think, David, we feel good about the opportunity to kind of grow revenues across a broad range of geographies. I do think you are going to continue to see a little bit of this headwind that we talked about in 2024, whereas you shift into, let's say, Latin America with kind of local-to-level kind of revenues with NEORIS, some further growth in India and growth in places like [indiscernible], which is an attractive price point, where you'll continue to see a little bit of compression. I don't want to say say compression, but you'll continue to see some headwinds on the revenue per headcount number as we move through 2025 would be my expectation.

Okay. And did you provide just some color onto what you think the mix shift headwind is to revenue growth in '25?

We did not. We talked about last year. This year, I think clearly, it depends. And I think that the answer is that what I would say is we are beginning to see somewhat broader demand. Clearly, you continue to see more growth in India. But we are beginning to see demand for our more traditional kind of Eastern European geographies as well. So maybe I would say it's somewhat less of an impact than what I talked about in the middle of 2024. But I would say you'll continue to see some impact from that, but I haven't sized it.

Okay. Great. And then, just in terms of the margins, I think you've already given a lot of color there. One thing you didn't mention was, again, any headwinds from diversifying your geographic capacity. I'm just wondering what impact, if any, that's having on the margins currently? And just curious whether there's anything unique about your specific ability to price versus wage increases versus your peers because I don't think your peers are seeing quite as much compression as you may be experiencing currently in 2024 and your expectation for '25?

Yes. I think one of the things is that we continue to focus on retaining talent, and our attrition continues to decline throughout 2024. So our voluntary attrition right now is it's definitely in the single digits. As I think Ark could probably talk better than I could, but we do think what has made us successful over time is really the ability to deliver, with very high-quality talent. We do want to make sure that we're able to retain that talent, particularly as we head towards a time where we think there is going to be more transformative programs.

We are beginning to see certain clients come back to us where they've had either failures or fatigue with other providers. We still think that the quality of execution is important. And we do think that there's an opportunity to improve price over some period of time. But I'll let Ark talk about the talent.

this is what we mentioned in our remarks. So there is kind of double movements. And again, our exposure changes proportionally much higher than many of our peers. And I think we try to make sure that we have the right talent to come back when demand will be normalized. So -- and yes, there is pressure there. When we were [ relocating ] people, so we were relocating this to some of them to other countries in Central Europe, some of them to Western and Central Asia, and there is a very different pricing points. We're trying to keep the right balance and create opportunity to grow in each of these locations.

Just any thoughts on the cadence that you said margins better in the second half than the first half. And any other color you want to provide around that?

Yes. I would just say probably Q1 to Q2, you wouldn't see a substantial improvement in gross margin, but we are taking the classic sort of steps to improve profitability throughout the year. That's all the things we've been talking about, improving the utilization, improvement in [ pyramid ] and then some amount of scaling. And so we do want to be prepared for us we want to exit 2025 with an ability to drive closer or above that classic profitability target of 16% or above.

Conclusion is previous year where our profitability was increasing.

Your next question comes from the line of Jason Kupferberg with bank of America.

The first one is just on revenue. I wanted to dive in a little bit just in terms of what's embedded in terms of assumptions on further improvement in discretionary spending. Obviously, you've started to see some pickup. And I'm wondering if the slope of that line, if you will, does that need to improve to get to, say, the midpoint or the high end of the revenue guide what's the underlying assumption there that you've built in?

Why don't you take the the high end of the range? And what's our assumption on improving discretionary environment?

So we -- the gross portfolio, we say that this is what we are sharing like during the previous call, we're seeing some discretionary change, which very different than 12 months ago. And we saw it in Q4, and we see that this is right now in Q1. The challenge here due to pricing environment is still challenging. Again, we mentioned this. And how it's going to change, we need to see.

But on the positive side, this is exactly what we expect the high range if this is starting to happen because there are already interesting proofs of businesses advantages when we started to do [indiscernible] transformations, more scale programs, GenAI related. So that it will drive the others and pricing together with us. So this is more like a high-end assumption.

We don't count in on huge change, but we count in some more pragmatic views of the companies, which would like to run change programs. And we saw already when the pricing was actually to the point in many programs where others couldn't deliver. So this has already built up at a very good argument to do it differently.

And just a follow-up on the margin. So I guess, wage inflation is eclipsing pricing this year. I think you said margins down about 90 bps on an organic basis. I was curious just which countries are driving some of that wage inflation you mentioned as you're investing to retain the talent?

Yes. I would generally say it's probably more than what I would refer as the off-site countries, again, you -- it would be hard for me to be specific on one country or another. What you're just seeing is, again, a focus on retaining top technical talent in an environment where it continues to be hard, as Ark said, to pass on price increases. So again, I would generally view it as -- we've been fairly careful on the expense of on-site talent, but it really is more in the delivery locations outside of the U.S. and Europe.

And to Italian specifically, its ability to understand what's the new SDLC [indiscernible] ability to work in this enabled by GenAI and solutions enabled by GenAI. This is becoming doing very hard [indiscernible] we're trying to build a company which is prepared for this demand. That's a retention which we need to like to focus exactly right now.

Your next question comes from the line of Darrin Peller with Wolfe Research.

When we exclude the couple of acquisition, it does look like your organic headcount growth inflected for the first time in some time. So maybe a bit more color on your hiring plans for the year, the geographies you plan to hire, any maybe specific skill sets? And then just as an attached question to that geopolitically, Obviously, no one knows where things are going from Ukraine, Russia standpoint. But if we were to see any change around the war and any change in terms of abilities for multinational to operate in those areas more, your headcount is still -- I mean, you still have a decent headcount in Belarus and Ukraine. Just remind us the mix of where your headcount is going forward for this year? And if that could impact you guys in any way from a margin or labor optimization standpoint of where you guys already have from head count.

Okay. So just as a reminder, we had net headcount additions that was organic in Q3 of this -- of 2024 that was somewhat less than 1,000, but still again a decent number of additions. We're about 1,500, as I indicated in Q4, again, on an organic kind of basis, of course, we had the incremental FD and NEORIS. And then for Q1 of 2025, we're also expected to be something approaching 1,000 or probably a little bit below based on kind of the slower start to the January month.

So we are definitely adding headcount. As I think we've talked about, although I'm not going to be specific about which countries is that we are beginning to see kind of demand return to certain geographies in Europe, will clearly still be growing in India, will clearly still be [indiscernible] We still -- we have seen a declining headcount in Belarus on a year-over-year basis and a modest decline in headcount in Ukraine on a year-over-year basis. But actually, we did see a little bit of growth late in Q4 in the Ukraine. And in a resolution to the conflict, we think that could make clients far open to putting more product programs, particularly in the Ukraine.

Okay. Okay. So I guess we'll have to see how the it goes. But I imagine from a margin standpoint, some of those labor forces that you guys have could be helpful from -- just relative to the mix you have in other markets you've got to build out .

Let me just quickly -- that's a very good point. Yes, okay, Ukraine has historically and continues to be one of our most profitable geographies.

Okay. Just a quick follow-up. I think you've seen somewhere around 400 or 500 basis points improvement or increase in fixed contract percent, if I'm not mistaken. Over the last couple of periods. Maybe just the overall trend. If you could just give us a little bit more color on what you're seeing there in the driving...

We've got probably 3 things, okay? One is that we are growing in the Middle East, which tends to be more of a fixed fee environment. And so a little bit of the mix shift there. Okay, we are seeing some more consulting-led programs where there's more of a consultant engagement and then the tail associated with the build. Those oftentimes have kind of a fixed fee component. And we probably have a little bit more time to manage service or fixed monthly fee. And again, that would obviously contribute to the mix of fixed fee business as well.

Our final question comes from the line of Jonathan Lee with Guggenheim Partners.

Can you help us understand what's contemplated across your outlook range from a vertical perspective? Any verticals expected to accelerate versus decelerate throughout the year?

I think it's pretty much in line with what we see during the last year and quarter. So bioscience and at this point, financial services, so good dynamics. And we still also not sure about retail for example, and business automation recovering because it will be big hit by the client, which we lost last year.

And then subcomponents that are emerging, including energy, would probably be areas of growth as well.

In general, it seems like because most of the verticals, we expect to grow

And then I think the only other point is that we do expect to see an acceleration in tech, and we are certainly seeing an improvement there in Q4 and do expect to see an improvement in....

Understood. And recognize that the pricing environment is somewhat challenging, but what in your view would catalyze a potential return to a better pricing environment?

So we're seeing some spots where clients are actually starting to focus more on change. And in these programs, they also understand that pricing should be changing. And we've seen these examples. We just need broader of this. And again, that's a previous answer what we're thinking about our high range to achieve this should be happening better. So let's see what market will be...

Thank you for joining us today, I think we really satisfied how we finished the year and each year starting from some new unknowns because by that, you feel much with what's going to happen. I think we have a pretty good We, I would say, feeling about how this year started from the client communications point of view. We're also trying to be very pragmatic with our annual guidance. And let's talk in 3 months. Thank you very much.

That concludes our conference for today. Thank you for participating. You may now all disconnect.