EPAM Systems - Earnings Call - Q1 2025

Executive Summary

• EPAM delivered a solid Q1: revenue $1.302B (+11.7% YoY) with organic constant-currency growth of 1.4%, non-GAAP operating margin 13.5%, and non-GAAP EPS $2.41; the company raised its FY25 revenue growth outlook to 11.5%–14.5% (organic CC 2%–5%).
• Results beat S&P Global consensus: revenue $1.302B vs $1.282B*, and non-GAAP EPS $2.41 vs $2.27*; GAAP EPS $1.28 (pricing lag and lower acquisition profitability pressured gross margin). Consensus values from S&P Global.*
• Q2 guide implies continued momentum: revenue $1.325–$1.340B (mid +16.2% reported YoY; +3.8% organic CC), non-GAAP EPS $2.56–$2.64; FY25 non-GAAP EPS raised to $10.70–$10.95 and FY25 GAAP EPS set at $6.78–$7.03 (higher GAAP ETR 25%).
• Strategic catalysts: accelerating AI-native demand with strong double-digit QoQ AI revenue growth, vendor consolidation driving share gains, expanded AWS SCA for GenAI, and Google Cloud Industry Solutions Partner of the Year (Oil & Gas); leadership succession announced (CEO to Executive Chairman Sep 1, 2025; CRO Balazs Fejes to CEO).

What Went Well and What Went Wrong

• What Went Well

  • AI-native momentum and client quality pivot: “our early-stage AI engagements are maturing visibly… AI native revenues grew strong double-digit quarter-over-quarter”.
  • Share gains via vendor consolidation: “some clients… are now returning to EPAM” as quality and reliability become paramount.
  • Broad-based growth: 4 of 6 verticals up; Financial Services +29.3% YoY (4.5% organic CC) with strength in insurance, banking, payments; Americas +12.6% YoY, EMEA +10.7% YoY; all regions grew organically in CC.

• What Went Wrong

  • Gross margin compression: GAAP 26.9% (vs 28.4% LY) and non-GAAP 28.7% (vs 30.4% LY) due to 2024 compensation increases and lower acquisition profitability, only partly offset by utilization and Polish R&D incentive.
  • Cash flow softness: CFO from ops $24.2M (vs $129.9M LY) on higher bonus payments and elevated DSO (75 days) given more fixed-fee milestone billing; FCF $15M (vs $123M LY).
  • Macro/tariffs headwind: reduced demand at a top NEORIS-acquired customer due to tariffs/manufacturing/materials uncertainty; pricing still not fully offsetting wage inflation near-term.

Transcript

Operator (participant)

Good day, and welcome to EPAM Systems' first quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mike Rowshandel, Head of Investor Relations, to begin the conference. Mike, over to you.

Mike Rowshandel (Head of Investor Relations)

Good morning, everyone, and thank you for joining us today on our first quarter 2025 earnings announcement. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. We hope you've had an opportunity to review the two news releases we shared earlier today. If you have not, copies are available on epam.com in the investor section. With me on today's call are Arkadiy Dobkin, CEO and President, and Jason Peterson, Chief Financial Officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risk and uncertainties as described in the company's earnings release and SEC filings. 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 section of our website. With that said, I will now turn the call over to Ark.

Arkadiy Dobkin (CEO and President)

Thank you, Mike. Good morning, everyone. Thank you for joining us today. As you may have seen in our additional press release this quarter, we have one more update to share today that goes beyond our usual business performance. Alongside our strong Q1 results, despite a tough macro environment, we also announced our planned leadership succession. Before we get into the details of our performance and growth momentum, I want to take a moment to share a few thoughts on my planned transition from CEO role. After 32 years since starting EPAM and serving as the Chairman, CEO, and President, I've decided to transition into the role of Executive Chairman. This move has been thoughtfully planned over the past several years, and I believe that the right moment is now, both for me personally and for the future of the company. I am not leaving EPAM.

As Executive Chairman, I plan to continue providing strategic guidance, combining my years of experience to hold the relationships and board leadership, and ensuring that the CEO transition is smooth and effective, and that EPAM continues advancing our mission, culture, and values. Beyond the transition period, I will be actively engaged as an employee of the company and helping to shape EPAM's long-term strategic direction, maintaining key relationships with clients, partners, and investors, providing guidance on critical strategic initiatives and programs, and promoting the company brand worldwide. I will be closely collaborating with CEO and the leadership team to help ensure that the values, relationship, and strategic focus that have defined EPAM for decades continue to guide the company's future. With that said, I am pleased to announce today that Balazs Fejes will become our new Chief Executive Officer and President on September 1, 2025.

Balazs, better known as FB, joined the company over 20 years ago and has been a critical part of our growth story. His leadership has been instrumental to EPAM's development, serving as our fourth CTO, building our financial services business globally, leading our European and APAC markets, and most recently, serving as the President of Global Business and Chief Revenue Officer. FB is uniquely positioned to provide both strategic and operational leadership during our next phase of evolution. I'm confident that his rare combination of business and technical acumen will enable him to continue driving EPAM forward. FB brings not only deep operational experience, but also a strong sense of energy and vision for EPAM's continuous evolution into the world-leading AI-native transformation company with a reputation for quality execution and excellence, commitment to our customers, employees, and communities.

In terms of timing and priorities, we remain focused on Q2 and full 2025 execution, working hard to extend our sequential momentum by driving and winning more value share. The CEO transition plan should be completed on September 1, 2025, at which point we will provide a more comprehensive update with an opportunity to hear directly from Balazs Fejes. I look forward to working closely with him, our entire executive team, and the board to support the continuous growth and long-term success of the company as EPAM enters the next phase of its evolution. Now, let's turn to our Q1 results. I'm pleased to share today that our first quarter results came in better than expected, despite a more challenging macroeconomic environment than most would have predicted 90 days ago.

This marks our third consecutive quarter of outperformance, and we're pleased to see sequential momentum, which we hope will continue throughout the remainder of this year. In a climate where cost continues to be top of mind, our client conversations have been broadly positive, and we are encouraged to see EPAM benefit from supplier consolidation activity in our core portfolio. It continues to be our view that the pivot toward reliability and quality is slowly progressing. EPAM's proven track record and reputation for high-quality execution put us in a sweet spot and is driving increased levels of new deal activity, which is enabling us to maintain and grow our organic footprint with existing clients.

Outside the volatility of the broader geopolitical economic environment, most of the growth themes we have been discussing over the past few quarters, especially AI-related, have continued through Q1, and we expect will carry throughout the remainder of this year. During Q1, we returned to double-digit revenue growth year over year, and while our inorganic contribution was driving a large portion of that, we are notably delivering year-over-year organic growth as well, which was significantly above our initial Q1 expectations of being flat at the midpoint of our guidance. This marks our second quarter in a row of delivering positive year-over-year organic growth since 2022 and illustrates continuous improvement in the core business. Overall, in Q1, client sentiment and engagement remained strong across most of our verticals and geographies, with particularly high interest in our rapidly expanding AI-related capabilities.

Our performance this quarter was driven by meaningful progress in strengthening client engagement, enhancing cross-selling efforts, and continuing to deliver advanced complex solutions. Our global footprint, supported by robust platforms, tools, and diversified talent hubs, is enabling us to effectively meet the evolving needs of our clients in a rapidly changing business environment. Now, turning to demand. Despite the notable changes over the past 90 days, we remain cautiously optimistic, given our strong Q1 results and the Q2 momentum we have built. The February and March project ramp-up dynamics that we signaled last quarter played better than expected, with the client sentiment continuing to improve. Further, we are encouraged by the incremental demand we continue to see for our AI capabilities, as focus on productivity and efficiency gains turns into more comprehensive AI-native transformation programs and encompasses multiple types of AI-centered solutions.

In short, our baseline client demand in H1 is improving faster than anticipated. While we remain mindful of external pressures caused by challenges in our clients and markets, as well as isolated instances of increased caution and shift in decision-making due to macroeconomic uncertainty, we have not seen any material impact on our business to date. Overall, we feel good about the resilience of our performance so far this year. It's also important to emphasize that we are doing everything we can to stay closely aligned with our clients, taking proactive, disciplined steps to effectively manage our operations, ensuring we are well prepared to respond to any potential impacts that we head into the second half of 2025. In addition, reflecting our recent client conversations, one thing becomes clear.

During the past few years of greater volatility, some clients who had prioritized cost above all else in selecting partners are now returning to EPAM. Their experience with underperforming programs has reinforced the critical value of deep expertise, consistent delivery quality, and the trusted ability to execute at scale. That is why, even as we expect 2025 to remain a year of transition with the potential for increased uncertainty in the second half, we believe clients will continue to focus on the most strategic priorities, which should translate into stronger growth for us compared to 2024. Our credibility and growing reputation as a leading partner in AI and AI-native transformation are already driving greater market awareness and demand, a trend we expect to continue throughout the remainder of this year.

Now, moving into our four global delivery hubs, which now are working together in some new ways and with rapidly growing access to our advanced AI-enabled productivity platforms. In Q1, we saw another quarter of sequential increase in net organic headcount across India, Europe, and Western Central Asia. Central Eastern Europe continues to be a cornerstone geography for us and serves as a backbone for many long-term clients with growing global location strategies. We saw modest growth in Hungary, Poland, Croatia, and Serbia, and stability across the rest of the region. Ukraine as well remains stable in terms of scale and core capabilities, as our nearly 9,000 people remain highly productive and continue to support both new and current clients across a diverse range of programs. In India, we continue to see strong demand for our differentiated product engineering offerings alongside our core capabilities in platforms, cloud, data, and AI.

The momentum we built last quarter carried out into Q1 with additional net headcount growth. We are also deepening our relationships with Global Capability Centers or GCCs, reinforcing our role as a trusted transformation partner. In Western and Central Asia, we continue to invest and expand our delivery presence with modest net additions across several locations. As we shared in the past, these locations allow us to have even greater adaptability when it comes to serving our clients by balancing cost, quality, and execution, and in some cases, proximity to client locations. Finally, in Latin America, we continue to progress with our significantly expanding client and talent footprint with the addition of new areas. Now, shifting to AI. As highlighted in our recently published AI report, while improved productivity and operational efficiency remain universal goals, scaling AI adoption across the enterprise continues to be a challenge.

In fact, only 30% of even the most advanced companies surveyed reported success in implementing AI at scale. Given that AI at scale remains a relatively new concept today, we believe the broader transformation required includes modernizing platforms, data, organizational structures, skills, and business processes. All of that represents a significant opportunity for EPAM. Our unique combination of deep engineering and consulting expertise, backed by our advanced suite of IP tools and accelerators, positions us well to lead in this space. While the AI landscape is evolving rapidly, one thing is undeniable: AI continues to drive new demand for us. Even in the context of traditional modernization programs, AI plays a central role in the majority of client discussions. We are currently engaged in a wide range of AI initiatives with the vast majority of our top 100 clients.

Our early-stage AI engagements are maturing visibly with a strong year-over-year growth, with more of them evolving into mid-sized projects with clearly defined outcomes and measurable ROIs. As we expand into larger-scale AI factories, these programs are becoming increasingly comprehensive, now incorporating agentic AI in government frameworks while also scaling in volume and complexity. In Q1, our AI-native revenues grew strong, double-digit quarter-over-quarter, continuing the strong momentum from the previous quarter. As we continue to mature our AI consulting and engineering offerings, we are also strengthening our overall value proposition by partnering with strategic players in cloud, data, and platforms to deliver innovative, commercially attractive software assets focused on industry-specific transformation and productivity gains. One illustrative example of our progress is in oil and gas and manufacturing verticals, where we develop breakthrough innovation in AI-powered geospatial data visualization and insights.

Built in partnership with Google Cloud Industry Solutions, this work led to EPAM being named Google 2025 Partner of the Year for Oil and Gas. The solution, which integrates with Google Gemini models, can also be applied to broader data challenges across manufacturing and supply chain use cases, demonstrating our deep domain expertise, our ability to handle large and complex data sets, and our proven track record in delivering AI-native cloud-based applications at scale. Another strong example is our ongoing effort to advance global engineering productivity through AI. Our focus extends beyond individual code generation to full lifecycle transformation in team environments. In Q3 of last year, we introduced EPAM AI Run, our AI-native SDLC framework and toolkit, and we are now well-positioned to build on this foundation through a strategic collaboration agreement with AWS.

By leveraging advanced generative AI services, including Amazon Bedrock, we will empower clients to develop specialized AI agents in an AI-native solution that addresses SDLC productivity challenges for large teams. This collaboration creates a robust platform for accelerating cloud and data modernization through AI-driven workflow and tooling automation. Finally, to illustrate our continuous innovation with the EPAM Dial platform, we continue to integrate advanced AI technologies into custom-tailored business strategies, which is driving significant impact across the industry and open-source community. Dial has evolved through several advancements and iterations since we started building it. Today, Dial is a complete generative AI platform with orchestration, including agentic marketplace, mind maps, and Dial expressive logic, and so much more. Dial is evolving into a complete AI platform for enterprises. To conclude, we are pleased with our stronger-than-expected Q1 results, the improvement in organic growth, and the sequential momentum we continue to build.

Our increasingly diversified and agile global delivery hubs, combined with advanced AI-native capabilities and deepening strategic partnerships, are having a real impact. As we shared last quarter, we expected 2025 to be a transformative year, and that outlook is proving true, perhaps even more visibly than we anticipated three months ago. We are encouraged by the opportunities ahead and remain cautiously optimistic about the second half of 2025, even as macro uncertainty persists. Our focus and disciplined execution remain our top priority. Let me now turn the call over to Jason, who will provide additional details on our Q1 results and 2025 outlook.

Jason Peterson (CFO)

Thank you, Art. Good morning, everyone. In the first quarter, EPAM generated revenue of $1.3 billion, a year-over-year increase of 11.7% on a reported basis.On an organic constant currency basis, revenue grew 1.4% compared to the first quarter of 2024, exceeding our expectations of flat organic growth anticipated at the midpoint of our Q1 guidance. We are pleased to deliver another quarter of year-over-year organic growth in constant currency, reflecting ongoing demand for EPAM services and strong execution across our global portfolio of clients. As Art mentioned, we believe the outperformance is in part driven by client recognition of EPAM's superior delivery quality and momentum across our AI offerings. Moving to our Q1 vertical performance, four out of six industry verticals delivered strong, very strong revenue growth. Revenues from our FD and the Neoris acquisitions had the most impact on our financial services and emerging verticals. I will break out the organic and inorganic contribution within these two verticals.

Financial services delivered very strong growth of 29.3% year-over-year, reflecting 4.5% organic growth in constant currency, driven by continued strength in insurance, banking, and payments. Software and high-tech grew 9.6% year-over-year, driven by strong execution and broad improvement across our existing portfolio, as well as new logo activity. Life sciences and healthcare increased 10.5% on a year-over-year basis. Growth in the quarter was driven primarily by clients in life sciences and med tech. German goods, retail, and travel decreased 1.4% year-over-year, largely due to the clients in consumer products and retail, partially offset by growth in travel. Business information and media declined 2.2% year-over-year. Our emerging verticals delivered very strong growth of 22.8%. Growth was positively impacted by Neoris Industrial Materials customers. Emerging verticals' organic revenue in constant currency contracted by 3.5% and was negatively impacted by softness across manufacturing and telecom clients.

From a geographic perspective, Americas, our largest region, representing 60% of our Q1 revenues, grew 12.6% year-over-year. AMEA, representing 38% of our Q1 revenues, increased 10.7% year-over-year. Finally, APAC, representing 2% of our revenues, increased 4.3% year-over-year. Each of our geographies delivered year-over-year organic constant currency revenue growth in the quarter. Lastly, in Q1, revenues from our top 20 clients grew 6.1% year-over-year, while revenues from clients outside our top 20 increased 14.6%. Moving down the income statement, our GAAP gross margin for the quarter was 26.9%, compared to 28.4% in Q1 of last year. Non-GAAP gross margin for the quarter was 28.7%, compared to 30.4% for the same quarter last year. Relative to Q1 2024, gross margin in Q1 2025 was negatively impacted by 2024 compensation increases, which were only partially offset through pricing. Additionally, lower profitability from recent acquisitions negatively impacted gross margin.

The negative impacts from compensation and lower profitability from acquisitions exceeded the benefits of improved utilization and the positive impact from the Polish R&D incentive. The company will be focused on improving gross margin throughout the remainder of the year. GAAP SG&A was 16.8% of revenue, compared to 17% in Q1 of last year. Non-GAAP SG&A in Q1 2025 came in at 14.2% of revenue, compared to 14.1% in the same period last year. GAAP income from operations was $99 million, or 7.6% of revenue in the quarter, compared to $111 million, or 9.5% of revenue in Q1 of last year. Non-GAAP income from operations was $176 million, or 13.5% of revenue in the quarter, compared to $174 million, or 14.9% of revenue in Q1 of last year. Our GAAP effective tax rate for the quarter came in at 22.2%, and our non-GAAP effective tax rate was 23.1%.

Diluted earnings per share on a GAAP basis was $1.28. Our non-GAAP diluted EPS was $2.41, compared to $2.46 in Q1 of last year, reflecting a 5% decrease year-over-year. In Q1, there were approximately 57.3 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q1 was $24 million, compared to $130 million in the same quarter of 2024. Higher bonus payments in Q1 2025 and a higher DSO resulting from the impact of an increasing share of fixed fee revenues with associated milestone billing, both contributed to the year-over-year decline in operating cash flows. Free cash flow was $15 million, compared to free cash flow of $123 million in the same quarter last year. Cash and cash equivalents were $1.2 billion as of the end of the quarter.

At the end of Q1, DSO was 75 days and compares to 70 days for Q4 2024 and 73 days for the same quarter last year. Share repurchases in the first quarter were approximately 796,000 shares for $160 million at an average price of $201.07 per share. Moving on to a few operational metrics, we ended the Q1 with more than 55,600 consultants, designers, engineers, and architects, reflecting total growth of 18.2% and organic growth of 6.4% compared to Q1 2024. In the quarter, we added over 500 professionals. Our total headcount for the quarter was more than 61,700 employees. Utilization was 77.5% compared to 76.8% in Q1 of last year and 76.2% in Q4 2024. Now let's turn to guidance. Before moving to the specifics of our 2025 and Q2 outlook, I'd like to provide some thoughts to help frame our guidance.

While the macroeconomic environment remains highly dynamic, we are pleased with our strong Q1 performance, with year-over-year organic constant currency revenue growth exceeding our expectations. This has resulted in three consecutive quarters of sequential organic revenue growth. With good visibility into Q2, we expect ongoing improvement in our organic revenues with both year-over-year and sequential growth in the quarter. We continue to experience improving demand for our highly differentiated services, and client budgets appear to remain substantially intact, with a few pockets of caution, which we are closely monitoring. Clients are turning to EPAM for trusted quality of execution and our advanced AI offerings. To date, we have not seen a material slowdown in client spending, as evidenced by our stronger-than-expected Q1 performance and sequential momentum we have seen thus far in Q2. That said, we acknowledge the elevated uncertainty and macroeconomic risks.

Considering our stronger-than-expected first half, balanced with a thoughtful assessment of client demand in our second half, we are raising the lower end of our organic full-year revenue guidance while leaving the upper end of the range unchanged. There are several additional factors impacting our view of revenue growth during the remainder of the year. Since we issued guidance last quarter, certain currencies have strengthened considerably relative to the US dollar. At the same time, due to the elevated uncertainties resulting from tariffs and impacts on the manufacturing and materials industries, we are seeing a reduction in demand from a top customer acquired as part of our Neoris acquisition. With our improved organic revenue contribution, the expected benefit from foreign exchange, partially offset by a modest reduction in expected inorganic revenues, we are raising both the upper and lower end of our reported revenue guidance.

Our guidance continues to assume that we will be able to deliver out of our Ukraine delivery centers at productivity levels similar to those achieved in 2024. Moving on to the full-year outlook, revenue growth will now be in the range of 11.5%-14.5%, with an inorganic contribution of approximately 9% for 2025. Based on today's spot exchange rates, coupled with an assumption of modest strengthening in the US dollar in the second half, foreign exchange is now expected to have a positive impact on revenue growth of 0.4%. We expect year-over-year revenue growth on an organic constant currency basis to now be in the range of 2%-5%. We expect GAAP income from operations to continue to be in the range of 9%-10%, and non-GAAP income from operations to continue to be in the range of 14.5%-15.5%.

We expect our GAAP effective tax rate to now be 25%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will continue to be 24%. For earnings per share, we expect the GAAP diluted EPS will now be in the range of $6.78-$7.03 for the full year. Non-GAAP diluted EPS will now be in the range of $10.70-$10.95 for the full year. The increase in non-GAAP diluted EPS is in part driven by our assumption of a reduced share count resulting from our plan to increase share repurchases within the constraints of the current share repurchase authorization. We now expect weighted average share count of 56.5 million fully diluted shares outstanding.

Moving to our Q2 2025 outlook, we expect revenue to be in the range of $1.325 billion-$1.340 billion, producing year-over-year growth of 16.2% at the midpoint of the range. Our guidance reflects an inorganic contribution of 10.6%, with a 1.8% positive foreign exchange impact during the quarter. For the second quarter, we expect GAAP income from operations to be in the range of 9%-10%, and non-GAAP income from operations to be in the range of 14%-15%. We expect our GAAP effective tax rate to be approximately 26% and our non-GAAP effective tax rate to be approximately 24%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.67-$1.75 for the quarter, and non-GAAP diluted EPS to be in the range of $2.56-$2.64 for the quarter.

With increases in share repurchases during the year, we expect a weighted average share count of 56.7 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q2 and the full year. Stock-based compensation expenses expect to be approximately $40 million for Q2, $45 million for Q3, and $46 million for Q4. Amortization of intangibles is expected to be approximately $17 million for each of the remaining quarters. The impact of foreign exchange is expected to be negligible for each of the remaining quarters. Tax-effective non-GAAP adjustments is expected to be around $13 million for Q2 and $15 million for Q3 and $14 million for Q4. We expect excess tax shortfall to be around $1 million for Q2, with minimal excess tax benefits or shortfalls in the remaining quarters.

Severance driven by our cost optimization programs is expected to be around $2 million in Q2 and $3 million for each of the remaining quarters. Finally, one more assumption outside of our GAAP to non-GAAP items. With the increased share repurchases, we will have a lower level of interest-generating cash. Therefore, we now expect interest and other income to be $2 million in both Q2 and Q3 and $3 million in Q4. We remain committed to continuing to drive sequential momentum and are confident in our positioning entering Q2 despite the dynamic environment. We will continue to run EPAM efficiently while remaining focused on strong execution and profitability throughout the year. Lastly, my continued thanks to all our employees for their dedication and focus on serving our clients and driving results for EPAM. Operator, let's open the call for questions.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone keypad. We ask you limit your questions to one and one short follow-up so we are able to take as many questions as possible. Your first question comes from line of Bryan Bergin with TD Cowen. Please go ahead.

Bryan Bergin (Managing Director, Equity Research)

Hi, good morning. Thank you. Ark, first, just congrats on all the success with what you've built here and congrats to BF for his promotion. My first question is the 2025 growth guide. So you raise your organic view here on the low end by a point. Looks to be a good Q1 and 2Q view. Can you give more color on that second half confidence? No, just what are you seeing in underlying macro and how did you think about what you have contracted versus what you need to still go get?

Jason Peterson (CFO)

We still continue our kind of look forward views in line with what we were doing for the last couple of quarters. Our view for the year did not change much, but we definitely saw the first half of the year better than we expected. Our, again, projection for the second part is practically in line with what we communicated during the last quarter. As soon as we see better visibility later on, we will kind of address this. Right now, it is what we see. Basically, we did not see any specifics which is changing this view, again, outside of normal.

Yeah. To go back to the last earnings call, we talked about the fact that we had seen a soft January and then we expected to see improvement in February and March. We absolutely saw that. We're still seeing improvement in demand in April and May. It's difficult, obviously, to forecast the remainder of the year, but we are looking into Q3, still feeling like the book of business looks quite solid. The guide would reflect the fact that things could be soft in Q4, but again, we're not seeing any change in client purchasing behavior at this time. Generally, what we are seeing is some amount of return to EPAM for quality of execution, which we think has probably been helpful for us and maybe explains the difference in our results relative to some of our peers.

Bryan Bergin (Managing Director, Equity Research)

Okay. Makes sense. My follow-up is just kind of around the bookings dynamics. Any detail you can just give us around bookings to help convey the magnitude of the positive directionality that's forming here? You're attributing better performance and optimism partly from a pickup in AI-related work. Just any numbers you can put around these?

Arkadiy Dobkin (CEO and President)

Yep. I think the only specific that we would have is on the AI-native work that we talked about last quarter. As we look from Q1 to Q2, we would say that we probably have double-digit, let's say, strong double-digit sort of growth in AI-related revenues between Q1 and Q2. Nice improvement in those revenues.

Bryan Bergin (Managing Director, Equity Research)

Thank you.

Operator (participant)

Your next question comes from the line of Ramsey El-Assal with Barclays. Please go ahead.

Ramsey El-Assal (Managing Director and Senior Equity Research Analyst)

Hi. Thank you very much for taking my question. Congratulations for me as well to both Arkadiy and Balazs. I wanted to ask about free cash flow. I know you called out some of the drivers of the lower free cash flow result this quarter on a year-over-year basis. How should we expect that to trend as we move through the year? Are some of these drivers more persistent, or do you expect things to normalize soon?

Arkadiy Dobkin (CEO and President)

Yeah. I think you always have seasonality with us, right? Q1 is usually low. Q1 was a lot better last year. Again, some of it has to do with all the payments we have associated with bonuses and things that happen in Q1. I still would say that we expect kind of an 80-90% kind of cash flow conversion, which is consistent. The only thing that I would say is maybe a little bit of a change is I do think DSO is probably going to stay a little bit elevated. I think in the past, we would have talked maybe around 73 or something. I think it is likely to stay a few days higher. As we see more fixed fee revenues, we do see some milestone billings and some of that stuff, which usually means the invoices go out a little bit later. We are seeing a little bit of an impact on DSO related to that.

Ramsey El-Assal (Managing Director and Senior Equity Research Analyst)

Okay. A follow-up from me is on the pricing environment. As you're seeing organic demand pick up, are you starting to sense now that you might be able to deploy a little bit of pricing later in the year, or is that still too early to call?

Jason Peterson (CFO)

I think it's too early to call. We indicated last time that I think it is going to be, and it is a gap between this. It would be some lagging changes. It's not going to happen too quickly. That's what we're sure. I think I would like to put in perspective also. Yes, we're seeing improvements, but this improvement is still relatively small. It should be a bigger change and should start to impact the great situation.

Ramsey El-Assal (Managing Director and Senior Equity Research Analyst)

Thank you very much.

Jason Peterson (CFO)

Thank you.

Operator (participant)

Your next question comes from the line of Maggie Nolan with William Blair. Please go ahead.

Maggie Nolan (Partner and IT Services Analyst)

Hi. Thank you. Can you talk a little bit more in specifics about plans to improve gross margin over the remainder of the year, particularly in light of mentioning that the guidance allows for some softening in the fourth quarter?

Jason Peterson (CFO)

Yeah. There is always some benefit that results in the second half just due to kind of seasonal factors and pushing past Social Security sort of caps and some of that type of stuff. To be fair, usually you would have a stronger Q3 because of more bill days and some other factors. At the same time, we are focused on improving utilization. We continue to sort of focus on taking some amount of actions and obviously working to drive revenue growth, but with a commitment to kind of getting utilization back to sort of 77%. Over time, probably in 2026, kind of better. We have just got kind of a renewed focus on improving utilization there.

Maggie Nolan (Partner and IT Services Analyst)

Okay. Thank you. Can you size partnership revenue within the business or give an idea of how it has trended in the last couple of years? Is this an important growth driver for the business going forward?

Jason Peterson (CFO)

I think it is the last question, which would be yes. Unfortunately, I do not think I can give you a specific kind of impact, but yes, it has been obviously very helpful, both the co-funding and the introductions to clients. It is definitely part of what has driven revenue growth over time. Our commitment to the partnerships has certainly, and investment in the partnerships has certainly been helpful.

Operator (participant)

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

David Grossman (Managing Director and Senior Equity Analyst)

Good morning. Thank you. I wonder if you could just speak a little bit more about the growth dynamics within the customer cohorts. I think the growth outside the top 20 has obviously reaccelerated. Maybe in the context of that question, maybe speak a little bit about when the customer losses compound and if it remains a headwind in the second quarter. I think you said in your prepared remarks that certain customers are coming back to you. Maybe if you could just flush out that dynamic a little bit more.

Jason Peterson (CFO)

I think that's what we were mentioning for some time. Each quarter, we see a little bit more and a little bit more. Clearly, it's not compensated, and it's not like all coming back. The trend is very visible. I think partially why we're seeing these improvements is because this trend is repeating and kind of accumulating quarter after quarter.

David Grossman (Managing Director and Senior Equity Analyst)

Maybe explain that dynamic, Arc, outside the top 20, why that growth rate is kind of accelerating versus the top 20.

Jason Peterson (CFO)

Yeah. I think sometimes when you have M&A, particularly larger scale M&A like we have, there are a larger number of sort of small customers introduced. I think it's a little hard to do an apples-to-apples comparison just because of the magnitude of the M&A introduced in Q4. I think some of what you're seeing is probably M&A driven.

We are seeing improvements in kind of new logos and the introduction of kind of new customers that are clearly kind of helping relationships. One of the things we've talked about a little bit is growth in the Middle East, where we see a number of new engagements. Yeah, that's probably what I would say at this point.

David Grossman (Managing Director and Senior Equity Analyst)

Got it. Just on the supply side, maybe you could speak just a little bit about where you think India is today versus your most mature geographies in terms of the whole dynamic around recruiting, the relationships, your ability to kind of fill kind of demand for resources at the price points that you want. I don't know if there's a way to really characterize that, but just somehow compare. Because you've been in India since, what, 2015, 2016. I know there was a lot of work done there to modify that model. Just curious where we are in India today versus your most mature recruiting kind of infrastructure in Ukraine.

Arkadiy Dobkin (CEO and President)

I think, David, this would be a difficult comparison because it's not like in, because very different dynamics. If you ask me like 20 years ago where our today considered mature locations, it would be probably from dynamics point of view, very similar because the ratio of senior people versus junior was very different. India right now is growing for us, and there is a very strong level of maturity in the top of the pyramid, which is comparable with anything else. The number of more junior people and accommodated to our requirements is still bigger versus mature like Ukraine or something, which is not growing for the last couple of years.

I think this general gap is shrinking, and quality is growing. There are perceptions from race and everything else, which build up not by us over the last couple of decades. I think we are working to manage all of this. Again, India is an extremely important part. It is practically 20% of our capacity right now, and we will be growing. It is growing right now fast.

David Grossman (Managing Director and Senior Equity Analyst)

All right. Great. Thanks for that.

Operator (participant)

Your next question comes from the line of Jonathan Lee with Guggenheim. Please go ahead.

Jonathan Lee (Managing Director, Equity Research)

Great. Thanks for taking our questions. Let me echo my congrats to Tark and FB on your respective positions. Look, you highlighted strikes stemming from the GCCs. Can you talk through how much of the growth you are expecting in this year is driven by GCC-related work? How does that impact any of your contract structures, duration, or contract profitability?

Jason Peterson (CFO)

I do not think we can share specific numbers here. We are just not doing this. The contract, fortunately, is very much in line with other contracts in our industry. While it could be any type of lex, there is no guarantee that something will be here tomorrow because usually there are pretty simple consolations, terminations, kind of terms there. Profitability is mostly in line with what we see in India across other clients. That is part of the growth, but I would not say it is the big part of the growth story. The other thing I would just say is that they continue to sort of value EPAM's differentiated engineering capabilities. That continues to be a selling point for us with the GCCs.

Jonathan Lee (Managing Director, Equity Research)

Understood. Look, it's good to hear the traction that you're seeing around the native AI volumes. How are you thinking about the level of reinvestment needed to continue to drive that AI-related volume, particularly as it relates to the 90 basis point headwind you called out on margins last quarter?

Jason Peterson (CFO)

Yeah. I think that the investment that we're making, probably no change in terms of what we said during the last earnings call. We are making investment. We do think it's producing real benefit. Again, we are getting really positive feedback from clients around, again, our differentiation. I think that what you see is maybe some reduction in the spend percentage of revenue once you get more into 2026. Right now, I would say it's generally similar to what we talked about at the beginning of the year in the last earnings call.

Jonathan Lee (Managing Director, Equity Research)

Appreciate that, Color.

Jason Peterson (CFO)

Thank you.

Operator (participant)

Your next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.

Jason Kupferberg (Senior Equity Research Analyst)

Good morning, guys. Appreciate it. And congrats on the management transition. I wanted to ask a little bit more about the vendor consolidation point. I think that came up a couple of times. It sounds like there are certain instances where clients are coming back to EPAM. Can you just talk about some of the specific project types where you're seeing that happen and which delivery centers are seeing that work get processed when you have these situations where work is coming back to EPAM from competitors? I'm curious where the clients are having that work get done. Thank you.

Arkadiy Dobkin (CEO and President)

It is pretty broad because even when it's coming back, it's not necessarily the work coming back exactly to the location where it was delivered before because during the last several years as we shared, there were a lot of changes and kind of restructuring of our delivery centers. With work coming back to Eastern Europe, work coming back with a switch to India, work coming back to Western Central Asia, it's pretty broad, okay? Some specifically, if sometimes possible, coming back exactly to locations where it was started from. Again, it's pretty diverse.

Jason Kupferberg (Senior Equity Research Analyst)

Okay. Understood. The second thing I wanted to ask was just in the Q1 revenue, just from a quarter-over-quarter perspective, financial services really stood out. You were up 12% there. I'm assuming since it was quarter-over-quarter, it was all organic. I'm just wondering if there were a couple of sizable contract ramps there or any additional color on that vertical, what you saw there and sustainability of that into Q2 and beyond.

Arkadiy Dobkin (CEO and President)

Yeah. In the Q4 to Q1 compare, you would have had two months of Neoris and two months of FD in Q4 and three months of Neoris and three months of FD in Q1. Both of those acquisitions have got a significant financial services component. Some of it is that. At the same time, we are seeing improvement in the organic business. We do expect to continue to see improvement in the organic business and financial services, banking, some amount of growth in insurance. We've also seen some growth in payers, at least in Q1. Probably banking would be maybe the biggest area of improvement.

Jason Kupferberg (Senior Equity Research Analyst)

Thanks, Jason.

Jason Peterson (CFO)

Sure.

Operator (participant)

Your next question comes from the line of Jamie Friedman with Susquehanna. Please go ahead.

Jamie Friedman (Senior FinTech and IT Services Research Analyst)

Hi. Good morning. Let me echo my congratulations to Ark. I learned a lot from you over the years and to FB on your future endeavors. I'll just ask my two upfront. The fixed price, Jason, that you're calling out, that did grow 19.4% up from 15.1%. I'd be interested in your perspective, both on your confidence on the delivery side, because when you move into fixed price, the risk does get reassigned. That's the first one. On the second one, just go back to Jonathan's question earlier. The dip in the gross margins to 26.9%, Jason, is that the wage increment, or is that still to come? Thank you both.

Arkadiy Dobkin (CEO and President)

Yeah. Okay. Let me do the last question first, okay? On the gross margin, when you look at the Q1 to Q1 compare, we would have a salary increase that would occur in Q2 of 2024, and we would probably also have some market adjustments in Q3 and Q4. When you do a Q1 to Q1 compare, you do not have the salary increase in the Q1 of 2024, but it does show up in the Q1 2025. What we have been talking about is just there is not as much ability to pass on the salary increases with rate increases to clients, although we are seeing a little bit of improvement. In the case of, and then the other thing as we have talked about is that the margin reduction that comes from the two acquisitions, which has about a 50 basis point negative impact. I guess that is the first question. Or the second question, the first question was.

Jamie Friedman (Senior FinTech and IT Services Research Analyst)

Yeah, the fixed price.

Jason Peterson (CFO)

Again, a little bit complicated. Some of it is evolution of our pricing models. It's not always we're going to do something for tens of millions of dollars for two years. Sometimes it's just a monthly fixed fee arrangement for either a team. It may assume some productivity, but again, there isn't as much kind of risk associated with that. Also with Neoris and FD, they've got more fixed fee in their engagements, although usually shorter term. That's what kind of caused the shift as you look into Q1. I think you'll continue to see a little bit of evolution.

It may be also part of the model with the use of AI, which is to introduce some productivity, but do it with a fixed monthly fee type component and be able to produce some benefit for the client, but also some better margin for us.

Jamie Friedman (Senior FinTech and IT Services Research Analyst)

Got it. Thank you. I'll drop back into queue.

Operator (participant)

Your next question comes from the line of Puneet Jain. Please go ahead.

Puneet Jain (Equity Research Analyst)

Hey, thanks for taking my question, and please accept my congratulations as well. It's been great working with you over the last so many years. I wanted to ask Jason about the guidance and the billing days dynamics that are baked in the second half for this year. Can you remind us? I know in the past, I think you talked about that you expect higher billing days in the second half. Can you remind us what does this guidance assume from first half to second half and the visibility you have on second half dynamics?

Jason Peterson (CFO)

Yeah. We never assumed improvement in billing throughout the year. What we did say is that we did expect that as the demand environment improved, that there would be the ability to pass on more rate increases next year. Right now, I would say that no real change in the environment. You still have some cost takeout exercises going on with clients. There's some modest opportunity for rate increases. Again, it may be not as bad. The pricing isn't, let's say, as challenging as it was last year, but it's still not significantly improved. As I just kind of look ahead, again, we do have quite good visibility in Q2.

All indications are that that would carry through into Q3. Of course, as we know, things are subject to change. As Ark said in his prepared remarks, we're not seeing almost any sort of changes in demands from clients or slowdown in project spend. That's kind of how we're thinking about Q3. Clearly, we got some benefit from foreign exchange, and we tried to be clear on that, that particularly the appreciation of the euro should take up anybody's revenue guide. I'm happy to share specifically the assumptions that we used in the production of the guide.

Puneet Jain (Equity Research Analyst)

Yeah. No, that's great. I'm sorry. I meant to ask billing days, number of the days people can work excluding holidays and vacation in the quarter.

Jason Peterson (CFO)

Yeah. Q3 is always more bill days. It would have a natural, you should get growth in Q2 to Q3 just based on seasonality. Q2 has got less bill days than Q3, but it has still got relatively good bill days. If you just look at seasonal patterns, you would expect an improvement from Q2 to Q3 and then arguably a decline in Q3 to Q4. The last couple of years, we have not seen that. We have seen growth between Q3 and Q4, even in challenging demand environments. Right now, particularly the midpoint of the guide would have more of the seasonal feel to it, again, with a little bit of improvement in revenue between Q2 and Q3 driven by seasonality and some softness in Q4, which could be demand related, but also is just generally what can be a seasonal pattern.

Puneet Jain (Equity Research Analyst)

Okay. Thank you. Thank you.

Operator (participant)

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

Darrin Peller (Managing Director and Senior Analyst)

Guys, thanks. And Ark, congrats on everything. Guys, your headcount showed notable year-over-year growth, even after accounting for the employees added from the two recent acquisitions. Maybe just a little bit more color on your overall headcount strategy for this year, where you're really sourcing talent from on a relative basis versus, let's just say, a couple of years back, and really what roles you're hiring for would be helpful for now.

Arkadiy Dobkin (CEO and President)

I think we, in general, are clearly much more careful even with this result and with better than we expected first half of the year. We're very cautious and careful about what would be happening. We're trying to maintain better bench from this point of view.

When we're bringing people, we're bringing people in locations where we expect in this type of environment more demand until, again, we can form that situation really changes. Because again, I would like to still keep a balance between the positive results of H1 and the reality of H2, which is very difficult to predict. Basically, India still is the fastest growing, and we are bringing people from the market with very specific skills and juniors as well because we believe that we can train better with all advances of AI impacting the SDLC process. The same balance happening in other locations, but again, as you see from the numbers, the number of new employees in other locations, it's relatively small right now. I can tell you that we see enhancing our training capabilities because we would like to be ready, if necessary, to increase recruitment. Again, right now, we're very, very careful with this.

Darrin Peller (Managing Director and Senior Analyst)

That makes sense. Ark, where are we in terms of size of average engagement on AI deals now? And just maybe a little more color on how that's trended and where you see that going. Just kind of curious for any kind of quantitative update to the best you can provide on AI.

Arkadiy Dobkin (CEO and President)

I think here we can repeat what we were saying during the last quarter, and this is happening, and this trend continues. The size is increasing and going to more production type situation with more number of use cases and functionality. So size of the deals definitely increases. Another thing is the type of what we qualify as AI, what type of applications is dynamically changing as well. That's why sometimes it's very difficult to have real apples-to-apple comparison.

With what we do and can do this internally because it's much easier to do than trying to put out this external announcement and some state competition. The size of the deals definitely increases. Operator, we have time. And number of the deals increasing. When we were talking about few deals like $10 million plus, then this number increasing as well.

Darrin Peller (Managing Director and Senior Analyst)

Right.

Jason Peterson (CFO)

Operator, we have time for one more question, please.

Operator (participant)

Your final question comes from Jim Schneider with Goldman Sachs. Please go ahead.

Jim Schneider (Senior Equity Analyst)

Good morning. Thanks for taking my question. Ark, congrats on a well-deserved transition. Two if I may. One is your commentary on client conversations and the outlook appears significantly better, at least from my perception, relative to some of your peers. You mentioned some clients returning, but can you attribute that to any other sort of specific kinds of project work or other client-specific factors that you're seeing in terms of the better client outlook? Maybe in terms of your visibility into the second half, any way of sort of quantifying your second half backlog coverage, perhaps being better, worse, or the same as in a typical time after a few months? Thank you.

Arkadiy Dobkin (CEO and President)

I think you would expect, I think this is exactly what's happening, that when clients come back to us, it's both. Sometimes we get in exactly the same work which we were kind of doing before. Sometimes it's a very new engagement. That's spread around these things. We're talking about second half of the year. I only can repeat what we said already.

With all kind of better environments, visibility is still relatively difficult. What we're seeing for the second part of the year is approximately what we were seeing quarterly. Decisions are still being made more in real time. That's what we're benefiting in Q1 and Q2 from. Predicting Q3 and Q4 better than we predicted so far is difficult, including the size of the deals as well. I think we can share more next quarter. Again, thank you very much. I think hopefully it was a little bit better message from us than before. At the same time, with all this encouragement about opportunities ahead of us, we are thinking about the future with cautious optimism based on everything that's happening and everything which is relatively uncertain from the macro environment. I would like to make sure that we're balancing the good message with a very difficult environment. Thank you. Still talking to you next quarter. Thank you very much.

Operator (participant)

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