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EPAM Systems Inc (EPAM -0.51%)
Q3Â 2019 Earnings Call
Nov 7, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the EPAM Systems Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
[Operator Instructions]
As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Straube, Head of Investor Relations for EPAM Systems. Thank you. You may begin.
David Straube -- Head of Investor Relations
Thank you, operator and welcome everyone. By now you should have received your copy of the earnings release for the Company's third quarter 2019 results. If you have not, a copy is available at epam.com in the Investors section.
With me on today's call are Arkadiy Dobkin, CEO and President; and Jason Peterson, Chief Financial Officer.
Before we begin, I'd like to remind you that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the Company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to GAAP and are available in our quarterly earnings materials located in the Investor section of our website.
With that said, I would now like to turn the call over to Ark.
Arkadiy Dobkin -- Chief Executive Officer
Thank you, David and good morning, everyone. Thanks for joining us. We delivered revenue of $588 million, reflecting an approximate 26% year-over-year growth or 27% in constant currency terms. Additionally, non-GAAP earnings per share was $1.39, which represents approximately 19% growth from Q3 of 2018. As we have discussed in the past, the challenges facing our clients continue to be complex and multi-dimensional. The digital ecosystem where everything is coming together, including people, suppliers, consumers and businesses into scalable and flexible environment brings with it a completely different level of sophistication in designing, building and delivering dynamic experiences, platform and systems.
And while many companies are investing in digital technologies across a very diverse landscape of system of record, engagements and insights, the use of technology to solve currently visible problems doesn't ensure future success. Instead organizations marching steps ahead and turn themselves into constantly changing adaptive enterprises by empowering these capabilities, in properly designed and well-built digital ecosystems.
This means that our clients must think about how to meet the challenges addressing the market share and opportunities as well as how to adapt to both technology and constant organizational changes, and do so with a high degree of agility, this continues to be very critical. As a result, during the last several years and present Q3, we have seen inconsistent demand environment that continues to present us with opportunities to expand from our traditional project engineering and technology-led lines of businesses into adjacent business and experience driven areas of customer needs.
That in turn has forced us not only to advance our consulting opportunities, but to bring those capabilities much earlier in the engagement cycles in comparison to what we did just several years ago. This evolution is also challenging us to think about how to properly orchestrate all aspects of our consulting capabilities together, including business experiencing technology, all of which we have been carefully advancing during the last few years both organically and through a number of targeted acquisitions.
Adding this on top of our traditional strength and ability to build high-quality solutions, platforms and experiences, its speed and scale, gives EPAM the ability to extend further across the demand landscape and also us to serve our clients with more complex requirements in both vertical and horizontal domains. So today, we feel the time is right to position ourselves more formally in a way that reflects the new diversity of our business. That is why in September, we launched EPAM Continuum, the integrated brand, which links together our capabilities in business consulting, technology consulting, experience and an innovation consulting.
EPAM Continuum is part of the EPAM organization and along with our core product engineering capabilities brings to the market integrated senior team of practitioners that can respond to complex client needs. It placed [Phonetic] and across multiple points in our client organizations to help them address the challenges of adoptive enterprises, the speed and agility.
Similar to our emphasis on talent development and education, driving higher levels of quality through our engineering excellence and evolving our market position and ecosystem partners models, the launch of EPAM Continuum is another example of our never-ending journey to change EPAM and stay relevant to our clients and the market.
As just mentioned, our condition efforts continue to be one of the sources of such change. On Tuesday, we announced the acquisition of NAYA Technologies, the data and cloud integration consultancy both in Israel and San Jose, California. This acquisition complements EPAM existing capabilities and also expands our geographic footprint into new talent market.
Before I hand the call over to Jason, I would like to highlight just one of the many recognitions EPAM has received since our last earnings call. In August, EPAM was included in the list of Fortune 100 fastest growing companies for 2018. The ranking of the world's best performance over the last three years and revenues [Indecipherable]. It's interesting to note also that EPAM was the only information technology services company featured on 2018 [Phonetic] list.
So to summarize, despite some of the macro level uncertainties, which has been reserved for multiple quarters, we are pleased with our third quarter results, which reflect broad-based consistent high-quality earnings that underscore our ability to execute and grow in the market that continues to demand high-end expertise and ever-changing capabilities.
I will now hand the call over to Jason to give more details on our third quarter results as well as to share our Q4 and annual guidance. Jason?
Jason Peterson -- Chief Financial Officer
Hey, thank you, Ark. And good morning, everyone. In the third quarter, we produced strong results in both revenue and profitability, while delivering across several key operational metrics. Here are a few highlights from the quarter. Revenue came in at $588.1 million, a year-over-year growth of 25.6% on a reported basis and 27.2% growth in constant currency terms, reflecting a negative foreign exchange impact of 1.6%. Revenues from acquisitions contributed approximately 1.5% of revenue growth in the quarter.
Our demand patterns for this quarter were relatively consistent with those of previous quarters. We saw strong broad-based growth across most industry verticals. Looking at Q3 revenue growth across our industry verticals, financial services delivered 24.4% year-over-year growth with demand substantially driven by offerings in asset management, payment processing and insurance. Additionally, growth in the quarter was positively impacted by the timing of revenue recognition for a few financial services clients primarily in Russia, which we previously discussed during our first quarter call.
Software and hi-tech grew 22.9% in the quarter, driven by demand for product engineering services. Travel and consumer grew 11.2% in the Q3, reflecting increasing demand for e-commerce, replatforming and data engineering and retail, offset by the continued ramp down of a few consumer clients. Rounding out our vertical performance, we saw very strong growth in business information and media, which posted 29.3% growth in Q3, driven by demand for data and analytics services. Life sciences and healthcare grew 49.7%, reflecting strong growth across both industries with demand for services in R&D IT, in addition to customer facing solutions and applications.
Emerging verticals delivered 35.1% growth, driven primarily by clients in telecommunications and energy. From a geographic perspective, North America, our largest region, representing 60.9% of our Q3 revenues, grew 26.2% year-over-year or 26.5% in constant currency. Europe representing 32.2% of our Q3 revenues, grew 24.4% year-over-year or 28.4% in constant currency. CIS representing 4.5% of our Q3 revenues, grew 43% or 42.9% in constant currency and finally, APAC grew 4.1% or 5.5% in constant currency and now represents 2.4% of our revenue.
Our revenue results for the quarter are underpinned by a diverse set of growth drivers across the portfolio of clients we serve. In the third quarter, growth in our top 20 clients was 17% and our clients outside our top 20, which represent approximately 60% of revenue, grew 32% compared to the same quarter last year.
Moving down the income statement. Our GAAP gross margin for the quarter was 35.8%, compared to 35.7% in Q3 of last year. Non-GAAP gross margin for the quarter was 37.1%, compared to 37.3% for the same quarter last year. GAAP SG&A was 20.2% of revenue compared to 19.9% in Q3 of last year and non-GAAP SG&A came in at 18.7% of revenue compared to 18.2% in the same period last year, in line with our expectations.
Our SG&A priorities remain focused on building capacity and capabilities to support our longer-term growth plans. GAAP income from operations was $80.6 million or 13.7% of revenue in the quarter, compared to $64.6 million for 13.8% of revenue in Q3 of last year. Non-GAAP income from operations was $99.7 million or 17% of revenue in the quarter compared to $82.1 million or 17.5% of revenue in Q3 of last year.
Our GAAP effective tax rate for the quarter came in at 16.2%, which includes a $4.2 million excess tax benefit related to stock option exercises investing of restricted stock units. Our non-GAAP effective tax rate, which excludes the excess tax benefit and includes the tax effect on non-GAAP adjustments, was 21.5%. Our non-GAAP tax rate reflects a $1.2 million discrete benefit in connection with our 2018 tax return filing.
Diluted earnings per share on a GAAP basis was $1.16, which reflects the impact of foreign exchange and a lower-than-expected excess tax benefit in the quarter. Non-GAAP EPS was $1.39, an 18.8% increase over the same quarter in fiscal 2018. In Q3, there were approximately 57.8 million of diluted shares outstanding.
And turning to our cash flow and balance sheet. Cash flow from operations in Q3 was $119 million compared to $102.3 million in the same quarter last year and free cash flow was $91.8 million compared to $94.1 million in the same quarter last year. DSO was 75 days compared to 79 days at the end of Q2 and 81 days in Q3 of last year. The lower-than-average DSO this quarter was the result of our ongoing operational focus in this area.
And moving on to a few operational metrics. Our total headcount for the quarter ended at more than 35,400 employees, which includes approximately 31,400 delivery professionals; a 24.7% increase year-over-year. During the quarter, there were more than 2,000 delivery professionals, who joined the EPAM primarily in our global delivery locations. Utilization was 76.1% compared to 76.4% in the same quarter last year and 78.4% in Q2.
Now let's turn to our business outlook. Starting with fiscal 2019. Based on continued strong demand, the revenue growth will continue to be at least 23% reported and at least 24% in constant currency terms factoring in a 1% estimated unfavorable foreign exchange impact. We expect GAAP income from operations to continue to be in the range of 12.5% to 13.5% and non-GAAP income from operations to now be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to now be approximately 15%, which includes an updated assumption for a lower level of excess tax benefit and our non-GAAP effective tax rate to now be approximately 22%.
Earnings per share. We now expect GAAP diluted EPS to be at least $4.43 for the full year, which reflects the impact of the higher GAAP effective tax rate. Non-GAAP diluted EPS will now be at least $5.35, reflecting a modest improvement in expected profitability for the full year. We continue to expect weighted average share count of 57.7 million fully diluted shares outstanding.
For Q4 of FY '19, revenues will be at least $616 million for the fourth, producing a growth rate of 22% in both reported and constant currency terms. So we anticipate there will be an insignificant foreign exchange impact. We expect GAAP income from operations to be in the range of 13.5% to 14.5% and non-GAAP income from operations to be in the range of 16.5% to 17.5%. We expect our GAAP effective tax rate to be approximately 21% and non-GAAP effective tax rate will be approximately 23%.
Earnings per share. We expect GAAP diluted EPS will be at least $1.19 for the quarter and non-GAAP EPS will be at least $1.43 for the quarter. And lastly, we expect a weighted average share count of 57.9 million fully diluted shares outstanding.
Finally, a few key assumptions that support our Q4 GAAP to non-GAAP measurements. Stock compensation expense is expected to be $14.8 million. Amortization of intangibles is expected to be $2.7 million. The impact of foreign exchange is expected to be approximately $2 million loss. Tax effective non-GAAP adjustments is expected to be $4.5 million. We expect excess tax benefit to be $1.8 million. And lastly, one more assumption that is not part of our GAAP to non-GAAP assumptions. We expect interest and other income to be $2.4 million in Q4.
In summary, we are quite pleased with our third quarter results, which reflect continued strong demand for our services underpinned by a diverse mix of projects and offerings across the industries we serve. With that, let's open up the call for questions.
David Straube -- Head of Investor Relations
Before we open the call for Q&A, I do want to mention that Ark and Jason are in different locations for today's call, and we could experience a slight delay in responding to questions.
With that operator, can you please give instructions for the Q&A.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Ramsey El-Assal with Barclays. Please proceed with your question.
Damian Wille -- Barclays -- Analyst
Hi, good morning. This is Damian on for Ramsey. I wanted to ask about your revenue growth expectations here and any potential conservatism that's in your guidance. I know you have a tough comp coming up here in Q4, but I would have thought that after the acceleration this quarter that you raised full year. So maybe what's stopping you there and how much conservatism is baked into your expectations. And then maybe as we move into 2020, is there any reason to believe that the nice growth that you've seen this year is set to decelerate. It seems like all the segments are chugging along nicely. Is there any reason that we can't use this year's exit rate is that sort of baseline for 2020?
Jason Peterson -- Chief Financial Officer
Yeah. So I think your points are good ones. So we continue to experience strong demand for our services, but the compare in the Q4 2018 is a challenging one. I think you'll remember that the growth in that quarter, on a constant currency basis was 29% and 26.5%, if you strip out the inorganic piece. So it's the highest growth rate since I've been here. We also generated 70% growth rate in the life science and healthcare business, and that business actually grew 26% sequentially in Q4.
So that is just -- it's a tough reference point. In addition, what we saw this year is a slightly different pattern in our CIS revenue recognition. Usually, we'd see a higher percentage of that revenue recognized in Q4. This year, we probably saw about $3 million more recognized in Q3 than we would expect based on traditional pattern. So that $3 million recognized in Q3 of 2019, I think earlier in the year, we would have expected that would probably show up in Q4 of 2019.
So again, I think that the guide from a revenue standpoint is a fair guide. And then from a growth rate standpoint in 2020, we continue to see strong demand for our services. The demand environment that we see is unchanged from the last conference call and right now, we're expecting to continue to see a growth rate in excess of 20% in our fiscal 2020.
Damian Wille -- Barclays -- Analyst
Yeah, that's great. And maybe I'll just zero in here on my follow-up. On the APAC region, saw slowdown there. Is there anything to do with maybe like the US-China trade war or Hong Kong or is it just simply tougher comps. Any broader commentary on the demand environment in the Asia-Pac region? Thanks guys.
Jason Peterson -- Chief Financial Officer
Yeah. I would say that's probably specific to EPAM is that, as you would know, most of our growth has come out of Western Europe and in North America. APAC, historically, we went to because our clients in North America and in Europe had asked us to support their operations there. It hasn't been a huge area of focus for us because we've been driving demand and are supporting demand out of our North American and European customers. And so, I think over time it will be an area of focus for us and you will see greater growth, but at this point, I think what we're doing is, we're prioritizing resourcing to support our large and rapidly growing customers in North America and Europe.
Damian Wille -- Barclays -- Analyst
All right. Great. Thanks so much.
Jason Peterson -- Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch. Please proceed with your question.
Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst
Good morning, guys. Thanks. I just wanted to start with a couple of questions on the NAYA acquisition. What kind of contribution to revenue are we thinking there for Q4 as well as 2020 and just any color on the number of employees they have and is Israel really the main new geography they help bring you into?
Arkadiy Dobkin -- Chief Executive Officer
Yeah. As we mentioned, it's data related and migration to the cloud consultancy. It's a small company, so contribution from all our acquisition is a little bit over 1%. So there is no much impact on numbers, but from capabilities point of view, it's a nice addition to our technology consulting group. And we do believe that it would improve our offering mostly in US and Western Europe, and also giving us kind of additional benefits to have office in Israel and to be able to source some specific talent available there, which we all know.
Jason Peterson -- Chief Financial Officer
So just to clarify, all acquisitions, including NAYA would make up about 1% of the growth rate in Q4 of 2019. So it's a -- we think an interesting acquisition, but again it's more of a capability in play than it is substantial increment in terms of revenue.
Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst
Okay. Okay, understood. And then can you comment on employee attrition in the quarter? I'd like to keep checking in on that, just obviously given the work for digital talent and maybe as part of that, any color you can provide just in terms of the hit rate you're seeing these days on campus offers?
Arkadiy Dobkin -- Chief Executive Officer
So it's mostly in line with what we were sharing during the last quarter, so maybe even last several years. So it's always staffing alignment. Our attrition rates better than last year. So we're putting a lot of efforts to make sure that the retention working. Training activities from our side and focus on education and [Indecipherable] is very high. So we put in a lot of efforts to make sure that it's not impacting our growth, but again, in general, it's always challenging, but I don't think there is any news specifically this quarter.
Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst
Okay. If I can just sneak in one more real quick. Just like it looks like the growth rate in fixed price revenue that seems to be accelerating and I was wondering if that's reflective of a broader trend in terms of client preferences or any certain project types that you see lending themselves more to the fixed-price model?
Jason Peterson -- Chief Financial Officer
Yeah, not really. So, you certainly see it show up in the numbers, but let me kind of explain to you what you're seeing is some of the acquisitions that we have, do have these small sort of fixed fee arrangements that might be projects that last a couple of months, but what you're really seeing in terms of the change in the percentage of fixed fee in this quarter is we have a large customer that has been growing rapidly that has -- our pricing arrangement with them involves -- there was -- sort of pricing per team. And so it's based on the component of the team, the size of the team, the skill sets of the team, and so it's very time and materials like, but because the pricing is done on a per team basis, it turns out that it was classified as a fixed fee.
But again it's traditional kind of agile kind of build new development type work. So it doesn't represent anything really different, just the pricing is like let's say a vague variant on time and materials that does show up in a fixed fee classification.
Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst
Okay. Very helpful. Thank you, guys.
Jason Peterson -- Chief Financial Officer
Sure.
Operator
Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
Maggie Nolan -- William Blair -- Analyst
Hi. As we think about getting into more consulting type engagements earlier in the cycle, does that change your expectation or what you're seeing in the way of larger deals?
Arkadiy Dobkin -- Chief Executive Officer
Yes. I think it is happening. We're not providing any specific KPIs or measurement on, but I think it's working in line with our expectations and that's why we also announced in EPAM Continuum brand now to make sure that we can do right go-to-market approach and explain to the clients that that's a capability switch, we now can [Indecipherable] and be kind of mature in the game to compete for larger deals from end-to-end. It is happening.
Maggie Nolan -- William Blair -- Analyst
Okay. Great. And then as you think about the Company continuing to scale up, what is really the optimal structure for EPAM in terms of how that employee pyramid is balanced. How many reporting levels are necessary versus what would bloat the Company and make you less agile? I'm trying to understand whether or not EPAM prefers a horizontal structure or if there is a little bit more hierarchy that needs to be introduced into the model?
Arkadiy Dobkin -- Chief Executive Officer
We do not believe that we need more hierarchy than we have. We do believe that we probably need even less, and that's one of the key points in our efforts all the time. And at the same time, it's very dynamically changing based on the needs. So we don't know what the optimal. We're trying to find the right configuration and kind of evolving. I think we will talk maybe a little bit more about it during our Investor Day, like, in a couple of weeks.
Maggie Nolan -- William Blair -- Analyst
Understood. Thank you.
Operator
Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question.
Darrin Peller -- Wolfe Research -- Analyst
Hey, guys. Thanks. I just want to touch first, just given where we are in the year right now on what kind of conversations you're having with your clients as they start thinking about 2020 from a demand standpoint and from a specific more and more granularity of where they're actually looking to spend, maybe even on a vertical basis, if you can?
Arkadiy Dobkin -- Chief Executive Officer
Listen, we understand desire to know what will be in the future, at the same time, conversation at this period of year still more focused how to finish the year, so not too much clients we need to go in conversation about next year, really. And probably very boring answer, but we don't expect any significant changes in the tone from last year's and there is demand for people for companies, which can deliver in complexity growth. So we do believe that the demand would be good. Anything can happen. Anything can happen as we all know from economies standpoint. So let's wait.
Jason Peterson -- Chief Financial Officer
Yeah. So from a demand environment, we're not seeing any change from -- really any change from the last quarter. We've done an early prelim look at our numbers for 2020, and I do believe we'll continue to grow at a rate above 20%. And the only thing sort of call out I have just in terms of overall demand and this is very consistent with what we said throughout this fiscal year. So this is not new commentary. But we continue to see kind of a -- some pro and some con in retail in Europe.
We've got some clients who continue to make investments and continue to grow with EPAM. Other clients who are beginning to slow down their investment levels, and those clients are actually having some modest decline. And so you've got some mix in what I call kind of retail in Europe and particularly in the UK. And then the other area of -- and we've talked about this throughout the fiscal year, is that just the European banking demand is less certain at this time. And that's unchanged from -- I think we talked about this even in Q1 of 2019.
Darrin Peller -- Wolfe Research -- Analyst
I mean it looks like your financial segment continues to do very well in fact accelerate. I know some of that could have been timing, but nonetheless, I mean with Europe being a little bit slower, perhaps, I guess it speaks to the North American financial side doing better than maybe earlier the year, is that fair.
Jason Peterson -- Chief Financial Officer
Yeah. In some ways, I think our portfolio might be different than many of our clients. And so we've got very strong growth in asset management, in insurance, in FinTech. There's a whole series of different -- in payment processing. And so, I think there's probably less exposure to us to large banks, and why you're seeing the high growth as you're seeing growth in these other areas of our portfolio. And plus, as you tell you pointed out a little bit of that Russian revenue recognition, which is largely financial services. And that's why you're seeing the high levels of growth in our financial services portfolio.
Darrin Peller -- Wolfe Research -- Analyst
That's great to hear. Just one last quick one is just on cash on hand has gone up nicely and your balance sheet looks really good. So just when we're thinking about priorities now, I mean, you've done a number of smaller tuck-ins, just anything in larger size that's in your pipeline or discussions right now from an MA -- I assume it's all going to be used either for just keeping cash on hand or M&A rather than...
Jason Peterson -- Chief Financial Officer
Yeah. So I think you've seen us do more acquisitions this year. As you point out, they've been small sort of tuck-in acquisitions. I think you'll continue to see us do a fair number of acquisitions in the coming year. And I think it's likely that the acquisitions or at least one or more of them could be larger. And that would be somewhat consumptive of cash. And then the other place where we're using cash is to continue to build out our physical infrastructure and our delivery centers and so those are probably the two places where you'll see cash used in the coming year.
Darrin Peller -- Wolfe Research -- Analyst
Got it. Got it. All right. Nice job, guys. Thanks.
Jason Peterson -- Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Mayank Tandon with Needham & Company. Please proceed with your question.
Kyle Peterson -- Needham & Company -- Analyst
Hey. Good morning. It's actually Kyle Peterson on from Mayank. Thanks for taking the questions. So let me start on margins. The profitability has obviously looked very good the last several quarters, kind of toward the top end of that kind of 16%, 17% range. And the 4Q guide implies that to continue. So how should we think about margins moving forward. Is 16%, 17% still the right band to look at? Or should they be more kind of on the upper end of that or just want to see your thoughts on the profitability outlook?
Jason Peterson -- Chief Financial Officer
Yeah. So as you point out, we run in the top half of the range in all quarters in 2019. At the same time though we continue to believe that operating in the 16% to 17% range is appropriate for the business. So I probably wouldn't have a different guide than what we've talked about throughout this fiscal year.
Kyle Peterson -- Needham & Company -- Analyst
Great. That's helpful. And then just one quick follow-up on the software and hi-tech vertical, at least on a sequential basis, seem to be a little softer relative to all the other verticals, which were quite strong. Is there any seasonality there that we should pay attention to? Or anything in particular kind of happening under the hood? Just want to get a little more color on that?
Arkadiy Dobkin -- Chief Executive Officer
I don't think we have any specific comment on this. It's -- some quarters, you get in a number of new accounts and it's getting a little bit flatter than the last spike. I don't think you will find any specific trends if you start to analyze backward, but there is nothing to highlight there.
Kyle Peterson -- Needham & Company -- Analyst
All right. Great. Thanks guys. Nice quarter.
Jason Peterson -- Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.
Joseph Foresi -- Cantor Fitzgerald -- Analyst
Hi. My first question is just around the governors to growth. As you look at the business model today, obviously, there's pockets of weakness. But how is the human capital element potentially a governor to growth and how could it impact margins? There's a couple of different players in the space, another public company, that's obviously focused on the Ukraine, is really the human resources the one governor to growth that you worry about the most, and how does that shake out today versus two, three years ago?
Arkadiy Dobkin -- Chief Executive Officer
It is definitely one of the major components of the growth, not just, clearly, a number of people, but the quality of this effort. And that's a topic, which we kind of touch in particularly each quarter, and we specifically, we're talking about our investments in premium education, selection, retention. So it's a very big topic, which almost impossible to address here. If you ask compared to last couple of years, I think it was pretty tough three, four years ago, and we advanced in our infrastructure or kind of ecosystem, internal ecosystem, how to deal with this. And that's why I don't think it's still much different than a couple of years ago, but it's still pretty tough. And again, I think, also, it would be one of the more advanced topics, which we're going to cover during the Investor Day.
Joseph Foresi -- Cantor Fitzgerald -- Analyst
Got it. Okay. Then just my last kind of two-part question. Can you just give us an update on attrition rates and wage inflation in perhaps your more dominant regions and then margins seem to want to continue to move upwards. I know I've asked a couple of times on the call about the kind of upward push on the margins, maybe you could give us sort of your long-term view on where you think margins can go and what the puts and takes are there? Thanks.
Jason Peterson -- Chief Financial Officer
Yeah. So from an attrition standpoint, attrition is lower in Q3 of '19 than it was in Q3 of '18. Attrition continues to run in the low teens for us. So again we've focused a lot of energy on that. And making certain that we're providing an appropriate sort of career experience for our delivery personnel. So that they really do feel that they've got a career and a long-term home at EPAM.
From a wage inflation standpoint, the wage inflation really hasn't changed throughout the year. So really no change there versus what I've talked about in the past. And then from a margin standpoint, I think we're going to continue to focus on running, let's say, the gross margin at about the level that we've been running it at. So and then from an SG&A standpoint, I think we've talked about this sort of 18% to 19% range.
And so, yeah, I don't see -- I wouldn't be talking about a different range for 2020. Certainly, you can see that we've been able to run at the top end of the range in 2019, but I think what we'd still talk about is a 16% to 17% adjusted IFO target range as we enter the 2020 fiscal year.
Joseph Foresi -- Cantor Fitzgerald -- Analyst
Thank you.
Jason Peterson -- Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.
Ashwin Shirvaikar -- Citi -- Analyst
Thank you. Good morning. Hi, Jason. Good quarter.
Jason Peterson -- Chief Financial Officer
Thanks.
Ashwin Shirvaikar -- Citi -- Analyst
Hey. So I guess my question is, last time we spoke in September, you guys said the demand exceeds supply, which for -- generally has been true for some time, but the question that I have is, if that continues, does it make sense at any point for you guys to make sort of a scale-based acquisition as opposed to what you've generally been doing is capability based acquisitions just to kind of tap into more of the demand spectrum?
Arkadiy Dobkin -- Chief Executive Officer
It might make sense if it would allow us to -- after this too expand organically more as well and the quality of this acquisition would be in line with our expectation, which is a very kind of a long shot. So -- but we're looking for this, and if this opportunity will come, definitely, we'll be considering. But again, sizable acquisition with high-quality resources and ability to grow at least 20% after this. So this type of companies probably cost a lot and have their own strategy.
Ashwin Shirvaikar -- Citi -- Analyst
Understood. No, that makes sense. The other thing was this really a clarification with regards to the stock-based compensation and accruals and the impact of all of that. I'm thinking that's already in the number for 4Q margins already, right?
Jason Peterson -- Chief Financial Officer
Yes, correct.
Ashwin Shirvaikar -- Citi -- Analyst
Okay.
Jason Peterson -- Chief Financial Officer
Yeah. So the -- what I'll call variable compensation and certainly the accrual is in for that based on our expectations for the performance in the fiscal year and then the stock based comp, yeah, we would be recognizing the expense associated with that throughout the year.
Ashwin Shirvaikar -- Citi -- Analyst
As a percent of revenue, would you expect that to start to be trending upward as we look in the future?
Jason Peterson -- Chief Financial Officer
Haven't thought about what that specific element would be and so let me think about that and we can talk about that later. Yeah, I guess maybe I'll just leave it at that.
Ashwin Shirvaikar -- Citi -- Analyst
Okay. Got it. Thank you, guys.
Jason Peterson -- Chief Financial Officer
Okay. Thanks.
Ashwin Shirvaikar -- Citi -- Analyst
Good quarter again. Thanks. Bye.
Operator
Thank you. Our next question comes from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question.
Vladimir Bespalov -- VTB Capital -- Analyst
Hello. Congratulations on the number and thank you for taking my questions. My first question is, like a kind of a broad one, maybe you could talk a little bit about your conversation with clients? For example, if the clients need to cut spending because of the macro uncertainties and things like this, where would IT spending stand in this and their priorities right now, whether this is the last kind of expense item that they're going cut or you see risks on this side?
And probably a couple of technical questions on the numbers. First, I see some acceleration in hiring. So maybe you could provide some color on this acceleration in the last reported quarter? And also, there is a change in the trend of your client concentration, the top five clients started to increase, and this is the first time for the past several quarters. So is this a kind of quarterly volatility or maybe you see some changes on this side as well? Thank you.
Arkadiy Dobkin -- Chief Executive Officer
Can you make -- the first question about the demand. You said, if we feel that there is some softness on some clients and then I didn't understand exactly what was the question, then would -- our reaction should be one or one, can you quantify a little bit?
Vladimir Bespalov -- VTB Capital -- Analyst
Yeah, yeah, sorry, if it was not very clear. So my question was basically, if we see some micro uncertainties to you, some recession in the global economy and things like this and companies, your clients in particular, will have to cut spending. So in terms of cutting spending, where IT spending stands for your clients? Whether it's going to be the number one, I think which they're going to cut or since this is so important for sustainability of their business, this will be probably the last one. How in general you feel that your clients think about this?
Arkadiy Dobkin -- Chief Executive Officer
Sure. So it's a very tough question taken in account how many clients and how many different situations could be there. So -- and also taking in account how to predict level of impact or what -- how big recession or how big, like, economic downturn could be. There is different bucket of clients. For some of them, it might be critical; for a lot of clients, it would be probably opportunity to invest continuously in digital part of the business.
So I can give you from our experience, like, 10 years ago, when pretty tough one happened, we had couple of clients who stopped completely, and we had a bunch of clients who actually continued to grow since then some jumped opportunity for utilizing the good capability in engineering account. But at that time, for example, EPAM was flat for a year and then starting to grow 50%. Okay. So maybe not what expected, but I don't think there is a really clear answer to this.
Vladimir Bespalov -- VTB Capital -- Analyst
Okay. Thank you very much.
Jason Peterson -- Chief Financial Officer
And just on the headcount, so the headcount additions in Q3 just are suggestive of what we're seeing from a demand environment. We continue to see a strong demand environment. We grew headcount rapidly in places like India and Mexico in addition to rapid growth rates in our traditional geographies like Ukraine and Belarus. We're also beginning to stand up a few additional sort of smaller centers. And so you'd see some growth there. And then the Competentum acquisition came with over 200 headcount, primarily in Russia. And so for the most part, the headcount growth is really being driven substantially by what we're seeing from a demand standpoint.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Moshe Katri with Wedbush Securities. Please proceed with your question.
Moshe Katri -- Wedbush Securities -- Analyst
Hey, thanks. A couple of things here. It seems that there is a different dynamics looking at the growth rates between the top 20 and the rest of the business in terms of client base. So should we assume that there a number of large top five or top 10 clients that are kind of dragging growth much lower on proportionally maybe you can give us some color on that and then maybe some color also on what are we seeing on pricing. I think historically we've seen some pricing uptick of -- in terms of a couple of hundred basis points, is that still the case? And then, any change in the dynamics, looking at wage inflation, specifically in some of the geographies in Eastern Europe. That will be helpful. Thanks a lot.
Jason Peterson -- Chief Financial Officer
So from a, I guess, a concentration, and I think that would also was a question I was asking about the prior caller, is that the -- I would say that there's a little bit of an uptick that you've seen between Q2 and Q3 in terms of concentration is not something that we expect over a longer period of time. I think it's just -- just add a bit of a subtle kind of uptick. And we have seen some good growth in some of our larger customers, but at the same time, we're seeing extremely high growth rates in customers outside our top 20 as well. So I think it's a fairly typical and again, I think it speaks to the diversification of the business that we've got rapid growth in our large customers and we also have growth and even greater growth in our customers outside the top 20.
From a wage inflation standpoint, at least at this time, it's pretty similar to what we've seen in past years, hard to predict what it could look like in the future, but at this point in time, it's been very consistent and from a pricing environment standpoint also quite similar. So we continue to get rate increases across a subset of our large long-standing customers. And then with newer engagements, those generally have somewhat stronger pricing just based on the overall kind of demand for resourcing in a market that is resource constrained.
Moshe Katri -- Wedbush Securities -- Analyst
And just if I can just sneak in one last one, looking at, obviously, you gave us some color on Q4. Is there anything that we should kind of keep in mind in terms of how the Q1 will start in terms of budgets and funding for projects and seasonality? Is there anything unusual looking into Q1 at this point?
Jason Peterson -- Chief Financial Officer
Yeah. We've done a prelim look for the full fiscal year, and again it's very preliminary and it does again speak to a growth rate in excess of 20% in the coming year. Hard for me to provide color on Q1 at this time.
Moshe Katri -- Wedbush Securities -- Analyst
Understood. Thanks a lot.
Jason Peterson -- Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Bryan Bergin with Cowen and Company. Please proceed with your question.
Bryan Bergin -- Cowen and Company -- Analyst
Hi. Good morning. Thanks. I wanted to ask on the sales force. Can you provide an update on the sales strategy as you look to 2020? Any color around more proactive development of a larger direct sales team and if so, any particular service lines or areas of focus?
Arkadiy Dobkin -- Chief Executive Officer
So I don't think we have big changes like it's exceptional, like we're talking about more consultative approach. And consulting approach is definitely part of our go-to-market and business development strategy. How to approach client is smarter ways of recognizing the opportunities and challenges they have and offer the solutions. But in general, the market which we operate is pretty interesting. From a growth point of view, I don't think we're opening kind of new lines of businesses or new sectors to go after. And today, we're already kind of -- we're growing our headcount in direct sales over the last couple of years. So I think we're, in general, in good place here.
Bryan Bergin -- Cowen and Company -- Analyst
Okay. Does the build out or broadening of that consulting practices, does that do anything from a profitability profile or is it consistent with where you are in the Company average?
Arkadiy Dobkin -- Chief Executive Officer
We will see what would be happening in that as probably everybody remember was our answer for some time because it's about growth, it's not about profitability for us to support the growth we have right now and to be more impactful on client results, but we bring in some additional people, profitability here probably depends on the cost of the resources and wages for consultants also high. So I think it was balanced. So it's revenue growth going forward to the main goal here.
Jason Peterson -- Chief Financial Officer
Yeah, so significantly larger engagements, which we hope will also have higher value. And then, again, as said, it's blended as part of an overall kind of delivery organization, kind of a consulting combined with the delivery. And so, don't expect a material impact in profitability, at least in the near term or the coming year.
Bryan Bergin -- Cowen and Company -- Analyst
Okay. That makes sense. And, Jason, just to follow-up on the delivery regions. You mentioned some smaller centers just setting up. Are those in new regions for EPAM?
Jason Peterson -- Chief Financial Officer
Yeah. They're in somewhat newish regions for us, kind of let's say tangential to some of the places that we've done business over the years.
Bryan Bergin -- Cowen and Company -- Analyst
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of James Friedman with Susquehanna. Please proceed with your question.
James Friedman -- Susquehanna -- Analyst
Hi. Thanks for taking my questions. It's Jamie. I'll just ask two up front. Jason, with regard to the -- I hate to start here, but with regard to the tax rate, that was a little confusing because you had a divergence between your non-GAAP tax commentary and your tax commentary. So I just want to make sure I heard that right? That's for Jason.
And then, Ark, I don't know if you aren't aware of it, there is a fair amount of controversy about the outsourcing trends, product development trends in the software and hi-tech vertical. One of your competitors has called out some challenges. They're exiting some verticals. They're exiting some customers where you guys actually are present. So I heard your answer to the previous one, there's a little deceleration, nothing to call out, but we're just trying to get a sense from our seat, is there something more profound going on here? Or do you feel like you're still adding the value and your road map looks positive?
So the first on tax and the second on software and hi-tech. Thank you.
Jason Peterson -- Chief Financial Officer
So I guess, I'll talk first about the tax rate. And so I think one of the statements that I made was that the excess tax benefit was somewhat less than we had expected inside the quarter. And so that would have impacted the GAAP tax rate. And then just the other statement we made is that we had a discrete benefit associated with our 2018 return, and that discrete benefit would have impacted both the GAAP and the non-GAAP rate. But what I was trying to clarify is that's why the GAAP tax rate was quite a bit lower than the approaching 23% that we've sort of talked out as our expected non-GAAP tax rate.
James Friedman -- Susquehanna -- Analyst
Thank you.
Arkadiy Dobkin -- Chief Executive Officer
Okay. And second question -- your question is like, if we feel that there is something special happening in hi-tech and software sector from kind of product engineering services point of view?
James Friedman -- Susquehanna -- Analyst
Yeah, yeah, that's what I'm trying to ask.
Arkadiy Dobkin -- Chief Executive Officer
So I don't know what -- to whom you refer that there are some specific problems or whatever. We actually do believe that it's a strong component for us, and it's a strategic component for us. We would like to stay there. And we do think that we bring a lot of value to some small software companies. And kind of mature software houses. And what we said in the hi-tech, which is all digital platform borne companies. And I think it's -- we expanded pretty well there. So -- and it's definitely nothing specific in this quarter.
James Friedman -- Susquehanna -- Analyst
Got it. I mean the numbers were good, it's just that I was trying to get some context about the overall demand trajectory. Thanks. I appreciate the color.
Jason Peterson -- Chief Financial Officer
Thank you.
Operator
Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Dobkin for any final comments.
Arkadiy Dobkin -- Chief Executive Officer
Thank you. Thank you, everybody, for the time this morning. I would like also to thank all our employees and their dedication to provide services and to help us to grow. And management team and myself looking forward to Investor Day on November 21 in Boston. So always, please contact David if you have any questions, and hopefully, see you face-to-face pretty soon. Thanks. Bye.
Operator
[Operating Closing Remarks]
Duration: 54 minutes
Call participants:
David Straube -- Head of Investor Relations
Arkadiy Dobkin -- Chief Executive Officer
Jason Peterson -- Chief Financial Officer
Damian Wille -- Barclays -- Analyst
Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst
Maggie Nolan -- William Blair -- Analyst
Darrin Peller -- Wolfe Research -- Analyst
Kyle Peterson -- Needham & Company -- Analyst
Joseph Foresi -- Cantor Fitzgerald -- Analyst
Ashwin Shirvaikar -- Citi -- Analyst
Vladimir Bespalov -- VTB Capital -- Analyst
Moshe Katri -- Wedbush Securities -- Analyst
Bryan Bergin -- Cowen and Company -- Analyst
James Friedman -- Susquehanna -- Analyst
