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EPAM Systems (NYSE:EPAM)
Q2 2021 Earnings Call
Aug 05, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and thank you for standing by. Welcome to the EPAM Systems second-quarter 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, David Straube, head of investor relations.

Please go ahead.

David Straube -- Head, Investor Relations

Thank you, operator, and good morning, everyone. By now you should have received your copy of the earnings release for the company's second-quarter 2021 results. If you have not, a copy is available on epam.com in the Investors section. With me today are Arkadiy Dobkin, CEO and president; and Jason Peterson, chief financial officer.

I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties, as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the Investors section of our website. With that said, I'll now turn the call over to Ark.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Thank you, David. Good morning, everyone, and thank you for joining us today. We delivered a strong set of results for the second quarter with revenues of $881 million, reflecting reported year-over-year growth rate of 39% and 36% in constant currency terms. Non-GAAP earnings per share were $2.05, an increase of 40% over the same quarter in 2020.

Growth was very much broad based. All our geographies and most of our industry verticals experienced strong demand, reflecting the robust market environment and pushing our growth rate to historically [Inaudible] levels. On a sequential basis, quarterly revenues exceeded our Q1 results by more than $100 million, and we finished another quarter with very strong sequential growth. The reason for surge in demand is pretty obvious.

By now we all know that application development and cloud and data integration services are growing post-pandemic very strongly and driving corporate budgets forward. But in addition, it has become very visible that the current client transformation efforts are continuous and multidimensional and carries uncertainty of them now. And that is the reason why, on top of application development and cloud integration at large, we are seeing very fast expanding demand for software-enabled business scenarios coming our way too. Overall and across all our industry verticals we have a portfolio of both new and current customers.

We see progression into new and larger multiyear engagements as our customers look in part to fulfill both engineering demand as well as demand for new collaboration models that bring in greater stake in product design and product management. In short, clients really need simultaneous help with both strategy and implementations today. This means that we will have to smartly blend not only industry and functional consulting expertise, but a good portion of management consulting capabilities together with very scalable and tough notions we need in technology delivery services, which have been maturing over the years. All that requires us to experiment with new approaches to source different type of talent, manage numerous risk and find very new ways of work in general.

And we're doing all of that. First, certain operation practices introduced in response to COVID that made us nimble and responding to new customer demands. And we have created an even more adaptable internal digital platforms to manage our increasingly global business operation. Additionally, throughout 2021, we have focused on establishing repeatable approaches to drive growth across a more globally diversified delivery base while also expanding our domain capability and geographical footprint, both organically and through acquisitions.

Finally, we are constantly incenting our partner ecosystem with closer and more vertically aligned working that position EPAM as a partner of choice for our cloud, digital, and industry solution innovations. That includes, for example, EPAM active participation in the MACH Alliance and continuous contribution of over 4,500 EPAMers to open-source projects, which makes EPAM the No. 1 services company now in the open-source community and among top 20 global contributors overall. Let's bring now some highlights on expanding our EPAM Continuum motion, which remains one of our core priorities, including the addition of strategy advisory services on top of already established industry and functional consulting capabilities.

It's becoming important exactly because of growing client demand for software-enabled business scenarios. And we seek now to help clients across a number of areas in their fast-changing businesses with both strategy implementations simultaneously. During the last several calls, we were sharing specific client stories to illustrate our progress in the end-to-end solution and increasing impact of our consulting quotient to our overall engagement. We brought examples from the gaming industry, which was one of the few that performed well even at the beginning of the pandemic uncertainty; and the healthcare industry, where we are helping with large-scale technology platform transformation efforts; and data and analytics segment, where we assisted to one of the most sophisticated global information providers with a massive cloud modernization story.

Today, we would like to highlight a client from the retail industry where we have delivered across the range of end-to-end programs. This American multinational manufacturer and marketer of prestigious skincare, makeup, fragrance, and hair care products is undergoing their own transformation to drive a deeper connection to their customers, optimize operations and shorten their supply chain. It's in part responding to consumer changes because of the global pandemic with a wider shift in the luxury and retail business model. We are working with the company to develop a control tower equivalent of their supply chain, connecting several internal and external data points, including product performance across geographic regions, competitor analysis, consumer engagement index, social media, and even weather events to create a predictive view and form a real-time production and placement of their projects in consumer markets.

This supply chain optimization project leveraging our business consulting, data analytics, and engineering capabilities. With a blending of physical and digital consumer buying behaviors, we developed a virtual trial platform, allowing the consumer to apply a cosmetic using AR/VR technology, in addition to creating a virtual consultation and the ability to engage with their consumer in new ways. The platform can be repurposed across their multiple cosmetic brands. The digital engagement platform strengthened the user journey during the pandemic months when stores were closed across the world and had driven better conversion rates and results for consumer acquisitions online.

It's already obvious that major consumer behavior shifts happened and are here to stay, so the company and EPAM believe that their future sales will be largely driven by digital platforms and the increased functionality based on the latest technology trends. Let's move now to the topic of talent. While the supply of talent continues to be the major challenge that is faced by all of the players in our sector, EPAM continues to grow rapidly in Central and Eastern Europe and in India. Additionally, we opened a new delivery location in Ontario, Canada, and are also expanding our operations in Latin America with the acquisition in Colombia of a digital and engineering company, which we just have closed a couple of days ago.

We'll share more details just in couple of minutes. In total, in Q2, we welcomed more than 3,800 net hires organically to EPAM, this talent joining the company from our university programs, lateral hires in our delivery locations and, increasingly, senior-level hires in market geographies with extensive industry experience. The last one allow us to expand our EPAM Continuum penetration of North American market with the addition of business experience and technology consulting teams in a half dozen new locations. While in Europe, we also brought new consulting capability via acquisition.

In total, in the first half of 2021, approximately 6,700 net additions have joined EPAM, a number greater than what we historically ever had added on a full-year basis. As in the past, to maintain hiring at an accelerated rate, we continue to make significant investments in our global talent development, upskilling and educational programs. We believe that in addition to these investments, our internal platform progression in talent, analysis, and AI will continue to bring us a new level of engagement and capability to deploy increasingly higher-value services to our global enterprise customers. We also believe that while all this should allow us to continuously scale, it will also ensure the quality standards of our delivery services without compromising costs.

Last time, we shared news about three companies being added to EPAM via our M&A efforts. Recently, we made two more acquisitions to extend our consulting and engineering capabilities while also expanding our presence in several for our key geographies. Last week, we announced our acquisition of CORE SE, consultancy think tank specializing in IT strategy and technology-driven transformations with presence in Berlin, Dubai, London, and Zurich. CORE will strengthen EPAM's strategy consulting footprint and extend our talent footprint in the DACH region.

Earlier this week, we also closed the acquisition of S4N, a digital software engineering company. In addition to their primary application platform development expertise, the company specializes in machine learning, data architecture, and cloud ops. Located in Bogota, Colombia and with presence in Seattle, Washington, the acquisition of S4N expands EPAM's geographic presence in Latin America and forms a second-class cloud institution. We are extremely pleased to extend EPAM's new talent and capabilities offered by those two firms.

Regarding acquisitions, I would like to close with some additional comments related to our recent efforts in the area. We already see visible contribution from our recent M&A activities in such areas as cyber advanced analytics, specifically on PolSource, which is one of the largest deals to date. We should say that we are rapidly shaping new EPAM offering and accelerating our go-to-market activities within the fast-growing Salesforce ecosystem. With that, let me hand the call over to Jason, who will provide more specifics on our Q2 results and update our 2021 business outlook.

Jason Peterson -- Chief Financial Officer

Thank you, Ark, and good morning, everyone. We are very pleased with our Q2 results, which reflect strong growth across a broad range of industry verticals and geographies. In the second quarter, EPAM delivered revenues of $881.4 million, a year-over-year increase of 39.4% on a reported basis and 35.9% in constant-currency terms, reflecting a positive foreign exchange impact of 350 basis points. This quarter's revenue growth was substantially driven by the continued improvement in the company's ability to expand delivery capacity in response to the extremely strong demand for EPAM's services.

Moving on to industry vertical performance. We delivered very strong sequential and year-over-year growth across the travel and consumer, financial services, telecommunications, energy and manufacturing, and automotive industries. Looking at the year-over-year performance across each of our industry verticals, travel and consumer grew 59.9% driven by very strong growth from both our consumer and retail clients, who are initiating and expanding large-scale transformation programs as they look for different ways to connect to their end customers. Financial services grew 51.5% with very strong, broad-based growth coming from banking, insurance wealth management, and payment platform providers.

Like last quarter, growth was driven by modernization and transformation of core applications, in addition to new payment platforms associated with real-time payments. Software and high tech grew 33.2% in the quarter. Life sciences and healthcare grew 33.1%. Business information and media delivered 12.5% growth in the quarter.

Growth in the quarter reflected a tougher comparison with the same quarter last year, with several clients having experienced substantial growth in the first half of 2020 with revenues from those programs generally plateauing late in 2020. And finally, our emerging verticals delivered 56.4% growth driven by clients in telecommunications, energy, manufacturing, and automotive. From a geographic perspective, North America, our largest region representing 59.8% of our Q2 revenues, grew 38.1% year over year or 36.9% in constant currency. Europe, representing 33% of our Q2 revenues, grew 38% year over year or 29.9% in constant currency.

CIS, representing 4.4% of our Q2 revenues, grew 70.8% year over year and 74.6% in constant currency. Strong performance in both financial services and materials, in addition to travel and consumer contributing to growth in Q2. And finally, APAC grew 44.4% year over year or 38.9% in constant-currency terms and now represents 2.8% of our revenues. In Q2, revenue growth across the portfolio resulted in increased customer diversification with our top 20 clients growing 19% while our clients outside our top 20 grew 55%.

And moving down the income statement. Our GAAP gross margin for the quarter was 33.8%, compared to 33.7% in Q2 of last year. Non-GAAP gross margin for the quarter was 35%, compared to 35.1% in the same quarter last year. Gross margin for the first half of 2021 reflects some degree of elevated labor costs in certain locations, which we expect to manage with rate increases and staffing rotation.

GAAP SG&A was 17.2% of revenue, compared to 18.1% in Q2 of last year. And non-GAAP SG&A came in at 15.6% of revenue, compared to 16% in the same period last year. While the absolute dollar spend of our SG&A has increased, the relative percentage of revenue remains lower than historical averages. GAAP income from operations was $125.3 million or 14.2% of revenue in the quarter, compared to $83.4 million or 13.2% of revenue in Q2 last year.

Non-GAAP income from operations was $155.2 million or 17.6% of revenues in the quarter, compared to $108.2 million or 17.1% of revenue in Q2 last year. Our GAAP effective tax rate for the quarter came in at 6.9%, which includes a higher-than-expected level of excess tax benefits related to stock-based compensation. Our non-GAAP effective tax rate, which excludes excess tax benefits, was 22.9%. Diluted earnings per share on a GAAP basis was $1.94.

Non-GAAP diluted EPS was $2.05, reflecting a 40.4% increase over the same quarter in 2020. In Q2, there were approximately 59 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q2 was $68.8 million compared to $146.2 million in the same quarter of 2020.

Free cash flow was $46.2 million, compared to $134.7 million in the same quarter last year. The lower level of free cash flow in Q2 2021 relative to Q2 2020 was the result of changes in DSO in each quarter, higher levels of cash payments made in Q2 2021 associated with corporate income tax and the absence of tax payment deferral programs made available in Q2 2020 as part of government COVID-related programs. We ended the quarter with approximately $1.3 billion in cash and cash equivalents. At the end of Q2, DSO was 70 days and compares to 67 days in Q1 2021 and 73 days in the same quarter last year.

We expect to maintain DSO around the same level for the remainder of the year. Moving on to the operational metrics. We ended the quarter with more than 42,800 consultants, designers and engineers, a year-over-year increase of 32.6%. Our total headcount for Q2 was more than 47,850 employees.

Both groups of employees grew just over 10% sequentially. Utilization was 80.2%, compared to 83.9% in Q2 of last year and 81.4% in Q1 2021. Now let's turn to guidance. With a strong first half behind us, a robust demand environment and increased confidence in our ability to scale production headcount in order to meet this demand, we are raising our business outlook for 2021.

Starting with our full-year outlook. Revenue growth will now be at least 37% on a reported basis and in constant-currency terms will now be at least 35% after factoring in approximate 2% favorable foreign exchange impact. We now expect approximately 300 basis points of revenue contribution coming from acquisitions we closed in the last 12 months, including CORE SE and S4N. We expect GAAP income from operations will now be in the range of 13.5% to 14.5%.

And non-GAAP income from operations will now be in the range of 17% to 18% based on the strength of our first half and anticipated ongoing efficiencies in SG&A spending as a percentage of revenue. We expect our GAAP effective tax rate will now be approximately 11% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to continue to be approximately 23%. Earnings per share. We expect that GAAP diluted EPS will now be in the range of $7.70 to $7.89 for the full year.

And non-GAAP diluted EPS will now be in the range of $8.25 to $8.44 for the full year. We expect weighted average share count of 59 million fully diluted shares outstanding. For Q3 of 2021, we expect revenues to be in the range of $957 million to $965 million, producing a year-over-year growth rate of approximately 47% at the midpoint of the range. We expect the favorable impact of FX on revenue growth to be approximately 1%.

Lastly, we now expect approximately 450 basis points of revenue contribution to come from acquisitions we closed in the last 12 months. For the third quarter, 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 17% to 18%. We expect our GAAP effective tax rate to be approximately 13% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 23%. For earnings per share, we expect GAAP diluted EPS to be in the range of $1.89 to $1.96 for the quarter and non-GAAP diluted EPS to be in the range of $2.15 to $2.22 for the quarter.

We expect a weighted average share count of 59.2 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements. Stock-based compensation expense is expected to be approximately $27.6 million in Q3 and $25.7 million in Q4. Amortization of intangibles is expected to be approximately $5.6 million for each of the remaining quarters.

The impact of foreign exchange is expected to be approximately a $1.5 million loss for each of the remaining quarters. Tax effect of non-GAAP adjustments is expected to be around $7.6 million in Q3 and approximately $7.1 million in Q4. And finally, we expect excess tax benefits to be around $13.7 million in Q3 and $12.8 million in Q4. In summary, we are pleased with our Q2 and first half 2021 results, which, combined with the broad-based strength we see across the business, provides support for what we believe will be a very strong 2021 performance.

Operator, let's open the call up for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from David Grossman with Stifel. Your line is open.

David Grossman -- Stifel Financial Corp. -- Analyst

Good morning. Thank you very much. It's obviously a very strong quarter and a very strong outlook. And it sounds like, to some extent, it was volume driven and your ability to access labor pools that you, I guess, earlier in the year envisioned being more difficult.

So maybe you can help us better understand, what changed over the course of the last three months that enabled you to access that labor? Were you doing something different? Did something break in the market? Maybe just some more insight into kind of what evolved over the last three or four months.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

I think it was happening across multiple efforts, which we started not necessarily even three months ago but even before COVID, how were looking at our delivery ecosystem. And we were talking about diversification, going to different markets and growing in existing location. And I think we were not sure what exactly the results would be, but the last couple of quarters confirmed that most of the efforts were fruitful and we grew in like -- we grew pretty well not only in Eastern Europe anymore but also across India. And we started to much more aggressively work in Latin America as well.

But even in some markets in Europe -- in Western Europe and in the U.S., we were hiring more people than we were anticipating before. So I think it's across multiple components of this.

David Grossman -- Stifel Financial Corp. -- Analyst

So was there anything specific, Ark, that you thought among those initiatives that was particularly effective in driving your ability to kind of recruit?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Again, I don't think there is one magic kind of source which was happening. It's exactly broad based, again with India becoming another point of growth for us in addition to Eastern Europe before.

Jason Peterson -- Chief Financial Officer

Yes. So, David, probably a broader range of geographies from which we were recruiting. Additionally, probably the ability to sort of bring in staff that are in a more distributed mode gives us access to staff and resources in different geographies, even within the countries that we've traditionally recruited. So I think it's both that and then, just obviously, we're working hard to meet demand.

David Grossman -- Stifel Financial Corp. -- Analyst

Right. And I think you mentioned in your prepared remarks about the ability to offset some of the gross margin pressure from higher labor costs with pricing. So I think that last year was this unusual year where you had pricing going up, labor markets with -- at the same time, trying to keep pricing down to your clients who were under duress. So did that start to change in the first half of the year? Or is that something that's more of a prospective thing that's going to -- going back to a more normalized pricing environment?

Jason Peterson -- Chief Financial Officer

Yes. So I think one of the things that we're beginning to see even in the middle of this year, which I think is different than certainly last year and probably different even than prior years, 2019 and '18, is we are getting midyear rate increases. So we are working with clients to begin to take up rates even here and as we entered Q3. And then clearly, as I discussed in the last call, is that we're expecting to see greater-than-usual rate increases in 2022.

So there's a real focus on account margin. There's even some prioritization of staffing related to both profitability and, obviously, the strategic nature of the client. And so I think that the dynamics on the pricing side are certainly improving. And at the same time, we still have to manage in an elevated wage inflation environment.

David Grossman -- Stifel Financial Corp. -- Analyst

Right. And just one last question is I think you mentioned the acquisition contribution for the third quarter and the year. I just want to make sure I got that right. Was it 450 for the year, 450 bps from --

Jason Peterson -- Chief Financial Officer

Yes. So it's 450 bps for Q3 and it's 300 bps for 2021.

David Grossman -- Stifel Financial Corp. -- Analyst

Got it. All right. Great. Thanks very much.

Jason Peterson -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Ramsey El-Assal with Barclays. Your line is open.

Ramsey El-Assal -- Barclays Investment Bank -- Analyst

Hi. Thank you for taking my question this morning. I wanted to ask you about -- you had mentioned that COVID kind of inspired you guys to create more digital platforms with more and more repeatable approaches to delivery. Is this one of the drivers of margin expansion in the business? Is that an overstatement? Or is that part of what's giving you confidence to raise the full-year margin guidance a little bit?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

I don't -- we don't believe that it's actually margin related kind of benefit. It's mostly how to manage and how to deliver and how to bring the talent in the company and be able to operate more actively. So employees will probably deliver and -- while we grow and as we're growing right now.

Ramsey El-Assal -- Barclays Investment Bank -- Analyst

Fair enough. OK. And then could you give us an update on your consulting strategy in terms of -- I don't know what you can share there in terms of cross-sell. Or -- and also, just comment on the driver of your kind of bullish guidance.

To what degree has consulting played a part in accelerating your broader growth in terms of engaging with clients or getting more work on the table? If you could comment on that, it'd be great.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

I think at large, there is not much change from our previous comment. We're not trying to build like separate -- completely separate line of business in consultancy. We're trying to deliver more end-to-end solutions and be able to advise client early in this end-to-end story. And we see in the progress like we definitely must be -- were accumulating more experience and understanding how to bring these multifunctional teams, including consultants and designers and engineers, for more complex opportunities.

And I think it's starting to pay some dividends. And from what we also saw is that we probably need to go even higher in the value chain and bring some strategic advisory services as well. And we were experimenting during the last 12 months with these type of engagements, which were single engagements for us when we were going to this level, and now decided to strategically invest in this area, too. And one of the acquisitions in Europe is exactly in this segment.

So I think in short, we're hoping that we would be able to make more impact and potentially maybe benefit even in the margin situation. But we still have to prove that it's going to work this way.

Ramsey El-Assal -- Barclays Investment Bank -- Analyst

Got it. All right. Thanks so much. Appreciate it.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Thank you.

Operator

Thank you. Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.

Ashwin Shirvaikar -- Citi -- Analyst

Thank you. Hi, Jason. Good morning. Outstanding quarter here.

Congratulations.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Thank you.

Ashwin Shirvaikar -- Citi -- Analyst

I want to ask about -- Ark first. In your prepared remarks, you alluded to clients coming to you for software-enabled business scenarios a little bit. Does that change your long-held view that you said many times that you're a services company, you don't want to go toward becoming more of a software company, channel conflict, all those things? But I do see that the implied revenue per employee in acquisitions like CORE is much higher. Are you perhaps tweaking around the edges the viewpoint around software in any way?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

I think when we're talking about software enablement, it's more related to the previous question about how much consulting and how actually new business models could drive the opportunity for us to build solutions with still significant portion of custom development because most of the solutions require like almost in real-time understanding what's happening and not necessarily relying on the very standard portion of enterprise packages. So our typical implementations or solutions even today would include like 70%, 80% for custom code on top of the -- some standard components. But combination of this exactly should enable new business models, and that's what we mostly mean. But if we have the right level of consultancies, then we can advise with this final solution would look like and then help to build it and implement it.

At the same time, there is an increasing portion of some accelerators and parts of software which we're developing over the years. And it's helping us actually to build the solution sometimes not only with third-party components but with our own components. But again, there's not much change from our more traditional business model with the exception that we would like to start early in the value chain, including some strategy advice.

Ashwin Shirvaikar -- Citi -- Analyst

Understood. Understood. That's very helpful. And then this might seem like a hard question given how much outlook is being raised in the results.

But last year, obviously, you had certain parts of business, certain verticals that were quite seriously impacted. Does the current outlook reflect that all of those have reasonably fully recovered? Or is there still some recovery to come from what would kind of impair or may hurt verticals from last year?

Jason Peterson -- Chief Financial Officer

I would say our results still reflect the fact that there's still some impairments in some of the verticals. But our outlook would include expectations for some improvement, particularly possibly in travel and hospitality, where we're beginning to see sequential growth but not necessarily annual growth. We do think that Business information and media will probably continue to deliver revenue growth below our average revenue growth for the remainder of the year. And although we feel that Life sciences and healthcare is going to produce sort of a strong market opportunity for the company longer term, we've got a few customer programs that are coming to an end in Q3.

And so you might see that we'll have Life sciences and healthcare run at a somewhat lower-than-company growth rate. And of course, the company growth rate is quite high. So that doesn't mean that it'll be single digits or something, it just means that it'll be lower than the average. So I don't know, I've said a lot there.

Does that answer your question, Ashwin?

Ashwin Shirvaikar -- Citi -- Analyst

Yes. It does. Yes. That's helpful.

Thank you.

Jason Peterson -- Chief Financial Officer

OK.

Operator

Our next question comes from James Faucette with Morgan Stanley. Your line is open.

James Faucette -- Morgan Stanley -- Analyst

Thank you very much. I wanted to ask -- I was struck a little bit by utilization kind of being down around 80%, which sounds like there's still a bit more capacity for you. How are you thinking about how long you can kind of stay ahead of the curve from that perspective? And how should we think about utilization evolution over the coming quarters?

Jason Peterson -- Chief Financial Officer

Yes. I mean, utilization traditionally for us ran below 80%. And then we have this very, very high utilization due to sort of unique circumstances in Q2 of 2020. That was almost 84%.

But that was really kind of unparalleled utilization for us. So now we do think that once you get to 80%, it does -- clearly, it limits your ability to grow when you've got new accounts or when you've got accounts that you didn't expect, and we're looking for new resources. You don't have as much availability on your bench. And so I think we probably believe that running maybe in the high 70s, somewhat below 80% is probably a better place for us to be.

We also think that we're going to see somewhat elevated levels of vacation in the second half of 2021. So right now, what we would model is utilization below 80% in the second half of 2021.

James Faucette -- Morgan Stanley -- Analyst

OK. That's good to hear. And then as far as -- Ark made comments around setting up new delivery centers and hiring in those regions. I'm just wondering how the EPAM brand itself is -- that's been an important hiring tool for you in the past and how it's resonating in these new areas locally.

And are you being able to adapt and adjust it as needed based on what you're seeing in hiring trends and retention trends?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

I think recognition of how different we are in the market created like additional level of curiosity for those that we've hired, and they're definitely trying to understand if they would be -- if they would have good opportunity to grow inside of EPAM. We definitely have very different interest from this more experienced portion of the talent pool globally than we had a couple of years ago. It's very, very reasonable. At the same time also, our brand recognition in the markets where we operate for some time or new markets which we enter in both in Eastern Europe, because we do have this high level of distribution across this more traditional DACH region, but also in India and Latin America visibly illustrate that there is very different recognition and hope for opportunity inside of -- in many minds, different type of services, companies with very strong engineering heritage, which make some additional attractiveness for the talent.

James Faucette -- Morgan Stanley -- Analyst

Good to hear. Thank you very much.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Thank you.

Jason Peterson -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Bryan Bergin with Cowen. Your line is open.

Bryan Bergin -- Cowen and Company -- Analyst

Hi. Good morning, guys. Thank you. Curious if you can comment on the pace at which you're able to add new resources to your engagements after they're hired.

So the time to ramp new hires and laterals, has that been accelerated versus the historical pace given just this level of demand? How are you thinking about that? And what kind of levers could you use to drive that better productivity and hiring pace?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

So it's -- in general, we all understand, and it's not only related to EPAM, there is very different demand trends than we were experiencing not just 12 months ago, because 12 months ago it definitely was a very different story and very different outlook, but let's say 24 months ago. So everybody knows again, that, pandemic changed the whole direction. In this case, clients -- and many of them work in different kind of agility pressure and ready to work and speed up the whole process. But it's also a very big effort and kind of harmonization effort to the whole supply chain when you're growing like we're growing today.

And that's why exactly we said we invest more in digital ecosystem than I think we experienced, plus we hope we experience some advantages of doing this investment kind of very purposely during the last decade. It's not just last year or previous year, and we're benefiting on putting on top of our previous investments. And the whole timing from opening opportunity to start to actually going through staffing process definitely is much more optimal today than it was a couple of years ago for us.

Bryan Bergin -- Cowen and Company -- Analyst

OK. And then you talked about a progression into new and larger, multiyear engagements. Can you put any numbers around that as far as giving us a sense on how much larger or longer you're seeing in deals relative to one or two years ago?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

So I think it's, in general, difficult to quantify. But like with our growth right now and if you look at the number of clients with $100 million and $50 million and $20 million, that's number is like very obviously increasing very fast right now. But I don't think I can give -- or we can give at this point like very special quantified kind of points.

Bryan Bergin -- Cowen and Company -- Analyst

OK. Understood. Thanks.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

And like the only things I would like is that we have now clients which are growing from start to $20 million, $30 million, $50 million. The whole -- this acceleration, also very, very visible.

Bryan Bergin -- Cowen and Company -- Analyst

Thank you.

Operator

Our next question comes from Jason Kupferberg with Bank of America. Your line is open.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Yes. Thanks, guys. Congrats. Great numbers.

I wanted to start with a follow-up on Bryan's question, just these larger, multi-year engagements. Is it both the MSAs and individual SOWs that are getting bigger and longer? And I'm just wondering if that's having any effect on your sales approach and strategy as you pursue larger engagements.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

I don't think it's related to specific MSA sizes because from this point of view, we're probably in the same situation like before. Nobody promising like huge, huge deals like contractually and up front. The reality of the deals is pretty different. And again, in services business, most of the clients still maintain the flexibility to stop doing things legally, contractually.

While in practicality, these engagements are very different right now.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

OK. So given how much your growth is accelerating, have you seen any change in the composition of your top five, top 10, top 20 clients?

Jason Peterson -- Chief Financial Officer

So probably not a lot of change with the top five, but you certainly would have seen rotation probably in the -- what I'd call the 11 through 20 cohort. And as Ark was indicating when he answered your earlier question is we have several -- maybe more than several customers that have gone from zero to our top 20 in a year or less. And so we are seeing some programs where there's a real strategic imperative where the growth accelerates very rapidly and they're already running in our top 20.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

OK. Just last one real quick. Are you seeing any return to in-person selling or in-person project delivery?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

So that means in-person, you mean me on-site? Or it is -- yes. If you're asking if clients asking us to bring people on-site or in the workplace, then probably not. I think situation in general is still very unstable. And even if there are some movements in the site like two weeks later, could be consultants.

Right now probably everybody kind of in a wait-and-see mode in regard into on-site working.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Makes sense. Thanks for all the color, guys. Appreciate it.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Sure. Thank you.

Operator

[Operator instructions] Our next question comes from Maggie Nolan with William Blair. Your line is open.

Maggie Nolan -- William Blair & Company-- Analyst

Hi. Thank you. In a strong demand environment like this, is there an opportunity to evaluate your client portfolio or become more selective over which clients you'd like to work with? And what are your latest thoughts on what an ideal or target client portfolio looks like or profile looks like? Thank you.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Yes. You're absolutely right. In this situation, there are opportunities to do it, and we definitely are carefully reviewing the situation and sometimes changing priorities from our standpoint. And yes, we're looking for ideal clients clearly all the time and probably finding some.

But definitely an opportunity. But again, we're evaluating this carefully and constantly in the past before. Right now, more things to do it. So there is choices right now which we make and where to invest.

And again, I don't know how else to answer your question, but saying yes, we do it.

Jason Peterson -- Chief Financial Officer

Maggie, in terms of the growth outside of our top 20, it's probably coming from exactly the type of decisions that Ark was referring to where we are looking at clients where we think that there's significant growth potential, but we also think that profitability will be sort of attractive and then we are choosing to sort of staff and grow with those customers. And so I think part of the reason why you're seeing good growth is not only our ability to bring more resources into the company but also some of the decisions we're making around somewhat smaller and newer customers that we think have got significant growth potential both in the second half and into 2020.

Maggie Nolan -- William Blair & Company-- Analyst

OK. And then as you think about the CORE acquisition and maybe future acquisitions you might do, what is the time line for integration into the business? And do you intend to or is it important to let some of these consultancies operate somewhat separately for a period of time?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Any acquisitions which we are doing for some time, we're trying to understand more details and kind of getting more insight because it's never possible to have a full picture before closing the deal. So the same is happening right now. And specifically, in consultancies, definitely we will be like looking to what's happening and what's the best ways for us to practically in real time.

Maggie Nolan -- William Blair & Company-- Analyst

Thank you.

Operator

Our next question comes from Vladimir Bespalov with VTB Capital. Your line is open.

Vladimir Bespalov -- VTB Capital -- Analyst

Hello. Thank you for taking my questions. First, could you update a little bit about your M&A pipeline? These are getting increasingly important in your growth story. And do you expect more deals to come in the coming couple of quarters maybe? And what expertise and sort of capabilities do you want to develop further with this M&A? And the second question is like on the growth outlook.

If we take the two-year stack, the growth rates that we are seeing are more or less close to your historical levels, something in the mid-20s. But the last couple of years, I would say we're quite bumpy. And maybe you could comment with your visibility, let's say, one year ahead. And do we really see some kind of acceleration from the historical levels of organic growth that we have seen so far?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

I think let's start on the second question. And I think I agree with you that for the last couple of years, results are bumpy. But I think the environment around us was very bumpy as well. And I think that's a collection of those.

If we take this out, then our long-term kind of promise to grow in above 20% growth, that's exactly what we're targeting, and we're on the same journey right now. Definitely, under this pressure of unknown which is around us, putting some extra efforts and maybe we will find some opportunities to improve what we were thinking about. But again, long term for us, how to grow profitably with 20% organic year-over-year growth and how to maintain security of delivery at the same time. I think that's good enough challenge.

And that's the target. The rest of this, again, impacted by a lot of changes around us. And the first question was about --

Jason Peterson -- Chief Financial Officer

M&A.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

M&A. And I think here, there is not much changes. We were mentioning before that we're evaluating the pipeline all the time, that we were looking for new capabilities in market expertise, consulting components, and thinking what would be the best for us, kind of the strategy of our delivery. So it's all applicable today.

We closed like five deals this year. It just reflects that we found better companies willing to join us. Versus from pipeline point of view -- it was pretty well-developed pipeline. In the past, we have pretty well-developed pipeline.

Right now, how many other transactions we'll be closing in the next six to 12 months? We need to wait and see.

Vladimir Bespalov -- VTB Capital -- Analyst

OK. Thank you very much.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

And in general, I would like to say like we don't have a strategy of kind of rolling up acquisitions. We specifically are looking for some which would add capabilities and fill the gaps which we need to fill. And even right now, most of those transactions are pretty small.

Operator

Thank you. Our next question comes from Surinder Thind with Jefferies. Your line is open.

Surinder Thind -- Jefferies -- Analyst

Thank you. I'd like to start with a big-picture question here. Any color you can provide on perhaps how compressed the times line are clients in terms of trying to get jobs till the project's done? Meaning pre-COVID, what a road map might have looked like and what it looks like nowadays?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Again, I don't think we're going to share anything new or what you don't know. It's definitely the pressure to perform and to deliver is much higher now in -- I was trying to say post-COVID, and we know. Is it post-COVID or still continuous COVID time versus pre-COVID time? That's definitely changed because everybody understands there is only so much time to adjust business models and build solutions to be able to continuously compete in this continuous COVID time. I mean, it is very visible across all markets right now and I think creates pressure on clients and on us as well.

Surinder Thind -- Jefferies -- Analyst

Fair enough. I guess what I'm trying to understand here is the client's appetite. Obviously, everybody wants to get something done today. And so how much work are you perhaps leaving on the table? And then maybe in terms of the ability -- or an earlier question is about you're now able to do rate increases at midyear.

You may be able to push rates at this point. Can you talk a little bit about that dynamic? Because it just seems like you talk about having bigger projects, longer projects. There's this dynamic of the rate increases. And then how should we think about how that fits into your strategy of adding headcount at this point? I mean, what kind of headcount addition should we thinking about?

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

So I think it's kind of a good question. At the same time, we get in our understanding as we speak as well because if nine months ago somebody will tell you now that we will be growing our talent pool as we're growing today, we would be very cautious to confirm that it would be possible. At the same time, as we mentioned before, with orchestrating multiple efforts, we say that we can do better than we were thinking in the past. Right now, we're thinking that probably around 3,000 additions per quarter would be something for us to achieve without much quality risks.

Maybe more, but that's how we're looking at this. What would be happening in reality, we will see like in a couple of quarters.

Jason Peterson -- Chief Financial Officer

Yes. And the rate increase question is about what can happen in terms of revenue growth. Certainly, that's helpful. And you are seeing an expansion of revenue per head.

But at the same time, a lot of the conversations that we're having with clients are informed by the wage inflation we're seeing. And so clearly, they're difficult conversations with clients. We're helping them understand, obviously, what conditions we're facing with somewhat elevated levels of wage inflation, which is in part then driving the conversation around meeting the higher rates. So like I do want us to leave with the idea that we're -- we feel good about the demand environment.

The demand environment helps us when it comes to rate increases. But at the same time, the 17% to 18% guide that we have for the full year is informed in part by the lower SG&A in 2021. And you're likely to see somewhat higher SG&A in 2022. And at the same time, we're going to work hard to sort of maintain and improve gross margins over time.

Surinder Thind -- Jefferies -- Analyst

Got it. And so just to clarify the last part, is the idea that when you think about 2022, relative margin stability versus this year? Or are you looking to maybe invest more? Or are -- I'm just trying to understand how that dynamic is working out because it seems that there's a really big opportunity here to continue to build up globally and do a lot of things. But at the same time, there's just structural limitations in those kinds of things as well.

Jason Peterson -- Chief Financial Officer

Yes. So -- well, we back up historically. So you'll remember that we generally have talked about 16% to 17% as a targeted adjusted type of range. And then we've run, in the last couple of years, closer to the top end of that range or somewhat above.

And so we guided this year to the 16.5% to 17.5% in part because of what we were seeing and also because we had lower-than-typical SG&A as a percentage of revenue. Right now, with obviously the strength in revenue and ongoing savings in SG&A, we've guided to 17% to 18%. But I think as you look forward, I wouldn't -- I certainly wouldn't commit to 17% to 18% as a targeted profitability range in future years. So you might think about us coming back to some earlier level in part because, well, we'll just continue to make investments in delivery centers and in other capabilities so we can continue to grow the business at a high rate.

Surinder Thind -- Jefferies -- Analyst

Thank you. Very helpful.

Operator

Thank you. And I'm currently showing no further questions at this time. I would like to turn the call back over to Arkadiy Dobkin for closing remarks.

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Thank you. Thank you, everybody, for joining today. So as usual, if you have any questions, David is available to help. And looking forward to talk to you in three months.

Thank you.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

David Straube -- Head, Investor Relations

Ark Dobkin -- Chief Executive Officer, President, and Chairman of the Board

Jason Peterson -- Chief Financial Officer

David Grossman -- Stifel Financial Corp. -- Analyst

Ramsey El-Assal -- Barclays Investment Bank -- Analyst

Ashwin Shirvaikar -- Citi -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Bryan Bergin -- Cowen and Company -- Analyst

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Maggie Nolan -- William Blair & Company-- Analyst

Vladimir Bespalov -- VTB Capital -- Analyst

Surinder Thind -- Jefferies -- Analyst

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