EPAM Systems (EPAM) Q3 2021 Earnings Call Transcript

EPAM Systems (EPAM -1.13%)
Q3 2021 Earnings Call
Nov 04, 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 third 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 of Investor Relations

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

I'd 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 material 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

Thank you, David. Good morning, everyone, and thank you for joining us today. I think it would make sense to start today from the same reference point we used exactly 12 months ago when we began to see the first positive turning signs after the pandemic hit us earlier in 2020. That reference point was our Investor and Analyst Day, which took place November 2019 in Boston, which was still done in the old-fashion, in-person setting.

On that day, we were reminding about EPAM's history during our post-IPO years, and our transformational journey from being a pure software engineering services firm to a much more diverse, digital and product consultancy with strong engineering offerings. Beginning in 2013, we set an aspirational goal to become one of the global leaders in product development services space. Three years later, in 2016, we set out another one to become one of the global leaders in product and platform engineering services. We were excited that practically every few years we focused on the way EPAM needs to evolve as an organization with our offerings and the specific elements that were essential to transform the company.

These undertakings enabled us to innovate, remain relevant and stay ahead in ever-changing market during those initial post-IPO times. Each aspirational mission was done at a landing point in a longer journey of transformation and was validated by external views, namely industry analysts within the sector, in our ability to grow significantly faster than the market, which has resulted in doubling the company revenue practically every three years. In result, at our Investor and Analyst Day in 2019, we shared our aspiration for the next three years, targeting actually the end of 2021 and softly indicated that we might be able to double the size of EPAM again. We also stated then that to achieve this goal, we will need to continue transforming EPAM into a different company with a strong capability to adapt people, platforms, and processes into those that quickly respond to change, build and bring to life the digital platform that connects our people to work seamlessly and enables us to be efficient and effective in all what we do, to extend our leadership across integrated consulting and engineering services, and in result, open opportunities for transformation for everybody anywhere through next-generation delivery, educational, social, and innovation products.

In short, we set our sights on becoming the transformation platform for those clients who would like to become adaptive enterprises themselves, which remains indeed our current undertaking today as well. So last year, on our Q3 earnings call, we were reminding of all that and shared a good level of optimism or self-confidence, if you will, that we would be returning to our traditional 20-plus percent organic growth rate in post-pandemic environment. But we also were almost certain at that point that doubling our 2018 revenue by the end of 2021 would not be a realistic target anymore with everything we experienced in Q2 and Q3 of last year and how we, in general, saw the situation for 2021 back then in November of 2020. Now as we sit here today, we see how naive our post-pandemic assumptions were just a year ago, especially regarding the post-pandemic term itself.

I guess, we all are realizing today that we can drop the post portion of this term for some time in the future. But on another side, we are now realizing that EPAM is in exciting growth route in its 28-year journey because while looking at the present, we have clear line of sight to a fiscal year, which will be one of the highest-growing revenue years in our post-IPO history, that includes also breaking through to our $4 billion revenue quarter at the end of 2021 and actually still reaching out our aspirational goal of doubling the company for the third time since 2012. This result is an intersection of many factors that have led us to our current state and the next phase of our journey, a journey that has been as much about transforming EPAM as it has been about helping our clients transform themselves. It's exactly through this latest ambition, which we shared in Boston, that we are developing ourselves to be one of the best in the areas of innovation and design, consulting, education and social responsibility in addition to driving even higher levels of excellence as one of the strongest engineering companies in our space.

And today, EPAM is a substantially different company than we were just six, eight years ago, one that has much more diverse foundation to drive the next levels of value to the clients and our growth in result. So along the way, we have to and will continue to solve for the challenges of scaling for growth, geographical expansions and attracting new types of talent, which brings different experiences and different types of think into EPAM, while complementing our strong technical and engineering teams. Additionally, at each conference we're identifying capabilities that we needed to strengthen or build in order to transform EPAM to serve the market needs, and to be done in both ways, organically and through acquisitions, which continue to be an important part of our capability extension strategy. As we turn to the future and set our sights on growing to a $10 billion revenue company, our growth will come from the foundational building blocks we have assembled over the last years, some of which include an integrated consulting and engineering offerings, which brings together business and strategy, technology and experience consulting brought to the market through our EPAM Continuum offerings; high-value cloud services focused on cloud-native development, application optimization and enabling the data-driven enterprise, helping our customers modernize grow from inside out; data and AI everywhere, leveraging our strong advances in engineering and data heritage; building the massive data structures and leveraging API technologies to drive fast insights; and enabled with our global talent pool that connected by our digital platforms guided by next-generation delivery methodologies and supported by educational, social and innovation initiatives.

Lastly, we will continue to focus on expanding our partner ecosystem aligned with our vision and mapped with our vertical and geographical focus developing joint solutions and go into market together. So pivoting into the current moment, as I mentioned a short time ago, acquisitions will continue to be a prominent part of EPAM capabilities and geographical extension strategy. This year, we have already closed on five acquisitions, which are enabling us to expand our current offerings in sales force, cybersecurity, analytics, strategy consulting and our presence in Latin America. You also may have seen recent regulatory filings about our intentions to acquire Emakina Group.

Emakina is globally recognized digital marketing and experience agency, or how they call themselves the user agency, specializing in a range of areas, including commerce and retail, media planning and buying, service design, branding, and content production across a number of others, headquartered in Belgium and with more than 1,100 employees and studios across 18 countries in Europe, the Middle East, Africa, and North America. This acquisition will enhance EPAM's ability to deliver creative solutions, personalized experience, and next-generation digital products, which will increase our new offering to our global clients. So worth noting that while EPAM is already listed among Ad Age Top 25 Largest Agencies in the World, Emakina will add very new capabilities to our agency working and significantly strengthen EPAM in market positioning across Europe and Middle East. With that, it seems like it's the right moment now to mention that just a few days ago, Fortune Magazine published their 100 fastest-growing companies list for 2021 and included EPAM in it the fourth time and third consecutive year, ranking us 25th overall and, the #1 in information technology services category.

Of note, we are actually is the only IT services company on the list. And in addition, Newsweek included EPAM for the first time in their 2021 America's Most Loved Workplace ranking, placing us as No. 49 on the list. So before turning to Jason to provide an update on our third quarter results and our 2021 outlook, while I would like one more time to state the demand for our services continues to be very strong and we see this across all market segments.

We also very well understand that this is an overall strong demand environment. And this is precisely why we feel we cannot become overly confident. We need to continuously build on our breadth and continuously invest in our strong engineering culture, while constantly expanding our services into real end-to-end, higher complexity engagements across the globe to bring unquestionable value to the clients. We understand that everything about our future high growth is hard.

But as before, we are not trying to push into new areas because they are challenging, and we are committed to do so in a very thoughtful and sustainable way so as not to compromise on the quality of the delivery that EPAM is known for. And if anything, we are constantly looking for ways to establish true differentiation for not only our customers, but also, as importantly, for EPAMers. With that, let me turn the call over to Jason.

Jason Peterson -- Chief Financial Officer

Thank you, Ark, and good morning, everyone. In the third quarter, EPAM delivered very strong results, reflecting continued significant demand for the company's services across a wide range of industry verticals and geographies. During the quarter, EPAM generated revenues of $988.5 million, a year-over-year increase of 51.6% on a reported basis and 50.7% in constant currency terms, reflecting a positive foreign exchange impact of 90 basis points. A continued robust demand environment, combined with our ability to recruit at record levels while retaining talent, drove a higher-than-expected revenue result for the quarter.

Customers continue to turn to EPAM for help transforming their businesses, and we continue to support our customers across a range of initiatives, including modernizing and transforming applications across the full range of industries we serve, creating new digital products and businesses and harnessing the resulting data to improve revenue growth, supply chain operations and end-customer experiences. And finally, merging physical and digital to create superior retail experiences. Turning to the performance of our industry verticals. Travel and consumer grew 79.3% driven by very strong growth from both our consumer and retail clients.

In addition, we saw renewed demand and return to growth across our travel customers. Financial services grew 68.9% with very strong broad-based growth coming from asset management, insurance, payments, and banking. Software and hi-tech grew 46.6% in the quarter. Life sciences and healthcare grew 29.5%.

Business information and media delivered 23.6% growth in the quarter. And finally, our emerging verticals delivered 61.5% growth, driven by clients in telecommunications, energy, manufacturing, and automotive. From a geographic perspective, North America, our largest region representing 60% of Q3 revenues, grew 51.6% year over year or 51.4% in constant currency. Europe, representing 33% of our Q3 revenues, grew 50.9% year over year or 49.5% in constant currency.

CIS, representing 4% of our Q3 revenues, grew 49.7% year over year and 44.6% in constant currency. And finally, APAC grew 60.4% year over year or 58% in constant-currency terms and now represents 3% of our revenues. In Q3, revenues from our top 20 customers grew 29%, while revenues from clients outside our top 20 grew 69%, resulting in greater diversification across our revenue base. Moving down to income statement.

Our GAAP gross margin for the quarter was 33.9% compared to 35.1% in Q3 of last year. Non-GAAP gross margin for the quarter was 35.1% compared to 36.8% for the same quarter last year. Gross margin in Q3 2021 was impacted by higher levels of funding for our variable compensation programs, given the company's outperformance versus targets established at the beginning of the 2021 fiscal year. GAAP SG&A was 17.1% of revenue, compared to 17.9% in Q3 of last year.

And non-GAAP SG&A came in at 15.3% of revenue, compared to 15.9% in the same period last year. GAAP income from operations was $144.1 million or 14.6% of revenue in the quarter, compared to $96.4 million or 14.8% of revenue in Q3 of last year. Non-GAAP income from operations was $179.6 million or 18.2% of revenue in the quarter, compared to $123.3 million or 18.9% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 14.6% versus our Q3 guide of 13% due to a lower-than-expected level of excess tax benefits related to stock-based compensation and a onetime benefit related to certain tax credits.

Our non-GAAP effective tax rate, which excludes excess tax benefits and includes the onetime benefit of the tax credit, was 21%. Diluted earnings per share on a GAAP basis was $1.95. Our non-GAAP diluted EPS was $2.42, reflecting a $0.77 increase or 46.7% growth over the same quarter in 2020. In Q3, there were approximately 59.2 million diluted shares outstanding.

Now turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $206.1 million, compared to $175.6 million in the same quarter of 2020. Free cash flow of $184.9 million produced a 129% conversion of adjusted net income, compared to free cash flow of $165.8 million in the same quarter last year. We ended the quarter with approximately $1.3 billion in cash and cash equivalents, which does not include the restricted cash related to the acquisition of Emakina Group.

Additionally, in October, we updated and expanded our unsecured credit facility, which will allow for up to $700 million in funding plus an additional $300 million via accordion, giving us access to a total of $1 billion in borrowing capacity. This new credit facility replaces a 2017 facility, which allowed for borrowing up to $300 million with an additional $100 million via accordion. At the end of Q3, DSO was 70 days and compares to 70 days for both Q2 2021 and the same quarter last year. We expect to maintain DSO around the same level or somewhat lower in Q4.

Moving on to a few operational metrics. We ended the quarter with more than 47,050 consultants, designers, and engineers, a year-over-year increase of 39.4%. Our total head count for Q3 was more than 52,650 employees. In the first three quarters of 2021, we had approximately 11,500 net additions, a record number for EPAM over a nine-month period.

Utilization was 77.1% compared to 78.2% in Q3 of last year and 80.2% in Q2 2021. Now let's turn to guidance. Based on our year-to-date results, combined with a robust demand environment and continued confidence in our ability to scale production headcount, we are raising our business outlook for 2021. So starting with our full year outlook, revenue growth will now be at least 40% on a reported basis, and in constant currency terms, it will now be at least 38%, after factoring in an approximate 2% favorable foreign exchange impact.

On an organic constant-currency basis, revenue growth will be at least 34% after excluding an approximate 400 basis points of revenue contribution from acquisitions we closed in the last 12 months, including Emakina. This compares to the previous full year revenue growth outlook of 37% reported, 35% constant currency, and 32% in organic constant currency terms, which we provided during our Q2 earnings call. We expect GAAP income from operations to continue to be in the range of 13.5% to 14.5% and non-GAAP income from operations to continue to be in the range of 17% to 18%. We expect our GAAP effective tax rate to continue to be approximately 11%, which includes the benefit of certain tax credits I mentioned previously.

Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will now be 22%. For earnings per share, we expect the GAAP diluted EPS will now be in the range of $7.86 to $7.93 for the full year, and non-GAAP diluted EPS will now be in the range of $8.72 to $8.79 for the full year. We expect weighted average share count of 59.1 million fully diluted shares outstanding. For Q4 of 2021, we expect revenues to be in the range of $1.075 billion to $1.085 billion, producing a year-over-year growth rate of approximately 49% at the midpoint of the range, with the favorable impact of foreign exchange on revenue growth expected to be minimal.

Lastly, we expect approximately 800 basis points of revenue contribution to come from acquisitions closed over the last 12 months, including Emakina. For the fourth 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 14% and our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, to be approximately 22%. For earnings per share, we expect GAAP diluted EPS to be in the range of $2.11 to $2.18 for the quarter and non-GAAP diluted EPS to be in the range of $2.44 to $2.51 for the quarter.

We expect a weighted average share count of 59.3 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements in the fourth quarter. Stock-based compensation expense is expected to be approximately $31.4 million. Amortization of intangibles is expected to be approximately $5.6 million.

The impact of foreign exchange is expected to be approximately a $1.5 million loss. Tax effect of non-GAAP adjustments is expected to be around $8 million. And finally, we expect excess tax benefits to be around $13 million in the quarter. In summary, we are pleased with our Q3 results and the record growth we are producing in our 2021 fiscal year.

While it is too early to give a detailed view of our business outlook for 2022, we believe the demand environment continues to support an elevated annual growth rate in excess of our traditional guidance of greater than 20%. However, we also believe it is important to establish and maintain a more sustainable growth rate in the coming year than that achieved in 2021. As we have done in the past, we'll provide a detailed view of 2022 guidance in February on our Q4 earnings call. Operator, let's open the call up for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Bryan Bergin with Cowen. Your line is open.

Bryan Bergin -- Cowen and Company -- Analyst

Hi. Good morning. I wanted to ask about the spread between your headcount growth versus revenue growth. It's really widened here despite the utilization normalizing.

Can you talk about some of the key drivers there as well as a sustainable level for that difference?

Jason Peterson -- Chief Financial Officer

Yes. I think that we continue to see some improvement in pricing, as I think we've discussed over the last couple of calls. And then probably there's a little bit of shift from a geographic standpoint in different geographies to have somewhat higher rates associated with them. And so I think you might continue to see some improvement over time.

And as I think we've sort of talked about, we feel that we've definitely increased our capacity to add headcount and more specifically to retain headcount. And so we expect that we will continue to add headcount at greater than historic rates. But currently, we're guiding to a somewhat lower increase in headcount in Q4 relative to Q3 based on what we think will be a little bit of slowdown in people joining the company in the month of December.

Bryan Bergin -- Cowen and Company -- Analyst

OK. And then just on the growth outlook, so it really looks quite broad-based across the business. Just any thoughts on how 2022 growth may progress, considering the level of comps you continue to put on board here in '21? And more specifically, how do you feel about headroom to grow in some of your largest clients?

Jason Peterson -- Chief Financial Officer

The demand environment continues to be strong. We see quite a bit of growth from existing clients. We also have a number of engagements that we have entered into more recently that have a lot of growth potential. So the demand environment is obviously quite solid.

We also feel that we have increased our ability to support organic growth rates. At the same time, I should say that we don't expect 36% organic growth rate become a normal -- sort of multiyear sustainable norm.

Bryan Bergin -- Cowen and Company -- Analyst

OK. And the largest accounts headroom in those, do you still feel strong there?

Jason Peterson -- Chief Financial Officer

Yes. There's definitely -- there's potential in the larger accounts.

Bryan Bergin -- Cowen and Company -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Jamie Friedman with Susquehanna. Your line is open.

Jamie Friedman -- Susquehanna International Group -- Analyst

Hi. Let me echo the congratulations. Two questions, I guess I'll ask them upfront. Maybe for Ark.

In your prepared remarks, Ark, you asked -- I mean you were discussing experienced consultants and you used that word experienced. I was just wondering how are you doing -- what verticals especially are you drawing talent from with the experienced consultants? And then the second thing is, Jason, is there any call out about Q4 seasonality or ideally 2022 budgets?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

So the question -- I'm sorry, the question about where we're taking people, where we kind of bringing in people from or in what markets we apply the capability because I --

Jamie Friedman -- Susquehanna International Group -- Analyst

Especially the second one, Ark.

Ark Dobkin -- Chief Executive Officer, President, and Chairman

OK. So I think like -- I don't think there is in here much difference with us and with other companies playing in the market. Right now, this is pretty much across in most of the verticals. Clearly, I think consumer goods, travel, retail, definitely leading this, but it would be relevant for majority of financial services on definitely entertainment and publishing.

So I think it's pretty much across in all -- and healthcare and life science, all of it.

Jason Peterson -- Chief Financial Officer

Yes. And I guess I'll answer the second question. And from the standpoint of budgets, budget's intact as we sort of exit Q4. Clients are looking to invest and continue to drive digital transformation.

So right now, it continues to be a market where probably supply constraint is the greater issue rather than demand. And we entered 2022, which looks -- with what looks like a pretty intact demand environment.

Jamie Friedman -- Susquehanna International Group -- Analyst

Got it. I'll drop back in the queue. Thank you.

Jason Peterson -- Chief Financial Officer

Thank you.

Operator

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

Ashwin Shirvaikar -- Citi -- Analyst

Thank you. Congratulations on the quarter. I guess the question -- I know in the past, you guys have spoken about sort of the risk to corporate culture from growing too fast and the ability to grow too fast. So as you scale, has that ability changed, or has your view changed?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I think, Ashwin, it's definitely a very relevant concern, and we're paying a lot of attention to this. At the same time, like things changing from the point of view, how we were thinking about general operation, level of distribution, how people were working just two years ago. So I'm just reminded exactly about kind of our naiveties sometimes. And we've put, during the last couple of years and even starting to do before, a lot of efforts to make sure that we create an environment from digital ecosystem perspective as well to see how we can support the culture better in what we were thinking will be relevant probably not during the 2020, 2021, but later.

It's all accelerated like we're always talking about it. But at the same time, that's exactly what Jason already mentioned, we don't believe that it's sustainable to grow with the growth which is happening right now for a relatively long period of time. So I think it might be better than what we were expecting a couple of years ago when we were talking about our growth, 20-plus percent organic growth, maybe it will be better in the future, but it's definitely not the rate which we grow in today, because in this case, we will be kind of 50%, 60%, 70% of people will be new to the company, which is very difficult to sustain culture and quality of the delivery. And we're very, very much focusing on the quality levels.

Ashwin Shirvaikar -- Citi -- Analyst

Understood. Understood. No. So you're focused on the right things as far as that type of growth is concerned, which is good.

I guess one separate question that was with Emakina, which I guess that process has been ongoing since August. Just to clarify, is the acquisition now complete in terms of just the public share repurchase and stuff like that? And is this an area where you would see yourself continuing to scale in terms of acquiring a lot of local talent in many different geographies?

Jason Peterson -- Chief Financial Officer

Yes. So from, I guess, the acquisition standpoint, over 98% of shareholders have agreed to tender their shares and cash has been transferred. We're still going through a little bit of, I guess, what's called a squeeze-out process here for the remainder of the shareholders. And so for all practical purposes, we would control the company as of, I guess, yesterday.

And I guess that's kind of what I'd say about that. And then we're --

Ark Dobkin -- Chief Executive Officer, President, and Chairman

Yes. That's right. And we're definitely focusing on expanding in the market. And the Emakina acquisition bring in like 1,100 people to us, specifically in European markets.

It's definitely improving our experience in consultancy, digital consultancy, marketing-related consultancy skills, which is a little bit new to EPAM but very complementing to what we're doing. But it's also very visible improvement of our presence across European and some Middle East geographies. And we're planning to continuously doing this, but again, with the right proportion and with consistent focus on delivery and engineering quality.

Jason Peterson -- Chief Financial Officer

And just to clarify, and I think I said it in my prepared remarks, but we've got two months of Emakina results built into the guidance that we communicated for the Q4 quarter.

Ashwin Shirvaikar -- Citi -- Analyst

Understood. OK. Great. Thank you.

Jason Peterson -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Maggie Nolan with William Blair. Your line is open.

Maggie Nolan -- William Blair -- Analyst

Thank you. I'm wondering, what is the level of seniority of the employees that you've been hiring so rapidly in the last couple of quarters here? And has the pyramid makeup shifted in the last couple of years?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I think we're definitely doing very specific analysis on this part. And while we're growing faster than we expected, we keep on seniority parameter in that right now. So this is kind of short term. Well, clearly, with this seniority, we bring in more new people, and that's a little bit more challenging and that's kind of related to the previous question which Ashwin was asking.

We're carefully doing this, but again seniority parameter supported as needed for the type of services we deliver.

Maggie Nolan -- William Blair -- Analyst

And then in previous quarters, you've discussed putting through an additional number of price increases compared to prior years. How widespread is this across your client base, and what is the magnitude? And how receptive have clients been to these conversations?

Jason Peterson -- Chief Financial Officer

We continue to have discussions and negotiations with clients around rate increases. Some of those are coming in the second half of 2021. At the same time, we're also beginning to have the discussions around rate increases for the beginning of 2022, which is kind of the more traditional period for rate increases. Obviously, nobody likes to absorb a rate increase.

But I think based on everything that people are seeing from a wage inflation standpoint, from I guess a global inflation standpoint and just the continued strong demand for resources, these are relatively easier conversations than we've had in the past, and I expect that we will see better price increase or rate increase in 2022 than we've seen in previous years.

Maggie Nolan -- William Blair -- Analyst

Is that pretty widespread across your client base, Jason?

Jason Peterson -- Chief Financial Officer

Yes. So every client is probably a little bit different. But yes, I think that there will generally be greater increases across clients than we've seen in the past. Some clients will have higher rate increases than others depending on where they've kind of been historically.

We are trying to make certain that we are growing our business responsibly and sort of able to maintain sort of a stable sort of level of profitability the way we've run the business over the last couple of years.

Maggie Nolan -- William Blair -- Analyst

Thank you. Congratulations.

Jason Peterson -- Chief Financial Officer

Thank you.

Operator

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

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

Hey, guys. This is Cathy, on for Jason, great set of results here. I wanted to ask about margins. I mean, obviously, your margin performance has been very impressive year to date.

I think you're already tracking to the upper end of your full year guidance range of 17% to 18%. Just curious, is there a reason you didn't pick up the full year margin guidance? Is it just conservatism or are there other factors that we should be aware of?

Jason Peterson -- Chief Financial Officer

Sure. So we believe that the 17% to 18% guidance that we maintained for adjusted income from operations is the appropriate kind of guidance. Q3 was a quite strong quarter, which did -- some of the profitability improvement was a result of sort of the upside in revenue that was somewhat unexpected in the quarter. For Q4, we expect that SG&A will come up a little bit between Q3 and Q4.

We'll maintain gross margins kind of in and around the range that we saw in Q3. And then I think the other thing I should point out is that our recent acquisitions have somewhat lower levels of profit than our traditional EPAM business. So all of those things kind of pushes you more toward a Q4 exit in the middle of that 17% to 18% range. And so that's kind of what informs that 17% to 18% guidance for the full year.

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

Great. Very helpful. And just a quick follow-up. I just wanted to ask about utilization.

Obviously, the 3Q number was lowest we've seen in about two years now. So is that just due to timing of onboarding because you obviously had a very short hiring quarter? Obviously, demand remains very strong. So I just wanted to know, is there any factors contributing to that?

Jason Peterson -- Chief Financial Officer

Yes. So utilization in Q3 is traditionally the seasonal low quarter. And so if you think about a world, I guess, pre-2020, it's a time when people go on vacation. And if you're lucky enough to be in Europe, maybe it's a two- or three-week vacation, and so utilization is relatively low.

Last year, when people couldn't leave their homes and countries, we saw higher utilization than is typical. The 77.1% that we saw in Q3 is actually pretty good and sort of, again, sort of seasonally consistent. We expect utilization might come up a little bit in Q4, but not unhappy with the 77.1% that we had in Q3. And I guess the other thing I should point out is we usually think about the business as kind of running in maybe a 77% to 79% utilization.

And again, it is somewhat seasonal. There are quarters when we run at or above 80%, but we generally consider that on the hotter side.

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

Great. Very helpful. Thanks, guys.

Jason Peterson -- Chief Financial Officer

Thank you.

Operator

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

Surinder Thind -- Jefferies -- Analyst

Hi, Jason. Just I was hoping for a bit more color on your commentary around when you mentioned looking toward a more sustainable growth rate to what you currently generated. Is that commentary around the scale at which EPAM is currently operating at? Or is that also some commentary on the industry growth that's occurring and maybe ultimately some expectations of slowdown as we look ahead?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I think it's difficult to comment about industry as a whole. At this point, we think there is very strong demand, and there is no really signs that this demand will go down. At the same time, from our internal assessment, we really would like to make sure that we bring in the value to the clients, and it's important the reputation which we built during the previous couple of decades. And from this point of view, we are talking about sustainability of our growth.

Because like if we're going to growing like 50% for a couple of years at our size, we don't believe that it's possible to do in the complexity of the business we have and the complexity of the engagement and all. So basically, sustainability was referring exactly to our understanding what's possible in reality with keeping the quality and culture of the company. Again, similar reply to what we already did to Ashwin as well.

Surinder Thind -- Jefferies -- Analyst

Understood. And then related to the commentary around expectations of strong demand outlook as you look over the next x number of years. You made a comment earlier about the naivete of predicting demand about a year ago and where you thought things were. Can you maybe provide some color around what gives you confidence that the current level of demand from an industry perspective is sustainable at these levels? And then if we look at past cycles, it seems like demand, where it spiked, will persist for a couple of years, but then there's generally a quick drawdown.

Any color you can provide there on your confidence levels.

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I think our point was exactly how difficult to predict the future, and how just a couple of years ago we didn't understand that it would be the turnover which happened. And even 12 months ago, we saw the impact of pandemic will be different and then just one or two quarters later changed. That's why from your question, we do believe that it would be strong demand during the next several years. What would be after this and how this ways you will be working, it's an interesting question because everything is changing.

So unfortunately, I cannot give you this kind of assurance for the next decade assumption.

Surinder Thind -- Jefferies -- Analyst

Understood. That's helpful. Thank you.

Operator

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

James Faucette -- Morgan Stanley -- Analyst

Thank you very much, and thanks for all the detail today. Wondering, you mentioned in prepared remarks that you're making some progress on standing up new delivery centers in different regions. Can you give a little more detail on that? How is hiring going in those regions? And how are you being able to build in the EPAM brand, which seems to have served really well to date in your existing geographies?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I think we will be very consistent with our comment on this side. I don't remember in what quarter we were saying that it's easy to bring talent. And I'm pretty sure we always were confirming that it's also very global. There is no practically spaces in the world today where you can come and starting to hire like talent without challenges.

And I think each quarter as this demand is becoming more challenging, at the same time, our investments in education and our recruitment processes and automation and everything becoming more impactful and allowed us to support what we're doing today. I don't know what else to say. I think war for talent is like in all media, in all websites, everywhere, like everybody talking about it, and we're pretty proud at this point that we're able to sustain the level of net additions which we have and the level of kind of relatively manageable attrition rates.

James Faucette -- Morgan Stanley -- Analyst

No. And that's -- and certainly, you have good reason to be proud and impressed with what you've done to date on hiring. You also talked about it, I just want to talk a little bit or ask quickly on customer growth and the contribution. It seemed like there was a pretty material sequential growth across your top customers.

How much is that the result of their own demand versus you turning away maybe other business and so that's resulting in more concentration? And how should we think about that going forward? Do you think you can get far enough ahead of the hiring curve to be able to take on some of that work that maybe you've been turning away recently or is that going to be an ongoing challenge?

Jason Peterson -- Chief Financial Officer

Yes. So I think that we're actually kind of deconcentrating. What I would say is that if you looked at the cohort in the 11 to 20, you did have pretty elevated growth rates in that cohort. And maybe some of that, it speaks to sort of the trends we're seeing in the market.

So you've got a few clients, one in the asset management space that was probably somewhat unprepared for the new digital kind of operating world. The pandemic sort of encouraged them to make investments and now there's a significant amount of investment around updating their infrastructure and the way they connect with their end clients. And so you've got, I would say, a number of companies who probably got additional religion via the pandemic and you're seeing quite accelerated investment. And then EPAM continues to bring that sort of trusted partner to the table.

And so clients who are looking to make certain that their transformation journey is successful oftentimes are working with EPAM because of the track record that Ark has spoken about. So we did see some really strong growth in the 11 through 20. But we're also seeing very strong growth in the customers below 20. I would say probably, if you're an existing customer with strong demand, you probably have a little bit more of a say at the table.

And so probably they are getting a little bit more of their share of resources than brand-new customers. And again, we continue to be constrained by supply and are expecting that we'll continue to have very, very solid net additions in Q4 but at a somewhat lower level than in Q3, OK? And of course, that excludes the 1,100 additions coming from Emakina. So I said a lot. Was that relatively clear or --

James Faucette -- Morgan Stanley -- Analyst

Yes. No. That was perfect. Just the one clarification that -- and I think you touched on this in terms of the lower net addition in the fourth quarter.

Do you think that -- is that seasonal? Or is there some other aspect that's impacting that?

Jason Peterson -- Chief Financial Officer

I mean, I think generally, what we're thinking is that December is a time when most people don't change jobs. And so we'll have maybe fewer joiners in December. But it might be a reflection that things could get a little bit harder over time. But as Ark has talked about, we've really improved our capability to attract.

I think our hiring brand continues to improve quarter after quarter, year after year. We've also improved our ability to staff projects and to match supply and demand. So I think that we've improved our capabilities around organic growth rates, but again, are expecting a somewhat slower level of net additions in Q4.

James Faucette -- Morgan Stanley -- Analyst

That's great. Thank you.

Operator

Our next question comes from Arvind Ramnani with Piper Sandler. Your line is open.

Arvind Ramnani -- Piper Sandler -- Analyst

Hey. Congrats on a terrific quarter. I just want to go back to a comment Ark made in your prepared remarks, you're talking about kind of pushing into new areas and capabilities. So a couple of questions around this.

What are you doing in terms of figuring out which areas to invest in? Just given the breadth of tech innovation kind of across the space, which areas -- how are you deciding which areas to really kind of focus on and build capabilities in before there's commercial revenue opportunity? And the second question is, how are you deciding what areas to kind of deemphasize? Are there certain areas where you're -- you don't see much growth? How are you deciding what areas to say like we're going to focus less on these areas.

Ark Dobkin -- Chief Executive Officer, President, and Chairman

Yes, Arvind, I appreciate your questions, like all of us trying to understand the fusion, how we're doing this. It's like simple sounded question, which like really complex. I just would like to remind, like I'm not going to go to specific topics. But we do believe that one of the advantages which we have is that around probably 30%, 40% of our business is still working with software companies and technology companies and platform companies.

And we're doing significant -- kind of sometimes significant portion of development of new products and platform for this type of clients which is giving us like very different exposure to what's happening in different areas. Like sometimes we do a new product or new concept like much earlier than it's going to the market. But then we are forced to help this type of clients to do implementation of this. So we have kind of organic internal barometer, if you will, to help us to select some areas and we build this capability sometimes in a very organic way.

And as we design, we're trying to keep this proportion of such clients in our business portfolio to be able to continuously do this. This is from a technology standpoint. And then from end-to-end solution standpoint, we definitely, with everything what we were sharing about consultants, we're going up and up in the chain and expanding business perspective of what we're building and how we can help clients. And first consulting was for API technologies, and we added experience components, and we're talking about business now, we're talking about strategy, Emakina part of this, but we also did a couple more acquisitions in this area.

And this is when we're talking about new areas. It's not only about new technology, it's also about the whole end-to-end story.

Arvind Ramnani -- Piper Sandler -- Analyst

Terrific. Terrific. Just another question. Certainly, in the last few years, you've expanded your consulting capabilities, which makes a lot more sense given that now you're doing close to $1 billion in revenue per quarter.

Can you just talk maybe about the competitive set? Who are you winning business from? Are you -- has the competitive set changed now versus three, four years back?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I think you understand our competitive base very, very well. And I think we're just getting proportionally more to the situation when consulting becoming a much more important part to start the business to open the door. From this point of view, I think we see the difference. From general competitive on kind of what exactly companies we compete against, I think it largely is the same because most of the large vendors had these capabilities before, we're just trying to bring different values through integrating better with delivery and engineering.

Arvind Ramnani -- Piper Sandler -- Analyst

Perfect. Thank you, and good luck for rest of the year.

Ark Dobkin -- Chief Executive Officer, President, and Chairman

Thank you.

Operator

Our next question comes from Steve Enders with KeyBanc Capital Markets. Your line is open.

Steve Enders -- KeyBanc Capital Markets -- Analyst

OK. Great. Thanks for taking my question. Just want to talk a little bit more about the macro and kind of where budgets are at this point.

Good to see, I guess, travel and consumer specifically, recovery here. But are you still seeing sort of that depressed spending levels from COVID still happening across some of the verticals in your client base?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I don't believe we've seen any of this at this stage. I think practically, and it's not only about travel and consumer, it's practically about all indices. We do believe that everybody understand that preparation for something new or even like changes which this pandemic trigger is pretty constant. And when I was saying before, like it's difficult to predict what would be two years or three years from now, it is difficult and anything can happen, and we all understand it.

But mostly, I was referring to level of demand which is happening specifically right now. The level which we were seeing and predicting for longer term like before pandemic, I think it definitely will be there for longer term as well. So -- but direct answer to your question, no, we don't see any type of sign of partial depression still from the pandemic right now in the market -- in our market.

Steve Enders -- KeyBanc Capital Markets -- Analyst

OK. Perfect. And just I guess as a follow-up, just as you kind of think about the biggest challenges that you are trying to solve for today, is still the biggest thing the ability to bring in more talent and we're just looking at kind of gross margin and where's is that today, but just ability to bring in talent and pass on some of the costs there and deal with the hiring levels? Or kind of what's the biggest challenge you're still solving for today?

Ark Dobkin -- Chief Executive Officer, President, and Chairman

In a very simplistic way, yes, the biggest challenge is bringing talent. But I think it's an overall huge oversimplification of what's happening because talent is a very broad term. Like in general, you can -- it's possible to hire a lot of people. The point is what type of people, how to orchestrate the complexity of the engagement, how to connect with the clients in the right way.

I think orchestration of the kind of integrated teams working together, specifically when you're growing like 30-plus percent, when you're having a lot of new people and you need to kind of bring them up to what's happening and understand the type of engagement which we do in the scale which is happening right now, that's a real challenge. So talent acquisition important enabler of this. Talent should be there. But the real concern how we deliver it.

And that should be the kind of very well understood.

Jason Peterson -- Chief Financial Officer

And I'm going to step in and kind of respond to that sort of more tactical question on gross margin. So as we talked about earlier in this call that we do continue to see elevated wage inflation. We are getting somewhat better increases in rates, OK, but probably not fully able to offset wage inflation. However, the one important point is that this year, we've had outperformed, I think you've seen, as we've taken up our guidance, I think, every quarter.

And so we have a variable compensation element that is the expense is looked based on the strength of the company's performance and revenue growth and profitability, so you are booking the expense associated with variable compensation at a much, much higher level this year than we have in past years. So next year, you think that that -- I would think that would normalize. And so that will have a positive impact on gross margin. And then you may continue to have some pressure with wage inflation.

And hopefully, those two kind of offset each other. And just to sort of round it out, the variable compensation expense shows up throughout the year and then it's generally paid in the form of a variable payout to employees in -- at the end of the Q1 quarter and the beginning of the Q2 quarter.

Steve Enders -- KeyBanc Capital Markets -- Analyst

Perfect. Thanks for taking the question. Very helpful.

Operator

Thank you. Our last question comes from Vladimir Bespalov with VTB Capital. Your line is open.

Vladimir Bespalov -- VTB Capital -- Analyst

Hello. Congratulations on very good numbers. I would like to ask you about your M&A pipeline, and general the M&A market, since Ark mentioned that this is a part of your strategy going forward, an important part. So do you feel like that the competition on this market is growing because there have been a lot of activity in the sector in general? Do you feel like the -- that it's getting more and more difficult to find the proper target, the valuations are going up and things like this.

So could you provide some color? Thank you.

Ark Dobkin -- Chief Executive Officer, President, and Chairman

I think it's definitely no in fact. And the answer will be yes, yes, and yes. So basically, there are a lot of companies in the market, but competition is growing and price is growing as well. So that's very natural in the market situation which we are describing today.

And we're still going to find the right companies to bring on board and to improve our capabilities. So we, like everybody else, talking to a number of opportunities right now.

Vladimir Bespalov -- VTB Capital -- Analyst

OK. Thank you very much.

Ark Dobkin -- Chief Executive Officer, President, and Chairman

Yes. Absolutely. Thank you.

Operator

I would now like to turn the call back over to Arkadiy Dobkin for closing remarks.

Ark Dobkin -- Chief Executive Officer, President, and Chairman

As always, thank you very much for attending the call today. You know that if you have any questions, David is available. And again, see you in three months. Thank you very much.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

David Straube -- Head of Investor Relations

Ark Dobkin -- Chief Executive Officer, President, and Chairman

Jason Peterson -- Chief Financial Officer

Bryan Bergin -- Cowen and Company -- Analyst

Jamie Friedman -- Susquehanna International Group -- Analyst

Ashwin Shirvaikar -- Citi -- Analyst

Maggie Nolan -- William Blair -- Analyst

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

Surinder Thind -- Jefferies -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Arvind Ramnani -- Piper Sandler -- Analyst

Steve Enders -- KeyBanc Capital Markets -- Analyst

Vladimir Bespalov -- VTB Capital -- Analyst

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