EPAM Systems (EPAM) Q3 2023 Earnings Call Transcript

EPAM Systems (EPAM 0.26%)
Q3 2023 Earnings Call
Nov 02, 2023, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to EPAM's third-quarter 2023 earnings conference call guidance. [Operator instructions] I'd now like to turn the conference over to 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 2023 results. If you have not, a copy is available on epam.com in the Investors section.

With me on today's call are Ark 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 -- President and Chief Executive Officer

Thank you, David. And good morning, everyone. Before I get into the results of our third quarter, I would like to recap what was certain in regards to our expectations for Q3 and full-year outlook three months ago during our last call. We stated that while the current business environment is more focused on cost optimization versus our differentiated build and deploying, we do believe the demand for transformation services will come back under the services market.

We'll be moving from core IT to accelerated digitization to reinvent our business models and ways of working with generative AI as the core of the transformation and we expect this new demand to be underpinned and even more driven exactly by our traditionally strong product platform engineering, data analytics, and AI/ML capabilities. At the same time, we said we still expect the negative dynamic to continue into second part of 2023, here when the outlook begins to normalize. We stated that we are focusing on experience from very challenging past quarters into pragmatic plans and action items, which will be applied to our business throughout the rest of '23 and into 2024. These changes are transformational for us and are already better positioning us in preparation for the return of toned market demand.

That was the first part of our premise. The second critical part was about our efforts to further globalize and stabilize our delivery ecosystem, propagation engineering quality standards, and optimize operational of our talent locations while closely focusing on our gross margin improvement efforts. All these to continue throughout the remainder of this year, and I expect it to go throughout 2024. So with that reminder, let's talk about three key topics to address our demand environment, global capabilities, and key investments.

Demand. We believe that while the demand for the new build for platform application remains lower than historic levels and the impact of ramp downs in the quarters continue to work through specific client portfolios, our results point to sign of stabilization in our business. Both in new logos and in retail and expanding programs in our existing portfolio, we are seeing signs of renewed interest, particularly in our life science and verticals, both in insurance and energy, and not only there. What is important to highlight in today's business environment, we are putting all possible efforts to address our client current priorities, including addressing the mix of engagement models, cost takeouts, and consolidation initiatives while protecting our share of wallet and long-term relationships.

Well, these factors are leading sometimes to a lower short-term profitability metrics, we are seeing signs that clients are returning to balance between cost and quality, and EPAM continues to be well positioned there. Also is required today an increased focus on demand-led sales and go-to-market motions and investments in global partnerships to winning and quickly growing new business. Over the last quarter, our global set organizations and our specialized practice teams are focused on developing new offerings in verticals and horizontals, expand into new engagement models, and extending our client portfolio to include new logos across the broader sector of our brands from large enterprises to mid-market players, to new and exciting start-ups in key verticals. And more and more often, we are engaging with clients at a C level of both IT and business functions.

One of the examples of those relatively new for us ways to engage is strengthening our partnerships, which have taken on a greater momentum recently with key collaborations driving net new go-to-market propositions, new IP, and new client wins. Last quarter, we shared our global partnership with Google Cloud to help our clients fast-track the development of artificial intelligence, machine learning, and data solutions to help them accelerate their transformation into AI-enabled business. Earlier this week, we announced a standing strategic collaboration agreement with AWS. This will aim to accelerate modernization, adapt cloud-native architecture and leverage artificial intelligence and advanced analytics to create customer value in key industries such as healthcare, life science, financial services, insurance, energy, and gaming.

Furthermore, we expanded our partnership with Microsoft becoming a globally managed enterprise system integrator. The enhanced partner status and a part advanced cloud nature, AI, and data expertise will enable us to help our clients modernize, transform, and simplify complex enterprise platform application and processes to accelerate business growth powered by Azure open AISX. Current results of these efforts are showing up an increasing number of conversations with clients and growing numbers of opportunities. And while it's still too early to say when we can show significant result in revenue growth, our production load is starting to come back to the level comparable with our Q1, and we hope to see this trend take shape during the next quarters.

Still, despite signs of improving demand conditions, the global macroeconomic environment remains volatile. And we see certain trends reflecting in our own business, notably in Europe, where the contraction in the third quarter is likely to take a few quarters to reverse. Now moving on to global capabilities. India and Lat Am for us are key growth delivery regions, while Central Eastern Europe and Central Western Asia are areas of stabilization after our location efforts, and we've seen future growth opportunities.

Part of the effort regarding globalization and stabilization of delivery is the rightsizing and cost optimization across multiple locations based on current and future demand outlook and specific location capabilities, seniority of pyramids, and office infrastructures. Some identical efforts are also relevant and several locations in Western Europe and North America. While we're optimizing some locations, we continue to reinvest in new talent and key initiatives to expand our engineering G&A across all strategic global delivery locations with continuous harmonization and upskilling efforts enabled by our own use of AI and co-productivity platforms. Those efforts are on the way as we speak, and we're already seeing first results and expect to have additional benefits to materialize in 2024.

This brings us to the topic of additional investments, which we mentioned in the past multiple times. We are continuously investing in our strategic priorities such as expansion of differentiated consulting agency, data ML/AI, and cloud capabilities with focus on vertical expertise. Development of go-to-market retina solutions, which now include propositions related to use of responsible AI across a broad range of business and technology use cases. Our strong cloud engineering data and ML core services profile should position EPAM to benefit in the medium and long term from the impact of both current pent-up demand for modernization and also from the fundamental skills shortage in concrete technological transformation, we still persist today.

The impact will become even more real in terms of complexity or future applications and platforms by encapsulating not just currently available elements of gen AI and requirements for trust, reliability, and security management of AI, but also by closely integrating with new classes of composite and adaptive AI platforms as well as with foundational models and specific industry cloud platforms. One of the key propositions offered by EPAM is our ability to make AI real. As part of this focus, a number of our labs and centers of exons have created IP that we are using to productize our earnings and to share them with our clients through our own open-source initiatives. We mentioned our work with Dial, our AI orchestration work bank in our previous call.

And today, we see a number of extensions of this platform into specific use cases and specific industries based on real-life problems, which we are addressing with a growing variety of integrated AI tools and data sources. One of our most significant investments related to AI is the development and internal rollout of the EMAP responsible AI framework and brought in play training to adapt it. Today, we are confident that EPAM has the necessary capabilities and talent to help our clients to evolve in the general adoption of AI and also in modernization of applications and proper data engineering efforts to drive the value AI promise to bring. Conversations with our clients are in volume as it become generally understood that fundamental capabilities and readiness in cloud and data are necessary prerequisites for success.

Still, the level of interest continues to indicate the demand for our related services will build momentum into 2024 and beyond. I believe that provides a good level of overview of current state and our key areas of focus. To summarize, I would like to say that with the exciting opportunities in front of us, we are still facing a complete demand environment. We are working to invest with the future while balancing supply and demand for skills and capabilities across a much more diverse delivery footprint.

This challenge continues as the war in Ukraine extends into the third year as well as the new disruptions in Middle East escalations, require us to continuously adapt the company in appropriate manner. Would think at this point, this will be well trained to manage all of the web. So with that, I would like to pass to Jason to share more details and numbers for Q3 and for an update for our business outlook for the remainder of 2023.

Jason Peterson -- Chief Financial Officer

Thank you, Ark, and good morning, everyone. In the third quarter, EPAM generated revenue of over $1.15 billion, a year-over-year decrease of 6.1% on a reported basis or 8% in constant currency terms, reflecting a favorable foreign exchange impact of 190 basis points. Revenue in the quarter continued to be impacted by reduced program spending across a number of our clients as well as ongoing client cost related to new project starts. The reduction in Russian customer revenues resulting from our exit from the market had an approximate 50-basis-point negative impact on year-over-year revenue growth.

Excluding Russia revenues, year-over-year revenue for reported in constant currency would have decreased by 5.6% and 7.6%, respectively. Beginning with our industry verticals on a year-over-year basis. Financial services decreased 3.3%, driven by declines predominantly in banking, partially offset by growth in asset management. Consumer decreased by 6.2%, primarily due to declines in consumer goods, partially offset by solid growth in travel and hospitality.

Life sciences and healthcare declined 4.2%. The year-over-year growth rate was negatively impacted by the ramp-down of a large transformational program in late 2022, which we have mentioned during our previous earnings calls. On a sequential basis, gross in Life sciences and healthcare was a positive 8.6%, and we expect to return to positive year-over-year growth next quarter. Business information & media declined 12% in the quarter.

Revenue in the quarter was impacted by a reduction in spend across a number of large clients based on uncertainty in their end markets, particularly in the mortgage data space. Software and hi-tech contracted 15.1%. The year-over-year growth rate was negatively impacted by the reduction in revenue from a former top 20 customer we mentioned during our previous earnings calls and generally slower growth in revenue across a range of customers in the vertical. And finally, our emerging verticals delivered solid growth of 8.5%, driven by clients in energy, manufacturing, and automotive.

From a geographic perspective, Americas, our largest region representing 59% of our Q3 revenues, declined 9.3% year over year or 9.5% in constant currency. On a sequential basis, growth in the Americas was relatively flat, an improvement from the declines in previous quarters in 2023. EMEA, representing 39% of our Q3 revenues, grew 1.8% year over year and decreased 3.5% in constant currency. CE, representing less than 1% of our Q3 revenues, contracted 66.4% year over year or 58.8% in constant currency.

Revenue in the quarter was impacted by EPAM's exit of its Russian operations. And finally, APAC declined 20.2% year over year or 19.8% in constant currency terms and now represents 2% of our revenues. Revenue in the quarter was impacted primarily by the ramp-down of work within our financial services vertical. In Q3, revenues from our top 20 clients declined 8.3% year over year, while revenues from clients outside our top 20 declined 4.9%.

Moving down the income statement. Our GAAP gross margin for the quarter was 31.1% compared to 32.6% in Q3 of last year. Non-GAAP gross margin for the quarter was 32.9% compared to 34.4% for the same quarter last year. Gross margin in Q3 2023 reflects the negative impact of pricing pressure and lower utilization, partially offset by a lower level of variable compensation expense.

GAAP SG&A was 16.9% of revenue compared to 16.1% in Q3 of last year. Non-GAAP SG&A in Q3 2023 came in at 14.4% of revenue compared to 14.1% in the same period last year. GAAP income from operations was $114 million or 9.9% of revenue in the quarter compared to $180 million or 14.7% of revenue in Q3 of last year. Included in our GAAP results in the quarter is a $25.9 million loss on the sale of the company's remaining holdings in Russia and $8.4 million of severance as we take steps to reduce our cost structure to better align with demand.

Non-GAAP income from operations was $196 million or 17% of revenue in the quarter compared to $232 million or 18.9% of revenue in Q3 of last year. Our GAAP effective tax rate for the quarter came in at 26.3%, which includes a one-time tax charge connected to the disposal of holdings in Russia and lower-than-expected excess tax benefits related to stock-based compensation. Non-GAAP effective tax rate was 23.2%. Diluted earnings per share on a GAAP basis was $1.65.

Our non-GAAP diluted EPS was $2.73, reflecting a $0.37 decrease compared to the same quarter in 2022. In Q3, there were approximately 58.9 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q3 was $215 million compared to $252 million in the same quarter of 2022.

Free cash was $211 million compared to free cash flow of $234 million in the same quarter last year. At the end of Q3, DSO was 73 days and compares to 71 days for Q2 2023 and 69 days for the same quarter last year. The uptick in DSO reflects an increase in the time some clients are taking in the review and approval of payments, combined with the last day of the quarter falling on a weekend. Share repurchases in the third quarter were approximately 318,000 shares for $78.5 million at an average price of $246.44 per share.

As of September 30, we had approximately $372 million of share repurchase authority remaining. We ended the quarter with approximately $1.9 billion in cash and cash equivalents. Moving on to a few operational metrics. We ended Q3 with more than 48,500 consultants, designers, engineers, trainers, and architects.

Including the impact of our exit from Russia, production headcount has declined 10% compared to Q3 2022. This is the result of lower levels of hiring combined with both voluntary and involuntary attrition as we continue to balance supply and demand. Our total headcount for the quarter was more than 54,600 employees. Utilization was 72.7% compared to 73.5% in Q3 of last year and 75.1% in Q2 2023.

Now let's turn to our business outlook. We are encouraged by the results of our demand generation efforts and new customer revenues resulting from these efforts. However, the level of new customer revenues being generated is still not enough to offset the impact from existing project ramp-downs and reduced spending from our top 20 clients. We are beginning to see a degree of demand stability emerging in our North American portfolio, but we are also expecting an impact from planned ramp-downs in several of our European customers.

Although there are encouraging signs, demand remains somewhat uncertain. In addition to the negative impact the Q4 seasonality usually has on revenue, we've also had a large number of employees relocated to countries that celebrate December holidays. In Q4, we were also expecting unfavorable foreign exchange headwinds in comparison with Q3. These factors are producing a sequential decline in Q4 revenue despite the stabilizing demand environment.

Our Ukrainian delivery organization continues to operate efficiently, and our teams remain highly focused on maintaining uninterrupted production. Our guidance assumes that we will continue to deliver from Ukraine at productivity levels consistent with previous levels throughout 2023. During the third quarter, we elevated our focus on aligning our cost structure with the near-term demand environment, initiating a cost optimization program designed to reduce operating costs by 2.5% to 3%. This effort is clearly more intentional than our previous supply and demand balancing efforts.

We think it is necessary to take this action in part to allow for further investment across our strategic initiatives, demand generation efforts, and people programs. As I mentioned earlier, we had $8.4 million in severance-related costs in Q3, of which $7.1 million related to the cost optimization program. In Q4, we expect to recognize a further $15 million in expenses as a result of this cost optimization program. We expect headcount will continue to decline in Q4 due to limited hiring and managed attrition, which will drive utilization slightly higher in the quarter.

Moving to our full-year outlook. We now expect revenue to be in the range of $4.663 billion to $4.673 billion, reflecting a year-over-year decline of approximately 3%. On an organic constant currency basis, excluding the impact of the exit from Russia, we expect revenue to also decline by 3%. We expect GAAP income from operations to now be in the range of 10% to 11% and non-GAAP income from operations to continue to be in the range of 15% to 16%.

We expect our GAAP effective tax rate to continue to be approximately 22%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, is expected to continue to be 23%. Earnings per share, we expect that GAAP diluted EPS will now be in the range of $7.07 to $7.15 for the full year, and non-GAAP diluted EPS will now be in the range of $10.31 to $10.39 for the full year. We now expect weighted average share count of 59.1 million fully diluted shares outstanding.

Moving to our Q4 2023 outlook. We expect revenue to be in the range of $1.13 billion to $1.14 billion, producing a year-over-year decline of 8%. On an organic constant currency basis, excluding the impact of the exit from Russia, we expect revenue to also decline by approximately 8%. For the fourth quarter, we expect GAAP income operations to be in the range of 10% to 11% and non-GAAP income from operations to be in the range of 15% to 16%.

We expect our GAAP effective tax rate to be approximately 24% and our non-GAAP effective tax rate to be approximately 23%. Earnings per share, we expect GAAP diluted EPS to be in the range of $1.67 to $1.75 for the quarter and non-GAAP diluted EPS to be in the range of $2.47 to $2.55 for the quarter. We expect a weighted average share count of 58.8 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 $36.3 million. Amortization of intangibles is expected to be approximately $5.7 million. The impact of foreign exchange is expected to be minimal. Tax effect of non-GAAP adjustments is expected to be around $12 million.

We expect excess tax benefits to be around $1.3 million, and we expect to recognize approximately $15 million in expenses related to our cost optimization program. In addition to these GAAP to non-GAAP adjustments and consistent with the prior quarters in 2023, we expect to have ongoing non-GAAP adjustments in Q4 resulting from Russia's invasion of Ukraine. Please see our Q3 earnings release for a detailed reconciliation of our GAAP to non-GAAP guidance. Finally, one more assumption outside of our GAAP to non-GAAP items.

With our significant cash position, we are generating a healthy level of interest income and are now expecting interest and other income to be $14 million in the fourth quarter. Looking beyond 2023, we intend to provide our 2024 business outlook during our fourth-quarter earnings call scheduled for February. However, I would like to provide some commentary at this time to help frame our initial thoughts. As Art mentioned, the demand environment remains uneven, and we believe this will persist at least into the first half of 2024.

We have been pleased with the progress we're making on demand generation, and we'll continue to prioritize revenue growth into 2024, which in some pursuits include some degree of discounting. Additionally, in 2024, we expect to incur incremental costs due to more normalized variable compensation as well as salary increases from our annual compensation cycle, which typically occurs in Q2. Although the cost optimization program will better align our 2024 cost structure, we still expect wage pressure, combined with the limited ability to improve client pricing to continue to put pressure on margins. While 2023 has been a challenging year for the IT sector in EPAM, we remain confident in our ability to drive historical levels of revenue growth and profitability in a more normalized demand environment.

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

Questions & Answers:

Operator

[Operator instructions] Our first question will come from the line of Bryan Bergin with TD Cowen. Please go ahead.

Bryan Bergin -- TD Cowen -- Analyst

Hi. Good morning, guys. Thank you. I guess let's start on the demand stabilization trends that you highlighted here again.

I heard you mentioned production load, I think, coming back toward 1Q levels. Can you dig in a bit more there? Is that prevalent across industries? And is it consistent across the large client cohort? And just anything, how that informs early 2024 client tech budget discussions?

Ark Dobkin -- President and Chief Executive Officer

OK. Let me clarify what we mean. We're trying to see the trend what's happening with our production load. It's not about revenue, it's how much work we're doing because there are a lot of different parameters, which has influenced revenues from FX to a number of days to race to discount and everything else.

But from the load point of view, the trend is that we're seeing -- we're coming back to a number of people who're doing production work, getting comparable to what we saw in Q1. That's what it means. It means that in general, we find end of the way to stabilize our share of the business even with some businesses, declining results but with some new opportunities growing and some clients coming back to us. So from demand environment, we have and this is what we mentioned as well.

We've seen more conversation about programs, more opportunities. But exactly, as we mentioned, where as explained, there is no clear time line of realization. So it's still difficult to say, but it seems like pressure on some clients to do work, getting bigger. So well started to be realized and difficult to say, especially with geopolitically environment as we see right now.

So more conversations, more opportunities to discuss, pretty tangible, but there is no clear updates.

Bryan Bergin -- TD Cowen -- Analyst

OK. Understood. And then my follow-up on the cost optimization plan. So Jason, what's the time frame on achieving that savings target? And can you talk about how you're balancing efficiency here in the near term versus global diversification investments for future growth?

Jason Peterson -- Chief Financial Officer

Yes. So the program is designed to to achieve somewhat over $100 million or as we talked about in the prepared remarks, 2.5% to 3% of our cost structure. Most of the actions will be taken by the end of the year, and then I would say there would be some residual actions that would take place early in 2024 with the idea of giving us effectively $100-plus million in savings to allow us to further invest in 2024. And so that's in demand generation programs, things like partnership programs, instant capabilities, generative AI, further consulting.

And then it also will allow us to effectively sort of fund a more normalized variable compensation in salary campaign next year. And so again, I expect much of the savings to be achieved by the end of this year, and there'll be probably still some actions taken in Q1. Truly, the costs that we talk about in the -- in Q3 and Q4, truly are incremental costs related to either severance payouts in different countries, facilities, lease exits, other costs that are incremental and again, allow us to achieve it a certain amount of savings as we enter 2024.

Bryan Bergin -- TD Cowen -- Analyst

Thank you.

Operator

Your next question will come from the line of Moshe Katri with Wedbush Securities. Please go ahead.

Moshe Katri -- Wedbush Securities -- Analyst

Hey, thanks. Thanks for taking my questions. I want to focus a bit about your selling efforts and using India as one of those, I guess, the liberty centers to be able to kind of pitch those new engagements. Maybe you can talk about some of your successes here? And on top of that, how does that differ in terms of your ability to generate profitability compared to what you have pre, I guess, hostilities in Eastern Europe? Maybe you can talk a bit about that.

Ark Dobkin -- President and Chief Executive Officer

So I think as we mentioned multiple times, India is growing for us. India is still the investment for us as well from the investment to uplift the capabilities, which we have said. Because relatively, utilization even if it's fastest growing for the last probably three years. So we view them purposely the same type of practices as we have from digital engagement to significant data practice and cloud practices.

So -- and the stability question is a difficult one in general in this environment because there's pressure everywhere from any locations which we have. So -- but I think we're seeing definitely opportunity to uplift the market demand coming back, and we're accumulating a lot of experience. Now we have very sizable programs there. So we also understand that we can hire people and hire them with comparable quality through additional investments, which we do have there.

So I think we're pretty optimistic about this. And with everything that's happened, as we mentioned several times, I think India will become proportionately much bigger part of EPAM deliveries.

Jason Peterson -- Chief Financial Officer

Yeah. And I'll just follow in on the profitability. So as we talked about in the last call, and again, we'll continue to talk about here today is that we continue to have some characteristics with heavier pyramid than we had traditionally operated with that ongoing kind of pressures on pricing and then some amount of wage inflation. And so it's hard to sort of return for typical profitability as we enter the next handful of quarters or maybe through most of 2024.

But when we look at India, given some time and particularly more demand, we think the ability to sort of run that geography at levels of profitability consistent with what we did in Eastern Europe is certainly possible and more than possible, I'd say, lively. So it's just right now, we're still working through, as Ark said, some of the imbalances on pricing and again, a heavier delivery pyramid.

Moshe Katri -- Wedbush Securities -- Analyst

Understood. And then in that context, can you just remind us your headcount mix by Eastern Europe, Latin America, and then India? Where are we today? And where do we -- what sort of mix do we want to get to down the road?

Jason Peterson -- Chief Financial Officer

Yeah. So we're clearly less than 30% in Eastern Europe and heading toward kind of low 20s. India is currently...

Ark Dobkin -- President and Chief Executive Officer

We're about 26%, 27% between Ukraine and Belarus. Eastern Europe or Central Europe, like it's different because we're pretty significantly present Poland and Hungary and all of this. And India is becoming right around second.

Jason Peterson -- Chief Financial Officer

Second largest location, yeah.

Ark Dobkin -- President and Chief Executive Officer

Right now, it's the second largest after Ukraine.

Moshe Katri -- Wedbush Securities -- Analyst

OK. Thank you.

Operator

Your next question comes from the line of Ashwin Shirvaikar with Citigroup. please go ahead. Ashwin, you're maybe on mute.

Ashwin Shirvaikar -- Citi -- Analyst

Can you hear me now?

Ark Dobkin -- President and Chief Executive Officer

Yeah.

Ashwin Shirvaikar -- Citi -- Analyst

OK. So I guess the question is when I look at your -- when I look at the results, either by geography or by vertical and on a sequential basis, and I kind of compare the growth rates what they were in 2Q versus the growth rate in 3Q, almost everything is either decel or relatively unchanged. You have obviously the very idiosyncratic things going on with life sciences. And I'm kind of wondering, does that -- I'm trying to drive back with what I sense as a little bit more positivity in terms of commentary because of stabilization.

So can you comment on how the environmental conversations with clients have evolved over the course of the quarter was September vertically different than July? How are things evolving in October? A little bit more color of where we are going in terms of what seems to be stabilization in more areas, that would be useful.

Ark Dobkin -- President and Chief Executive Officer

OK. I think I -- again, the general numbers and optics is declining. From amount of work which we do right now, it's definitely stabilized because if -- it's difficult to have apple-to-apple comparison. But with all our terms, it's actually getting latest load.

There are still big programs in which we continue to decline. Best of the client decisions done in -- even during the last year. That's why you see some big clients. On the other side after this period, why there is a positivity, we see that for some local fixed programs, clients coming back to us and started annualization or even some decisions when programs starting to come back to us.

Opportunities, new opportunities but this is what I comment as the very beginning. Some of them sizable, means that clients started to seriously consider as they need to do it. And unfortunately, some of the client delays so much while there are very specific deadline they have ahead of them, and they will have to start making decisions. So -- and this conversation happens, but they're still not making calls.

But the level of conversation is a different level. That's a positivity as well. And there are a lot of small new business where we enter in, which is historically for us, it wasn't very normal because it never was going to be program from day 1. It's usually where entry point, and then the potential is that we can do more open, better quality work and then it was growing.

So we have a lot of seats right now for the future. So -- but actually main point that we definitely see is the production load is getting more stable.

Jason Peterson -- Chief Financial Officer

Yeah. I think, Ashwin, also if you look clearly on a year-over-year basis, the numbers still don't look sequentially despite the fact that we still saw a decline between Q2 and Q3. That decline was less than the decline we had in Q2. And when we look ahead to Q4, we still have a modest decline, but I would say that's largely sort of foreign exchange and to a certain extent as we talk about the billability or the available builds in Q4.

And so if you adjust for that, it does feel like our demand is stabilizing, particularly in North America as we talked about during our prepared remarks.

Ark Dobkin -- President and Chief Executive Officer

And something to mention, like I know that there are a lot of consumers we would be able to deliver quality from new locations. That looks more positive as well for us because we're getting more and more experience and we have more scale outside our traditional strength in Eastern Europe, while in Eastern Europe and Western Central Asia, will also stabilize the total. While in general, geopolitical environment is still very, very challenging.

Ashwin Shirvaikar -- Citi -- Analyst

That last point is really good to hear. In terms of pricing because when you kind of talk about transaction loan volume versus results, does that imply soft pricing environment? And if you could break that down into how much of that is a geo mix type of issue as opposed to apples-to-apples price crunching. And then over the last few quarters, you have mentioned obviously that because of the war in Ukraine, you had to move equal to newer geographies and there was a pricing impact that clients needed to absorb because of that. Are we past the impact of that on client decision-making?

Jason Peterson -- Chief Financial Officer

Yes. So let me quickly do, on a year-over-year basis, you would have had the impact of those movements that we took people from Russia and dollars in Ukraine and moved into higher-cost geographies. But if you begin to look at what's happening here in Q3 and what we think we see in Q4 is that you've got both the facts. And unfortunately, I can't give you the exact percentage.

But certainly, one of the effects is that we are seeing more demand for India-based resources where the rates are lower. So that would speak to the mix shift that you talked about. And then the other thing, as Ark has indicated and I mentioned as well, is the pricing environment still is -- it's somewhat challenging with, in some cases, concessions provided to existing customers and then with newer engagements also starting with a sharper pencil. And so you've got both impacts.

And I think that you'll see them show up more so in Q4 and probably in the first half of 2024, which, again, is part of the discussion around what we see for profitability in coming quarters.

Ashwin Shirvaikar -- Citi -- Analyst

Understood, and that's what you're adjusting for them. OK. I got it. Thanks.

Operator

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

David Grossman -- Stifel Financial Corp. -- Analyst

Thank you. Just wondering if I could just follow up a couple of points that we just made in the last question. I guess I'm just trying to reconcile -- you've given us a lot of good information about production about headwinds from customer losses, some of the larger customers that you've been talking about over the last several quarters and other dynamics. So I guess I'm just trying to reconcile all of that because I think, Jason, you said that when you back out FX and seasonal kind of workdays or work hours that it feels flattish.

So it sounds like the newer work that's coming on is offsetting those headwinds. Is that a reasonable way to think about things as we kind of move into 2024? I know you don't want to give guidance, but does it feel like those headwinds that you've been experiencing in the last couple of quarters that have been driving sequential declines in revenues should pretty much abate by the end of this year?

Jason Peterson -- Chief Financial Officer

Yeah. Obviously, the world is a very complicated place at this time, and so I want to be careful not to make it an absolute assertion. But certainly, at this time, we are seeing more stability in customer programs and budgets. And so particularly as we look at North America, it does feel like we've achieved some degree of stability, less of these unexpected sort of surprises and ramp-downs, and we believe that we're seeing similar as we enter Q4.

As I did mention in my prepared remarks, we do have a couple of customers in Europe who've already notified us, and we've been aware of it for a little while that we'll cease ramp-downs there. But again, it feels right now that we're seeing less of these sort of unexpected surprises that drove both the miss in Q2 and has resulted in sequential declines. And so absolutely, if you adjusted out the build at impact, you'd have flat revenue as you go through Q3 to Q4.

David Grossman -- Stifel Financial Corp. -- Analyst

And maybe a similar question on the margins in terms of -- it looks like your utilization went down again sequentially. And you've got, again, the wage pricing dynamic, which sounds like the timing may be extending into calendar '24. So -- and then you factor and you've taken some cost-cutting actions. So when you roll up all those different elements, is it reasonable to think that you're still targeting your historical range as we go into 2024, that that's kind of what the objective is based on the actions you've taken thus far in 2023?

Jason Peterson -- Chief Financial Officer

So I think with some of the actions we're taking and some of the stabilizing stabilization in demand, I think that you'll see better utilization in Q4, and we clearly hope to improve utilization in the first half of 2024. However, with the lower bill days, you'll still have some compressed gross margin in Q4, which is why we've sort of guided the way we have with the 15% to 16%. What I do think as we enter 2024 is there is still an imbalance between customer pricing and wage inflation. And as I think you've noted before, David, we do expect to return to a more normalized variable compensation.

And so I think as we enter 2024, it's -- and we haven't done all the work on this yet. We don't quite know what wage pressures are going to be next year. And again, we're still trying to assess what happens with some of the deals we close here in Q4 and how that will impact future pricing as we enter 2024. But the sense is that it's possible that we could see profitability decline somewhat as we move from 2023 to 2024.

And then as I've been talking about over the last couple of earnings calls, we view 2024 as a transitional year, where we get the opportunity to work through a few things. We expect at some point more rational sort of supply/demand, and then that will give us opportunities in both pricing and with a return to more traditional profitability more likely in 2025.

David Grossman -- Stifel Financial Corp. -- Analyst

Great. Thanks for that. Just one quick follow-up to those. So the kind of wage pricing dynamic, is that the biggest headwind to gross margins as we go into next year, just letting that play out?

Jason Peterson -- Chief Financial Officer

Yeah, I would say that that continues to be -- the wage pricing dynamic the uncertain element, which is why it's harder for me to sort of comment on it right now, but I will be able to do the next time we talk. But yeah, I would say that the ongoing imbalance between sort of customer pricing and wage.

David Grossman -- Stifel Financial Corp. -- Analyst

Got it. Great. Thanks very much. Appreciate that.

Jason Peterson -- Chief Financial Officer

Sure.

Operator

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

Ramsey El-Assal -- Barclays -- Analyst

Thanks for taking my questions. I wanted to ask about booking conversion trends. And if you could just comment on things like average portfolio duration is trending or timeline to convert bookings to revenue or pipeline erosion trends? I'm just kind of curious, are you seeing consistency and stability when it comes to conversion? Or is it more of a moving target still kind of in this tough environment?

Ark Dobkin -- President and Chief Executive Officer

Sync is still second. At the same time, if you're talking about lens of the relationship, I think that's exactly what we said is that it's very much stabilizing and we don't see the same kind of -- that's a way different like versus Q1 situation and now. OK? I think it's much more manageable, I said my more transparency in the situation.

Ramsey El-Assal -- Barclays -- Analyst

OK. Thank you. And a quick follow-up for me. I wanted to ask about -- a follow-up on a prior question about the headcount numbers globally.

And in particular, I'm just curious, the absolute headcount numbers in Ukraine and Belarus, should we think about those as relatively stable at this point? Or do you have plans to further drawdown? I'm thinking particularly in Belarus, especially given kind of the way Russia kind of ended this quarter officially. I'm just curious whether we should think about the absolute numbers is the sort of watermark that's going to be persistent or whether we could see more declines on an absolute basis in the region.

Ark Dobkin -- President and Chief Executive Officer

I think the answer is very simple. Like we believe that Ukraine would be more stable and Belarus will be less stable just based on the situation of supply and-demand ratio. And in absolute numbers and relative numbers, Belarus declined during the last several years, much, much, much more significantly than Ukraine. And I think this trend might be dependent on geopolitics and client reactions.

Ramsey El-Assal -- Barclays -- Analyst

OK. Thank you very much.

Operator

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

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

Good morning, guys. I just wanted to come back to some of the commentary around quarter-over-quarter growth rates. I know that's what you guys have been watching most closely just to assess demand, and you've talked about the stabilization here. Just looking ahead to the first quarter of '24, do you think we get back to positive quarter-over-quarter revenue growth then? I think the Street is looking for about 3% growth.

So I just wanted to get your take on that. I mean putting any potential moves in FX on the side given some of the stabilization in parts of the business, do you think we're back in positive territory in the first quarter?

Ark Dobkin -- President and Chief Executive Officer

I think you should expect our assets, we will tell you this exactly in three months. But again, we're seeing positivity right now, but we'll check in three months.

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

Right. OK. And just a follow-up, Jason, on some of your margin commentary, I want to make sure we've got the messaging right there because it sounds like most of the cost optimization is going to get reinvested. So it sounds like what you're suggesting is in 2024, non-GAAP margins or perhaps down versus 2023.

And then '25, you're kind of back to a "normal range" like 16% or 17%. Is that directionally the point?

Jason Peterson -- Chief Financial Officer

Yeah. So we still -- we haven't worked through pricing. We haven't worked through what we think is going to happen from the wage environment, I think, in certain markets is pressures are not as pronounced. But then there's other markets where there's very, very high cost of living inflation.

And so what I'm saying is we haven't worked through it yet, but I think it's certainly possible that you could see us talk about 2024 with lower profitability. And that was just in response to the question around do we think that will maintain profitability in 2024, I just want to make certain that there is an indication that we could be lower as we enter the fiscal year and again working to get ourselves back into a position where we could operate in the 16% to 17% range in 2025.

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

Very helpful. Thank you.

Operator

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

Unknown speaker

Good morning. This is Jesse on for Maggie. So first, how do you feel Ukraine is performing compared to the market? Do you think that you're starting to take share?

Ark Dobkin -- President and Chief Executive Officer

I think we started to return to taking some share. OK? I think in existing clients, we stabilized, while again there are some longer-term post that some clients make, and they have a plan that they will be executing according to the plan. As Jason mentioned that there are several plants in Europe, which we know was going to happen. So on the other side, in existing clients, I think we stabilized.

And in some of the clients, we started to take share there.

Unknown speaker

Got it. Thanks, Ark. And then were you going to say something else?

Ark Dobkin -- President and Chief Executive Officer

No. That's good.

Unknown speaker

OK. And then for my follow-up, Europe appeared to be a bright spot. But Jason, you mentioned the incremental ramp-downs there. Have you seen any changing behaviors or sentiment from clients in that geo? Or are there just some client-specific challenges that caused those ramp-downs?

Jason Peterson -- Chief Financial Officer

Yes. We saw Europe actually declined somewhat sequentially between Q2 and Q3. And so we are seeing Europe is a little bit more mixed. But generally, it has been positive relative to North America.

And then we've got a couple of these customers that we talked about. So it's not what I would call broad-based, and I would call it more customer-specific.

Ark Dobkin

I think we are looking at this almost year-to-year comparison becoming less meaningful at this environment because there is no big change between these two years so right now, the quarter-by-quarter comparison is really showing what's happened. And from this point, actually not in the right spot right now.

Unknown speaker

Got it. Thank you, both.

Jason Peterson -- Chief Financial Officer

You're welcome. Thank you.

Operator

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

Jamie Friedman -- Susquehanna International Group -- Analyst

I had a slightly longer-term question, Ark. I was wondering how would you compare the relevance of -- and the month of some of the key services that you're known for especially application development. In terms of the tech stack, is application development more or less meaningful, relevant in today's technology architecture? How do you see that evolving, if at all?

Ark Dobkin -- President and Chief Executive Officer

I think this is -- we will try to predict a little bit the future. And from this future point of view, I think application development and bill function will become even more important with everything what's happening. So it's very easy to optimize yourself to in-time environment, the call point, and that's what would happen quarters from now or a couple of years from now. And from this point of view, we still believe that this is what started this conversation this morning, we still believe that definitions which we build and build function and strong capability would be extremely critical with tech stack, which is changing on our eyes.

We don't know where all this will be impacted, but even I mentioned multiple times, I do believe that there is a huge technical debt on leasing cloud environment in the world. And right now, it's taken kind of second priority in this environment, but it couldn't be done for too long because there are some companies which not invested and will be there. So I think it will come back. And as I said, what's happening with will be changing the whole application infrastructure, new opportunities, and we'll have to be rebuilt together.

So that's why I think it's for us to try to maintain this advantage.

Jamie Friedman -- Susquehanna International Group -- Analyst

Got it. Thanks for that. I'll jump back in the queue, give someone else a chance. Thank you.

Operator

Your next question will come from the line of James Faucette with Morgan Stanley. Please go ahead.

James Faucette -- Morgan Stanley -- Analyst

Thanks very much. I wanted to ask quickly a couple of questions. First on pricing, Jason, you mentioned a little bit of discounting et cetera. Can you help us think through kind of the longer-term implications? I know you've alluded to it in terms of, at some point, being able to recover that.

But can you just help us think through what that mechanism typically would look like? And what would make sense over the medium to long run?

Jason Peterson -- Chief Financial Officer

Yeah. And this is one, we're probably using Ark's response with barrier or it depends is probably appropriate, but I'll just give you some conversions of it. Certainly, as you -- as people wanted to be more cost-efficient, India has been a more attractive play. We do think that India will continue to be an important delivery location for us.

but that you'll also see more demand over time in our other geographies. And so what you may see in the next couple of quarters is still a more pronounced mix of India delivery, but we don't think that that's necessarily permanent. At the same time, from a pricing standpoint, oftentimes it does take probably a year to reset. And so it's hard to kind of go.

Demand is higher tomorrow, and now your price is higher. Oftentimes, the relationships are sort of set over a year. And so that's why in some of the earlier calls, I've said I think you're going to enter 2024 with an environment where it's difficult to take up price. And then we'll probably end up somewhat locked in during 2024, OK, not in all clients and not in all roles.

And then we've got more opportunity to adjust price probably later in the year. And of course, we'll be exposed to wage inflation during our traditional compensation campaign in Q2.

James Faucette -- Morgan Stanley -- Analyst

Great. I appreciate that, Jason. Then my second question was just how do you think about -- and this is for Ark and/or Jason, obviously. But how do you think about any changes that you need to adjust to long term if we're in a higher interest rate for longer environment? I guess I'm just thinking that historically, EPAM has been really good at doing acquisitions and acquiring new technologies to stay at kind of leading edge.

But with the cost of capital now being higher, do you have to adjust how you think about the importance and the role of acquisitions and future strategy and capability development? Thanks.

Jason Peterson -- Chief Financial Officer

I think we would still continue with the same strategy that we've had with doing acquisitions that allow us to expand capabilities and then sort of help further our opportunities to grow organically. And so certainly, we'll be careful as we have been, but I think that you'll still see a significant focus on acquisitions that are probably more in that sort of small to midsized tuck-in.

Ark Dobkin -- President and Chief Executive Officer

And I guess that's an advantage we have from our potential position, we have a very strong cash position to not rely on the outside market, to do exactly what we were doing in the past because it was also the small acquisitions targeted to specific countries or very specific geographies. And we have a very good shape to continue doing this. I think that's not much change.

James Faucette -- Morgan Stanley -- Analyst

Great. Appreciate those comments.

Jason Peterson -- Chief Financial Officer

No, absolutely. Thank you.

Operator

Your next question will come from the line of Puneet Jain with J.P. Morgan. please go ahead.

Puneet Jain -- JPMorgan Chase and Company -- Analyst

Hi. Thanks for taking my questions. I wanted to ask on financial services. Some of your peers have talked about seeing some weakness there, and you also mentioned banking within financial services as weak.

So can you double-click on what you are seeing there? Like are the head and cloud-based within banking? Or are they client-specific?

Jason Peterson -- Chief Financial Officer

Yeah. For us, clearly, we have one large client, where it's probably client-specific. And we have seen some, I guess, some reduction in revenues there. And then there's a number of other banks that we would work with, where we've also seen declines.

So I would say it's probably relatively broad for banking. But other elements of the financial services practices are -- we're also seeing growth. And so banking is certainly somewhat soft with opportunities in asset management and other areas in financial services, including insurance.

Puneet Jain -- JPMorgan Chase and Company -- Analyst

That's great. And then like it was nice to hear that some of the programs, some of the product clients are coming back. Is that incremental work driven by clients need to modernize their core systems maybe because of generative AI? Or are these still more cost-optimization type of deals?

Ark Dobkin -- President and Chief Executive Officer

I think where the returns happen, usually, it's a program. It's a program where suppliers saw the level of technology that they can do it with somebody else. And that's usually the trigger for the return, but then it's actually triggered opening new opportunities with us as well. So we have already several situations during the last several quarters when it's happening.

So generative AI, we talked about, we still see the directive part on the revenue. It's not going to be exactly there yet, but there are a lot of activities and with all investments which we do in right here, right now. We are definitely differentiating ourselves. We see the client reaction what we show.

So it's starting to create tangible opportunities when the size of that, but still relatively small. So I think we will see us go to be developing during the next quarters soon.

Puneet Jain -- JPMorgan Chase and Company -- Analyst

Got it. Thank you.

Operator

With that, I'll turn the call back over to Mr. Dobkin, CEO and president, for any closing remarks.

Ark Dobkin -- President and Chief Executive Officer

Yes. Thank you for joining today. So I think it all kind of numbers which we said, we still look at more positive to the situation that several matters. Unfortunately, the world still continues to be a very unpredictable place, and that's why it's difficult to make more clear statements sometimes.

So let's meet in remarks and see what we will be able to serve that. Thank you very much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

David Straube -- Head of Investor Relations

Ark Dobkin -- President and Chief Executive Officer

Jason Peterson -- Chief Financial Officer

Bryan Bergin -- TD Cowen -- Analyst

Moshe Katri -- Wedbush Securities -- Analyst

Ashwin Shirvaikar -- Citi -- Analyst

David Grossman -- Stifel Financial Corp. -- Analyst

Ramsey El-Assal -- Barclays -- Analyst

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

Unknown speaker

Jamie Friedman -- Susquehanna International Group -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Puneet Jain -- JPMorgan Chase and Company -- Analyst

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