Sign in

    Epam Systems Inc (EPAM)

    Business Description

    EPAM Systems, Inc. is a leading digital transformation services and product engineering company that provides digital platform engineering and software development services to clients across six continents. The company focuses on building long-term partnerships with clients in various industries by delivering innovative and scalable software solutions, integrated strategy, experience, and technology consulting, along with a continually evolving mix of advanced capabilities . EPAM derives its revenues primarily from time-and-materials and fixed-price contracts, with the majority coming from time-and-material contracts billed using hourly, daily, or monthly rates . The company's service offerings have evolved to provide more customized and integrated solutions, combining software engineering with customer experience design, business consulting, and technology innovation services .

    1. Professional Services - Delivers customized and integrated solutions that combine software engineering with customer experience design, business consulting, and technology innovation services.
    2. Licensing and Other Revenues - Generates income from licensing agreements and other miscellaneous sources, contributing a small portion to the overall revenue.

    Q3 2024 Summary

    Initial Price$186.42July 1, 2024
    Final Price$196.38October 1, 2024
    Price Change$9.96
    % Change+5.34%

    What went well

    • EPAM delivered better-than-expected Q3 results and anticipates stronger Q4 results than initially expected, indicating a positive growth trajectory.
    • The acquisition of Nedis significantly expands EPAM's presence in Latin America and Europe, adding approximately $300 million in revenue and opening up new market opportunities.
    • EPAM is improving profitability by increasing utilization and reducing SG&A expenses, enhancing underlying profitability.

    What went wrong

    • EPAM expects profitability to be somewhat below 16% to 17% in 2025, even after including the approximate $38 million benefit from the Polish R&D incentive, due to ongoing wage inflation and lack of improvement in the pricing environment.
    • Management expressed uncertainty about the level of organic revenue growth in 2025, stating they expect a return to growth but questioning what is considered 'meaningful', indicating potential challenges in achieving strong growth.
    • There is a lack of transparency regarding the organic growth profile of the recently acquired company Nedis, and potential client concentration risk as CEMEX is a significant customer, possibly posing integration and revenue risks.

    Q&A Summary

    1. Margin Outlook
      Q: What is the expected margin outlook, considering Poland R&D incentives?
      A: EPAM expects to see benefits from the Poland R&D incentives similar to the $38 million received in 2024. However, due to wage inflation outpacing modest pricing improvements, profitability is expected to be slightly below the historical 16–17% range in 2025, even inclusive of the Poland benefit.

    2. Organic Revenue Growth in 2025
      Q: Do you expect a return to positive organic revenue growth in 2025?
      A: Yes, EPAM definitely expects a return to organic revenue growth in 2025, as demand is getting better. While the exact growth rate is not specified, they are looking to return to growth next year.

    3. Impact of Acquisitions
      Q: How will recent acquisitions affect revenue and margins?
      A: The acquisition of Nedis is expected to contribute $54 million in Q4. Both Nedis and the upcoming First Data acquisition will likely have margins in the low teens, slightly lower than EPAM's standalone business. This may modestly impact adjusted IFO, with core synergies anticipated over the next couple of years.

    4. Demand Improvement in Key Sectors
      Q: Which sectors are leading the recovery and what is the demand outlook?
      A: EPAM is seeing improvement in financial services, reflected in Q3 results and expected to continue. There is also progress in hi-tech and consistent growth in life sciences and healthcare. Client conversations feel incrementally more constructive, though it's too early to comment on 2025 budgets.

    5. Headcount Increases and Hiring Trends
      Q: What are the trends in headcount and hiring?
      A: EPAM increased production headcount by 750 in Q3 and expects further increases in Q4. Hiring is broadening globally, including in Eastern Europe and Western Asia, indicating a positive leading indicator of demand.

    6. Pricing vs. Wage Inflation
      Q: How is wage inflation impacting margins compared to pricing power?
      A: EPAM continues to face wage inflation without significant pricing improvements. While modest price increases are expected next year, there remains a disconnect between wage inflation and price improvement, which will pressurize 2025 profitability.

    7. Return of Clients Due to Quality Focus
      Q: Are clients returning to EPAM due to quality issues with other vendors?
      A: Yes, EPAM is beginning to see clients return based on quality challenges they've had with other vendors. Multiple accounts are growing because clients are seeking better quality after unsatisfactory experiences elsewhere.

    8. Integration of Acquisitions
      Q: What are the plans for integrating recent acquisitions?
      A: The focus is on revenue opportunities, actively pursuing engagements jointly with Nedis. Integration efforts include understanding deeper capabilities, with core synergies expected over the next couple of years.

    9. Shift Back to Eastern and Central Europe Delivery
      Q: Is there evidence of a shift back to delivery in Eastern and Central Europe?
      A: Yes, EPAM has begun to see recovery in demand for Eastern Europe and is increasing capacity there, as clients seek more diversified teams beyond India.

    10. Profitability Improvements Excluding Poland Benefit
      Q: Are there underlying profitability improvements excluding the Poland benefit?
      A: EPAM has improved utilization and reduced SG&A as a percentage of revenue, positively impacting profitability. However, the lack of significant pricing improvements continues to be a challenge.

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Arkadiy DobkinChairman of the Board of Directors, President, and CEO1993Arkadiy Dobkin co-founded EPAM Systems, Inc. in 1993 and has served as Chairman and CEO since 2002. He has extensive experience as an IT professional and executive in the IT services industry, providing valuable insights into operational, strategic, and management issues, as well as general industry trends .
    Balazs FejesPresident of Europe and APAC Markets2004Balazs Fejes joined EPAM in 2004 as part of the acquisition of Fathom Technology. He leads market activities across Europe and APAC and co-leads global business operations. He also oversees the strategy of EPAM's Banking and Financial Services Industry business unit .
    Viktar DvorkinSenior Vice President, Head of Global Delivery1997Viktar Dvorkin joined EPAM in 1997. He is responsible for the strategy and operation of the company's Delivery Organization, Solution Practices, and Competency Centers. He also oversees EPAM's Advanced Technology programs, including EngX and Delivery Excellence .
    Jason PetersonSenior Vice President, Chief Financial Officer, and Treasurer2017Jason Peterson joined EPAM in 2017. He leads EPAM's Global Finance, Corporate Development, and Procurement organizations. He has over 25 years of finance experience, having previously worked at Cognizant Technology Solutions and other companies .
    Edward RockwellSenior Vice President, General Counsel, and Corporate SecretaryOctober 2018Edward Rockwell joined EPAM in October 2018. He oversees the legal activities of the organization and provides strategic counsel and legal guidance to senior leadership and EPAM’s Board of Directors .
    Elaina ShekhterSenior Vice President, Chief Marketing and Strategy Officer2001Elaina Shekhter has been with EPAM since 2001. She has served in various roles, including Global Head of Business Development and Global Head of the Travel and Consumer Business Unit. She integrates functions that influence EPAM's strategy, positioning, and messaging .
    Boris ShnayderSenior Vice President, Co-Head of Global BusinessJuly 2015Boris Shnayder joined EPAM in July 2015. He focuses primarily on operations in the Americas and oversees a portfolio of business in the region, including service programs and client acquisition .
    Larry SolomonSenior Vice President, Chief People OfficerOctober 2016Larry Solomon joined EPAM in October 2016. He is responsible for overseeing all aspects of talent management, talent acquisition, workforce planning and management, as well as other human resource-related functions globally .
    Sergey YezhkovSenior Vice President, Co-Head of Global Business2006Sergey Yezhkov joined EPAM in 2006 as part of the acquisition of Vested Development Inc. (VDI). He focuses on a North American book of business and oversees the strategy and operation of EPAM's Life Science & Healthcare portfolio .
    Gary AbrahamsVice President, Corporate Controller, and Chief Accounting OfficerJune 2016Gary Abrahams joined EPAM in June 2016 after initially serving as an independent contractor starting in March 2016. He was appointed as Chief Accounting Officer in April 2017. He has over 25 years of experience in global corporate financial management and public accounting .

    Questions to Ask Management

    1. Your guidance indicates that operating margins in 2025 will be slightly below 16% even after factoring in the recurring Polish R&D incentives; can you explain the underlying factors causing this margin pressure and how you plan to address them?

    2. While you expect to return to organic revenue growth in 2025, you mentioned uncertainty about whether it will be "meaningful"; what challenges are limiting stronger growth, and what strategies are in place to accelerate it?

    3. With the acquisition of Nedis being significant for your expansion, how will you ensure its successful integration without impacting your core operations, and what are the anticipated effects on your revenue and profitability?

    4. You noted ongoing wage inflation and a lack of improvement in the pricing environment; how are these trends impacting your competitiveness, and what measures are you taking to manage costs while sustaining profitability?

    5. As you continue to diversify your global delivery hubs, particularly in higher-cost regions like Central Europe, how are you balancing talent acquisition with the impact on your cost structure and margins?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateN/AAugust 1, 2024
    End Date/DurationExhausted by June 30, 2024 24 months
    Total additional amount$500.0 million $500.0 million
    Remaining authorization$0 $450.0 million
    DetailsFully utilizedDiscretionary repurchase

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024

    Guidance:

    Full Year 2024 (FY 2024):

    • Revenue: $4.685 billion to $4.695 billion
    • GAAP Income from Operations: 11% to 11.5%
    • Non-GAAP Income from Operations: 16% to 16.5%
    • GAAP Effective Tax Rate: 23%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $7.78 to $7.86
    • Non-GAAP Diluted EPS: $10.73 to $10.81
    • Weighted Average Share Count: 57.9 million

    Q4 2024:

    • Revenue: $1.205 billion to $1.215 billion
    • GAAP Income from Operations: 10.5% to 11.5%
    • Non-GAAP Income from Operations: 16% to 17%
    • GAAP Effective Tax Rate: 26%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $1.73 to $1.81
    • Non-GAAP Diluted EPS: $2.70 to $2.78
    • Weighted Average Share Count: 57.2 million
    • Stock-based Compensation Expense: $44 million
    • Amortization of Intangibles: $9 million
    • Impact of Foreign Exchange: $1 million loss
    • Tax Effective Non-GAAP Adjustments: $14 million
    • Tax Shortfall Related to Stock-based Compensation: $1 million
    • Severance Driven by Cost Optimization Program: $9 million
    • Interest and Other Income: $6 million .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024

    Guidance:

    Full Year 2024 (FY 2024):

    • Revenue: $4.590 to $4.625 billion
    • GAAP Income from Operations: 10.5% to 11%
    • Non-GAAP Income from Operations: 15.5% to 16%
    • GAAP Effective Tax Rate: 21%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $7.18 to $7.38
    • Non-GAAP Diluted EPS: $10.20 to $10.40
    • Weighted Average Share Count: 57.9 million

    Q3 2024:

    • Revenue: $1.145 billion to $1.155 billion
    • GAAP Income from Operations: 10% to 11%
    • Non-GAAP Income from Operations: 16% to 17%
    • GAAP Effective Tax Rate: 24%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $1.75 to $1.83
    • Non-GAAP Diluted EPS: $2.65 to $2.73
    • Weighted Average Share Count: 57.4 million .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024

    Guidance:

    Full Year 2024 (FY 2024):

    • Revenue: $4.575 billion to $4.675 billion
    • GAAP Income from Operations: 10% to 10.5%
    • Non-GAAP Income from Operations: 15% to 15.5%
    • GAAP Effective Tax Rate: 20%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $7.34 to $7.64
    • Non-GAAP Diluted EPS: $10 to $10.30
    • Weighted Average Share Count: 58.7 million

    Q2 2024:

    • Revenue: $1.135 billion to $1.145 billion
    • GAAP Income from Operations: 9% to 10%
    • Non-GAAP Income from Operations: 13.5% to 14.5%
    • GAAP Effective Tax Rate: 25%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $1.52 to $1.60
    • Non-GAAP Diluted EPS: $2.21 to $2.29
    • Weighted Average Share Count: 58.8 million
    • Stock-Based Compensation Expense: $38 million for Q2, $46 million for Q3, $47 million for Q4
    • Amortization of Intangibles: $6 million for each of the remaining quarters
    • Impact of Foreign Exchange: $1 million loss for each of the remaining quarters
    • Tax Effective Non-GAAP Adjustments: $10 million for Q2, $11 million for each of the remaining quarters
    • Excess Tax Benefits: $1 million for Q2, $1.7 million for each of the remaining quarters
    • Interest and Other Income: $15 million for Q2, $20 million for Q3, $15 million for Q4 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024

    Guidance:

    Full Year 2024 (FY 2024):

    • Revenue Growth: 1% to 4%
    • GAAP Income from Operations: 9.5% to 10.5%
    • Non-GAAP Income from Operations: 14.5% to 15.5%
    • GAAP Effective Tax Rate: 21%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $7.20 to $7.60
    • Non-GAAP Diluted EPS: $10 to $10.40
    • Weighted Average Share Count: 59.3 million

    Q1 2024:

    • Revenues: $1.155 billion to $1.165 billion
    • GAAP Income from Operations: 9% to 10%
    • Non-GAAP Income from Operations: 13.5% to 14.5%
    • GAAP Effective Tax Rate: 11%
    • Non-GAAP Effective Tax Rate: 24%
    • GAAP Diluted EPS: $1.79 to $1.87
    • Non-GAAP Diluted EPS: $2.26 to $2.34
    • Weighted Average Share Count: 59.1 million
    • Stock-based Compensation Expense: $198 million for the year
    • Amortization of Intangibles: $26 million for the year
    • Interest and Other Income: $66 million for the full year .