EPAM Q1 2025: AI Revenues Grow Double-Digits Sequentially
- Strong momentum in AI-related work: Q&A responses highlighted that EPAM’s AI native revenues are growing in strong double-digits sequentially (from Q1 to Q2), reflecting robust demand for AI-powered solutions and improved client adoption.
- Improved client engagement and re-engagement: Executives noted that clients, including those who previously prioritized cost, are returning to EPAM due to its proven quality of execution and differentiated AI capabilities, indicating a healthy and growing pipeline.
- Broad-based, geographically diversified recovery: The discussion revealed that work is coming back across multiple delivery centers—including Eastern Europe, India, and Western Central Asia—demonstrating resilience and diversified revenue streams amid macro uncertainties.
- Weak free cash flow trends: Q1 free cash flow dropped sharply from prior levels (from $123 million to $15 million) due to higher bonuses and increasing DSO, which could signal ongoing cash management challenges.
- Eroding margins: Gross margins declined to 26.9% compared to 28.4%, driven by recent wage increases and acquisition-related costs, which raises concerns about profitability continuity.
- Persistent macro uncertainty and limited second-half visibility: Executives acknowledged challenges in forecasting demand for the remainder of the year and noted that while client engagement is improving, overall macroeconomic risks remain, posing a potential headwind.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +12% (from $1,165.5M to $1,301.692M) | Total Revenue increased by approximately 12%, driven by strong regional performance with the Americas contributing $780.3M and additional support from EMEA ($497.1M) and APAC ($24.3M). The improvement reflects robust growth building on previous revenue levels, highlighting a positive market demand and effective business expansion. |
Financial Services | +29% (from $242.7M to $313.965M) | Financial Services revenue grew by around 29% YoY, reflecting improved client engagement and an expanded service portfolio which built upon a lower revenue base in the prior period. This strong performance suggests that the company leveraged market conditions and elevated client demand effectively. |
Software & Hi-Tech | +9.7% (from $173.4M to $190.073M) | Software & Hi-Tech increased by approximately 9.7% YoY. The growth is attributable to enhanced engagement with technology clients and expanded service offerings in key regions, building on previous performance improvements despite some regional challenges in earlier periods. |
Emerging Verticals | +22.6% (from $179.6M to $220.641M) | Emerging Verticals experienced a 22.6% revenue increase YoY, driven by broad-based expansion into industries such as energy, manufacturing, and professional services. This progression builds on prior strong performance, particularly in North America, where growth was previously noted at 26.6% in FY 2024, supplemented by new client acquisitions. |
Net Income | -37% (from $116,243K to $73,482K) | Net Income declined by about 37% YoY, which may be attributed to margin pressures and higher expense adjustments despite revenue gains. Factors such as increased operating expenses and possible one-off items in Q1 2025 contrasted with stronger performance in the prior year contributed to this drop. |
Operating Cash Flow | -80% (from $129,920K to $24,162K) | Operating Cash Flow dropped over 80% YoY, driven primarily by a lower net income (down from $116,243K to $73,482K) and adverse working capital changes—highlighted by a $76,680K increase in trade receivables and declines in key liability accounts. These operational challenges reduced liquidity conversion compared to Q1 2024. |
Cash and Cash Equivalents | -41% (from $1,983,721K to $1,173,639K) | Cash and Cash Equivalents fell about 41% YoY, reflecting the impact of weakened operating cash inflows and aggressive financing activities including significant stock repurchases. The decline also stems from reduced net cash flows in investing activities when compared to the previous period. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q1 2025 | Expected to be in the range of $1.275B to $1.290B with 10% YoY growth; Inorganic Contribution: 11.4%, Negative FX Impact: 1.4% | no guidance provided | no current guidance |
GAAP Income from Operations | Q1 2025 | 6.5% to 7.5% | no guidance provided | no current guidance |
Non-GAAP Income from Operations | Q1 2025 | 12.5% to 13.5% | no guidance provided | no current guidance |
Weighted Average Share Count | Q1 2025 | 57.7 million diluted shares outstanding | no guidance provided | no current guidance |
Stock-Based Comp. Expense | Q1 2025 | $50 million | no guidance provided | no current guidance |
Severance Costs | Q1 2025 | $6 million | no guidance provided | no current guidance |
Tax Effective Non-GAAP Adjustments | Q1 2025 | $17 million | no guidance provided | no current guidance |
Excess Tax Benefits | Q1 2025 | $7 million | no guidance provided | no current guidance |
Amortization of Intangibles | Q1 2025 | $18 million | no guidance provided | no current guidance |
Interest and Other Income | Q1 2025 | $4 million | no guidance provided | no current guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q1 2025 | "$1.275B to $1.290B" | "$1.301692B" | Beat |
GAAP Income from Operations | Q1 2025 | "6.5% to 7.5%" | "7.63% (99,330÷ 1,301,692)" | Beat |
Stock-based Compensation Expense | Q1 2025 | "$50 million" | "$48.456 million" | Beat |
Interest and Other Income | Q1 2025 | "$4 million" | "$5.814 million" | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
AI-Driven Growth and Capabilities | Consistently emphasized in Q2 2024 ( ), Q3 2024 ( ) and Q4 2024 ( ) with expanding frameworks, strategic partnerships, and transformational projects. | Q1 2025 continues robust momentum with strong double‐digit AI revenue growth, larger deal sizes, and deeper client engagement through advanced AI frameworks and partnerships ( ). | Consistent emphasis with scaling impact; sentiment is highly positive and focused on expanding AI-led initiatives. |
Client Engagement and Retention | Mentioned in Q2 2024 with some account hesitance ( ) while Q3 and Q4 2024 reported improving sentiment, returning clients, and stronger GenAI engagements ( ). | Q1 2025 reports heightened client confidence with returning clients and improved organic footprint driven by AI capabilities ( ). | Positive upward trajectory with improving client sentiment and renewed engagement, indicating long-term growth potential. |
Margin and Profitability Dynamics | Discussed across Q2 2024 ( ), Q3 2024 ( ) and Q4 2024 ( ), highlighting challenges from compensation increases, acquisitions, and wage inflation. | Q1 2025 shows continued pressure due to rising compensation costs and acquisition impacts, despite efforts to improve utilization ( ). | Persistent margin pressures with cautious optimism for mitigation through improved utilization; sentiment remains guarded. |
Free Cash Flow Trends and Cash Management Concerns | Q2 2024 noted a decline in free cash flow and increased DSO ( ); Q4 2024 showed lower free cash flow with slight DSO improvements; Q3 2024 did not address this topic explicitly. | Q1 2025 reports a significant drop in free cash flow—attributed to higher bonus payments and elevated DSO—although conversion remains strong ( ). | Ongoing challenge with cash generation and collection, prompting careful monitoring despite maintained liquidity metrics. |
Geographical Diversification and Utilization Strategies | Q2 2024 focused on diversification with workforce shifts to India and Latin America influencing revenue ( ); Q3 and Q4 2024 further stressed global hiring and talent relocation ( ). | Q1 2025 outlines robust global delivery hubs across India, Eastern Europe, Western/Central Asia, and Latin America with improved utilization (77.5%) while noting regional revenue headwinds ( ). | Steady global diversification with incremental utilization improvements; benefits balanced by headwinds from regional pricing differences. |
Macroeconomic and Geopolitical Uncertainty | Q2 2024 assumed macro stability with cautious demand ( ); Q3 2024 and Q4 2024 discussed broader uncertainties impacting client behavior and pricing ( ). | Q1 2025 acknowledges ongoing uncertainty with no material adverse impact yet, though future visibility remains challenging ( ). | Consistent cautious tone; external uncertainties are acknowledged without derailing performance, maintaining a cautiously optimistic outlook. |
Acquisition Strategy and Integration Risks | Q2 2024 indicated openness to M&A activities ( ); Q3 2024 emphasized capability-focused deals and integration challenges ( ); Q4 2024 highlighted acquisitions (NEORIS, FD) that boosted revenue but pressured margins ( ). | Q1 2025 describes acquisitions as contributing positively to revenue growth in emerging verticals, while also imposing margin headwinds due to integration and pricing impacts ( ). | Evolving strategy with continued revenue growth focus despite integration risks; short-term margin impacts persist amid strategic acquisitions. |
Pricing Environment and Billing Rate Pressures | Q2 2024 highlighted modest billing rate pressures from the shift to India ( ); Q3 2024 reported only very modest price improvement prospects with wage inflation concerns ( ); Q4 2024 stressed persistent pricing challenges amid geographic mix impact ( ). | Q1 2025 indicates limited ability to pass on wage increases with only slight potential rate improvements, maintaining similar challenges ( ). | Stagnant pricing environment with ongoing billing rate pressures and limited pass-through of cost increases; market remains cautious. |
Wage Inflation and Compensation Cost Pressures | Q2 2024 attributed margin declines to compensation increases from promotional campaigns ( ); Q3 2024 and Q4 2024 underscored persistent wage inflation impacting margins ( ). | Q1 2025 continues to face negative impacts from wage inflation and compensation increases, with management noting limited ability to pass these on to clients ( ). | Persistent and significant challenge across periods with little sign of relief; remains a major headwind to profitability. |
Organic Revenue Growth and On-site vs Offshore Utilization Challenges | Q2 2024 saw organic revenue declines partly from workforce shifts to India and noted on-site utilization challenges ( ); Q3 2024 reported flat organic growth with efforts to boost utilization ( ); Q4 2024 noted a return to modest organic growth. | Q1 2025 reports a modest recovery in organic revenue growth (1.4% on constant currency) with less focus on on-site versus offshore dynamics, though overall utilization efforts remain in focus ( ). | Slight improvement in organic growth, but on-site versus offshore utilization challenges persist; sentiment is cautiously positive with room for operational enhancements. |
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Growth Guidance
Q: What drives second half growth?
A: Management noted that Q1 outperformance has set a strong base for 2025, and despite macro uncertainty, sequential momentum and healthy organic revenue growth inspire confidence for the remainder of the year. -
Margin Outlook
Q: Fixed price, gross margin dip reason?
A: They explained that acquisitions have imposed about a 50 bp drag and salary increases have impacted margins, while evolving fixed-price structures should help improve operational leverage. -
Free Cash Flow
Q: How is free cash flow trending?
A: Management reported a notable decline in free cash flow in Q1 due to bonus payments and increased DSO, expecting a smoother trend as these temporary factors normalize. -
Bookings & AI Growth
Q: What bookings growth in AI work?
A: They highlighted strong double-digit growth in AI-related revenues from Q1 to Q2, underscoring robust demand for their advanced AI capabilities. -
Pricing Environment
Q: Will rate increases resume soon?
A: They indicated it’s still too early to deploy pricing adjustments, although modest rate passes are beginning as client demand gradually improves. -
Gross Margin Improvement
Q: Plans to boost gross margin?
A: The focus is on driving better utilization and cost control, with seasonal factors favoring improvements in Q3 and an outlook for recovery by 2026. -
Customer Cohorts
Q: What’s notable in customer growth?
A: Revenues from clients outside the top 20 are accelerating, partly reflecting recent M&A activity and a return of former customers to EPAM’s quality execution. -
Client Backlog Outlook
Q: Visibility into second half backlog?
A: Backlog visibility remains consistent with past quarters, and while future deal sizes are less predictable, management remains cautiously optimistic. -
AI Investment
Q: Future reinvestment in AI work?
A: They confirmed that investments in AI will maintain their current pace, expecting that scaled AI initiatives will eventually lower the relative spend and boost margins. -
GCC Impact
Q: How significant is GCC's contribution?
A: Although GCC-related work helps bolster growth, it isn’t the primary driver; contracts and profitability remain comparable to industry norms. -
Fixed Price Dynamics
Q: Any Q1 fixed-price trends?
A: Fixed-price contracts, especially in financial services, expanded due to additional full-month engagements from recent acquisitions, providing revenue consistency. -
Vendor Consolidation
Q: Where is work returning from competitors?
A: Client projects are broadly returning across geographies such as Eastern Europe, India, and Western Central Asia, reflecting renewed confidence in EPAM’s execution. -
Billing Days
Q: What about billing days trends?
A: Seasonal patterns show an expected increase in billable days from Q2 to Q3, with modest seasonal growth even amid fixed-fee challenges. -
Headcount Strategy
Q: How is headcount evolving?
A: Despite growth from both organic hiring and acquisitions, recruitment remains targeted, with India emerging as a key region for rapid talent expansion. -
Partnership Revenue
Q: Role of partnerships in growth?
A: While no specific figures were disclosed, partnerships continue to add value through co-funding and client introductions, significantly supporting overall revenue. -
AI Engagement Size
Q: How is average AI deal size trending?
A: Management affirmed that the size and number of AI engagements are increasing as deals move toward production-level outcomes, marking notable growth compared to previous periods.
Research analysts covering EPAM Systems.