Q3 2024 Earnings Summary
- 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.
- 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.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +1% | Modest growth driven by incremental new client work and partial offset from the exit of Russian operations; foreign exchange tailwinds supported top-line figures but conservative client spending in select verticals limited the overall increase. |
Operating Income (EBIT) | +55% | Cost reductions (including lower variable compensation) and significantly fewer extraordinary expenses (e.g., Russia-Ukraine continuity costs) relative to the prior period; improved SG&A efficiency also further boosted margins. |
Net Income | +40% | Reduced foreign exchange losses and strong operating performance drove a higher bottom line compared to the previous year, when one-time relocation and humanitarian costs weighed on results. |
Diluted EPS | +45% | Higher net income and a lower share count (due to repurchases) contributed to the improved EPS; the prior year’s figures were depressed by extraordinary costs, creating a favorable comparison base. |
Business Information & Media | -9% | Reduced client spending (especially in mortgage data and media clients) and ramp-downs among top accounts caused revenue contraction; ongoing market caution regarding new projects also slowed growth. |
Life Sciences & Healthcare | +15% | Rebounding from a large program ramp-down in the prior year, the vertical saw increased demand from pharmaceutical and healthcare clients, along with new project wins, driving double-digit growth. |
Emerging Verticals | +9% | Expansion in energy, telecommunications, and industrial customers, plus ongoing diversification into professional services and educational platforms, fueled consistent growth; these verticals benefited from stable client relationships. |
United Kingdom | -10% | Softening demand in key verticals (e.g., Business Information & Media) and macroeconomic challenges in the UK market led to reduced revenues; foreign exchange fluctuations also had a slight negative impact. |
Switzerland | +14% | Currency tailwinds (strengthening Swiss franc) and steady client expansions in the region supported the increase; Switzerland remained one of the top contributors within EMEA due to stable demand. |
Netherlands | -22% | Reduced project volumes from key enterprise clients and overall macro-driven caution resulted in a notable revenue drop; heavier impacts in discretionary spending verticals contributed to the decline. |
Other Locations | +7% | A mixed performance across smaller geographies combined for a moderate overall increase; no material concentration of wins or losses, indicating broadly stable but not accelerating demand in these areas. |
Net Change in Cash | +663% | Improved operating cash flows (due to healthier DSOs and less one-time spending) along with lower capital expenditures boosted liquidity; compared to the prior period’s significant outflows related to geopolitical disruptions, the current period saw stronger net inflows. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | FY 2024 | $4.590B‒$4.625B | $4.685B‒$4.695B | raised |
GAAP Income from Operations | FY 2024 | 10.5%‒11% | 11%‒11.5% | raised |
Non-GAAP Income from Ops | FY 2024 | 15.5%‒16% | 16%‒16.5% | raised |
GAAP Effective Tax Rate | FY 2024 | 21% | 23% | raised |
Non-GAAP Effective Tax Rate | FY 2024 | 24% | 24% | no change |
GAAP Diluted EPS | FY 2024 | $7.18‒$7.38 | $7.78‒$7.86 | raised |
Non-GAAP Diluted EPS | FY 2024 | $10.20‒$10.40 | $10.73‒$10.81 | raised |
Weighted Avg. Share Count | FY 2024 | 57.9M | 57.9M | no change |
Revenue | Q4 2024 | no prior guidance | $1.205B‒$1.215B | no prior guidance |
GAAP Income from Operations | Q4 2024 | no prior guidance | 10.5%‒11.5% | no prior guidance |
Non-GAAP Income from Ops | Q4 2024 | no prior guidance | 16%‒17% | no prior guidance |
GAAP Effective Tax Rate | Q4 2024 | no prior guidance | 26% | no prior guidance |
Non-GAAP Effective Tax Rate | Q4 2024 | no prior guidance | 24% | no prior guidance |
GAAP Diluted EPS | Q4 2024 | no prior guidance | $1.73‒$1.81 | no prior guidance |
Non-GAAP Diluted EPS | Q4 2024 | no prior guidance | $2.70‒$2.78 | no prior guidance |
Weighted Avg. Share Count | Q4 2024 | no prior guidance | 57.2M | no prior guidance |
Stock-based Compensation | Q4 2024 | no prior guidance | $44M | no prior guidance |
Amortization of Intangibles | Q4 2024 | no prior guidance | $9M | no prior guidance |
Foreign Exchange Impact | Q4 2024 | no prior guidance | $1M loss | no prior guidance |
Tax Effective Non-GAAP Adj. | Q4 2024 | no prior guidance | $14M | no prior guidance |
Tax Shortfall (SBC) | Q4 2024 | no prior guidance | $1M | no prior guidance |
Severance Costs | Q4 2024 | no prior guidance | $9M | no prior guidance |
Interest and Other Income | Q4 2024 | no prior guidance | $6M | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q3 2024 | $1.145B to $1.155B | $1.168B (1,167,527 thousands) | Beat |
GAAP Op. Income | Q3 2024 | 10% to 11% | 15.2% (≈ $176.98M / $1.168B) | Beat |
GAAP Diluted EPS | Q3 2024 | $1.75 to $1.83 | $2.37 | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Demand environment and revenue growth | Q2 2024: Complex environment, minimal improvements, slight Q3 uptick followed by Q4 decline, negative YoY growth. Q1 2024: Volatility from macro factors, -3.8% YoY, negative full-year guidance. Q4 2023: Challenging environment but stabilizing, -2.8% YoY for 2023, 1-4% growth in 2024. | Broad improvements in client engagement; 1.3% YoY revenue growth; stabilization in EMEA; optimism for 4.6% YoY growth in Q4. | Improving sentiment |
Margin pressure and cost optimization | Q2 2024: Ongoing cost optimization, margins impacted by compensation increases and FX. Q1 2024: Pricing pressure, FX, lower utilization, geographic rebalancing. Q4 2023: Higher compensation and wage inflation expected to pressure margins, continued cost optimization. | Disconnect between wage inflation and pricing; Polish R&D incentive boosted margins; SG&A at 14% of revenue; utilization at 76.4%. | Continues across periods, still challenging |
Pricing power | Q2 2024: Modest pressure on bill rates from India shift, FX and compensation outweigh utilization gains. Q1 2024: Tough pricing environment, discounting, client pushback. Q4 2023: Limited near-term pricing improvements; focusing on flexibility and fixed-fee models. | No significant improvement; only modest gains expected in 2025; profitability impacted. | Recurring challenge |
Global delivery and headcount expansion | Q2 2024: Prioritizing cost-efficient locations; India >20% of total headcount by end of 2024. Q1 2024: Balanced global delivery; 52,800 staff; shift to India/LatAm. Q4 2023: Rebalanced footprint (53,150 employees, -10.4% YoY); prepared for future hiring. | Enhanced diversification; +600 headcount; expansions in Eastern Europe, India (target 10,000 by early 2025), and LatAm. | Consistent expansion |
Generative AI | Q2 2024: Dozens of GenAI projects, small portion of revenue, internal training, AI-led transformations. Q1 2024: Investing in genAI with limited immediate revenue impact. Q4 2023: 400+ GenAI projects, DIAL platform, in experimentation phase. | Engaged with 70% of top 100 clients; large-scale AI ecosystems; “StatGPT 2.0” for IMF; doubling of early-stage projects. | Growing in importance |
Major client turnover | Q2 2024: Decline in top 20 clients; notable M&A-related exit; broader caution. Q1 2024: Competitor takeover of a top-20 client; partial returns from others. Q4 2023: Anticipated ramp-down in Q1 2024, top 20 clients -5% YoY, smaller new client additions. | Clients returning due to quality issues with other vendors; new logos scaling; some previously ramped-down clients re-engaging. | Select turnover but signs of stabilizing |
Acquisitions and share buybacks | Q2 2024: Considering larger M&A; repurchased 1.16M shares for $214M; new $500M buyback authorization. Q1 2024: Targeted acquisitions; repurchased 396k shares for $121M. Q4 2023: Minimal inorganic revenue expected in 2024; repurchase of 143k shares in Q4. | Nedis acquisition (largest to date) for new markets, focus on revenue synergy; repurchased 245k shares for $50M. | Ongoing expansions and buybacks |
Fixed-fee engagements | Q2 2024: Growing share; often linked to GenAI productivity; implications for margins and DSO. Q1 2024: No mention. Q4 2023: Consulting-led deals with operational improvement opportunities. | No mention in Q3 2024. | Mentioned intermittently |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.
Research analysts covering EPAM Systems.