Q4 2024 Earnings Summary
- EPAM's Q4 revenue exceeded expectations, landing at $1.248 billion, which was higher than the guided range of $1.217 billion to $1.227 billion. This was driven by stronger-than-expected performance in their stand-alone business, sequential growth in Europe, and improvements in financial services, including growth in European financial institutions.
- Management expects to see improved profitability in the second half of the year, aiming to return to operating margins of 16% or above. They are taking steps to improve utilization, pyramid structure, and scaling, believing that achieving a 16% or better margin is achievable.
- EPAM is experiencing positive trends in client engagement, with a significant number of new clients, some quickly reaching an annualized $10 million in revenue. Additionally, big tech companies are returning after previously reducing engagement, indicating strong demand and client confidence in EPAM's quality and technology expertise.
- Margin Pressure from Challenging Pricing Environment and Compensation Increases: EPAM expects to run the business at lower levels of profitability in 2025 due to compensation increases to retain top talent and limited ability to improve client pricing in the near term. Additionally, recent acquisitions have a dilutive impact on profitability, continuing to put pressure on margins throughout the year.
- Dependence on Ukraine as a Profitable Delivery Center Amid Geopolitical Risks: Ukraine has historically been one of EPAM's most profitable geographies. Any instability or challenges in Ukraine could negatively impact EPAM's profitability, as it continues to rely on Ukraine for its profitable delivery centers.
- Uncertainty in Key Verticals Due to Client Loss and Market Challenges: EPAM remains uncertain about the recovery in certain verticals like retail and business automation, especially due to losing a big client last year, which could impact growth prospects in these sectors.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue (Q3 2023) | –6.1% | Declined 6.1% YoY primarily due to reduced client spending amid economic uncertainty and the exit from Russia—which removed revenue (≈50 basis points drag)—even though favorable FX fluctuations contributed a +1.9% offset. |
Operating Income (Q3 2023) | –36.7% | Dropped from $180.2 million to $114.0 million as a result of a $25.9 million loss on the sale of Russian holdings and $7.1 million in cost optimization expenses, compounded by lower revenues and pricing pressure that reduced gross margins. |
Net Income (Q3 2023) | –37.7% | Fell from $156.1 million to $97.2 million due to the same revenue decline and sale-related losses, further pressured by a higher effective tax rate (26.3% vs lower previous rates) and additional costs from severance and FX impacts. |
Basic EPS (Q3 2023) | Declined from $2.72 to $1.68 | Reduced EPS reflects the combined effects of lower revenue, a one-time loss on the sale of Russian assets, severance-related costs, and increased tax burdens compared to Q3 2022. |
Total Revenue (Q3 2024) | +1.3% | Modest revenue growth (from $1,152.1 million to $1,167.5 million) stemmed from a stabilization in demand and a favorable FX impact (+0.4%) that helped overcome the previous period’s disruption from the exit of Russian operations. |
Operating Income (Q3 2024) | +55.2% | Operating Income surged from $114.0 million to $177.0 million driven by improved gross margins (GAAP margin increased from 31.1% to 34.6%) thanks to the Polish R&D incentive, better cost management, and the absence of the one-time $25.9 million loss seen in Q3 2023. |
Net Income (Q3 2024) | +40.2% | Net Income increased from $97.2 million to $136.3 million, reflecting higher operating income from improved operational efficiency and a significant Polish R&D benefit of $52.0 million, even as a higher effective tax rate partly offset the gains. |
Basic EPS (Q3 2024) | Increased from $1.68 to $2.40 | EPS improvement is driven by the strong net income recovery and operational enhancements, including the benefit from Polish R&D incentives and the absence of one-time sale losses, which collectively boosted profitability. |
Total Revenue (Q4 2024) | +8% | Revenue climbed from $1,157.26 million in Q4 2023 to $1,248.35 million in Q4 2024 as revived client spending and stable demand across key business segments reversed earlier challenges, including those seen in Q3 2023. |
Operating Income (Q4 2024) | +11% | Operating Income increased from $122.49 million to $136.51 million, supported by enhanced operational efficiency, cost management, and sustained margin improvements that built on lessons learned from prior periods. |
Net Income (Q4 2024) | +6% | Net Income rose moderately (from $97.55 million to $103.30 million) due to continued operational improvements and efficiency gains, albeit with more tempered growth compared to Q3 2024. |
Basic EPS (Q4 2024) | +7.7% | EPS improvement, from $1.69 to $1.82, mirrors the net income gains and reflects a more efficient earnings generation process as the company continued to resolve earlier operational challenges. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q1 2025 | no prior guidance | Expected to be in the range of $1.275 billion to $1.290 billion, reflecting 10% YoY growth; Inorganic Contribution: 11.4%, Negative FX Impact: 1.4% | no prior guidance |
GAAP Income from Operations | Q1 2025 | no prior guidance | 6.5% to 7.5% | no prior guidance |
Non-GAAP Income from Operations | Q1 2025 | no prior guidance | 12.5% to 13.5% | no prior guidance |
Weighted Average Share Count | Q1 2025 | no prior guidance | 57.7 million diluted shares outstanding | no prior guidance |
Stock-Based Compensation Expense | Q1 2025 | no prior guidance | $50 million | no prior guidance |
Severance Costs | Q1 2025 | no prior guidance | $6 million | no prior guidance |
Tax Effective Non-GAAP Adjustments | Q1 2025 | no prior guidance | $17 million | no prior guidance |
Excess Tax Benefits | Q1 2025 | no prior guidance | $7 million | no prior guidance |
Amortization of Intangibles | Q1 2025 | no prior guidance | $18 million | no prior guidance |
Interest and Other Income | Q1 2025 | no prior guidance | $4 million | no prior guidance |
Revenue Growth | FY 2025 | no prior guidance | Expected to be in the range of 10% to 14%, with an inorganic contribution of 10% and a negative FX impact of 0.9% | no prior guidance |
GAAP Income from Operations | FY 2025 | no prior guidance | Expected to be in the range of 9% to 10% | no prior guidance |
Non-GAAP Income from Operations | FY 2025 | no prior guidance | Expected to be in the range of 14.5% to 15.5% | no prior guidance |
GAAP Effective Tax Rate | FY 2025 | no prior guidance | Approximately 24% | no prior guidance |
Non-GAAP Effective Tax Rate | FY 2025 | no prior guidance | Approximately 24% (excludes excess tax benefits related to stock-based compensation) | no prior guidance |
GAAP Diluted EPS | FY 2025 | no prior guidance | Expected to be in the range of $6.78 to $7.08 | no prior guidance |
Non-GAAP Diluted EPS | FY 2025 | no prior guidance | Expected to be in the range of $10.45 to $10.75 | no prior guidance |
Weighted Average Share Count | FY 2025 | no prior guidance | 58.1 million fully diluted shares outstanding | no prior guidance |
Stock-Based Compensation Expense | FY 2025 | no prior guidance | Approximately $194 million for the year (distributed as: Q1: $50M, Q2: $44M, Q3: $50M, Q4: $50M) | no prior guidance |
Amortization of Intangibles | FY 2025 | no prior guidance | Approximately $68 million for the year (distributed as: Q1: $18M, Q2: $17M, Q3: $17M, Q4: $17M) | no prior guidance |
Foreign Exchange Impact | FY 2025 | no prior guidance | Expected to be a $1 million loss per quarter | no prior guidance |
Interest and Other Income | FY 2025 | no prior guidance | Expected to be $18 million for the year (distributed as: Q1: $4M, Q2: $4M, Q3: $5M, Q4: $5M) | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q4 2024 | $1.205B to $1.215B | $1.248B | Beat |
GAAP Income from Operations | Q4 2024 | 10.5% to 11.5% | 10.93% (→ $136,512K ÷ $1,248,351K) | Met |
GAAP Diluted EPS | Q4 2024 | $1.73 to $1.81 | $1.80 | Met |
Revenue | FY 2024 | $4.685B to $4.695B | $4.728B (+++) | Beat |
GAAP Income from Operations | FY 2024 | 11% to 11.5% | 11.52% (+++) | Beat |
GAAP Diluted EPS | FY 2024 | $7.78 to $7.86 | 7.84 (+++) | Met |
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Revenue Growth Outlook
Q: What's your revenue guidance and growth expectations?
A: We expect 0% to 4% organic revenue growth for 2025, and 1% to 5% growth when accounting for foreign exchange headwinds. Despite a slow start in January, we're seeing strong program starts and client demand in February. Acquisitions of NEORIS and FD are expected to contribute modest growth as we move from 2024 to 2025. -
Margin Expectations
Q: Do you anticipate returning to prior profit levels?
A: We expect improved profitability in the second half of the year relative to the first half. Our goal is to get back to 16% or better adjusted IFO margins, aiming for the 16% to 17% range we've operated in historically. -
Wage Inflation Impact
Q: Which countries are driving wage inflation affecting margins?
A: Wage inflation is primarily occurring in our off-site delivery locations outside the U.S. and Europe. We're investing in retaining top technical talent, especially those skilled in GenAI, despite challenges in passing on price increases to clients. -
Demand Acceleration Capacity
Q: Can you accelerate revenue when demand improves?
A: We have the capacity to grow revenues across geographies, including India, Eastern Europe, and the Americas. Some headwinds may continue due to geographic mix shifts into lower-cost regions like India and Latin America, which could cause compression in revenue per headcount as we move through 2025. -
Client Spending Trends
Q: How is client spending behavior evolving, new vs existing clients?
A: We're adding new clients, some quickly reaching annualized $10 million in revenue. Many new clients are engaging with us on GenAI proof of concepts that are starting to scale. Some former clients are returning, seeking our quality and technical expertise. We saw stronger-than-expected revenue in Q4, particularly in November and December. -
Pricing Pressure Areas
Q: Is pricing pressure affecting new or existing work?
A: Pricing pressure exists across both 'run the business' and 'change the business' engagements, affecting new and existing work. There's inertia in changing pricing, but we expect this to start improving in 2025. -
Hiring Plans and Geopolitical Impact
Q: What's your hiring outlook and geopolitical impact on headcount?
A: We're adding headcount, with net additions of about 1,500 organically in Q4 and expecting around 1,000 in Q1 2025. There's modest headcount decline in Belarus and Ukraine, but some growth in Ukraine in late Q4. Resolution of the conflict could encourage clients to increase programs in Ukraine, which remains one of our most profitable geographies. -
Impact of Geographic Diversification
Q: How is geographic diversification affecting margins?
A: Diversifying our geographic capacity presents some margin headwinds due to different pricing points in various regions. We're balancing relocation of talent to Central Europe and Central Asia, while ensuring we have the right talent as demand normalizes. -
Vertical Growth Prospects
Q: Which verticals are expected to accelerate or decelerate?
A: Life sciences and financial services are showing good dynamics. We're uncertain about retail and business automation recovery due to losing a big client last year. Energy is emerging as an area of growth, and we expect acceleration in tech, with improvements seen in Q4. -
Catalysts for Better Pricing
Q: What could catalyze a better pricing environment?
A: As clients focus more on transformational change programs, particularly involving GenAI, they recognize the need for appropriate pricing. We're seeing examples of this, and broader adoption could improve the pricing environment. -
Fixed Contract Trends
Q: What's driving the increase in fixed contract percentage?
A: The increase is due to growth in the Middle East, which uses more fixed-fee engagements, more consulting-led programs with fixed-fee components, and an uptick in managed services or fixed monthly fee arrangements.
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