EPAM Systems, Inc.
CEO : Mr. Arkadiy Dobkin
Quarterly earnings growth(YoY,%)
| Period | Revenue | Operating Income | EPS | Release Date |
|---|---|---|---|---|
| 2023 Q2 | -2.1% YoY | -19.3% | 527.3% | 2023-08-03 |
Jason Peterson says,
Revenue Performance
- In Q2 2023, EPAM generated revenue of $1.17 billion, a year-over-year decrease of 2.1% on a reported basis and a decrease of 2.4% in constant currency terms.
- Revenue in the quarter was impacted by reductions in program spending across a number of clients and client caution related to new project starts.
- The reduction in Russian customer revenues resulted in a 100-basis-point negative impact on year-over-year revenue growth. Excluding Russia revenues, year-over-year revenue would have decreased by 1.1% and 1.7% in reported and constant currency terms, respectively.
- Travel and consumer declined 1%, primarily due to declines in retail, partially offset by solid growth in travel and hospitality.
- Financial services grew 3.2%, with growth coming from asset management and insurance services.
- Business information and media decreased 4.1% in the quarter due to a reduction in spend at a number of large clients in the mortgage data space.
- Software and Hi-tech contracted 10.3% due to a reduction in revenue from a former top 20 customer and slower growth across various customers.
- Life Sciences and Healthcare declined 10.9% due to the ramp down of a large transformational program.
- Emerging verticals delivered solid growth of 8.6% driven by clients in energy, manufacturing, and automotive.
Geographic Performance
- Americas, representing 58% of Q2 revenues, declined 5.9% year-over-year or 5.7% in constant currency. The decline was impacted by the ramp down of a life sciences and healthcare customer.
- EMEA, representing 39% of Q2 revenues, grew 8.5% year-over-year or 6.5% in constant currency.
- CEE, representing 1% of Q2 revenues, contracted 61.1% year-over-year or 45.8% in constant currency due to the decision to exit Russia operations.
- APAC, representing 2% of Q2 revenues, declined 19.7% year-over-year or 18.6% in constant currency due to the ramp down of work in the financial services vertical.
Financial Performance
- GAAP gross margin for the quarter was 30.9%, compared to 29.2% in Q2 of last year.
- Non-GAAP gross margin for the quarter was 32.6%, compared to 31.5% for the same quarter last year.
- GAAP SG&A was 16.7% of revenue, compared to 19.5% in Q2 of last year.
- Non-GAAP SG&A was 14.8% of revenue, compared to 15.2% in the same period last year.
- GAAP income from operations was $144 million or 12.3% of revenue in the quarter, compared to $93 million or 7.8% of revenue in Q2 of last year.
- Non-GAAP income from operations was $191 million or 16.3% of revenue in the quarter, compared to $177 million or 14.9% of revenue in Q2 of last year.
- GAAP effective tax rate for the quarter was 20%. Non-GAAP effective tax rate was 23.3%.
- GAAP diluted EPS was $2.03. Non-GAAP diluted EPS was $2.64.
Cash Flow and Balance Sheet
- Cash flow from operations for Q2 was $89 million, compared to $78 million in the same quarter of 2022.
- Free cash flow was $82 million, compared to $59 million in the same quarter last year.
- DSO at the end of Q2 was 71 days, compared to 69 days in Q1 2023 and 71 days in Q2 of last year.
- Completed the sale of the Russian business, resulting in a decline in Russian revenues from Q2 to Q3 and an estimated loss on sale of $18.4 million.
- Ended the quarter with approximately $1.8 billion in cash and cash equivalents.
Business Outlook
- Maintaining expectations for a muted demand environment, with a sequential decline in Q3 and further sequential or flat revenue growth in Q4.
- Expect headcount to decline modestly in Q3 due to
Arkadiy Dobkin says,
Impact on Stock’s Movement
- The shift in demand dynamics for the sector due to geopolitical impact and economic conditions has led to a high percentage of shortfall in the first half of 2023.
- Negative dynamic is expected to continue into the second half of 2023, but at a lower level than the first half.
- EPAM is focusing on real-time adjustments to savings, go-to-market plan, customer engagement programs, and global delivery talent platform stabilization to prepare for a strong rebound position.
- The primary focus on digital product and data engineering services combined with digital consulting, agency, design, content, and digital marketing services is expected to benefit the company in the medium and longer term.
- EPAM is optimistic about the transformative opportunities in the IT sector, especially in cloud data and engineering, driven by generative AI capabilities.
- The company is diversifying and stabilizing its global delivery platform, optimizing talent allocation, and driving higher levels of gross margin performance.
- EPAM has seen positive signs of return to demand with new logo acquisitions and ramping-up programs with existing clients.
- Partnerships with major cloud players like Google Cloud, Microsoft, and AWS are helping EPAM in its go-to-market progress.
- The company is investing in AI, building accelerators, expanding partnerships, and focusing on responsible and cost-effective solutions to position for long-term success.
- AI-led requirements are expected to drive demand for advanced data engineering, cloud computing, content creation, and AI-native applications, which will be an engine for future growth.
Q & A sessions,
Visibility and Stability
- Visibility and predictability have improved, allowing for better planning.
- There is still a slowdown, but it is more stable compared to previous quarters.
- Some clients are showing signs of returning and discussing growth opportunities.
- Expectation of stability in work conditions and productivity.
Global Delivery Platform
- Efforts in India and Latin America are starting to pay off.
- India is now the second-largest location for EPAM, with plans to further expand in India and Latin America.
- Central Western Asia and Central Eastern Europe are also strong locations for EPAM’s delivery platform.
- The goal is to build the most balanced global delivery platform.
Partnerships with Hyperscalers
- Partnerships with hyperscalers, like Microsoft, are becoming more important.
- EPAM’s reputation for complex modernization and innovation is crucial in these partnerships.
- Expecting improved partnership levels and announcements in the coming weeks.
- Hyperscalers’ relationships will be critical for EPAM’s growth.
Market Environment and Demand
- The current market environment has changed, and new deals have different cost structures.
- Some clients are utilizing this time to invest and gain a competitive advantage.
- Others are building relationships with stronger vendors to prepare for future demand.
- Anticipating strong demand for talent once the market rebounds.
Action Plan and Focus
- EPAM is implementing a pragmatic action plan to navigate through the current challenges.
- Focusing on real-time adjustments, savings, customer engagement, and talent platform stabilization.
- Continuing to invest in digital product and data engineering services to capitalize on market trends.
- Expecting a negative dynamic to continue in the second half of 2023, but at a lower level than the first half.
No bad stock 