Executive Summary / Key Takeaways

• EPAM is strategically transforming its global delivery model through significant acquisitions (NEORIS, First Derivative) and organic expansion, particularly in India and Latin America, to enhance geographic balance and address geopolitical risks while positioning for future growth.
• The company is making substantial investments in AI and GenAI capabilities, developing proprietary platforms (DIAL, AI/Run, EliteA) and upskilling its workforce, which is driving new demand and evolving into larger, more complex client engagements with demonstrable ROI.
• Recent financial performance shows a return to year-over-year organic revenue growth and sequential momentum, with Q1 2025 results exceeding expectations, driven by improving client sentiment and benefits from supplier consolidation towards quality providers.
• EPAM has raised the lower end of its full-year 2025 revenue and EPS guidance, signaling cautious optimism for continued improvement, although profitability remains pressured by wage inflation, pricing dynamics, and integration costs from recent acquisitions.
• Key risks include ongoing geopolitical uncertainty (Ukraine/Belarus), potential macroeconomic headwinds impacting client spending in the second half of 2025, and the challenge of effectively integrating acquired businesses and realizing expected synergies.

Setting the Stage: Engineering Heritage Meets Global Transformation

EPAM Systems, Inc. traces its roots back over three decades, founded on a deep foundation of software engineering expertise. This heritage has shaped its evolution into a leading global provider of digital engineering, cloud and AI-enabled transformation services, complemented by robust business and experience consulting capabilities. Operating within the competitive landscape of global IT services, EPAM stands alongside larger, more diversified players like Accenture (ACN), Cognizant (CTSH), Infosys (INFY), and Wipro (WIT), as well as specialized niche providers and increasingly, the platform arms of major cloud vendors like AWS and Microsoft Azure.

EPAM's core strategy has long centered on delivering complex, high-quality technology solutions, building long-term client partnerships, and leveraging a global delivery model. The company's historical journey, including early investments in talent hubs in Eastern Europe, and later strategic moves into regions like India and Latin America starting around 2015, laid the groundwork for its current focus on becoming a truly geo-balanced talent organization. This strategic imperative gained significant urgency following the geopolitical disruptions beginning in early 2022, which necessitated a rapid acceleration of diversification efforts.

In this dynamic environment, EPAM differentiates itself through its strong engineering DNA, agile methodologies, and a commitment to developing advanced capabilities and proprietary intellectual property. While larger competitors like Accenture benefit from immense scale and broader service portfolios, and Indian-centric firms like Infosys and Wipro often leverage cost advantages through extensive offshore models, EPAM positions itself as a partner for complex, quality-driven digital transformations. Its ability to execute intricate technical projects and its growing expertise in cutting-edge areas like AI are central to its competitive standing. However, EPAM's smaller scale relative to market leaders can result in higher operating costs per unit in some areas, and it faces ongoing pressure in cost-sensitive segments where firms like Cognizant and Wipro are particularly strong.

Technological Differentiation: The Engine of EPAM's Value

At the heart of EPAM's competitive moat lies its differentiated approach to digital engineering and its continuous investment in advanced technologies, particularly AI and GenAI. The company's core strength is its ability to handle complex software development and digital transformation projects with a high degree of technical depth and quality. This is supported by proprietary platforms and methodologies designed to enhance productivity and accelerate client outcomes.

Key technological differentiators include:

• EPAM DIAL: A unified GenAI orchestration platform designed to help enterprises accelerate experimentation and innovation by connecting various large language models (LLMs), data sources, and AI-native applications into meaningful workflows. This platform is evolving into a comprehensive AI platform for enterprises, enabling clients to move beyond theoretical use cases to practical, integrated solutions.
• EPAM AI/Run: An AI-native Software Development Lifecycle (SDLC) framework and toolkit. This methodology leverages GenAI to accelerate the entire software development process, aiming to improve time-to-market by up to 30%. This provides a tangible benefit to clients seeking faster delivery and quicker realization of ROI from their digital investments.
• EPAM EliteA: A collaboration platform specifically for teams working with LLMs. It streamlines the development, accessibility, and management of LLM assets like prompts, templates, and agents, fostering efficiency and consistency in AI development projects.
• EPAM Quanthub: Proprietary IP utilized in projects like the IMF's StatGPT. This framework enables conversational data exploration, allowing users to interact with complex data sets using natural language. Initial results from the IMF StatGPT project demonstrated significant quantifiable benefits, including a 50% increase in research productivity and a 35% increase in research accuracy.

These platforms and the underlying expertise represent EPAM's commitment to moving beyond theoretical AI discussions to practical, deployable solutions. While competitors also invest in AI, EPAM's focus on integrating AI into the core engineering lifecycle (SDLC) and developing orchestration platforms like DIAL provides a distinct advantage in handling complex enterprise-scale AI transformations. This technological edge is crucial for winning and scaling new engagements, particularly as clients seek partners who can navigate the complexities of data modernization and cloud infrastructure necessary to support AI at scale.

The "so what" for investors is that this technological focus is not merely academic; it directly contributes to EPAM's ability to attract and retain clients, command premium pricing in certain complex engagements, and drive future revenue growth. It strengthens the company's competitive moat against firms primarily competing on cost and positions it favorably as the market shifts towards AI-driven transformation.

Global Delivery and Strategic Expansion: Building a Balanced Footprint

A central pillar of EPAM's strategy, significantly accelerated by recent geopolitical events, is the transformation of its global delivery model towards greater geographic balance. Historically strong in Eastern and Central Europe, the company has made deliberate moves to build scaled operations across four major hubs: Europe, India, Latin America, and Western Central Asia.

The acquisitions of NEORIS in November 2024 and First Derivative in December 2024 were transformative steps in this strategy. NEORIS, described as the most significant acquisition in EPAM's history, brought approximately 4,800 professionals and substantially scaled EPAM's presence in Latin America (Mexico, Colombia, Argentina, Brazil) and parts of Europe (Spain, Portugal). This acquisition added significant expertise in areas like SAP (over 1,000 practitioners), manufacturing, and telco, strengthening EPAM's ability to serve clients across the Americas and locally within Latin America. First Derivative added capabilities in financial services managed services and consulting, particularly in the UK, Ireland, North America, and APAC. These deals combined added nearly 6,000 professionals, significantly increasing EPAM's global footprint and diversifying its talent pool.

Organically, EPAM continues to invest heavily in India, which is on track to become its largest single-country delivery location by early 2025, expected to reach 10,000 people. The focus in India is on building high-quality product engineering capabilities and centers of excellence in areas like data, cloud, and AI, while also deepening relationships with Global Capability Centers (GCCs). The Western Central Asia hub is also growing, providing a balance of cost, quality, and proximity with nearly 7,000 people. Meanwhile, operations in Ukraine remain significant, with approximately 9,000 professionals operating at productivity levels consistent with prior periods, even seeing sequential net additions in Q4 2024.

This diversification strategy is critical for mitigating geopolitical risks associated with concentrated delivery locations and for enhancing EPAM's ability to offer flexible, nearshore, and offshore delivery options to global clients. While the integration of acquisitions like NEORIS and First Derivative presents operational challenges and initially impacts profitability due to lower margins compared to EPAM's standalone business, the strategic rationale is clear: to create a more resilient, globally capable organization better positioned to capture demand across diverse markets.

Financial Performance: Navigating Headwinds, Building Momentum

EPAM's recent financial performance reflects a business navigating a complex demand environment while strategically investing and integrating acquisitions. Q1 2025 revenues reached $1.30 billion, an increase of 11.7% year-over-year. This growth was positively impacted by improving demand and contributions from the 2024 acquisitions (NEORIS and First Derivative), although partially offset by negative foreign currency impacts (a 1.7% headwind to growth). Crucially, the company returned to year-over-year organic constant currency revenue growth, exceeding its initial expectations for Q1 2025 and marking the third consecutive quarter of sequential organic revenue growth.

Profitability, however, remains under pressure. GAAP income from operations as a percentage of revenues decreased to 7.6% in Q1 2025 from 9.5% in Q1 2024. Non-GAAP income from operations was 13.5% in Q1 2025 compared to 14.9% in Q1 2024. This compression is primarily attributed to several factors: the impact of 2024 compensation increases that could not be fully offset by pricing adjustments, lower profitability profiles of the recently acquired businesses, and increased depreciation and amortization from acquired intangible assets. These factors outweighed the benefits from improved utilization and the recognition of a $12.1 million benefit from the Polish R&D incentive in Q1 2025. Cost of revenues exclusive of depreciation and amortization increased as a percentage of revenue, driven by acquisitions and salary increases. Selling, general and administrative expenses also increased in absolute terms due to acquisitions but decreased slightly as a percentage of revenue due to better control over personnel costs.

Cash flow generation in Q1 2025 was significantly lower than the prior year period, with cash flow from operations at $24.16 million compared to $129.92 million in Q1 2024. This was negatively impacted by a larger increase in days sales outstanding (DSO), which rose to 75 days at the end of Q1 2025 from 70 days in Q4 2024, and higher variable compensation payments. Management anticipates DSO may remain slightly elevated due to an increasing share of fixed-fee contracts with milestone billing. Despite the Q1 dip, management remains confident in its overall liquidity position, citing $1.17 billion in cash and cash equivalents and $675 million in available borrowing capacity as of March 31, 2025. The company continues to utilize its share repurchase program, buying back $160 million of stock in Q1 2025.

Looking back at 2024, the year saw revenues effectively flat year-over-year on a reported basis ($4.73 billion), but down 1.7% organically in constant currency. Non-GAAP income from operations grew slightly to $779 million (16.5% margin), benefiting from the Polish R&D incentive but facing headwinds from wage inflation and pricing. Full-year 2024 non-GAAP diluted EPS increased 2.5% year-over-year to $10.86. The latter half of 2024 showed sequential improvement, culminating in organic growth in Q4, signaling stabilization and building momentum.

Outlook and Forward Strategy: Cautious Optimism Amidst Uncertainty

Based on the stronger-than-expected performance in the first half of 2025 and improving demand trends, EPAM has raised its full-year 2025 outlook. The company now expects reported revenue growth in the range of 11.5% to 14.5%, with an inorganic contribution of approximately 9% and a positive foreign exchange impact of 0.4%. This translates to expected organic constant currency revenue growth of 2% to 5%, an increase from the prior guidance range.

For Q2 2025, EPAM guides for revenue between $1.325 billion and $1.340 billion, representing 16.2% year-over-year growth at the midpoint, including a 10.6% inorganic contribution and a positive 1.8% FX impact. This implies continued sequential and year-over-year organic growth in the second quarter.

Management's outlook reflects cautious optimism. They note improving demand for EPAM's differentiated services, stable client budgets with a shift towards strategic programs, and the benefit of clients returning to quality execution. The momentum built in Q1 and expected in Q2 provides confidence in the first half. However, visibility into the second half of 2025 remains subject to macroeconomic uncertainty.

Profitability guidance for full-year 2025 remains pressured, with non-GAAP income from operations expected in the range of 14.5% to 15.5%. This reflects ongoing investments in talent retention, acceleration of AI/GenAI IP and tooling advancements, and integration costs from acquisitions, combined with limited near-term ability to fully offset 2024 compensation increases through pricing. Management expects profitability to improve from the first half to the second half of the year. Non-GAAP diluted EPS is guided between $10.70 and $10.95, benefiting in part from a reduced share count assumption due to planned share repurchases.

The strategic focus for the remainder of 2025 is on driving sequential momentum, winning wallet share through differentiated offerings (especially AI), continuing to optimize the global delivery model, and effectively integrating the acquired businesses to realize synergies and expand market reach.

Risks and Challenges

Despite the positive momentum and strategic progress, EPAM faces significant risks that could impact its performance and outlook.

• Geopolitical Risks: The ongoing war in Ukraine and potential escalation involving Belarus continue to pose risks to operations, personnel, and assets in the region. While EPAM has diversified its delivery footprint and its Ukraine operations remain resilient, prolonged conflict or expanded sanctions could still have a material adverse effect.
• Macroeconomic Uncertainty: Although demand has shown signs of improvement, the global macroeconomic environment remains dynamic. A slowdown in client spending, particularly in the second half of 2025, could impact revenue growth and profitability.
• Pricing and Wage Inflation: The disconnect between ongoing wage inflation, particularly for skilled technical talent (including AI expertise), and the ability to increase client pricing continues to pressure margins.
• Acquisition Integration: Successfully integrating NEORIS and First Derivative, including their operations, cultures, and financial systems, is critical for realizing expected synergies and achieving profitability targets. Failure to integrate effectively could lead to operational disruptions and underperformance.
• Belarus Dividend Restrictions: Restrictions on distributing dividends from Belarus could limit the company's ability to access cash held in that country, although management does not currently expect a material impact on worldwide cash obligations.
• Client Concentration and Financial Health: While trade receivables are dispersed, a downturn or financial distress among large clients could lead to increased credit losses.

These risks necessitate careful management and could introduce volatility to EPAM's results, requiring investors to monitor the execution of the company's strategic initiatives closely.

Conclusion

EPAM Systems is navigating a complex global landscape by leveraging its core engineering strength, strategically diversifying its delivery footprint through significant acquisitions, and aggressively investing in cutting-edge AI and GenAI capabilities. The return to organic growth and sequential momentum in recent quarters, culminating in a raised outlook for 2025, signals that these strategic efforts are beginning to yield results and that demand, particularly for high-quality, complex digital transformation services, is improving.

While profitability faces near-term pressure from investments and integration, the focus on enhancing technological differentiation and building a more resilient global delivery model positions EPAM to capitalize on the eventual rebound in discretionary spending and the accelerating adoption of AI-driven solutions. The company's ability to demonstrate tangible ROI from its AI engagements and its strengthening partnerships with major technology providers are key competitive advantages. For investors, the story is one of a company executing a fundamental transformation to emerge stronger from a challenging period, with the success of its AI initiatives and the seamless integration of its recent acquisitions being critical factors to watch as it aims for sustained growth in the years ahead.