EPAM Systems, Inc. (EPAM) is a leading global provider of digital transformation services and product engineering. Over the course of its 30-year history, the company has established itself as a trusted partner for enterprises seeking to leverage cutting-edge technology and innovation to drive business success.
Company History
EPAM was founded in 1993 in Newtown, Pennsylvania by Arkadiy Dobkin and several colleagues. The company started as a small software engineering services firm, focused on serving clients in the United States. In its early years, EPAM faced challenges common to many technology startups, including securing funding, finding and retaining top engineering talent, and establishing a reputation in the market. However, the company was able to differentiate itself through its commitment to engineering excellence and focus on delivering high-quality software solutions for its clients.
As EPAM grew, it expanded its geographic reach, opening offices in Eastern Europe to tap into the region's strong technical talent pool. This global delivery model allowed EPAM to scale its operations and provide cost-effective services to clients worldwide. By the early 2000s, EPAM had established a strong presence in Ukraine and other parts of Central and Eastern Europe. The company's focus on innovation and adapting to changing market demands has been a key driver of its success. In the late 2000s, EPAM began investing heavily in emerging technologies, such as cloud computing and data analytics, to better serve its clients' evolving needs. This strategic shift helped EPAM become a trusted partner for digital transformation initiatives, complementing its core software engineering capabilities.
One significant challenge EPAM faced was the 2022 Russian invasion of Ukraine, where the company had a substantial presence. EPAM responded by executing its business continuity plans, relocating employees, and providing humanitarian aid to its Ukrainian workforce and their families. Despite the disruption, EPAM was able to maintain its operations and continue serving its global client base.
Financials
EPAM's growth over the past three decades has been nothing short of remarkable. In 2020, the company generated $2.66 billion in revenue and $327.16 million in net income. By 2022, those figures had grown to $4.82 billion and $419.42 million, respectively, representing a compound annual growth rate of over 30% in both revenue and net income.
For the most recent fiscal year (2023), EPAM reported revenue of $4.69 billion, net income of $417.08 million, operating cash flow of $562.63 million, and free cash flow of $534.22 million. In the most recent quarter (Q3 2024), the company reported revenue of $1.167 billion, net income of $136.35 million, operating cash flow of $241.96 million, and free cash flow of $236.99 million.
Year-over-year growth from Q3 2023 to Q3 2024 showed a revenue increase of 1.3%. This growth was primarily driven by stabilizing demand for the company's services, partially offset by the sale of its remaining holdings in Russia in the third quarter of 2023. EPAM saw broad improvements in client engagement across all its verticals and geographies, which it believes demonstrate a more stable overall market outlook.
EPAM generates revenues primarily from clients located in the Americas, EMEA, and APAC regions. In the third quarter of 2024, the Americas region, which includes the United States, accounted for 59.7% of total revenues, EMEA accounted for 38.1%, and APAC accounted for 2.2% of total revenues.
This impressive financial performance is underpinned by EPAM's unique engineering expertise and its ability to deliver high-quality, innovative solutions to its clients. The company's global delivery model, which leverages a network of delivery centers around the world, allows it to access a deep pool of engineering talent and provide cost-effective services to its customers.
Liquidity
EPAM's financial ratios paint a picture of a well-run, financially stable company. As of the end of 2022, the company had a current ratio of 2.01, indicating a strong ability to meet its short-term obligations. Its debt-to-equity ratio of 0.08 suggests a conservative approach to leverage, and its return on equity of 16.9% demonstrates the company's ability to generate strong returns for its shareholders.
As of September 30, 2024, EPAM's liquidity position remained strong. The company had $2.04 billion in cash and cash equivalents and $675 million of available borrowing capacity under its revolving credit facility. The debt-to-equity ratio stood at 0.0071, reflecting a very conservative approach to leverage. The current ratio and quick ratio were both 4.56, indicating excellent short-term liquidity.
Recent Developments and Outlook
Looking ahead, EPAM is well-positioned to continue its growth trajectory. The company's latest 10-Q filing for the third quarter of 2024 highlighted several key developments:
- Revenues of $1.168 billion, up 1.3% year-over-year, driven by broad-based improvements across the company's industry verticals and geographies. - Non-GAAP earnings per share of $3.12, up 14% year-over-year, exceeding analyst expectations. - The company's acquisition of NEORIS, a global advanced technology consultancy, which significantly expands EPAM's presence in Latin America and Europe. - Continued investment in emerging technologies like generative AI, with the company noting that it is engaged with 70% of its top 100 clients on various AI initiatives.
EPAM provided guidance for the fourth quarter of 2024 and updated its full-year 2024 outlook:
For Q4 2024: - Revenue is expected to be in the range of $1.205 billion to $1.215 billion, representing a year-over-year increase of 4.6% (4.3% on a constant currency basis). - This guidance includes a $54 million contribution from the NEORIS acquisition. - GAAP income from operations is expected to be in the range of 10.5% to 11.5%. - Non-GAAP income from operations is expected to be in the range of 16% to 17%.
For the full year 2024: - Revenue is now expected to be in the range of $4.685 billion to $4.695 billion, effectively flat year-over-year. This includes a $54 million contribution from NEORIS for November and December. - GAAP income from operations is expected to be in the range of 11% to 11.5%. - Non-GAAP income from operations is expected to be in the range of 16% to 16.5%. - GAAP effective tax rate is expected to be 23%, and non-GAAP effective tax rate is expected to be 24%. - GAAP diluted EPS is expected to be in the range of $7.78 to $7.86. - Non-GAAP diluted EPS is expected to be in the range of $10.73 to $10.81.
Business Overview
EPAM is a leading digital transformation services and product engineering company, providing digital platform engineering and software development services to clients across six continents. The company focuses on building long-term partnerships with clients in various industries through delivery of innovative and scalable software solutions, integrated strategy, experience and technology consulting, and a continually evolving mix of advanced capabilities.
EPAM's key service offerings include: - Digital platform engineering and software development services - Integrated strategy, experience and technology consulting - Delivery of innovative and scalable software solutions
The company serves clients across several industry verticals: - Consumer Goods, Retail & Travel - Financial Services - Software & Hi-Tech - Business Information & Media - Life Sciences & Healthcare - Emerging Verticals (e.g. energy, professional services, industrial materials, educational platforms)
Conclusion
While EPAM faces some risks, such as ongoing geopolitical tensions and the potential for macroeconomic headwinds, the company's strong execution, diversified client base, and unique engineering capabilities position it well for continued success. As EPAM continues to invest in emerging technologies and expand its global footprint, it remains a compelling option for investors seeking exposure to the thriving digital transformation services market. The company's solid financial performance, strong liquidity position, and positive outlook for the remainder of 2024 further underscore its potential for sustained growth in the digital services industry.