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Why Is Epam (EPAM) Up 1.5% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Epam (EPAM). Shares have added about 1.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Epam due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

EPAM Systems Reports Strong Q2 Result

EPAM Systems’ second-quarter 2019 non-GAAP earnings per share rose 26.7% year over year to $1.28 and also beat the Zacks Consensus Estimate of $1.23.

Additionally, revenues in the reported quarter came in at $551.6 million, marking a year-over-year rise of 23.8% and also topping the Zacks Consensus Estimate of $549 million. On constant currency (cc) basis, revenues were up 25.1%. During the quarter, inorganic contribution was 0.9%.

The company is benefiting from growth across all industry verticals and geographies. Digital transformation, focus on customer engagement and product development are key drivers.

Top-Line Details

EPAM Systems’ largest vertical Financial Services registered 16.9% growth on a year-over-year basis. Growing demand for asset management and payment processing offerings is a key driver as well. Albeit insurance is a small segment generating a modest amount of revenues, it is increasingly benefiting the company.

Travel and Consumer segment improved 6% (8.2% in cc). However, slowdown within certain consumer clients in Europe and lower growth for a few North American clients are an overhang.

Software & Hi-Tech was up nearly 24.1%. Business information and media too rose 26.4%. Further, Life Science & Healthcare soared 53.7%, backed by growth in the existing customers and new client wins.

The company’s emerging verticals grew 51.3%, driven primarily by clients in energy and telecommunications sectors.

Geographically, EPAM Systems generated 60.7% of total revenues from North America, up 26.6% year over year (26.9% at cc). While revenues from Europe, contributing 32.2% to total revenues, were up 18.4% (21.1% at cc). APAC also rose 19.9% (23.3% at cc), accounting for 2.6% of revenues. Moreover, Commonwealth of Independent States (CIS), representing 4.5% of the metric, jumped 29.3% (32.4% at cc).

The company’s top 20 clients ascended nearly 14.8% year over year in the quarter under review while the rest augmented 31%.

Margins

EPAM Systems’ non-GAAP gross margin expanded 10 basis points (bps) to 36.8%.

The company’s non-GAAP operating income increased 28% year over year to $92.6 million while the operating margin expanded 60 bps to 16.8%.

Balance Sheet and Cash Flow

EPAM Systems exited the second quarter with cash and cash equivalents of $777.4 million, up from $762.5 million at the end of the last reported quarter.

Cash generated from operating activities was $44 million in the quarter compared with $0.2 million of cash used sequentially.

Guidance

For 2019, EPAM Systems now expects revenue growth to be at least 23% year over year compared with 22% predicted earlier. At cc, the metric is expected to be 24%. The company still anticipates foreign currency fluctuations to have an adverse impact of 1% on revenues.

Non-GAAP operating margin is reiterated in the band of 16-17%. The company anticipates non-GAAP earnings to be $5.25, up from $5.19 predicted earlier.

For the third quarter, the company forecasts revenues at minimum $579 million, up 23% year over year. At cc, the same is likely to be 24%.

Non-GAAP earnings per share are assumed at $1.32. While non-GAAP operating margin is predicted between 16% and 17%.

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

At this time, Epam has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Epam has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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