It has been about a month since the last earnings report for Epam (EPAM). Shares have added about 10.3% 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 Q3 Earnings & Revenues Surpass Estimates
EPAM Systems’ third-quarter 2019 non-GAAP earnings per share improved 18.8% year over year to $1.39 and also beat the Zacks Consensus Estimate by 3.7%.
Additionally, revenues in the reported quarter came in at $588.1 million, reflecting a year-over-year rise of 25.6%. The top line also surpassed the Zacks Consensus Estimate of $580 million. On constant currency (cc) basis, revenues were up 27.2%. During the quarter, inorganic contribution to revenue growth was approximately 1.5%.
The company is benefiting from growth across all industry verticals and geographies. Digital transformation, focus on customer engagement and product development are key catalysts.
Revenue Break Up by Verticals
EPAM Systems’ largest vertical Financial Services (representing 22.1% of total revenues) exhibited 24.4% growth on a year-over-year basis to $130.3 million. Growing demand for asset management, insurance and payment processing offerings is a key catalyst.
Travel and Consumer (19.1%) improved 11.2% (8.2% in cc) to $112.4 million. An uptick in demand for replatforming, e-commerce, retail and data engineering services aided performance. However, ongoing slowdown within certain consumer clients limited growth.
Software & Hi-Tech (18.4%) was up nearly 22.9% to $108.4 million on strong adoption of product engineering services.
Business Information & Media (18%) rose 29.3% to $105.8 million on robust traction witnessed by data and analytics services.
Life Science & Healthcare (11.4%) surged 49.7% to 66.8 million, backed by improving demand for R&D IT services and other applications.
Emerging Verticals (11%) improved 35.1% to $64.4 million, driven primarily by clients in energy and telecommunications sectors.
Revenue Break Up by Geography
Geographically, EPAM Systems generated 60.9% of total revenues from North America, up 26.2% year over year (26.5% at cc) to $358.4 million.
Revenues from Europe, contributing 32.2% to total revenues, were up 24.4% (28.4% at cc) to $189.3 million.
CIS or Commonwealth of Independent States, representing 4.5% of revenues, jumped 43% (42.9% at cc), to $26.5 million.
APAC rose 4.1% (5.5% at cc), accounting for 2.4% of revenues, to $13.9 million.
Revenue Break Up by Customer Concentration
The company’s top 20 clients, contributing 40.8% to total revenues, climbed 17% year over year in the quarter under review while the rest (representing 59.2% of total revenues) improved 32%.
EPAM Systems’ non-GAAP gross margin contracted 20 bps to 37.1%.
The company’s non-GAAP operating income improved 21.6% year over year to $99.7 million while the operating margin contracted 50 bps to 17%.
Balance Sheet and Cash Flow
EPAM Systems exited the third quarter with cash and cash equivalents of $853.2 million, up from $777.4 million at the end of the second quarter.
As of Sep 30, 2019, long-term debt came in at $25 million, flat when compared with the second quarter.
Cash generated from operating activities was $119 million in the quarter compared with $44 million reported in the previous quarter.
Free cash flow came in at $91.8 million, compared with $32.4 million in the second quarter.
For 2019, EPAM Systems expects revenue growth to be at least 23% year over year. At cc, the metric is expected to be 24%. The company anticipates foreign currency fluctuations to have an adverse impact of 1% on revenues.
Non-GAAP operating margin is now projected in the band of 16.5-17.5%, compared with the earlier predicted range of 16-17%. The company now anticipates non-GAAP earnings to be $5.35, up from $5.25 predicted earlier, reflecting anticipated improvement in profitability.
For the fourth quarter, the company forecasts revenues at minimum $616 million, up 22% (as reported and at cc) year over year.
Non-GAAP earnings per share are expected to be at least at $1.43. Meanwhile non-GAAP operating margin is predicted between 16.5% and 17.5%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
At this time, Epam has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise 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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