EPAM Systems, Inc. Q3 FY2024 earnings call

• Q3 results were better than expected with revenue growth both year-over-year and sequentially. Broad improvements in client engagement across verticals and geographies. - Acquired NEORIS on November 1, which doubled delivery footprint to ~7,500 people, expanding presence in LatAm, Spain, and Portugal, and bringing strong capabilities in data AI, SAP, and key verticals. - Global delivery hubs in Europe, India, Latin America, and Western Central Asia with specific focus and progress. - Gen AI initiatives with three-dimensional approach: internally focused talent transformation, client transformation opportunities with Gen AI-enabled solutions, and partner ecosystem network. - Solid progress across Gen AI dimensions, with examples like StatGPT 2.0 development and client programs in life sciences and manufacturing. - GAAP gross margin 34.6% vs 31.1% last year, non-GAAP gross margin 34.3% vs 32.9% last year. GAAP SG&A 17.7% of revenue vs 16.9% last year, non-GAAP SG&A 14% of revenue vs 14.4% last year. Cash flow from operations $242 million, free cash flow $237 million, highest in history.

In Q3, EPAM generated revenue of $1.168 billion, a year-over-year increase of 1.3% on a reported basis or 0.9% in constant currency. Financial Services increased 3.3% year-over-year, driven by fin-tech, banking, and insurance. Life sciences & healthcare delivered very strong year-over-year growth of 14.6%. Consumer goods, retail and travel decreased 4.5% year-over-year. Software and hi-tech grew 2.1% year-over-year. Business information and media declined 9% but returned to slight positive sequential growth. Emerging verticals delivered solid year-over-year revenue growth of 8.5% driven by energy and manufacturing. Geographically, Americas, the largest region at 60% of Q3 revenues, grew 2.9% year-over-year on a reported basis and 2.9% in constant currency. EMEA, representing 38% of Q3 revenues, contracted 0.3% year-over-year and 1.3% in constant currency but showed signs of stabilization. APAC increased 1.8% year-over-year or 0.6% in constant currency and now represents 2% of revenues.

• Q4 2024 revenue expected to be approximately flat year-over-year excluding NEORIS acquisition. Full-year revenue expected to be in the range of $4.685 billion to $4.695 billion, effectively flat year-over-year. - Q4 2024 revenue expected to be in the range of $1.205 billion to $1.215 billion, producing a year-over-year increase of 4.6%. On constant currency basis, expected to increase 4.3% year-over-year. - GAAP income from operations for Q4 expected to be in the range of 10.5% to 11.5% and non-GAAP income from operations in the range of 16% to 17%. GAAP effective tax rate ~26%, non-GAAP effective tax rate ~24%. Earnings per share: GAAP diluted EPS in range of $1.73 to $1.81, non-GAAP diluted EPS in range of $2.70 to $2.78. - Key assumptions for GAAP to non-GAAP measurements include stock-based compensation, amortization of intangibles, foreign exchange impact, tax adjustments, severance, and interest income decline due to acquisitions.

• Pricing environment: No significant price improvement expected next year while facing wage inflation, which may pressurize profitability. - Integration of acquisitions: NEORIS and First Derivative acquisitions may have a modestly negative impact on profitability in the near term. - External factors: Uncertainties in global politics and demand environment that can affect client spending and business projections.

Q: Are there particular areas leading the recovery in client behavior and color on early '25 budget discussions?

A: Jason Peterson said financial services, hi-tech, and life sciences & healthcare are showing improvement, but it's too early to comment on 2025 budgets.

Q: How does the Poland R&D incentive benefit impact gross margin and effective tax rate?

A: Jason Peterson said the $29 million benefit in Q3 and expected $9 million in Q4 impacts gross margin, but wage inflation and lack of significant price improvement may pressurize 2025 profitability.

Q: Should we expect similar M&A activity ahead and what types of assets are sought?

A: Arkadiy Dobkin said not the same level of size impact, focusing on small acquisitions for specific capabilities or leaders.

Q: Have you seen evidence of reversion to delivery in Eastern and Central Europe?

A: Jason Peterson and Arkadiy Dobkin said beginning to see recovery in demand for Eastern Europe and broader global hiring.

Q: Plans for integrating acquisitions and margin profiles?

A: Jason Peterson said focus on revenue growth, NEORIS contribution $54 million in Q4, acquisitions have lower profitability than EPAM standalone, modestly negative impact on adjusted IFO.

Q: Structural perspective on margins with diversified global delivery footprint?

A: Jason Peterson said margin profiles of different geographies are more similar, impact from demand environment and pricing lag.