• Revenue: $1.168 billion, a year-over-year increase of 1.3% on a reported basis.
• Constant Currency Revenue Growth: 0.9%, reflecting a positive foreign exchange impact of 40 basis points.
• Polish R&D Incentive Benefit: $52 million, improving GAAP gross margin and income from operations by 450 basis points.
• GAAP Gross Margin: 34.6%, compared to 31.1% in Q3 of last year.
• Non-GAAP Gross Margin: 34.3%, compared to 32.9% in the same quarter last year.
• GAAP Income from Operations: $177 million or 15.2% of revenue.
• Non-GAAP Income from Operations: $223 million or 19.1% of revenue.
• GAAP Effective Tax Rate: 28.1%.
• Non-GAAP Effective Tax Rate: 24.1%.
• GAAP Diluted EPS: $2.37.
• Non-GAAP Diluted EPS: $3.12, a $0.39 increase year-over-year.
• Cash Flow from Operations: $242 million.
• Free Cash Flow: $237 million, highest level in company history.
• Consultants, Designers, Engineers, and Architects: More than 47,750, a decline of 1.5% year-over-year.
• Total Headcount: More than 53,250 employees.
• Utilization Rate: 76.4%, compared to 72.7% in Q3 of last year.

• Warning! GuruFocus has detected 3 Warning Signs with EPAM.

Release Date: November 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• EPAM Systems Inc (NYSE:EPAM) reported stronger-than-expected third-quarter results, with revenue growth both year-over-year and sequentially.
• The acquisition of Nedis provides EPAM with entry into new markets in Latin America and parts of Europe, expanding their client portfolio and delivery capabilities.
• The company saw improvements in client engagement across all verticals, particularly in financial services, life sciences, healthcare, and software sectors.
• EPAM's global delivery strategy is focused on diversification, with significant growth in India and Latin America, and a strong presence in Europe.
• EPAM is actively engaged with 70% of its top 100 clients on Gen AI initiatives, showcasing its capabilities in AI-driven transformations.

Negative Points

• Despite positive results, EPAM continues to face challenges with delayed decision-making and a focus on cost optimization among clients.
• The company is experiencing wage inflation pressures, which are not fully offset by pricing improvements, impacting profitability.
• EPAM's profitability is expected to be slightly below the 16% to 17% range in 2025, even with benefits from Polish R&D incentives.
• There is a continued need for strategic investments to capture market share, which may impact short-term financial performance.
• The integration of recent acquisitions, such as Nedis, may initially contribute lower profitability compared to EPAM's standalone operations.

Q & A Highlights

Q: Are there particular areas leading the recovery in client behavior, and any insights on early 2025 budget discussions? A: Jason Peterson, CFO, noted improvements in financial services, hi-tech, and life sciences and healthcare. Clients are recognizing the need to invest again. While it's early to comment on 2025 budgets, conversations are incrementally more constructive.

Q: Can you elaborate on the Poland R&D incentive benefit and its impact on gross margin and tax rate? A: Jason Peterson explained that the $29 million benefit in Q3 impacts gross margin, with adjusted IFO at 16.6%. A similar level of benefit is expected, but wage inflation and pricing challenges will continue to pressure profitability in 2025.

Q: What is the outlook for revenue per head and hiring trends in Europe? A: Jason Peterson mentioned headcount increases in Q3 and expected growth in Q4, indicating a positive leading indicator. Hiring is broadening globally, including Eastern Europe and Western Asia, not just India or Latin America.

Q: How should we view the impact of the Poland R&D incentives on future margins? A: Jason Peterson stated that while the Polish incentive will continue, the pricing environment remains challenging. He advises considering profitability slightly below the 16% to 17% range for 2025, inclusive of the Polish benefit.

Q: Can you discuss the integration plans for recent acquisitions and their impact on margins? A: Jason Peterson highlighted that the focus is on revenue opportunities with Nedis, with joint engagements already underway. Both acquisitions have lower profitability than EPAM's standalone business, impacting adjusted IFO slightly.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.