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EPAM Q1 Earnings Beat, Shares Fall on Downbeat FY24 Guidance
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EPAM Systems, Inc. (EPAM - Free Report) reported better-than-expected first-quarter 2024 results. However, shares of the company plunged 27% on Thursday as the digital transformation services and product provider lowered its full-year 2024 guidance due to a challenging demand environment.
EPAM Systems’ first-quarter non-GAAP earnings of $2.46 per share beat the Zacks Consensus Estimate of $2.32. However, the figure came a penny lower than the year-ago quarter’s earnings of $2.47 per share, primarily due to lower revenues and a higher tax rate, partially offset by its cost-saving initiatives, which include workforce rebalancing efforts.
EPAM Systems, Inc. Price, Consensus and EPS Surprise
First-quarter revenues of $1.165 billion were in line with the Zacks Consensus Estimate but declined 3.8% year over year. On a constant-currency basis, the top line decreased 4.3% year over year.
The year-over-year decline in revenues reflects the negative impacts of a slowdown in IT spending in the ongoing uncertain macroeconomic environment. The company's decision to move out of the Russian market affected its top line. Excluding the effect of EPAM's withdrawal from Russia, revenues declined 4.8% in the first quarter.
Geography-wise, EPAM generated 59% of the total revenues from the Americas, down 2.4% year over year. Revenues from the EMEA (now includes CCE region), contributing 39% to total revenues, decreased 3.2% year over year. Sales in the Asia Pacific region declined 13.1% year over year and accounted for 2% of revenues.
End-Market Performance
Coming to business vertical performance, EPAM Systems registered a sales decline across the majority of its end markets except for Life Sciences & Healthcare and Emerging. To reflect a more diverse end market, the company has renamed its Travel and Consumer vertical to Consumer Goods, Retail and Travel.
EPAM Systems’ Life Science & Healthcare segment jumped 26% year over year to $140 million and accounted for 12% of revenues, primarily driven by client growth in both life sciences and healthcare. The Emerging Verticals segment improved 12.9% year over year to $179.6 million and contributed 15.5% to revenues, driven by clients in energy and telecom. Our model estimates for Life Science & Healthcare and Emerging verticals were pegged at $123 million and $165.5 million, respectively.
Revenues from the Business Information & Media end market declined 15.8% year over year to $170.3 million and accounted for 14.6% of the company’s revenues. Weak performance in this vertical was mainly due to ramp-down by the top 20 clients in this end market. Our model estimate for the Business Information & Media end market was pegged at $184.8 million.
Sales in the Financial Services vertical decreased 10.3% year over year to $242.8 million and accounted for 20.8% of revenues, mainly driven by declines in banking, asset management and the payment sector. Our model estimate for the Financial Services vertical was pegged at $249.6 million.
Software & Hi-Tech was down 8.3% to $173.5 million and contributed 14.9% to total revenues. Our model estimate for the Software & Hi-Tech end market was pegged at $174.9 million.
EPAM Systems’ Consumer Goods, Retail and Travel revenues declined 6.9% to $259.1 million and accounted for 22.2% of total revenues. Sales decline across this end market was largely due to declines in retail, partially offset by solid growth in travel. Our model estimate for the Consumer Goods, Retail and Travel vertical was pegged at $263.3 million.
Operating Details
EPAM Systems’ non-GAAP gross profit declined 7% to $354.1 million, while the gross margin contracted 110 basis points (bps) to 30.4%. The first-quarter gross margin was negatively impacted by foreign exchange due to the strengthening of currencies in certain of the company’s delivery locations. Additionally, the inability to adjust prices after EPAM Systems' second-quarter 2023 promotion campaign continues to have a negative impact on profitability.
EPAM Systems’ non-GAAP selling, general & administrative (SG&A) expenses declined 11.3% year over year to $164.4 million. SG&A expenses as a percentage of total revenues contracted 120 bps to 14.1%. The improvement in SG&A expenses was primarily driven by the company’s ongoing focus on managing the cost base and increasing efficiency in spending.
The non-GAAP operating income decreased to $173.6 million from $178.3 million in the year-ago quarter. However, the non-GAAP operating margin expanded 20 bps to 14.9%, mainly due to lower SG&A expenses as a percentage of revenues.
Balance Sheet and Cash Flow
As of Mar 31, 2024, EPAM had cash, cash equivalents and restricted cash of $1.98 billion, down from $2.04 billion as of Dec 31, 2023.
As of Dec 31, 2023, the long-term debt was $25.8 million, down from $26.1 million as of Dec 31, 2023.
In the first quarter, EPAM generated operating and free cash flows of $129.9 million and $123.2 million, respectively.
Guidance
Considering the challenging demand environment, EPAM Systems lowered its guidance for the full-year 2024. The company now projects 2024 revenues between $4.575 billion and $4.675 billion, reflecting a year-over-year decline of 1.4% at the midpoint. Earlier, the company projected growth in the 1-4% range (2.5% midpoint). The Zacks Consensus Estimate for 2024 revenues currently stands at $4.79 billion.
EPAM Systems now forecasts full-year non-GAAP earnings in the $10-$10.30 per share range instead of the previously provided guidance range of $10-$10.40 per share. However, the company raised its non-GAAP operating margin projection to 15-15.5% from the 14.5-15.5% range. The consensus mark for 2024 EPS is pegged at $10.18.
Additionally, EPAM Systems initiated guidance for the second quarter. The company estimates reporting revenues between $1.135 billion and $1.145 billion, which suggests a year-over-year decline of 2.6% at the midpoint of the guidance range. The Zacks Consensus Estimate for second-quarter revenues currently stands at $1.18 billion.
Management projects the non-GAAP operating margin in the range of 13.5-14.5% of revenues. Non-GAAP earnings are expected in the range of $2.21-$2.29 per share. The consensus mark for second-quarter EPS is pegged at $2.42.
EPAM expects 58.8 million weighted average diluted shares outstanding for the second quarter and 58.7 million for the full-year 2024. The non-GAAP effective tax rate for both periods is projected at approximately 24%.
Zacks Rank & Stocks to Consider
Currently, EPAM Systems carries a Zacks Rank #4 (Sell). Shares of EPAM have plunged 38.8% year to date (YTD).
The Zacks Consensus Estimate for NVIDIA’s fiscal 2025 earnings has been revised 10 cents upward to $23.94 per share in the past 30 days, which suggests year-over-year growth of 84.7%. The long-term estimated earnings growth rate for the stock stands at 30.9%. The NVDA stock has soared 79.2% YTD.
The Zacks Consensus Estimate for Salesforce’s fiscal 2025 earnings has been revised upward by 3 cents to $9.71 per share in the past 60 days, which calls for an increase of 18.1% on a year-over-year basis. The long-term expected earnings growth rate for the stock is pegged at 17.4%. CRM shares have risen 4.6% YTD.
The consensus mark for Paycom’s 2024 earnings has been revised upward by 5 cents to $7.68 per share over the past seven days, which indicates a marginal 0.9% decrease from 2023. It has a long-term earnings growth expectation of 10.4%. The PAYC stock has declined 16% in the YTD period.
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EPAM Q1 Earnings Beat, Shares Fall on Downbeat FY24 Guidance
EPAM Systems, Inc. (EPAM - Free Report) reported better-than-expected first-quarter 2024 results. However, shares of the company plunged 27% on Thursday as the digital transformation services and product provider lowered its full-year 2024 guidance due to a challenging demand environment.
EPAM Systems’ first-quarter non-GAAP earnings of $2.46 per share beat the Zacks Consensus Estimate of $2.32. However, the figure came a penny lower than the year-ago quarter’s earnings of $2.47 per share, primarily due to lower revenues and a higher tax rate, partially offset by its cost-saving initiatives, which include workforce rebalancing efforts.
EPAM Systems, Inc. Price, Consensus and EPS Surprise
EPAM Systems, Inc. price-consensus-eps-surprise-chart | EPAM Systems, Inc. Quote
First-Quarter Top-Line Performance
First-quarter revenues of $1.165 billion were in line with the Zacks Consensus Estimate but declined 3.8% year over year. On a constant-currency basis, the top line decreased 4.3% year over year.
The year-over-year decline in revenues reflects the negative impacts of a slowdown in IT spending in the ongoing uncertain macroeconomic environment. The company's decision to move out of the Russian market affected its top line. Excluding the effect of EPAM's withdrawal from Russia, revenues declined 4.8% in the first quarter.
Geography-wise, EPAM generated 59% of the total revenues from the Americas, down 2.4% year over year. Revenues from the EMEA (now includes CCE region), contributing 39% to total revenues, decreased 3.2% year over year. Sales in the Asia Pacific region declined 13.1% year over year and accounted for 2% of revenues.
End-Market Performance
Coming to business vertical performance, EPAM Systems registered a sales decline across the majority of its end markets except for Life Sciences & Healthcare and Emerging. To reflect a more diverse end market, the company has renamed its Travel and Consumer vertical to Consumer Goods, Retail and Travel.
EPAM Systems’ Life Science & Healthcare segment jumped 26% year over year to $140 million and accounted for 12% of revenues, primarily driven by client growth in both life sciences and healthcare. The Emerging Verticals segment improved 12.9% year over year to $179.6 million and contributed 15.5% to revenues, driven by clients in energy and telecom. Our model estimates for Life Science & Healthcare and Emerging verticals were pegged at $123 million and $165.5 million, respectively.
Revenues from the Business Information & Media end market declined 15.8% year over year to $170.3 million and accounted for 14.6% of the company’s revenues. Weak performance in this vertical was mainly due to ramp-down by the top 20 clients in this end market. Our model estimate for the Business Information & Media end market was pegged at $184.8 million.
Sales in the Financial Services vertical decreased 10.3% year over year to $242.8 million and accounted for 20.8% of revenues, mainly driven by declines in banking, asset management and the payment sector. Our model estimate for the Financial Services vertical was pegged at $249.6 million.
Software & Hi-Tech was down 8.3% to $173.5 million and contributed 14.9% to total revenues. Our model estimate for the Software & Hi-Tech end market was pegged at $174.9 million.
EPAM Systems’ Consumer Goods, Retail and Travel revenues declined 6.9% to $259.1 million and accounted for 22.2% of total revenues. Sales decline across this end market was largely due to declines in retail, partially offset by solid growth in travel. Our model estimate for the Consumer Goods, Retail and Travel vertical was pegged at $263.3 million.
Operating Details
EPAM Systems’ non-GAAP gross profit declined 7% to $354.1 million, while the gross margin contracted 110 basis points (bps) to 30.4%. The first-quarter gross margin was negatively impacted by foreign exchange due to the strengthening of currencies in certain of the company’s delivery locations. Additionally, the inability to adjust prices after EPAM Systems' second-quarter 2023 promotion campaign continues to have a negative impact on profitability.
EPAM Systems’ non-GAAP selling, general & administrative (SG&A) expenses declined 11.3% year over year to $164.4 million. SG&A expenses as a percentage of total revenues contracted 120 bps to 14.1%. The improvement in SG&A expenses was primarily driven by the company’s ongoing focus on managing the cost base and increasing efficiency in spending.
The non-GAAP operating income decreased to $173.6 million from $178.3 million in the year-ago quarter. However, the non-GAAP operating margin expanded 20 bps to 14.9%, mainly due to lower SG&A expenses as a percentage of revenues.
Balance Sheet and Cash Flow
As of Mar 31, 2024, EPAM had cash, cash equivalents and restricted cash of $1.98 billion, down from $2.04 billion as of Dec 31, 2023.
As of Dec 31, 2023, the long-term debt was $25.8 million, down from $26.1 million as of Dec 31, 2023.
In the first quarter, EPAM generated operating and free cash flows of $129.9 million and $123.2 million, respectively.
Guidance
Considering the challenging demand environment, EPAM Systems lowered its guidance for the full-year 2024. The company now projects 2024 revenues between $4.575 billion and $4.675 billion, reflecting a year-over-year decline of 1.4% at the midpoint. Earlier, the company projected growth in the 1-4% range (2.5% midpoint). The Zacks Consensus Estimate for 2024 revenues currently stands at $4.79 billion.
EPAM Systems now forecasts full-year non-GAAP earnings in the $10-$10.30 per share range instead of the previously provided guidance range of $10-$10.40 per share. However, the company raised its non-GAAP operating margin projection to 15-15.5% from the 14.5-15.5% range. The consensus mark for 2024 EPS is pegged at $10.18.
Additionally, EPAM Systems initiated guidance for the second quarter. The company estimates reporting revenues between $1.135 billion and $1.145 billion, which suggests a year-over-year decline of 2.6% at the midpoint of the guidance range. The Zacks Consensus Estimate for second-quarter revenues currently stands at $1.18 billion.
Management projects the non-GAAP operating margin in the range of 13.5-14.5% of revenues. Non-GAAP earnings are expected in the range of $2.21-$2.29 per share. The consensus mark for second-quarter EPS is pegged at $2.42.
EPAM expects 58.8 million weighted average diluted shares outstanding for the second quarter and 58.7 million for the full-year 2024. The non-GAAP effective tax rate for both periods is projected at approximately 24%.
Zacks Rank & Stocks to Consider
Currently, EPAM Systems carries a Zacks Rank #4 (Sell). Shares of EPAM have plunged 38.8% year to date (YTD).
Some better-ranked stocks in the broader technology sector are NVIDIA (NVDA - Free Report) , Salesforce (CRM - Free Report) and Paycom Software (PAYC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for NVIDIA’s fiscal 2025 earnings has been revised 10 cents upward to $23.94 per share in the past 30 days, which suggests year-over-year growth of 84.7%. The long-term estimated earnings growth rate for the stock stands at 30.9%. The NVDA stock has soared 79.2% YTD.
The Zacks Consensus Estimate for Salesforce’s fiscal 2025 earnings has been revised upward by 3 cents to $9.71 per share in the past 60 days, which calls for an increase of 18.1% on a year-over-year basis. The long-term expected earnings growth rate for the stock is pegged at 17.4%. CRM shares have risen 4.6% YTD.
The consensus mark for Paycom’s 2024 earnings has been revised upward by 5 cents to $7.68 per share over the past seven days, which indicates a marginal 0.9% decrease from 2023. It has a long-term earnings growth expectation of 10.4%. The PAYC stock has declined 16% in the YTD period.