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EPAM Systems (EPAM) Q2 Earnings Top Estimates, Revenues Miss

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EPAM Systems (EPAM - Free Report) second-quarter 2018 non-GAAP earnings per share grew 26.3% year over year to $1.01 per share and beat the Zacks Consensus Estimate of 99 cents

Revenues for the quarter came in at $445.6 million, marking a year-over-year jump of 27.7%, but missed the Zacks Consensus Estimate of $447 million. On a constant currency (cc) basis, revenues were up 27.1%.

Top-Line Details

EPAM’s largest vertical Financial Services registered 30% growth on a year-over-year basis driven by digital transformation and expertise in wealth management. Travel and Consumer segment increased 30%. Software & Hi-Tech was up nearly 22%. Business information and media rose 23%. Life Science & Healthcare witnessed solid 33% growth on key client wins.

The company’s emerging verticals grew 32%, driven primarily by clients from industrial engineering, energy and automotive sectors.

Geographically, EPAM Systems generated 59.3% of total revenues from North America, up 28% year over year in cc. Revenues from Europe, contributing 33.6% to total revenues, were up 21.3% in cc. CIS, representing 4.4%, grew 42.5% in cc. APAC grew 66.5% in cc, accounting for 2.7% of revenues.

Margins

EPAM’s non-GAAP gross margin contracted 140 basis points (bps) to 36.7%, mainly due to lower utilization and increased accrued variable compensation.
    
The company’s non-GAAP operating income increased 29.6% year over year to $72.3 million, while operating margin expanded 20 bps to 16.2%. The impact of reduced non-GAAP gross margin was more than offset by lower SG&A expenses as a percentage of revenues. SG&A expenses as a percentage of revenues decreased to 18.8% from 20.4% in the year-ago quarter.

Balance Sheet and Cash Flow

EPAM exited the quarter with cash and cash equivalents of $584.1 million, up from $535.9 million at the end of previous quarter.

The company generated $59.5 million of cash flow from operational activities. However, free cash flow was $50.9 million.

Guidance

EPAM lowered its revenues outlook for 2018, factoring the impact of currency fluctuations.

The company now predicts revenues to be $1.828 billion, down from the earlier projection of $1.842 billion. This reflects year-over-year improvement of 26% instead of the earlier prediction of 27%. On a cc basis, the guidance remained unchanged at 25%.

However, the company kept its non-GAAP operating margin guidance range of 16-17% unchanged. Similarly, non-GAAP earnings guidance was intact at $4.11 per share.

This apart, EPAM issued its outlook for the third quarter. For the quarter, the company anticipates revenues to be $466 million, up 23% year over year.

Non-GAAP earnings per share are anticipated to come in at $1.04. Non-GAAP operating margin is anticipated to lie between 16% and 17%.

EPAM Systems, Inc. Price, Consensus and EPS Surprise

EPAM Systems, Inc. Price, Consensus and EPS Surprise | EPAM Systems, Inc. Quote

Zacks Rank & Key Picks

EPAM Systems currently has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader technology sector are YY Inc. (YY - Free Report) , Science Applications (SAIC - Free Report) and Verint Systems (VRNT - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for YY, Science Applications and Verint is projected to be 26.4%, 5% and 10%, respectively.

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