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EPAM Systems (EPAM) Q3 Earnings and Revenues Top Estimates

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EPAM Systems (EPAM - Free Report) third-quarter 2018 non-GAAP earnings per share grew 27.2% year over year to $1.17 per share and beat the Zacks Consensus Estimate of $1.05.

Revenues for the quarter came in at $468.2 million, marking a year-over-year jump of 24% and topping the Zacks Consensus Estimate of $467 million. On a constant currency (cc) basis, revenues were up 25.4%.

The company witnessed growth across geographies and all industry verticals. Digital transformation, focus on customer engagement and product development were key growth drivers.

However, foreign exchange impact was 0.4% more than anticipated.

Top-Line Details

EPAM’s largest vertical Financial Services registered 18.1% growth on a year-over-year basis. Ramp-down of activity at some (mainly Europe-based) clients was a dampener.

Travel and Consumer segment increased 29.1%. Software & Hi-Tech was up nearly 20.1%. Business information and media rose 27.2%. Life Science & Healthcare witnessed solid 40.3% growth on key client wins.

The company’s emerging verticals grew 31.4%, driven primarily by clients from industrial engineering and energy sectors.

Geographically, EPAM Systems generated 60.7% of total revenues from North America, up 30.7% year over year in cc. Revenues from Europe, contributing 32.5% to total revenues, were up 14% in cc. CIS, representing 4%, grew 27.8% in cc. APAC grew 67.6% in cc, accounting for 2.8% of revenues.

The company’s top-20 clients grew nearly 23% year over year in the quarter whereas the rest grew 25% during the same time frame.

Margins

EPAM’s non-GAAP gross margin contracted 60 basis points (bps) to 36.3%, mainly due to increased accrued variable compensation.
    
The company’s non-GAAP operating income increased 31% year over year to $82 million, while operating margin expanded 90 bps to 17.5%. 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% from 19.8% in the year-ago quarter.

Balance Sheet and Cash Flow

EPAM exited the quarter with cash and cash equivalents of $685.1 million, up from $584.1million at the end of the previous quarter.

The company generated $102.3 million of cash flow from operational activities compared with $59.5 million in the previous quarter. Free cash flow was $94.1 million.

Guidance

EPAM increased its outlook for 2018, factoring the impact of recent acquisition and revenue acceleration.

The company now predicts revenues to reflect year-over-year improvement of 26.5% compared with the earlier prediction of 26%. On a cc basis, the guidance was increased to 26% from 25%.

The company expects inorganic revenues to contribute nearly 2% to full-year revenues.

The company increased its non-GAAP operating margin guidance range to 16.5%-17.5% from 16-17% projected earlier. Similarly, the company anticipates non-GAAP earnings to be $4.32, up from the earlier projection of $4.11 per share.

For the fourth quarter, the company anticipates revenues to be at least $500 million, up 25% year over year. TH_NK acquisition is expected to contribute $2 million. The company anticipates strong demand in financial services.

Non-GAAP earnings per share are anticipated to come in at $1.22. Non-GAAP operating margin is anticipated to be between 17% and 18%.

EPAM Systems, Inc. Price, Consensus and EPS Surprise

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

Zacks Rank and Stocks to Consider

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

A few better-ranked stocks in the broader technology sector are Intel Corp. (INTC - Free Report) , Twitter, Inc. (TWTR - Free Report) and CACI International (CACI - Free Report) , each 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 Intel, Twitter and CACI International is projected to be 8.4%, 22.1% and 10%, respectively.

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