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Epam (EPAM) Up 2.1% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Epam (EPAM - Free Report) . Shares have added about 2.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Epam due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

EPAM Systems Reports Q3 Results

EPAM Systems 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. Moreover, deeper insights to artificial intelligence, machine learning, and analytics drove results, adds management.

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%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 13.01% due to these changes.

VGM Scores

Currently, Epam has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Epam has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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