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EPAM Systems (EPAM) Q4 Earnings Top on Broad-Based Growth

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Shares of EPAM Systems (EPAM - Free Report)   have surged 34.6% in the past year, substantially outperforming the industry’s rally of 5.1%.

The company is benefiting from growth across geographies and all industry verticals.Digital transformation, focus on customer engagement and product development were key growth drivers. Moreover, deeper insights through artificial intelligence, machine learning and analytics are an upside. This development is further evident from the recently reported quarterly results.

The company delivered fourth-quarter 2018 non-GAAP earnings per share, reflecting an increase of 25.7% year over year to $1.27 and also beat the Zacks Consensus Estimate of $1.22.

Revenues for the reported quarter came in at $505 million, marking a year-over-year rise of 26.5% and also topping the Zacks Consensus Estimate of $501 million. On constant currency (cc) basis, revenues were up 28.9%, denoting a negative impact of 2.4% from foreign exchange.

 

 

Top-Line Details

EPAM Systems’ largest vertical Financial Services registered 16.9% 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 17.3%. Slowdown within certain consumer clients in Europe remained an overhang.

Software & Hi-Tech was up nearly 26%. Business information and media rose 24%. Life Science & Healthcare witnessed solid 71.3% growth on key client wins.

The company’s emerging verticals grew 38.1%, driven primarily by clients from energy, telecommunications and automotive sectors.

Geographically, EPAM Systems generated 61.6% of total revenues from North America, up 37.5% year over year at cc. Revenues from Europe, contributing 31.2% to total revenues, were up 12.1% at cc. CIS, representing 4.4% of the metric, climbed 11.3% at cc. APAC soared 72.5% at cc, accounting for 2.8% of revenues.

The company’s top-20 clients ascended nearly 22% year over year in the quarter under review while the rest augmented 30% during the same time frame.

EPAM Systems, Inc. Price, Consensus and EPS Surprise

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

Margins

EPAM Systems’ non-GAAP gross margin contracted 30 basis points (bps) to 37.7%.

The company’s non-GAAP operating income increased 39% year over year to $93.1 million while operating margin expanded 160 bps to 18.4%. The impact of a contracted 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 200 bps to 17.7%.

Balance Sheet and Cash Flow

EPAM Systems exited the fourth quarter with cash and cash equivalents of $770.6 million, up from $685.1 million at the end of the last reported quarter.

The company generated $123.1 million of cash flow from operational activities compared with $102.3 million in the sequential quarter.

Full-Year Highlights

Revenues for 2018 increased 27.1% year over year to $1.84 billion. It rose 26.9% at cc. The company’s acquisitions in 2018 contributed approximately 200 bps to growth.

Non-GAAP earnings were $4.38 per share, which increased 26.6% from 2017-level.

Guidance

EPAM Systems projects 2019 revenues to improve 22% year over year. On cc basis, the metric is expected to be 23%.

The company expects inorganic revenues, mainly TH_NK and Continuum acquisitions to contribute 1% to full-year revenues (compared with 2% in 2018).

The company predicts SG&A expenses to increase in the range of 18-19%. As a result, non-GAAP operating margin is expected to be in the band of 16%-17%.

The company anticipates non-GAAP earnings to be $5.06.

For the first quarter, the company forecasts revenues to be at least $518 million, up 22% year over year. On cc basis, the same is likely to be 25%.

TH_NK and Continuum acquisitions are estimated to provide 200 bps of benefit. The company envisions strong demand for healthcare services, currently the highest growing vertical for the entity. Despite soft spending by a couple of European customers, the company’s traction with payment customers and its penetration into insurance space are positive for its financial segment.

Non-GAAP earnings per share are assumed to come in at $1.16. Non-GAAP operating margin is anticipated between 15% and 17%.

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 CommVault Systems, Inc. (CVLT - Free Report) , MeetMe, Inc. (MEET - Free Report) and Fortinet Inc. (FTNT - 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 rate for CommVault, MeetME and Fortinet is projected at 15.8%, 20% and 16.8%, respectively.

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