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Epam (EPAM) Up 4.1% 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 4.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

EPAM Systems Q1 Earnings Top Estimates

EPAM first-quarter 2019 non-GAAP earnings per share surged 34.4% year over year to $1.25 and also beat the Zacks Consensus Estimate of $1.17.

Revenues in the reported quarter came in at $521.3 million, marking a year-over-year rise of 22.9% and also topping the Zacks Consensus Estimate of $519 million. On constant currency (cc) basis, revenues were up 26.3%, denoting a negative impact of 3.4% from foreign exchange.

The company is benefiting from growth across all industry verticals and majority of its geographies. Digital transformation, focus on customer engagement and product development were key growth drivers. Moreover, deeper insights into artificial intelligence, machine learning and analytics are an upside.

Top-Line Details

EPAM Systems’ largest vertical Financial Services registered 9.1% (13.3% at cc) growth on a year-over-year basis. Ramp-down of some client activity (mainly Europe-based) and the timing of revenue recognition from various financial services clients in Russia were a dampener.

Travel and Consumer segment improved 13.6% (18.1% in cc). Slowdown within certain consumer clients in Europe and muted growth for a few North American clients are an overhang.

Software & Hi-Tech was up nearly 23.4%. Business information and media rose 24.7%. Life Science & Healthcare soared 69.6% growth in key client wins.

The company’s emerging verticals grew 40.7%, driven primarily by clients from energy, telecommunications and automotive sectors.

Geographically, EPAM Systems generated 60.7% of total revenues from North America, up 33% year over year at cc. Revenues from Europe, contributing 33.3% to total revenues, were up 19.3% at cc. APAC rose 37.3% at cc, accounting for 2.5% of revenues.

However, Commonwealth of Independent States (CIS), representing 3.5% of the metric, slipped 4.1% at cc. Revenue recognition timing from several financial services clients was a drag in the region.

The company’s top 20 clients ascended nearly 15.5% year over year in the quarter under review while the rest augmented 29%.

Margins

EPAM Systems’ non-GAAP gross margin contracted 20 basis points (bps) to 36.3%.
    
The company’s non-GAAP operating income increased 31.8% year over year to $89.2 million while the operating margin expanded 110 bps to 17.1%.

Balance Sheet and Cash Flow

EPAM Systems exited the first quarter with cash and cash equivalents of $762.5 million, down from $770.6 million at the end of the last reported quarter.

Cash used in operating activities was $0.2 million in the quarter compared with $123.1 million of cash generated from operational activities in the sequential quarter.

Guidance

EPAM Systems reaffirms its 2019 revenue improvement at 22% year over year. On cc basis, the metric is expected to be 23%.

Soft spending by the European banking clients and sluggish demand in consumer and retail, primarily in Europe, are persistent concerns. Uncertainty over Brexit is also a challenge to spending. However, healthy growth rates in life sciences and healthcare plus high tech and the emerging verticals are a positive.

Non-GAAP operating margin is envisioned in the band of 16-17%. The company anticipates non-GAAP earnings to be $5.19, up from $5.06 predicted earlier.

For the second quarter, the company forecasts revenues at minimum $549 million, up 23% year over year. At cc, the same is likely to be 24%.

Non-GAAP earnings per share are assumed at $1.21. Non-GAAP operating margin is predicted between 15.5% and 16.5%. Margins are likely to be impacted by higher level of holidays in the CIS region and an increase in annual compensation.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, Epam has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, 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 F. 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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