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EPAM Systems (NYSE: EPAM)
Q4 2023 Earnings Call
Feb 15, 2024, 8:00 a.m. ET

Key Takeaways from EPAM’s Q4 2023 Earnings Call

• Leadership Insights
• Financial Outlook
• Strategic Initiatives for 2024

Leadership Insights

Operator

Thank you for joining the EPAM Systems Q4 2023 earnings conference call. With me on today’s call are Arkadiy Dobkin, CEO and president, and Jason Peterson, chief financial officer.

David Straube — Head of Investor Relations

Good morning, everyone. By now, you should have received your copy of the earnings release for the company’s fourth-quarter and full-year 2023 results. If you have not, a copy is available on epam.com in the Investors section.

Ark Dobkin — President and Chief Executive Officer

I want to thank our team around the world for their dedication to our clients and hard work throughout last year and for staying committed and engaged in the work ahead of us in 2024. The performance in 2023 reflects our ability to navigate volatile demand growth financed by geopolitical and macroeconomic conditions. We have focused on harmonizing our delivery quality, optimizing cost effectiveness, and leveraging our extensive advanced technology and growing consulting capabilities to capitalize on GenAI and AI-driven opportunities of the future.

Financial Outlook

In 2023, the Russian invasion of Ukraine necessitated the relocation of over 13,000 people plus families to new geographies. Our team in Ukraine remained a reliable partner for our clients, and we made significant adjustments to our global delivery footprint. Notably, India continued to be our fastest-growing location, and our presence in Latin America matured, allowing us to meet rising demand from North American clients.

Looking ahead to 2024, it is clear that our geographic delivery platform is more balanced than ever, with increased investments in engineering excellence, AI learning, and geographic expansion. We have observed a growing number of clients returning and expanding their engagements with us, utilizing our diverse footprint and advanced delivery capabilities. Our focus is to continue building these capabilities – both geographically and from our services mix perspective, in alignment with our strategic priorities. In 2024, our key investments and areas of differentiation will include harmonizing our engineering competencies and critical capabilities in cloud, data, and AI, to be present in each of our strategic locations.

Strategic Initiatives for 2024

In 2024, we are committed to building up our capabilities both geographically and from a services mix perspective, supporting the increasing trend of clients expanding their engagements with us. We will continue to invest in engineering excellence, AI learning, and productivity measurement frameworks, all aimed at continuous improvement and differentiation, to position EPAM at the forefront of technology innovation.

EPAM’s Diverse Expansion and AI Advancements Make Waves.

Cost Optimization Efforts and Global Presence

Throughout 2023, EPAM made thrifty adjustments to its operations, helping the company steer through the perplexing economic environment. The firm’s ongoing optimization initiatives across global and in-market delivery locations bolstered utilization in the short term, giving EPAM the financial boost to fund several 2023 and 2024 endeavors. Eyes forward, EPAM remains committed to perpetuating these efforts to guarantee adaptability. The company is devoting extensive labor to reshaping its seniority pyramid while nurturing budding talent and enhancing its seniority in pivotal global practices.

AI and GenAI Advancements

EPAM has long been invested in scaling its data, machine learning, and predictive AI capacity. Currently, the company is extensively sought out for its foundational engineering and data ML work, laying the groundwork for businesses to delve into generative AI. With over 400 GenAI-related projects in the pipeline, EPAM’s influence extends to diverse use cases, spanning knowledge management, HCM, product management, supply chain optimization, and engineered productivity enhancements. The launch of their enterprise-level orchestration platform, DIAL, has catalyzed the development of GenAI-integrated business solutions, sparking a tidal wave of 60 pursuits backed by high-profile clientele. EPAM’s strides in this arena have rippled across tech, insurance, retail, automotive, life science, and the overarching business information verticals.

Client Pursuits and Prospects

Despite some pullback in client spending, particularly in the wake of vendor consolidation exercises, EPAM has sustained its programs and client portfolios throughout 2023. While cherishing the influx of fresh clients, EPAM readies itself for a prospective environment in 2024, expecting a continuation of 2023’s trends. The company anticipates the onset of potential demand toward the latter half of 2024 and is bracing its operations for this paradigm shift. EPAM’s noteworthy progress with clients has garnered acclaim from leading analysts, corroborating the company’s narrative with independent validation.

Industry Recognitions and Market Positioning

EPAM’s ascendancy in the industry has been validated by leading analyst firms. Garnering recognition in Gartner’s Competitive Landscape IT Service Providers to the Global Insurance Industry Report and Forrester’s Cybersecurity Consulting Services Landscape Q4 2023, EPAM has solidified its standing across industries. The company also secured laudable rankings in Gartner’s Magic Quadrant for Critical Capabilities for Customer Software Development Services Worldwide and IDC’s appraisals for various spheres. EPAM’s prominent placement in the echelons of both US and global agencies underscores its formidable rise in the sector.

Financial Fortitude and Outlook for 2024

Despite grappling with the tempestuous market conditions, EPAM’s financials for 2023 unfurl a revenue generation of $4.69 billion, with an adjusted income from operations exceeding initial guided ranges. EPAM’s Q4 results, characterized by sequential revenue growth after three quarters of decline, signal a positive trajectory for the company. Anticipating a favorable outlook for the end of 2024, EPAM is primed to capitalize on resurging demand, driven by legacy modernizations, advanced customer-centric solutions, and the burgeon of GenAI and AI applications. The company will pivot its investments into strategic initiatives, anchoring its vision for long-term growth and sustained market dominance.

In an industry landscape fraught with turbulence and uncertainty, EPAM’s resilient growth and strategic foresight stand as a testimony to the company’s mettle in navigating adversities. As the company surges ahead in the coming years, EPAM’s steadfastness and innovative acumen are poised to carve a formidable legacy in the annals of tech and consultancy.

*Disclaimer: The performance and initiatives of EPAM as reflected in this piece are subject to market dynamics and business risks*

EPAM Systems Revenues Decline 6% in Q4 2023

The latest financial report from EPAM Systems for Q4 2023 showed revenue of $1.16 billion, indicating a year-over-year decline of 6%. Even on a constant currency basis, there was a 7.3% dip, with a positive foreign exchange impact of 130 basis points. The decision to exit the Russian market contributed to a 70 basis point negative impact on year-over-year revenue growth. This reduced revenue from Russian customers, along with a slowing demand, resulted in the modest sequential growth for the quarter.

Varying Growth Across Industry Verticals

Turning to specific industry verticals, the life sciences and healthcare sector witnessed a robust growth of 11.6% in Q4. This increase was primarily driven by clients in the life sciences domain. However, the travel and consumer segment experienced a contraction of 4.4%, while financial services declined by 7.1%, primarily due to decreases in banking revenues. Business information and media also faced a considerable decline of 14.8%.

Challenges Across Different Verticals

Moreover, the software and hi-tech vertical showed a significant 16.8% decline, influenced by reduced revenue from key clients and slower growth across customer segments. On the positive side, emerging verticals managed to register growth of 4.2%, driven by clients in energy, manufacturing, and education.

Regional Revenue Performances

From a geographical standpoint, the Americas, which represents 58% of Q4 revenues, declined by 7.6% year over year, and EMEA remained flat year over year, declining 3.5% in constant currency. The APAC region experienced a double-digit decline of 10.9% in both reported and constant currency terms and now represents a mere 2% of total revenues. In contrast, CEE, which represents only 0.1% of Q4 revenues, suffered the most, contracting by 91.6% year over year or 91.3% in constant currency.

Impact on Financials and Operations

While the revenues took a hit, EPAM Systems’ gross margin, both GAAP and non-GAAP, witnessed a decrease compared to the same quarter last year. Specifically, GAAP gross margin was 31.1%, and non-GAAP gross margin was 33% for Q4 2023. Operating income also saw a decline. GAAP income from operations was $122 million, down from $170 million in Q4 of the previous year.

Outlook and Guidance

The overall decline in financials has prompted the company to provide guidance, acknowledging the current uncertain demand environment. EPAM Systems emphasized the need for prioritizing revenue growth in 2024, even though this might involve some degree of discounting in certain pursuits. Additionally, it expects to face incremental costs owing to more normalized variable compensation levels in the coming year.

EPAM Systems, Inc. 2024 Fiscal Outlook

Rising Costs and Limited Pricing Power Impact EPAM’s 2024 Guidance

EPAM Systems, Inc. (NYSE: EPAM) presented its fiscal outlook for 2024, detailing expectations for revenue, income from operations, effective tax rates, and earnings per share. The company anticipates challenges stemming from wage inflation in specific regions, which, when combined with constraints on improving client pricing in the near term, will exert pressure on margins throughout 2024. Despite ongoing conflict, EPAM’s operations in Ukraine have remained largely unscathed with undeterred production. The company aims to maintain delivery productivity similar to 2023 levels. This cautiously optimistic projection, however, hinges on several key assumptions.

Revenue Guidance and Demand Outlook

Stated revenue growth for 2024 is expected to range between 1% and 4% on both a reported and constant currency basis. EPAM does not foresee any significant impact from foreign exchange. Amid a backdrop of improved demand, the company acknowledges limited visibility for the year. Although projecting modest sequential growth in Q1, EPAM acknowledges that potential increases in demand may not counterbalance revenue impacts influenced by seasonal shifts across all quarters in 2024.

Income from Operations and Tax Projections

EPAM foresees GAAP income from operations in the range of 9.5% to 10.5% and non-GAAP income from operations ranging from 14.5% to 15.5%. The company estimates its GAAP and non-GAAP effective tax rates at approximately 21% and 24% respectively. The guidance for diluted earnings per share sets the range at $7.20 to $7.60 for GAAP and $10 to $10.40 for non-GAAP, with a weighted average share count of 59.3 million fully diluted shares outstanding.

First-Quarter Projections and Key Assumptions

For Q1 2024, EPAM projects revenues in the range of $1.155 billion to $1.165 billion, reflecting a year-over-year decline of about 4%, with minimal expected impact from foreign exchange. The company anticipates a GAAP income from operations of 9% to 10% and non-GAAP income from operations of 13.5% to 14.5% for the first quarter.

EPAM outlines several key assumptions supporting its GAAP to non-GAAP measurements, including the impact of stock-based compensation expense, amortization of intangibles, foreign exchange, and tax-effective non-GAAP adjustments. Additionally, the company expects increased interest and other income resulting from its growing cash reserves and governmental incentives, estimating it to be around $66 million for the full year.

Question & Answer Session Insights

During the subsequent Q&A session, key concerns were expressed regarding the second half of 2024 and the drivers of confidence in a potential positive inflection point. EPAM’s President and Chief Executive Officer, Ark Dobkin, acknowledged increased activities and conversations leading to delayed decisions, expressing confidence in the inevitability of addressing mounting debt. Moreover, questions about margin considerations prompted insights from EPAM’s Chief Financial Officer, Jason Peterson, who highlighted the company’s deliberate approach to managing costs and investments in the face of evolving market dynamics.

EPAM’s cautiously optimistic fiscal outlook for 2024 reflects an adaptive approach to navigating persistent challenges while capitalizing on potential growth opportunities. As the company strives to maintain its competitive edge, investors track EPAM’s progress with an eye on how it maneuvers through the evolving business landscape.

The Future of AI Investment at XYZ, Inc.

As XYZ Inc. held its quarterly earnings call, the discussions shed light on the company’s journey into the realms of AI and data engineering. The President and Chief Executive Officer expressed the ongoing nature of experimentation and the promising progress in implementing AI technologies. The company has been treading on uncharted territories, though not without fruitful developments in proof of concepts. As the gears of experimentation and proof of concept spin, the need to scale up data engineering efforts becomes increasingly apparent, signaling a forthcoming surge in the workload.

Financial Strategies and Projections Unveiled

Shedding light on the financial aspects, Jason Peterson, the Chief Financial Officer, alluded to the anticipated returns from the company’s AI investments. Furthermore, Peterson set the stage for a promising increase in gross margin in the latter half of 2024, paving the way for enhanced profitability in 2025.

Client Retention and Growth Prospects

During the questioning session, Bryan Bergin, an analyst from TD Cowen, inquired about the progress of the company’s larger client cohort expectations and the anticipated improvements in the second half of the year. Peterson responded by reaffirming the stabilization of demand and the positive growth trajectory in several industry verticals, particularly in life sciences, indicating a broadening landscape for the company’s services.

In response to another question from a different analyst, Peterson provided insights into the company’s workforce dynamics. He noted a decline in headcount levels across various geographies while emphasizing the growth in India and Latin America. This geographical shift is expected to exert pressure on revenue per headcount, thus influencing the company’s financial targets for the period.

Reflections and Forecasts on the Company’s Journey

Ark Dobkin, the President and Chief Executive Officer, also chimed in, reflecting on the company’s journey, describing 2023 as a period of adjustment to align its resources with the market realities. Dobkin reiterated the company’s comfortable outlook for the current year, projecting a realistic stance and a consistent strategy of strategic investments.

Margin Dynamics and Future Outlook

Upon scrutinizing the margin dynamics for the year, one analyst inquired about the implications for margin improvement as 2024 progresses. Peterson anticipated lower gross margins in the initial half of the year, followed by a significant upturn in the latter half, primarily attributed to increased bill days, improved utilization, and organizational restructuring. This upward trajectory is expected to steer the company towards a more typical level of profitability by the end of the year and as it steps into 2025.

As the call wrapped up and the insights from the executives and analysts resonated, it was evident that XYZ, Inc. was maneuvering through the complexities of AI, data engineering, and shifting workforce dynamics with a poised, resolute attitude, steering toward a promising future.

The Changing Landscape of EPAM Systems

Adapting to a New Work Model

As EPAM Systems navigates through the changing landscape influenced by a more distributed delivery model, Chief Financial Officer Jason Peterson reinforced the company’s goal to move back toward a more typical utilization rate, aiming to surpass the higher 70s. The impact of distribution on targeted utilization levels is projected to be minimal, indicating a commitment to overcoming this operational hurdle.

Embracing Seasonal Fluctuations

Peterson detailed the quarterly challenges relating to seasonal pressures and demand offset, acknowledging Q2 as a period with less available billable days and Q3 as a traditionally robust quarter with substantial sequential growth. Highlighting a perceptible improvement in the demand environment and the potential impact of seasonality on sequential growth from Q1 to Q2, he underlined the necessity of an evolving demand environment for overcoming these challenges.

Enhancing Pricing Strategies

With a focus on future pricing protection, EPAM has strategically avoided locking into multi-year commitments, providing the flexibility to reassess pricing structures with clients. Additionally, the company has been actively engaging in more fixed fee engagements, propelling both consulting and delivery responsibility to optimize profitability.

Strategic Workforce Planning

Addressing concerns about evolving skill sets and hiring capabilities, President and CEO Ark Dobkin emphasized EPAM’s proactive stance in monitoring productivity growth and aligning investment efforts with market demands. The company’s confidence in the ability to accelerate hiring when needed reflects ongoing investments in educational training, providing reassurance in the face of evolving market dynamics.

Flexibility and Adaptability

Reinforcing their commitment to maintaining flexibility in response to demand, CFO Jason Peterson expressed confidence in the company’s capacity to swiftly address market needs. Emphasizing the ongoing investments to expand capacity across diverse geographical locations signifies EPAM’s proactive approach to meet the evolving market demands and remain agile in its operations.

In conclusion, the dynamic interplay of market forces, demand environment, and seasonal fluctuations has established EPAM Systems as an organization adept at balancing resilience with adaptability. As they navigate the ever-changing landscape, EPAM’s strategic agility and proactive stance mark them as a company poised to thrive in the face of evolving market conditions.

EPAM Systems CEO Talks Competitive Landscape and Client Engagement

Client Shifts and the Impact of the War

Ark Dobkin, the President and CEO of EPAM Systems, discussed how the war has impacted the company’s risk profile and led to delays in client decisions. The uncertainty and risk raised by the war prompted some clients to delay their decisions or even seek out new partners. Dobkin highlighted that the simultaneous impact of the war and economic slowdown posed critical challenges for EPAM, placing them at a disadvantage compared to competitors.

Client Reengagement and Competitive Dynamics

Dobkin and Jason Peterson, the Chief Financial Officer, emphasized that despite the challenges, EPAM has been witnessing some clients returning, with discussions of transferring work back based on unsatisfactory results with other vendors. Dobkin attributed this to clients becoming more comfortable with EPAM’s execution, particularly in places like India, as well as dissatisfaction with the results from competitors.

Competitive Landscape and Client Acquisition

When questioned about the competitive landscape, Dobkin acknowledged the intensified competition and the company’s adaptive strategies to protect its client base. He highlighted a shift towards smaller engagements and increased pressure from competitors. Peterson also mentioned stronger new customer revenues and expressed optimism about the potential for improvement in the demand environment.

Challenges and Realistic Expectations

Dobkin underlined the unpredictability of the current year, emphasizing the impact of heightened competition and war-induced uncertainties on the IT segment as a whole. EPAM Systems maintains a conservative yet realistic outlook, anticipating the realization of right demands in the second part of the year.

Client Engagement and GenAI Capabilities

During the call, Dobkin addressed the ongoing experimentation and straightforward thinking about GenAI among clients, highlighting the potential to change interfaces and access hybrid data. He noted that companies are currently focused on creating copilots and experimenting with the implications of GenAI.

Final Insights and Outlook

Despite the challenges posed by the war and intensified competition, EPAM Systems remains confident in its client engagement strategies and the potential for a more favorable demand environment in the latter part of the year. The company continues to adapt to the evolving competitive landscape, aiming to capitalize on client reengagement and the exploration of GenAI capabilities.

EPAM Systems, Inc. Earnings Call: A Stabilizing Market Presence

Stability in the Midst of Uncertainty

The recent earnings call for EPAM Systems, Inc. exuded a palpable optimism as the company celebrated its ability to stabilize its revenue and client base. Amidst the unpredictable market dynamics, EPAM’s top executives expressed a sense of reassurance at the positive trend in their performance. With slight growth, in contrast to the previous quarters of decline, the company’s leadership remains vigilant yet cautiously upbeat about the forthcoming year.

Key Participants

The call featured key figures including Ark Dobkin, the President and Chief Executive Officer, and Jason Peterson, the Chief Financial Officer. Financial analysts from various institutions such as Barclays, TD Cowen, and JPMorgan Chase and Company, also joined the discussion, adding depth to the conversation on EPAM’s financial standing and prospects for future growth.

Each analyst provided valuable insights into the company’s operations, market positioning, and potential challenges. Their perspectives helped to shape a more comprehensive and intricate understanding of EPAM’s trajectory in an ever-evolving market landscape.

Looking Ahead

It’s evident that the company is navigating through a period of substantial ambiguity — a testament to the volatile nature of the current business environment. The challenges are dynamic and continue to shift, quarter by quarter, as EPAM seeks to adapt and evolve with the market. In the words of Sean Kennedy from Mizuho Securities, factors currently viewed as pioneering and exciting are likely to become commonplace and more sophisticated in the near future, underscoring the rapid evolution businesses must grapple with.

Final Thoughts

As the call concluded, the prevailing sentiment was one of guarded optimism. The company acknowledges the stabilization in its performance, cognizant of the significant unknowns on the horizon. The ability to maintain the client base, stabilize revenue, and achieve slight growth signals a positive upward trend in the face of challenges.

It’s clear that EPAM Systems, Inc. is determined to weather the storm and emerge stronger, leveraging their current position as a springboard for future success. As we reflect on the call, it’s evident that while the road ahead may be uncertain, EPAM remains resolute in their commitment to stability and growth.

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