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EPAM Systems Boosts Sales as Earnings Growth Continues

By Dan Caplinger – May 4, 2017 at 9:22AM

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A revenue-outlook increase at the global software-engineering company points to long-term confidence.

The demand for information technology and programming professionals is global, and EPAM Systems (EPAM -1.78%) has sought to retain an international workforce to compete more effectively against other providers of programming and IT services. Yet like any other high-growth company, EPAM faces the challenge of keeping its growth rates as high as investors want.

Coming into Thursday's first-quarter financial report, EPAM investors were hoping to see the company continue its strong track record of performance. EPAM's results were solid, with good growth rates in its key financial metrics. The company also boosted its sales outlook for the full year, pointing to longer-term outperformance. Let's take a closer look at EPAM Systems and what its results mean for the future.

EPAM holiday card.

Image source: EPAM Systems.

EPAM keeps growing

EPAM Systems' first-quarter results were mixed in the eyes of investors. Revenue jumped 23%, accelerating from its pace in recent quarters and topping the consensus forecast for 20% top-line growth. Adjusted net income from operations rose 15% to $49.3 million, and that resulted in adjusted earnings of $0.72 per share. Some investors weren't happy with that figure, having expected a slightly higher $0.74 per share for the quarter.

Looking more closely at the results, one favorable item for EPAM came from the currency exchange realm. A strong dollar did have a slight negative impact on sales, but it only cost the company a bit more than one percentage point of revenue growth. That's down from past quarters, showing the slowing of the dollar's gains.

There were some signs that EPAM's growth has started to slow. Headcount topped 22,400, which was up 15% from year-ago levels. But the figure was almost unchanged from where EPAM ended 2016, and the rise in the number of delivery professionals has also seemed to hit a plateau in recent months.

Also, EPAM continued to see rising costs have a disproportionately negative impact on its bottom line. Gross margin dropped by almost a full percentage point, and GAAP net income actually dropped from year-ago levels. Only a change in foreign currency translation adjustments boosted comprehensive income, and overhead expenses rose by more than a quarter. Higher than expected stock-based compensation figures played a role in the cost increases that in turn hurt EPAM's bottom-line results.

Still, CEO Arkadiy Dobkin was pleased with how EPAM did. "Our first quarter results confirm our ability to successfully deliver business value to our customers around the world through our transformative technology solutions," Dobkin said.

Can EPAM keep it up?

EPAM believes the market is favorable for further growth down the road. As the CEO said, "We continue to invest in our consultative capabilities and new emerging technologies to constantly evolve our offerings and strengthen our position as a leader in digital business solutions."

EPAM's guidance had some strong aspects as well. For the second quarter, EPAM believes sales will come in at $340 million or above, pointing to a 20% growth rate. Adjusted earnings per share of $0.80 per share would compare reasonably closely to the current consensus forecast among investors. For the full year, EPAM kept its projection for $3.38 per share in adjusted earnings, but it boosted its sales growth forecast by a percentage point to at least 21%.

EPAM Systems investors didn't immediately react to the news, and the stock didn't move in pre-market trading following the announcement. However, regardless of the short-term direction shares move, EPAM is still demonstrating its ability to deliver the services its customers want and need, and there's little sign that overall demand for those services is in any danger of slackening in the near future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends EPAM Systems. The Motley Fool has a disclosure policy.

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