Tax reform has had an impact on thousands of major companies, especially in the technology industry. EPAM Systems (EPAM +2.59%) has capitalized on strong IT services demand throughout the year, even though the changes to the way the U.S. taxes corporations imposed a one-time challenge for the company. Despite the speed bump, EPAM should benefit in the long run from lower tax rates and its promising prospects.
Coming into Friday's fourth-quarter financial report, EPAM investors anticipated continued growth in earnings and sales for the tech specialist. EPAM posted a GAAP loss due to tax reform, but its adjusted figures were solid and point toward a prosperous 2018. Let's look more closely at EPAM Systems and what its latest numbers say about the future.
Image source: EPAM Systems.
EPAM finishes a successful year
EPAM Systems' fourth-quarter results continued the company's past growth pace. Revenue of $399.3 million was 27% higher than the year-ago quarter and was slightly better than most investors were expecting. Adjusted net income of $56.6 million represented growth of 38%, and the corresponding adjusted earnings of $1.01 per share topped the consensus forecast among those following the stock of $0.97 per share.
Tax reform had a significant impact on the company. EPAM said that it took a $74.6 million charge due to changes in the law, which include both revaluation of existing deferred tax items and a one-time deemed repatriation tax on accumulated foreign earnings. That cost the company roughly $1.36 per share in lost earnings on a GAAP basis.
Foreign currency had a substantial positive impact on EPAM's numbers during the quarter. Revenue growth would have been slower by more than 3.5 percentage points without the dollar's relative weakness, and for the full year, sales got a better than 1 percentage point lift from stronger foreign currencies.
From a fundamental business perspective, EPAM kept making progress. Headcount jumped to 25,900, up 1,350 in just the past three months. Most of those new positions were for delivery professionals, which climbed to 22,900. Gross margin eased downward by not quite half a percentage point to 36.3%, but a nearly 40% rise in operating income showed the company's commitment to keep costs in check and drive profit growth.
CEO Arkadiy Dobkin celebrated a strong year for EPAM. "We are pleased with our strong 2017 results, ending with 25% year-over-year growth and $1.45 billion in annual revenues, reflecting our continued evolution into a leading end-to-end digital solutions service provider," Dobkin said.
What's next for EPAM?
EPAM has no concerns about its ability to grow. As Dobkin sees it, "We expect that our focus on solving our customers' most complex digital challenges, along with our ability to bring new capabilities and our commitment to accelerating time-to-market in innovative practical solutions, will continue to drive demand."
The company also gave a clearer look at what it expects for 2018. In the first quarter, revenue of $414 million would represent another quarter of 27% growth, with adjusted operating margin of 15% to 16% and adjusted earnings of $0.90 per share. For the full 2018 year, EPAM predicts sales growth of 24%, with adjusted earnings of $4.03 per share reflecting a roughly 16% to 17% adjusted operating margin and favorable movements in tax rates.
EPAM Systems shareholders seemed comfortable with the news, and the stock was up less than 1% in early morning trading Friday following a slight dip immediately after the announcement. With ongoing needs for tech services on the rise, EPAM is still well placed to take advantage of favorable trends in its target market in 2018 and beyond.
