Image: EPAM Systems.
In the IT world, EPAM Systems (EPAM +3.57%) is a pioneer, having chosen a different path from most international software engineering firms. Rather than relying on the parts of the world that most companies turn to for cost-effective software professionals, EPAM has focused on tapping the intellectual human capital available in Eastern Europe, and it has developed a solid reputation for delivering high-quality products to clients around the world. Coming into Tuesday afternoon's second-quarter financial report, EPAM investors expected the company to continue its streak of revenue and earnings growth, and EPAM's results only highlighted its ability to surpass the expectations that those who follow the stock put on the company. Let's take a closer look at EPAM Systems and why it thinks its future could be even brighter.
EPAM's growth continues unabated
EPAM Systems' performance in the second quarter surprised even the company itself. Revenue jumped nearly 25% to $217.8 million, and those results came despite an extremely strong U.S. dollar that lopped about eight percentage points of growth off EPAM's dollar-denominated figures. Adjusted net income climbed 28% to $36.9 million, and that produced adjusted earnings of $0.64 per share, meeting the consensus estimate for the quarter.
Taking a closer look at the report, EPAM Systems once again had to deal with some adverse trends that threatened the pace of its bottom-line growth. Overhead expenses soared nearly 45%, but the company managed to limit increases in its cost of revenue to a rate slower than its sales growth, thereby boosting gross margins enough to support a quarter-percentage point in operating margins. Stock-based compensation also soared once again, more than doubling from year-ago levels, but the fact that EPAM shares have nearly doubled in price over the same period certainly blunts any ill will that investors might have about fairly compensating the company's employees.
CEO Arkadiy Dobkin once again was pleased with EPAM's performance. In a statement that bore an eerie resemblance to last quarter's release, Dobkin said that sales are growing according to plan and that "despite the currency headwinds, we are maintaining our market momentum and remain focused on further differentiating our capabilities and enhancing our offerings."
Can EPAM Systems keep up the pace?
EPAM Systems did take the opportunity to raise its guidance for the full 2015 year. The company now believes that sales will rise between 23% and 25% this year, which is about two percentage points higher than its previous projections. Adjusted net income should grow between 22% to 24% in 2015, matching the same two-percentage point boost from past guidance.
In addition, for the third quarter, EPAM's guidance was slightly better than what most investors expected. Adjusted earnings of $0.66 to $0.68 would be in line with the current consensus forecast, but revenue between $238 million and $240 million would be slightly higher than the $236 million projection among those following the stock.
Perhaps the most exciting news for the company came after the quarter ended, with EPAM announcing that it would acquire digital strategy and experience design company NavigationArts. EPAM believes that NavigationArts will help the company improve its digital consulting, architecture, and content solutions capabilities both within North America and around the world. Dobkin specifically highlighted NavigationArts' "proven ability to act as a strategic advisor to Fortune 500 clients" as a key factor that "makes them an exciting addition to our fast-growing Digital Engagement practice." For its part, NavigationArts thinks that it has only partially unlocked its full potential and believes that becoming part of EPAM Systems will help it achieve even greater long-term success.
EPAM Systems didn't respond very much to the news, with a loss of about 1% in the first couple of hours of after-market trading following the announcement on very light volume. Nevertheless, EPAM Systems appears to remain on track with its long-term growth strategy, and its innovative approach toward the field is likely to keep paying dividends for investors well into the future.
