Image: EPAM Systems.
Technology is global, and EPAM Systems (EPAM -1.75%) has taken advantage of the ubiquitous nature of the IT industry to tap into a fertile source of programmer talent in Eastern Europe. Yet Cognizant Technology (CTSH -0.77%) and other peers among IT outsourcing companies have suffered difficulty lately, and some industry analysts have reported expected declines in enterprise spending on technology that could bode poorly for companies like EPAM. Coming into Wednesday's fourth-quarter financial report, EPAM investors expected the company to post solid growth, and the company's results were actually stronger than many had expected, defying the industry trend. Let's take a closer look at the latest results from EPAM Systems and what they say about the company's future.
EPAM ends 2015 on the right foot
EPAM Systems' fourth-quarter results were strong on all fronts. Revenue climbed to a record $260.3 million, a 29% advance from last year's quarter and easily surpassing expectations for 24% growth on the top line. EPAM's adjusted net income climbed 30% to $46.9 million, and that produced adjusted earnings of $0.78 per share, beating the consensus forecast among investors by a nickel per share.
A closer look at the numbers revealed some additional details. The strength of the U.S. dollar actually held back EPAM Systems' growth, and sales would have climbed 34% had it not been for foreign currency headwinds. Still, the translation adjustments for foreign currency were only half what they were last year, showing that dollar strength appears to be moderating. On the margin front, overhead expenses climbed at almost exactly the same rate as revenue, but falling expense numbers elsewhere helped boost operating margins by a third of a percentage point to 12.2%. Stock-based compensation also continued to rise, picking up more than 50% from the year-ago quarter and affecting both gross margins and operating margins.
Interestingly, cash flows from operations were down significantly both for the quarter and for the full year. In the fourth quarter, EPAM only brought in $11.8 million in cash from operations, down by about three-quarters from a year ago. Yet the company still has almost $200 million in cash on its balance sheet.
CEO Arkadiy Dobkin was happy with EPAM's performance. "Despite market uncertainties and FX challenges," Dobkin said, "our investments in new digital capabilities, along with our ability to successfully integrate them with our traditionally strong software engineering skills, allowed us to reach our 16th consecutive quarter of over 20% year-over-year organic revenue growth." The CEO was happy about EPAM's prospects heading into 2016.
Can EPAM keep climbing?
EPAM's guidance for the near future was strong on the top line, albeit being somewhat conservative on the earnings front. EPAM expects first-quarter revenue of at least $258 million, which would represent 29% growth and exceed expectations for $249 million in sales. However, earnings of $0.70 per share would be $0.02 below the consensus forecast if EPAM can't exceed its reported minimum guidance. Similarly, full-year calls for revenue growth of 26% is higher than the 24% rate that investors expect, but earnings growth of 20% would be a bit shy of the $3.16 per share target that investors have.
Yet the big wildcard for EPAM is whether global economic conditions will cooperate. In its report earlier in February, Cognizant Technology pointed to heavy competition in the broader IT market, giving guidance that fell short of what most investors had expected from the consultant. Cognizant still believes that it can navigate changing conditions in IT well, but the potential for a slowdown could hit Cognizant's ability to match past growth rates. EPAM could face the same problems as Cognizant on a smaller scale.
EPAM Systems stock has fallen dramatically as peers have given downbeat expectations for 2016, but that leaves the shares with room to rise based on continued growth. If EPAM can do as well this year as it expects, then the stock could rebound from its poor recent performance.
