Why Is Epam (EPAM) Down 29.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Epam (EPAM). Shares have lost about 29.4% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Epam due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

EPAM Systems Q4 Earnings & Revenues Surpass Estimates

EPAM Systems' fourth-quarter 2019 non-GAAP earnings per share improved 18.9% year over year to $1.51 and also beat the Zacks Consensus Estimate by 4.1%.

Additionally, revenues in the reported quarter came in at $633 million, reflecting a year-over-year rise of 25.3%. The top line also surpassed the Zacks Consensus Estimate of $618 million. On a constant currency (cc) basis, revenues were up 24.8%.

Increase in demand in the second half of the quarter coupled with stronger performance from a few of its acquired companies drove results. The company also incurred foreign exchange benefit of 0.5% due to the strengthening of Russian ruble.

The company is benefiting from growth across all industry verticals and geographies. Digital transformation, focus on customer engagement and product development are key catalysts.

Top-Line Details

EPAM Systems’ largest vertical Financial Services exhibited 21.8% growth on a year-over-year basis. Travel & Consumer improved 15.9%.

Software & Hi-Tech was up nearly 24.5%. Business Information & Media rose 38%.

Life Science & Healthcare rose 20.3%. Exceptionally strong performance in the year-ago quarter resulted in tough year-over-year comparison.

Emerging Verticals improved 36.3%, driven primarily by clients in energy and telecommunications sectors.

Geographically, EPAM Systems generated 60.1% of total revenues from North America, up 20.2% year over year.

Revenues from Europe, contributing 32.7% to total revenues, were up 31.4% (31.7% at cc).

CIS or Commonwealth of Independent States, representing 4.9% of revenues, jumped 39.7% (27.7% at cc).

APAC rose 5.4%, accounting for 2.3% of revenues.

The company’s top 20 clients climbed 22.1% year over year in the quarter under review while the rest improved 27.7%.

Margins

EPAM Systems’ non-GAAP gross margin contracted 100 basis points (bps) to 36.7%.

The company’s non-GAAP operating income improved 15.6% year over year to $107.6 million while operating margin contracted 140 bps to 17%.

Balance Sheet and Cash Flow

EPAM Systems exited the fourth quarter with cash and cash equivalents of $936.6 million, up from $853.2 million at the end of the third quarter.

As of Dec 31, 2019, long-term debt was $25 million, flat sequentially.

Cash generated from operating activities was $124.6 million in the quarter compared with $119 million reported in the previous quarter.

Free cash flow came in at $77.6 million, compared with $91.8 million sequentially.

Guidance

For 2020, EPAM Systems expects revenue growth to be at least 22% year over year. The company anticipates foreign currency fluctuations to have no impact on revenues. Inorganic contribution for the full year is expected to be around 1%.

Non-GAAP operating margin is projected in the band of 16-17%. The company anticipates non-GAAP earnings to be $6.3.

For the fourth quarter, the company forecasts revenues of minimum $642 million, up 23% (as reported and at cc) year over year.

Non-GAAP earnings per share are expected to be at least at $1.36. Meanwhile non-GAAP operating margin is predicted between 15% and 16%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Epam has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Epam has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.