EPAM Systems (NYSE: EPAM) - American IT company, which was founded in 1993 by immigrants from Belarus and currently operates in more than 35 countries of the world. The name of the society stands for Effective Programming for America - "Effective Programming for America".
About company
The main activity of EPAM Systems is the development and improvement of software for its customers, facing the challenges of digitalization, optimization, scaling, design and business consulting. To do this, the company creates individual solutions for each customer., that improve their business processes, offer them more intelligent analytics, lead to higher quality of work and cover the full life cycle of infrastructure management, including application management, databases, network, servers, repositories and systems, as well as monitoring, incident notification and resolution.
Sales structure
EPAM Systems segments its business by industry and sales geography. The first division is sectoral, with this approach, the company's sales structure is divided based on the industry, in which the client works. The company identifies six areas.
Financial services. This division works with global investment banks, commercial and retail lending institutions, credit card companies and payment solutions, trading platforms, wealth management institutions, funds, insurance companies and various other financial service providers. EPAM Systems helps these clients create, designing and refining their own systems, so they can solve problems, related to new regulations, compliance requirements, customer needs and risk management.
Travel & Consumer Goods. In this segment, EPAM Systems cooperates with leading airlines, hotels, large and regional offline networks, online stores, marketplaces and manufacturers of goods, to help them build or develop their platforms, applications and solutions to serve their customers, improve management efficiency, control of operating expenses and increase in income.
Software and high technologies. EPAM Systems works with the most famous companies in the IT sector and provides them with comprehensive services for the creation of software products, which cover the entire life cycle: development, testing, performance tuning, deployment, service and support.
media. EPAM Systems is involved in creating solutions for modern media platforms, search engines, entertainment media, financial information and news providers, broadcasters and advertising networks.
healthcare. EPAM Systems collaborates with global pharmaceutical, medical and biotechnology companies, to, using their technological expertise, customers could accelerate research and time-to-market for their products, improve cooperation with other manufacturers and improve work efficiency.
New directions. This segment includes customers from the following industries: energetic, telecommunications, automotive and manufacturing, as well as the sector of public orders.
The second division is geographical, depending on the client's location. EPAM Systems operates in 39 countries of the world and distinguishes four major geographic groups: America, Europe, CIS and Asia-Pacific.
Sectoral structure of the company's income, million dollars
| Revenue | share | |
|---|---|---|
| Financial services | 193,938 | 22% |
| Travel & Consumer Goods | 171,545 | 19% |
| Software and high technologies | 159,162 | 18% |
| media | 157,847 | 18% |
| healthcare | 91,696 | 11% |
| New directions | 107,178 | 12% |
Geographic structure of the company's income, million dollars
| Revenue | share | |
|---|---|---|
| America | 527,398 | 60% |
| Europe | 291,281 | 33% |
| CIS | 37,703 | 4% |
| Asian-Pacific area | 24,984 | 3% |
Market
The current overall enterprise IT services market is split in two: development of new systems and maintenance of existing. It is about a trillion dollars. EPAM Systems operates in the most dynamically developing segment of the market for consulting services and the development of new solutions, the volume of which is about $ 460 billion.
IT services of the company, share in the overall market
| Consulting | 20% |
| Creation and implementation of solutions | 25% |
| IaaS and infrastructure services | 5% |
| Infrastructure Management Services | 16% |
| Equipment management services | 7% |
| Application Management Services | 8% |
| Business process outsourcing | 19% |
20%
What is the trick of the company
The two main growth drivers of EPAM Systems are the team and the rapid growth of financial performance.
Team. The global development model is the main competitive advantage of the company, which allows it to better understand and meet the diverse requirements of its customers, and offer them the most attractive prices.
The entire main production headquarters of EPAM Systems is located in the CIS, in total, more than 25 thousand employees work in the Republic of Belarus, Ukraine and Russia.
Rapid growth of financial indicators. EPAM Systems is a very successful American growth story, which has grown from zero income in 1993 to $2,659 million in 2020. Its average annual revenue growth over the past five years was 24%.
Profit distribution
EPAM Systems invests all earned profit in its growth and development, therefore, the company does not make dividend payments and buyback. At the same time, the company in terms of the average annual total shareholder return — total shareholder return — is more than 50% ahead of the market.
Comparison of the average annual growth rates
| For the last 5 years | For the last 3 of the year | |
|---|---|---|
| EPAM Systems | 35% | 49% |
| S&P 500 IT | 26% | 27% |
| Russell 1000 | 13% | 13% |
Profitability of EPAM Systems in comparison with benchmarks
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|---|
| EPAM Systems | 100% | 81,8% | 136,64% | 147,56% | 269,85% | 455,8% |
| Peer Group Index | 100% | 96,45% | 131,43% | 114,08% | 121,46% | 175,61% |
| S&P 500 Index | 100% | 111,96% | 136,4% | 130,43% | 171,5% | 203,05% |
Financial results and forecast for 2021
Financial indicators over the past five years have increased by almost 2,3 Times. The company's business has been profitable every quarter since 2016, except for the fourth quarter of 2017. Then the report reflected a paper loss due to additional expenses, related to US tax reform.
EPAM Systems management forecast for 2021:
- Revenue this year will grow by 37%, up to $3.643 billion, of which will bring 3% new acquisitions.
- Operating income will range from 13.5 to 14,5% proceeds, which corresponds to 492-528 million dollars.
- The company expects, that the weighted average number of shares outstanding for the year will be 59 million pieces.
- In 2021, the effective tax rate, according to the board of directors, will be at the level 11% under GAAP and 23% by non-GAAP.
- EPS, or net earnings per share, this year will grow to 7.7-7.89 $, total annual net profit will be $ 454-465 million.
EPAM Systems Financial Results, billion dollars
| Revenue | EBITDA | Net profit | net debt | |
|---|---|---|---|---|
| 2016 | 1,160 | 0,157 | 0,099 | −0,337 |
| 2017 | 1,450 | 0,201 | 0,073 | −0,557 |
| 2018 | 1,843 | 0,282 | 0,240 | −0,745 |
| 2019 | 2,294 | 0,348 | 0,261 | −0,911 |
| 2020 | 2,659 | 0,442 | 0,327 | −1,297 |
| 6м2021 | 1,662 | 0,270 | 0,224 | −1,258 |
Comparison with competitors
| EV / EBITDA | P / E | net debt / EBITDA | |
|---|---|---|---|
| EPAM Systems | 63,53 | 77,49 | −2,46 |
| Accenture | 22,28 | 37,26 | −0,85 |
| Cognizant | 13,03 | 23,65 | −0,23 |
| Infosys | 24,15 | 35,84 | −0,62 |
| VeriSign | 28,48 | 37,46 | 1,78 |
| Wipro | 22,28 | 32,59 | −1,54 |
Arguments for
Growth history. For less than 20 years EPAM Systems has gone from a small garage startup to a sector leader, which still continues to grow. In 2021, the company was able to restore its previous growth rate: so, for the first 6 months of the current year it was 29% against 24% in 2019 and 16% in 2020.
Development model. The main competitive advantage of the company is the development model, which allows EPAM Systems to save money and quickly adjust to remote work, what the company has successfully demonstrated in the crisis year of 2020.
Strong outlook for 2021. Management announced a rather ambitious plan before the end of this year, according to which the company's growth rate in the second half of 2021 will increase to 44%. Based on these data, EPAM Systems revenue to rise to $957-965 million in Q3 2021, and in the fourth quarter for the first time in history should exceed a billion dollars.
Moderate debt burden. Large cash reserves allow the company to maintain current growth rates, buying up competitors and investing in their development. At the moment, the company's net debt is negative and amounts to −1.258 billion dollars., and the Net Debt / EBITDA multiplier is −2.46.
Argument against
Evaluation. The multiples of the company in question are significantly higher than those of competitors. The current multiple of the difference is due to the rapid growth of EPAM Systems, which are 2-3 times higher than the values of other industry IT opponents.
What's the bottom line?
EPAM Systems is a fast growing American IT company, which operates in a dynamically developing market of consulting services, development of new systems and solutions. Even the global financial crisis and quarantine restrictions could not stop the development of the company.
Given the current multiples of the company, long-term investors should now abandon the purchase and wait for a strong correction, after which the EPAM Systems assessment will move closer to competitors.
But if we focus on the short-term planning horizon, then stock still capable of growing, that results for the third and fourth quarters will be stronger than management's current guidance, how it was in the first and second quarters of 2021.
