EPAM(EPAM)2024-08-08 17:07Financial Data and Key Metrics - Revenue for Q2 2024 was $1.147 billion, a year-over-year decrease of 2% on a reported basis or 1.7% in constant currency terms [22] - GAAP gross margin for Q2 was 29.3%, down from 30.9% in Q2 2023, while non-GAAP gross margin was 30.8%, down from 32.6% in the same period last year [24] - GAAP income from operations was $121 million (10.5% of revenue), compared to $144 million (12.3% of revenue) in Q2 2023 [25] - Non-GAAP diluted EPS was $2.45, down from $2.64 in Q2 2023 [26] - Cash flow from operations for Q2 was $57 million, compared to $89 million in Q2 2023 [27] Business Line Performance - Life sciences & healthcare delivered strong year-over-year growth of 22.4% [23] - Consumer goods, retail, and travel decreased 7.7% year-over-year, largely due to declines in retail [23] - Financial services decreased 5.6% year-over-year, driven by softness in asset management, banking, and payments [23] - Software and hi-tech contracted 3.7% year-over-year, while business information and media declined 12.6% [23] - Emerging verticals grew 10.6% year-over-year, driven by energy and telecom clients [23] Geographic Performance - Americas, representing 60% of Q2 revenues, grew 1.8% year-over-year on a reported basis and 2% in constant currency terms [24] - EMEA, representing 38% of Q2 revenues, contracted 6% year-over-year and 5.6% in constant currency [24] - APAC declined 0.6% year-over-year or 0.2% in constant currency terms, now representing 2% of revenues [24] Company Strategy and Industry Competition - The company is focusing on data and analytics, core engineering, and digital engagement offerings, with a strong emphasis on AI transformation [7] - EPAM is expanding its global delivery strategy, particularly in India, which is on track to becoming the largest delivery location by the end of 2024 [8][9] - The company is investing in GenAI capabilities, with over 10% of EPAMers now advanced GenAI technical practitioners [13][14] - EPAM is building full-service GenAI delivery practices through a network of GenAI X-Labs across major development centers [10] Management Commentary on Operating Environment and Future Outlook - The demand environment remains complex, with clients cautious about larger programs and cost-saving priorities [6] - The company expects no net improvements in overall demand for the remainder of 2024 but is optimistic about certain sectors returning to modest growth in the next 2-3 quarters [6] - EPAM is focused on managing its business responsibly, building on strong fundamentals, and ensuring it remains a partner of choice as the demand environment improves [7] Other Important Information - The company exited the Russian market, which had a 50 basis point negative impact on year-over-year revenue growth [22] - EPAM repurchased 1.16 million shares for $214 million in Q2 and has a new $500 million share repurchase program authorized [27] - The company ended Q2 with over 47,000 consultants, designers, engineers, and architects, a decline of 4.8% compared to Q2 2023 [28] Q&A Session Summary Question: Utilization dynamics between on-site and offshore workforce - Offshore utilization is healthy, while on-site utilization remains below targeted levels, contributing to revenue growth challenges [35] - The company is working to address on-site utilization through demand generation and cost optimization [36] Question: Demand progression in top accounts - Top 5 clients are generally stable, with only one client showing a decline, which is stabilizing [39][40] Question: GenAI-related work progression - GenAI projects are moving from POCs to production, with some projects now in the high hundreds of thousands or low millions of dollars [41][42] - The company sees significant potential in GenAI but acknowledges that technical debt and data modernization are barriers to rapid adoption [44] Question: Sequential revenue guidance and demand environment - Q3 revenue is expected to show a modest improvement due to seasonal factors, while Q4 may see a decline due to higher vacation levels [48][49] - The company sees no significant improvement in demand but is focusing on maintaining production systems and exploring modernization opportunities [50][51] Question: Hiring and AI efficiency - The company plans to continue hiring, particularly in offshore locations like India and Latin America, while leveraging AI for productivity improvements [53] Question: Discretionary demand environment and margin leverage - Clients are holding back on investments due to macroeconomic uncertainty, but the company expects a rebound in demand for data infrastructure and cloud modernization in 2025 [55] - Margin improvement in Q2 was driven by SG&A efficiency and utilization improvements, with further gains expected from cost optimization and reduced bench time [56][57] Question: India's progress and impact on revenue and margins - India is expected to account for just over 20% of headcount by the end of 2024, with modest pressure on average bill rates [59] - The company is building strong data and GenAI capabilities in India, maintaining its reputation for complex engineering solutions [61][62] Question: Fixed-price contracts and M&A - Fixed-price contracts are trending up, driven by client needs and opportunities with GenAI, potentially improving profitability [66][67] - Larger-scale M&A is not off the table, with the company continuing to evaluate opportunities to plug capability gaps [68][69] Question: Global delivery footprint and talent differentiation - The company is diversifying its global delivery footprint, with India and Latin America playing increasingly important roles [72][73] - EPAM differentiates itself in India by offering high-quality engineering solutions and competing with tech companies and captives for talent [75][76] Question: Headwinds from India and lost clients - The headwind from India's mix shift is expected to be slightly higher than 2% in 2025, driven by increased billable headcount in India and lower on-site utilization [78][79] - The company continues to see a gradual decline in demand from a client due to their internal restructuring and concerns about EPAM's Ukrainian footprint [80] Question: DSO and fixed-price contracts - DSO increased to 76 days in Q2 due to timing issues but is expected to stabilize around 74 days in the second half of the year as the company shifts towards more fixed-price contracts [81] Question: Fixed-price contracts and life sciences growth - Fixed-price contracts are growing due to client demand for predictable costs and some experimentation with GenAI-driven productivity improvements [83] - Life sciences & healthcare growth is driven by strong data programs and industry expertise, with a high concentration of data-related projects in this vertical [84]