On Monday, Scotiabank (TSX:BNS) upgraded EPAM Systems (NYSE:EPAM) stock to Sector Outperform from Sector Perform and increased the price target to $275 from $245.
The upgrade followed EPAM's third-quarter financial report, which showed higher-than-expected revenues of $1.17 billion, marking a year-over-year increase of 1.3% on a reported basis and 0.9% on a constant currency basis.
Despite foreign exchange headwinds and the impact of exiting Russia, EPAM displayed a sequential improvement in demand, particularly in North America and the EMEA region.
The company experienced growth in healthcare and life sciences by 14.6% year-over-year, emerging verticals by 8.5% year-over-year, and the financial services industry by 3.3% year-over-year. However, the business information & media and consumer goods & retail sectors faced significant declines due to market pressures.
Management noted an uptick in positive demand sentiment among new and existing clients compared to the prior quarter, despite some delays in decision-making for larger transformational programs. EPAM also saw increased interest in advanced data and cloud engineering offerings, though the extent of client investment in digital cloud infrastructure remains uncertain.
The company's non-GAAP gross margin for the quarter was reported at 34.3%, a 140 basis points increase from the previous year, partly due to R&D incentives from the Polish government. It's important to note that a $22.9 million benefit related to fiscal 2023 incentives has been adjusted for non-GAAP purposes.
While past incentives for fiscal 2023 and year-to-date fiscal 2024 were recognized this quarter, EPAM anticipates a normalization in the receipt of these Polish R&D benefits.
Continued cost containment efforts resulted in a decrease in non-GAAP SG&A expenses to 14% of revenue, a 40 basis points reduction year-over-year.
This contributed to non-GAAP operating income of $223 million, or a 19.1% operating margin, an improvement from $196 million, or a 17% operating margin in the same quarter of the previous year.
In other recent news, EPAM Systems, Inc. has unveiled StatGPT 2.0 in collaboration with the International Monetary Fund (IMF), marking a significant advancement in global economic and financial data accessibility.
This platform, based on EPAM's DIAL technology, promises a more efficient user experience in data management and exchange. It was tested by over 100 representatives from various institutions and organizations using eight publicly available datasets.
Simultaneously, EPAM reported strong Q3 results, with revenues reaching $1.168 billion, a 1.3% increase year-over-year. This growth was driven by the acquisition of NEORIS, which doubled the company's delivery workforce in Latin America and Europe. A $52 million incentive from the Polish government also positively impacted profitability.
The company anticipates continued growth in Q4, with expected revenue between $1.205 billion and $1.215 billion. Despite challenges such as wage inflation and global uncertainties, EPAM's leadership remains confident in the company's trajectory, focusing on leveraging acquisitions and improving client engagement. These recent developments demonstrate EPAM's commitment to advancing AI-enabled solutions and expanding globally.
InvestingPro Insights
EPAM Systems' recent upgrade by Scotiabank aligns with several positive indicators from InvestingPro data. The company's market cap stands at $13.24 billion, reflecting its significant presence in the IT services sector. EPAM's financial health appears robust, with InvestingPro Tips highlighting that it holds more cash than debt on its balance sheet and its liquid assets exceed short-term obligations.
The company's profitability is noteworthy, with a P/E ratio of 30.33 and an adjusted P/E ratio of 26.92 for the last twelve months as of Q3 2024. This is complemented by an InvestingPro Tip indicating that EPAM has been profitable over the last twelve months, and analysts predict continued profitability this year.
EPAM's recent stock performance has been particularly strong, with InvestingPro data showing a 23.32% return over the last week and a 19.7% return over the last month. This aligns with the InvestingPro Tip noting a significant return over the last week and a strong return over the last three months.
For investors seeking more comprehensive analysis, InvestingPro offers 11 additional tips for EPAM Systems, providing a deeper understanding of the company's financial position and market performance.
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