Many investors probably have not heard of Newtown, Pa.-based Epam Systems (EPAM). The tech services firm, though, continues to notch annual revenue growth at 25% or higher.
And, many investors may not think of Eastern Europe as a hub for back-office tech services or more specialized product engineering services. Yet Epam has thrived by hiring computer software developers in Eastern Europe.
Most of Epam’s offshore centers are located in Belarus, Ukraine, Russia and Hungary. Just as in India, there’s plenty of well-educated tech talent available in Eastern Europe. Wages are relatively low.
Besides, India’s tech services firms have struggled recently. Companies are outsourcing fewer data-center, customer-support and application-development operations.
Instead, many companies are now looking for competitive gains from digital technology and Big Data analytics. Epam has set itself apart by specializing in custom software development and product engineering services.
“Epam’s focus on revenue-generating projects is viewed by customers as a vital lever to transforming their businesses for the digital age,” KeyBanc Capital Markets analyst Arvind Ramnani said in a recent note to clients.
Epam Engineering Strength
“The company’s engineering foundation continues to see healthy demand given that emerging technologies require a high degree of process re-engineering, system architecture design and data science.”
Epam rivals are paying attention to its Eastern European operations. India-based Cognizant Technologies (CTSH) and others are setting up shop in Eastern Europe.
So Epam is fighting back by expanding in India, China and Mexico. In 2017, Epam added 6,000 new employees, bringing its workforce to more than 25,000.
Battle For Software Talent
Epam is battling other tech services firms for top software engineering talent, said Chief Executive Arkadiy Dobkin, on its third-quarter earnings call in November. So it’s likely to expand to more places.
“We’re always looking for new regions, for new talents,” Dobkin said. “It’s one of the key challenges for everybody in the global market. We’re thinking about some additional investments in locations where we have started to improve the quality of talent.”
Dobkin co-founded Epam in 1993. Originally the company was called Effective Programming for America.
Dobkin has been Epam’s CEO since December 2002. He began his career in Belarus and Russia, where he worked at several software companies.
Consulting Services Expansion
Epam recently has been targeting the life science, oil-and-gas and automotive industries. Roughly 60% of Epam tech services revenue comes from North America.
“Epam is well-positioned to see its revenue and earnings continue growing at an industry leading 20%-to-25% year-over-year pace,” Jefferies analyst Surinder Thind said in a recent report to clients. “The company is benefiting from its focus on delivering complex solutions in the digital applications space, which is experiencing robust, growing demand.”
Epam has expanded into higher-margin consulting services. In November, Epam acquired TH_NK, a digital consulting agency based in the United Kingdom. Then in March, Epam acquired Continuum, a Boston-based engineering design firm.
Artificial Intelligence Gains In Tech Services
“Going forward, we expect management to utilize Epam’s accumulating cash balance for additional strategic acquisitions to further build out consulting and other capabilities,” William Blair analyst Maggie Nolan said in a recent note.
Analyst Moshe Katri at Wedbush Securities says Epam should get a boost as more companies aim to use artificial intelligence in business operations.
“Digital projects continue to evolve around customer engagement, analytics and AI,” Katri said in a recent note.
AI involves computer algorithms — software programs that aim to mimic the human ability to learn, interpret patterns, and make predictions. Companies are using AI tools to improve sales forecasts or automate tasks now done manually.
In the September quarter, Epam earnings rose 27% to $1.17 per share. Revenue climbed 24% to $468.2 million. Epam reported adjusted operating margin at 17.5% of revenue, which was the highest margin in the past 10 quarters.
The IT services firm has a Composite Rating of 95 out of a best-possible 99.
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