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EPAM Systems Stock Rebounds After Regional Fears – by Pete Barlas

Investor’s Business Daily and Forrester Analyst Charles Green review EPAM’s stock history as the company regains its financial stability and exceeds Wall Street expectations despite political unrest in the Ukraine.

When EPAM Systems warned investors that Russia's incursion into Ukraine could hurt its business, things looked bad for the company.

Shares of the information-technology services provider plunged more than 27% on March 3, the day EPAM issued its warning in a public filing, though the stock did recover 16% the next day.

EPAM Systems (NYSE:EPAM) stock has since slipped but remains up 11% for 2014.

The stock has been lifted by better-than-expected Q1 earnings, though few publicly traded tech companies seem to have more exposure to the troubled Ukraine region.

Indeed, more than 25% of all the engineers employed by the outsourcer — 2,600 out of 9,759 — work out of facilities in that region.

Where most tech outsourcing-services providers depend largely on skilled tech staff based out of India, China or other parts of Asia, EPAM's tech talent mostly comes from Central and Eastern Europe.

It's a touchy situation for Newtown, Pa.-based EPAM.

"Are companies going to think twice about looking to Eastern Europe, given the potential for trouble in the Ukraine? Nobody really knows what to forecast," Charles Green, an analyst for Forrester Research, told IBD.

But as bad as the Ukraine-Russia conflict has gotten, he sees it more as a glitch for EPAM than any long-term problem.

"I don't see this impacting their business too much," Green said.

After all, EPAM's formula has found success.

Its Q1 revenue in Europe jumped 49% from the year-earlier quarter — compared with 29% for the company overall. That also was up 20% from Q4.

EPAM's overall Q1 revenue and earnings per share minus items easily topped Wall Street expectations, as did EPAM's Q2 guidance.

Much of EPAM's growth comes from companies looking for software development and other tech-related skills from areas that many of its larger rivals, including India-based tech services outsourcer Infosys (NYSE:INFY), don't target much, Green says.

"(EPAM's customers) are looking for this higher skill set that you can find out of Eastern Europe and looking at hiring people typically with a master's degree or above, and EPAM was able to take advantage of that," Green said.

In Q1, EPAM derived 69% of its total revenue from software development, with that unit's sales rising 32% to $110.6 million.

Forrester says that EPAM was the No. 1 provider of outsourced software development services in Q1, ahead of HCL Technologies, Infosys, GlobalLogic, Wipro (NYSE:WIT) and all others.

EPAM's top strengths are its abilities to drive innovation and help clients develop more innovative new products, Green says.

"When I speak to EPAM's clients, the one thing they talk about is their engineering excellence," he said. "They have a really great understanding of new technologies."

EPAM's top market continues to be banking and finance, up 46% in Q1 and representing nearly 30% of total revenue. Customers are demanding more technology improvements from banks and financial institutions, which in turn are tapping EPAM, Green says.

"More is happening through the software and through mobile applications, so EPAM can be a strong partner to these financial services companies," he said.

EPAM has also boosted revenue through acquisitions.

In March, the company acquired Netsoft USA, a tech consulting firm that specializes in health insurance companies.

In late April, it acquired Joint Technology Development to expand the company's financial-services capabilities in the Asia-Pacific region.

And in June, EPAM acquired GGA Software Services, a provider of scientific informatics services to global pharmaceutical, medical-device and life-sciences companies.

Terms weren't disclosed for any of the three deals, indicating that each was relatively small.

EPAM's most important acquisition, though, was Empathy Labs in late 2012, says Green. Those terms also weren't disclosed, but the digital strategy and multichannel design firm appeals to a wide range of customers that need mobile and other apps to improve their work with customers, Green says.

"If you are developing a mobile application, how do you ensure that users really want to use the app? Do you have the design skills to make sure the application is fun, addictive and easy to use?" he said. "This acquisition provides (EPAM) with key design and user-experience skills, an area where companies clearly are looking for help."

Original publication is here.