In the News:
Investors.com – by Vance Cariaga
After spending most of its 21 years going after smaller contracts and growing them into much larger ones, EPAM Systems is aiming for bigger game.
The company, founded in 1993, provides outsourced software engineering and other IT services to clients in North America, Europe and the Russia-dominated Commonwealth of Independent States. Its portfolio of services includes product and application development, technology consulting, infrastructure and hosting, application testing, and maintenance and support.
EPAM (NYSE:EPAM) has used a combination of buyouts and organic growth to nearly quadruple its annual revenue over the past four years.
On the organic side, the company's strategy has been to get a foot in the door with customers by starting out small and then growing the relationship over time. But since its initial public offering in 2012, EPAM has upped its sales and marketing efforts to land bigger deals.
"We are now going in trying to win bigger engagements, and we are doing that by differentiating ourselves from others in the PDO (product development organization) market," said Chief Financial Officer Anthony Conte.
After EPAM came out of its 2012 IPO, the company was "kind of bucketed in with general outsourcers," Conte told IBD. "But the reality is, we are very different. We have been building products for software vendors for over 20 years now. What we offer is much higher value, but nobody was seeing that. That was the motivation for more sales and marketing."
But EPAM has made some pretty impressive strides. In August, it announced that it was on the short list of companies competing to implement a major data project, called the Consolidated Audit Trail (CAT), undertaken by the Securities and Exchange Commission.
According to an EPAM press release, the CAT is "one of the biggest undertakings" in the history of the securities industry. It involves recording 21 petabytes of securities transaction data within the next five years, the release said, and is "second only to the NSA data warehouse in scale."
Others on the short list include SunGard Data Systems as well as a consortium that includes Hewlett-Packard (NYSE:HP).
The decision on which company gets the contract will come next year, Conte says. "No matter what happens, it's a real feather in our cap making it into the final selection."
EPAM serves numerous industries, including financial services, health care, retail and business information. Much of its workforce is based in Central and Eastern Europe and provides an alternative to offshore IT firms that do most of their work in India or China.
The company has made a bigger play into the application maintenance and infrastructure outsourcing markets in recent quarters, notes Citigroup analyst Ashwin Shirvaikar. These markets "are cumulatively larger and grow faster than the software development end market," he said.
Even when EPAM wins smaller deals with customers, it doesn't take the company long to grow its relationships.
As an example, EPAM's relationship with its biggest customer, Swiss financial giant UBS (NYSE:UBS), began in 2008 with a small mobile application project worth less than $100,000 in revenue.
Today, EPAM provides services in "many different areas" for UBS, Conte said, and UBS now accounts for about $90 million to $100 million in annual revenue for EPAM.
A similar relationship evolved with Canadian Tire, which operates nearly 1,700 retail and gasoline outlets in Canada.
"They brought us in to do one small e-commerce app and we have since grown that into a variety of different projects across many of their portfolio companies," Conte said.
In less than two years, EPAM's revenue from Canadian Tire grew from nothing to around $20 million a year.
UBS and British financial services firm Barclays (NYSE:BCS) are EPAM's two biggest customers, accounting for second-quarter revenue of $23.2 million and $13.5 million, respectively. They are the only two customers that accounted for at least 10% of overall sales.
Total revenue during the second quarter came in at $174.7 million, up 31% from the prior year and above consensus estimates. That continued a years-long run in which quarterly revenue has risen by at least 26%. Earnings for the quarter gained 33% to 53 cents a share, also above views.
Analysts polled by Thomson Reuters expect EPAM to report Q3 earnings of 54 cents a share, a gain of 26% year-over-year. Full-year profit is seen rising 25% in 2014 and another 15% in 2015. Its stock as of Wednesday traded near 47.
There were concerns earlier this year about how EPAM would be affected by the military and political conflicts that erupted in Ukraine, where the company operates several offices and delivery centers. However, those concerns have died down as EPAM has worked to convince customers and investors that it faces little risk from the turmoil.
"At this stage it has not had any impact on our business," Conte said. "The primary fighting in that region was several hundred kilometers from our nearest facility. We continue to go to work there and perform as necessary, and there has been no disruption at all."
Meanwhile, EPAM has also gotten attention for its aggressive acquisition strategy this year. The company made three buyouts during the first half of 2014.
In March it acquired Netsoft USA, a strategic technology and design firm that specializes in health care and health insurance.
That deal was followed by EPAM's April acquisition of Joint Technology Development — a provider of technology services to investment banking and wealth and asset management firms — and its June purchase of GGA Software Services, a provider of scientific informatics services to companies in global pharmaceuticals and other industries.
The GGA and Netsoft deals brought aboard "a good list of health care clients that have mobile commerce/digitization needs and can be further penetrated," analyst Shirvaikar noted.
Expect EPAM to keep scouting deals in the coming quarters.
"We have a pretty deep pipeline of acquisitions we are looking at," Conte said. "The main focus that we have when looking at acquisitions is new regions and geographies as we move to become more of a global player."
Original publication is here.