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Did EPAM Systems Have a Good Third Quarter?

Shares of IT consulting firm EPAM Systems (NYSE: EPAM) are up by close to 70% in 2021 alone, and with good reason. The company just reported another stellar quarter on Nov. 4. In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Brian Withers and Trevor Jennewine discuss this lesser-known stock and why it's one for long-term investors to put on their radar.

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Brian Withers: This is one of the backstage recs from last week?

Trevor Jennewine: Yes, recent Backstage rec. Alright, so there's the slides. EPAM Systems.

Brian Withers: A lot of green, wow. [laughs] A lot of green and a stock chart that's going through the roof. That's awesome.

Trevor Jennewine: I know, right? Everything looks great here. This is an IT consulting company, they specialize in product engineering. What that means is they basically help their clients build and deploy software platforms that help them achieve their digital transformation initiatives. The company has expertise that spans the whole gamut from cloud computing and computer vision to cybersecurity and analytics. And like Brian just mentioned, the stock performance has been incredible over the last year.

We're a little bit late covering the company's earnings. They reported back on November 4th. But the revenue came in at 988 million; that was up 52% beat on the top line. GAAP earnings was $1.95 per diluted share, up 28% beat on the bottom line. Some of the highlights from the quarter. The company breaks its business into six key verticals, and the largest two are financial services and traveling consumer. Both of those were growing over 60%.

Strong growth in the largest areas of the business, but the smaller verticals were growing quickly as well, too. It has another one that's just emerging companies, and that was growing very quickly. EPAM also operates across a wide geography, and all three of its core markets -- North America, Europe, and Asia-Pacific -- were growing over 50%.

One other point: So the company's customer concentration is actually improving, too. If you look at the top five customers using its consulting services, they accounted for 18% of revenue on the most recent quarter, and that was down from 23% last year. EPAM also has very strong attrition rates. Their attrition rate's 11%, so very good for a consulting company.

One concern that may jump out at you if you look at the cash flow statement is their cash from operations came in at $288 million; that was down 25% from the previous year. Mostly just changes in working capital. I don't think there's anything too long-term to worry about there.

Looking toward the full-year results, the company actually raised its guidance up to $3.7 billion on the top line so it'd be 40% growth. They are looking for earnings of between $7.86 to $7.93; that would be up 42% on the bottom line. Also, a raise there, so beat and raise. I think this is a good stock to own.

EPAM has taken the top spot on Fortune's 100 Fastest-Growing Companies list for the last three consecutive years. And sort of like Jason just mentioned, with healthcare spending, digital transformation spending, is just going to go up in the coming years. The IDC estimates that enterprises will spend $6.5 trillion dollars on digital transformation initiatives between 2022 and 2024. I think there's a lot to like here.

Brian Withers: Yeah, I was going to mention the tailwinds here, our digital transformations. And whether it's smaller businesses that don't have the technical IT chops, or are companies that are just trying to capture, digitally transform their enterprises, whether it's artificial intelligence or just upgrading new software or whatnot, these guys are a great way to play that.

And you don't have to pick a specific software vendor. You don't have to know who's going to win in the space. They're going to probably continue to grow as companies continue to look at digital transformation as a way to just be more effective.

Trevor Jennewine: Yeah, we mentioned that when we were doing the recommendation on the show a couple of days ago. This is sort of like a picks-and-shovels play for digital transformation. Like you mentioned, businesses are usually concerned with their day-to-day operations. It's hard to implement new solutions, learn how to use new software, and so it's nice to have a partner like EPAM to help you do that.

Brian Withers has no position in any of the stocks mentioned. Rachel Warren has no position in any of the stocks mentioned. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends EPAM Systems. The Motley Fool has a disclosure policy.


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