Analysis Report- EPAM Systems Inc.

EPAM Systems Incorporated
Information Technology
IT Consulting & Software Services
Analyst: Saul Ellison
12/10/16

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Table of Contents
Tear Sheet .............................................................................................................................. 3
Investment Case ..................................................................................................................... 4
Recommendations ..................................................................................................................................................................... 4
Company Overview ................................................................................................................ 6
Financial Analysis .................................................................................................................... 7
A. Liquidity Ratios ................................................................................................................................................................. 7
B. Asset Management Ratios ............................................................................................................................................. 7
C. Debt Management Ratios .............................................................................................................................................. 8
D. Profitability Ratios ........................................................................................................................................................... 8
E. Market Value Ratios ......................................................................................................................................................... 9
Sector & Industry Outlook ...................................................................................................... 9
Risk & Reward ...................................................................................................................... 11
Summary .............................................................................................................................. 12
Appendix .............................................................................................................................. 13

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Investment Case

Recommendations

EPAM Systems Inc. has shown an adept and consistent ability to grow extremely rapidly
and sustainably since it’s IPO debut in 2012. It has since grown it’s stock price an astounding
270%, increased revenues by 231% in the past 5 years and expanded it’s service offerings across
a vertical integration of software development, cloud services, and back-end optimization for
myriad of companies across the Financial, Information technology, HealthCare and Media
Entertainment Industries. The investment case for EPAM Systems can be summarized as
follows:
1.) Diversified Dynamic Growth: As a burgeoning growth company, EPAM has shown a
remarkable ability to expand in the right particular areas within IT Consulting that has seen them
have 90% recurring revenues from clients continuing to engage in business with EPAM. As the
economy continues to grow in aspects regarding increased digitization and globalized reach,
there is an increasing reliance on software enrichment to adjust business models, which EPAM
has been able to grow not only with client accounts but also geographically. With 8 years in
experience with client regarding commerce product development with major tech companies
including but not limited to: Google, Oracle, SAP and the London Stock Exchange and
expanding reach into Thompson Reuters, Coca Cola and Sephora. Expanded global reach has
seen their revenues increase in Tech heavy markets such as Europe from 26.4% in 2010 to
41.2%, making it more balanced against their North American revenues. Their recurring account
revenue growth has also shown to grow in a relatively consistent and balanced light with the top
accounts bringing in Revenues around 20 million, accounting for 14.2%, their top 5 accounts
making up 32.6% of revenues, the top 10 and top 20 43.8% and 54.3% respectively as of 2015.
These accounts growing from 2012 to 2015 127% and 63% respectively. The demand increase in
this market segment specifically has certainly proved to serve this company abundantly over the
past 5 years.
2.) Superior Revenue and Profitability: As one of the world’s leading suppliers of outsourced
software development and has maintained a combination of high availability of skilled IT staff,
accessible location, low operating costs, stability of staff tenure and the regulatory environment
as key factors in its success. Since 2012, the company has grown as compound annual growth
rate of 33.7% as compared to the Industry average of 16.45%. The revenue itself increasing over
230% just in the past 5 years alone and with it steadily growing proves to be a solid provider of
product software services that exhibits it’s ability to retain and grow it’s base. To complement
this surging revenue, the company has exhibited a specious ability to also steadily grow its
bottom line with efficient cost cutting. It’s operating income has grown by 57.8% as a compound
annual growth rate which it’s major driver is pushed by it’s ability to cut it’s Selling, General and
Administrative expenses as a % of revenue from 44% in 2012 to 28% in 2015.

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3.) Deep Vertical Expertise across multiple Industries: EPAM Systems has exhibited the
strongest grasp and execution of the Digital Platform Engineering Services (DPES) of its major
competitors niched in this market. Clients have consistently cited EPAM as a strategic partner in
business-critical digital transformation projects. The firm provides full life-cycle capabilities
from business strategy ideation and consulting through actual implementation and management.
As part of digital platform projects, clients have also enlisted EPAM to rewrite back-end systems
to support the improved overall customer experience. EPAM has been aggressively acquiring
services firms that add to the scope of their DPES organization. This practice has added value for
clients, but integrating acquired firms has taken considerable time. Of their service offerings,
they specialize in business intelligence, Systems, Applications & Products (SAP), User
experience, mobile, Cloud storage capabilities, big data-analytics and multi layer cloud
development in infrastructure as a service, platform as a service and software as a service
engineered solutions. They have managed to expand to major financial companies including JP
Morgan, Barclays and UBS, Travel & consumer companies including Expedia and Addidas and
many more. To note, their revenue breakdown across industries include 27% from the financials
industry, 24% from travel and consumer industry, 20% in software and tech and 14% from
Media Entertainment demonstrating their diverse and high profile cliental to continue to propel
profits.
4.) Competitive Advantage: With the heightened demand for tech solutions in not only business
to business operations but in consumer demand, there is a lack of the necessary and specialized
workforce to handle the abundance in demand. Remediation and mainframe skills shortage
supported initial offshore vendor growth. Client focus on minimizing cost per hour for low-end
IT functions further contributed for EPAM to invest heavily in Central European nations which
have more per-capita human resources in Central Europe than India and North America stem
from Central Europe; with a strong heritage of technology and engineering excellence backed by
the educational system focus. EPAM capitalizes on near shore delivery capabilities for European
clients - quickly growing a less penetrated market, which has allowed them to cut labor, costs
immensely. EPAM has seen growth in its Belarus, Hungary, Ukraine and Russian operations of
more than 40 per cent a year since 2003, with Belarus having the highest growth. The high
quality and availability of IT skills, exceptional workforce stability, low operating costs and the
excellent government support, makes many central European nations a major region and an
increasingly popular alternative to India and other Asian countries. EPAM also benefits from
overall lower taxes in this region such as Belarus and Hungary where EPAM pays no corporate
income tax and its employees enjoy the lowest personal taxes in the eastern European region.
Today more than 40% of its 5,000 staff in Eastern Europe works in Belarus. These competitive
advantages put them in an excellent position to have flexible cash flow for continued expanding
operations.

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5.) Acquisitions in Cloud Computing: Since EPAM’s IPO in 2012, the company have been
extremely aggressive in increasing their service offerings through a series of pivotal acquisitions
that have shown encouraging signs they are continuing to increase their market share and
diversified capabilities to eventually become a powerful juggernaut. Acquiring 8 companies
since 2012 starting with Thought Corp and Empathy Lab in 2012, to an immense 2014 acquiring
JoinTech, GGA Software Services, and Great Fridays allowed EPAM to now deliver Omni-
channel UXD services, scientific healthcare services and consultancy, and an ability to create
service design systems and test automation just to name a few of these acquisitions allowing
them expand their domain-led enterprise solutions. In 2016 they had acquired Dextrys
establishing offices in Shanghai and Hong Kong, which furthered their international expansion.
Company Overview

EPAM was founded in 1993 and is headquartered in Newtown, Pennsylvania by Belarus
natives Arkadiy Dobkin in Princeton, New Jersey and Leo Lozner. They provide software
engineering solutions and technology consulting services worldwide. The company offers
software product development services, including product research, customer experience design
and prototyping, program management, component design and integration, lifecycle software
testing, product deployment and end-user customization, performance tuning, product support
and maintenance, and managed services, as well as porting and cross-platform migration. It also
provides custom application development services, such as business and technical requirement
analysis, user experience design, solution architecture creation and validation, development,
quality assurance and testing, legacy applications re-engineering/refactoring, porting, and cross-
platform migration and documentation. In addition, the company offers software application
testing services, including test automation tools and frameworks; testing for enterprise IT, such
as test management, automation, functional and non-functional testing, and defect management;
and consulting services. Further, it provides enterprise application platform services comprising
requirement analysis and platform selection, customization, cross-platform migration,
implementation, integration, and support and maintenance. Additionally, the company offers
application maintenance and support services, such as incident management, fault investigation
diagnosis, work-around provision, bug fixes, release management, enhancements, and third-party
maintenance; and infrastructure management services, including application, database, network,
server, storage, and systems operations management, as well as incident notification and
resolutions. It serves independent software vendors and technology companies in financial
service, travel and consumer, software and hi-tech, media and entertainment, life sciences, and
healthcare industries.

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Financial Analysis

The major financial statements help to give better financial understandings to both external
and internal users to help track, trend and forecast where the company is heading, where they
have strengths as well as what their weaknesses are. The Income statement provides revenues
and expenses incurred generating those revenues in a period of time through both operating and
non-operating activities. The statement of cash flows provides aggregate data regarding all cash
inflows a company receives from both its ongoing operations and external investment sources, as
well as all cash outflows that pay for business activities and investments during a given quarter.
The balance sheet is a snapshot in time of a company's assets, liabilities and shareholders' equity.

A. Liquidity Ratios

Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations.
It’s a process that can be done by comparing a company's most liquid assets (or those that can be
easily converted to cash) to its short-term liabilities. When looking at their current ratio, it has
fluctuated from 4.23 in 2012 to a high point in 6.05 in 2013, and then repeating a similar pattern
in 2014 and 2015 at 4.14 to 6.23, which typically has been a result of their recent acquisitions in
those exact years. The Quick ratio also follows this same track. This increase generally trends
positive towards the company’s growth in assets relative to their liabilities, which indicates rapid
internal growth. Although this alone isn’t indicative, it’s clear they aren’t in range to indicate a
inefficient use of assets (which may lead to an extremely high ratio.) The company has more
cash and cash equivalents than current liabilities. In this situation, the company has the ability to
cover all short-term debt and still have cash remaining.

B. Asset Management Ratios

Asset Management Ratios attempt to measure the firm's success in managing its assets to
generate sales. For example, these ratios can provide insight into the success of the firm's credit
policy and inventory management. These ratios are also known as Activity or Turnover Ratios.
EPAM being primarily a software engineering and consulting company has not been involved in
any inventories as of yet. A major metric for this company however in their management can be
looked at is their days sales outstanding (DSO) is a measure of the average number of days that a
company takes to collect revenue after a sale has been made. This has made nominal gains in
the past 5 years in 2012 at 82.8 upwards to 87.95 in 2016. IT should be noted this is a decrease
from 89.99 in 2015. This overall increase is natural for a rapidly expanding company particular
in it’s revenue streams as they continue expansion in multiple service sectors. The Fixed asset
turnover rate indicates how well the business is using its fixed assets to generate sales, similar
with the total asset turnover. Generally speaking, the higher the asset turnover ratio, the better the
company is performing, since higher ratios imply that the company is generating more revenue
per dollar of assets. Yet, this ratio can vary widely from one industry to the next. Tacking a
deeper look into the fundamentals, fixed asset turnover has actually increased consistently all 5

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years peaking currently in 2016 at 16.69, up nearly 70%. This is an extremely favorable number
when realizing they aren’t overinvesting in their assets as they are efficiently converting into
sales and speaks of sound profitability once again. Total asset turnover has a different case
experiencing a slight tick downward particularly in the last 3 years from 2014 at 1.42 toward
1.41 but this may be misleading when realizing they managed to pop this number up from 1.33
in 2015. The higher the number once again the better the performance, what’s interesting
specifically here is the higher overall turnover with fixed assets but not overall which is actually
rather typical of software companies. The accounts receivables turnover has also experienced
consistent increases on a year to year basis over the past 5 years although marginal gains overall,
indicating that EPAM’s collection of accounts receivable is efficient, and that the company has a
high proportion of quality customers that pay off their debts quickly.

C. Debt Management Ratios
Debt Management Ratios attempt to measure the firm's use of Financial Leverage and ability to
avoid financial distress in the long run. Debt generally represents a fixed cost of financing to a
firm. Thus, if the firm can earn more on assets, which are financed with debt than the cost of
servicing the debt, then these additional earnings will flow through to the stockholders.
Moreover, our tax law favors debt as a source of financing since interest expense is tax
deductible. Specifically EPAM hasn’t truly engaged in much debt financing due to sound
internal growth, this is exemplified when looking at the Debt to asset ratio which became
significant only in in the last year in 2015 at 21% but decreased 16% during a pivotal acquisition
and has shown signs of lowering that. This indicates a high level of financial flexibility due to
the fact EPAM hasn’t run significant debt margins and has actually lowered them over time. This
puts them in more promising regards when it comes to their growth model of the next few years
to allow for massive expansion relative to competitors. It’s even more accurate when comparing
over time that this has decreased better giving the indications EPAM can be expected to be much
more financial flexible with their cash outlays and inflows as they embark on expanding their
revenue stream in the next 5-10 years.

D. Profitability Ratios
Profitability ratios are a class of financial metrics that are used to assess a business's ability to
generate earnings compared to its expenses and other relevant costs incurred during a specific
period of time. For most of these ratios, having a higher value relative to a competitor's ratio or
relative to the same ratio from a previous period indicates that the company is doing well.
Different profit margins are used to measure a company's profitability at various cost levels,
including gross margin, operating margin, pretax margin and net profit margin. The margins
shrink as layers of additional costs are taken into consideration, such as cost of goods sold
(COGS), operating and non-operating expenses, and taxes paid. EPAM’s return on Assets
(ROA) has decreased overtime from 14.1% to 11.6% from 2012 to 2016. The previous 3 years, it
has however held steady at around mid 11% levels. These marginal decreases aren’t to be
worried about; it’s more telling that they have stabilized if anything. Return on equity is a ratio
that concerns a company's equity holders the most, since it measures their ability of earning
return on their equity investments. ROE may increase dramatically without any equity addition

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when it can simply benefit from a higher return helped by a larger asset base. ROE has also
experienced decreases falling inline with their ROA decreasing 32% over the 5 year run. Low
use of debt to finance much of its growth, this would eat into ROE and can explain this figure.
This holds true for EPAM’s overall consistency in profitability when looking at their profit
margins remained consistent around 10% for the last 4 years. Overall with high Price to earnings
typical of high growth companies, profitability isn’t of main concern to many investors but
EPAM has shown ability for profitability as well as continued surge in their growth prospects
through their main business pipelines that have yet to show any serious stagnation.

E. Market Value Ratios

Market value ratios are used to evaluate the current share price of a publicly held company's
stock. These ratios are employed by current and potential investors to determine whether a
company's shares are over-priced or underpriced. These ratios are not closely watched by the
managers of a business, since these individuals are more concerned with operational issues with
potential investors however, these are significant in terms of capital gain yields and other
investor metrics whether with portfolio accounts or etc. The price to equity ratio (P/E) is the ratio
for valuing a company that measures its current share price relative to its per share earnings. In
essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a
company in order to receive one dollar of that company’s earnings. The price to equity has
decreased rather significantly from 6% in 2012 to 3% in 2016 maintaining that 3% for the past 2
years. The price to earnings ration on the other hand has outperformed the overall industry
considerably at 32.84 to the industry average 24.82 and even the particular sector in IT
consulting of 18.63. This proves the prospects of the overall bullish sentiments in regard to their
revenue growth going forward and that investors are willing to pay a premium for this high
growth stock. EPAM’s price to book ratio stands 4.29 meaning they are trading 4.29 times it’s
intrinsic book value, a expected number especially when looking at the overall industry is
trailing here as well at 3.53 and the sector at 1.89 indicating this company to be in further growth
prospects relative to competitors.

Sector & Industry Outlook

The Information Technology sector over the last two decades has shown immense growth
in changing not only the economy but has also continued to be the major backbone to continued
globalization and further excelling the digital economy. Advancements in computer processing
power, data storage, and chip design; the ubiquity of bandwidth; enterprise mobility; and many
other developments that have unfolded in recent years are enabling myriad opportunities that
were once impossible, both technologically and economically. 2016 has shown an increased
emphasis on cognitive computing, the internet of things (IOT), big data analytics and cloud
computing that are going to be the main drivers in the coming year as the industry as a whole
moves on from the smartphone era and into more expanded products. Realizing this many
businesses have begun implementing growth plans to adjust their business model to help
facilitate further revenue opportunities in the ever-changing business environment.

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In 2016, the Tech Sector had outperformed the S&P 500 marginally at 8.38% to the
S&P’s 8.14% with a market cap at a $6.37 trillion. The major drivers within the Tech Sector are
the Electronic Equipment & Storage at 22.12% growth and Semiconductors & Semiconductor
Equipment at 22.15% and the third driver deriving from Communications Equipment at 14%.
Strong performance from the sectors large stock’s and consistent solid earnings had contributed
to the increase in equipment and semiconductors whereas the major component to the increase in
communications equipment came as a direct result in the demand for cloud computing and
network clients. The growth specifically in the third quarter had been attributed to a bulk of the
sector demonstrating higher growth in the business cycle in the early to mid stages as compared
to the S&P which stems from a release of new products over the last 6 months that will be the
foundation to the emerging new economy that is developing as a result. When looking primarily
at the last 6 months we have seen on a momentum basis, which is based on the rate of
acceleration for the price of securities, the Tech sector as stated was driven to a massive increase
by the sector’s largest stocks which had helped it outperform the next two biggest momentum
increases in Telecom and Materials.
One of the more interesting recent market trends and potentially blockbuster
technological breakthroughs is the move of Virtual Reality (VR) and Augmented Reality (AR)
into the mainstream. According to BIS Research (Business Intelligence and Strategy Research), a
market research hand advisory company, the global AR and VR market is estimated to grow over
$161 Billion and $17 billion by 2022 at a CAGR of 85.4% and 44.5% respectively through the
2015-2022, with North American leading the Market.
2017 will see a continued upward trend for this sector as we see the platforms beginning
to expand in IoT, cognitive technologies, and potentially other areas. With the IoT, we anticipate
that there will be a handful of large open platform providers. However, they will pave the way
for the emergence of many other players in the IoT ecosystem such as companies providing
SAAS (Service as a Service) solutions for businesses and industry specific applications. We are
anticipating a large segment of uncertainty with regard to regulatory environments. Global
regulators, increasingly focused on the digital economy and technology companies, see
opportunity to increase revenues through taxes and incentives. While regulatory uncertainty
around taxation doesn’t change the fact that global markets are an essential expansion channel
for most technology companies, many companies will be need to prepare different scenarios into
their growth plans with the imminent changes in not only the global environment but the tech
sectors biggest market which is the U.S. We anticipate with certain policies to further strengthen
and enhance the economy, many more privately funded will continue to lower the barrier to entry
into this sector is likely to increase as innovators and investors look to develop new products,
platforms, and services as rapidly as possible. After an overall successful 2016, look for 2017 to
continue this overall transition into further changing our economy, as we know it.

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Risk & Reward

Listed as the number 6 fastest growing Tech Company in 2016 by Forbes and as the 59th
fastest growing company period EPAM presents an intriguing prospect to investors looking at
high growth Tech companies as the overall industry makes aggressive transitions in it’s business
model as technology and the internet continues to further it’s presence across multiple segments
of businesses from the high to the lower levels. This small cap company at $3.2 billion has a
much larger room to grow relative to the industry dominating mega-cap tech companies which
still rely on Legacy IT to finance it’s performances and industry wide has shown a slowed
growth due to massive investments in cloud computing, big data analytics and it’s software
optimization as it’s continues to grow foundations in the Internet of Things tech outbreak fast
approaching and already on it’s way.
EPAM scored the highest of all providers on driving innovation and helping to create innovative
new products based on a number of metrics. In EPAM’s most recent quarterly earnings in
September of 106, cash from operations was $111.2 million for the nine months of 2016, up
from $64.6 million as compared to the nine months of 2015; and was $61.8 million in the third
quarter of 2016, up from $55.5 million in the third quarter of 2015. Revenues increased to $298.3
million, a year-over-year increase of $62.2 million, or 26.4%. In constant currency, revenue was
up 28.7% year-over-year. Total number of delivery professionals increased 36.2% to 19,070 as
of the end of the third quarter of 2016 from 14,004 as of the end of the third quarter of 2015 and
beating earnings estimates once again after missing second quarter estimates only slightly.
An important note to mention that seems to be an industry wide particular with the U.S. market.
The rising impact of the US dollar had hampered further growth earnings abroad by EPAM,
which has a large contingent of its business outside particularly of North America but not the
majority. The inherent risks with the Tech industry as a whole may seem not entirely clear due to
the prospect of the Trump administration coming down on American companies for outsourcing
and keeping profits abroad. Trump's unexpected win has shaken up the immigration battle in the
tech community, deflating the high hopes of reformers and forcing them to ready a defense.
Many tech companies, particularly EPAM are affected and may be fighting just to keep some
existing visa policies in place. Trump's position on H-1B visas, which allow companies to hire
high-skilled workers, has been inconsistent. But it's his claims that these visas steal jobs from
Americans that's left tech leaders unnerved.

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Summary
EPAM Systems incorporated has benefitted from the intelligent decision making of their CEO
and management over the past 5 years growing faster than industry wide growth and profitability
thanks to the recent boom in Cloud computing technologies and other digital platform prospects
that have emerged in the 21st
Century. Incorporating a range of diversity from not only their
revenue streams geographically, but also sector offerings ranging from infrastructure and
licensing agreements, software and back-end application development, managed services and test
automation with a highly skilled and overall workforce stability has positioned EPAM well
moving into 2017 and forward as this small mid cap company continues to gain ground in an
ever expanding digitized world. Though there seems to be inherent worry with the prospects of
the American government and many others coming out in defiance of continued globalization,
technologies presence across industries has and will continue to grow. EPAM benefits from the
growth of their own cliental which range from juggernauts in the Financial, Healthcare and
Consumer industries as prospects on further market rallies from trade and fiscal policies in the
U.S. may spur further global growth which seems to have stagnated over the last few years.
EPAM has sound fundamentals and though may be priced and overvalued over the past year
their share price has decreased creating an imminent buying opportunity as the stock has begun
to rally over the last several months of 2016 and looming acquisitions in the new world
environment seem beneficial to the growth prospects of this burgeoning company.

Analysis Report- EPAM Systems Inc.

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