EPAM Systems, Inc. (EPAM) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call shows a mix of positive and negative elements. While there is optimism around AI-native services and potential growth in financial services, there are concerns about slower growth due to client declines and elongated sales cycles. The cautious guidance and lack of clear acceleration timelines contribute to a neutral outlook. The absence of a market cap makes it difficult to gauge the exact impact, but the mixed signals suggest a neutral stock price movement.
Key Financial Performance
Q4 Revenue $1.4 billion, a year-over-year increase of 12.8% on a reported basis. Organic constant currency growth was 5.6%. Growth driven by AI-native and AI foundational services.
Q4 GAAP Gross Margin 30.1%, compared to 30.4% in Q4 of last year. Decrease due to higher variable compensation expense.
Q4 Non-GAAP Gross Margin 31.7%, compared to 32.2% in Q4 of last year. Decrease due to higher variable compensation expense.
Q4 GAAP Income from Operations $149 million or 10.6% of revenue, compared to $137 million or 10.9% of revenue in Q4 of last year. Decrease in margin due to higher variable compensation expense.
Q4 Non-GAAP Income from Operations $230 million or 16.3% of revenue, compared to $208 million or 16.7% of revenue in Q4 of last year. Decrease in margin due to higher variable compensation expense.
Q4 GAAP Diluted EPS $1.98.
Q4 Non-GAAP Diluted EPS $3.26, reflecting an increase of $0.42 or 14.8% compared to the same quarter in 2024.
Q4 Cash Flow from Operations $283 million, compared to $130 million in the same quarter of 2024. Increase due to improved operational performance.
Q4 Free Cash Flow $268 million, compared to $115 million in the same quarter last year. Increase due to improved operational performance.
Full Year 2025 Revenue $5.46 billion, up 15.4% on a reported basis year-over-year. Organic constant currency growth was 4.9%.
Full Year 2025 GAAP Income from Operations $520 million, a decrease of 4.5% year-over-year, representing 9.5% of revenue.
Full Year 2025 Non-GAAP Income from Operations $831 million, a growth of 6.7% compared to the prior year, representing 15.2% of revenue.
Full Year 2025 GAAP Diluted EPS $6.72.
Full Year 2025 Non-GAAP Diluted EPS $11.50, reflecting a 5.9% increase over 2024.
Full Year 2025 Cash Flow from Operations $655 million, compared to $559 million for 2024. Increase due to improved operational performance.
Full Year 2025 Free Cash Flow $613 million, reflecting a 94.7% adjusted net income conversion.
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Operating Highlights
AI-native revenues: Generated more than $105 million in Q4 2025, with strong sequential growth. Expected to scale these revenues to over $600 million in 2026.
AI/Run.Transform Playbook: Launched frameworks and tools to support AI-native projects, with 60%-70% expanding from proof of concept to larger programs.
AI-powered pricing tool: Developed for Bayer, optimizing pricing strategies across 35 countries, delivering EUR 20-30 million in incremental yearly profit.
GenAI-powered styled solution: Developed for Zalando, providing personalized shopping experiences.
Empathy Lab expansions: Expanded to help CMOs in North America with AI-powered creative talent and innovation frameworks.
National Geographic Society partnership: Designated as preferred digital transformation partner, modernizing infrastructure and engaging global audiences.
Revenue growth: Achieved 12.8% year-over-year growth in Q4 2025, with $1.4 billion in revenues.
Client examples: Partnerships with EBSCO, Bayer, Zalando, and National Geographic Society highlight operational success.
Employee growth: Ended Q4 2025 with over 62,850 employees, reflecting 2.7% total growth.
AI-native transformation: Positioned to guide clients through AI-native transformation with investments in people, accelerators, and tooling.
Partnerships: Recognized as 2025 Microsoft Innovate with Azure AI Platform Partner of the Year and AWS Global Innovation Partner of the Year.
AI/Run frameworks: Introduced AI/Run.Transform and AI/Run for SDLC frameworks to enhance AI-native business transformation.
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Risk or Challenges
Geopolitical and macroeconomic adversity: The company faces challenges from extreme geopolitical and macroeconomic conditions, which could impact its business model and operations.
Client budget slowness: At the start of 2026, there is slowness in client decision-making as they finalize budgets and establish priorities, potentially delaying revenue recognition.
Economic impact on NEORIS' largest client: NEORIS' largest client, headquartered in Mexico, is significantly impacted by a challenging economic environment, including U.S. tariffs, leading to a sequential revenue decline.
Extended sales cycles for AI programs: Larger AI programs introduce a more mature procurement process, including RFPs and modest extensions of sales cycles, which could delay revenue realization.
Productivity levels in Ukraine delivery centers: The guidance assumes continued productivity levels in Ukraine delivery centers, which could be disrupted by external factors.
Higher variable compensation expenses: Gross margins were negatively impacted by higher variable compensation expenses, which could affect profitability.
Introduction of junior employees: The addition of junior employees, who initially operate at lower utilization levels, impacts overall utilization rates and could affect operational efficiency.
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Guidance & Outlook
AI-native services revenue: Expected to scale revenues in excess of $600 million in 2026, driven by robust demand and strategic AI deployments.
Client budgets and spending: Client budgets are expected to remain relatively intact in 2026 compared to 2025, with a continued shift in spending towards scaled AI deployment and strategic programs.
Revenue growth: Full year 2026 revenue growth projected to be in the range of 4.5% to 7.5%, with organic constant currency growth rate expected to be 3% to 6%.
Profitability: Committed to improving overall profitability and specifically gross margin in 2026.
Q1 2026 revenue: Expected to be in the range of $1.385 billion to $1.4 billion, reflecting a year-over-year growth of 7% at the midpoint.
Q1 2026 GAAP income from operations: Projected to be in the range of 7% to 8%.
Q1 2026 non-GAAP income from operations: Expected to be in the range of 13.5% to 14.5%.
Q1 2026 GAAP diluted EPS: Expected to be in the range of $1.32 to $1.40.
Q1 2026 non-GAAP diluted EPS: Projected to be in the range of $2.70 to $2.78.
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Shareholder Return Plan
Share repurchases in the fourth quarter: Approximately 1.2 million shares for $224 million at an average price of $192.33 per share.
Share repurchases in 2025: Approximately 3.5 million shares for $661 million at an average price of $186.67 per share.
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Key Q&A
Q:How do you expect the year to build given the first quarter guidance is lower than the full-year organic revenue and margin guidance?
A:Jason Peterson explained that the NEORIS' largest customer is ramping down business between Q4 and Q1, causing a mid-single-digit decline. However, they expect stabilization moving forward and aim for a 3% or better organic constant currency growth rate in Q1. Balazs Fejes added that they have a strong pipeline and good traction in European and Middle East markets to deliver on the year.
Q:Are there investments needed to bolster vertical industry expertise, and how will they impact competitive positioning?
A:Balazs Fejes stated that the current P&L and guidance already reflect planned investments for 2026. They are prioritizing investments in business development, AI, and building industry capabilities and vertical accelerators.
Q:Why is the 2026 organic growth outlook slower than 2025 despite earlier expectations of faster growth?
A:Jason Peterson attributed the slower growth to a 100 basis point negative impact from the decline of NEORIS' largest client. He emphasized guiding based on current visibility without assuming environmental improvements.
Q:What is contemplated across the low and high ends of the guidance range, and which verticals are expected to accelerate or decelerate?
A:Balazs Fejes highlighted strong demand in financial services, energy, and expected momentum in life sciences & healthcare later in the year. He noted that achieving the high end of the range does not assume macroeconomic changes but relies on winning deals and client expenditure acceleration.
Q:Are elongated sales cycles and client indecision impacting the full-year guidance or just the Q1 outlook?
A:Balazs Fejes explained that elongated sales cycles are due to larger AI transformation programs requiring stringent processes. These dynamics shape the year but do not impact the full-year guidance.
Q:What are the gross margin and free cash flow expectations for 2026?
A:Jason Peterson expects free cash flow conversion to operate within the 80%-90% range, unlike the higher conversion in 2025. Gross margin improvement will come from better execution in expanding geographies and some price increases.
Q:What is the headwind to year-over-year growth for Q1 due to the large client decline, and are there any bill day dynamics?
A:Jason Peterson stated the large client decline impacts Q1 growth by approximately 100 basis points. Fewer bill days from Q4 to Q1 affect profitability and revenues, but lower vacation may offset some impact.
Q:What is the progress on pyramiding and global delivery optimization, and expectations for billable engineering resource additions in 2026?
A:Jason Peterson noted better utilization and lower bench in Q4 2025. They are optimizing cost outcomes in geographies like Western and Central Europe and India. Balazs Fejes added that they are onboarding juniors and optimizing the delivery pyramid for sustainability.
Q:What is the impact of pricing and mix shift dynamics, particularly with India, on 2026 revenue growth?
A:Jason Peterson mentioned low single-digit rate increases in Europe and North America. India, growing faster than other geographies, is margin accretive despite lower pricing per hour.
Q:When will spending accelerate despite uncertainty, and are there data points indicating momentum in conversion?
A:Balazs Fejes expressed optimism about larger programs in financial services and AI investments. He highlighted the expected $600 million AI-native revenue in 2026 as a sign of momentum.
Q:Is the revenue per utilized head growth reflecting a better pricing environment?
A:Jason Peterson acknowledged revenue improvement due to foreign exchange, price, utilization, and revenue recognition timing. He noted that contractors' revenue is not included in headcount calculations.
Q:How does the shift to fixed-price contracts impact free cash flow and share repurchase plans?
A:Jason Peterson explained that fixed-price contracts may improve pricing and cash flow through milestone payments. Free cash flow conversion is expected in the 80%-90% range, and share repurchases will continue, especially in early 2026.
Q:What are the implications of AI on the IT services market, and is there pricing pressure due to AI?
A:Balazs Fejes and Jason Peterson emphasized that AI enables more software building, benefiting EPAM. They are not seeing pricing pressure due to AI and expect rate improvements in 2026.
Q:What is the board's stance on capital allocation between M&A and share repurchases?
A:Balazs Fejes and Jason Peterson indicated a focus on share repurchases in the near term, with potential for scaled M&A activity over time.
Q:Is the AI-native revenue growth rate accurate, and how does EPAM's definition differ from competitors?
A:Jason Peterson confirmed high growth rates for AI-native revenue. Balazs Fejes clarified that EPAM's definition is strict, including only AI-centric solutions and enterprise transformations, excluding foundational AI work.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing when spending would accelerate despite uncertainty, providing no specific timeline or data points. Additionally, while discussing fixed-price contracts, the impact on free cash flow was not clearly quantified.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Run
AI readiness
AI talent
AI transformation
Bayer
CX
EPAM EBSCO
EUR
Gartner leader
IP
Investor Day
Run Transform
agent
application development
application service
benchmark
builder
buyer
category
consulting implementation
custom software
cycle
dashboard
dedication team
developer
engineering AI
example EPAM
experience
framework
implementation service
leader market
machine learning
market quadrant
model AI
pace
quadrant AI
service AI
solution
tooling
EPAM Transcript
EPAM Systems, Inc. (EPAM) Q4 2025 Earnings Call Transcript
Unknown2-19
The earnings call shows a mix of positive and negative elements. While there is optimism around AI-native services and potential growth in financial services, there are concerns about slower growth due to client declines and elongated sales cycles. The cautious guidance and lack of clear acceleration timelines contribute to a neutral outlook. The absence of a market cap makes it difficult to gauge the exact impact, but the mixed signals suggest a neutral stock price movement.
EPAM Systems, Inc. (EPAM) Q3 2025 Earnings Call Transcript
Positive11-6
The earnings call highlights strong AI-driven growth, strategic investments, and improved margins. Despite some negative seasonality impacts and uncertainties in the Agentic BPO space, the company shows a positive outlook with robust revenue growth projections and strategic share repurchases. The Q&A section reveals confidence in AI initiatives and competitive advantages, although some responses were vague. Overall, the strategic focus on AI and client engagement, along with expected profitability improvements, suggests a positive sentiment. However, the lack of market cap data limits the precision of the prediction.
EPAM Systems, Inc. (EPAM) Q2 2025 Earnings Call Transcript
Positive8-7
The earnings call indicates solid growth and strategic initiatives, particularly in AI transformation and client engagement. Despite some cautious guidance on Q4, there is optimism in discretionary spending and AI-driven programs. The Q&A section reveals management's focus on improving utilization and margins, with positive client demand trends. The ongoing AI upskilling and balanced workforce composition are strengths. While some risks are not fully detailed, the overall sentiment is positive, with strong financial metrics and strategic direction likely to support a 2% to 8% stock price increase.
EPAM Systems, Inc. (EPAM) Q1 2025 Earnings Call Transcript
Unknown5-8
The earnings call presented mixed signals. While there is strong growth in AI-related revenues and positive client engagement, financial metrics like gross margin, income from operations, and cash flow have declined year-over-year. The Q&A section reveals uncertainties about pricing, cash flow normalization, and management's reluctance to provide specific numbers, which may concern investors. Despite positive AI initiatives, the weak financial performance and vague guidance lead to a neutral sentiment, suggesting limited stock price movement in the near term.
EPAM Slides
EPAM Report
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