EPAM Systems, Inc. (EPAM) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A reveal a positive outlook with strong revenue growth, improved profitability, and AI-driven strategies. Despite some uncertainties in pipeline conversions and evolving contract models, the company’s strategic focus on AI and large deal opportunities, coupled with improved margins and shareholder returns, suggest a positive sentiment. The market's response is likely to be positive, with potential for stock price increase.
Key Financial Performance
Revenue $1.4 billion in Q1 2026, representing a year-over-year growth of 7.6%. On an organic constant currency basis, revenue grew 3.7% compared to Q1 2025. Growth was driven by AI-native revenues and broad-based growth across verticals.
AI-native Revenues Over $125 million in Q1 2026, marking the fifth consecutive quarter of sequential double-digit growth. This reflects strong demand for AI foundational services and faster growth in data and cloud practices.
Financial Services Revenue Increased by 11.5% year-over-year in Q1 2026, driven by asset management and insurance clients.
Software & Hi-Tech Revenue Grew 10.9% year-over-year in Q1 2026, driven by strong execution across existing clients and contributions from new logos.
Consumer Goods, Retail & Travel Revenue Increased by 7.2% year-over-year in Q1 2026, notably driven by Retail and Consumer Goods.
Life Sciences & Healthcare Revenue Increased by 5.9% year-over-year in Q1 2026, primarily driven by clients in Life Science and medtech.
Business Information Media Revenue Decreased by 0.7% year-over-year in Q1 2026.
Emerging Verticals Revenue Grew 6.8% year-over-year in Q1 2026, primarily driven by ongoing strength in energy and government.
Americas Revenue Represented 57% of Q1 2026 revenues and grew 2.5% year-over-year.
EMEA Revenue Comprised 41% of Q1 2026 revenues and grew 15.9% year-over-year, with 8.4% growth in constant currency.
APAC Revenue Made up 2% of Q1 2026 revenues and grew 1.2% year-over-year.
Top 20 Clients Revenue Grew 4.4% year-over-year in Q1 2026.
Clients Outside Top 20 Revenue Increased by 9.1% year-over-year in Q1 2026.
GAAP Gross Margin 27.7% in Q1 2026, compared to 26.9% in Q1 2025, reflecting improved profitability.
Non-GAAP Gross Margin 29.4% in Q1 2026, compared to 28.7% in Q1 2025, demonstrating commitment to improving profitability.
GAAP Income from Operations $117 million or 8.3% of revenue in Q1 2026, compared to $99 million or 7.6% of revenue in Q1 2025, reflecting an 18% year-over-year growth.
Non-GAAP Income from Operations $201 million or 14.3% of revenue in Q1 2026, compared to $176 million or 13.5% of revenue in Q1 2025, reflecting over 14% year-over-year growth.
GAAP Diluted EPS $1.52 in Q1 2026, compared to $1.28 in Q1 2025, reflecting an 18.8% year-over-year growth.
Non-GAAP Diluted EPS $2.86 in Q1 2026, compared to $2.41 in Q1 2025, reflecting an 18.7% year-over-year growth.
Cash Flow from Operations Negative $36 million in Q1 2026, compared to $24 million in Q1 2025. Impacted by higher variable compensation payments and timing of vendor payments.
Free Cash Flow Negative $54 million in Q1 2026, compared to $15 million in Q1 2025.
Cash and Cash Equivalents Over $1 billion as of the end of Q1 2026.
DSO (Days Sales Outstanding) 76 days in Q1 2026, compared to 72 days in Q4 2025 and 75 days in Q1 2025.
Share Repurchases Approximately 1.8 million shares for $264 million in Q1 2026, at an average price of $143.84 per share.
Delivery Professionals More than 56,500 as of Q1 2026, reflecting total growth of 1.6% compared to Q1 2025.
Total Head Count More than 62,750 employees as of Q1 2026.
Utilization 77% in Q1 2026, compared to 77.5% in Q1 2025 and 75.4% in Q4 2025.
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Operating Highlights
AI-native revenues: Exceeded $125 million in Q1, up nearly 20% sequentially from Q4. Targeting $600 million for the full year.
Strategic AI partnership with Anthropic: Announced a multiyear partnership to deliver enterprise-grade AI. Over 20,000 employees trained, with 1,300 Claude certifications achieved and aiming for 10,000 by year-end.
AI/Run.Transform framework: Launched over 100 new AI-native projects in Q1, supporting enterprise AI adoption and transformation.
North America market investments: Accelerating go-to-market investments modeled on successful EMEA strategies.
EMEA growth: Delivered strong double-digit year-over-year growth in Q1.
Revenue growth: Achieved 7.6% year-over-year growth in Q1, with constant organic currency growth of 3.7%.
Profitability improvements: GAAP income from operations grew by 18%, and non-GAAP income from operations grew by over 14% year-over-year.
Client engagement: More than 80% of top 100 clients engaged in AI initiatives, with over 100 new AI-native projects launched in Q1.
AI transformation strategy: Focused on becoming a leading AI delivery provider, transforming into an AI-native organization, and expanding AI go-to-market offerings.
AI-enabled vendor consolidations: Accelerating large-deal pipeline focused on AI-enabled vendor consolidations, with multiyear deals larger than historical norms.
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Risk or Challenges
Macro uncertainty: Increased macroeconomic uncertainty compared to 90 days ago is impacting client decision-making, particularly in North America, leading to lower visibility for the second half of the year.
Client caution and reprioritization: Clients are exercising caution and reprioritizing short-term actions against larger transformation opportunities, causing delays in decision-making and impacting Q2 performance.
Energy prices and global economic uncertainty: Higher energy prices and global economic uncertainty are expected to impact revenue growth rates for the year.
AI adoption complexity: The rapid pace of AI advancements and the associated complexities, including tokenomics and investment economics, are increasing challenges for enterprises in balancing cost optimization and productivity with business outcomes.
North America underperformance: Underperformance in North America is contributing to lower visibility and revenue challenges.
Middle East uncertainty: Ongoing uncertainty in the Middle East is beginning to impact client decision-making, leading to modest delays in decisions.
Cost optimization focus: Some clients are focusing on cost optimization, including vendor consolidations, which may impact revenue growth.
Delivery center risks: The company’s ability to deliver from Ukraine delivery centers at productivity levels similar to 2025 remains a key assumption, posing potential risks.
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Guidance & Outlook
Revenue Growth: Full year revenue growth is projected to be in the range of 4% to 6.5%, with organic constant currency growth expected to be between 2.5% and 5%. Q2 revenue is expected to range from $1.4 billion to $1.415 billion, reflecting year-over-year growth of 4% at the midpoint.
Profitability: GAAP income from operations is expected to remain in the range of 10% to 11%, and non-GAAP income from operations is projected to be between 15% and 16% for the full year.
Earnings Per Share (EPS): GAAP diluted EPS for the full year is expected to range from $8.29 to $8.59, while non-GAAP diluted EPS is projected to be between $12.98 and $13.28. For Q2, GAAP diluted EPS is expected to range from $1.79 to $1.87, and non-GAAP diluted EPS is projected to be between $3.10 and $3.18.
AI Revenue Growth: Pure AI-native revenues are expected to reach $600 million for the full year, with continued double-digit sequential growth.
Client Pipeline and Market Trends: The company anticipates strong momentum in AI-native business, with over 100 new AI-native projects launched in Q1 and a robust pipeline of large multiyear deals. However, macroeconomic uncertainty and client caution may impact the timing of certain projects.
Geographic Performance: Investments in North America are being accelerated to address underperformance, while EMEA continues to show strong double-digit growth.
Operational Adjustments: The company is focusing on cost optimization, including targeted headcount reductions and vendor consolidations, to improve efficiency and profitability.
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Shareholder Return Plan
Share Repurchase Program: Share repurchases in the first quarter were approximately 1.8 million shares for $264 million at an average price of $143.84 per share. To date, since the initiation of our share repurchase program, we've returned approximately $1.5 billion in cash to shareholders.
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Key Q&A
Q:On the 2026 organic growth guide revision, is the slowdown due to a handful of large engagements or a broader portfolio dynamic? What gives confidence in the second half implied sequential growth?
A:The slowdown is attributed to a handful of customers with delayed decision-making, observed more in April and May. The company is not assuming significant geopolitical changes but is targeting unusually large opportunities enabled by AI capabilities. These opportunities are outside their normal scope and are included in the current guide.
Q:Can you elaborate on the Anthropic relationship and its impact on AI-native revenue growth mix?
A:The Anthropic relationship is seen as important for EPAM. The company has over 1,400 certified Claude architects and is ramping up applied AI solutions. This partnership is viewed as an expansion rather than a pivot, with expectations of acceleration in AI-native revenue growth.
Q:Does the full-year guidance consider a broadening of weakness beyond the subset of clients currently affected?
A:The lowered bottom end of the range reflects potential broadening of delayed decision-making. Impacts are already observed in the travel and consumer sectors, while financial services and high-tech sectors show strong demand.
Q:Can you bridge the gap between the non-GAAP operating margin of 14.3% in Q1 and the full-year target range of 15%-16%?
A:Profitability is expected to improve year-over-year, with better gross margins observed in Q1. Seasonal factors and ongoing focus on profit improvement, including AI transformation opportunities, are expected to drive margins closer to the target range.
Q:What are the quarter-over-quarter revenue growth expectations for Q3 and Q4?
A:Stronger sequential growth is expected between Q2 and Q3 due to seasonal factors and deal wins. The second half is expected to have a higher growth rate driven by large opportunities within the company's line of sight.
Q:How many large opportunities are in the pipeline for the second half, and what is their nature?
A:There are close to 10 large opportunities, which are outsized and involve non-T&M commercial models. These include business transformation, vendor consolidation, and AI-driven projects. The company is risk-adjusting these opportunities in its guidance.
Q:What is the outlook for long-term gross margin improvement and SG&A efficiency?
A:The company is on track for improved profitability through price increases, cost optimization, and seniority index improvements. SG&A optimization is expected more in the out years, while current efforts focus on go-to-market investments.
Q:What are the AI-enabled vendor consolidation opportunities mentioned?
A:These opportunities involve deploying AI capabilities to disrupt the vendor landscape. The company is using its AI/Run.Transform Playbooks to offer differentiated propositions to clients, challenging the status quo.
Q:Can you provide visibility on the back half of the year and the guidance range?
A:The lower end of the range assumes worsening economic conditions and delayed decision-making. The higher end assumes solid execution and a higher share of wins in large deals. The midrange relies on steady execution and typical deal conversions.
Q:What are the go-to-market investments in North America?
A:Investments include personnel, process changes, and transformation of go-to-market motions. The company is applying learnings from the EMEA market to North America, focusing on performance marketing and adapting to a buyer's market.
Q:What gives confidence in closing and executing large multiyear deals?
A:The company has a differentiated AI-native offering that resonates with clients. While there is uncertainty in conversion and ramp-up speed, EPAM has experience running large programs and is risk-adjusting its pipeline.
Q:What is the status of the large NEORIS client?
A:Revenue from the large NEORIS client stabilized in Q1 as expected, with modest sequential declines anticipated. Growth is observed in the Iberian Peninsula and South America, while Mexico shows some slowness.
Q:What is the impact of large deals on margins and capital allocation priorities?
A:Large deals may have a modest impact during transitions but are expected to contribute to improved profitability. Capital allocation priorities include share repurchases and potential M&A investments later in the year.
Q:What are the dynamics of contract pricing and the Anthropic partnership?
A:Contract pricing is evolving with tokenomics being explored. Currently, clients bear token costs. The Anthropic partnership involves developing software using their stack and exploring different commercial models.
Q:What is the headcount and revenue per head outlook for the year?
A:Headcount is expected to grow to support business growth, with adjustments to improve utilization and contract structures. Revenue per head is influenced by rate increases and foreign exchange impacts.
Q:How confident is the company in converting pipeline opportunities to meet guidance?
A:The company is counting on a modest share of pipeline opportunities to convert, supported by a significant number of deals and differentiated offerings.
Q:Is there revenue cannibalization due to AI work?
A:There is some shift in IT budgets towards AI spending and automation, impacting areas like testing and digital platform investments.
Q:Are clients being offered AI solutions to reduce headcount on projects?
A:Yes, the company is proactively offering advanced engagement models like dark factory capabilities to automate processes and reduce headcount.
Q:What are the levers to control token costs and the focus of M&A?
A:The company is developing capabilities to manage model usage, multi-sourcing, and token costs. M&A focus includes domain capabilities, data assets, and geographic expansion, particularly in Asia Pacific.
Q:Review of Unclear Management Responses
A:Management appeared to avoid giving a direct answer on the exact timing and ramp-up speed of large pipeline opportunities, citing uncertainty and risk-adjusting their inclusion in guidance. Additionally, there was limited clarity on the commercial models and tokenomics for AI-related contracts, as these are still evolving.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Run
AI delivery
AI foundation
AI program
AI project
Investor Day
Nelnet
PDLC
Rowshandel Head
Run Transform
adoption gap
approach
award
build opportunity
caution
certification
challenge
client decision
decision making
deployment
domain
enterprise AI
gen AI
moat
motion
opportunity term
order loss
outlook AI
partner enterprise
pillar
platform client
playbook
potential
practice
readiness
reinsurance
revenue momentum
service provider
streaming
system
team AI
transformation opportunity
variability
EPAM Transcript
EPAM Systems, Inc. (EPAM) Q1 2026 Earnings Call Transcript
Positive5-7
The earnings call summary and Q&A reveal a positive outlook with strong revenue growth, improved profitability, and AI-driven strategies. Despite some uncertainties in pipeline conversions and evolving contract models, the company’s strategic focus on AI and large deal opportunities, coupled with improved margins and shareholder returns, suggest a positive sentiment. The market's response is likely to be positive, with potential for stock price increase.
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 Slides
EPAM Report
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