EPAM Q2 2026 Earnings Call Summary

1Key Financial Results and Metrics

Revenue: $1.415 billion, up 4.5% year-over-year; organic constant currency growth of 3.4%.

Gross Margins: GAAP gross margin at 30.4% (up from 28.8% YoY); non-GAAP gross margin at 32% (up from 30.1% YoY).

Income from Operations: GAAP income grew by over 20% to $152 million; non-GAAP income grew by 14.7% to $233 million.

Earnings Per Share (EPS): GAAP diluted EPS at $1.97 (up 26.3% YoY); non-GAAP diluted EPS at $3.38 (up 22% YoY).

Cash Flow: Negative cash flow from operations of $2 million, impacted by higher variable compensation and increased Days Sales Outstanding (DSO) to 82 days.

2Strategic Updates and Business Highlights

AI Native Revenue: Reached over $160 million, marking six consecutive quarters of double-digit sequential growth, now representing 11% of total revenue.

Vertical Performance: Strong growth in Financial Services (up 11.5% YoY) and Life Sciences & Healthcare (up 8% YoY). Declines in Software & Hi-Tech (-1.3%) and Business Information & Media (-2.1%).

Geographic Performance: EMEA showed strong growth (up 10.9% YoY), while North America experienced only 0.5% growth, primarily due to shifts in client spending towards AI-led services.

Strategic Partnerships: Expanded collaborations with OpenAI, Google, and Anthropic to enhance AI capabilities and training initiatives.

3Forward Guidance and Outlook

2026 Revenue Guidance: Revised to a growth range of 3.2% to 4.2%, with organic constant currency growth expected between 2% to 3%.

Q3 2026 Outlook: Anticipated revenue between $1.410 billion and $1.425 billion, reflecting year-over-year growth of 1.7%.

Profitability: Expected GAAP income from operations in the range of 10.5% to 11% for the full year, with non-GAAP income from operations between 15.5% to 16%.

4Bad News, Challenges, or Points of Concern

North America Growth: Identified as a significant challenge, with expectations for continued underperformance in the second half of the year. Clients are shifting budgets away from traditional services to AI-led modernization, creating a growth gap.

Project Ramp Downs: Notable declines in Software & Hi-Tech due to project completions and ramp downs, impacting overall growth.

Cash Flow Concerns: Negative cash flow in Q2 raises questions about working capital management and future cash flow generation, with expectations for a lower free cash flow conversion rate of around 70% for 2026.

5Notable Q&A Insights

Demand Environment: Clients are prioritizing AI budgets over traditional task-based services, leading to a need for EPAM to adapt its go-to-market strategy.

Go-to-Market Transformation: EPAM is implementing a multi-quarter commercial transformation to enhance sales capabilities, particularly in North America, where they aim to shift focus from engineering excellence to business development.

Large Deals Pipeline: Progressing well but none are yet signed; expected to contribute meaningfully to revenue in early 2027.

Competitive Landscape: While some clients are shifting spending to other tech priorities, EPAM has not seen a significant loss of business to competitors, indicating a focus on internal capabilities and strategic partnerships. Overall, while EPAM demonstrated solid financial results in Q2 2026, challenges in North America and shifts in client spending patterns pose risks to future growth. The company is actively addressing these issues through strategic initiatives and a focus on AI capabilities.