EPAM Systems’ Disappearing 3Q Earnings Beat (EPAM)
Look closely and it all goes away
In August, we published our initial analysis of EPAM Systems, Inc. (EPAM), titled EPAM Systems, Inc. (EPAM)- Hidden Challenges in the Path to Turnaround. In that piece, we highlighted multiple unsuitable accounting tailwinds and unrealistic adjustments to earnings.
In the subsequent third quarter, EPAM's stock rose after the company reported non-GAAP EPS that exceeded consensus expectations by $0.42 and revenues by just over 1%. However, revenue guidance for 4Q includes $54 million from acquisitions. Excluding this, guidance for $1.15–$1.16 billion reflects a slight sequential decline from 3Q24 and remains flat year-over-year.
More importantly, a closer examination reveals that the bulk of the earnings beat was driven by a significant, unexpected tax benefit. Specifically, EPAM identified eligibility for $52 million in R&D incentives from Poland, of which $22.9 million, related to 2023 activities, was excluded from non-GAAP results. The remaining $29.1 million, tied to 2024 activities, was included, boosting non-GAAP EPS by $0.35—a surprise not anticipated by analysts. Excluding this benefit, the EPS beat narrows to just $0.07. While this suggests a respectable performance, a closer look at the numbers uncovers ongoing accounting-related tailwinds that should not be counted on to sustain future growth.
Let’s take a closer look behind the numbers…