EPAM Systems, Inc. (EPAM) Earnings

Management highlights

- Strategic Pillar Progress * Leading AI-native software engineering: Rebuilt engineering workflows to move clients beyond traditional SDLC to integrated agentic enterprise solutions, real-time data modernization, cyber resilience, and token cost engineering. Thousands of specially trained engineers deploy EPAM's proprietary tools (AI Run, Dial, MFLance) across hundreds of client engagements, with growth driven by unaddressed legacy technical debt, modernization, and data work required for enterprise AI value creation. * Full-stack AI-native organizational transformation: Expanded strategic AI partnerships, joining the OpenAI Partner Network as an advanced partner targeting 5,000 certified OpenAI consultants and 10,000 trained EPAM specialists in the first year. Hit 2,000 certified Gemini specialists on track for a 5,000 Q3 2026 target with Google, and reached 5,700 certified Entropic engineers, ahead of the 5,000 Q3 target, targeting 10,000 cloud-certified architects by end of 2026. * Go-to-market transformation: Launched a multi-quarter commercial transformation focused on North America, standardizing large account prioritization, improving new logo pipeline discipline, and investing in sales training and capabilities. - Operational Highlights * Received multiple industry recognitions, including Databricks 2026 AI Partner of the Year, 2026 Fortress Cybersecurity Award for Cloud Security, Gartner specialist positioning for physical AI services, and inclusion in the Wall Street Journal's Best Companies for the Future. * Demonstrated client impact: Delivered 60% effort savings for a wealth management firm's AI-powered mainframe modernization, 30 million euros in annual operational impact for a beverage manufacturer's unified AI data platform, and 40% infrastructure cost reduction for an energy commodity firm's AWS migration. * Headcount: Ended Q2 with over 56,650 delivery professionals (1.5% YoY total growth) and 62,850 total employees, with utilization of 78.3%, up from 77% in Q1 2026 and flat compared to Q2 2025. * Profitability: GAAP gross margin improved to 30.4% from 28.8% YoY; non-GAAP gross margin improved to 32% from 30.1% YoY. GAAP operating income grew 20.4% YoY to $152 million (10.8% of revenue); non-GAAP operating income grew 14.7% YoY to $233 million (16.4% of revenue).

Guidance

- Full-year 2026 guidance was revised downward for revenue, with profitability guidance raised to the high end of the prior range: total revenue growth is now expected to be 3.2% to 4.2% YoY, with organic constant currency growth of 2% to 3%. - Management reaffirms the full-year 2026 target of $600 million in AI-native revenue, which remains on track. - Non-GAAP operating margin is now expected to be 15.5% to 16%, at the high end of the prior 15% to 16% range. GAAP operating margin is expected to be 10.5% to 11%. - Full-year 2026 GAAP diluted EPS is guided to $8.22 to $8.38, and non-GAAP diluted EPS is guided to $13.08 to $13.24, representing over 14% YoY growth at the midpoint. - 2026 full-year free cash flow conversion is expected to be ~70%, below the typical 80% to 90% range, driven by weaker first half free cash generation; free cash flow conversion is expected to exceed 100% in both Q3 and Q4 2026. - Q3 2026 guidance expects revenue of $1.410 billion to $1.425 billion, with 1.8% organic constant currency growth YoY at the midpoint. Q3 non-GAAP operating margin is guided to 15.5% to 16.5%, with non-GAAP diluted EPS of $3.38 to $3.46 (over 11% YoY growth at the midpoint). - Management expects sequential growth in Q3, followed by flattish revenue from Q3 to Q4. Meaningful revenue contribution from the large pipeline of pending AI-led deals is now expected to start in the first half of 2027, pushed back from the second half of 2026.

Segment performance

Total Q2 2026 revenue was $1.415 billion, 4.5% year-over-year (YoY) growth (3.4% organic constant currency growth). AI-native revenue hit $160 million, marking the sixth consecutive quarter of sequential double-digit growth, representing 11% of total revenue. By vertical segment: 1. Financial services: grew 11.5% YoY, the fastest growing vertical, contributing 11.5% revenue growth share among growing verticals, driven by AI-led modernization across EMEA and Americas. 2. Life Sciences and Healthcare: grew 8% YoY, the second fastest growing vertical, with accelerating growth driven by pharma R&D, AI-enabled clinical trials, and MedTech expansion. 3. Consumer goods, retail, and travel: grew 2.3% YoY, led by retail and consumer goods. 4. Emerging verticals (energy, manufacturing): grew 4.9% YoY, driven by energy expansion from upstream to midstream, downstream, and data center work. 5. Software and high-tech: declined 1.3% YoY, driven by non-AI project ramp-downs that outweighed AI, cloud, and cybersecurity growth in the vertical. 6. Business information and media: declined 2.1% YoY, driven by completion of several large client projects. By geographic segment: 1. Americas: 57% of total Q2 revenue, grew 0.5% YoY, with strong financial services growth offset by declines in software and high-tech and business information and media. 2. EMEA: 41% of total Q2 revenue, grew 10.9% YoY (9.4% constant currency), with strong double-digit growth driven by financial services, travel, consumer goods, and energy. 3. APAC: 2% of total Q2 revenue, declined 0.3% YoY.

Risks & headwinds

- A faster-than-expected demand shift away from legacy non-AI task-based services (manual testing, front-end JavaScript engineering, UX work) towards AI-native services has created a near-term growth gap, particularly in North America, as ramp-up of new AI work has not yet offset declines in legacy service lines. - The go-to-market model in North America was historically focused on engineering-only sales to technical buyers, and lacks the mature domain and consulting capabilities required to sell outcome-driven AI solutions to business buyers, creating a capability gap that will take multiple quarters to address. - Client budget reprioritization is shifting discretionary non-AI spend toward AI infrastructure, tokens, and GPUs, creating near-term revenue drag for legacy service lines, especially in the North American software and high-tech vertical. - Extended procurement cycles for large multi-year AI-led deals create revenue timing uncertainty, with near-term growth visibility reduced. - DSO increased to 82 days in Q2 from 76 days in Q1 2026 and 78 days YoY, and is expected to remain slightly elevated relative to prior years through 2026, pressuring near-term cash flow.

Analyst Q&A

• Q: What are the specific drivers of the reduced 2026 outlook, especially the North American growth gap, and what actions are you taking to address it? /

  A: The macro environment is unchanged, but clients have rapidly shifted budgets away from legacy task-based services to AI modernization, faster than new AI work can ramp up to offset declines. Most of this impact is concentrated in North America's software and high-tech SaaS client base, where non-AI project ramp-downs outweigh AI growth. EPAM is addressing the gap by rolling out the same domain-led, business outcome-focused go-to-market transformation that delivered double-digit growth in EMEA, including expanding the North American sales force and revising sales processes to prioritize AI solutions, a multi-quarter program. (324 words)

• Q: How does the North American transformation compare to what you did in EMEA, how long will it take to see an inflection, and what is the expected timing for large deal contribution? /

  A: EPAM's historical North American model was focused on engineering excellence selling to technical buyers, while EMEA already developed the domain-led, business case-focused go-to-market motion that clients now demand. The company is replicating this successful model in North America, building out consulting and business development capabilities alongside existing delivery strength. While progress is faster than expected, the transformation will take time, and significant revenue contribution from the large pending AI deal pipeline is expected to start in 2027, so none of these deals are included in 2026 guidance. (231 words)

• Q: Is the North American growth gap a capability gap in delivery or just go-to-market, and what is driving strong growth in financial services? /

  A: The gap is a go-to-market and business development capability, not a delivery gap: EPAM already has the AI delivery capability that works to deliver double-digit growth in EMEA, so fixing the sales model should drive similar results in North America. Financial services growth is strong because EPAM has successfully combined deep domain knowledge in the sector with AI-native capabilities to deliver large legacy modernization programs, using EPAM IP to modernize legacy systems and build the foundational data platforms required for reliable enterprise AI deployment. This model can be replicated across other verticals as the go-to-market transformation progresses. (216 words)

• Q: AI-native revenue is at 11% of revenue today; when will it be large enough to lift overall company growth? /

  A: AI-native revenue is defined narrowly (only pure AI-native engagements, excluding AI-assisted revenue that many other firms count), and continues to grow with six consecutive quarters of double-digit sequential growth. Management expects that once AI-native revenue crosses the 25% share threshold of total revenue, it will start to lift overall consolidated growth for EPAM. The company remains on track to hit the full-year 2026 target of $600 million in AI-native revenue. (158 words)