February 13, 2012, 1:44 pm

EPAM - EPAM Systems

2012-02-02
EPAM - EPAM Systems

EPAM - EPAM Systems plans on offering 8.5 million shares at $16-$18. Insiders will be selling 5.9 million shares in the deal. Citi, UBS, Barclays and RenCap are leading the deal, Stifel and Cowen co-managing. Post-ipo EPAM will have 41.8 million shares outstanding for a market cap of $711 million on a pricing of $17. Ipo proceeds will be used for general corporate purposes.

Russia Partners will own 40% of EPAM post-ipo. Russia Partners is a Russian based private equity firm focusing on Russian and eastern European investments.
From the prospectus:
'We are a leading global IT services provider focused on complex software product development services, software engineering and vertically-oriented custom development solutions.'
IT outsourcing operations focused on software product development. Located in Belarus, Ukraine, Russia, Hungary, Kazakhstan and Poland.
Full lifecycle software development services which includes design and prototyping, product development and testing, component design and integration, product deployment, performance tuning, porting and cross-platform migration.
Top 30 clients include Barclays, Citigroup, The Coca-Cola Company, Expedia, Google, InterContinental Hotels Group, Kingfisher, MTV Networks, Oracle, Renaissance Capital, SAP, Sberbank, Thomson Reuters, UBS and Wolters Kluwer.
Reuters accounts for 10%+ of annual revenues.
53% of revenues from North America, 26% from Western Europe and 19% from Russia and Eastern Europe.
Longterm relationships as 93% of 2010 revenues were derived from clients of 2+ years.
Industry - worldwide offshore R&D/software development services spending is expected to grow 10%+ annually through 2014.
***Pretty easy to understand business model here: Offshore IT outsourcing based in Russia and Eastern Europe.
Sector is a low margin people intensive business. As of 9/11, EPAM had 6,554 IT employees. High attrition rate of 10% annually.
Competitors include offshore IT outsourcing companies in India and China.
Software development accounted for 65% of revenues, testing services 20%.
Financials
$2 per share in cash post-ipo, no debt.
Tax rate appears to be in the 20% range post-ipo.
2011 - Strong growth here past 1 1/2 years as EPAM has grown revenues nicely from existing customers. $325 million in revenues, 47% growth from 2010. 39% gross margins inline with prior periods. Operating margins of 17 1/4%. 13 1/4% net margins. EPS of $1.
2012 - EPAM does not break down numbers quarterly, plus we've yet to see the 4th Q 2011 results. If we plug in solid 15% 2012 revenue growth run we shouldn't see operating metrics change all that much. $375 million in revenues, 17 1/2% operating margins, 13 1/2% net margins. EPS of $1.20. On a pricing of $17, EPAM would trade 14 X's 2012 estimates.
Conclusion - Definitely not a high multiple sector here. I'd submit a PE of 20+ regardless of growth rate means the sector/stock has gotten ahead of itself. EPAM is on the more sophisticated services end of the outsourcing sector here. This is not a customer service outsourcing operation, EPAM is focused on software development and testing.
EPAM has shown very nice growth the 15 months prior to ipo. Margins are solid and multiple at 14 is reasonable. If priced right, the ipo should work short and mid-term. Generally not a fan of this sector, looks though that EPAM coming public quite reasonable. Not one to pay up for, but in range looks solid.

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