EPAM Systems Financial Model

For EACH of the six revenue verticals (Financial Services, Travel & Consumer, Software & Hi-Tech, Business Information & Media, Life Sciences & Healthcare, Emerging):

• Segment name: As reported in the 10-K (e.g., "Financial Services").
• Revenue driver formula: Average Billable Headcount allocated to Vertical x Average Utilisation Rate x Average Annualised Revenue per Professional.
• Historical growth rate: 5% to 15% historically, with a rebound to approximately 15% consolidated growth in FY2025 after a slower FY2023 and FY2024.
• Key growth levers and headwinds: Growth is driven by enterprise AI foundational readiness, cloud migration, and vendor consolidation. Headwinds include macroeconomic uncertainty delaying discretionary IT spending and foreign exchange volatility.
• Pricing dynamics: Predominantly time-and-materials (T&M) contracts, allowing the company to pass through wage inflation, alongside a smaller portion of fixed-price contracts.
• Revenue recognition notes: Recognised over time as services are performed and billable hours are incurred.
• Seasonality: Q4 is typically the strongest quarter due to year-end client budget flushes, while Q1 is often the weakest due to fewer billing days and holiday impacts.

• Total assets: Approximately $4.5 billion to $5.0 billion.
• Key asset categories: Cash and cash equivalents (approx. $1.3 billion), Trade receivables, Contract assets (unbilled revenues), and Goodwill.
• Goodwill & intangibles as % of total assets: Approximately 15% to 20%, reflecting a history of strategic bolt-on acquisitions.
• Working capital profile:
• Days Sales Outstanding (DSO): 65 to 75 days.
• Days Inventory Outstanding (DIO): Not applicable (services business).
• Days Payable Outstanding (DPO): 25 to 35 days.
• Net working capital as % of revenue: 15% to 20%.
• Is working capital positive or negative? Positive. The company requires working capital to fund payroll before collecting cash from clients.
• PP&E: Asset-light. Consists primarily of computer equipment and leasehold improvements for global delivery centres.
• Right-of-use assets / operating leases: Material, representing the global footprint of office and delivery centre leases.

• Capex as % of revenue: 1.5% to 2.5%.
• Maintenance capex vs. growth capex: Heavily weighted towards growth capex (fitting out new delivery centres in emerging geographies and upgrading IT infrastructure).
• Major capex programmes underway or planned: Expansion of delivery hubs in India, Latin America, and Central Asia.
• Capitalised software / development costs if material: Immaterial for this services business.
• M&A pattern: Serial bolt-on acquirer to gain specific vertical expertise or geographic footprint (e.g., the acquisition of First Derivative in late 2024).
• Typical acquisition multiple paid: Typically 2.0x to 3.0x revenue for premium digital engineering assets.

• Total debt and net debt: Effectively zero structural debt. The company operates with a massive net cash position (over $1.3 billion in cash).
• Debt/EBITDA ratio: 0.0x.
• Credit rating: Unrated, but operates with investment-grade credit metrics.
• Key debt instruments: Relies on an undrawn revolving credit facility for short-term liquidity needs.
• Maturity profile: Not applicable due to lack of term debt.
• Interest rate profile: Generates interest income on its large cash balances.
• Covenants: Standard leverage and interest coverage covenants on the revolving credit facility, which are easily met.
• Share repurchase programme: Highly active. The company repurchased 3.54 million shares for $660.6 million in FY2025.
• Dividend policy: No dividend. All capital return is executed via share repurchases.

• Operating cash flow conversion: Very strong, typically 1.2x to 1.5x Net Income ($654.9 million OCF in FY2025).
• Free cash flow margin: 10.0% to 12.0%.
• Major non-cash items that bridge net income to OCF: Stock-based compensation, depreciation and amortisation, and amortisation of acquired intangibles.
• Working capital cash flow impact: Generally a use of cash during periods of high growth due to the buildup of trade receivables and contract assets.
• Capex intensity: Very low (under 3% of revenue).
• Cash tax rate vs. GAAP effective tax rate: Cash taxes are generally lower than the GAAP effective tax rate due to excess tax benefits from stock-based compensation.

1. Assumptions: Hardcoded inputs for macroeconomic drivers, headcount growth, utilisation, bill rates, and margin targets.
2. Headcount & Delivery: Schedules for billable delivery professionals vs non-billable headcount, attrition rates, and geographic mix.
3. Revenue: Revenue built up by the six industry verticals (Financial Services, Travel & Consumer, Software & Hi-Tech, Business Information & Media, Life Sciences & Healthcare, Emerging).
4. Income Statement: Consolidated P&L mirroring the 10-K (Cost of revenues, SG&A, D&A, restructuring charges).
5. Stock-Based Compensation: Schedule allocating SBC between Cost of Revenues and SG&A to bridge GAAP to Non-GAAP metrics.
6. Balance Sheet: Standard asset and liability line items, highlighting unbilled revenues (contract assets) and deferred revenues.
7. Working Capital: Schedules for trade receivables, contract assets, and accrued compensation.
8. PP&E & Intangibles: Capex, depreciation, and amortisation of acquired intangibles.
9. Debt & Equity: Revolver schedule, share repurchase tracking, and basic EPS calculation.
10. Cash Flow Statement: Indirect method starting from Net Income.
11. Valuation: DCF and comparable company multiples.

1. Total Delivery Professionals = Prior Period Delivery Professionals x (1 + Net Hiring Rate)
2. Average Billable Headcount = (Beginning Delivery Professionals + Ending Delivery Professionals) / 2
3. Vertical Revenue = Total Average Billable Headcount x Vertical Allocation % x Average Utilisation Rate x Average Annualised Bill Rate
4. Total Revenue = Sum of all six Vertical Revenues
5. Cost of Revenues = Average Delivery Professionals x Average Compensation per Professional + Delivery SBC
6. Gross Profit = Total Revenue - Cost of Revenues
7. SG&A Expense = Average Non-Billable Headcount x Average Compensation per Non-Billable Professional + Corporate Overhead + SG&A SBC
8. Non-GAAP Operating Income = GAAP Operating Income + Total SBC + Amortisation of Acquired Intangibles + Humanitarian/Restructuring Charges
9. Contract Assets = (Total Revenue / 365) x Days Unbilled Outstanding
10. Diluted Shares Outstanding = Prior Period Shares - (Share Repurchase Amount / Average Share Price) + Options Dilution

• The Assumptions sheet feeds the Headcount & Delivery and Revenue sheets.
• The Headcount & Delivery sheet drives the Revenue sheet, the Income Statement (Cost of Revenues), and the Working Capital sheet (Accrued Compensation).
• The Income Statement feeds the Cash Flow Statement (Net Income) and the Balance Sheet (Retained Earnings).
• The Working Capital sheet feeds the Cash Flow Statement (Changes in NWC) and the Balance Sheet.
• The Debt & Equity sheet feeds the Income Statement (Interest Income) and the Cash Flow Statement (Share Repurchases).
• A circularity risk exists where Interest Income depends on average cash balances, which depend on Net Income, which in turn depends on Interest Income.

• Revenues, Assets, and Headcount metrics are entered and displayed as positive numbers.
• Expenses and Liabilities are calculated as positive numbers on their supporting schedules but are subtracted in the Income Statement and Balance Sheet equations.
• On the Cash Flow Statement, cash inflows are positive, and cash outflows (such as Capex and Share Repurchases) are negative.

• Failing to allocate Stock-Based Compensation correctly between Cost of Revenues and SG&A, which distorts gross margin calculations.
• Ignoring the impact of foreign exchange fluctuations; EPAM reports organic constant currency growth which differs materially from reported GAAP revenue.
• Miscalculating the bridge between GAAP and Non-GAAP operating margins (a 500-600 bps difference driven by SBC, amortisation, and restructuring).
• Overestimating utilisation rates; EPAM typically caps utilisation around 78% to 82% to allow for training, bench time, and vacation.
• Forgetting to model unbilled revenues (contract assets), which are a massive component of working capital for IT services firms.
• Mismodelling the share count reduction; EPAM uses its strong free cash flow to aggressively buy back shares, which is critical for accurate EPS forecasting.
• Treating all headcount equally; the model must separate billable delivery professionals from non-billable SG&A staff.
• Overlooking the geographic shift; moving headcount from Eastern Europe to India and Latin America changes the average cost per employee and the effective tax rate.

• Gross margin must remain between 30.0% and 33.0% based on historical performance.
• Non-GAAP operating margin should stabilise around 15.0% to 16.5% based on management guidance.
• OCF to Net Income conversion must be greater than 1.1x, reflecting the company's strong cash generation.
• Capex as a percentage of revenue should not exceed 3.0%.
• Total Assets must equal Total Liabilities plus Equity in all periods.
• Effective GAAP tax rate should be approximately 26.0%, and Non-GAAP tax rate approximately 24.0%.
• Diluted share count should decrease year-over-year given the active $600 million+ annual repurchase programme.

• Filings: SEC EDGAR for EPAM's 10-K and 10-Q filings.
• Presentations: EPAM Investor Relations website for earnings presentations, headcount metrics, and geographic mix updates.
• Peers: Globant (GLOB), Endava (DAVA), Accenture (ACN), and Cognizant (CTSH) for margin and valuation benchmarking.
• Industry Data: Gartner and IDC IT Services forecasts for total addressable market growth.
• Consensus: FactSet or Bloomberg for consensus EPS and revenue estimates to validate model outputs.

• EPAM Systems, Inc. Form 10-K for the Fiscal Year Ended December 31, 2025.
• EPAM Systems, Inc. Q4 and Full Year 2025 Earnings Release (February 19, 2026).
• EPAM Systems, Inc. Investor Relations Presentations and Analyst Day Transcripts (March 2026).