EPAM SYSTEMS, INC. 2026 Q2 Earnings Call

Good morning, everyone, and thank you for joining us today on our second quarter 2026 earnings announcement. As the operator just mentioned, I'm Mike Rowshandel, Head of Investor Relations. We hope you've had an opportunity to review our earnings release we issued earlier today. If you have not, copies are available on epam.com in the investors section. With me on today's call are Balazs Fejes, CEO and President, and Jason Peterson, Chief Financial Officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risk and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the investors section of our website.

With that said, I will now turn the call over to FP.

Since we last spoke, I've spent quarter with clients, partners, and our own teams across global delivery centers, and one thing keeps sharpening. AI is transforming everything we do while adding more complexity across the enterprise. The gap between AI experimentation, adoption, and optimization is EPAM's opportunity. Revenue growth in the second quarter came in the high end of our outlook range, with continued improvement in profitability and strong adjusted earnings per share. Our pure AI native revenues accelerated, reaching more than $160 million in the quarter. Our operating momentum remains solid, and we will be direct today about the growth gaps we are experiencing, particularly in significant parts of the North American business, and what we are already doing about it.

We are executing the strategy we set out at the investor day back in March, and this quarter is more evidence that we are progressing in the right direction. It's been a noisy and volatile few months, both broadly and for our sector especially, and that volatility itself a reflection of how disruptive AI and the technology continues to be. Our results this quarter support what we have been saying. AI accelerates demand for specialized talent and new ranges of capability, and we are executing against three strategic pillars to capitalize on these new demands. Starting with the first pillar, leading in AI native software engineering, we are rebuilding how we engineer software from the inside out by taking clients beyond traditional SDLC into fully integrated agentic enterprise harnesses, real-time data modernization, cyber resilience, and token cost engineering.

Today, our advanced tools like AI/Run, DIAL, and MF Lens are running complex use cases deployed by thousands of specially trained EPAM engineers across hundreds of client engagements. Whenever I sat down with clients this quarter, the same question came up, "How to deliver value from AI and generate a positive return on investment?" My response is that this is a complex question in which AI does not offer a simple answer. The reason is that AI does not decrease complexity. It adds to it across talent, architecture, process, governance, and models. Coding gets automated, engineering doesn't. The better AI gets at writing code, the more the last mile solution engineering and successful deployments matter.

Every successful AI deployment we deliver surfaces new use cases and new scope, which is exactly why the foundational work of modernization, data engineering, and retiring technical debt clients have carried for years presents the biggest opportunity for us, and one that is finally addressable because of AI. Yet we know that we are still in the early in this cycle, and it isn't linear. Some programs are starting, some are stopping, and some are converting into new ways of engaging, changing the mix, and altering the market. On the second pillar, turning EPAM into a full stack AI-native organization, we continue to accelerate and expand our strategic partnership. These partnerships, along with others, are on badges. They are how we build a multimodal bench that's already feeding named pipeline and many of our larger multiyear deals.

This quarter, we joined the OpenAI Partner Network as an OpenAI advanced partner with a path to elite status. Together, we are building forward-deployed engineering, cyber resilience, and customer experience capabilities on OpenAI's frontier models with a first-year commitment to certify more than 5,000 OpenAI consultants and train over 10,000 EPAM specialists. Beyond creating the expert force, we are extending into security, managed services, and industry-specific solutions across our main geographies. With Google, we have certified more than 2,000 of our 5,000 by Q3 target under the Gemini Enterprise Certified Partner Specialist program, building our capabilities on Google's Gemini enterprise ecosystem for building, running, and governing multi-step AI agents. This is on top of our multiyear GCP relationship with over 2,000 certified Google Cloud practitioners, agentic GCP marketplace solutions, and award-winning offerings.

With Anthropic, we are now among the top five globally certified partners with more than 5,700 certified engineers already ahead of the 5,000 by Q3 milestone we set out. We are building toward more than 10,000 Claude certified architects by the year-end, with over half of our delivery organization already through the Anthropic academic coursework. Backed by a dedicated group of 250 forward-deployed engineering black belts. Notably, the practice now extends beyond the team enablement into security and into specific verticals and key accounts. Finally, on the third pillar, our go-to-market transformation, we are using our AI-native structure to open new go-to-market motions with a special focus right now in North America.

Over the past quarter, we have launched a structured multi-quarter commercial transformation, standardizing how we prioritize and pursue our largest accounts, building more disciplined new logo pipeline management, and investing in sales capabilities and training across the organization. This is a forward investment in commercial discipline and the back to fundamentals execution focus we are applying across the whole business. Now let's turn to some quick Q2 highlights. Revenue grew 4.5% year-over-year on a reported basis with organic constant currency growth of 3.4%. Four of our six verticals grew year-over-year, led by financial services and life sciences healthcare, while emerging verticals and consumer goods and retail and travel businesses both contributed to growth. Software and high tech and business information and media both declined in the quarter. Business information and media's decline was driven by the completion of several client projects.

Software and high tech experienced project ramp downs concentrated in non-AI services, which outweighed the growth in AI, cloud, and cybersecurity work within the same vertical. Across geographies, EMEA continued to lead our growth with strong double-digit performance, while, in contrast, Americas delivered significantly lower growth. Now turning to the demand environment. From macro perspective, client sentiment and budget behavior are sitting in roughly the same zone as last quarter. The environment has not materially improved nor worsened, and we continue to see prolonged decision-making as the war in the Middle East persists. Against this background, we continue to see some real areas of strength. Let me share some specifics. EMEA continues to drive strong revenue growth, driven by an active pipeline created by proactive go-to-market sales motions that we have already implemented.

Financial services were our fastest growing vertical again this quarter, delivering growth across both EMEA and the Americas. A key driver for growth has been AI-led deployment of use cases, including mainframe modernization, using EPAM IP to reverse engineer, automate, and rebuild with new forward-deployed capabilities. Life sciences and healthcare was our second fastest growing vertical this quarter, picking up momentum over the past two quarters, led by pharma R&D and clinical trials paired with AI and continued momentum in med tech products and services. In energy, our book of business is significantly larger than it was 12 months ago, primarily driven by expanding scope of services across our existing client base, as well as new logo revenues. While we historically focused on upstream, we are now expanding our book of business into midstream, downstream, and data center work for this vertical. Now, some of the offsetting factors.

Let me be direct. North America is not growing fast enough. We now expect it to operate below our expectations in the second half. Based on where business sits today, I want to be clear that this is not a story about waiting for the macro to turn. We own it. Two things are driving conditions. First, there's a genuine shift in what North American clients are buying. Demand is moving away from tax-based services like manual testing, user experience, JavaScript front-end engineering, and shifting towards AI-led modernization. This transition is happening faster than the replacement work is ramping, creating a growth gap that needs to be filled even faster. Separately, software and high tech pulled back this quarter, primarily due to project ramp downs. While the underlying client relationships remain solid, the timing is creating a drag in this part of the portfolio.

Second, our own go-to-market in the region has not been operating at the level it needs to. This is squarely within our control. That's exactly what the multi-quarter commercial transformation I described earlier is going to address by building forward selling momentum into subsequent quarters. For now, we would rather set expectations honestly than ask you to wait on a recovery we haven't yet earned. Jason will take you through what this means for the numbers. Turning to the new big deals pipeline. We are seeing good progress here. These AI-led opportunities are exclusively with existing clients, not new logos. They continue to actively move through our pipeline. All of them are AI related, specifically agentic managed services and application maintenance. To be clear, none of them are signed yet. We are deliberately not getting ahead of ourselves in factoring them in.

The potential is real. It's one of the things we are most encouraged by this quarter. What makes these deals notable is their composition, size, and multi-year structure. We are using our AI-native capabilities to compete for portions of existing clients' business for which EPAM hasn't been historically positioned, thereby expanding our footprint and impact. It's complementary growth on top of our core business. We have focused on executing it. At the same time, the natural procurement cycle runs longer than our typical deals. Based on our best view today, the likelihood of closing and the ramp timing, we now expect more meaningful revenue contribution starting in the first half of 2027 versus the second half of 2026. Turning to AI. Our data business grew faster than the rest of the business this quarter.