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Based in Newtown, PA, EPAM Systems (NYSE:EPAM) scheduled a $126 million IPO with a market capitalization of $697 million at a price range mid-point of $17 for Wednesday, February 8, 2012.

EPAM is one of nine IPOs scheduled for this week (see our IPO calendar).

SUMMARY

EPAM is an IT services provider in a relatively niche market.

For the nine months ended September 2011 compared to 2010 sales increased 58% to $239 million and net income increased 92% to $32 million.

CONCLUSION

EPAM shows very good internal growth. At the price range mid-point we are favorably inclined towards EPAM.

BUSINESS

EPAN is a leading global IT services provider focused on complex software product development services, software engineering and vertically-oriented custom development solutions.

Since inception in 1993, EPAN has been serving independent software vendors, or ISVs, and technology companies. These companies produce advanced software and technology products that demand sophisticated software engineering talent, tools, methodologies and infrastructure to deliver solutions that support functionality and configurability to sustain multiple generations of platform innovation.

The foundation EPAM has built serving ISVs and technology companies has enabled EPAN to differentiate itself in the market for software engineering skills and technology capabilities.

EPAM's work with these clients exposes the company to customers' challenges across a variety of industry "verticals." This has enabled EPAM to develop vertical-specific domain expertise and grow our business in multiple industry verticals, including Banking and Financial Services, Business Information and Media, Travel and Hospitality and Retail and Consumer.

CORE COMPETENCY

EPAM's historical core competency is full lifecycle software development services including design and prototyping, product development and testing, component design and integration, product deployment, performance tuning, porting and cross-platform migration.

Delivery centers in Belarus, Ukraine, Russia, Hungary, Kazakhstan and Poland are strategically located in centers of software engineering talent and educational excellence across Central and Eastern Europe, or CEE, and the Commonwealth of Independent States, or the CIS.

EPAM also has client management locations in the United States, United Kingdom, Germany, Sweden, Russia, Switzerland and Kazakhstan.

EPAM believes it is the only SAS 70 Type II certified IT services provider with multiple delivery centers in CEE, based on EPAM's analysis of publicly available information of IT services providers. This certification is a widely recognized auditing standard developed by the American Institute of Certified Public Accountants, or AICPA, and it serves as additional assurance to EPAM clients that are required to validate the controls in place to protect the security of their sensitive data.

CLIENTS

EPAM's clients primarily consist of Forbes Global 2000 corporations located in North America, Europe and the CIS. Selected companies among EPAM's top 30 clients based on 2010 revenues include Barclays (NYSE:BCS), Citigroup (NYSE:C), The Coca-Cola Company (NYSE:KO), Expedia (NASDAQ:EXPE), Google (NASDAQ:GOOG), InterContinental Hotels Group (NYSE:ICE), Kingfisher (OTCPK:KGFHF), MTV Networks (NYSE:DIS), Oracle (NYSE:ORCL), Renaissance Capital (OTC:RNCG), SAP, Sberbank (SBRBF.PK), Thomson Reuters (NYSE:TRI), UBS (NYSE:UBS) and Wolters Kluwer (OTC:WOLTF).

EPAM maintains a geographically diverse client base with 52.8% of 2010 revenues from clients located in North America, 26.4% from clients in Europe and 19.1% from clients in the CIS.

EMAM's focus on delivering quality to clients is reflected by an average of 92.8% and 77.3% of revenues in 2010 coming from clients that had used our services for at least two and three years, respectively.

INDUSTRY BACKGROUND

Industry Background

According to IDC, offshore IT services spending in the United States and Europe, the Middle East and Africa, or EMEA, grew from $12.7 billion in 2005 to $30.0 billion in 2009, representing a four-year CAGR of 24.0%. IDC estimates this market will further grow at an estimated five-year CAGR of 6.1% through 2014 to $40.2 billion.

Growth of Central and Eastern Europe as an Offshore Delivery Region

The growing acceptance of the offshore delivery model, beyond the traditional India-based IT services providers, has created significant opportunities for CEE-based IT services providers. CEE-based IT services providers now compete against the largest and more-established global IT services providers and have been recognized by independent third-party research firms such as IDC for providing complex IT services.

As a result, according to the Central and Eastern European Outsourcing Association, the volume of IT outsourcing and custom software product development services exported from CEE was expected to increase between 10% and 30% in 2010, depending on the country. Factors contributing to this growth include:

COMPETITION

Includes ...

  • India-based technology outsourcing IT services providers, such as Cognizant Technology Solutions, (NASDAQ:CTSH), ($21 billion market cap).
  • GlobalLogic, HCL Technologies, Infosys Technologies (NYSE:INFY) $31 billion market cap); Mindtree, $18 billion market cap); Sapient (NASDAQ:SAPE) $1.8 billion market cap;, Symphony Technology, owned by (NYSE:IBM); Tata Consultancy Services (TCS.BO) $2.17 trillion market cap; and Wipro (NYSE:WIT) $27 billion market cap.
  • Local CEE technology outsourcing IT services providers
  • Large global consulting and outsourcing firms, such as Accenture (NYSE:ACN), Atos Origin (OTCPK:AEXAF), Capgemini, CSC (NYSE:CSC) and IBM.
  • China-based technology outsourcing IT services providers such as Camelot Information Services (NYSE:CIS), hiSoft Technology (HSFT) International, iSoftStone (NYSE:ISS) and VanceInfo Technologies (NYSE:VIT); and
  • In-house IT departments of clients and potential clients.

USE OF PROCEEDS

EPAM expects to net $20 million from the sale from 1.4 million shares. Shareholders intend to sell 5.9 shares. Proceeds are allocated for general corporate purposes.

Source: IPO Preview: EPAM Systems