Great write-up Balkar/Daye. My main concern is on structural impairment of future growth. The infrastructure they built with universities across Belarus/Ukraine/Russia was crucial in their talent hiring process, which is the key revenue driver given the supply-constrained IT service industry.
if the war doesn't end in the next 2-3yrs, don't you think that future near/mid-term growth will be capped? Especially if you look at other "engineering-focused" service providers like Globant, where many of their "bulk" hiring are geographically-focused (despite most of them doing offshore work). I assume the shift will take a significant amount of time
Thanks Yi. Good points. If you look at their hiring trends for the last few years, incremental adds in other countries has been much higher compared to core geography. So they have shown a capability to hire engineering talent in other locations. This they will need to speed up. On core, so there is that scenario where they lose their advantage but if we do some gaming of the scenarios on the other side then what happens? This is all very dynamic right. Will the graduates from these universities go around unemployed or move to a delivery center in a neighboring countries/West Ukraine? If Russia becomes North Korea, will Russian engineers not move? I don't disagree with what you are saying but we know how hard it is to execute this business and this is a management that has executed to $3.7 bn in revenues. My experience is that these management's surprise you to the upside and my r/r is good at these valuations hence the small position.
Also the Russian employees, i think, cannot be paid due to sanctions, plus they are paid in rubles (if i recalled correctly), so you effectively lose part of your Russian workforce (also Belarus). So ur existing revenue, and future growth, will both be impaired
Yes - these are usually multi-year relationships. Also, Ukrainian politicians have given supportive statements for EPAM as it has historically helped with digital projects for the government.
I find your expectations of being able to hire more talent and maintain profit margins overly optimistic. Given the challenge of finding these staff it is not going to be so easy to make this change. I would extend the timelines longer as it takes two to three years to develop talent.
Thanks for the comment. I would not disagree. That is the biggest risk. Profit margins come down in scenario 2 and 3. Given management has shown they are very good at executing - I'll give them the benefit of the doubt.
Thanks for the comment, Andrew. The industry is fairly competitive. EPAM prices a bit higher vs. competition but we would not say they alone have pricing power. If there are cost pressures on the industry that can be passed but if there are cost pressures on EPAM alone then it would have to absorb them. That is why we have margins going down in Scenario 2 and 3.
Great write-up Balkar/Daye. My main concern is on structural impairment of future growth. The infrastructure they built with universities across Belarus/Ukraine/Russia was crucial in their talent hiring process, which is the key revenue driver given the supply-constrained IT service industry.
if the war doesn't end in the next 2-3yrs, don't you think that future near/mid-term growth will be capped? Especially if you look at other "engineering-focused" service providers like Globant, where many of their "bulk" hiring are geographically-focused (despite most of them doing offshore work). I assume the shift will take a significant amount of time
Thanks Yi. Good points. If you look at their hiring trends for the last few years, incremental adds in other countries has been much higher compared to core geography. So they have shown a capability to hire engineering talent in other locations. This they will need to speed up. On core, so there is that scenario where they lose their advantage but if we do some gaming of the scenarios on the other side then what happens? This is all very dynamic right. Will the graduates from these universities go around unemployed or move to a delivery center in a neighboring countries/West Ukraine? If Russia becomes North Korea, will Russian engineers not move? I don't disagree with what you are saying but we know how hard it is to execute this business and this is a management that has executed to $3.7 bn in revenues. My experience is that these management's surprise you to the upside and my r/r is good at these valuations hence the small position.
Yeap understandable, and agree on the sizing given the risk-reward profile. Thanks for the perspective on this. Appreciate it!
Also the Russian employees, i think, cannot be paid due to sanctions, plus they are paid in rubles (if i recalled correctly), so you effectively lose part of your Russian workforce (also Belarus). So ur existing revenue, and future growth, will both be impaired
They have USD and Roubles in bank accounts (local branches) in these countries with which they are paying employees.
Awesome research, explanation, and analysis. Thank you.
Thanks for reading, Ryan.
One other thing - there is high chance of clients sticking to the service provider in the difficult times to have empathy
Yes - these are usually multi-year relationships. Also, Ukrainian politicians have given supportive statements for EPAM as it has historically helped with digital projects for the government.
I find your expectations of being able to hire more talent and maintain profit margins overly optimistic. Given the challenge of finding these staff it is not going to be so easy to make this change. I would extend the timelines longer as it takes two to three years to develop talent.
Thanks for the comment. I would not disagree. That is the biggest risk. Profit margins come down in scenario 2 and 3. Given management has shown they are very good at executing - I'll give them the benefit of the doubt.
With cost going up. Will this company have pricing power? If they hike their price, will their customers leave or not renewal with them?
Thanks for the comment, Andrew. The industry is fairly competitive. EPAM prices a bit higher vs. competition but we would not say they alone have pricing power. If there are cost pressures on the industry that can be passed but if there are cost pressures on EPAM alone then it would have to absorb them. That is why we have margins going down in Scenario 2 and 3.
Awesome analysis Bakker.
Thank you for this additional explanation.