EPAM Systems Q2 2026 Earnings Report

EPAM Systems EPS Results

• Actual EPS: $3.38
• Consensus EPS: $3.16
• Beat/Miss: Beat by +$0.22
• One Year Ago EPS: $2.77

EPAM Systems Revenue Results

• Actual Revenue: $1.41 billion
• Expected Revenue: $1.41 billion
• Beat/Miss: Beat by +$7.21 million
• YoY Revenue Growth: +4.60%

EPAM Systems Announcement Details

• Quarter: Q2 2026
• Date: 8/6/2026
• Time: Before Market Opens
• Conference Call Date: Thursday, August 6, 2026
• Conference Call Time: 8:00AM ET

EPAM Systems (NYSE:EPAM) (NYSE: EPAM) is a global digital engineering and technology services company that helps businesses design, build and modernize software and digital platforms. Its services include software development, product and platform engineering, cloud services, data and analytics, artificial intelligence, cybersecurity, and technology consulting.

The company works with clients across industries including financial services, healthcare, life sciences, retail, travel and consumer products, media, telecommunications, and energy. EPAM provides services ranging from strategy and experience design to application development, systems integration, modernization, and ongoing technology support.

EPAM was founded in 1993 by Arkadiy Dobkin and Leo Lozner and has expanded from its early focus on software engineering in Central and Eastern Europe into an international technology services provider. The company serves clients across North America, Europe, Asia, and other global markets. Arkadiy Dobkin has served as EPAM’s chief executive officer since the company’s founding.

EPAM Systems Q2 2026 Earnings Call Transcript

Key Takeaways

• Q2 results exceeded expectations: Revenue rose 4.5% year over year to $1.415 billion, while non-GAAP operating margin improved to 16.4% and non-GAAP EPS increased 22% to $3.38.
• AI momentum continued: AI-native revenue exceeded $160 million, representing more than 11% of total revenue and marking the sixth consecutive quarter of double-digit sequential growth; EPAM remains on track for its $600 million 2026 AI-native revenue target.
• North American growth is a major weakness: Americas revenue grew only 0.5%, and management expects very slow growth in the region during the second half as clients shift spending away from task-based services toward AI-led modernization and the company rebuilds its go-to-market capabilities.
• Full-year revenue guidance was reduced: EPAM now expects 2026 revenue growth of 3.2%-4.2%, or 2%-3% on an organic constant-currency basis, with Q3 growth expected to slow to roughly 1.7% at the midpoint and revenues projected to be flat from Q3 to Q4.
• Large AI-related deals remain unsigned: A growing pipeline of multi-year agentic managed services and application-maintenance opportunities is progressing with existing clients, but meaningful revenue contribution is now expected mainly in the first half of 2027 rather than late 2026.

Presentation

[Mike Rowshandel, Head of Investor Relations at EPAM]

Good morning, everyone, and thank you for joining us today on our Q2 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.

[Mike Rowshandel, Head of Investor Relations at EPAM]

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

[Balazs Fejes, CEO and President at EPAM]

Thank you, Mike. And good morning, everyone. It's a pleasure to meet you all again.

[Balazs Fejes, CEO and President at EPAM]

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 Q2 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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

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.

[Balazs Fejes, CEO and President at EPAM]

Our data business grew faster than the rest of the business this quarter. That foundational demand is exactly what continues to feed our AI native pipeline, underscoring our thesis of the largely untouched backlog underneath AI, technical debt, legacy modernization, and foundational data and cloud work of all of which has to happen before AI can drive value for the enterprise. Yet, while AI native revenue growth is compounding nicely, extending its run of consecutive quarters of double-digit sequential growth, now representing over 11% of our business, getting it to a more sizable share of the business is going to take some time. The constraint we see isn't our ability to deliver. Our FD teams, our AI/Run platform, and our partners can absorb considerably more than the backlog we see today.

[Balazs Fejes, CEO and President at EPAM]

What is needed for reliable traction within complex enterprises is a motion to bring AI from enablement to business change and impact. Compared to a year ago, our progress is real and meaningful. The industry overall is still relatively early in the process and set against a backdrop of rapidly changing and complex industry trade winds. Let me share a few client examples to help illustrate. For a leading financial services wealth management firm, we are modernizing with AI and accelerating mainframe transformation with reverse engineering over 10 million lines of code, delivering 60% times savings in reverse engineering effort, while inserting new forward deployed engineering capabilities into fundamentally new engagement modalities. For a multinational beverage manufacturing company, we built a unified data platform to consolidate the fragmented enterprise data into a trusted AI foundation, enabling scale deliver more than 80 data and AI initiatives.

[Balazs Fejes, CEO and President at EPAM]

Now live, the company has seen over EUR 30 million in business operational impact over the past 12 months. For a global energy commodity company, EPAM helped migrate more than 1,000 workloads to AWS with zero downtime for users, resulting in a 40% reduction in infrastructure and operational costs and a 30% improvement in operational efficiency. The project came at a sensitive time after an acquisition when the company needed to extract a critical application from its legacy environment and consolidate hundreds of aging on-premises servers. Since we spoke last, we have been honored to receive several key leadership distinctions. Databricks named EPAM its 2026 Consulting and Systems Integrator AI Partner of the Year, recognizing EPAM's work helping clients across industries operationalize AI and turn fragmented data into production-grade AI applications and agents.

[Balazs Fejes, CEO and President at EPAM]

EPAM won the 2026 Fortress Cybersecurity Award in cloud security for migrating a Swiss private bank's entire IT landscape, hundreds of applications to Microsoft Azure while meeting strict FINMA requirements. Gartner positioned EPAM as a specialist in its emerging market quadrant for physical AI services, spending out among established vendors. IDC MarketScape named EPAM a major player in its first worldwide life sciences R&D strategic consulting services 2026 vendor assessment. Forrester included EPAM among the 28 most important vendors in the customer experience strategy consulting services landscape. Finally, The Wall Street Journal named EPAM one of its best companies for the future. These recognitions continue to reflect the hard work and dedication of our global teams and our unwavering commitment to delivering tangible results and outcomes for our clients. In summary, our strong Q2 reflects real progress against our multi-year strategy and AI specific goals.

[Balazs Fejes, CEO and President at EPAM]

We outperformed despite the macro backdrop, made tangible headways on each of our three strategic pillars, and took deliberate early steps on the areas that need it most, particularly in North America. We remain confident in our long-term strategy to become a global leader in AI transformation services, serving as a trusted AI accelerator and a partner for our clients. Our AI native and AI foundational momentum continues to build. Over time, these revenues will continue to make up a larger share of our overall business. We see this quarter as a solid step in that direction. We are clear-eyed that the second half will be uneven, particularly in North America. Our conviction in the strategy, the team, and the commercial transformation is high.

[Balazs Fejes, CEO and President at EPAM]

The work ahead of us over the next couple of quarters is to keep converting focus into results with the same discipline that got us here. Lastly, I want to thank you all for your continued commitment, trust, and support. Jason, over to you.

[Jason Peterson, CFO at EPAM]

Thank you, FB, and good morning, everyone. In Q2, we delivered strong quarterly results, outperforming the high end of our guidance ranges for organic constant currency revenue growth, profitability, and EPS. Revenue was $1.415 billion, delivering year-over-year growth of 4.5%. On an organic constant currency basis, revenue grew 3.4% compared to the Q2 of 2025. GAAP and non-GAAP gross margins both improved year-over-year and exceeded our expectations for the quarter. With solid revenue growth and improved year-over-year profitability, GAAP income from operations grew by more than 20%, and non-GAAP income from operations grew by 14.7%. GAAP diluted EPS grew by 26.3%, and non-GAAP diluted EPS grew by 22%. AI native and AI foundational revenues continue to contribute to year-over-year growth. With more than $160 million in AI native revenues in the quarter, this is the sixth consecutive quarter of sequential double-digit growth.

[Jason Peterson, CFO at EPAM]

Moving on to our Q2 industry performance, we delivered year-over-year growth across the majority of our verticals. Financial services delivered strong growth and was our fastest-growing vertical in the quarter, up 11.5% year-over-year, driven significantly by insurance and asset management clients across both EMEA and the Americas. We continue to generate double-digit revenue growth in the vertical with significant contribution from AI modernization programs. Consumer goods, retail, and travel delivered 2.3% year-over-year growth, notably driven by retail and consumer goods. Life sciences and healthcare delivered solid growth and was our second-fastest-growing vertical in the quarter, with growth of 8% on a year-over-year basis. Revenue growth in the vertical continues to be driven primarily by clients in life sciences and med tech. Notably, year-over-year revenue growth in this vertical continues to accelerate.

[Jason Peterson, CFO at EPAM]

Software and high tech declined 1.3% year-over-year, driven significantly by the expected ramp down of a large client program, as well as the shift in priorities that FB mentioned earlier. Business information and media decreased 2.1% year-over-year, driven primarily by the completion of several client projects. Our emerging verticals delivered year-over-year growth of 4.9%, primarily driven by ongoing strength in energy and manufacturing. From a geographic perspective, Americas, our largest region, representing 57% of our Q2 revenues, grew 0.5% year-over-year, with strong growth in financial services revenue offset substantially by declines in the software and high tech and business information and media verticals. EMEA, comprising 41% of our Q2 revenues, increased 10.9% year-over-year and 9.4% in constant currency, with strong growth in financial services, as well as contributions from travel and consumer goods and energy. Finally, APAC, making up 2% of our revenues, decreased 0.3% year-over-year.

[Jason Peterson, CFO at EPAM]

Lastly, in Q2, revenues from our top 20 clients grew 3.1% year-over-year, while revenues from clients outside our top 20 increased 5.2%. Now as we move down the income statement, our GAAP gross margin for the quarter was 30.4%, compared to 28.8% in Q2 of last year. Non-GAAP gross margin for the quarter was 32%, compared to 30.1% for the same period a year ago, demonstrating our ability to improve profitability while continuing to invest in our AI capabilities and grow our AI native revenues. GAAP SG&A was 17.3% of revenues, compared to 17.1% in Q2 of last year. Non-GAAP SG&A in Q2 2026 came in at 14.5% of revenue, compared to 14.1% in the same period last year. GAAP income from operations was $152 million, or 10.8% of revenue, compared to $126 million, or 9.3% of revenue, in Q2 of last year and grew by 20.4% year-over-year.

[Jason Peterson, CFO at EPAM]

Non-GAAP income from operations was $233 million, or 16.4% of revenue, compared to $203 million, or 15% of revenue, in Q2 of the previous year and grew by 14.7% year-over-year. Our GAAP effective tax rate, which includes a higher level of tax shortfalls related to stock-based compensation, came in at 26.7%, and our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $1.97, compared to $1.56 in Q2 of last year. A $0.41 increase year-over-year, reflecting growth of 26.3%. Our non-GAAP diluted EPS was $3.38, compared to $2.77 in Q2 of last year. A $0.61 increase year-over-year, reflecting growth of 22%. In Q2, there were approximately 52.3 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q2 was negative $2 million, compared to a positive $53 million in the same quarter of 2025.

[Jason Peterson, CFO at EPAM]

Q2 cash flow was negatively impacted by higher variable compensation payments related to 2025 performance, as well as an increase in DSO in the quarter. Free cash flow was negative $18 million, compared to positive free cash flow of $43 million in the same quarter last year. Cash and cash equivalents were approximately $800 million as of the end of the quarter. At the end of Q2, DSO was 82 days and compares to 76 days for Q1 2026 and 78 days for the same quarter last year. During the quarter, we repurchased approximately 1.3 million shares, which included open market purchases of approximately 800,000 shares for $80 million. Approximately half a million shares from the final settlement of our accelerated share repurchase that was paid in the first quarter. To date, since the initiation of our share repurchase program, we've returned approximately $1.6 billion in cash to shareholders.

[Jason Peterson, CFO at EPAM]

Moving on to operational metrics. We ended Q2 with more than 56,650 delivery professionals, reflecting total growth of 1.5% compared to Q2 2025. Our total head count at quarter end was more than 62,850 employees. Utilization was 78.3% compared to 78.1% in Q2 of last year, and 77% in Q1 2026. Now let's turn to guidance. Before moving to the specifics of our 2026 and Q3 outlook, I'd like to provide some thoughts to help frame our guidance. We're encouraged by our performance in the Q2 and by the continued momentum in our pure AI-native revenues, keeping us on track to meet our goal of $600 million in AI-native revenues in 2026. We have also been able to improve company profitability and most notably gross margin, while continuing to invest in our expanding AI capabilities.

[Jason Peterson, CFO at EPAM]

We are now expecting a slowdown in our revenue growth rate in the second half of the year. I'll try to be clear about the underpinnings of our updated outlook. As FB indicated, we delivered modest growth from North America in Q2 and now expect to continue to see very slow revenue growth from the geography for the remainder of the year. We believe our lower growth in North America is largely idiosyncratic to EPAM and something we are working to address. At the same time, our emerging pipeline of larger opportunities continues to develop, and we remain encouraged by the size of this pipeline and the progress we're making in client negotiations. None of these deals have been closed. As a result, we are not expecting meaningful revenues from these deals to contribute to growth until early in 2027.

[Jason Peterson, CFO at EPAM]

We now expect modest sequential growth in Q3, as well as flattish revenues as we move from Q3 to Q4. We will be lowering our revenue guidance for 2026. At the same time, based on our solid profitability in the first half of the year, an updated forecast for the second half, we now expect to operate at the high end of our previous adjusted IFO range of 15%-16%, and have updated our guidance to reflect this. Compared to 90 days ago, we see no material improvement or worsening in the broader macro environment. We're not assuming any change, better or worse, for the remainder of the year. Client budgets remain intact for AI and other strategic priorities. Non-AI discretionary spending continues to be muted.

[Jason Peterson, CFO at EPAM]

As in past years, we expect to generate significant free cash flows in the second half of the year, with our free cash flow conversion rate forecasted to be above 100% in both Q3 and Q4. With the lower free cash generation in the first half of the year, we are now expecting our free cash flow conversion rate in 2026 to be around 70%, below our typical 80%-90% conversion rate. As usual, our guidance assumes we can continue to deliver from our Ukraine delivery centers at productivity levels similar to those achieved in 2025. Moving to our full-year outlook. Revenue growth will now be in the range of 3.2%-4.2%. Foreign exchange is expected to have a positive impact of approximately 1.2%. The organic constant currency growth is now expected to be in the range of 2%-3%.

[Jason Peterson, CFO at EPAM]

We now expect GAAP income from operations to be in the range of 10.5%-11%, and non-GAAP income from operations to be in the range of 15.5%-16%. We continue to expect our GAAP effective tax rate to be 27%. Our non-GAAP effective tax rate will continue to be 24%. For earnings per share, we now expect that GAAP diluted EPS will be in the range of $8.22-$8.38 for the full year. Non-GAAP diluted EPS will now be in the range of $13.08-$13.24 for the full year, producing year-over-year growth of over 14% at the midpoint of the range. We now expect weighted average share count of 52.2 million fully diluted shares outstanding.

[Jason Peterson, CFO at EPAM]

Moving to our Q3 2026 outlook, we expect revenue to be in the range of $1.410 billion-$1.425 billion, producing year-over-year growth of 1.7% at the midpoint of the range. Our guidance reflects a 0.1% negative foreign exchange impact during the quarter, producing organic constant currency growth of 1.8% at the midpoint of the range. For the third quarter, we expect GAAP income from operations to be in the range of 11%-12%, and non-GAAP income from operations to be in the range of 15.5%-16.5%. We expect our GAAP effective tax rate to be approximately 25%, and our non-GAAP effective tax rate to be approximately 24%.

[Jason Peterson, CFO at EPAM]

For earnings per share, we expect GAAP diluted EPS to be in the range of $2.33-$2.41 for the quarter, and non-GAAP diluted EPS to be in the range of $3.38-$3.46 for the quarter, producing year-over-year growth of over 11% at the midpoint of the range. We expect a weighted average share count of 51.4 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for Q3 and the remainder of the year. Stock-based compensation expense is expected to be approximately $44 million for Q3 and $45 million for Q4. Amortization of intangibles is expected to be approximately $17 million for each of the remaining quarters. The impact of foreign exchange is expected to be an approximate $3 million loss in Q3 and a $1 million loss in Q4. We completed our 2025 cost optimization program in the Q2.

[Jason Peterson, CFO at EPAM]

As a result, for the remainder of the year, the company will no longer adjust for severance-related expenditures, and those expenses will be recognized as part of the company's GAAP and non-GAAP results. Tax effect of non-GAAP adjustments is expected to be around $14 million for Q3 and $14 million for Q4. We expect negligible tax shortfall related to stock compensation in Q3 and $2 million tax shortfall in Q4. One more assumption outside of GAAP to non-GAAP items, we now expect interest in other income to be $1 million in Q3 and $0.5 million in Q4. Lastly, my continued thanks to all our EPAMers for their dedication and focus on serving our clients and driving results throughout 2026. Operator, let's open the call up for questions.

[Operator]

We will now move to our question and answer session. As a reminder, if you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. When you are called on, please unmute your line and ask your question. Please limit your inquiry to one question and one brief follow-up. The first question is from Bryan Bergin at TD Cowen. Please unmute yourself and begin with your question.

[Bryan Bergin, Managing Director at TD Cowen]

Hi, thanks for taking the question. Maybe I just wanted to start with unpacking fiscal 2026 guide, and maybe the demand here, and dig in on the primary headwinds in this reduced outlook. Just based on the biz info and the high-tech vertical slowdown does seem to be more than something macro-related, and I think you owned up to that with some of the idiosyncratic pressures. Just curious what you saw there specifically in decision-making cycles, and then on the North American idiosyncratic weakness, can you talk about what you're specifically changing to restart that growth? What's near term versus long-term fixes?

[Balazs Fejes, CEO and President at EPAM]

Hi, Bryan. How are you doing? Let's start with the hard questions. Overall, the demand environment didn't really change. We are still in the same macro space. What started to change somewhere in July, first of all, to really explain it, I need to remind everybody that most of our business is time and material contracts, right? It's not annuity-based. You need to resell or renew the contracts quite regularly. Somewhere in July, we started to see that clients are prioritizing AI budgets, reprioritizing away from task-based services like manual testing, user experience, and as I mentioned, from JavaScript or front-end engineering. They're shifting towards modernization. This shift is happening faster than the replacement work is ramping, right? Creating a growth gap for us.

[Balazs Fejes, CEO and President at EPAM]

The clients are planning to do the ramp-ups of the AI-native services, mainly from savings from what AI is delivering. At the same time, they are funding tokens, hardware, and infrastructure. As the savings are realizing or appearing slower than, and this as expected, this creates a gap. This is what we are seeing. This is actually very much impacted in North America. It's mostly confined in our SaaS client base, which is largely confined inside the software and high tech. Clearly, they have others in other places. Most of the SaaS clients are in the software and high-tech sector. In this sector also, we are seeing some level of project ramp downs outside of AI areas. The ramp downs are outweighing our growth in AI, cloud, or cybersecurity. That's the demand environment as we see it right now.

[Balazs Fejes, CEO and President at EPAM]

Your second question.

[Bryan Bergin, Managing Director at TD Cowen]

Okay. Appreciate that detail.

[Balazs Fejes, CEO and President at EPAM]

The second question was what are we going to do about the sales, right? I think already in our Q1 earnings calls, we started to talk about the structural changes which we are making in how we go into market. We kick this off. It takes time. It's a process. Our clients, what we're seeing, that they are increasingly want to see business cases, commercial proposals, rather than just engineering go-to-market motions, which was the priority in the past. I think already we talked about this in our Investor Analyst Day. This is a part of our transformation. We are building this depth in domain and consulting capability, which allows us to actually respond to these demands. This has worked before, and the evidence is in the EMEA growth rate, where we actually made this investment in the past and made the transformation.

[Balazs Fejes, CEO and President at EPAM]

We put a multi-quarter program in place where we're changing how we're going to market, from marketing all the way to sales motions, how we prioritize clients, how we create proposals. We are building out, hiring, and building a bigger sales force in North America, especially focused in North America.

[Bryan Bergin, Managing Director at TD Cowen]

Got it. Okay. Makes sense. Jason, on free cash flow, can you just unpack some of the moving pieces there as far as the added working capital headwind? Was there anything one time in contracting? I want to just understand that and your confidence in the second half free cash flow improvement, and whether anything maybe beyond this year changes as you think about conversion.

[Jason Peterson, CFO at EPAM]

No. We would still have high confidence in the 80%-90% as we move past 2026 into 2027 and 2028. What we did see at the end of Q2 was we had clients who were expected to make payments in the last two days of the quarter, and those payments ended up being made in the first two days of the next quarter, in Q3. Effectively, it was a fairly significant amount of money that supposedly required an additional level of review before they made payment. That was really what drove the less than expected free cash flow in Q2. We are seeing a somewhat higher level of DSO. I do think that probably is going to continue throughout the year.

[Jason Peterson, CFO at EPAM]

It's not going to stay at the level it was at Q2, but I think as you compare each quarter, Q1, Q2, Q3, Q4, to the corresponding quarter in 2025, DSO is probably going to be a bit higher, and that's probably a cost. We also have some additional tax-related expenses, but again, I think it's very much confined to 2027, and again, be it 2026. I expect beyond 2026, you'll see a return to the 80%-90% conversion range.

[Bryan Bergin, Managing Director at TD Cowen]

Okay. That's clear. Thank you.

[Operator]

The next question is from Maggie Nolan at William Blair. Please unmute yourself and begin with your question.

[Maggie Nolan, Analyst at William Blair]

Hi, thank you. It sounds like there's also a bit of a timing gap in North America. You're talking about this go-to-market transformation. I'm wondering if you can draw some parallels between what you've done in EMEA and what you're doing in North America, and maybe help us understand how long the rebuild phase is, when you can see maybe an inflection point in North America. Any information on maybe some of those large deals and TCV there, and ability to see contribution from those in 2027 would be helpful.

[Balazs Fejes, CEO and President at EPAM]

Hi, Maggie. I think we already started to talk about this during Investor Analyst Day, that EPAM was very focused on fulfillment, very much focused on delivering engineering excellence and selling to the head of engineering or head of products. It was especially true in North America, where we have a large concentration of our software and high-tech business. Very much we were focused on fulfilling that demand instead of focusing and formulating business solutions, which was more predominant in the European portfolio. You have to address different buyers. You have to have different propositions in place. Engineering excellence is just not enough in the current environment, as clients are looking to receive ROIs or actually realizing business goals.

[Balazs Fejes, CEO and President at EPAM]

This is actually what we've done in Europe, and we invested into it, is we are actually created very specific domain-led go-to-market motions, pairing it with larger seller capabilities, which is in terms of numbers and processes and methods, and go-to-market motions. We are bringing this investment, which we've done into North America, expanding and starting to build it out. We start a transformation programs as how we are approaching the big deals and building out a new growth movement inside EPAM, which is focused differently than in the past, which was very much focused on purely engineering excellence. We need to pair it with business development excellence. How much time it will take, I think it's hard to say. It's actually taking probably longer than we anticipated, but we are making big strides during this year.

[Balazs Fejes, CEO and President at EPAM]

In terms of big deals, I think Jason updated and also updated that it is progressing very well. We have a number of big deals are increasing. We are very optimistic about it, and we're seeing that as they're going through the pipeline. As we have less experience in some of these things, that's why we are still reluctant to include that into our guidance or early on into our forecast. They are going through the pipeline, and we have emphasis to actually continue building this pipeline for the future, and this is going to be part of our normal go-to-market motions going forward. Expect to see results of it in 2027 in terms of significant revenue contribution.

[Maggie Nolan, Analyst at William Blair]

Okay, thank you. Then Jason, maybe can you comment a little bit on the margin durability, maybe what is foreign currency and cost optimization, and whether or not you can hold these margin levels into 2027 if the organic growth is in the low single digits range here?

[Jason Peterson, CFO at EPAM]

Yeah. I'm probably going to stay away from commenting on 2027, but happy to talk about 2026 and gross margin levels. We're actually not getting a lot of benefit from foreign exchange. Despite the fact that we've got a significant India workforce, India as a percentage of our total cost is not near as significant as it is for many of our competitors. We still have very significant costs in places like Poland and Hungary and Mexico and even Colombia, where those currencies have all appreciated. Actually, foreign exchange has not been a contributor. It actually has been somewhat negative. What we did get is some of the price increases that we got at the beginning of the year, which has been helpful. We also have been working to improve our fixed fee profitability, our non-T&M profitability. That's improved nicely on a year-over-year basis.

[Jason Peterson, CFO at EPAM]

We continue to do all the work that we've been doing to continue to improve the cost efficiency in places like India. I feel good about the gross margin performance in the first half. I also expect that we'll continue to see gross margin in excess of 32% for each of the quarters, Q3 and Q4. Again, we're trying to do the right things to sort of preserve profitability and EPS for the remainder of the year.

[Maggie Nolan, Analyst at William Blair]

Thank you.

[Operator]

The next question is from Puneet Jain at JPMorgan. Please unmute yourself and begin with your question.

[Puneet Jain, Analyst at JPMorgan]

Hey, thanks for taking my question. I wanted to follow up on earlier question on go-to-market. Would you say it's a capability gap, versus the more business use cases and outcomes that clients are looking for? Or would you say it's merely an issue around messaging, positioning, account coverage in North America?

[Balazs Fejes, CEO and President at EPAM]

I think it's a capability gap, Puneet, in business development. It's not a capability gap in terms of delivery. We can actually deliver it because we are delivering from a global workforce, and it's proven that in Europe, with a different go-to-market motion and different business development capability, you can actually deliver double-digit growth, which we delivered this quarter. I am actually very optimistic if we fix our go-to-market motion in North America, if we increase our growth organization, if we retarget them, equip them with other tools, then the capabilities, the product which we're bringing to the market, that product resonates with our clients.

[Balazs Fejes, CEO and President at EPAM]

We are serving global organizations, so I think what works in Europe in terms of the product, what we are selling, will be also delivering the same type of growth or similar growth figures in North America if we bring it to the market in a correct way.

[Puneet Jain, Analyst at JPMorgan]

Got it. Then your financial services vertical was up double digits, growing at rapid clip relative to rest of the business.

[Balazs Fejes, CEO and President at EPAM]

Yes.

[Puneet Jain, Analyst at JPMorgan]

What's driving higher growth there, and could that vertical be a precursor to better growth rates in rest of the business?

[Balazs Fejes, CEO and President at EPAM]

We were successful, Puneet, in financial services to actually combine our domain knowledge with our AI-native capabilities and actually driving large transformation programs in this case. Also, we are modernizing using AI, utilizing with EPAM's IP, which I actually called out MF Lens, our clients' legacy systems. Actually, all of them is a precursor in what we call AI foundation elements. We've just been more successful packaging it and bringing to our clients and our clients who have a large legacy, they are responding to that. They're also building out the data platforms and data products which they need to ground the AI models once when they get implemented.

[Puneet Jain, Analyst at JPMorgan]

Got it. Thank you.

[Operator]

The next question is from Jonathan Lee at Guggenheim Partners. Please unmute yourself and begin with your question.

[Jonathan Lee, Analyst at Guggenheim Partners]

Great. Thanks for taking my questions. The fact that the demand shift happened in July after you'd set the 2Q framework in early May raises questions about forward visibility. Given most of your business is T&M rather than annuity-based, and clients can reprioritize budgets relatively quickly, how should we think about the durability of the revised calendar 2026 outlook? What gives you the confidence that a similar dynamic doesn't play out in August or September within a different client cohort?

[Jason Peterson, CFO at EPAM]

No, it's a fair question, Jonathan. When we look at the guide that we have for the full year, the midpoint of the guide is going to give you, as we said in the prepared remarks, a 1.8% year-over-year growth, and then midpoint just requires that we kind of remain flat. We continue to see growth, as we discussed in Europe. We continue to see growth particularly in financial services and life sciences. We think we do have a strong series of kind of growers in the business, while we will probably see some ongoing underperformance in both North America and in the high-tech portion of the portfolio. Again, I feel very confident that the ability to sort of operate in this midpoint of the range or higher and then to be able to operate with a flat execution as we move from Q3 to Q4.

[Jason Peterson, CFO at EPAM]

You would need a material sequential decline from Q3 to Q4 to end up in the low end of this range. Again, I really do feel quite confident that this one is de-risked.

[Jonathan Lee, Analyst at Guggenheim Partners]

I appreciate that color. Just as a follow-up, to what extent is the growth gap in North America a function of clients gravitating toward more diversified peers who can bundle AI-led savings on infrastructure or managed services with the transformation work effectively self-funding the ramp within a single commercial construct? I mean, EPAM's more concentrated engineering services model doesn't necessarily naturally offer the same savings pool to redeploy. If that's the case, how are you thinking about the commercial response?

[Balazs Fejes, CEO and President at EPAM]

I think it's a good question. We haven't seen that, actual demand actually migrated to our peers. What we are seeing is that some of the spend is migrated to tokens, which we can also offer, but most of our clients buying them directly or migrate it towards infrastructure or into GPUs. I think with our larger deal go-to-market notion, we are actually want to transform the savings, what our clients are going to achieve with AI-driven services, into reinvest them into growth themselves. What you are asking, I haven't seen that one yet. We're not losing to competitors, if that's what you're asking.

[Jonathan Lee, Analyst at Guggenheim Partners]

Thanks for the color.

[Operator]

The next question is from Tyler Dupont at Wells Fargo. Please unmute yourself and begin with your question.

[Tyler Dupont, Analyst at Wells Fargo]

Hey. Good morning, FB and Jason. This is Tyler on for Jason Kupferberg. Thanks for taking the questions. I want to start within North America. There are a few moving pieces in the updated outlook, just want to ask about some of the drivers there. You mentioned macro is largely unchanged, if we just put that to one side. How much of this updated outlook is due to your current go-to-market capability set versus clients actually shifting spend away from services altogether towards other tech priorities like tokens and memory, as you mentioned in a previous response?

[Balazs Fejes, CEO and President at EPAM]

I think it's both, right, happening in the same time, right? The clients are trying to buy different things different ways, right? We have a large concentration of. Number one, it's both, right? I think each of them is in a different bucket. The clients who are really shifting away the spend from us is very much comprised in the SaaS client portfolio, which is predominantly inside our software and high tech sector. Those are the clients who are shifting their spend towards tokens, towards GPUs, which we clearly are not delivering. The rest of the portfolio and the clients, their demand is shifting, right? I called out shifting from, let's say, manual testing, front-end capabilities, from task-based setups towards AI native, AI-driven solution. Here our capability around driving the business is lacking.

[Balazs Fejes, CEO and President at EPAM]

That's where the business development strengthening or go-to-market notions or growth community is what's needed to actually push through and actually see the same results. We have that type of capability available, we have that knowledge, we have the certified engineers. We actually know how to make it work for our clients. We just need to make sure that we are able to sell it, too.

[Tyler Dupont, Analyst at Wells Fargo]

Okay. That's helpful. I guess, just an update on the pricing environment right now would be pretty helpful. Some of your peers have recently mentioned more, let's call it, competitive pricing dynamics to win work or challenges getting as much net pricing realization as they'd hoped due to increasing levels of productivity savings. Are you guys seeing any of that at this moment or not so much?

[Jason Peterson, CFO at EPAM]

Yeah. As we've talked about, we did see price improvement at the beginning of the year. We are seeing ongoing sort of vendor consolidation exercises across certain customers. Generally, those are done where a client obviously expects to see some economic advantage from those consolidations. They obviously do give upside kind of revenue potential as well. I think whenever we've talked about these larger deals, while we are talking about using agentic solutions to produce a more cost-effective offering, the advantage for us is that we currently don't really participate in the market for agentic managed services. It is a significant revenue opportunity at what we believe can be appropriate, solid, and good profits, profitability. It may look like a price haircut if you're sitting there delivering managed services today. I could understand why some competitors might refer to that.

[Jason Peterson, CFO at EPAM]

Again, for us, it's an incremental opportunity and, as a result, doesn't represent a reduction in price.

[Tyler Dupont, Analyst at Wells Fargo]

Great. Well, I appreciate all the color. Thanks again.

[Operator]

The next question is from James Friedman at Susquehanna. Please unmute yourself and begin with your question.

[James Friedman, Analyst at Susquehanna]

Here.

[James Friedman, Analyst at Susquehanna]

Hi. Thank you, FB, Jason. Sixth consecutive quarter of double-digit sequential AI native revenue growth. Wondering if you can roughly size what % of revenue is AI native today, and when can we expect it to lift total consolidated company growth? How are you thinking about that? Thank you.

[Balazs Fejes, CEO and President at EPAM]

I think we already mentioned it's 11% of our business right now, it's AI native. It continues to grow. It's a very fast-growing segment. I think once it's crossing a certain threshold, we think 25%, that's when you're going to start seeing that it's going to lift the growth of EPAM itself. Remember, this is a very narrow definition, how we call this out. It's very narrow what we are calling AI native. We're not including in this what others would call AI-assisted revenue

[James Friedman, Analyst at Susquehanna]

Thank you, FB. I'll drop back in the queue.

[Balazs Fejes, CEO and President at EPAM]

Thank you.

[Operator]

The next question is from James Schneider at Goldman Sachs. Please unmute yourself and begin with your question.

[James Schneider, Analyst at Goldman Sachs]

Good morning. Thanks for taking my question. I was wondering if you could maybe just follow up on the last response. I may have missed it, with the $160 million of AI native revenue you reported in Q2, do you still expect to hit the $600 million target you talked about earlier?

[Balazs Fejes, CEO and President at EPAM]

Clearly, $600 is our declared goal in 2026. If we over blew it, then we actually went toward one of the KPIs we set ourselves, right?

[Jason Peterson, CFO at EPAM]

Yeah. I think with that, FB's way of saying absolutely.

[Balazs Fejes, CEO and President at EPAM]

Yeah.

[Jason Peterson, CFO at EPAM]

Yeah.

[James Schneider, Analyst at Goldman Sachs]

Okay, fine. That makes sense. As you look at the vertical performance, would you expect financial services to sort of maintain the stronger growth rates heading into 2027? Maybe with respect to the larger deals you see kind of pushing into 2027, if you could address where are those verticals, or is it broadly dispersed across a bunch of verticals? Maybe just talk a little bit about the vertical composition of those deals. Thank you.

[Jason Peterson, CFO at EPAM]

Yeah. I think we are going to stay away from talking about 2027, although maybe we'll talk a little bit about the large deals. I will say throughout the remainder of this year, we are continuing to see strong growth in financial services. All of the AI-supported modernization, including programs which use EPAM IP, continue to deliver nice revenue growth for the company. We're also continuing and expecting to see good growth in life sciences. I don't know, FB, you want to talk about some of the color around the big deals?

[Balazs Fejes, CEO and President at EPAM]

I think in the big deals bucket, we have quite a few from regulated industries, which for us is financial services, banking, and insurance. There's a large portion of that. I think once we see how it converts, we're going to update you. We do expect some of them is going to convert and some of the large deals coming from the financial services sector.

[James Schneider, Analyst at Goldman Sachs]

Thank you.

[Operator]

The final question is from Paul Obrecht at Wolfe Research. Please unmute yourself and begin with your question.

[Paul Obrecht, Analyst at Wolfe Research]

Hi. Thanks. This is Paul Obrecht on for Darrin Peller. FB, outside of the new large deals emerging in areas such as BPO and agentic managed services, your guide also included some larger deals in your traditional markets. Just curious, as the year has progressed, how these deals have evolved relative to your initial expectations.

[Balazs Fejes, CEO and President at EPAM]

We didn't lose them. They are progressing. They are progressing through our pipeline. Some of these deals are actually in the smaller phases, started to convert. I think what's more interesting for us is that even if it's more traditional vendor consolidation, for example, larger deals, they are also triggering other type of deals, which is agentic BPO or let's say legacy mainframe transformation. We are seeing it, that it's progressing. We are not losing them. They are still in the pipeline, and we will update you in, I think, on the next earnings call how successful we have been in closing them and converting them.

[Jason Peterson, CFO at EPAM]

Yeah. Paul, some of the deals were AI-specific.

[Jason Peterson, CFO at EPAM]

You're clearly seeing wins with those, including the ones that use EPAM IP. You also have had some vendor consolidation exercises where we've had some wins, so those would be outside of the agentic managed services, and we've made progress there. As we pointed out, it's been somewhat uneven, with good growth in Europe as we talked about financial services, life sciences, and less so in some of the other verticals and geographies.

[Paul Obrecht, Analyst at Wolfe Research]

Right. That makes sense. That's helpful color. Just as a follow-up, FB, can you provide a bit more detail on the path forward to develop full stack agentic engineers? Just curious how much of that would be coming from internal training versus external hiring. For the internal, what level of training is really required to get there relative to current talent?

[Balazs Fejes, CEO and President at EPAM]

Forward FDEs are actually part of our sales motion. That's what we are partnering with our AI partners and also with the hyperscalers to actually build this. EPAM is building it. We're building it from internally. There's a clear deliberate motion to ramp up, it's part of how we go to market and how we sell solutions with our new partners. We are expecting to build it inside, we set up a training programs academy around it. This is a big part of our effort in 2026.

[Balazs Fejes, CEO and President at EPAM]

I think as we updated you on the certifications, what we've done around Anthropic or with Google, what we actually announced around OpenAI, you're clearly going to see that EPAM will have the largest concentration of certified engineering, software engineering professionals in the industry, we aim to be the source and the solution for all our partners to solve and get their needs around FDE solved. Not just solved, but we want to be the source and the supplier to work with them and solve their clients' problems using FDEs. That's kind of what our aim, this is what we are pushing for. This is what we are aiming for in 2026.

[Operator]

There are no more questions at this time. I now would like to turn the call over to Balazs Fejes for closing remarks.

[Balazs Fejes, CEO and President at EPAM]

Thank you very much for joining us in our Q2 earnings calls. Clearly, we have our work cut out for us, and on the next earnings call, we're going to update you how we're progressing in transforming our go-to market notion and also around the big deals, which we will talk about, and also what progress we're going to make around transforming EPAM to an AI-native engineering services organization. Thank you much. See you next time

Participants

Executives

• Balazs Fejes, CEO and President
• Jason Peterson, CFO

Analysts

• Mike Rowshandel, Head of Investor Relations at EPAM
• Bryan Bergin, Managing Director at TD Cowen
• Maggie Nolan, Analyst at William Blair
• Puneet Jain, Analyst at JPMorgan
• Jonathan Lee, Analyst at Guggenheim Partners
• Tyler Dupont, Analyst at Wells Fargo
• James Friedman, Analyst at Susquehanna
• James Schneider, Analyst at Goldman Sachs
• Paul Obrecht, Analyst at Wolfe Research