EPAM Systems, a global digital platform engineering and software development powerhouse, delivered a mixed bag in their Q1 2024 earnings call. While they touted a return to sequential revenue growth, a closer look at the transcript reveals a hidden revenue drag that could have significant implications for the company's future – the accelerating shift to India-based delivery.

Sure, EPAM executives acknowledge the growth of their India operations, even predicting it might surpass Ukraine as their largest delivery location by the end of the year. But they seem to downplay a crucial aspect: the impact of this shift on revenue growth in dollar terms.

While EPAM insists that demand for their Central and Eastern European talent remains robust, the reality is that client "sensitivity" is increasingly pushing new engagements towards India. This preference, likely driven by cost considerations in a volatile macroeconomic environment, translates to lower bill rates and a direct hit on EPAM's revenue growth.

Jason Peterson, EPAM's CFO, finally put some numbers to this trend, revealing a potential $100 million revenue headwind for 2024 purely from the geographic mix shift. This figure, calculated by comparing 2024 revenue projections with a hypothetical scenario where the geographic mix remains the same as 2023, highlights the hidden cost of EPAM's successful India expansion.

Geographic Mix Shift Impact on Revenue

The following table illustrates the potential $100 million revenue headwind from the shift to India-based delivery.

Here's the catch: EPAM's guidance for 2024 revenue growth only factors in a nominal revenue contribution from inorganic growth. This suggests that the expected 1% to 4% growth relies heavily on organic demand improvement, which the company itself admits remains uncertain in the first half of the year.

The $100 million India-related headwind, therefore, isn't fully accounted for in their guidance. If organic demand doesn't materialize as aggressively as EPAM hopes, the actual revenue impact of this geographic shift could be far greater than anticipated, potentially putting their projected growth targets at risk.

This raises a critical question: is EPAM downplaying the revenue drag from India to maintain an optimistic outlook for investors? Perhaps. But by glossing over this crucial detail, they risk setting unrealistic expectations and leaving investors unprepared for a potential revenue shortfall.

What's more, the shift towards India, while cost-effective, raises concerns about maintaining EPAM's renowned quality of delivery. EPAM has built its reputation on its highly skilled Eastern European talent, often commanding a premium for their expertise. While they claim to have differentiated their India operations with a focus on quality, scaling such a significant operation while maintaining high standards is a formidable challenge.

The competitive landscape in India is also far more crowded than EPAM's traditional service delivery geographies. Navigating this intensified competition while upholding their premium pricing strategy in a cost-sensitive environment will require deft execution.

Projected Revenue Growth for 2024

The chart below depicts EPAM's projected revenue growth for 2024, highlighting the potential impact of the geographic mix shift.

This isn't to say that EPAM's India expansion is a mistake. It's a shrewd move to tap into a vast talent pool and offer clients a cost-effective delivery option. However, the company needs to be more transparent about the potential revenue impact of this shift and the challenges associated with maintaining their quality differentiation in this fiercely competitive market.

As investors digest EPAM's latest earnings call, they should pay close attention to this hidden revenue drag and how the company plans to navigate it in the coming quarters. The success of their India expansion hinges not only on scale, but also on quality and price, factors that will ultimately determine whether this strategic move translates to sustainable long-term growth or a costly stumble.

"Fun Fact: EPAM's name is an acronym for "Effective Programming for America," reflecting its origins in 1993 when it was founded by Arkadiy Dobkin and Leo Lozner in Belarus, with its initial focus on serving clients in the United States."