EPAM Systems' recent earnings call, held on May 9th, 2024, painted a picture of caution and adaptation. While the company acknowledges a volatile demand environment and lowered its revenue guidance for Q2 and the full year, it also highlights encouraging signs of new deals and opportunities in domains like Generative AI and industry-specific solutions. However, beneath the surface of cautious optimism and strategic repositioning lies a hidden signal, one that speaks to a deeper and potentially more significant shift occurring within EPAM's business model - a shift that, surprisingly, hasn't garnered much attention from analysts.

This hidden signal is the company's accelerating dependence on India as a primary delivery location. While EPAM assures investors of sustained demand for its traditionally strong locations in Central and Eastern Europe, the undeniable truth is that new engagements are increasingly biased towards India, driven by client sensitivity to pricing and cost optimization. This geographic rebalancing, while seemingly a pragmatic response to current market pressures, has profound implications for EPAM's revenue trajectory and overall business strategy.

The numbers tell a compelling story. Jason Peterson, EPAM's CFO, revealed that the shift to lower-cost locations, primarily India, could negatively impact this year's revenue growth by approximately $100 million on a constant currency basis. This translates to a significant drag on growth, especially in a year where EPAM is already expecting a decline in overall revenue. While India's lower bill rates don't negatively impact profitability, they create a notable headwind against revenue, a factor that, according to Peterson himself, might not have been fully anticipated in the initial guidance.

"What's more, EPAM projects India to be its largest delivery location by the end of 2024, potentially surpassing Ukraine in terms of headcount. This shift from a largely Central and Eastern European workforce to a more diversified, India-centric model represents a fundamental change in EPAM's operational structure, one that could lead to unforeseen challenges and opportunities."

The implications of this shift extend beyond the immediate impact on revenue. Historically, EPAM differentiated itself by offering high-quality engineering talent from Eastern Europe, charging a premium for its expertise. The move towards India, while driven by cost pressures, challenges this core differentiator. EPAM will need to strategically navigate this transition, ensuring that its India operations maintain the same level of quality and engineering excellence that defined its European offerings.

Projected Headcount Growth in India

This chart illustrates the projected growth of EPAM's headcount in India.

The question remains: is this shift a temporary response to market volatility or a harbinger of a long-term strategic transformation for EPAM? While the company maintains that demand for its European talent persists, the growing bias towards India suggests a potentially irreversible trend. This trend is likely influenced not just by cost sensitivity, but also by factors like the rapidly expanding talent pool in India and the increasing comfort of clients with geographically distributed delivery models.

The implications of this transition are multifaceted. EPAM will need to double down on its efforts to ensure consistent quality and engineering excellence across its India operations. It will also need to articulate a clear value proposition that differentiates its India-based offerings in a crowded and competitive market. On the flip side, this shift could open up new avenues for growth and expansion, allowing EPAM to tap into a vast talent pool and cater to a broader client base.

Ultimately, the accelerating shift towards India as a delivery hub represents a critical juncture for EPAM. It's a signal that necessitates a strategic reassessment of its core differentiators, its value proposition, and its long-term growth strategy. While the immediate impact on revenue might be concerning, the long-term implications could be transformative, pushing EPAM to redefine its position in the global digital engineering landscape. This is a story that's just beginning to unfold, and its impact will be felt not just within EPAM, but across the broader IT services industry.

"EPAM's dependence on India for new engagements will continue to accelerate, driven by sustained client sensitivity to cost and the expanding Indian talent pool. By the end of 2025, India will represent over 25% of EPAM's total headcount. Revenue growth in dollar terms will remain subdued until demand for higher-margin engagements in EPAM's traditional locations rebounds."

"EPAM's name is actually an acronym! It stands for "Effective Programming for America," a nod to the company's roots in 1993 when it was founded in Belarus and primarily served clients in the United States."