Press Release: February 14, 2019

Fourth quarter revenues of $504.9 million, up 26.5% year-over-year
Annual revenues of $1.84 billion, up 27.1% year-over-year
GAAP Diluted EPS of $1.05 for the fourth quarter and $4.24 for the full year
Non-GAAP Diluted EPS of $1.27 for the fourth quarter and $4.38 for the full year

NEWTOWN, Pa., Feb. 14, 2019 /PRNewswire/ -- EPAM Systems, Inc. (NYSE: EPAM), a leading global provider of digital platform engineering and software development services, today announced results for its fourth quarter and full year ended December 31, 2018.

"Our focus on developing true partnerships with our customers, attracting and developing the right talent, and continuously evolving our capabilities drove our strong fiscal 2018 results," said Arkadiy Dobkin, CEO & President, EPAM. "Demand for successful transformation strategies is only increasing, and we are well-positioned to help our clients derive new business value and remain competitive."

Fourth Quarter 2018 Highlights

  • Revenues increased to $504.9 million, a year-over-year increase of $105.6 million, or 26.5%, and on a constant currency basis, revenues were up 28.9% over the corresponding period last year;
  • GAAP income from operations was $78.3 million, an increase of $26.2 million, or 50.4% , compared to $52.1 million in the fourth quarter of 2017;
  • Non-GAAP income from operations was $93.1 million, an increase of $26.1 million, or 39.0%, compared to $66.9 million in the fourth quarter of 2017;
  • Diluted earnings per share ("EPS") on a GAAP basis was $1.05, compared to $(0.58) in the fourth quarter of 2017, based on a weighted average share count of 56.9 million fully diluted shares outstanding. The fourth quarter of 2017 was negatively impacted by the $74.6 million provisional charge related to U.S. tax reform; and
  • Non-GAAP diluted EPS was $1.27, an increase of $0.26, or 25.7%, compared to $1.01 in the fourth quarter of 2017.

Full Year 2018 Highlights

  • Revenues increased to $1.84 billion, a year-over-year increase of $392.5 million, or 27.1%, and on a constant currency basis, revenues were up 26.9% year-over-year;
  • GAAP income from operations was $245.8 million, an increase of $72.8 million, or 42.1%, compared to $172.9 million in 2017;
  • Non-GAAP income from operations was $315.1 million, an increase of $80.5 million, or 34.3%, compared to $234.7 million in 2017;
  • Diluted EPS on a GAAP basis was $4.24, compared to $1.32 in 2017 based on a weighted average share count of 56.7 million fully diluted shares outstanding. GAAP diluted EPS in 2018 benefited from the recognition of $26.0 million of net deferred tax assets resulting from the implementation of changes to our tax structure in response to U.S. tax reform. GAAP diluted EPS in 2017 was negatively impacted by the $74.6 million provisional charge related to U.S. tax reform; and
  • Non-GAAP diluted EPS was $4.38, an increase of $0.92, or 26.6%, compared to $3.46 in 2017.

Cash Flow and Other Metrics

  • Cash provided by operating activities was $123.1 million in the fourth quarter of 2018, an increase from $71.2 million in the fourth quarter of 2017; and was $292.2 million in 2018, an increase from $192.8 million in 2017;
  • Cash, cash equivalents and restricted cash totaled $771.7 million as of December 31, 2018, an increase of $188.8 million, or 32.4%, from $582.9 million as of December 31, 2017; and
  • Total headcount was approximately 30,200 as of December 31, 2018. Included in this number were approximately 26,800 delivery professionals, an increase of 16.4% from December 31, 2017.

2019 Outlook - Full Year and First Quarter

Full Year

  • Revenue growth for 2019 will be at least 22%. The Company expects that foreign currency translation will have a 1% unfavorable impact on full year reported revenues. The Company expects revenue growth on a constant currency basis will be at least 23%;
  • The Company expects GAAP income from operations to be in the range of 12.5% to 13.5% of revenues and non-GAAP income from operations to be in the range of 16% to 17% of revenues;
  • The Company expects its GAAP effective tax rate to be approximately 16% and its non-GAAP effective tax rate to be approximately 23%; and
  • The Company expects GAAP diluted EPS will be at least $4.45 for the full year, and non-GAAP diluted EPS will be at least $5.06 for the full year. The Company expects weighted average share count for the year of 57.9 million diluted shares outstanding.

First Quarter

  • Revenues will be at least $518 million for the first quarter, reflecting a year-over-year growth rate of at least 22%. The Company expects foreign currency translation to have a 3% unfavorable impact on year-over-year revenue growth during the quarter. The Company expects year-over-year revenue growth on a constant currency basis to be at least 25%;
  • For the first quarter, the Company expects GAAP income from operations to be in the range of 12% to 13% of revenues and non-GAAP income from operations to be in the range of 16% to 17% of revenues;
  • The Company expects its GAAP effective tax rate to be approximately 12% and its non-GAAP effective tax rate to be approximately 23%; and
  • The Company expects GAAP diluted EPS will be at least $1.00 for the quarter, and non-GAAP diluted EPS will be at least $1.16 for the quarter. The Company expects weighted average share count for the quarter of 57.5 million diluted shares outstanding.

Conference Call Information

EPAM will host a conference call to discuss results on Thursday, February 14, 2019 at 8:00 a.m. Eastern time. The live conference call will be available by dialing +1 (877) 407-0784 or +1 (201) 689-8560 (outside of the U.S.). A webcast of the conference call can be accessed at the Investor Relations section of the Company's website at http://investors.epam.com. A replay will be available approximately one hour after the call by dialing +1 (844) 512-2921 or +1 (412) 317-6671 (outside of the U.S.) and entering the conference ID 13686259. The replay will be available until February 28, 2019.

About EPAM Systems
Since 1993, EPAM Systems, Inc. (NYSE: EPAM) has leveraged its software engineering expertise to become a leading global product development, digital platform engineering, and top digital and product design agency. Through its 'Engineering DNA' and innovative strategy, consulting, and design capabilities, EPAM works in collaboration with its customers to deliver next-gen solutions that turn complex business challenges into real business outcomes. EPAM's global teams serve customers in over 25 countries across North America, Europe, Asia and Australia. EPAM is a recognized market leader in multiple categories among top global independent research agencies and was one of only four technology companies to appear on Forbes 25 Fastest Growing Public Tech Companies list every year of publication since 2013. Learn more at http://www.epam.com/ and follow us on Twitter @EPAMSYSTEMS and LinkedIn.

Non-GAAP Financial Measures

EPAM supplements results reported in accordance with United States generally accepted accounting principles, referred to as GAAP, with non-GAAP financial measures. Management believes these measures help illustrate underlying trends in EPAM's business and uses the measures to establish budgets and operational goals, communicate internally and externally, for managing EPAM's business and evaluating its performance. Management also believes these measures help investors compare EPAM's operating performance with its results in prior periods. EPAM anticipates that it will continue to report both GAAP and certain non-GAAP financial measures in its financial results, including non-GAAP results that exclude stock-based compensation expenses, write-offs and recoveries, acquisition-related costs, amortization of purchased intangible assets, goodwill impairment, certain other one-time charges and benefits, changes in fair value of contingent consideration, foreign exchange gains and losses, the impact of U.S. tax reform, excess tax benefits related to stock-based compensation, and the related effect on income taxes of the pre-tax adjustments. Management also compares operating results on a basis of "constant currency," which is also a non-GAAP financial measure. This measure excludes the effect of foreign currency exchange rate fluctuations by translating the current period revenues and expenses into U.S. dollars at the weighted average exchange rates of the prior period of comparison. Because EPAM's reported non-GAAP financial measures are not calculated in accordance with GAAP, these measures are not comparable to GAAP and may not be comparable to similarly described non-GAAP measures reported by other companies within EPAM's industry. Consequently, EPAM's non-GAAP financial measures should not be evaluated in isolation or supplant comparable GAAP measures, but rather, should be considered together with the information in EPAM's consolidated financial statements, which are prepared in accordance with GAAP.

Forward-Looking Statements

This press release includes statements which may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to future events that may not prove to be accurate. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in the Company's most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. EPAM undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law.

 

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

       
 

Three Months Ended
December 31,

 

Year Ended December 31,

 

2018

 

2017

 

2018

 

2017

Revenues

$

504,931

   

$

399,297

   

$

1,842,912

   

$

1,450,448

 

Operating expenses:

             

Cost of revenues (exclusive of depreciation and 
     amortization)

319,031

   

254,121

   

1,186,921

   

921,352

 

Selling, general and administrative expenses

97,447

   

85,430

   

373,587

   

327,588

 

Depreciation and amortization expense

10,183

   

7,696

   

36,640

   

28,562

 

Income from operations

78,270

   

52,050

   

245,764

   

172,946

 

Interest and other income, net

1,080

   

1,799

   

3,522

   

4,601

 

Foreign exchange (loss)/gain

(582)

   

(1,772)

   

487

   

(3,242)

 

Income before provision for income taxes

78,768

   

52,077

   

249,773

   

174,305

 

Provision for income taxes

18,803

   

82,951

   

9,517

   

101,545

 

Net income/(loss)

$

59,965

   

$

(30,874)

   

$

240,256

   

$

72,760

 

Foreign currency translation adjustments, net of tax

(6,695)

   

3,425

   

(21,338)

   

20,065

 

Unrealized loss on cash-flow hedging instruments, net of tax

(472)

   

   

(2,553)

   

 

Comprehensive income/(loss)

$

52,798

   

$

(27,449)

   

$

216,365

   

$

92,825

 
               

Net income/(loss) per share:

             

Basic

$

1.11

   

$

(0.58)

   

$

4.48

   

$

1.40

 

Diluted

$

1.05

   

$

(0.58)

   

$

4.24

   

$

1.32

 

Shares used in calculation of net income/(loss) per share:

             

Basic

54,031

   

52,879

   

53,623

   

52,077

 

Diluted

56,887

   

52,879

   

56,673

   

54,984

 

 

 

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

       
 

As of
December 31, 
2018

 

As of
December 31, 
2017

Assets

     

Current assets

     

Cash and cash equivalents

$

770,560

   

$

582,585

 

Accounts receivable, net of allowance of $1,557 and $1,186, respectively

297,685

   

265,639

 

Unbilled revenues

104,652

   

86,500

 

Prepaid and other current assets

26,171

   

25,309

 

Total current assets

1,199,068

   

960,033

 

Property and equipment, net

102,646

   

86,419

 

Intangible assets, net

57,065

   

44,511

 

Goodwill

166,832

   

119,531

 

Deferred tax assets

69,983

   

24,974

 

Other noncurrent assets

16,208

   

14,788

 

Total assets

$

1,611,802

   

$

1,250,256

 
       

Liabilities

     

Current liabilities

     

Accounts payable

$

7,444

   

$

5,574

 

Accrued expenses and other current liabilities

127,937

   

89,812

 

Due to employees

49,683

   

38,757

 

Deferred compensation due to employees

9,920

   

5,964

 

Taxes payable, current

67,845

   

40,860

 

Total current liabilities

262,829

   

180,967

 

Long-term debt

25,031

   

25,033

 

Taxes payable, noncurrent

43,685

   

59,874

 

Other noncurrent liabilities

17,661

   

9,435

 

Total liabilities

349,206

   

275,309

 

Commitments and contingencies

     

Stockholders' equity

     

Common stock, $0.001 par value; 160,000,000 authorized; 54,099,927 and 53,003,420
 shares issued, 54,080,192 and 52,983,685 shares outstanding at December 31, 2018
 and December 31, 2017, respectively

54

   

53

 

Additional paid-in capital

544,700

   

473,874

 

Retained earnings

759,533

   

518,820

 

Treasury stock

(177)

   

(177)

 

Accumulated other comprehensive loss

(41,514)

   

(17,623)

 

Total stockholders' equity

1,262,596

   

974,947

 

Total liabilities and stockholders' equity

$

1,611,802

   

$

1,250,256

 

 

 

EPAM SYSTEMS, INC. AND SUBSIDIARIES

Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Financial Measures

(Unaudited)

(In thousands, except percent and per share amounts)

 

Reconciliation of revenue growth at constant currency to revenue growth as reported under GAAP is presented in the table below:

 
       
 

Three Months Ended
December 31, 2018

 

Year Ended
December 31, 2018

Revenue growth at constant currency(1)

28.9

%

 

26.9

%

Foreign exchange rates impact

(2.4)

%

 

0.2

%

Revenue growth as reported

26.5

%

 

27.1

%

 

(1)

Constant currency revenue results are calculated by translating current period revenues in local currency into U.S.
dollars at the weighted average exchange rates of the comparable prior period.

 

 

Reconciliation of various income statement amounts from GAAP to non-GAAP for the three months and years ended
December 31, 2018 and 2017:

 
 

Three Months Ended December 31, 2018

 

Year Ended December 31, 2018

 

GAAP

 

Adjustments

 

Non-GAAP

 

GAAP

 

Adjustments

 

Non-GAAP

Cost of revenues (exclusive of 
     depreciation and amortization)(2)

$

319,031

   

$

(4,410)

   

$

314,621

   

$    1,186,921

 

$

(27,245)

   

$    1,159,676

Selling, general and administrative 
     expenses(3)

$

97,447

   

$

(8,081)

   

$

89,366

   

$

373,587

   

$

(33,998)

   

$

339,589

 

Income from operations(4)

$

78,270

   

$

14,792

   

$

93,062

   

$

245,764

   

$

69,344

   

$

315,108

 

Operating margin

15.5

%

 

2.9

%

 

18.4

%

 

13.3

%

 

3.8

%

 

17.1

%

Net income(5)

$

59,965

   

$

12,359

   

$

72,324

   

$

240,256

   

$

7,754

   

$

248,010

 

Weighted average diluted shares 
     outstanding(6)

56,887

   

   

56,887

   

56,673

   

   

56,673

 

Diluted earnings per share

$

1.05

       

$

1.27

   

$

4.24

       

$

4.38

 

 

 

 

Three Months Ended December 31, 2017

 

Year Ended December 31, 2017

 

GAAP

 

Adjustments

 

Non-GAAP

 

GAAP

 

Adjustments

 

Non-GAAP

Cost of revenues (exclusive of 
 depreciation and amortization)(2)

$

254,121

   

$

(6,416)

   

$

247,705

   

$

921,352

   

$

(20,868)

   

$

900,484

 

Selling, general and administrative 
 expenses(3)

$

85,430

   

$

(6,625)

   

$

78,805

   

$

327,588

   

$

(33,281)

   

$

294,307

 

Income from operations(4)

$

52,050

   

$

14,897

   

$

66,947

   

$

172,946

   

$

61,711

   

$

234,657

 

Operating margin

13.0

%

 

3.8

%

 

16.8

%

 

11.9

%

 

4.3

%

 

16.2

%

Net (loss)/income(5)

$

(30,874)

   

$

87,500

   

$

56,626

   

$

72,760

   

$

117,542

   

$

190,302

 

Weighted average diluted shares 
  outstanding(6)

52,879

   

3,065

   

55,944

   

54,984

   

   

54,984

 

Diluted (loss)/earnings per share

$

(0.58)

       

$

1.01

   

$

1.32

       

$

3.46

 
                                       

Items (2) through (5) above are detailed in the table below with the specific cross-reference noted in the appropriate
item.

 

 

 

 

Three Months Ended
 December 31,

 

Year Ended
 December 31,

 

2018

 

2017

 

2018

 

2017

Stock-based compensation expenses

$

4,410

   

$

6,416

   

$

27,245

   

$

20,868

 

Total adjustments to GAAP cost of revenues(2)

4,410

   

6,416

   

27,245

   

20,868

 

Stock-based compensation expenses

8,042

   

6,071

   

31,943

   

31,539

 

Other acquisition-related expenses

209

   

570

   

916

   

1,500

 

One-time (recoveries)/charges

(170)

   

(16)

   

1,139

   

242

 

Total adjustments to GAAP selling, general and 
  administrative expenses(3)

8,081

   

6,625

   

33,998

   

33,281

 

Amortization of purchased intangible assets

2,301

   

1,856

   

8,101

   

7,562

 

Total adjustments to GAAP income from operations(4)

14,792

   

14,897

   

69,344

   

61,711

 

Change in fair value of contingent consideration included in
Interest and other income, net

   

   

(900)

   

 

Foreign exchange (loss)/gain

582

   

1,772

   

(487)

   

3,242

 

Provision for/(benefit from) income taxes:

             

Tax effect on non-GAAP adjustments

(1,855)

   

(2,946)

   

(12,862)

   

(12,736)

 

Net discrete charge/(benefit) related to U.S. tax reform

13

   

74,632

   

(29,971)

   

74,632

 

Excess tax benefits related to stock-based compensation

(1,173)

   

(855)

   

(17,370)

   

(9,307)

 

Total adjustments to GAAP net income/(loss)(5)

$

12,359

   

$

87,500

   

$

7,754

   

$

117,542

 
                               

 

(6) There was a 3,065 increase to the shares used in the calculation of diluted earnings per share on a non-GAAP 
     basis during the three months ended December 31, 2017 as these shares were excluded from the calculation of 
     diluted loss per share on a GAAP basis due to the anti-dilutive effect of these shares as a result of the net loss in 
     the period. There were no adjustments to GAAP weighted-average diluted common shares outstanding in the

     calculation of diluted earnings per share on a non-GAAP basis during the three months ended December 31,      

     2018 and twelve months ended December 31, 2018 and 2017.

 

 

 

EPAM SYSTEMS, INC. AND SUBSIDIARIES

Reconciliations of Guidance Non-GAAP Measures to Comparable GAAP Measures

(Unaudited)

(In percent, except per share amounts)

 

The below guidance constitutes forward-looking statements within the meaning of the federal securities laws and is based on a number of assumptions that are subject to change and many of which are outside the control of the Company. Actual results may differ materially from the Company's expectations depending on factors discussed in the Company's filings with the Securities and Exchange Commission.

 

Reconciliation of projected revenue growth in constant currency is presented in the table below:

       
 

First Quarter 2019

 

Full Year 2019

Revenue growth at constant currency (at least)(7)

25

%

 

23

%

Foreign exchange rates impact

(3)

%

 

(1)

%

Revenue growth (at least)

22

%

 

22

%

   

(7)

Constant currency revenue results are calculated by translating current period projected revenues in local currency into U.S. dollars at the weighted average exchange rates of the comparable prior period.

 

 

Reconciliation of projected GAAP to non-GAAP income from operations as a percentage of revenues is presented in the table below:

       
 

First Quarter 2019

 

Full Year 2019

GAAP income from operations as a percentage of revenues

12% to 13%

 

12.5% to 13.5%

Stock-based compensation expenses

3.5

%

 

3.0

%

Included in cost of revenues (exclusive of depreciation and amortization)

1.7

%

 

1.4

%

Included in selling, general and administrative expenses

1.8

%

 

1.6

%

Amortization of purchased intangible assets

0.5

%

 

0.5

%

Non-GAAP income from operations as a percentage of revenues

16% to 17%

 

16% to 17%

 

 

Reconciliation of projected GAAP to non-GAAP effective tax rate is presented in the table below:

       
 

First Quarter 2019

 

Full Year 2019

GAAP effective tax rate (approximately)

12

%

 

16

%

Tax effect on non-GAAP adjustments

4.3

%

 

2.9

%

Excess tax benefits related to stock-based compensation

6.7

%

 

4.1

%

Non-GAAP effective tax rate (approximately)

23

%

 

23

%

 

 

Reconciliation of projected GAAP to non-GAAP diluted earnings per share is presented in the table below:

       
 

First Quarter 2019

 

Full Year 2019

GAAP diluted earnings per share (at least)

$

1.00

   

$

4.45

 

Stock-based compensation expenses

0.31

   

1.11

 

Included in cost of revenues (exclusive of depreciation and amortization)

0.15

   

0.54

 

Included in selling, general and administrative expenses

0.16

   

0.57

 

Amortization of purchased intangible assets

0.04

   

0.16

 

Foreign exchange loss

0.01

   

0.02

 

Provision for income taxes:

     

     Tax effect on non-GAAP adjustments

(0.08)

   

(0.29)

 

     Excess tax benefits related to stock-based compensation

(0.12)

   

(0.39)

 

Non-GAAP diluted earnings per share (at least)

$

1.16

   

$

5.06

 

 

 

 

 

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SOURCE EPAM Systems, Inc.

EPAM Systems, Inc.: David Straube, Head of Investor Relations, Phone: +1-267-759-9000 x59419, david_straube@epam.com

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David Straube
INVESTOR RELATIONS
DAVID STRAUBE
Head of Investor Relations
Phone: +1-267-759-9000 x 59419