Press Release: November 1, 2018

Third quarter revenues of $468.2 million, up 24.0% year-over-year
GAAP Diluted EPS of $1.15 for the third quarter
Non-GAAP Diluted EPS of $1.17 for the third quarter

NEWTOWN, Penn., Nov. 1, 2018 /PRNewswire/ -- EPAM Systems, Inc. (NYSE: EPAM), a leading global provider of digital platform engineering and software development services, today announced results for its third quarter ended September 30, 2018.

"Our continued focus on expanding and strengthening our engineering, design and consulting capabilities helped us deliver another strong quarter," said Arkadiy Dobkin, CEO & President, EPAM. "As our customers try to keep pace with constant change, we will continue to meet their demands with our compelling, disruptive solutions, delivering value and broadening our relevance to the market."

Third Quarter 2018 Highlights

  • Revenues increased to $468.2 million, a year-over-year increase of $90.7 million, or 24.0%, and on a constant currency basis, revenues were up 25.4% over the corresponding period last year;
  • GAAP income from operations was $64.6 million, an increase of $15.3 million, or 31.1%, compared to $49.2 million in the third quarter of 2017;
  • Non-GAAP income from operations was $82.1 million, an increase of $19.4 million, or 31.0%, compared to $62.6 million in the third quarter of 2017;
  • Diluted earnings per share ("EPS") on a GAAP basis was $1.15, an increase of $0.38, or 49.4%, compared to $0.77 in the third quarter of 2017 based on a weighted average share count of 57.0 million fully diluted shares outstanding; and
  • Non-GAAP diluted EPS was $1.17, an increase of $0.25, or 27.2%, compared to $0.92 in the third quarter of 2017.

Cash Flow and Other Metrics

  • Cash provided by operations was $169.1 million for the first nine months of 2018, an increase from $121.6 million for the first nine months of 2017;
  • Cash, cash equivalents and restricted cash totaled $686.3 million as of September 30, 2018, an increase of $103.4 million or 17.7% from $582.9 million as of December 31, 2017; and
  • Total headcount was approximately 28,400 as of September 30, 2018. Included in this number were approximately 25,200 delivery professionals, an increase of 16.6% from September 30, 2017.

2018 Outlook - Full Year and Fourth Quarter

Full Year

  • Revenue growth for 2018 will now be at least 26.5%. The Company now expects that foreign currency translation will have a 0.5% benefit on full year reported revenues. The Company expects revenue growth on a constant currency basis will now be at least 26%;
  • The Company expects GAAP income from operations to now be in the range of 12.5% to 13.5% of revenues and non-GAAP income from operations will now be in the range of 16.5% to 17.5% of revenues;
  • The Company expects its GAAP effective tax rate to now be approximately 2% and its non-GAAP effective tax rate to continue to be approximately 22%; and
  • The Company expects GAAP diluted EPS will now be at least $4.22 for the full year, and non-GAAP diluted EPS will now be at least $4.32 for the full year. The Company continues to expect weighted average share count for the year of 56.7 million diluted shares outstanding.

Fourth Quarter

  • Revenues will be at least $500 million for the fourth quarter of which the Company expects a $2 million contribution from the TH_NK acquisition announced this morning, reflecting a year-over-year growth rate of at least 25%. The Company expects foreign currency translation to have a 1% 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 26%;
  • For the fourth quarter, the Company expects GAAP income from operations to be in the range of 14% to 15% of revenues and non-GAAP income from operations to be in the range of 17% to 18% of revenues;
  • The Company expects its GAAP effective tax rate to be approximately 19% and its non-GAAP effective tax rate to be approximately 22%; and
  • The Company expects GAAP diluted EPS will be at least $1.03 for the quarter, and non-GAAP diluted EPS will be at least $1.22 for the quarter. The Company expects weighted average share count for the quarter of 57.1 million diluted shares outstanding.

Conference Call Information
EPAM will host a conference call to discuss results on Thursday, November 1, 2018 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 13683420. The replay will be available until November 15, 2018.

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 each of the Forbes 25 Fastest Growing Public Tech Companies lists between 2013 and 2017.

Learn more at http://www.epam.com/ and follow EPAM 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 expense, write-offs and recoveries, acquisition-related costs, amortization of purchased intangible assets, goodwill impairment, legal settlements, certain other one-time charges and benefits, change in fair value of contingent consideration, foreign exchange gains and losses, the impact of U.S. tax reform, excess tax benefits related to stock 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 according to 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

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 
 
       
 

Three Months Ended
 September 30,

 

Nine Months Ended
 September 30,

 

2018

 

2017

 

2018

 

2017

Revenues

$

468,186

   

$

377,523

   

$

1,337,981

   

$

1,051,151

 

Operating expenses:

             

Cost of revenues (exclusive of depreciation and amortization)

301,081

   

239,369

   

867,890

   

667,231

 

Selling, general and administrative expenses

92,490

   

81,190

   

272,110

   

240,062

 

Depreciation and amortization expense

9,319

   

7,174

   

26,457

   

20,866

 

Other operating expenses, net

736

   

542

   

4,030

   

2,096

 

Income from operations

64,560

   

49,248

   

167,494

   

120,896

 

Interest and other income, net

1,941

   

1,416

   

2,442

   

2,802

 

Foreign exchange (loss)/gain

(514)

   

(77)

   

1,069

   

(1,470)

 

Income before provision for/(benefit from) income taxes

65,987

   

50,587

   

171,005

   

122,228

 

Provision for/(benefit from) income taxes

369

   

7,953

   

(9,286)

   

18,594

 

Net income

$

65,618

   

$

42,634

   

$

180,291

   

$

103,634

 

Foreign currency translation adjustments, net of tax

(2,118)

   

5,703

   

(14,643)

   

16,640

 

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

(74)

   

   

(2,081)

   

 

Comprehensive income

$

63,426

   

$

48,337

   

$

163,567

   

$

120,274

 
               

Net income per share:

             

Basic

$

1.22

   

$

0.81

   

$

3.37

   

$

2.00

 

Diluted

$

1.15

   

$

0.77

   

$

3.19

   

$

1.90

 

Shares used in calculation of net income per share:

             

Basic

53,852

   

52,545

   

53,485

   

51,807

 

Diluted

56,963

   

55,229

   

56,600

   

54,662

 

 

 

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 
 
 

As of
 September 30, 
 2018

 

As of
 December 31, 
 2017

Assets

     

Current assets

     

Cash and cash equivalents

$

685,108

   

$

582,585

 

Accounts receivable, net of allowance of $3,039 and $1,186, respectively

282,276

   

265,639

 

Unbilled revenues

129,683

   

86,500

 

Prepaid and other current assets, net of allowance of $50 and $45, respectively

29,646

   

23,196

 

Employee loans, current, net of allowance of $23 and $0, respectively

2,289

   

2,113

 

Total current assets

1,129,002

   

960,033

 

Property and equipment, net

99,465

   

86,419

 

Employee loans, noncurrent, net of allowance of $0 and $0, respectively

1,456

   

2,097

 

Intangible assets, net

52,669

   

44,511

 

Goodwill

144,987

   

119,531

 

Deferred tax assets

61,905

   

24,974

 

Other noncurrent assets, net of allowance of $0 and $140, respectively

14,498

   

12,691

 

Total assets

$

1,503,982

   

$

1,250,256

 
       

Liabilities

     

Current liabilities

     

Accounts payable

$

8,422

   

$

5,574

 

Accrued expenses and other current liabilities

98,442

   

89,812

 

Due to employees

52,405

   

38,757

 

Deferred compensation due to employees

9,174

   

5,964

 

Taxes payable, current

52,530

   

40,860

 

Total current liabilities

220,973

   

180,967

 

Long-term debt

25,028

   

25,033

 

Taxes payable, noncurrent

50,242

   

59,874

 

Other noncurrent liabilities

11,804

   

9,435

 

Total liabilities

308,047

   

275,309

 

Commitments and contingencies

     

Stockholders' equity

     

Common stock, $0.001 par value; 160,000,000 authorized; 54,011,579 and 53,003,420

  shares issued, 53,991,844 and 52,983,685 shares outstanding at September 30, 2018

  and December 31, 2017, respectively

54

   

53

 

Additional paid-in capital

530,837

   

473,874

 

Retained earnings

699,568

   

518,820

 

Treasury stock

(177)

   

(177)

 

Accumulated other comprehensive loss

(34,347)

   

(17,623)

 

Total stockholders' equity

1,195,935

   

974,947

 

Total liabilities and stockholders' equity

$

1,503,982

   

$

1,250,256

 

 

 

EPAM SYSTEMS, INC. AND SUBSIDIARIES
Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Financial Measures
(In thousands, except percent and per share amounts)
(Unaudited)

       

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

       
       
 

Three Months Ended
 September 30, 2018

 

Nine Months Ended

September 30, 2018

Revenue growth at constant currency(1)

25.4

%

 

26.2

%

Foreign exchange rates impact

(1.4)%

   

1.1

%

Revenue growth as reported

24.0

%

 

27.3

%

 

(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 and nine months ended
September 30, 2018 and 2017:

       
 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

 

GAAP

 

Adjustments

 

Non-GAAP

 

GAAP

 

Adjustments

 

Non-GAAP

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

$

301,081

   

$

(7,492)

   

$

293,589

   

$

867,890

   

$

(22,835)

   

$

845,055

 

Selling, general and administrative
  expenses(3)

$

92,490

   

$

(8,083)

   

$

84,407

   

$

272,110

   

$

(24,608)

   

$

247,502

 

Income from operations(4)

$

64,560

   

$

17,493

   

$

82,053

   

$

167,494

   

$

54,552

   

$

222,046

 

Operating margin

13.8

%

 

3.7

%

 

17.5

%

 

12.5

%

 

4.1

%

 

16.6

%

Net income(5)

$

65,618

   

$

749

   

$

66,367

   

$

180,291

   

$

(4,605)

   

$

175,686

 

Diluted earnings per share

$

1.15

       

$

1.17

   

$

3.19

       

$

3.10

 

 

 

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

GAAP

 

Adjustments

 

Non-GAAP

 

GAAP

 

Adjustments

 

Non-GAAP

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

$

239,369

   

$

(4,913)

   

$

234,456

   

$

667,231

   

$

(14,452)

   

$

652,779

 

Selling, general and administrative
  expenses(3)

$

81,190

   

$

(6,336)

   

$

74,854

   

$

240,062

   

$

(26,398)

   

$

213,664

 

Income from operations(4)

$

49,248

   

$

13,376

   

$

62,624

   

$

120,896

   

$

46,814

   

$

167,710

 

Operating margin

13.0

%

 

3.6

%

 

16.6

%

 

11.5

%

 

4.5

%

 

16.0

%

Net income(5)

$

42,634

   

$

8,336

   

$

50,970

   

$

103,634

   

$

30,042

   

$

133,676

 

Diluted earnings per share

$

0.77

       

$

0.92

   

$

1.90

       

$

2.45

 
                                       

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

 

 

 

Three Months Ended
 September 30,

 

Nine Months Ended
September 30, 2018

 

2018

 

2017

 

2018

 

2017

Stock-based compensation expenses

$

7,492

   

$

4,913

   

$

22,835

   

$

14,452

 

Total adjustments to GAAP cost of revenues(2)

7,492

   

4,913

   

22,835

   

14,452

 

Stock-based compensation expenses

7,838

   

6,304

   

23,901

   

25,468

 

Other acquisition-related expenses

245

   

32

   

707

   

930

 

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

8,083

   

6,336

   

24,608

   

26,398

 

Amortization of purchased intangible assets

2,008

   

1,869

   

5,800

   

5,706

 

One-time charges

(90)

   

258

   

1,309

   

258

 

Total adjustments to GAAP income from operations(4)

17,493

   

13,376

   

54,552

   

46,814

 

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

(900)

   

   

(900)

   

 

Foreign exchange (loss)/gain

514

   

77

   

(1,069)

   

1,470

 

Provision for/(benefit from) income taxes:

             

Tax effect on non-GAAP adjustments

(3,490)

   

(2,497)

   

(11,007)

   

(9,790)

 

Net discrete benefit from tax planning and U.S. tax reform

(6,801)

   

   

(29,984)

   

 

Excess tax benefits related to stock-based compensation

(6,067)

   

(2,620)

   

(16,197)

   

(8,452)

 

Total adjustments to GAAP net income(5)

$

749

   

$

8,336

   

$

(4,605)

   

$

30,042

 

 

 

EPAM SYSTEMS, INC. AND SUBSIDIARIES
Reconciliations of Guidance Non-GAAP Measures to Comparable GAAP Measures
(in percent, except per share amounts)
(Unaudited)

       

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:

       
       
       
 

Fourth Quarter
2018

 

Full Year

2018

Revenue growth at constant currency (at least) (6)

26

%

 

26

%

Foreign exchange rates impact

(1)%

   

0.5

%

Revenue growth (at least)

25

%

 

26.5

%

           

(6) 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:

       
 

Fourth Quarter
2018

 

Full Year

2018

GAAP income from operations as a percentage of revenues

14% to 15%

 

12.5% to 13.5%

Stock-based compensation expenses

2.5

%

 

3.3

%

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

1.2

%

 

1.6

%

Included in selling, general and administrative expenses

1.3

%

 

1.7

%

Other acquisition-related expenses

%

 

0.1

%

Amortization of purchased intangible assets

0.5

%

 

0.5

%

One-time charges

%

 

0.1

%

Non-GAAP income from operations as a percentage of revenues

17% to 18%

 

16.5% to 17.5%

 

 

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

       
 

Fourth Quarter
2018

 

Full Year

2018

GAAP effective tax rate (approximately)

19

%

 

2

%

Tax effect on non-GAAP adjustments

1.7

%

 

4.5

%

Net discrete benefit related to tax planning and U.S. tax reform

%

 

9.6

%

Excess tax benefits related to stock-based compensation

1.3

%

 

5.9

%

Non-GAAP effective tax rate (approximately)

22

%

 

22

%

 

 

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

       
 

Fourth Quarter
2018

 

Full Year

2018

GAAP diluted earnings per share (at least)

$

1.03

   

$

4.22

 

Stock-based compensation expenses

0.23

   

1.05

 

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

0.11

   

0.51

 

Included in selling, general and administrative expenses

0.12

   

0.54

 

Other acquisition-related expenses

   

0.01

 

Amortization of purchased intangible assets

0.05

   

0.15

 

One-time charges

   

0.02

 

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

   

(0.02)

 

Foreign exchange (loss)/gain

0.01

   

(0.01)

 

Provision for income taxes:

     

     Tax effect on non-GAAP adjustments

(0.06)

   

(0.25)

 

     Net discrete benefit from tax planning and U.S. tax reform

   

(0.52)

 

     Excess tax benefits related to stock-based compensation

(0.04)

   

(0.33)

 

Non-GAAP diluted earnings per share (at least)

$

1.22

   

$

4.32

 

 

 

Cision View original content to download multimedia:http://www.prnewswire.com/news-releases/epam-reports-results-for-third-quarter-2018-300741930.html

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