EPAM Systems Reports Results for Second Quarter 2013

Press Release:

Second quarter revenues up 28% year-over-year and 7% sequentially

Newtown, PA — August 8, 2013 — EPAM Systems, Inc. (NYSE: EPAM), a leading provider of complex software engineering solutions and a leader in Central and Eastern European IT services delivery, today announced results for the quarter ended June 30, 2013.

"Our differentiated business model and focus on emerging technology trends has given us a clear competitive advantage in the marketplace and helped us to produce another quarter of industry-leading revenue growth. We continue to see strong demand for our complex software engineering services across our vertical markets from both new and existing clients," commented Arkadiy Dobkin, CEO and President of EPAM Systems, Inc.

Second Quarter 2013 Highlights

  • Revenues increased to $133.2 million, up 28.3% year-over-year and 7.2% sequentially;
  • GAAP income from operations was $17.5 million, an increase of $0.7 million or 4.2% from $16.8 million in the second quarter of 2012;
  • Non-GAAP income from operations was $21.8 million, an increase of $2.7 million or 14.3% from $19.1 million in the second quarter of 2012;
  • Non-GAAP quarterly diluted EPS was $0.40, up 8.1% from $0.37 in the year-ago quarter;
  • Quarterly diluted earnings per share (EPS) on a GAAP basis was $0.29, flat compared to the year-ago quarter.

EPAM generated cash from operations of $8.0 million in the second quarter of 2013. At June 30, 2013, cash and cash equivalents were $107.5 million.
Reconciliations of non-GAAP financial measures to operating results and diluted EPS are included at the end of this release.

Corporate Highlights

  • Forbes named EPAM number 6 in the Forbes' list of America's 25 Fastest-Growing Tech Companies, which includes some of the most well-respected companies in technology such as LinkedIn, Facebook, Apple, Google, and Cognizant. This list was developed to identify firms that have proven and sustainable businesses with a pipeline of innovative ideas. In order to qualify for membership in the list, Forbes requires sales growth of at least 10% for each of the past three fiscal years and over the last 12 months, as well as estimated earnings growth above 10% over the next three to five years.
  • EPAM's Innovation Lab project created with its long-standing client, Wolters Kluwer, won the IT Outsourcing Project of the Year category at the 2013 European Outsourcing Association ("EOA") Awards and Best Practice Showcase. The winners were announced in Amsterdam, Netherlands, on April 25, during the annual EOA Awards ceremony that celebrates best pan-European IT practices.
  • EPAM was recognized with a Duke's Choice Award. At the event, Oracle recognized companies for their innovative projects and significant contribution to the Java community. The Award winners were announced on April 23 at JavaOne Russia 2013 in Moscow as part of the regional JavaOne conference series.

Full Year and Third Quarter 2013 Outlook

"We remain confident that the demand for our service offerings will be strong for the balance of the year.  Our technical expertise combined with the investments that we have made to expand our scope of services, both organically and through acquisitions, have positioned us for continued future growth across the geographies and verticals that we serve." concluded Mr. Dobkin.

Based on current conditions, EPAM reiterates full year guidance of expected year-over-year revenue growth in the range of 23% to 25%. Non-GAAP net income growth for 2013 is expected to be in the range of 12% to 15% year-over-year, with an effective tax rate of approximately 20%.

For the third quarter of 2013, EPAM expects revenues between $135 million and $137 million, representing a growth rate of 23% to 25% over third quarter 2012 revenues. Third quarter 2013 non-GAAP diluted EPS is expected to be in the range of $0.41 to $0.42 based on an estimated third quarter 2013 weighted average of 48.7 million diluted shares.

Conference Call Information

EPAM will hold a conference call to discuss its second quarter 2013 results at 8:00 a.m. Eastern time, on Friday, August 9, 2013. A live webcast of the call may be accessed over the Internet from EPAM's Investor Relations website at http://investors.epam.com. Participants should follow the instructions provided on the website to download and install the necessary audio applications. The conference call is also available by dialing 1-800-237-9752 (international) or 1-617-847-8706 (domestic) and entering the passcode 90572291.

A replay of the live conference call will be available approximately one hour after the call. The replay will be available on EPAM's website or by dialing 1-888-286-8010 (international) or 1-617-801-6888 (domestic) and entering the replay passcode 37864189. The telephonic replay will be available until August 26, 2013.

About EPAM Systems

Established in 1993, EPAM Systems, Inc. (NYSE:EPAM) provides software engineering solutions through its leading Central and Eastern European service delivery platform. Headquartered in the United States, EPAM employs approximately 8,900 IT professionals and serves clients worldwide from its locations in the United States, Canada, UK, Switzerland, Germany, Sweden, Netherlands, Belarus, Hungary, Russia, Ukraine, Kazakhstan and Poland.

Non-GAAP Financial Measures

EPAM supplements results reported in accordance with principles generally accepted in the United States, 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, communicated 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 and compare EPAM and similar companies. 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-off and recovery, amortization of purchased intangible assets, goodwill impairment, legal settlement, foreign exchange gains and losses, and acquisition-related costs. However, because EPAM's reported non-GAAP financial measures are not calculated according to GAAP, these measures are not comparable to GAAP and may not necessarily 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 its consolidated financial statements, which are prepared according to 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 our 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

(Unaudited)

    Three Months Ended June 30,     Six Months Ended June 30,  
    2013     2012     2013     2012  
    (in thousands, except share and per share data)  
Revenues   $ 133,184     $ 103,800     $ 257,382     $ 198,183  
Operating expenses:                                
Cost of revenues (exclusive of depreciation and amortization)     83,547       63,803       161,484       123,978  
Selling, general and administrative expenses     28,541       20,711       55,624       38,338  
Depreciation and amortization expense     3,854       2,423       7,471       4,634  
Other operating (income)/ expenses, net     (293)       33       (268 )     619  
Income from operations     17,535       16,830       33,071       30,614  
Interest and other income, net     769       460       1,399       936  
Foreign exchange loss     (869 )     (1,394 )     (1,368 )     (1,314 )
Income before provision for income taxes     17,435       15,896       33,102       30,236  
Provision for income taxes     3,317       2,575       6,304       4,816  
Net Income   $ 14,118     $ 13,321     $ 26,798     $ 25,420  
                                 
Net income per share of common stock:                                
Basic (common)   $ 0.31     $ 0.31     $ 0.59     $ 0.60  
Diluted (common)   $ 0.29     $ 0.29     $ 0.56     $ 0.55  
Shares used in calculation of net income per share of common stock:                                
Basic (common)     45,486       42,475       45,151       36,987  
Diluted (common)     47,977       46,382       47,813       40,820  
 

EPAM SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

    As of
June 30, 2013
    As of
December 31, 2012
 
    (in thousands, except share
and per share data)
 
Assets            
Current assets            
Cash and cash equivalents   $ 107,475     $ 118,112  
Accounts receivable, net of allowance of $2,434 and $2,203, respectively     82,817       78,906  
Unbilled revenues     57,680       33,414  
Prepaid and other current assets     17,167       11,835  
Employee loans, net of allowance of $0 and $0, respectively, current     1,417       429  
Time deposits     977       1,006  
Restricted cash, current     60       660  
Deferred tax assets, current     5,876       6,593  
Total current assets     273,469       250,955  
Property and equipment, net     55,400       53,135  
Restricted cash, long-term     353       467  
Employee loans, net of allowance of $0 and $0, respectively, long-term     3,408       -  
Intangible assets, net     15,115       16,834  
Goodwill     22,304       22,698  
Deferred tax assets, long-term     3,530       6,093  
Other long-term assets     938       632  
Total assets   $ 374,517     $ 350,814  
                 
Liabilities                
Current liabilities                
Accounts payable   $ 8,376     $ 6,095  
Accrued expenses and other liabilities     7,017       19,814  
Deferred revenue, current     4,041       6,369  
Due to employees     13,744       12,026  
Taxes payable     13,619       14,557  
Deferred tax liabilities, current     543       491  
Total current liabilities     47,340       59,352  
Deferred revenue, long-term     312       1,263  
Taxes payable, long-term     1,228       1,228  
Deferred tax liabilities, long-term     404       2,691  
Total liabilities     49,284       64,534  
Commitments and contingencies                
Stockholders' equity                
Common stock, $0.001 par value; 160,000,000 authorized; 46,914,858 and 45,398,523 shares issued, 45,958,829 and 44,442,494 shares outstanding at June 30, 2013 and December 31, 2012, respectively     46       44  
Additional paid-in capital     182,503       166,962  
Retained earnings     155,790       128,992  
Treasury stock     (8,697 )     (8,697 )
Accumulated other comprehensive loss     (4,409 )     (1,021 )
Total stockholders' equity     325,233       286,280  
Total liabilities and stockholders' equity   $ 374,517     $ 350,814  
 

EPAM SYSTEMS, INC. AND SUBSIDIARIES

Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures

(Unaudited)

(In thousands, except per share amounts and percentages)

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      2013
GAAP
      2013
Adjustments
      2013
Non-GAAP
      2013
GAAP
      2013
Adjustments
      2013
Non-GAAP
 
Cost of revenues (exclusive of depreciation and amortization)(1)   $ 83,547     $ (1,079 )   $ 82,468     $ 161,484     $ (1,858 )   $ 159,626  
Selling, general and administrative expenses(2)   $ 28,541     $ (2,781 )   $ 25,760     $ 55,624     $ (4,616 )   $ 51,008  
Income from operations(3)   $ 17,535     $ 4,233     $ 21,768     $ 33,071     $ 7,546     $ 40,617  
Operating margin     13.2 %     3.1 %     16.3 %     12.8 %     3.0 %     15.8 %
Net income(4)   $ 14,118     $ 5,102     $ 19,220     $ 26,798     $ 8,914     $ 35,712  
Diluted earnings per share(5)   $ 0.29             $ 0.40     $ 0.56             $ 0.75  

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      2012
GAAP
      2012
Adjustments
      2012
Non-GAAP
      2012
GAAP
      2012
Adjustments
      2012
Non-GAAP
 
Cost of revenues (exclusive of depreciation and amortization)(1)   $ 63,803     $ (884 )   $ 62,919     $ 123,978     $ (1,450 )   $ 122,528  
Selling, general and administrative expenses(2)   $ 20,711     $ (1,196 )   $ 19,515     $ 38,338     $ (2,260 )   $ 36,078  
Income from operations(3)   $ 16,830     $ 2,220     $ 19,050     $ 30,614     $ 4,574     $ 35,188  
Operating margin     16.2 %     2.2 %     18.4 %     15.4 %     2.4 %     17.8 %
Net income(4)   $ 13,321     $ 3,614     $ 16,935     $ 25,420     $ 5,888     $ 31,308  
Diluted earnings per share(5)   $ 0.29             $ 0.37     $ 0.55             $ 0.69  

Notes:

(1)   Does not include $1,079 and $884 of stock-based compensation expense reported within cost of revenues during the three months ended June 30, 2013 and 2012, respectively, and $1,858 and $1,450 of stock-based expense during the six months ended June 30, 2013 and 2012, respectively.

(2)    Adjustments to GAAP selling, general and administrative expenses:

      Three Months Ended
June 30,
      Six Months Ended
June 30,
 
      2013
GAAP
      2012
Non-GAAP
      2013
GAAP
      2012
Non-GAAP
 
Stock-based compensation expense   $ 2,771     $ 889     $ 4,568     $ 1,873  
Acquisition-related costs     10       307       48       387  
Total adjustments to GAAP selling, general and administrative expenses   $ 2,781     $ 1,196     $ 4,616     $ 2,260  

(3)    Adjustments to GAAP income from operations:

      Three Months Ended
June 30,
      Six Months Ended
June 30,
 
      2013
GAAP
      2012
Non-GAAP
      2013
GAAP
      2012
Non-GAAP
 
Stock-based compensation expense   $ 3,850     $ 1,773     $ 6,426     $ 3,323  
reported within cost of revenues     1,079       884       1,858       1,450  
reported within selling, general and administrative expenses     2,771       889       4,568       1,873  
Amortization of purchased intangible assets     704       140       1,403       280  
Acquisition-related costs     10       307       48       387  
One-time charges     (331 )     -       (331 )     584  
Total adjustments to GAAP income from operations   $ 4,233     $ 2,220     $ 7,546     $ 4,574  

 

 

(4)    Adjustments to GAAP net income:

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2013     2012     2013     2012  
    GAAP     Non-GAAP     GAAP     Non-GAAP  
Stock-based compensation expense   $ 3,850     $ 1,773     $ 6,426     $ 3,323  
reported within cost of revenues     1,079       884       1,858       1,450  
reported within selling, general and administrative expenses     2,771       889       4,568       1,873  
Amortization of purchased intangible assets     704       140       1,403       280  
Acquisition-related costs     10       307       48       387  
One-time charges     (331 )     -       (331 )     584  
Foreign exchange loss/ (gain)     869       1,394       1,368       1,314  
Total adjustments to GAAP net income   $ 5,102     $ 3,614     $ 8,914     $ 5,888  

 

(5) Non-GAAP weighted average diluted common shares outstanding were 47,977 and 46,382 during the three months ended June 30, 2013 and 2012, and 47,813 and 45,449 during the six months ended June 30, 2013 and 2012, respectively.

Non-GAAP diluted earnings per share presents non-GAAP net income divided by Non-GAAP weighted average diluted common shares outstanding. Non-GAAP weighted average diluted common shares outstanding assumes (i) the 2.9 million shares EPAM sold in its February 2012 initial public offering were outstanding as of January 1, 2012, and (ii) the conversion of the outstanding preferred stock into common stock on an as-converted basis.