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EPAM Systems Reports Results for Second Quarter 2014

Press Release:

Second quarter revenues up 31% year-over-year and 9% sequentially

Newtown, PA - August 4, 2014 - 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, 2014.

Second Quarter 2014 Highlights

  • Revenues increased to $174.7 million, up 31.2% year-over-year and 8.9% sequentially;
  • Non-GAAP income from operations was $28.9 million, an increase of $7.1 million or 32.7% from $21.8 million in the second quarter of 2013;
  • Non-GAAP quarterly diluted EPS was $0.53, up 32.5% from $0.40 in the second quarter of 2013;
  • GAAP income from operations was $18.5 million, an increase of $0.9 million, or 5.4%, from $17.5 million in the second quarter of 2013;
  • Quarterly diluted earnings per share (EPS) on a GAAP basis was $0.30, up 3.4% from $0.29 in the second quarter of 2013.

EPAM generated cash from operations of $15.4 million in the second quarter of 2014 and $31.6 million on a year-to-date basis. At June 30, 2014, cash and cash equivalents were $175.1 million.

Reconciliations of non-GAAP financial measures to operating results and diluted EPS are included at the end of this release.

Corporate Highlights

  • EPAM delivery headcount crossed the 10,000 employee mark.
  • EPAM was named as one of Top 50 on CRN's 2014 Solution Provider 500 (SP500) list by The Channel Company's CRN. The list ranks the top revenue-generating technology integrators in the U.S. and Canada whose forward-thinking approach to the channel has helped them evolve and thrive in today's cloud and services-driven IT era.
  • EPAM was named as one of 20 most promising solution providers in Travel & Hospitality 2014, published by CIO Review magazine in its special edition.
  • EPAM, together with industry leaders CIO magazine and The CMO Club, released a new study looking at the challenges CIOs and CMOs are facing in pursuing omnichannel strategies.

Full Year and Third Quarter 2014 Outlook

"I am very pleased to report another very solid quarter, despite all the geo-political turmoil in Eastern Europe over the last six months.  Our strong focus on the high growth portion of global software services market and continued delivery of high quality solutions to our clients allowed us to over-perform the original organic forecast as well as the general market." said Arkadiy Dobkin, CEO and President of EPAM. "Combined with several relatively small but important acquisitions our top-line grew over 30% this quarter setting a good base for achieving our annual and longer-term strategic goals."

For the full year 2014, based on current conditions and including the impact of all acquisitions, EPAM expects year-over-year revenue growth to be 28% to 30%. Non-GAAP net income growth for 2014 is expected to be in the range of 26% to 28% year-over-year, with an effective tax rate of 20%. The full year weighted average share count is expected to be just over 50 million diluted shares outstanding.

For the third quarter of 2014, EPAM expects revenues between $188 million and $190 million, representing a growth rate of 34% to 36% over third quarter 2013 revenues. Third quarter of 2014 non-GAAP diluted EPS is expected to be in the range of $0.53 to $0.55, based on an estimated second quarter weighted average shares of 50.3 million. GAAP diluted EPS is expected to be the in the range of $0.25 to $0.27.

Conference Call Information

EPAM will host a conference call to discuss its second quarter results on Tuesday, August 5, 2014 at 8:00 a.m. Eastern Time. The live conference call can be accessed by dialing 1-877-407-0784 (international) or 1-201-689-8560 (domestic).

A telephonic replay will also be available approximately one hour after the call and can be accessed by dialing 1-877-870-5176 (international) or 1-858-384-5517 (domestic). The passcode for the replay is 13587206. The telephonic replay will be available until August 19, 2014.

Interested investors and other parties may also listen to a webcast of the conference call by logging onto the Investor Relations section of the Company's website at http://investors.epam.com

About EPAM Systems

Established in 1993, EPAM Systems, Inc. (NYSE: EPAM), is recognized as a leader in software product development by independent research agencies. Headquartered in the United States, EPAM employs approximately 10,500 IT professionals and serves clients worldwide utilizing its award-winning Central and Eastern European global delivery platform and its locations in 17 countries throughout North America, Europe, and Asia. EPAM was ranked by Forbes as #6 among America's 25 Fastest-Growing Tech Companies and #2 among the Fast-Growing Tech Stars.

For more information, please visit www.epam.com.

Non-GAAP Financial Measures

EPAM supplements results reported in accordance with generally accepted accounting principles 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.

Contact: 
EPAM Systems, Inc.
Anthony J. Conte, Chief Financial Officer
Phone: +1-267-759-9000 x64588
Fax: +1-267-759-8989
investor_relations@epam.com

EPAM SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(US Dollars in thousands, except share and per share data)

  As of
June 30,
2014
    As of
December 31,
2013
Assets          
Current assets          
Cash and cash equivalents $ 175,075     $ 169,207  
Accounts receivable, net of allowance of $2,267 and $1,800, respectively 108,179     95,431  
Unbilled revenues 67,880     43,108  
Prepaid and other current assets 16,200     14,355  
Employee loans, net of allowance of $0 and $0, respectively, current 2,240     1,989  
Time deposits 1,142     1,188  
Restricted cash, current -     298  
Deferred tax assets, current 4,123     5,392  
Total current assets 374,839     330,968  
Property and equipment, net 54,523     53,315  
Restricted cash, long-term 212     225  
Employee loans, net of allowance of $0 and $0, respectively, long-term 4,218     4,401  
Intangible assets, net 49,381     13,734  
Goodwill 42,547     22,268  
Deferred tax assets, long-term 9,382     4,557  
Other long-term assets 2,862     3,409  
Total assets $ 537,964     $ 432,877  
           
Liabilities          
Current liabilities          
Accounts payable $ 12,500     $ 2,835  
Accrued expenses and other liabilities 23,280     20,175  
Deferred revenue, current 4,244     4,543  
Due to employees 21,006     12,665  
Taxes payable 15,050     14,171  
Deferred tax liabilities, current 1,563     275  
Total current liabilities 77,643     54,664  
Other long-term liabilities 31,892     -  
Deferred revenue, long-term 228     533  
Taxes payable, long-term 1,228     1,228  
Deferred tax liabilities, long-term 326     351  
Total liabilities 111,317     56,776  
Commitments and contingencies          
Stockholders' equity          
Common stock, $0.001 par value; 160,000,000 authorized; 48,229,347 and 47,569,463 shares issued, 47,514,892 and 46,614,916 shares outstanding at June 30, 2014 and December 31, 2013, respectively 48     46  
Additional paid-in capital 212,450     195,585  
Retained earnings 223,164     190,986  
Treasury stock (6,500 )   (8,684 )
Accumulated other comprehensive loss (2,515 )   (1,832 )
Total stockholders' equity 426,647     376,101  
Total liabilities and stockholders' equity $ 537,964     $ 432,877  

EPAM SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(US Dollars in thousands, except share and per share data)

  Three Months Ended
 June 30,
  Six Months Ended
 June 30,
  2014     2013     2014     2013  
Revenues $ 174,695     $ 133,184     $ 335,079     $ 257,382  
Operating expenses:                      
Cost of revenues (exclusive of depreciation and amortization) 110,102     83,547     212,556     161,484  
Selling, general and administrative expenses 38,671     28,541     71,030     55,624  
Depreciation and amortization expense 5,451     3,854     9,140     7,471  
Other operating expenses, net 1,995     (293 )   2,020     (268 )
Income from operations 18,476     17,535     40,333     33,071  
Interest and other income, net 1,164     769     2,140     1,399  
Foreign exchange loss (1,239 )   (869 )   (2,480 )   (1,368 )
Income before provision for income taxes 18,401     17,435     39,993     33,102  
Provision for income taxes 3,587     3,317     7,815     6,304  
Net income $ 14,814     $ 14,118     $ 32,178     $ 26,798  
Foreign currency translation adjustments 2,894     (1,045 )   (683 )   (3,388 )
Comprehensive income $ 17,708     $ 13,073     $ 31,495     $ 23,410  
                       
Net income per share:                      
Basic $ 0.31     $ 0.31     $ 0.69     $ 0.59  
Diluted $ 0.30     $ 0.29     $ 0.65     $ 0.56  
Shares used in calculation of net income per share:                      
Basic 47,068     45,486     46,933     45,151  
Diluted 49,559     47,977     49,384     47,813  

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

  Three Months Ended June 30, 2014   Six Months Ended June 30, 2014
  GAAP   Adjustments   Non-GAAP   GAAP   Adjustments   Non-GAAP
Cost of revenues (exclusive of depreciation and amortization)(1) $ 110,102     $ (2,525 )   $ 107,577     $ 212,556     $ (3,928 )   $ 208,628  
Selling, general and administrative expenses(2) $ 38,671     $ (3,665 )   $ 35,006     $ 71,030     $ (6,051 )   $ 64,979  
Income from operations(3) $ 18,476     $ 10,412     $ 28,888     $ 40,333     $ 14,851     $ 55,184  
Operating margin 10.6 %   5.9 %   16.5 %   12.0 %   4.5 %   16.5 %
Net income(4) $ 14,814     $ 11,651     $ 26,465     $ 32,178     $ 17,331     $ 49,509  
Diluted earnings per share(5) $ 0.30     $ 0.23     $ 0.53     $ 0.65     $ 0.35     $ 1.00  

 

  Three Months Ended June 30, 2013   Six Months Ended June 30, 2013
  GAAP   Adjustments   Non-GAAP   GAAP   Adjustments   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     $ 0.11     $ 0.40     $ 0.56     $ 0.19     $ 0.75  

Notes:

(1) Adjustments to GAAP cost of revenues (exclusive of depreciation and amortization) were comprised of stock-based compensation expense recorded in the periods presented.
(2) Adjustments to GAAP selling general and administrative expenses:

 

  Three Months Ended
 June 30,
  Six Months Ended
 June 30,
  2014     2013     2014     2013  
Stock-based compensation expense $ 3,366     $ 2,771     $ 5,171     $ 4,568  
Acquisition-related costs 299     10     880     48  
Total adjustments to GAAP selling, general and administrative expenses $ 3,665     $ 2,781     $ 6,051     $ 4,616  

 

(3) Adjustments to GAAP income from operations:

 

  Three Months Ended
 June 30,
  Six Months Ended
 June 30,
  2014     2013     2014     2013  
Stock-based compensation expense $ 5,891     $ 3,850     $ 9,099     $ 6,426  
reported within cost of revenues 2,525     1,079     3,928     1,858  
reported within selling, general and administrative expenses 3,366     2,771     5,171     4,568  
Acquisition-related costs 299     10     880     48  
Amortization of purchased intangible assets 2,222     704     2,872     1,403  
One-time charges 2,000     (331 )   2,000     (331 )
Total adjustments to GAAP income from operations $ 10,412     $ 4,233     $ 14,851     $ 7,546  

 

(4) Adjustments to GAAP net income:

 

  Three Months Ended
 June 30,
  Six Months Ended
 June 30,
  2014     2013     2014     2013  
Stock-based compensation expense $ 5,891     $ 3,850     $ 9,099     $ 6,426  
reported within cost of revenues 2,525     1,079     3,928     1,858  
reported within selling, general and administrative expenses 3,366     2,771     5,171     4,568  
Acquisition-related costs 299     10     880     48  
Amortization of purchased intangible assets 2,222     704     2,872     1,403  
One-time charges 2,000     (331 )   2,000     (331 )
Foreign exchange loss 1,239     869     2,480     1,368  
Total adjustments to GAAP net income $ 11,651     $ 5,102     $ 17,331     $ 8,914  

 

(5) There were no adjustments to GAAP average diluted common shares outstanding during the three and six months ended June 30, 2014 and 2013.