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EPAM Reports Results for First Quarter 2018

Press Release:

First quarter revenues of $424.1 million, up 30.6% year-over-year
GAAP Diluted EPS of $1.15 for the first quarter
Non-GAAP Diluted EPS of $0.93 for the first quarter

Newtown, PA — May 9, 2018 — EPAM Systems, Inc. (NYSE: EPAM), a leading global provider of digital platform engineering and software development services, today announced results for its first quarter ended March 31, 2018.

“We delivered a strong first quarter with growth across all of our verticals, based on our ability to meet the demands of our customers, helping them create new business models to stay competitive in an ever-changing market,” said Arkadiy Dobkin, CEO & President, EPAM. “We continue to gain market share through both our core engineering and digital capabilities, in addition to our investments in emerging technologies and acquisitions. Our first quarter results provide a solid foundation and positions us well for fiscal 2018.”

First Quarter 2018 Highlights

  • Revenues increased to $424.1 million, a year-over-year increase of $99.5 million, or 30.6%, and on a constant currency basis, revenue was up 26.0% over the corresponding period last year. Revenue growth in the quarter continues to demonstrate strong broad-based demand from both existing and new clients across the industries EPAM serves and the geographies in which it operates;
  • GAAP income from operations was $48.7 million, an increase of $17.7 million, or 57.3%, compared to $31.0 million in the first quarter of 2017;
  • Non-GAAP income from operations was $67.7 million, an increase of $18.4 million, or 37.4%, compared to $49.3 million in the first quarter of 2017;
  • Diluted earnings per share (“EPS”) on a GAAP basis was $1.15, an increase of $0.71, or 161.4%, compared to $0.44 in the first quarter of 2017. GAAP EPS benefited from a net $22.5 million one-time benefit recorded in the first quarter of 2018 related to the implementation of tax planning to disregard certain foreign subsidiaries as separate entities for U.S. income tax purposes partially offset by an incremental provisional charge associated with the one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax required under U.S. Tax Reform. Diluted EPS on a GAAP basis excluding the net discrete benefit from tax planning and U.S. tax reform was $0.75; and
  • Non-GAAP diluted EPS was $0.93, an increase of $0.21, or 29.2%, compared to $0.72 in the first quarter of 2017 based on a weighted average share count of 56.2 million fully diluted shares outstanding.

Cash Flow and Other Metrics

  • Cash from operations was $7.3 million for the first quarter of 2018, down from $29.1 million for the first three months of 2017. The decrease is primarily due to higher variable compensation payments associated with the 2017 performance year as well as an increase in days sales outstanding during the first quarter of 2018;
  • Cash, cash equivalents and restricted cash totaled $537.1 million as of March 31, 2018, a decrease of $45.8 million or 7.9% from $582.9 million as of December 31, 2017. The decrease is primarily attributable to the $50.3 million net cash used in the acquisition of Continuum during the quarter ended March 31, 2018; and
  • Total headcount was approximately 26,700 as of March 31, 2018. Included in this number were approximately 23,700 delivery professionals, an increase of 20.4% from March 31, 2017.

2018 Outlook - Full Year and Second Quarter

Full Year

  • Revenue growth for 2018 will now be at least 27%, including an estimated 2% for currency tailwinds. The Company expects constant currency growth will now be at least 25%;
  • The Company expects GAAP income from operations to continue to be in the range of 12% to 13% of revenues and non-GAAP income from operations to continue to be in the range of 16% to 17% of revenues;
  • The Company expects its GAAP effective tax rate to now be approximately 4% principally due to the implementation of tax planning to disregard certain foreign subsidiaries as separate entities for U.S. income tax purposes 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 $3.77 for the full year; and non-GAAP diluted EPS will now be at least $4.11 for the full year based on an updated expected weighted average share count of 56.9 million diluted shares outstanding.

Second Quarter

  • Revenues will be at least $445 million for the second quarter, reflecting a year-over-year growth rate of approximately 28% including an estimated 2% for currency tailwinds. The Company expects constant currency growth will be approximately 26%;
  • For the second quarter, the Company expects GAAP income from operations to be in the range of 11.5% to 12.5% of revenues and non-GAAP income from operations to be in the range of 15.5% to 16.5% of revenues;
  • The Company expects its GAAP effective tax rate to be approximately 10% and its non-GAAP effective tax rate to be approximately 22%; and
  • The Company expects GAAP diluted EPS will be at least $0.82 for the quarter, and non-GAAP diluted EPS will be at least $0.98 for the quarter based on an expected weighted average share count of 56.9 million diluted shares outstanding.

Conference Call Information

EPAM will host a conference call to discuss results on Wednesday, May 9, 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 13677981. The replay will be available until May 23, 2018.

About EPAM Systems

Since 1993, EPAM Systems, Inc. (NYSE: EPAM), has leveraged its core engineering expertise to become a leading global product development and digital platform engineering services company. Through its “Engineering DNA” and innovative strategy, consulting, and design capabilities, EPAM works in collaboration with its customers to deliver innovative solutions that turn complex business challenges into real business opportunities. EPAM’s global teams serve customers in over 25 countries across North America, Europe, Asia and Australia. EPAM is a recognized market leader among independent research agencies and was ranked #12 in FORBES 25 Fastest Growing Public Tech Companies and as a top UK Digital Design & Build Agency.

For more information, visit 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, amortization of purchased intangible assets, goodwill impairment, legal settlements, foreign exchange gains and losses, acquisition-related costs, certain other one-time charges and benefits, 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 supplemented results with the non-GAAP financial measure “Diluted EPS on a GAAP basis excluding the net discrete benefit from tax planning and U.S. tax reform.” This measure excludes the one-time benefit associated with the recognition of net deferred tax assets as a result of the election to disregard as separate entities for U.S. income tax purposes certain foreign subsidiaries of the Company as well as the provisional charge associated with U.S. Tax Reform. 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
 March 31,
  2018   2017
Revenues $ 424,148
   $ 324,651
Operating expenses:      
Cost of revenues (exclusive of depreciation and amortization)
 277,634
   207,730
Selling, general and administrative expenses 87,777
   78,453
Depreciation and amortization expense 8,176
   6,672
Other operating expenses, net 1,864
   830
Income from operations 48,697
   30,966
Interest and other (loss)/income, net
 (551)   584
Foreign exchange loss (247)   (2,955)
Income before (benefit from)/provision for income taxes
 47,899
   28,595
(Benefit from)/provision for income taxes
 (16,519)
   4,954
Net income
 $ 64,418   $ 23,641
Foreign currency translation adjustments, net of tax
 3,309
   6,386
Unrealized gain on cash-flow hedging instruments, net of tax
 69
   --
Comprehensive income
 $ 67,796   $ 30,027
       
Net income per share:      
Basic $ 1.21
   $ 0.46
Diluted $
 1.15
   $ 0.44
Shares used in calculation of net income per share:      
Basic 53,079
   50,958
Diluted 56,241
   53,889

 

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

  As of
March 31,  
 2018		   As of
 December 31,  
 2017
Assets      
Current assets      
Cash and cash equivalents $ 535,857
   $ 582,585
  
Accounts receivable, net of allowance of $1,375 and $1,186, respectively
 262,295
   265,639
  
Unbilled revenues 136,807
   86,500
  
Prepaid and other current assets, net of allowance of $161 and $45, respectively
 33,154
   23,196
  
Employee loans, current, net of allowance of $0 and $0, respectively 2,067
   2,113
  
Total current assets 970,180
   960,033
  
Property and equipment, net 96,825
   86,419
  
Employee loans, noncurrent, net of allowance of $0 and $0, respectively 1,883
   2,097
  
Intangible assets, net 59,500
   44,511
  
Goodwill 150,337
   119,531
  
Deferred tax assets 48,170
   24,974
  
Other noncurrent assets, net of allowance of $138 and $140, respectively
 16,507
   12,691
  
Total assets $ 1,343,402
   $
 1,250,256
  
       
Liabilities      
Current liabilities      
Accounts payable $ 8,474
   $ 5,574
  
Accrued expenses and other current liabilities 56,701
   89,812
  
Due to employees 60,642
   38,757
  
Deferred compensation due to employees 1,827
   5,964
  
Taxes payable, current 52,264
   40,860
  
Total current liabilities 179,908
   180,967
  
Long-term debt 25,025
   25,033  
Taxes payable, noncurrent 62,031
   59,874
  
Other noncurrent liabilities 21,090
   9,435
  
Total liabilities 288,054
   275,309
  
Commitments and contingencies      
Stockholders’ equity      
Common stock, $0.001 par value; 160,000,000 authorized; 53,326,733 and 53,003,420
shares issued, 53,306,998 and 52,983,685 shares outstanding at March 31, 2018 and
December 31, 2017, respectively
 53   53  
Additional paid-in capital 486,022
   473,874
  
Retained earnings 583,695
   518,820
  
Treasury stock (177)   (177)  
Accumulated other comprehensive loss (14,245)   (17,623)  
Total stockholders’ equity 1,055,348
   974,947
  
Total liabilities and stockholders’ equity $ 1,343,402
   $ 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
 March 31, 2018
Revenue growth at constant currency (1) 26.0%
Foreign exchange rates impact 4.6%
Revenue growth as reported 30.6%

 

(1) Constant currency revenue results are calculated by translating current period revenue 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 ended March 31, 2018 and 2017:

  Three Months Ended March 31, 2018
  GAAP   Adjustments   Non-GAAP
Cost of revenues (exclusive of 
depreciation and amortization)(2)		 $ 277,634
   $ (8,289)   $ 269,345
Selling, general and administrative 
expenses(3)		 $ 87,777
   $ (8,684)   $ 79,093
Income from operations(4) $ 48,697
   $ 18,976
   $ 67,673
Operating margin 11.5%
   4.5%   16.0%
Net income(5) $ 64,418
   $ (12,175)
   $ 52,243
Diluted earnings per share $ 1.15
       $ 0.93

 

  Three Months Ended March 31, 2017
  GAAP   Adjustments   Non-GAAP
Cost of revenues (exclusive of 
depreciation and amortization)(2)		 $ 207,730
   $ (5,350)   $ 202,380
Selling, general and administrative 
expenses(3)		 $ 78,453
   $ (10,994)   $ 67,459
Income from operations(4) $ 30,966
   $ 18,293
   $ 49,259
Operating margin 9.5%
   5.7%   15.2%
Net income(5) $ 23,641
   $ 15,281
   $ 38,922
Diluted earnings per share $ 0.44
       $ 0.72

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



  Three Months Ended
 March 31,
  2018   2017
Stock-based compensation expenses - non-acquisition related $ 8,289
   $ 5,350
Total adjustments to GAAP cost of revenues(2) 8,289
   5,350
Stock-based compensation expenses - acquisition related --   4,574
Stock-based compensation expenses - all other 8,307
   5,852
Other acquisition-related expenses 377   568
Total adjustments to GAAP selling, general and administrative expenses(3) 8,684
   10,994
Amortization of purchased intangible assets 1,760
   1,949
One-time charges 243
   —
Total adjustments to GAAP income from operations(4) 18,976
   18,293
Foreign exchange loss 247
   2,955
(Benefit from)/provision for income taxes:      
Tax effect on non-GAAP adjustments (4,231)   (4,273)
Net discrete benefit from tax planning and U.S. tax reform
 (22,477)
   —
Excess tax benefits related to stock-based compensation (4,690)
   (1,694)
Total adjustments to GAAP net income(5) $ (12,175)
   $ 15,281

 

Reconciliation of diluted EPS on a GAAP basis to diluted EPS on a GAAP basis excluding the net discrete benefit from tax planning and U.S. tax reform for the three months ended March 31, 2018:

  Three Months Ended March 31, 2018
  GAAP   Adjustments   GAAP excluding
Net Discrete Benefit from
Tax Planning and
U.S. Tax Reform
Net income(6) $ 64,418
   $ 22,477
   $ 41,941
Weighted average diluted shares
 outstanding		 56,241
       56,241
Diluted earnings per share $ 1.15       $ 0.75

(6) The total adjustments to GAAP net income include the one-time tax benefit associated with the recognition of $24.6 million of net deferred tax assets as a result of the election to disregard as separate entities for U.S. tax purposes certain foreign subsidiaries of the Company partially offset by a $2.2 million provisional charge to increase the income taxes payable associated with the one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax


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:

  Second Quarter 2018
   Full Year 2018
Revenue growth at constant currency (7) 26%   25%
Foreign exchange rates impact 2%   2%
Revenue growth  28%   27%

(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 GAAP to Non-GAAP income from operations as a percentage of revenue is presented in the table below:

  Second Quarter 2018   Full Year 2018
GAAP income from operations as a percentage of revenues 11.5% to 12.5%   12% to 13%
Stock-based compensation expenses 3.2%   3.3%
Included in cost of revenues 1.6%   1.6%
Included in selling, general and administrative expenses 1.6%   1.7%
Other acquisition-related expenses
 --   0.1%
Amortization of purchased intangible assets
 0.5%   0.5%
One-time charges
 0.3%   0.1%
Non-GAAP income from operations as a percentage of revenues 15.5% to 16.5%   16% to 17%


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

  Second Quarter 2018   Full Year 2018
GAAP effective tax rate 10%   4%
Tax effect on non-GAAP adjustments
 4.9%   5.3%
Net discrete benefit related to tax planning and U.S. tax reform
 --%   7.2%
Excess tax benefits related to stock-based compensation 7.1%   5.5%
Non-GAAP effective tax rate 22%   22%


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

  Second Quarter 2018   Full Year 2018
GAAP diluted earnings per share (at least) $ 0.82   $ 3.77
Stock-based compensation expenses 0.25   1.06
Included in cost of revenues 0.12   0.53
Included in selling, general and administrative expenses 0.13   0.53
Other acquisition-related expenses
 --   0.01
Amortization of purchased intangible assets 0.04   0.15
One-time charges
 0.02   0.03
Foreign exchange loss 0.03   0.08
Provision for income taxes:      
  Tax effect on non-GAAP adjustments (0.07)   (0.29)
  Net discrete benefit from tax planning and U.S. tax reform
 --   (0.39)
  Excess tax benefits related to stock-based compensation (0.11)   (0.31)
 Non-GAAP diluted earnings per share (at least) $ 0.98   $ 4.11