EPAM Reports Results for Third Quarter 2018

EPAM Reports Results for Third Quarter 2018

PR Newswire

NEWTOWN, Pennsylvania, Nov. 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, Pennsylvania, 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.

EPAM logo

"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

Cash Flow and Other Metrics

2018 Outlook - Full Year and Fourth Quarter

Full Year

Fourth Quarter

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


 

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