PR Newswire | Nov 5, 2020 06:01AM EST

11/05 05:00 CST

EPAM Reports Results for Third Quarter 2020Third quarter revenues of $652.2 million, up 10.9% year-over-yearGAAP Diluted EPS of $1.53 for the third quarterNon-GAAP Diluted EPS of $1.65 for the third quarter NEWTOWN, Pa., Nov. 5, 2020

NEWTOWN, Pa., Nov. 5, 2020 /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, 2020.

"EPAM's solid third quarter performance was the result of an improving demand environment along with the ongoing expansion of the Company's capabilities-enabling us to continue supporting our customers in the execution of their transformation programs," said Arkadiy Dobkin, CEO & President, EPAM. "Our continuous efforts on implementing internally the principles of an adaptive organization, allow us to navigate the realities of the global economic environment more effectively, while increasing the value we bring to our clients and extending our market position as a trusted digital solutions partner."

Third Quarter 2020 Highlights

* Revenues increased to $652.2 million, a year-over-year increase of $64.1 million, or 10.9%, and on a constant currency basis, revenues were up 10.0% over the corresponding period last year; * GAAP income from operations was $96.4 million, an increase of $15.8 million, or 19.6%, compared to $80.6 million in the third quarter of 2019; * Non-GAAP income from operations was $123.3 million, an increase of $23.6 million, or 23.6%, compared to $99.7 million in the third quarter of 2019; * Diluted earnings per share ("EPS") on a GAAP basis was $1.53, an increase of $0.37, or 31.9%, compared to $1.16 in the third quarter of 2019 based on weighted average diluted shares outstanding of 58.6 million; and * Non-GAAP diluted EPS was $1.65, an increase of $0.26, or 18.7%, compared to $1.39 in the third quarter of 2019.

Cash Flow and Other Metrics

* Cash provided by operating activities was $385.0 million for the first nine months of 2020, compared to $162.9 million for the first nine months of 2019; * Cash and cash equivalents totaled $1,161.1 million as of September 30, 2020, an increase of $224.5 million, or 24.0%, from $936.6 million as of December 31, 2019; and * Total headcount was approximately 38,000 as of September 30, 2020. Included in this number were approximately 33,800 delivery professionals, an increase of 7.4% from September 30, 2019.

Fourth Quarter 2020 Outlook

The Company expects the following for the fourth quarter:

* Revenues will be in the range of $695 million to $705 million for the fourth quarter reflecting a year-over-year growth rate of approximately 10.6% at the mid-point of the range. The Company expects that foreign currency translation will have a negligible impact on year-over-year revenue growth during the quarter; * 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 17.5% to 18.5% of revenues; * The Company expects its GAAP effective tax rate to be approximately 15% and its non-GAAP effective tax rate to be approximately 23%; and * The Company expects GAAP diluted EPS will be in the range of $1.44 to $1.54 for the quarter, and non-GAAP diluted EPS will be in the range of $1.63 to $1.73 for the quarter. The Company expects weighted average diluted shares outstanding for the quarter of 58.9 million.

Conference Call Information

EPAM will host a conference call to discuss the results on Thursday, November 5, 2020 at 8:00 a.m. Eastern time. The live conference call will be available by dialing +1 (844) 707-0662 or +1 (703) 318-2250 (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 https://investors.epam.com. A replay will be available approximately one hour after the call by dialing +1 (855) 859-2056 or +1 (404) 537-3406 (outside of the U.S.) and entering the conference ID 4187416. The replay will be available until November 12, 2020.

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 more than 30 countries across North America, Europe, Asia and Australia. As a recognized market leader in multiple categories among top global independent research agencies, EPAM was one of only four technology companies to appear on Forbes 25 Fastest Growing Public Tech Companies list every year of publication since 2013 and was the only IT services company featured on Fortune's 100 Fastest-Growing Companies list of 2019. Learn more at www.epam.com and follow us 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 expenses, acquisition-related costs including amortization of intangible assets, impairment of assets, certain other one-time charges and benefits, changes in fair value of contingent consideration, foreign exchange gains and losses, excess tax benefits related to stock-based 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 in accordance with 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 estimates and 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. Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends, which affect or may affect our business and operations. Those future events and trends may relate to, among other things, the anticipated impact of the COVID-19 pandemic and civil unrest in the geographies where we operate and the effect that they may have on our sales, operations, access to capital, revenues, profitability and customer demand. Other factors that could cause actual results to differ materially from those expressed or implied include general economic conditions, the factors discussed in the Company's most recent Annual Report on Form 10-K, the factors discussed in the Company's Quarterly Report on Form 10-Q, filed on or after the date of this press release, particularly in Part I. Item 2. (Management's Discussion and Analysis of Financial Condition and Results of Operations) and Part II. Item 1A. (Risk Factors), and other filings with the Securities and Exchange Commission. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. 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 Nine Months Ended September 30, September 30,

2020 2019 2020 2019

Revenues $652,243$588,103$1,935,985$1,661,023

Operating expenses:

Cost of revenues (exclusive of depreciation and 423,388 377,525 1,266,730 1,078,129 amortization)

Selling, general and administrative expenses 116,530 118,886 355,829 332,434

Depreciation and amortization expense 15,929 11,127 46,095 32,355

Income from operations 96,396 80,565 267,331 218,105

Interest and other income, net 1,672 2,509 5,875 6,775

Foreign exchange gain/(loss) 5,896 (3,105) 3,253 (10,151)

Income before provision for income taxes 103,964 79,969 276,459 214,729

Provision for income taxes 14,532 12,967 34,838 28,196

Net income $89,432 $67,002 $241,621 $186,533

Foreign currency translation adjustments, net of tax 199 (10,114) (15,878) (4,551)

Unrealized (loss)/gain on cash-flow hedging instruments, net of(498) (2,163) (3,420) 2,474 tax

Comprehensive income $89,133 $54,725 $222,323 $184,456



Net income per share:

Basic $1.60 $1.22 $4.34 $3.42

Diluted $1.53 $1.16 $4.14 $3.24

Shares used in calculation of net income per share:

Basic 55,884 54,878 55,625 54,604

Diluted 58,616 57,844 58,341 57,567

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



As of As of September December 31, 30, 2019 2020

Assets

Current assets

Cash and cash equivalents $1,161,065$936,552

Short-term investments 60,089 9

Trade receivables and contract assets, net of allowance of $5,371 493,225 497,716 and $2,920, respectively

Prepaid and other current assets 37,843 39,934

Total current assets 1,752,222 1,474,211

Property and equipment, net 163,689 165,259

Operating lease right-of-use assets, net 232,780 238,991

Intangible assets, net 54,321 56,258

Goodwill 207,764 195,043

Deferred tax assets 90,071 75,013

Other noncurrent assets 54,578 39,433

Total assets $2,555,425$2,244,208



Liabilities

Current liabilities

Accounts payable $10,785 $7,831

Accrued compensation and benefits expenses 263,918 230,035

Accrued expenses and other current liabilities 65,242 82,476

Income taxes payable, current 13,779 9,064

Operating lease liabilities, current 61,107 57,542

Total current liabilities 414,831 386,948

Long-term debt 25,039 25,074

Income taxes payable, noncurrent 43,259 45,878

Operating lease liabilities, noncurrent 183,935 180,848

Other noncurrent liabilities 28,127 9,315

Total liabilities 695,191 648,063

Commitments and contingencies

Stockholders' equity

Common stock, $0.001 par value; 160,000,000 authorized; 56,001,270 and 55,207,446 shares issued, 55,981,535 56 55 and 55,187,711 shares outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 648,686 607,051

Retained earnings 1,262,341 1,020,590

Treasury stock (177) (177)

Accumulated other comprehensive loss (50,672) (31,374)

Total stockholders' equity 1,860,234 1,596,145

Total liabilities and stockholders' equity $2,555,425$2,244,208

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



Reconciliation of revenue growth as reported on a GAAP basis to revenue growth on a constant currency basis is presented in the table below:



Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020

Revenue growth as reported 10.9 % 16.6 %

Foreign exchange rates impact (0.9) 0.2

Revenue growth on a constant currency basis^(1) 10.0 % 16.8 %

Constant currency revenue results are calculated by translating current period (1)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, 2020 and 2019:



Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020

GAAP Adjustments Non-GAAP GAAP Adjustments Non-GAAP

Cost of revenues (exclusive of $423,388 $(10,854) $412,534 $1,266,730 $(23,796) $1,242,934 depreciation and amortization)^(2)

Selling, general and $116,530 $(12,976) $103,554 $355,829 $(36,497) $319,332 administrative expenses^(3)

Income from operations^(4) $96,396 $26,916 $123,312 $267,331 $69,508 $336,839

Operating margin 14.8 %4.1 %18.9 %13.8 %3.6 %17.4 %

Net income^(5) $89,432 $7,254 $96,686 $241,621 $22,915 $264,536

Diluted earnings per share $1.53 $1.65 $4.14 $4.53

Three Months Ended Nine Months Ended September 30, 2019 September 30, 2019

GAAP AdjustmentsNon-GAAP GAAP Adjustments Non-GAAP

Cost of revenues (exclusive of $377,525 $(7,580) $369,945 $1,078,129 $(27,841) $1,050,288 depreciation and amortization)^(2)

Selling, general and $118,886 $(9,037) $109,849 $332,434 $(28,264) $304,170 administrative expenses^(3)

Income from operations^(4) $80,565 $19,171 $99,736 $218,105 $63,398 $281,503

Operating margin 13.7 %3.3 %17.0 %13.1 %3.8 %16.9 %

Net income^(5) $67,002 $13,215 $80,217 $186,533 $38,920 $225,453

Diluted earnings per share $1.16 $1.39 $3.24 $3.92

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

Three Months Ended Nine Months Ended September 30, September 30,

2020 2019 2020 2019

Stock-based compensation expenses $10,854$7,580 $23,796$27,841

Total adjustments to GAAP cost of revenues^(2) 10,854 7,580 23,796 27,841

Stock-based compensation expenses 12,620 7,891 30,998 25,183

Other acquisition-related expenses 243 1,144 859 2,505

One-time charges 113 2 4,640 576

Total adjustments to GAAP selling, general and administrative12,976 9,037 36,497 28,264 expenses^(3)

Amortization of acquired intangible assets 3,086 2,554 9,215 7,293

Total adjustments to GAAP income from operations^(4) 26,916 19,171 69,508 63,398

Change in fair value of contingent consideration included in (43) - (1,481) 1,356 Interest and other income, net

Impairment of investment - - 313 -

Foreign exchange gain/(loss) (5,896) 3,105 (3,253) 10,151

Provision for income taxes:

Tax effect on non-GAAP adjustments (4,558) (4,833) (13,181)(15,503)

Excess tax benefits related to stock-based compensation (9,165) (4,228) (28,991)(20,482)

Total adjustments to GAAP net income^(5) $7,254 $13,215$22,915$38,920

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



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 expected revenue growth on a GAAP basis to expected revenue growth on a constant currency basis is presented in the table below:



Fourth Quarter 2020

Revenue growth (at mid-point of the range) 10.6%

Foreign exchange rates impact - %

Revenue growth on a constant currency basis (at mid-point of the range) ^(6) 10.6%

Constant currency revenue results are calculated by translating expected (6)revenues in local currency into U.S. dollars at the weighted average exchange rates of the comparable prior period.

Reconciliation of expected GAAP to non-GAAP income from operations as a percentage of revenues is presented in the table below:



Fourth Quarter 2020

GAAP income from operations as a percentage of revenues 14% to 15%

Stock-based compensation expenses 3.0 %

Included in cost of revenues (exclusive of depreciation and amortization) 1.4 %

Included in selling, general and administrative expenses 1.6 %

Amortization of purchased intangible assets 0.5 %

Non-GAAP income from operations as a percentage of revenues 17.5% to 18.5%

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



Fourth Quarter 2020

GAAP effective tax rate (approximately) 15 %

Tax effect on non-GAAP adjustments 3.1 %

Excess tax benefits related to stock-based compensation 4.9 %

Non-GAAP effective tax rate (approximately) 23 %

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



Fourth Quarter 2020

GAAP diluted earnings per share $1.44 to $1.54

Stock-based compensation expenses 0.33

Included in cost of revenues (exclusive of depreciation and amortization) 0.15

Included in selling, general and administrative expenses 0.18

Amortization of acquired intangible assets 0.05

Foreign exchange loss 0.05

Provision for income taxes:

Tax effect on non-GAAP adjustments (0.09)

Excess tax benefits related to stock-based compensation (0.15)

Non-GAAP diluted earnings per share $1.63 to $1.73

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SOURCE EPAM Systems, Inc.