EPAM Reports Results for Second Quarter 2019

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

Three Months Ended
 June 30,

Six Months Ended
 June 30,

2019

2018

2019

2018

Revenues

$

551,587

$

445,647

$

1,072,920

$

869,795

Operating expenses:

Cost of revenues (exclusive of depreciation and amortization)

355,915

289,175

700,604

566,809

Selling, general and administrative expenses

111,762

93,273

213,548

182,914

Depreciation and amortization expense

11,028

8,962

21,228

17,138

Income from operations

72,882

54,237

137,540

102,934

Interest and other income, net

1,190

1,052

4,266

501

Foreign exchange (loss)/gain

(3,562)

1,830

(7,046)

1,583

Income before provision for/(benefit from) income taxes

70,510

57,119

134,760

105,018

Provision for/(benefit from) income taxes

11,733

6,864

15,229

(9,655)

Net income

$

58,777

$

50,255

$

119,531

$

114,673

Foreign currency translation adjustments, net of tax

2,620

(15,834)

5,563

(12,525)

Unrealized gain/(loss) on cash-flow hedging instruments, net of tax

1,537

(2,076)

4,637

(2,007)

Comprehensive income

$

62,934

$

32,345

$

129,731

$

100,141

Net income per share:

Basic

$

1.07

$

0.94

$

2.19

$

2.15

Diluted

$

1.02

$

0.89

$

2.08

$

2.03

Shares used in calculation of net income per share:

Basic

54,682

53,517

54,465

53,299

Diluted

57,614

56,587

57,427

56,415

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

As of
June 30, 
 2019

As of
December 31,
2018

Assets

Current assets

Cash and cash equivalents

$

777,365

$

770,560

Accounts receivable, net of allowance of $1,882 and $1,557, respectively

343,864

297,685

Unbilled revenues

135,786

104,652

Prepaid expenses and other current assets

28,808

26,171

Total current assets

1,285,823

1,199,068

Property and equipment, net

111,175

102,646

Operating lease right-of-use assets

210,447

?

Intangible assets, net

53,821

57,065

Goodwill

179,214

166,832

Deferred tax assets

69,734

69,983

Other noncurrent assets

21,237

16,208

Total assets

$

1,931,451

$

1,611,802

Liabilities

Current liabilities

Accounts payable

$

6,043

$

7,444

Accrued expenses and other current liabilities

96,026

127,937

Due to employees

64,032

49,683

Deferred compensation due to employees

7,928

9,920

Taxes payable, current

50,156

67,845

Operating lease liabilities, current

48,429

?

Total current liabilities

272,614

262,829

Long-term debt

25,000

25,031

Taxes payable, noncurrent

43,650

43,685

Operating lease liabilities, noncurrent

158,137

?

Other noncurrent liabilities

9,803

17,661

Total liabilities

509,204

349,206

Commitments and contingencies

Stockholders' equity

Common stock, $0.001 par value; 160,000,000 authorized; 54,799,024 and 54,099,927 shares issued, 54,779,289 and 54,080,192 shares outstanding at June 30, 2019 and December 31, 2018, respectively

55

54

Additional paid-in capital

574,619

544,700

Retained earnings

879,064

759,533

Treasury stock

(177)

(177)

Accumulated other comprehensive loss

(31,314)

(41,514)

Total stockholders' equity

1,422,247

1,262,596

Total liabilities and stockholders' equity

$

1,931,451

$

1,611,802

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

Three Months
Ended
 June 30, 2019

Six Months
Ended
 June 30, 2019

Revenue growth on a constant currency basis⁽¹⁾

25.1

%

25.7

%

Foreign exchange rates impact

(1.3)

%

(2.3)

%

Revenue growth as reported

23.8

%

23.4

%

(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 six months ended June 30, 2019 and 2018:

Three Months Ended
 June 30, 2019

Six Months Ended
 June 30, 2019

GAAP

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

Cost of revenues (exclusive of depreciation and amortization)⁽²⁾

$

355,915

$

(7,480)

$

348,435

$

700,604

$

(20,261)

$

680,343

Selling, general and administrative expenses⁽³⁾

$

111,762

$

(9,606)

$

102,156

$

213,548

$

(19,227)

$

194,321

Income from operations⁽⁴⁾

$

72,882

$

19,687

$

92,569

$

137,540

$

44,227

$

181,767

Operating margin

13.2

%

3.6

%

16.8

%

12.8

%

4.1

%

16.9

%

Net income⁽⁵⁾

$

58,777

$

14,933

$

73,710

$

119,531

$

25,705

$

145,236

Diluted earnings per share

$

1.02

$

1.28

$

2.08

$

2.53

Three Months Ended
 June 30, 2018

Six Months Ended
 June 30, 2018

GAAP

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

Cost of revenues (exclusive of depreciation and amortization)⁽²⁾

$

289,175

$

(7,054)

$

282,121

$

566,809

$

(15,343)

$

551,466

Selling, general and administrative expenses⁽³⁾

$

93,273

$

(8,997)

$

84,276

$

182,914

$

(17,924)

$

164,990

Income from operations⁽⁴⁾

$

54,237

$

18,083

$

72,320

$

102,934

$

37,059

$

139,993

Operating margin

12.2

%

4.0

%

16.2

%

11.8

%

4.3

%

16.1

%

Net income⁽⁵⁾

$

50,255

$

6,821

$

57,076

$

114,673

$

(5,354)

$

109,319

Diluted earnings per share

$

0.89

$

1.01

$

2.03

$

1.94

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

Three Months Ended
 June 30,

Six Months Ended
 June 30,

2019

2018

2019

2018

Stock-based compensation expenses

$

7,480

$

7,054

$

20,261

$

15,343

Total adjustments to GAAP cost of revenues⁽²⁾

7,480

7,054

20,261

15,343

Stock-based compensation expenses

8,217

7,756

17,292

16,063

Other acquisition-related expenses

850

85

1,361

462

One-time charges

539

1,156

574

1,399

Total adjustments to GAAP selling, general and administrative expenses⁽³⁾

9,606

8,997

19,227

17,924

Amortization of purchased intangible assets

2,601

2,032

4,739

3,792

Total adjustments to GAAP income from operations⁽⁴⁾

19,687

18,083

44,227

37,059

Change in fair value of contingent consideration included in Interest and other income, net

1,356

?

1,356

?

Foreign exchange loss/(gain)

3,562

(1,830)

7,046

(1,583)

Provision for/(benefit from) income taxes:

Tax effect on non-GAAP adjustments

(4,931)

(3,286)

(10,670)

(7,517)

Net discrete benefit related to U.S. tax reform

?

(706)

?

(23,183)

Excess tax benefits related to stock-based compensation

(4,741)

(5,440)

(16,254)

(10,130)

Total adjustments to GAAP net income⁽⁵⁾

$

14,933

$

6,821

$

25,705

$

(5,354)

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

Third Quarter 2019

Full Year 2019

Revenue growth on a constant currency basis (at least) ⁽⁶⁾

24

%

24

%

Foreign exchange rates impact

(1)

%

(1)

%

Revenue growth (at least)

23

%

23

%

(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:

Third Quarter 2019

Full Year 2019

GAAP income from operations as a percentage of revenues

12.5% to 13.5%

12.5% to 13.5%

Stock-based compensation expenses

2.9

%

3.0

%

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

1.4

%

1.5

%

Included in selling, general and administrative expenses

1.5

%

1.5

%

Other acquisition-related expenses

0.1

%

0.1

%

Amortization of purchased intangible assets

0.5

%

0.4

%

Non-GAAP income from operations as a percentage of revenues

16% to 17%

16% to 17%

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

Third Quarter 2019

Full Year 2019

GAAP effective tax rate (approximately)

15

%

14

%

Tax effect on non-GAAP adjustments

3.4

%

3.9

%

Excess tax benefits related to stock-based compensation

4.6

%

5.1

%

Non-GAAP effective tax rate (approximately)

23

%

23

%

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

Third Quarter 2019

Full Year 2019

GAAP diluted earnings per share (at least)

$

1.14

$

4.43

Stock-based compensation expenses

0.28

1.20

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

0.13

0.61

Included in selling, general and administrative expenses

0.15

0.59

Other acquisition-related expenses

0.01

0.04

Amortization of purchased intangible assets

0.05

0.18

One-time charges

?

0.01

Change in fair value of contingent consideration included in Interest and other income, net

?

0.02

Foreign exchange loss

0.02

0.16

Provision for income taxes:

     Tax effect on non-GAAP adjustments

(0.08)

(0.34)

     Excess tax benefits related to stock-based compensation

(0.10)

(0.45)

Non-GAAP diluted earnings per share (at least)

$

1.32

$

5.25