NEWTOWN, Pa., Nov. 2, 2023 /PRNewswire/ -- EPAM Systems, Inc. (NYSE: EPAM), a leading digital transformation services and product engineering company, today reported results for the third quarter ended September 30, 2023.
"While we navigate through a challenging market landscape, we have observed indications of stability and growth in some parts of our business, which partially offsets the negative impacts in other parts of our portfolio," said Arkadiy Dobkin, CEO & President, EPAM. "Our solid third-quarter results are primarily due to our enhanced efforts in driving key client engagements, investment in strategic solution capabilities and go-to-market partnerships, and the unwavering dedication of our employees."
Third Quarter 2023 Highlights
Cash Flow and Other Metrics
2023 Outlook - Full Year and Fourth Quarter
Full Year
EPAM now expects the following for the full year:
Fourth Quarter
EPAM expects the following for the fourth quarter:
Conference Call Information
EPAM will host a conference call to discuss the results on Thursday, November 2, 2023, at 8:00 a.m. EDT. The conference call will be available live on the EPAM website at https://investors.epam.com. Please visit the website at least 15 minutes prior to the call to register for the event. For those who cannot access the live webcast, a replay will be available in the Investor Relations section of the website.
About EPAM Systems
Since 1993,?EPAM Systems, Inc.?(NYSE: EPAM) has leveraged its advanced software engineering heritage to become the foremost global digital transformation services provider ? leading the industry in digital and physical product development and digital platform engineering services. Through its innovative strategy; integrated advisory, consulting, and design capabilities; and unique 'Engineering DNA,' EPAM's globally deployed hybrid teams help make the future real for clients and communities around the world by powering better enterprise, education and health platforms that connect people, optimize experiences, and improve people's lives. In 2021, EPAM was added to the S&P 500 and included among the list of Forbes Global 2000 companies.
Selected by Newsweek as a 2021, 2022 and 2023 Most Loved Workplace, EPAM's global multidisciplinary teams serve customers in more than 50 countries across six continents. As a recognized leader, EPAM is listed among the top 15 companies in Information Technology Services on the Fortune 1000 and ranked four times as the top IT services company on Fortune's 100 Fastest Growing Companies list. EPAM is also listed among Ad Age's top 25 World's Largest Agency Companies for three consecutive years, and Consulting Magazine named EPAM Continuum a top 20 Fastest Growing Firm.
Learn more at www.epam.com and follow EPAM on?Twitter?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 acquired intangible assets, impairment of assets, expenses associated with EPAM's humanitarian commitment to its professionals in Ukraine, unbilled business continuity resources resulting from Russia's invasion of Ukraine, costs associated with the geographic repositioning of EPAM employees based outside of Ukraine impacted by the war and geopolitical instability in the region, employee separation costs in Russia, 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 revenues on an "organic constant currency basis excluding the impact of the exit from Russia," which is also a non-GAAP financial measure. This measure excludes the effect of acquisitions by removing revenues from an acquired company in the twelve months after completing an acquisition, foreign currency exchange rate fluctuations by translating the current period revenues into U.S. dollars at the weighted average exchange rates of the prior period of comparison and the decision to exit from Russia by removing revenues from customers located in Russia in both the current period and 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. These statements may include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions. Those future events and trends may relate to, among other things, developments relating to the war in Ukraine and escalation of the war in the surrounding region, political and civil unrest or military action in the geographies where we conduct business and operate, difficult conditions in global capital markets, foreign exchange markets and the broader economy, and the effect that these events may have on our revenues, operations, access to capital, and profitability. Other factors that could cause actual results to differ materially from those expressed or implied include general economic conditions, the risk factors discussed in the Company's most recent Annual Report on Form 10-K and the factors discussed in the Company's Quarterly Reports on Form 10-Q, particularly under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "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 based on 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 (Unaudited) (In thousands, except per share data) | |||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2023 | 2022 | 2023 | 2022 | ||||
Revenues | $ 1,152,136 | $ 1,226,920 | $ 3,533,283 | $ 3,593,395 | |||
Operating expenses: | |||||||
Cost of revenues (exclusive of depreciation and amortization) | 794,265 | 826,796 | 2,458,881 | 2,453,955 | |||
Selling, general and administrative expenses | 194,829 | 198,021 | 601,093 | 667,825 | |||
Depreciation and amortization expense | 23,092 | 21,876 | 68,642 | 69,126 | |||
Loss on sale of business | 25,922 | ? | 25,922 | ? | |||
Income from operations | 114,028 | 180,227 | 378,745 | 402,489 | |||
Interest and other income, net | 13,931 | 4,228 | 37,162 | 5,642 | |||
Foreign exchange gain/(loss) | 3,893 | 6,691 | (6,725) | (102,035) | |||
Income before provision for income taxes | 131,852 | 191,146 | 409,182 | 306,096 | |||
Provision for income taxes | 34,648 | 35,092 | 89,653 | 41,719 | |||
Net income | $ 97,204 | $ 156,054 | $ 319,529 | $ 264,377 | |||
Net income per share: | |||||||
Basic | $ 1.68 | $ 2.72 | $ 5.52 | $ 4.62 | |||
Diluted | $ 1.65 | $ 2.63 | $ 5.40 | $ 4.47 | |||
Shares used in calculation of net income per share: | |||||||
Basic | 57,853 | 57,420 | 57,850 | 57,194 | |||
Diluted | 58,948 | 59,357 | 59,143 | 59,108 |
EPAM SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except par value) | |||
As of September 30, 2023 | As of December 31, 2022 | ||
Assets | |||
Current assets | |||
Cash and cash equivalents | $ 1,872,977 | $ 1,681,344 | |
Trade receivables and contract assets, net of allowance of $10,884 and $15,310, respectively | 913,029 | 932,626 | |
Short-term investments | 60,431 | 60,336 | |
Prepaid and other current assets | 78,851 | 85,319 | |
Total current assets | 2,925,288 | 2,759,625 | |
Property and equipment, net | 239,654 | 273,348 | |
Operating lease right-of-use assets, net | 136,311 | 148,780 | |
Intangible assets, net | 69,730 | 77,652 | |
Goodwill | 548,177 | 529,072 | |
Deferred tax assets | 187,524 | 172,797 | |
Other noncurrent assets | 55,588 | 47,877 | |
Total assets | $ 4,162,272 | $ 4,009,151 | |
Liabilities | |||
Current liabilities | |||
Accounts payable | $ 25,415 | $ 30,852 | |
Accrued compensation and benefits expenses | 392,417 | 475,871 | |
Accrued expenses and other current liabilities | 127,898 | 154,339 | |
Income taxes payable, current | 29,554 | 46,069 | |
Operating lease liabilities, current | 38,294 | 40,352 | |
Total current liabilities | 613,578 | 747,483 | |
Long-term debt | 27,500 | 27,693 | |
Operating lease liabilities, noncurrent | 108,332 | 122,317 | |
Other noncurrent liabilities | 112,844 | 108,648 | |
Total liabilities | 862,254 | 1,006,141 | |
Commitments and contingencies | |||
Equity | |||
Stockholders' equity | |||
Common stock, $0.001 par value; 160,000 shares authorized; 57,706 and 57,668 shares issued, 57,693 and 57,655 shares outstanding at September 30, 2023 and December 31, 2022, respectively | 58 | 58 | |
Additional paid-in capital | 951,086 | 847,965 | |
Retained earnings | 2,440,043 | 2,248,948 | |
Treasury stock | (118) | (118) | |
Accumulated other comprehensive loss | (91,630) | (95,321) | |
Total EPAM Systems, Inc. stockholders' equity | 3,299,439 | 3,001,532 | |
Noncontrolling interest in consolidated subsidiaries | 579 | 1,478 | |
Total equity | 3,300,018 | 3,003,010 | |
Total liabilities and equity | $ 4,162,272 | $ 4,009,151 |
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 decline as reported on a GAAP basis to revenue decline on an organic constant currency basis excluding the impact of the exit from Russia is presented in the table below: | |||
Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||
Revenue decline as reported | (6.1) % | (1.7) % | |
Foreign exchange rates impact | (1.9) % | (0.4) % | |
Inorganic revenue growth | (0.2) % | (0.1) % | |
Impact of exit from Russia | 0.4 % | 1.1 % | |
Revenue decline on an organic constant currency basis excluding the impact of the exit from Russia(1) | (7.8) % | (1.1) % |
(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, 2023 and 2022: |
Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||
GAAP | Adjustments | Non-GAAP | GAAP | Adjustments | Non-GAAP | ||||||
Cost of revenues (exclusive of depreciation and amortization)(2) | $ 794,265 | $ (21,146) | $ 773,119 | $ 2,458,881 | $ (67,281) | $ 2,391,600 | |||||
Selling, general and administrative expenses(3) | $ 194,829 | $ (28,828) | $ 166,001 | $ 601,093 | $ (76,021) | $ 525,072 | |||||
Income from operations(4) | $ 114,028 | $ 81,584 | $ 195,612 | $ 378,745 | $ 185,932 | $ 564,677 | |||||
Operating margin | 9.9 % | 7.1 % | 17.0 % | 10.7 % | 5.3 % | 16.0 % | |||||
Net income(5) | $ 97,204 | $ 63,876 | $ 161,080 | $ 319,529 | $ 144,344 | $ 463,873 | |||||
Diluted earnings per share | $ 1.65 | $ 2.73 | $ 5.40 | $ 7.84 | |||||||
Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||
GAAP | Adjustments | Non-GAAP | GAAP | Adjustments | Non-GAAP | ||||||
Cost of revenues (exclusive of depreciation and amortization)(2) | $ 826,796 | $ (21,358) | $ 805,438 | $ 2,453,955 | $ (48,576) | $ 2,405,379 | |||||
Selling, general and administrative expenses(3) | $ 198,021 | $ (25,221) | $ 172,800 | $ 667,825 | $ (130,914) | $ 536,911 | |||||
Income from operations(4) | $ 180,227 | $ 52,163 | $ 232,390 | $ 402,489 | $ 196,074 | $ 598,563 | |||||
Operating margin | 14.7 % | 4.2 % | 18.9 % | 11.2 % | 5.5 % | 16.7 % | |||||
Net income(5) | $ 156,054 | $ 27,685 | $ 183,739 | $ 264,377 | $ 206,643 | $ 471,020 | |||||
Diluted earnings per share | $ 2.63 | $ 3.10 | $ 4.47 | $ 7.97 |
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, | ||||||
2023 | 2022 | 2023 | 2022 | ||||
Stock-based compensation expenses | $ 18,142 | $ 17,474 | $ 49,569 | $ 31,782 | |||
Unbilled business continuity resources (a) | ? | 1,031 | 9,415 | 12,862 | |||
Humanitarian support in Ukraine (b) | 3,004 | 2,853 | 8,297 | 25,288 | |||
Discretionary compensation (c) | ? | ? | ? | (21,356) | |||
Total adjustments to GAAP cost of revenues(2) | 21,146 | 21,358 | 67,281 | 48,576 | |||
Stock-based compensation expenses | 19,705 | 15,813 | 59,967 | 36,510 | |||
One-time charges (d) | 7,178 | 2,360 | 7,420 | 6,236 | |||
Humanitarian support in Ukraine (b) | 643 | 1,631 | 5,309 | 13,219 | |||
Other acquisition-related expenses | 867 | 264 | 2,448 | 934 | |||
Geographic repositioning (e) | 435 | 4,425 | 877 | 37,497 | |||
Russia long-lived asset impairment charges (f) | ? | ? | ? | 19,570 | |||
Russia business restructuring (g) | ? | 728 | ? | 16,948 | |||
Total adjustments to GAAP selling, general and administrative expenses(3) | 28,828 | 25,221 | 76,021 | 130,914 | |||
Loss on sale of business (h) | 25,922 | ? | 25,922 | ? | |||
Amortization of acquired intangible assets | 5,688 | 5,584 | 16,708 | 16,584 | |||
Total adjustments to GAAP income from operations(4) | 81,584 | 52,163 | 185,932 | 196,074 | |||
Foreign exchange (gain)/loss | (3,893) | (6,691) | 6,725 | 102,035 | |||
Change in fair value of contingent consideration included in Interest and other income, net | 300 | 2,414 | 1,818 | 8,520 | |||
Impairment of financial assets | ? | ? | ? | 1,300 | |||
Provision for income taxes: | |||||||
Tax effect on non-GAAP adjustments | (12,395) | (8,044) | (34,060) | (61,443) | |||
Excess tax benefits related to stock-based compensation | (1,720) | (10,879) | (15,103) | (31,370) | |||
Net discrete benefit from tax planning (i) | ? | (1,278) | (968) | (8,473) | |||
Total adjustments to GAAP net income(5) | $ 63,876 | $ 27,685 | $ 144,344 | $ 206,643 |
(a) | Given the uncertainty in the region introduced by Russia's invasion of Ukraine, EPAM has assigned delivery employees in locations outside of the region to ensure the continuity of delivery for customers who have substantial delivery exposure to Ukraine or other delivery concerns resulting from the invasion. These employees are not billed to clients and operate largely in a standby or backup capacity. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal. |
(b) | Humanitarian support in Ukraine includes expenses related to EPAM's $100 million humanitarian commitment in response to Russia's invasion of Ukraine to support EPAM professionals and their families in and displaced from Ukraine. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal. |
(c) | Discretionary compensation includes the reduction of previously accrued amounts associated with the Company's variable compensation program for the year ended December 31, 2021. This adjustment was made in response to Russia's invasion of Ukraine and is not expected to recur in the future. |
(d) | One-time charges for the three and nine months ended September 30, 2023 include $7.1 million related to the Company's Cost Optimization Program initiated in the third quarter of 2023. Consistent with the Company's historical non-GAAP policy, costs incurred in connection with formal restructuring initiatives have been excluded from non-GAAP results as these are one-time and unusual in nature. |
(e) | Geographic repositioning includes expenses associated with the relocation to other countries of employees based outside of Ukraine impacted by the war and geopolitical instability in the region, and includes the cost of accommodations, travel and food. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal. |
(f) | As a result of the Company's decision to no longer serve customers in Russia, the Company incurred impairment charges for long-lived assets in Russia including charges of $15.1 million associated with property and equipment, $3.8 million associated with right-of-use assets and $0.7 million associated with goodwill for the nine months ended September 30, 2022. Consistent with the Company's historical non-GAAP policy, impairment charges have been excluded from non-GAAP results as these are one-time and unusual in nature. |
(g) | As a result of the Company's decision to no longer serve customers in Russia and begin the process of a phased exit of its operations in Russia, the Company incurred charges associated with employee separation. Consistent with the Company's historical non-GAAP policy, employee separation costs incurred in connection with formal restructuring initiatives have been excluded from non-GAAP results as these are one-time and unusual in nature. |
(h) | On July 26, 2023, the Company completed the sale of its remaining operations in Russia and recorded a loss on sale of approximately $25.9 million during the third quarter of 2023, including the recognition of the accumulated currency translation loss related to this foreign entity that was previously included in Accumulated other comprehensive loss in the condensed consolidated financial statements. The Company excluded this loss from non-GAAP results as it is one-time and unusual in nature. |
(i) | One-time benefit related to the implementation of tax planning to disregard certain foreign subsidiaries as separate entities for U.S. income tax purposes. Consistent with the Company's historical non-GAAP policy, the benefit related to the implementation of tax planning has been excluded from non-GAAP results as it is one-time and unusual in nature. |
EPAM SYSTEMS, INC. AND SUBSIDIARIES |
Reconciliations of Guidance Non-GAAP Financial Measures to Comparable GAAP Financial Measures |
(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 expected revenue decline on a GAAP basis to expected revenue decline on an organic constant currency basis excluding the impact of the exit from Russia is presented in the table below: |
Fourth Quarter 2023 | Full Year 2023 | ||
Revenue decline (at midpoint of the range) | (8) % | (3) % | |
Foreign exchange rates impact | (0.4) % | (0.6) % | |
Inorganic revenue growth | (0.2) % | (0.2) % | |
Impact of exit from Russia | 0.6 % | 0.8 % | |
Revenue decline on an organic constant currency basis excluding the impact of the exit from Russia (at midpoint of the range) (6) | (8) % | (3) % |
(6) | Constant currency revenue results are calculated by translating expected 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 2023 | Full Year 2023 | ||
GAAP income from operations as a percentage of revenues | 10% to 11% | 10% to 11% | |
Stock-based compensation expenses | 3.2 % | 3.1 % | |
Included in cost of revenues (exclusive of depreciation and amortization) | 1.4 % | 1.4 % | |
Included in selling, general and administrative expenses | 1.8 % | 1.7 % | |
Unbilled business continuity resources (a) | ? % | 0.2 % | |
Humanitarian support in Ukraine (b) | 0.2 % | 0.3 % | |
One-time charges (d) | 1.2 % | 0.4 % | |
Loss on sale of business (h) | ? % | 0.5 % | |
Amortization of acquired intangible assets | 0.4 % | 0.5 % | |
Non-GAAP income from operations as a percentage of revenues | 15% to 16% | 15% to 16% |
Reconciliation of expected GAAP to non-GAAP effective tax rate is presented in the table below: |
Fourth Quarter 2023 | Full Year 2023 | ||
GAAP effective tax rate (approximately) | 24 % | 22 % | |
Excess tax benefits related to stock-based compensation | 0.9 % | 3.0 % | |
Tax effect on non-GAAP adjustments | (1.9) % | (2.0) % | |
Non-GAAP effective tax rate (approximately) | 23 % | 23 % |
Reconciliation of expected GAAP to non-GAAP diluted earnings per share is presented in the table below: |
Fourth Quarter 2023 | Full Year 2023 | ||
GAAP diluted earnings per share | $1.67 to $1.75 | $7.07 to $7.15 | |
Stock-based compensation expenses | 0.62 | 2.47 | |
Included in cost of revenues (exclusive of depreciation and amortization) | 0.28 | 1.12 | |
Included in selling, general and administrative expenses | 0.34 | 1.35 | |
Unbilled business continuity resources (a) | ? | 0.16 | |
Humanitarian support in Ukraine (b) | 0.06 | 0.29 | |
One-time charges (d) | 0.25 | 0.40 | |
Loss on sale of business (h) | ? | 0.43 | |
Other acquisition-related expenses | ? | 0.04 | |
Amortization of acquired intangible assets | 0.10 | 0.38 | |
Change in fair value of contingent consideration | ? | 0.03 | |
Foreign exchange loss | ? | 0.12 | |
Provision for income taxes: | |||
Tax effect on non-GAAP adjustments | (0.21) | (0.78) | |
Excess tax benefits related to stock-based compensation | (0.02) | (0.28) | |
Net discrete benefit from tax planning (i) | ? | (0.02) | |
Non-GAAP diluted earnings per share | $2.47 to $2.55 | $10.31 to $10.39 |
SOURCE EPAM Systems, Inc.
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