EPAM Reports Results for Second Quarter 2018

NEWTOWN, Pa., Aug. 2, 2018 /PRNewswire/ -- EPAM Systems, Inc. (NYSE: EPAM), a leading global provider of digital platform engineering and software development services, today announced results for its second quarter ended June 30, 2018.

"Our business continues to benefit from strong broad-based demand for our high-value solutions and customized digital experiences across the markets we serve," said Arkadiy Dobkin, CEO & President, EPAM. "As companies accelerate digital initiatives by applying new advances in Intelligent Automation, Blockchain, Artificial Intelligence and IoT, we are well-positioned to deliver disruptive solutions that help our customers stay competitive and expand their markets."

Second Quarter 2018 Highlights

    --  Revenues increased to $445.6 million, a year-over-year increase of $96.7
        million, or 27.7%, and on a constant currency basis, revenue was up
        27.1% over the corresponding period last year;
    --  GAAP income from operations was $54.2 million, an increase of $13.5
        million, or 33.3%, compared to $40.7 million in the second quarter of
        2017;
    --  Non-GAAP income from operations was $72.3 million, an increase of $16.5
        million, or 29.5%, compared to $55.8 million in the second quarter of
        2017;
    --  Diluted earnings per share ("EPS") on a GAAP basis was $0.89, an
        increase of $0.21, or 30.9%, compared to $0.68 in the second quarter of
        2017 based on a weighted average share count of 56.6 million fully
        diluted shares outstanding; and
    --  Non-GAAP diluted EPS was $1.01, an increase of $0.21, or 26.3%, compared
        to $0.80 in the second quarter of 2017.

Cash Flow and Other Metrics

    --  Cash provided by operations was $66.8 million for the first six months
        of 2018, an increase from $59.3 million for the first six months of
        2017;
    --  Cash, cash equivalents and restricted cash totaled $585.3 million as of
        June 30, 2018, an increase of $2.4 million or 0.4% from $582.9 million
        as of December 31, 2017. EPAM used $50.3 million net cash for the
        acquisition of Continuum during the six months ended June 30, 2018; and
    --  Total headcount was approximately 27,400 as of June 30, 2018. Included
        in this number were approximately 24,300 delivery professionals, an
        increase of 19.1% from June 30, 2017.

2018 Outlook - Full Year and Third Quarter

Full Year

    --  Revenue growth for 2018 will now be at least 26% reflecting an update to
        the expectation about the benefit of currency exchange rates on reported
        revenues. The Company now expects that foreign currency translation will
        have a 1% benefit on full year reported revenue rather than the 2%
        previously forecasted. The Company expects revenue growth on a constant
        currency basis will continue to 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
        5% 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 $3.80 for the
        full year, and non-GAAP diluted EPS will continue to be at least $4.11
        for the full year. The Company now expects weighted average share count
        for the year of 56.7 million diluted shares outstanding.

Third Quarter

    --  Revenues will be at least $466 million for the third quarter, reflecting
        a year-over-year growth rate of at least 23%. The Company expects
        foreign currency translation to have a 1% unfavorable impact on
        year-over-year revenue growth during the quarter. The Company expects
        year-over-year revenue growth on a constant currency basis to be at
        least 24%;
    --  For the third quarter, the Company expects GAAP income from operations
        to be in the range of 12% to 13% of revenues and non-GAAP income from
        operations to be in the range of 16% to 17% of revenues;
    --  The Company expects its GAAP effective tax rate to be approximately 17%
        and its non-GAAP effective tax rate to be approximately 22%; and
    --  The Company expects GAAP diluted EPS will be at least $0.85 for the
        quarter, and non-GAAP diluted EPS will be at least $1.04 for the
        quarter. The Company expects weighted average share count for the
        quarter of 56.9 million diluted shares outstanding.

Conference Call Information

EPAM will host a conference call to discuss results on Thursday, August 2, 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 13681484. The replay will be available until August 16, 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.

Learn more at http://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 expense, write-offs and recoveries, acquisition-related costs, amortization of purchased intangible assets, goodwill impairment, legal settlements, certain other one-time charges and benefits, 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                                 Six Months Ended
                                                                                                        June 30,                                     June 30,

                                                                                             2018                     2017             2018                   2017
                                                                                             ----                     ----             ----                   ----

    Revenues                                                                                         $445,647                               $348,977                     $869,795  $673,628

    Operating expenses:

    Cost of revenues (exclusive of depreciation and                                       289,175                              220,132                    566,809          427,862
       amortization)

    Selling, general and administrative expenses                                           91,843                               80,419                    179,620          158,872

    Depreciation and amortization expense                                                   8,962                                7,020                     17,138           13,692

    Other operating expenses, net                                                           1,430                                  724                      3,294            1,554
                                                                                            -----                                  ---                      -----            -----

    Income from operations                                                                 54,237                               40,682                    102,934           71,648

    Interest and other income, net                                                          1,052                                  802                        501            1,386

    Foreign exchange gain/(loss)                                                            1,830                                1,562                      1,583          (1,393)
                                                                                            -----                                -----                      -----           ------

    Income before provision for/(benefit from) income taxes                                57,119                               43,046                    105,018           71,641

    Provision for/(benefit from) income taxes                                               6,864                                5,687                    (9,655)          10,641
                                                                                            -----                                -----                     ------           ------

    Net income                                                                                        $50,255                                $37,359                     $114,673   $61,000

    Foreign currency translation adjustments, net of tax                                 (15,834)                               4,551                   (12,525)          10,937

    Unrealized loss on cash-flow hedging instruments, net of tax                          (2,076)                                   -                   (2,007)               -
                                                                                           ------                                  ---                    ------              ---

    Comprehensive income                                                                              $32,345                                $41,910                     $100,141   $71,937
                                                                                                      =======                                =======                     ========   =======


    Net income per share:

    Basic                                                                                               $0.94                                  $0.72                        $2.15     $1.19

    Diluted                                                                                             $0.89                                  $0.68                        $2.03     $1.12

    Shares used in calculation of net income per share:

    Basic                                                                                  53,517                               51,899                     53,299           51,431

    Diluted                                                                                56,587                               54,849                     56,415           54,371


                                                                                              EPAM SYSTEMS, INC. AND SUBSIDIARIES

                                                                                             CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                                                          (Unaudited)

                                                                                        (In thousands, except share and per share data)


                                                                                                                                          As of                   As of
                                                                                                                                        June 30,             December 31,
                                                                                                                                             2018                        2017
                                                                                                                                             ----                        ----

    Assets

    Current assets

    Cash and cash equivalents                                                                                                                       $584,081                      $582,585

    Accounts receivable, net of allowance of $2,790 and $1,186, respectively                                                              283,001                       265,639

    Unbilled revenues                                                                                                                     123,434                        86,500

    Prepaid and other current assets, net of allowance of $42 and $45, respectively                                                        31,919                        23,196

    Employee loans, current, net of allowance of $0 and $0, respectively                                                                    2,084                         2,113
                                                                                                                                            -----

    Total current assets                                                                                                                1,024,519                       960,033

    Property and equipment, net                                                                                                            98,450                        86,419

    Employee loans, noncurrent, net of allowance of $0 and $0, respectively                                                                 1,669                         2,097

    Intangible assets, net                                                                                                                 55,201                        44,511

    Goodwill                                                                                                                              144,667                       119,531

    Deferred tax assets                                                                                                                    54,805                        24,974

    Other noncurrent assets, net of allowance of $130 and $140, respectively                                                               12,884                        12,691
                                                                                                                                           ------                        ------

    Total assets                                                                                                                                  $1,392,195                    $1,250,256
                                                                                                                                                  ==========                    ==========


    Liabilities

    Current liabilities

    Accounts payable                                                                                                                                  $6,727                        $5,574

    Accrued expenses and other current liabilities                                                                                         72,443                        89,812

    Due to employees                                                                                                                       50,374                        38,757

    Deferred compensation due to employees                                                                                                  4,338                         5,964

    Taxes payable, current                                                                                                                 47,529                        40,860
                                                                                                                                           ------                        ------

    Total current liabilities                                                                                                             181,411                       180,967

    Long-term debt                                                                                                                         25,020                        25,033

    Taxes payable, noncurrent                                                                                                              56,540                        59,874

    Other noncurrent liabilities                                                                                                           16,421                         9,435
                                                                                                                                           ------                         -----

    Total liabilities                                                                                                                     279,392                       275,309
                                                                                                                                          -------                       -------

    Commitments and contingencies

    Stockholders' equity

    Common stock, $0.001 par value; 160,000,000 authorized; 53,705,002 and 53,003,420                                                          54                            53
       shares issued, 53,685,267 and 52,983,685 shares outstanding at June 30, 2018 and
       December 31, 2017, respectively

    Additional paid-in capital                                                                                                            511,131                       473,874

    Retained earnings                                                                                                                     633,950                       518,820

    Treasury stock                                                                                                                          (177)                        (177)

    Accumulated other comprehensive loss                                                                                                 (32,155)                     (17,623)
                                                                                                                                          -------                       -------

    Total stockholders' equity                                                                                                          1,112,803                       974,947


    Total liabilities and stockholders' equity                                                                                                    $1,392,195                    $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                        Six Months
                                              Ended                              Ended
                                          June 30, 2018                      June 30, 2018
                                         -------------                      -------------

    Revenue growth at
     constant
     currency(1)                                  27.1%                                         26.6%

    Foreign exchange
     rates impact                                  0.6%                                          2.5%
                                                    ---                                            ---

    Revenue growth as
     reported                                     27.7%                                         29.1%
                                                   ====                                           ====


    (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 and six months ended June 30, 2018 and 2017:


                                                                                                        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                                                                  $289,175                                      $(7,054)                                $282,121                       $566,809        $(15,343)  $551,466
      depreciation and amortization)(2)

    Selling, general and administrative                                                              $91,843                                      $(7,841)                                 $84,002                       $179,620        $(16,525)  $163,095
      expenses(3)

    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



                                                                                                     Three Months Ended June 30, 2017                                Six Months Ended June 30, 2017
                                                                                                                                                                        ------------------------------

                                                                                         GAAP                  Adjustments               Non-GAAP          GAAP           Adjustments                Non-GAAP
                                                                                         ----                  -----------               --------          ----           -----------                --------

    Cost of revenues (exclusive of                                                                  $220,132                                      $(4,189)                                $215,943                       $427,862         $(9,539)  $418,323
      depreciation and amortization)(2)

    Selling, general and administrative                                                              $80,419                                      $(9,068)                                 $71,351                       $158,872        $(20,062)  $138,810
      expenses(3)

    Income from operations(4)                                                                        $40,682                                       $15,145                                  $55,827                        $71,648          $33,438   $105,086

    Operating margin                                                                       11.7%                                  4.3%                       16.0%                          10.6%                   5.0%           15.6%

    Net income(5)                                                                                    $37,359                                        $6,425                                  $43,784                        $61,000          $21,706    $82,706

    Diluted earnings per share                                                                         $0.68                                                       $0.80                                      $1.12                          $1.52



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


                                                                   Three Months Ended                    Six Months Ended
                                                                         June 30,                            June 30,

                                                                  2018                2017          2018                  2017
                                                                  ----                ----          ----                  ----

    Stock-based compensation expenses                                     $7,054                          $4,189                 $15,343    $9,539
                                                                                                                               -------

    Total adjustments to GAAP cost of revenues(2)                7,054                        4,189                    15,343       9,539
                                                                 -----                        -----                    ------       -----

    Stock-based compensation expenses                            7,756                        8,738                    16,063      19,164

    Other acquisition-related expenses                              85                          330                       462         898
                                                                   ---                          ---                       ---         ---

    Total adjustments to GAAP selling, general and               7,841                        9,068                    16,525      20,062
      administrative expenses(3)


    Amortization of purchased intangible assets                  2,032                        1,888                     3,792       3,837

    One-time charges                                             1,156                            -                    1,399           -
                                                                                                                      -----         ---

    Total adjustments to GAAP income from operations(4)         18,083                       15,145                    37,059      33,438
                                                                ------                       ------                    ------      ------

    Foreign exchange gain/(loss)                               (1,830)                     (1,562)                  (1,583)      1,393

    Provision for/(benefit from) income taxes:

    Tax effect on non-GAAP adjustments                         (3,286)                     (3,020)                  (7,517)    (7,293)

    Net discrete benefit from tax planning and U.S. tax reform   (706)                           -                 (23,183)          -

    Excess tax benefits related to stock-based compensation    (5,440)                     (4,138)                 (10,130)    (5,832)
                                                                                                                    -------      ------

    Total adjustments to GAAP net income(5)                               $6,821                          $6,425                $(5,354)  $21,706
                                                                          ======                          ======                 =======   =======


                      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:


                                           Third
                                          Quarter
                                            2018                  Full Year

                                                                    2018
                                                                      ----

    Revenue growth
     at constant
     currency (at
     least) (6)                               24%                           25%

    Foreign
     exchange
     rates impact                            (1)%                            1%
                                                                                 ---

    Revenue growth
     (at least)                               23%                           26%
                                              ===                            ===


    (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 revenue is presented in the table below:



                                                                                                                                    Third Quarter      Full Year
                                                                                                                                             2018
                                                                                                                                                             2018
                                                                                                                                                             ----

    GAAP income from operations as a percentage of revenue                                                                             12% to 13%     12% to 13%

    Stock-based compensation expenses                                                                                                        3.4%                 3.5%

    Included in cost of revenues (exclusive of depreciation and amortization)                                                                1.6%                 1.7%

    Included in selling, general and administrative expenses                                                                                 1.8%                 1.8%

    Other acquisition-related expenses                                                                                                          - %                  - %

    Amortization of purchased intangible assets                                                                                              0.6%                 0.4%

    One-time charges                                                                                                                            - %               0.1%
                                                                                                                                              --- ---              ---

    Non-GAAP income from operations as a percentage of revenue                                                                         16% to 17%     16% to 17%
                                                                                                                                        =========       =========


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



                                                                                                     Third Quarter   Full Year
                                                                                                              2018
                                                                                                                          2018
                                                                                                                          ----

    GAAP effective tax rate (approximately)                                                                    17%               5%

    Tax effect on non-GAAP adjustments                                                                        2.8%             4.8%

    Net discrete benefit related to tax planning and U.S. tax reform                                             - %           5.1%

    Excess tax benefits related to stock-based compensation                                                   2.2%             7.1%

    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:



                                                                                                             Third Quarter       Full Year
                                                                                                                      2018
                                                                                                                                      2018
                                                                                                                                      ----

    GAAP diluted earnings per share (at least)                                                                             $0.85                   $3.80

    Stock-based compensation expenses                                                                                 0.26                    1.10

    Included in cost of revenues (exclusive of depreciation and amortization)                                         0.12                    0.53

    Included in selling, general and administrative expenses                                                          0.14                    0.57

    Other acquisition-related expenses                                                                                   -                   0.01

    Amortization of purchased intangible assets                                                                       0.04                    0.14

    One-time charges                                                                                                     -                   0.02

    Foreign exchange gain/(loss)                                                                                      0.01                  (0.01)

    Provision for income taxes:

         Tax effect on non-GAAP adjustments                                                                         (0.07)                 (0.27)

         Net discrete benefit from tax planning and U.S. tax reform                                                      -                 (0.40)

         Excess tax benefits related to stock-based compensation                                                    (0.05)                 (0.28)
                                                                                                                     -----                   -----

    Non-GAAP diluted earnings per share (at least)                                                                         $1.04                   $4.11
                                                                                                                           =====                   =====

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SOURCE EPAM Systems, Inc.