EPAM Reports Results for Third Quarter 2020

EPAM Reports Results for Third Quarter 2020

Third quarter revenues of $652.2 million, up 10.9% year-over-year

GAAP Diluted EPS of $1.53 for the third quarter

Non-GAAP Diluted EPS of $1.65 for the third quarter

PR Newswire

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
September 30,


Nine Months Ended
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
  amortization)

423,388



377,525



1,266,730



1,078,129


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
  tax

(498)



(2,163)



(3,420)



2,474


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
September 30,
2020


As of
December 31,
2019

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
 and $2,920, respectively

493,225



497,716


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
 and 55,187,711 shares outstanding at September 30, 2020 and December 31, 2019,
respectively

56



55


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
September 30, 2020


Nine Months Ended
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

%

 

(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, 2020 and 2019:



Three Months Ended
September 30, 2020


Nine Months Ended
September 30, 2020


GAAP


Adjustments


Non-GAAP


GAAP


Adjustments


Non-GAAP

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

$

423,388



$

(10,854)



$

412,534



$

1,266,730



$

(23,796)



$

1,242,934


Selling, general and
administrative expenses(3)

$

116,530



$

(12,976)



$

103,554



$

355,829



$

(36,497)



$

319,332


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
September 30, 2019


Nine Months Ended
September 30, 2019


GAAP


Adjustments


Non-GAAP


GAAP


Adjustments


Non-GAAP

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

$

377,525



$

(7,580)



$

369,945



$

1,078,129



$

(27,841)



$

1,050,288


Selling, general and
administrative expenses(3)

$

118,886



$

(9,037)



$

109,849



$

332,434



$

(28,264)



$

304,170


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
September 30,


Nine Months Ended
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 administrative
expenses(3)

12,976



9,037



36,497



28,264


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
Interest and other income, net

(43)



—



(1,481)



1,356


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%

 

(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 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.

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