EPAM Reports Results for Third Quarter 2023 and Updates Full Year Outlook

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

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