SMTOF

COVID-19 Response and Operational Transition

• Early experience with COVID-19 in APAC (January-February 2020) allowed the company to quickly transition nearly all employees to productive work-from-home by March 2020, leveraging years of prior investments in business continuity infrastructure, remote work readiness, and internal productivity platforms
• 98% of the workforce is currently working remotely, with no material negative impact on productivity; clients have recognized the speed and reliability of service continuity through the transition
• Employee health and well-being remains the company's top priority

Q1 2020 Core Performance Highlights

• Q1 revenue came in $9 million above initial guidance, extending EPAM's streak of 37 consecutive quarters of 20%+ organic growth, a growth target the company plans to return to post-crisis
• Growth among the top 20 clients hit 30.5% year-over-year, while growth outside the top 20 hit 21% year-over-year
• The company ended Q1 with 37,300 total employees (33,100 engineering/design/consulting staff), a 18.7% year-over-year increase with 550 net new production professionals added; utilization was 79.5%, flat compared to prior year
• The company holds $916 million in cash and cash equivalents plus $270 million in available credit, totaling over $1 billion in available liquidity

Strategic Priorities During the Crisis

• Main priority is protecting employees, preserving financial strength, and continuing investments in core capabilities and talent to prepare for post-crisis growth
• Internally, the company is breaking down silos, increasing investments in knowledge management and productivity platforms, and establishing faster decision processes to address new challenges
• Talent retention, attraction, and development remains the core long-term organizational priority, with continued investment in delivery, collaboration, education, and community platforms to support an increasingly digital post-pandemic world
• The company maintains a real-time view of client demand, tight alignment between supply and demand, and has dramatically reduced incremental hiring and discretionary spending to preserve capacity for future demand growth

• Full-year 2020 guidance is suspended due to extreme market uncertainty, with the company not comfortable providing full-year projections at this time
• Q2 2020 guidance is provided as a range (the most appropriate format for current conditions):
  • Revenue: $590 million to $605 million, with 8.3% year-over-year growth at the midpoint of the range
  • GAAP operating income margin: 11% to 13%; non-GAAP operating income margin: 14% to 16%
  • GAAP diluted EPS: $0.93 to $1.12; non-GAAP diluted EPS: $1.12 to $1.31
• Q3 2020 guidance is not provided, as high client behavior volatility creates unacceptable uncertainty; all scenarios (including a sequential revenue decline) remain possible
• Long-term, the company reaffirms its expectation to return to 20%+ annual growth post-pandemic, as the fundamental demand for digital product and platform engineering services remains intact

Overall Q1 2020 revenue was $651.4 million, with 24.9% year-over-year reported growth and 26% constant currency growth. Industry vertical performance:

• Business Information and Media (largest vertical): 46% year-over-year revenue growth
• Life Sciences and Healthcare: 26.4% year-over-year revenue growth
• Software and High Tech: 21.9% year-over-year revenue growth
• Financial Services: 16.2% year-over-year revenue growth
• Travel and Consumer: 14.6% year-over-year revenue growth
• Emerging Vertical (telecommunications and energy): 30.3% year-over-year revenue growth

Geographic segment performance:

• North America (largest region, 59.9% of revenue): 23.1% year-over-year growth
• Europe (34.2% of revenue): 28.6% reported growth (30% constant currency)
• CIS (3.8% of revenue): 36.8% reported growth (45.8% constant currency)
• APAC (2.1% of revenue): 4.7% year-over-year growth

• The COVID-19 pandemic has created immediate, serious, highly variable impacts across global markets, with the company noting we are still only in the first phase of disruption and far from the end of the event
• Over one-third of the company's portfolio has experienced some form of COVID-19-related revenue impact, with travel, consumer, hospitality, energy, and retail facing particularly severe end-market disruption
• Multiple waves of impact across additional market segments are possible as the crisis unfolds
• The situation remains highly unpredictable: projected Q2 2020 revenue ranges for comparable public companies can vary by up to 20%, and client plans can change significantly over short periods of time
• Current market conditions may pressure pricing for new engagements with clients facing severe financial stress, and could lead to project delays, cancellations, or extended payment terms
• Sequential revenue decline in Q3 2020 remains a possible scenario, as economic reopening creates additional uncertainty

Q: How much expense flexibility does EPAM have, how will utilization trend, and how does the balance between cost cutting and growth preparedness look? How do you view M&A in the current environment? / A: The company's priority is controlling costs (including labor costs) while minimizing negative impacts on the employee base, to retain capacity for future demand growth. Late in Q1, significant discretionary spending and hiring controls were implemented, performance-based staffing adjustments were initiated, and travel/relocation/hiring expenses are already well controlled, consistent with the 14% to 16% non-GAAP operating margin guided for Q2. EPAM continues evaluating M&A opportunities, but it is too early to assess pandemic impacts on target business models and pricing, so no accelerated activity is planned at this time.

Q: How are sales productivity and demand holding up with fully remote operations, and are you seeing pricing pressure compared to pre-pandemic levels? / A: EPAM was already a highly distributed company by design, so remote operations have been effective, including for business development and consulting engagements. Daily business unit reviews track both downside risks and new opportunities, and the company continues to win new engagements even during the crisis. Pricing pressure is mixed: clients in severely impacted industries face extreme revenue declines, so the company is flexible to support their current needs, but there is no long-term change to EPAM's ability to command premium pricing, and demand for digital services is expected to rebound post-crisis.

Q: Is a sequential Q3 revenue decline your base case, and have you seen any market stabilization to date? How are vertical trends evolving into Q2? / A: A sequential Q3 decline is simply one of multiple possible scenarios, not a confirmed base case. Some stabilization has occurred, but the company is still not out of the crisis. Travel, hospitality, consumer retail, and energy are expected to remain challenged through the coming quarters. Business information and media continues to see very strong demand, while financial services is mixed with some growth offset by declines at a subset of European banks.

Q: What types of revenue impacts are you seeing across the one-third of your affected portfolio, and what utilization assumptions underpin your Q2 guidance? How has productivity held up during remote work? / A: All types of impacts are present: belt-tightening, program suspensions, extended payment terms, but also program accelerations and new projects, so it is not entirely negative. Utilization will align with the final revenue outcome: lower end of the revenue range will lead to lower utilization, while the upper end will result in solid utilization. EPAM's pre-existing distributed infrastructure and prior productivity investments mean no material productivity impact has been seen to date, and clients have complimented EPAM's speed and productivity relative to other providers during the transition.