UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

    

267-759-9000

Securities registered pursuant to Section 12(g) of the Act: None.

 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x  No ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

As of June 30, 20172018 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $4,178$6,392 million based on the closing sale price as reported on the New York Stock Exchange. Solely for purposes of the foregoing calculation, “affiliates” are deemed to consist of each officer and director of the registrant, and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant.

The number of shares of common stock, $0.001 par value, of the registrant outstanding as of February 12, 20182019 was 53,039,83254,177,444 shares.

The registrant intends to file a definitive Proxy Statement for its 20182019 annual meeting of stockholders pursuant to Regulation 14A within 120 days of the end of the registrant’s fiscal year ended December 31, 2017.2018. Portions of the registrant’s Proxy Statement are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the Proxy Statement expressly incorporated by reference, such document shall not be deemed filed with this Form 10-K.

EPAM SYSTEMS, INC.

FORM 10-K

In this annual report, “EPAM,” “EPAM Systems, Inc.,” the “Company,” “we,” “us” and “our” refer to EPAM Systems, Inc. and its consolidated subsidiaries.

“EPAM” is a trademark of EPAM Systems, Inc. “CMMI” is a trademark of the Software Engineering Institute of Carnegie Mellon University. “ISO 9001:2015” and “ISO 27001:2013” are trademarks of the International Organization for Standardization. “ISAE” is a trademark of the International Federation of Accountants. All other trademarks and servicemarks used herein are the property of their respective owners.

Unless otherwise indicated, information contained in this annual report concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from various sources (including industry publications, surveys and forecasts and our internal research), on assumptions that we have made, which we believe are reasonable, based on such data and other similar sources and on our knowledge of the markets for our services. The projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate, are subject to a high degree of uncertainty and risk due to a variety of factors, including those described under “Item 1A. Risk Factors” and elsewhere in this annual report. These and other factors could cause results to differ materially from those expressed in the estimates included in this annual report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains estimates and forward-looking statements, principally in “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 businesses and operations. 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. Important factors, in addition to the factors described in this annual report, may materially and adversely affect our results as indicated in forward-looking statements. You should read this annual report and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.

The words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update, to revise or to review any estimate and/or forward-looking statement because of new information, future events or other factors.made. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results, level of activity, performance or achievements may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above, and the differences may be material and adverse. Because of these uncertainties, you should not place undue reliance on these forward-looking statements. We undertake 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 law.

    

GEOGRAPHICAL REFERENCES

We use the collective terms “CIS”, “CEE” and “APAC” to describe a portion of our geographic operations and assets. In our operations, CIS which stands for the Commonwealth of Independent States, is comprised of constituents of the former U.S.S.R., includingrefers to Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia Tajikistan, Turkmenistan, Ukraine and Uzbekistan. CEE, which stands for Central and Eastern Europe, includes Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Republic of Macedonia, Romania, Serbia, Montenegro, Slovakia and Slovenia.Ukraine. APAC, which stands for Asia Pacific, includes all of Asia (including India) and Australia.

We areEPAM is a leading global provider of software product development and digital platform engineering services to clientsmany Fortune 500 and 1000 customers located around the world, primarily in North America, Europe, Asia and Australia. WithWe focus on helping our customers thrive in a strong focus onmarket constantly challenged by the pressures of digitization through our innovative and scalable software solutions, high quality business consulting and experience design, and a continually evolving mix of advanced capabilities, we leverage industry standardblending our engineering and custom developed technology toolscapabilities with business and platformsexperience consulting to deliver results for the most complex business challenges.true end-to-end value. We focus on building long-term partnerships with clients in industries such ascustomers, enabling them to reimagine their businesses through a digital lens. Our industry expertise includes financial services, travel and consumer, software and hi-tech, mediabusiness information and entertainment,media, life sciences and healthcare, as well as other emerging industries.

Our historical core competency, software development and product engineering services, and our work with global enterprise leaders in enterprise software platforms and emerging technology companies, created our foundation for the evolution of our other offerings, which include advanced technology software solutions, intelligent enterprise services and digital engagement. Our strategic acquisitions have further expanded our global footprint and service offering portfolio, including our capabilities in the healthcare and financial services industries,such as digital strategy and design, consulting and test automation. We expect our strategic acquisitions will continue to enable us to offer a broader range of services to our clientscustomers from a widerwide variety of locations.

Our service offerings have been evolving to provide more customized and integrated solutions to our customers where we combine best-in-class software engineering with customer experience design, business consulting and technology innovation services. We are continually expanding our service capabilities, moving beyond traditional services into business consulting, design and physical product development and areas such as artificial intelligence, robotics and virtual reality.

We use our experience, custom tools and specialized knowledge to integrate our customers’ chosen application platforms with their internal systems and processes and to create custom solutions filling the gaps in their platforms’ functionality in order to address the needs of the customers’ users and customers. We address our customers’ increased need for tighter enterprise integration between software development, testing and maintenance with private, public and mobile infrastructures through our infrastructure management services. These solutions cover the full software product development lifecycle from digital strategyof infrastructure management including application, database, network, server, storage and customer experience design to enterprise application platforms implementationsystems operations management, as well as monitoring, incident notification and programresolution. We deliver maintenance and support services through our proprietary distributed project management servicesprocesses and from complex software development servicestools, which reduce the time and costs related to maintenance, enhancement and support custom application development, application testing, and infrastructure management. We meet the standards of ISAE 3402 Type 2, ISO 27001:2013 and ISO 9001:2015, and these certifications provide our clients with third-party verification of our information security, quality management and general controls practices.activities.

We also work closely with leading companies in other industries to enable our clients to better leverage technology and address the simultaneous pressures of driving value for the consumer and offering a more engaging experience. Our digital strategy and experience design practice provides strategy, design, creative and program management services for clients looking to improve their customer experience. We offerhave deep expertise across several domains including business-to-business and business-to-consumer e-commerce, customer/partner self-service, employee portals, online merchandising and sales, web content management, mobile solutions and billing.

We offer complete custom application development services to meet the requirementsturn our customers’ operations into intelligent enterprise hubs with our proprietary platforms, integrated engineering practices and smart automation. Developing a digital experience or product from end-to-end requires input and expertise from a variety of businessesprofessionals with sophisticated needs not adequately supported by packaged applications or by existing custom solutions. Our custom application development services leverage our experience in software product development as well as our industry expertise, prebuilt application solution frameworks and specific software product assets. Oura broad range of services includes businessskills. Our multidisciplinary teams and technical requirements analysis, user experience design, solution architecture creationglobal delivery framework come together to deliver well-rounded technology solutions that bring competitive advantage to our customers. In addition to utilizing our dedicated delivery centers, which allow us to deploy key delivery talent, we work closely with leading companies in various industries to enable our customers to better leverage technology and validation, development, component designaddress the simultaneous pressures of driving value for their consumer and integration,offering a more engaging experience.

We turn process optimization into real transformation by using process automation and cognitive techniques to transform legacy processes and deliver streamlined operations that increase revenues and reduce costs for our customers. We rely on our teams, methodologies and tools to optimize every stage of software delivery for improved quality assurance and testing, deployment, performance tuning, support and maintenance, legacy applications re-engineering/refactoring, porting and cross-platform migration and documentation.

We maintain a dedicated group of testing and quality assurance professionals with experience across a wide range of technology platforms and industry verticals. Our Quality Management System complies with global quality standards such as ISO 9001:2015 and we employ industry-recognized and proprietary defect tracking tools to deliver a comprehensive range of testing services. Our application testing services include: (i)verticals, who perform software application testing, including test automation tools and frameworks; (ii) testing for enterprise IT, including test management, automation functional and non-functional testing, as well as defect management; and (iii) consulting services focused on helping clientscustomers improve their existing software testing and quality assurance practices. We employ industry-recognized and proprietary defect tracking tools and frameworks to deliver a comprehensive range of testing services that identify threats and close loopholes to protect our customers’ business systems from information loss.

Over the years, as a complement to our core engineering skills, we have added capabilities in business consulting to give us an agile, hybrid approach to the market. Our consulting services drive deeper relationships as we help our customers with larger and Support

We build enterprise technologies that offer smarter analytics,apply design thinking to digital and service strategy, user experience and the product lifecycle with a focus on innovative design ideas and product development. Our digital and service design practice provides strategy, design, creative and program management services for customers looking to improve the user experience.

We are continuously looking to strengthen and grow our design and consulting practices as evidenced by recent business processes,acquisitions. During 2018, we acquired Continuum Innovation LLC, which will enhance our consulting, physical design and result in greater operational excellence. Ourproduct development capabilities and Think Limited, which will enhance our global product and design offerings.

We believe the development of a robust global delivery framework and industry-specific blueprints allowmodel creates a key competitive advantage, enabling us to better understand and meet theour customers’ diverse needs and to provide a compelling value proposition. We continuously grow our delivery platform both organically and through strategically acquired locations and personnel with diversified skills that support our strategy. We had 26,760 revenue generating personnel as of December 31, 2018, which mainly includes our clients’ enterprises and build business application platforms and their components in areas including customer relationship management, sales automation, enterprise resource planning, enterprise content management, business intelligence and cloud management. We deploy the platforms and services that enable data-driven business decisions by turning data into intelligence. Our agile engineering expertise allows us to offer services around business process management, enterprise content management and more, including requirements analysis and platform selection, deep and complex customization, cross-platform migration, implementation and integration,core information technology professionals as well as supportdesigners, consultants and maintenance. scientists.

We serve our customers through on-site, off-site and offshore locations across the world and use our experience, custom toolsstrategically located delivery centers to offer a strong, diversified and specialized knowledgecost-effective delivery platform. Our largest delivery centers are located in Belarus, Ukraine and Russia.

As of December 31, 2018, we had 8,242 IT professionals located in Belarus. The majority of these IT professionals are located in Minsk, the capital of Belarus, which is well-positioned to integrate our clients’ chosen application platforms with their internal systemsserve as a prime IT outsourcing destination given its strong industrial base and processesestablished educational infrastructure. Furthermore, the government in Belarus strongly supports the technology industry and to create custom solutions filling the gapsencourages investment in their platforms’ functionality necessary to address the needsthis sector through various long-term tax incentives.

Our locations in Ukraine and Russia offer many of the clients’ userssame benefits as Belarus, including educational infrastructure, availability of qualified software engineers and customers.government support of the technology industry. As of December 31, 2018, we had 5,836 IT professionals in Ukraine and 4,438 IT professionals in Russia. Our delivery model has not been materially affected by the political and economic uncertainty in Ukraine and Russia to date.

We maintain a geographically diverse client base, which primarily consists of Fortune 500 and 1000 customers located in North America, Europe, CIS and APAC. Our Vertical Marketsfocus on delivering quality service is reflected in established relationships with many of our customers, with 54.8% and 30.9% of our revenues in 2018 coming from customers that had used our services for at least five and ten years, respectively. Our sustained growth and increased capabilities are furthered by both organic growth and strategic acquisitions. We continually evaluate potential acquisition targets that can expand our vertical-specific domain expertise, geographic footprint, service portfolio, client base and management expertise.

We derivederived our revenues from a variety of service offerings, which represent specific competencies of our IT professionals. Contracts for these services havehad different terms and conditions based on the scope, deliverables, and complexity of the engagement, which requirerequired management to make judgments and estimates in determining appropriate revenue recognition. Fees for these contracts may behave been in the form of time-and-materials or fixed-price arrangements. If there was uncertainty about the project completion or receipt of payment for the services, revenue was deferred until the uncertainty was sufficiently resolved. At the time revenue was recognized, we provided for any contractual deductions and reduced revenue accordingly. The Company reported gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues in the consolidated statements of income and comprehensive income.

The majority of our revenues (90.3% of revenues in 2017 and 88.2% in 2016 and 85.8% in 2015) are2016) were generated under time-and-material contracts whereby revenues arewere recognized as services arewere performed with the corresponding cost of providing those services reflected as cost of revenues. The majority of such revenues arewere billed using hourly, daily or monthly rates by whichas actual time was incurred is charged directly toon the client. We expect time-and-material arrangements to continue to comprise the majority of our revenues in the future.

If the initial accounting for the business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. Once the measurement period ends, which in no case extends beyond one year from the acquisition date, revisions of the accounting for the business combination are recorded in earnings.

Historically, a significant portion of the purchase consideration related to our acquisitions was allocated to customer relationships. In valuing customer relationships, we typically utilize the multi-period excess earnings method, a form of the income approach. The principle behind this method is that the value of the intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset only. We amortize our intangible assets that have finite lives on a straight-line basis or, if reliably determinable, the pattern in which the economic benefit of the asset is expected to be consumed utilizing expected discounted future cash flows. Amortization is recorded over the estimated useful lives that predominantly range from five to ten years. We do not have any intangible assets with indefinite useful lives.

We review our intangible assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, we will write down the carrying value of the intangible asset to its fair value in the period identified. In assessing fair value, we must make assumptions regarding estimated future cash flows and discount rates. If these estimates or related assumptions change in the future, we may be required to record impairment charges. If the estimate of an intangible asset’s remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

The provision for income taxes includes federal, state, local and foreign taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the consolidated financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be reversed. Changes to enacted tax rates would result in either increases or decreases in the provision for income taxes in the period of change.changes.

The realizability of deferred tax assets is primarily dependent on future earnings. We evaluate the realizability of deferred tax assets and recognize a valuation allowance when it is more likely than not that all, or a portion of, deferred tax assets will not be realized.

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“U.S. Tax Act”). The U.S. Tax Act, significantly changeswhich subjects a U.S. corporate income tax laws including a reduction of the U.S. corporate income tax rate from 35.0%shareholder to 21.0% effective January 1, 2018 and the creation of a territorial tax system with a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax. In addition, the Tax Act creates new taxes on Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign-sourced earnings and certainforeign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, “Accounting for Global Intangible Low-Taxed Income”, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related party payments, which are referred to asGILTI in the global intangible low-taxed incomeyear the tax andis incurred. During the base erosion anti-abuseyear ended December 31, 2018, we elected to provide for the tax respectively.

Adjusting stock-based compensation expense for estimated forfeitures requires judgment. If we change our assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past.

Equity-based awards that do not meet the criteria for equity classification are recorded as liabilities and adjusted to fair value based on the closing price of our stock at the end of each reporting period. Future stock-based compensation expense related to our liability-classified awards may increase or decrease as a result of changes in the market price for our stock, adding to the volatility in our operating results.

Our adoption of ASU 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017, increased income tax expense volatility. Our future operating results will depend on thebe impacted by fluctuations in the stock price on the dates the awards vest or options are exercised and the magnitude of transactions occurring in each reporting period, among other factors.

Our revenues are derived primarily from providing software development servicesWe continue to expand our clients. Revenues include revenue from services as well as license revenues, reimbursable expensespresence in multiple geographies and other revenues.

We discuss below the breakdown of our revenuerevenues by clientvertical, customer location, service offering, vertical, contractarrangement type, and clientcustomer concentration.

Our revenues are sourced from four geographic markets: North America, Europe, CIS and APAC. We present and discuss our revenues by clientcustomer location based on the location of the specific clientcustomer site that we serve, irrespective of the location of the headquarters of the clientcustomer or the location of the delivery center where the work is performed. RevenueRevenues by clientcustomer location is different from the revenuerevenues by reportable segment in our consolidated financial statements included elsewhere in this annual report. Segments are not based on the geographic location of the clients,customers, but instead they are based on the location of the Company’s management responsible for a particular client.

During the year ended December 31, 2017, revenues in our largest geography, North America, closed atwere $840.7 million growing $170.1 million, or 25.4%, from $670.6 million reported for the year ended December 31, 2016. Revenues from this geography accounted for 58.0% of total revenues in 2017, a level consistent with the prior year.

Within North America, we experienced strong growth across all verticals with the Business Information & Media and Entertainment vertical contributing 31.7% of total growth in the North AmericanAmerica geography. In addition, our traditionally strong Software & Hi-Tech portfolio grew 19.6% year over year. We saw continued growth in Emerging Verticals with 44.2% growth in revenues with 29.7% of the growth coming from customers who have been with us less than one year.

Revenues in our Europe geography were $511.3 million, an increase of $93.5 million, or 22.4% over $417.8 million lastin the prior year. Revenues in this geography accounted for 35.2% of consolidated revenues in 2017 as compared to 36.0% lastin the prior year. Europe experienced strong growth in the Business Information & Media, and Entertainment, Life Sciences and& Healthcare, and Emerging Verticals, each of which grew over 55% during 2017. Over 70% of the growth in our Europe geography in 2017 came from customers who have been with us less than two years. Financial Services remained our largest vertical in this geography accounting for 41.1% of the Europe geography’s revenues in 2017 as compared to 47.7% in 2016.

Revenues in the CIS geography increased $22.3 million, or 48.3%, from last year. The increase in CIS revenues came predominantly from customers within the Financial Services and Emerging verticals.Verticals. Revenues in this geography benefited by $5.9 million from the appreciation of the Russian ruble relative to the U.S. dollar.

We saw continued tractionhave long-standing relationships with customers in the pharmaceutical segmentmany of our Life Sciencescustomers and Healthcare vertical, and significantly grew our portfolio of customers in Emerging Verticals with over 30% growth in revenues there coming from customers who have been with us less than one year. Combined growth in our Software & Hi-Tech and Media & Entertainment verticals accounted for 48.6% of the overall growth in the North America geography, of which $19.6 million, or 22.4%, was attributable to the expansion of existing relationship with certain long-standing customers within our Media and Entertainment vertical.