EPAM Systems, Inc. (EPAM)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this annual report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Forward-Looking Statements” and “Part I. Item 1A. Risk Factors.” We assume no obligation to update any of these forward-looking statements.

Executive Summary

We have used our software engineering expertise to become a leading global provider of digital engineering, cloud and AI-enabled transformation services, as well as a leading business and experience consulting partner for global enterprises and ambitious startups. We address our clients’ transformation challenges by fusing EPAM Continuum’s integrated strategy, experience and technology consulting with our 30+ years of engineering execution to speed our clients’ time to market and drive greater value from their digital investments.

Through increased specialization in focused verticals and a continued emphasis on strategic partnerships, we are able to deliver technology transformation from start to finish, leveraging agile methodologies, proven client collaboration frameworks, engineering excellence tools, hybrid teams and our award-winning proprietary global delivery platform.

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Our clients depend on us to solve their complex technical challenges and rely on our expertise in core engineering, advanced technologies, digital design and intelligent enterprise development. We combine our software engineering heritage with strategic business and innovation consulting, design thinking, and physical-digital capabilities to deliver end-to-end digital transformation services for our clients. We focus on building long-term partnerships with our clients in a market that is constantly challenged by the pressures of digitization through our innovative strategy and scalable software solutions, integrated advisory, business consulting and experience design, and a continually evolving mix of advanced capabilities.

Our global delivery model and centralized support functions, combined with the benefits of scale from the shared use of fixed-cost resources, enhance our productivity levels and enable us to better manage the efficiency of our global operations. As a result, we have created a delivery base whereby our applications, tools, methodologies and infrastructure allow us to seamlessly deliver services and solutions from our global delivery centers to our clients across the world. Our teams of consultants, designers, architects, engineers and trainers have the capabilities and skill sets to deliver business results.

During the year ended December 31, 2024, we have completed several acquisitions of businesses, including NEORIS and First Derivative. We believe these acquisitions will enhance our client portfolio and service offerings as well as expand our presence in Latin America and Europe.

See Note 3 “Acquisitions” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information related to our completed acquisitions of businesses.

Business Update Regarding the War in Ukraine

On February 24, 2022, Russian forces attacked Ukraine and its people and EPAM has repeatedly called for an immediate end to this unlawful and unconscionable attack. EPAM’s highest priority is the safety and security of its employees and their families in Ukraine as well as in the broader region, and we have continued to support relocating our employees to lower risk locations, both within Ukraine and to other countries where we operate. The vast majority of our Ukraine employees are in safe locations and operating at levels of productivity consistent with those achieved prior to the attack. As of December 31, 2024, Ukraine continues to be a significant delivery location with a large number of delivery professionals. Furthermore, we have maintained our $100 million humanitarian aid commitment to our people in Ukraine in addition to our other donations and volunteer efforts.

The impact of Russia’s invasion of Ukraine on our operations, personnel, and physical assets in Ukraine has had, and, along with any escalation of the war that includes Belarus’ territory or military, could continue to have a material adverse effect on our operations. Actions taken by other countries, including new and stricter sanctions by Canada, the United Kingdom, the European Union, the U.S. and other companies and organizations against officials, individuals, regions, and industries in Belarus, and Belarus’ responses to those sanctions, including counter-sanctions and other actions, have had and could continue to have a material adverse effect on our operations. Clients have and may continue to seek altered terms, conditions, and delivery locations for the performance of services, delay planned work or seek services from alternate providers, or suspend, terminate, fail to renew, or reduce existing contracts or services, which could have a material adverse effect on our financial condition. Some of our clients have implemented steps to block internet communications with Ukraine and Belarus to protect against potential cyberattacks or other information security threats, which has caused a material adverse effect on our ability to deliver our services to these clients from those locations. Such material adverse effects disrupt our delivery of services, cause us to shift all or portions of our work occurring in the region to other countries, restrict our ability to engage in certain projects in the region and serve certain clients in or from the region, and could negatively impact our personnel, operations, financial results and business outlook. Our Board of Directors continues its oversight of our strategic, geopolitical, and cybersecurity risks and the risks related to our geographic expansion. Our Board has received updates from management during both regular and special meetings, while also providing oversight of the risks associated with Russia’s invasion of Ukraine and other strategic areas of importance related to the war.

Moving Forward

We continue to monitor and respond to the difficult conditions in Ukraine while maintaining a focus on our clients and long-term growth. We execute on our business continuity plans and adapt to developments as they occur to protect the safety of our people and address impacts on our delivery infrastructure, including reallocating work to other geographies within our global footprint. We engage with both our personnel and our clients when navigating delivery challenges and we continue to operate productively in a multitude of locations and provide consistent high-quality delivery to our clients. Our global delivery centers have sufficient resources, including infrastructure and capital, to support ongoing operations while maintaining the safety and security of our employees and their families in Ukraine as well as in the broader region.

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The implementation and execution of our business continuity plans, relocation costs, our humanitarian commitment to our people in Ukraine, and the cost of our phased exit from Russia resulted in materially increased expenses. Some of these expenses continued during this year and we expect some of these expenses will continue to occur in subsequent quarters for some time in the future.

We have no way to predict the progress or outcome of the war in Ukraine because the conflict and government reactions change quickly and are beyond our control. Prolonged military activities, broad-based sanctions and counter-sanctions, or escalation of the war that includes Belarus’ territory or military could have a material adverse effect on our operations and financial condition. The information contained in this section is accurate as of the date hereof but may become outdated due to changing circumstances beyond our control or present awareness.

For additional information on the various risks posed by the attack against Ukraine and the impact in the region as well as other disruptors to our business, please read “Part I. Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), which require us to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our audited consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places significant demands on the judgment of our management.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our audited consolidated financial statements and other disclosures included elsewhere in this annual report. Additional information on our policies is in Note 1 “Organization and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

Revenues — We recognize revenues when control of goods or services is passed to a client in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Such control may be transferred over time or at a point in time depending on satisfaction of obligations stipulated by the contract. Consideration expected to be received may consist of both fixed and variable components and is allocated to each separately identifiable performance obligation based on the performance obligation’s relative standalone selling price. Variable consideration usually takes the form of volume-based discounts, service level credits, price concessions or incentives. Determining the estimated amount of such variable consideration involves assumptions and judgment that can have an impact on the amount of revenues reported.

We derive revenues from a variety of service arrangements, which have been evolving to provide more customized and integrated solutions to clients by combining software engineering with customer experience design, business consulting and technology innovation services. Fees for these contracts may be in the form of time-and-materials or fixed-price arrangements. We generate the majority of our revenues under time-and-material contracts, which are billed using hourly, daily or monthly rates to determine the amounts to be charged directly to the client. We apply a practical expedient and revenues related to time-and-material contracts are recognized based on the right to invoice for services performed.

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Fixed-price contracts include maintenance and support arrangements, which may exceed one year in duration. Maintenance and support arrangements generally relate to the provision of ongoing services and revenues for such contracts are recognized ratably over the expected service period. Fixed-price contracts also include application development arrangements, where progress towards satisfaction of the performance obligation is measured using input or output methods and input methods are used only when there is a direct correlation between hours incurred and the end product delivered. Assumptions, risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and deferred revenues at each reporting period.

Revenues from licenses which have significant stand-alone functionality are recognized at a point in time when control of the license is transferred to the client. Revenues from licenses which do not have stand-alone functionality are recognized over time. If there is an uncertainty about the receipt of payment for the services, revenue recognition is deferred until the uncertainty is sufficiently resolved. We apply a practical expedient and do not assess the existence of a significant financing component if the period between transfer of the service to a client and when the client pays for that service is one year or less.

We report gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues in the consolidated statements of income.

Business Combinations — We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate purchase price to the individual assets acquired and liabilities assumed. A substantial portion of the purchase price is typically allocated to goodwill and other intangible assets, which typically include customer relationships, software, trade names, non-competition agreements, and assembled workforce. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. The significant estimates and assumptions used include the timing and amount of forecasted revenues and cash flows, anticipated growth rates, customer attrition rates, the discount rate reflecting the risk inherent in future cash flows, and the useful lives for finite-lived assets. There are different valuation models for each component, the selection of which requires considerable judgment. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable but recognize that the assumptions are inherently uncertain.

We determine the fair value of contingent consideration using either Monte Carlo simulations (which involve a simulation of future revenues and earnings during the earn-out period using management's best estimates) or probability-weighted expected return methods. Changes in financial projections, market risk assumptions, discount rates or probability assumptions related to achieving the various earn-out criteria would result in a change in the fair value of contingent consideration. Such changes, if any, are recorded within Interest and other income, net in the Company’s consolidated statements of income.

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 to the accounting for the business combination are recorded in earnings.

Recent Accounting Pronouncements

See Note 1 “Organization and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding recent accounting pronouncements.

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Results of Operations

The following table presents a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

(1) Includes $80,944, $68,797 and $47,470 of stock-based compensation expense for the years ended December 31, 2024, 2023 and 2022, respectively.

(2) Includes $86,353, $78,933 and $52,439 of stock-based compensation expense for the years ended December 31, 2024, 2023 and 2022, respectively.

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Revenues

We continue to diversify our presence across multiple geographies and verticals, both organically and through strategic acquisitions. During the year ended December 31, 2024, our total revenues increased 0.8% from the previous year to $4.728 billion. Revenues have been positively impacted by stabilizing demand for our services and fluctuations in foreign currency exchange rates which increased our revenue growth by 0.1% during the year ended December 31, 2024 as compared to the previous year, partially offset by the sale of our remaining holdings in Russia in the third quarter of 2023. Revenues have also been positively impacted by our acquisitions of NEORIS and First Derivative, which in aggregate contributed $65.9 million to our revenues in 2024. During the year ended December 31, 2024, we experienced a decrease in client concentration in our top client groups as a percentage of total revenues as compared to the previous year.

See Note 3 “Acquisitions” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information related to our completed acquisitions of businesses.

We discuss below the breakdown of our revenues by vertical, client location, service arrangement type, and client concentration.

Revenues by Vertical

We assign our clients into one of our five main vertical markets or a group of various industries where we are increasing our presence, which we label as “Emerging Verticals.” Emerging Verticals include clients in multiple industries such as energy, utilities, manufacturing, industrial materials, automotive, telecommunications and several others.

The following table presents our revenues by vertical and revenues as a percentage of total revenues by vertical for the periods indicated:

Financial Services became our largest vertical during 2024, comprising 21.6% of total revenues. Financial Services, Life Sciences & Healthcare, and Emerging Verticals experienced revenue growth in 2024 over the prior year, while Consumer Goods, Retail & Travel, Business Information & Media, and Software & Hi-Tech verticals experienced revenue declines in 2024 from the prior year.

Revenues by Client Location

Our revenues are sourced from multiple countries, which we assign into four geographic markets identified as Americas, EMEA, APAC, and CEE. As a result of the Company’s exit from Russia and sale of the Company’s remaining holdings in Russia to a third-party on July 26, 2023, revenues from the CEE region became no longer material. Starting in 2024, revenues from the CEE region are included in the EMEA region. We present and discuss our revenues by client location based on the location of the specific client site that we serve, irrespective of the location of the headquarters of the client or the location of the delivery center where the work is performed. Revenues by client location differ from revenues 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, but rather they are based on the location of the Company’s management responsible for a particular client.

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The following table sets forth revenues by client location by amount and as a percentage of our revenues for the periods indicated:

(1)Americas includes revenues from clients in North, Central and South America.

(2)EMEA includes revenues from clients in Western Europe and the Middle East.

(3)APAC, or Asia Pacific, includes revenues from clients in East Asia, Southeast Asia and Australia.

(4)CEE includes revenues from clients in Belarus, Georgia, Kazakhstan, Russia, Ukraine and Uzbekistan. As a result of the sale of the Company’s remaining holdings in Russia to a third-party on July 26, 2023, revenues from the CEE region are no longer material. Beginning in 2024, revenues from the CEE region are included in the EMEA region.

During the year ended December 31, 2024, revenues in the Americas, our largest geography, were $2.835 billion, growing $92.0 million, or 3.4%, from $2.743 billion reported for the year ended December 31, 2023. Revenues in this geography benefited from acquisitions which contributed $95.9 million to revenue growth in 2024. Revenues from Americas accounted for 60.0% of total revenues in 2024, an increase from 58.4% in the prior year. The United States continued to be our largest client location contributing revenues of $2.680 billion in 2024 compared to $2.634 billion in 2023.

Revenues in our EMEA geography were $1.793 billion, a decrease of $29.6 million, or 1.6%, from $1.823 billion in the previous year. Revenues in this geography benefited from acquisitions which contributed $28.3 million to revenue growth in 2024. Revenues from EMEA accounted for 37.9% of consolidated revenues in 2024 as compared to 38.9% in the previous year. The top three revenue contributing client location countries in EMEA were the United Kingdom, Switzerland and Germany generating revenues of $523.4 million, $407.8 million and $206.1 million in 2024, respectively, compared to $585.2 million, $367.1 million and $178.5 million in 2023, respectively.

Revenues from clients in locations in our APAC region comprised 2.1% of total revenues in 2024, a decrease from 2.2% in the prior year.

Discussion of revenues from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Revenues by Client Concentration

We have long-standing relationships with many of our clients and we seek to grow revenues from our existing clients by continually expanding the scope and size of our engagements. Revenues derived from these clients may fluctuate as these accounts mature, upon beginning or completion of multi-year projects or due to external economic environment trends. We believe there is a significant potential for future growth as we expand our capabilities and offerings within existing clients. In addition, we remain committed to diversifying our client base and adding more clients to our client mix through organic growth and strategic acquisitions, and over the long-term, we expect revenue concentration from our top clients to decrease.

The following table presents revenues contributed by our clients by amount and as a percentage of our revenues for the periods indicated:

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The following table shows the number of clients grouped by revenues recognized by the Company for each year presented:

Revenues by Service Offering

Our service arrangements have been evolving to provide more customized and integrated solutions to our clients where we combine software engineering with customer experience design, business consulting and technology innovation services in areas such as cloud platforms, cybersecurity and artificial intelligence. We are continually expanding our service capabilities, moving beyond traditional services into business consulting, design and physical product development.

The following table shows revenues by service offering as an amount and as a percentage of our revenues for the years indicated:

See Note 13 “Revenues” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information regarding our contract types and related revenue recognition policies.

Cost of Revenues (Exclusive of Depreciation and Amortization)

The principal components of our cost of revenues (exclusive of depreciation and amortization) are salaries, bonuses, fringe benefits, stock-based compensation, project-related travel costs and fees for subcontractors who are assigned to client projects. Salaries and other compensation expenses of our delivery professionals are reported as cost of revenues regardless of whether the employees are actually performing services for clients during a given period. Our employees are a critical asset, necessary for our continued success and therefore we expect to continue hiring talented employees and providing them with competitive compensation programs. Additionally, government incentives and assistance related to services performed by delivery professionals and contractors assigned to client projects are reported in cost of revenues.

We manage the utilization levels of our delivery professionals through strategic hiring practices, dynamic management of staff, and efficient staffing of projects. Our staff utilization also depends on the general economy and its effect on our clients and their business decisions regarding the use of our services.

During the year ended December 31, 2024, cost of revenues (exclusive of depreciation and amortization) was $3.277 billion, representing an increase of 0.6% from $3.257 billion reported last year. The increase during the year ended December 31, 2024 compared to 2023, was primarily due to an increase in compensation costs, including a $12.1 million increase in stock-based compensation expense, as well as $19.4 million in reduced benefits from our hedging program and a 0.2% unfavorable impact from changes in foreign currency exchange rates. Compensation costs also increased due to impacts from salary increases and promotions for existing professionals, an increase in variable compensation expense, the relocation of employees to higher cost geographies as well as a 2.2% growth in the average number of production professionals contributed in part by our acquisition of businesses during 2024. The increases were significantly offset by benefits totaling $68.8 million recognized in the second half of 2024 for government incentives related to conducting R&D activities in Poland and a decline in costs associated with our humanitarian efforts for Ukraine of $8.9 million and our unbilled business continuity resources of $9.4 million year-over-year.

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Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 69.3% and 69.4% during the years ended December 31, 2024 and 2023, respectively. The year-over-year decrease is primarily due to benefits totaling $68.8 million recognized in the second half of 2024 for government incentives related to conducting R&D activities in Poland and improved utilization, largely offset by a $12.1 million increase in stock-based compensation expense, increases in compensation costs including variable compensation, reduced benefits from our hedging program and the negative impact from the appreciation of foreign currencies in certain of our delivery locations.

Discussion of cost of revenues (exclusive of depreciation and amortization) from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses represent expenditures associated with promoting and selling our services and general and administrative functions of our business. These expenses include the costs of salaries, bonuses, fringe benefits, stock-based compensation, severance, bad debt, travel, legal and accounting services, insurance, facilities including operating leases, advertising, and other promotional activities. Additionally, selling, general and administrative expenses contain costs of relocating our employees and various one-time and unusual expenses such as impairment charges.

During the year ended December 31, 2024, selling, general and administrative expenses were $816.3 million, representing an increase of 0.2% as compared to $815.1 million reported last year. The increase in selling, general and administrative expenses during 2024 compared to 2023 was primarily driven by a $14.1 million increase in personnel-related costs, including a $7.4 million increase in stock-based compensation expense, a $10.3 million increase in professional fee expenses related to our business acquisition efforts and a $4.7 million increase in expenses associated with our humanitarian efforts for Ukraine. Personnel-related costs increased due to impacts from salary increases and promotions for existing professionals, increases in variable compensation expense and severance, which reflects the impact from the Cost Optimization Programs initiated in the second quarter of 2024 and the third quarter of 2023. See Note 12 “Cost Optimization Programs” for more information regarding the Company’s restructuring programs. These year-over-year increases were partially offset by an $8.4 million decrease in bad debt expense, a $5.6 million reduction in facility exit costs and a $3.9 million reduction in facilities and infrastructure expenses as compared to the prior year.

Expressed as a percentage of revenues, selling, general and administrative expenses decreased 0.1% to 17.3% for the year ended December 31, 2024, as compared to the prior year primarily driven by reductions in facility exit costs, bad debt expense and facilities and infrastructure expenses as a percentage of revenues.

Discussion of selling, general and administrative expenses from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Depreciation and Amortization Expense

Depreciation and amortization expense includes depreciation of physical assets used in the operation of our business such as computer equipment, software, buildings we purchased, leasehold improvements as well as various office furniture and equipment. Depreciation and amortization expense also includes amortization of acquired finite-lived intangible assets.

During the year ended December 31, 2024, depreciation and amortization expense was $89.6 million, representing a decrease of $2.2 million from $91.8 million reported in the prior year. The decrease in depreciation and amortization expense was primarily the result of lower depreciation on furniture, fixtures, other equipment and computer hardware, partially offset by increased amortization of software licenses and acquired finite-lived intangible assets. Expressed as a percentage of revenues, depreciation and amortization expense remained the same at 1.9% during the year ended December 31, 2024, as compared to 2023.

Discussion of depreciation and amortization expense from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Loss on Sale of Business

On July 26, 2023, the Company completed the sale of its remaining holdings in Russia to a third-party. The Company recorded a loss on sale of $25.9 million during the year ended December 31, 2023, including the recognition of the accumulated currency translation loss related to this foreign entity that was previously included in Accumulated other comprehensive loss.

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Interest and Other Income, Net

Interest and other income, net includes interest earned on cash, cash equivalents and short-term investments, gains and losses from certain financial instruments, interest expense related to our borrowings, certain government grant income, and changes in the fair value of contingent consideration. Interest and other income, net decreased from $51.1 million during the year ended December 31, 2023 to $46.9 million during the year ended December 31, 2024. This decrease was largely driven by a $4.2 million decrease in government grant income and a $2.9 million increase in loss due to the change in fair value of contingent consideration, partially offset by a $1.1 million increase in other income.

Discussion of Interest and other income, net from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Provision for Income Taxes

Determining the consolidated provision for income tax expense, deferred income tax assets and liabilities and any potential related valuation allowances involves judgment. We consider factors that may contribute, favorably or unfavorably, to the overall annual effective tax rate in the current year as well as the future. These factors include statutory tax rates and tax law changes in the countries where we operate and excess tax benefits upon vesting or exercise of equity awards as well as consideration of any significant or unusual items.

As a global company, we are required to calculate and provide for income taxes in each of the jurisdictions in which we operate. During 2024, 2023 and 2022, we had $391.4 million, $325.7 million and $428.7 million, respectively, in income before provision for income taxes attributed to our foreign jurisdictions. Changes in the geographic mix or level of annual pre-tax income can also affect our overall effective income tax rate.

Our provision for income taxes includes the impact of provisions established for uncertain income tax positions, as well as the related net interest and penalty expense. Tax exposures can involve complex issues and may require an extended period to resolve. Although we believe we have adequately reserved for our uncertain tax positions, we cannot provide assurance that the final tax outcome of these matters will not be different from our current estimates. We adjust these reserves after consideration of changes in facts and circumstances, such as the closing of a tax audit, statute of limitation lapse or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

The provision for income taxes was $129.9 million in 2024 and $119.5 million in 2023. The increase was primarily driven by an increase in pre-tax income. The effective tax rate decreased slightly from 22.3% in 2023 to 22.2% in 2024 primarily due to the increase in excess tax benefits recorded upon vesting or exercise of stock-based awards, which were $22.4 million in 2024 compared to $19.8 million in 2023.

See Note 16 “Income Taxes” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information and detail regarding our provision for income taxes and effective tax rate.

Discussion of the provision for income taxes from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Foreign Exchange Loss

For discussion of the impact of foreign exchange fluctuations see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Risk.”

Results by Business Segment

Our operations have historically consisted of three reportable segments: North America, Europe, and Russia. On July 26, 2023, we completed the sale of our remaining holdings in Russia to a third party and as a result of this sale, we no longer have operations associated with the Russia segment.

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The segments represent components of EPAM for which separate financial information is available and used on a regular basis by our chief executive officer, who is also our chief operating decision maker (“CODM”), to evaluate performance, allocate resources and make business decisions. We manage our business primarily based on the managerial responsibility for our client base and market. As managerial responsibility for a particular client relationship generally correlates with the client’s geographic location, there is a high degree of similarity between client locations and the geographic boundaries of our reportable segments. In some cases, managerial responsibility for a particular client is assigned to a management team in another region and is usually based on the strength of the relationship between client executives and particular members of EPAM’s senior management team. In such cases, the client’s activity would be reported through the management team’s reportable segment.

Segment results are based on the segment’s revenues and operating profit, where segment operating profit is defined as segment income from operations before unallocated costs. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as an allocation of certain shared services expenses. Intersegment transactions are excluded from the segment’s revenues and operating profit on the basis that they are neither included in the measure of a segment’s profit and loss results, nor considered by the CODM during the review of segment results. Certain corporate expenses are not allocated to specific segments as these expenses are not controllable at the segment level. Such expenses include certain types of professional fees, certain taxes included in operating expenses, compensation to non-employee directors and certain other general and administrative expenses, including compensation of specific groups of non-production employees. In addition, we do not allocate amortization of intangible assets acquired through business combinations, goodwill and other asset impairment charges, stock-based compensation expenses, acquisition-related costs and certain other one-time charges and benefits. These unallocated amounts are combined with total segment operating profit to arrive at consolidated income from operations.

Our CODM considers the operating results of each segment on a quarterly basis and uses segment operating profit predominantly to assess the performance of each segment by comparing the results of each segment with one another and to historical performance. When combined with certain other financial information, this enables the CODM to make decisions about the reporting structure, allocation of operating and capital resources, and compensation of certain employees.

During the year ended December 31, 2024, the Company revised its CODM report to enhance the presentation of segment expenses by category and to revise the allocation methodology for certain types of shared expenses. The following prior period amounts presented have been revised to align with the current year methodology. No changes were made to historically reported segment revenues.

See Note 19 “Segment Information” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information related to our reportable segments.

North America Segment

The following table summarizes revenues from external clients and operating profit, before unallocated expenses, for the North America segment for the years ended December 31, 2024, 2023 and 2022:

During 2024, North America segment revenues increased $101.3 million, or 3.7%, from the previous year. Revenues from our North America segment represented 60.6% of total segment revenues, an increase from 58.9% reported in the corresponding period of 2023. Acquisitions contributed $95.7 million to North America segment revenues during 2024. During 2024 as compared to 2023, North America segment operating profits increased $30.4 million, or 5.9%, to $541.4 million. Expressed as a percentage of revenue, North America segment operating profit increased to 18.9% in 2024 as compared to 18.5% in 2023. This increase is primarily attributable to higher utilization and recognition of government incentives related to conducting R&D activities in Poland, partially offset by an increase in variable compensation expense as a percentage of segment revenues during 2024 compared to 2023.

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The following table presents North America segment revenues by industry vertical for the periods indicated:

During the year ended December 31, 2024, Software & Hi-Tech remained the largest industry vertical in the North America segment which was a result of the continued focus on engaging with our technology clients. However, a reduction in revenues from a former top 20 client impacted the revenues in this vertical. Financial Services decreased 3.5% in 2024 compared to the prior year, largely impacted by decline in demand from a group of wealth management and insurance clients. Consumer Goods, Retail & Travel declined 4.7% during 2024 compared to the prior year primarily due to declines from clients in the retail industry, partially offset by growth from our travel clients. During the year ended December 31, 2024, revenues from the Business Information & Media vertical experienced an increase of 4.6% primarily due to improvement in demand from clients in the information services and entertainment sectors. Life Sciences & Healthcare increased 13.8% during 2024 compared to the prior year primarily due to increased demand from pharmaceutical and medical device clients. Emerging Verticals experienced 26.6% growth during 2024 compared to the prior year due to growth from various clients in industries such as energy, professional services, industrial materials, telecommunications, manufacturing and automotive. Emerging Verticals also benefited from new revenues from clients in several verticals that we gained as part of our acquisitions.

Discussion of North America segment operating results from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Europe Segment

The following table summarizes revenues from external clients and operating profit, before unallocated expenses, for the Europe segment for the years ended December 31, 2024, 2023 and 2022:

During 2024, Europe segment revenues were $1.862 billion, reflecting a decrease of $47.8 million, or 2.5%, from last year. Acquisitions contributed $28.9 million to Europe segment revenues during 2024. Revenues were positively impacted by changes in foreign currency exchange rates during 2024. Had our Europe segment revenues been expressed in constant currency terms using the exchange rates in effect during 2023, we would have reported a revenue decline of 3.0%. Revenues from our Europe segment represent 39.4% and 40.7% of total segment revenues during 2024 and 2023, respectively. During 2024, Europe segment operating profits increased $34.0 million, or 13.6% as compared to last year, to $284.2 million. Europe segment operating profit represented 15.3% of Europe segment revenues as compared to 13.1% in 2023. Europe segment operating profit as a percentage of revenues was positively impacted by higher utilization and government incentives related to conducting R&D activities in Poland, partially offset by an increase in variable compensation expense and negative impact from the fluctuations in foreign exchange rates during 2024 compared to 2023.

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The following table presents Europe segment revenues by industry vertical for the periods indicated:

Consumer Goods, Retail & Travel remained the largest industry vertical in the Europe segment during the year ended December 31, 2024. However, revenues in this vertical declined 5.7% during the year ended December 31, 2024, as compared to 2023, primarily due to decreased demand from clients in the retail and consumer goods industries, partially offset by growth from our travel clients. During the year ended December 31, 2024, revenues in Financial Services experienced 6.5% growth primarily due to the improvement in demand from insurance and wealth management clients as well as from commercial banking clients. Financial Services also benefited from new revenues from clients that we gained as part of our acquisitions. Revenues in Business Information & Media decreased during 2024 primarily due to decreased demand from two clients who were historically included in our top-10 clients. Revenue growth in Software & Hi-Tech during the year ended December 31, 2024, as compared to 2023, was largely attributable to the expansion of services provided to one of our top 10 clients. Revenues in Life Sciences & Healthcare grew 42.3% during 2024 primarily due to the growth experienced from clients in the pharmaceutical and healthcare sectors. Revenues in Emerging Verticals grew 1.7% during 2024, with growth experienced from clients in the energy industry as well as a client that was previously reported under the Russia segment and partially offset by declines from customers in the telecommunications industry.

Discussion of Europe segment operating results from 2023 as compared to 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Effects of Inflation

Economies in many countries where we operate have periodically experienced high rates of inflation, including during 2024. Periods of higher inflation may affect various economic sectors in those countries and increase our cost of doing business there. We do not believe that inflation has had a material impact on our business, results of operations or financial condition to date. We continue to track the impact of inflation, particularly on wages, while attempting to minimize its effects through pricing and cost management strategies. A higher-than-normal rate of inflation in the future could adversely affect our operations and financial condition.

Liquidity and Capital Resources

Capital Resources

Our cash generated from operations has been our primary source of liquidity to fund operations, investments to support the growth of our business and share repurchases. As of December 31, 2024, our principal sources of liquidity were cash and cash equivalents totaling $1.286 billion, short-term investments totaling $1.7 million as well as $675.0 million of available borrowings under our revolving credit facility. See Note 10 “Debt” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding the terms of our revolving credit facility and information about debt.

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Cash Flows

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Our largest source of cash provided by operating activities is cash generated from our professional services that we provide to our clients. Our primary uses of cash from operating activities include compensation to our employees and related costs, payments for leased facilities, various general corporate expenditures and income tax payments. Since the invasion of Ukraine in 2022, our operating activities included using cash on humanitarian efforts for Ukraine and geographic repositioning of our workforce.

Cash provided by operating activities in 2024 was primarily driven by the Company's cash collections from client contracts and was positively impacted by lower payments for variable compensation as compared to 2023, attributable to a lower level of financial performance for the year ended December 31, 2023. Cash provided by operating activities in 2023 was primarily driven by the Company's cash collections from client contracts, which was partially offset by variable compensation payments, severance payments related to the Cost Optimization Program and other working capital outflows.

Investing Activities

Our primary uses of cash from investing activities consist of purchases of computer hardware, software and office equipment, as well as investments into office buildings and new businesses. We also use cash for short-term investments and time deposits and receive cash upon maturity of these deposits. Most of our investments are typically short-term and cash equivalent in nature but we may invest in longer term deposits if the terms are favorable. The cash used in investing activities during 2024 was primarily attributable to $912.2 million used for the acquisitions of businesses, net of cash acquired, and $32.1 million used for capital expenditures compared to $24.8 million used for the acquisitions of businesses, net of cash acquired and $28.4 million used for capital expenditures during 2023. The use of cash from investing activities was partially offset by inflows of $61.5 million from matured investments in time deposits during 2024, compared to $10.9 million during 2023.

Financing Activities

Cash used in financing activities mainly consists of repurchasing shares of EPAM common stock under our share repurchase programs, payments of withholding taxes related to net share settlements of restricted stock units, repayments of debt, and settlements of the acquisition-date fair value of contingent consideration related to acquisitions of businesses. Cash provided by financing activities mainly consists of the proceeds from the purchases of shares under our ESPP and exercises of stock options issued under our long-term incentive plans as well as proceeds from debt. We typically do not rely on debt to supplement our cash flows. Net cash used in financing activities increased from 2023 to 2024 primarily due to $398.0 million of payments to repurchase our common stock during 2024 compared to $164.9 million during 2023. In addition, during 2024 we used cash for the payments of withholding taxes related to net share settlements of restricted stock units of $35.2 million, compared to $29.1 million paid during 2023. These cash outflows were partially offset by cash received from the exercises of stock options issued under our long-term incentive plans and proceeds from the purchases of shares under our ESPP of $53.7 million during 2024, compared to $51.6 million received during 2023.

Discussion of the comparison of the cash flows between 2023 and 2022 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” of our Annual Report on Form 10-K for the year ended December 31, 2023.

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Future Capital Requirements

We believe that our existing cash, cash equivalents and short-term investments, combined with our expected cash flow from operations will be sufficient to meet our projected operating and capital expenditure requirements for at least the next twelve months and that we possess the financial flexibility to execute our strategic objectives, including the ability to make acquisitions and strategic investments in the foreseeable future. However, the invasion of Ukraine, other various geopolitical events, and the related measures to contain their impact, have caused and may continue to cause material disruptions in financial markets and economies. These disruptions may increase our costs of capital, decrease returns on investment, and otherwise adversely affect our business, results of operations, financial condition and liquidity.

Our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors including the impact of the invasion of Ukraine, as described elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. To the extent that existing cash, cash equivalents, short-term investments, and operating cash flows are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business and there is no assurance that we would be able to raise additional funds on favorable terms or at all. Our ability to expand and grow our business in accordance with current plans and to meet our long-term capital requirements will depend on many factors, including the rate at which our cash flows increase or decrease and the availability of public and private debt and equity financing.

See Note 9 “Leases”, Note 10 “Debt”, Note 18 “Commitments and Contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding our various contractual obligations and capital expenditure requirements.

Off-Balance Sheet Commitments and Arrangements

We do not have any material obligations under guarantee contracts or other contractual arrangements other than as disclosed in Note 18 “Commitments and Contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K. We have not entered into any transactions with unconsolidated entities where we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us, or engages in leasing, hedging, or research and development services with us.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this annual report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Forward-Looking Statements” and “Part I. Item 1A. Risk Factors.” We assume no obligation to update any of these forward-looking statements.

Executive Summary

We have used our software engineering expertise to become a leading global provider of digital engineering, cloud and AI-enabled transformation services, as well as a leading business and experience consulting partner for global enterprises and ambitious startups. We address our clients’ transformation challenges by fusing EPAM Continuum’s integrated strategy, experience and technology consulting with our 30+ years of engineering execution to speed our clients’ time to market and drive greater value from their digital investments.

Through increased specialization in focused verticals and a continued emphasis on strategic partnerships, we are able to deliver technology transformation from start to finish, leveraging agile methodologies, proven customer collaboration frameworks, engineering excellence tools, hybrid teams and our award-winning proprietary global delivery platform.

Our customers depend on us to solve their complex technical challenges and rely on our expertise in core engineering, advanced technologies, digital design and intelligent enterprise development. We combine our software engineering heritage with strategic business and innovation consulting, design thinking, and physical-digital capabilities to deliver end-to-end digital transformation services for our customers. We focus on building long-term partnerships with our customers in a market that is constantly challenged by the pressures of digitization through our innovative strategy and scalable software solutions, integrated advisory, business consulting and experience design, and a continually evolving mix of advanced capabilities.

Our global delivery model and centralized support functions, combined with the benefits of scale from the shared use of fixed-cost resources, enhance our productivity levels and enable us to better manage the efficiency of our global operations. As a result, we have created a delivery base whereby our applications, tools, methodologies and infrastructure allow us to seamlessly deliver services and solutions from our global delivery centers to our customers across the world. Our teams of consultants, designers, architects, engineers and trainers have the capabilities and skill sets to deliver business results.

Business Update Regarding the War in Ukraine

On February 24, 2022, Russian forces attacked Ukraine and its people and EPAM has repeatedly called for an immediate end to this unlawful and unconscionable attack. EPAM’s highest priority is the safety and security of its employees and their families in Ukraine as well as the broader region, and we have continued to support relocating our employees to lower risk locations, both in Ukraine and to other countries where we operate. The vast majority of our Ukraine employees are in safe locations and operating at levels of productivity consistent with those achieved prior to the attack. As of December 31, 2023, Ukraine remains our largest delivery location with the most delivery professionals. Furthermore, we have maintained our $100 million humanitarian aid commitment to our people in Ukraine in addition to our other donations and volunteer efforts.

Prior to the attack in February 2022, Russia was our third largest delivery location as measured by the number of delivery professionals. In April 2022, the Company announced the beginning of a phased exit of our operations in Russia in close collaboration with our employees, contractors, and customers. We discontinued services to certain customers located in Russia and on July 26, 2023, we completed the sale of our remaining holdings in Russia to a third party.

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The impact of Russia’s invasion of Ukraine on our operations, personnel, and physical assets in Ukraine has had, and, along with any escalation of the war that includes Belarus’ territory or military, could continue to have a material adverse effect on our operations. Actions taken by other countries, including new and stricter sanctions by Canada, the United Kingdom, the European Union, the U.S. and other companies and organizations against officials, individuals, regions, and industries in Belarus, and Belarus’ responses to those sanctions, including counter-sanctions and other actions, have had and could continue to have a material adverse effect on our operations. Customers have and may continue to seek altered terms, conditions, and delivery locations for the performance of services, delay planned work or seek services from alternate providers, or suspend, terminate, fail to renew, or reduce existing contracts or services, which could have a material adverse effect on our financial condition. Some of our customers have implemented steps to block internet communications with Ukraine and Belarus to protect against potential cyberattacks or other information security threats, which has caused a material adverse effect on our ability to deliver our services to these customers from those locations. Such material adverse effects disrupt our delivery of services, cause us to shift all or portions of our work occurring in the region to other countries, restrict our ability to engage in certain projects in the region and serve certain customers in or from the region, and could negatively impact our personnel, operations, financial results and business outlook. Our Board of Directors continues its oversight of our strategic, geopolitical, and cybersecurity risks and the risks related to our geographic expansion. Our Board has received updates from management during both regular and special meetings, while also providing oversight of the risks associated with Russia’s invasion of Ukraine and other strategic areas of importance related to the war.

Moving Forward

We continue to execute our business continuity plans and adapt to developments as they occur to protect the safety of our people and address impacts on our delivery infrastructure, including reallocating work to other geographies within our global footprint. We have engaged both our personnel and our customers to meet their needs and to mitigate delivery challenges. EPAM continues to operate productively in more than 50 countries and provides consistent high-quality delivery to our customers. Our global delivery centers have sufficient resources, including infrastructure and capital, to support ongoing operations. We continue to rapidly respond to the difficult conditions in Ukraine while maintaining a focus on our customers and long-term growth.

Implementation and execution of our business continuity plans, relocation costs, our humanitarian commitment to our people in Ukraine, and the cost of our phased exit from Russia resulted in materially increased expenses during 2022 and these expenses continued to be incurred in 2023. We expect some of those expenses will continue to occur in subsequent quarters for some time in the future.

We have no way to predict the progress or outcome of the war in Ukraine because the conflict and government reactions change quickly and are beyond our control. Prolonged military activities, broad-based sanctions and counter-sanctions, or escalation of the war that includes Belarus’ territory or military could have a material adverse effect on our operations and financial condition. The information contained in this section is accurate as of the date hereof but may become outdated due to changing circumstances beyond our control or present awareness.

For additional information on the various risks posed by the attack against Ukraine and the impact in the region as well as other disruptors to our business, please read “Part I. Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), which require us to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our audited consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places significant demands on the judgment of our management.

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An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our audited consolidated financial statements and other disclosures included elsewhere in this annual report. Additional information on our policies is in Note 1 “Organization and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

Revenues — We recognize revenues when control of goods or services is passed to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Such control may be transferred over time or at a point in time depending on satisfaction of obligations stipulated by the contract. Consideration expected to be received may consist of both fixed and variable components and is allocated to each separately identifiable performance obligation based on the performance obligation’s relative standalone selling price. Variable consideration usually takes the form of volume-based discounts, service level credits, price concessions or incentives. Determining the estimated amount of such variable consideration involves assumptions and judgment that can have an impact on the amount of revenues reported.

We derive revenues from a variety of service arrangements, which have been evolving to provide more customized and integrated solutions to customers by combining software engineering with customer experience design, business consulting and technology innovation services. Fees for these contracts may be in the form of time-and-materials or fixed-price arrangements. We generate the majority of our revenues under time-and-material contracts, which are billed using hourly, daily or monthly rates to determine the amounts to be charged directly to the customer. We apply a practical expedient and revenues related to time-and-material contracts are recognized based on the right to invoice for services performed.

Fixed-price contracts include maintenance and support arrangements, which may exceed one year in duration. Maintenance and support arrangements generally relate to the provision of ongoing services and revenues for such contracts are recognized ratably over the expected service period. Fixed-price contracts also include application development arrangements, where progress towards satisfaction of the performance obligation is measured using input or output methods and input methods are used only when there is a direct correlation between hours incurred and the end product delivered. Assumptions, risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and deferred revenues at each reporting period.

Revenues from licenses which have significant stand-alone functionality are recognized at a point in time when control of the license is transferred to the customer. Revenues from licenses which do not have stand-alone functionality are recognized over time. If there is an uncertainty about the receipt of payment for the services, revenue recognition is deferred until the uncertainty is sufficiently resolved. We apply a practical expedient and do not assess the existence of a significant financing component if the period between transfer of the service to a customer and when the customer pays for that service is one year or less.

We report gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues in the consolidated statements of income.

Business Combinations — We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate purchase price to the individual assets acquired and liabilities assumed. A substantial portion of the purchase price is typically allocated to goodwill and other intangible assets, which typically include customer relationships, software, trade names, non-competition agreements, and assembled workforce. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. The significant estimates and assumptions used include the timing and amount of forecasted revenues and cash flows, anticipated growth rates, customer attrition rates, the discount rate reflecting the risk inherent in future cash flows, and the useful lives for finite-lived assets. There are different valuation models for each component, the selection of which requires considerable judgment. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable but recognize that the assumptions are inherently uncertain.

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We determine the fair value of contingent consideration using Monte Carlo simulations (which involve a simulation of future revenues and earnings during the earn-out period using management's best estimates) or probability-weighted expected return methods. Changes in financial projections, market risk assumptions, discount rates or probability assumptions related to achieving the various earn-out criteria would result in a change in the fair value of contingent consideration. Such changes, if any, are recorded within Interest and other income/(loss), net in the Company’s consolidated statements of income.

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 to the accounting for the business combination are recorded in earnings.

Recent Accounting Pronouncements

See Note 1 “Organization and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding recent accounting pronouncements.

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

(1) Includes $68,797, $47,470 and $51,580 of stock-based compensation expense for the years ended December 31, 2023, 2022 and 2021, respectively.

(2) Includes $78,933, $52,439 and $60,075 of stock-based compensation expense for the years ended December 31, 2023, 2022 and 2021, respectively.

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Revenues

We continue to diversify our presence across multiple geographies and verticals, both organically and through strategic acquisitions. During the year ended December 31, 2023, our total revenues decreased 2.8% from the previous year to $4.691 billion. Revenues have been negatively impacted by reduced demand for our services as our customers took action to reduce spending, in light of the uncertain economic environment and to reduce their geographic exposure to the region impacted by the war in Ukraine, and our decision to exit Russia and discontinue services to customers there, which contributed 1.0% to the year-over-year decline. Revenues have been positively impacted by fluctuations in foreign currency exchange rates which partially offset our revenue decline by 0.6% during the year ended December 31, 2023 as compared to the previous year. During the year ended December 31, 2023 we experienced similar customer concentration in our top customer groups as a percentage of total revenues as compared to the previous year.

We discuss below the breakdown of our revenues by vertical, customer location, service arrangement type, and customer concentration.

Revenues by Vertical

We assign our customers into one of our five main vertical markets or a group of various industries where we are increasing our presence, which we label as “Emerging Verticals.” Emerging Verticals include customers in multiple industries such as energy, utilities, manufacturing, automotive, telecommunications and several others.

The following table presents our revenues by vertical and revenues as a percentage of total revenues by vertical for the periods indicated:

Travel & Consumer remained our largest vertical during 2023, comprising 22.9% of total revenues. Except for Emerging Verticals, which grew at a rate of 8.8% in 2023 over the prior year, all of our verticals experienced revenue declines in 2023 from the prior year.

Revenues by Customer Location

Our revenues are sourced from multiple countries, which we assign into four geographic markets identified as Americas, EMEA, APAC, and CEE. We present and discuss our revenues by customer location based on the location of the specific customer site that we serve, irrespective of the location of the headquarters of the customer or the location of the delivery center where the work is performed. Revenues by customer location differ from revenues by reportable segment in our consolidated financial statements included elsewhere in this annual report. Segments are not based on the geographic location of the customers, but rather they are based on the location of the Company’s management responsible for a particular customer.

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The following table sets forth revenues by customer location by amount and as a percentage of our revenues for the periods indicated:

(1)Americas includes revenues from customers in North, Central and South America.

(2)EMEA includes revenues from customers in Western Europe and the Middle East.

(3)APAC, or Asia Pacific, includes revenues from customers in East Asia, Southeast Asia and Australia.

(4)CEE includes revenues from customers in Belarus, Georgia, Kazakhstan, Russia, Ukraine and Uzbekistan. On July 26, 2023, the Company completed the sale of its remaining holdings in Russia to a third-party.

During the year ended December 31, 2023, revenues in the Americas, our largest geography, were $2.743 billion, decreasing $144.5 million, or 5.0%, from $2.887 billion reported for the year ended December 31, 2022, largely due to a ramp down initiated in the fourth quarter of 2022 of a large transformation program at a customer that was previously in our top 10 customers as well as reduced spending at certain other large accounts and generally slower growth in revenues across a range of customers in the geography. Revenues from this geography accounted for 58.4% of total revenues in 2023, a decrease from 59.9% in the prior year. The United States continued to be our largest customer location contributing revenues of $2.634 billion in 2023 compared to $2.761 billion in 2022.

Revenues in our EMEA geography were $1.823 billion, an increase of $84.9 million, or 4.9%, over $1.738 billion in the previous year. Revenues in this geography accounted for 38.9% of consolidated revenues in 2023 as compared to 36.0% in the previous year. The top three revenue contributing customer location countries in EMEA were the United Kingdom, Switzerland and the Netherlands generating revenues of $585.2 million, $367.1 million and $236.3 million in 2023, respectively, compared to $619.3 million, $323.4 million and $215.4 million in 2022, respectively. Fluctuations in foreign currency exchange rates with the U.S. dollar, particularly the euro, Swiss franc and the British pound, during 2023 compared to the same period in the prior year positively impacted revenue growth in the EMEA geography by 2.0%. Revenues in the region benefited from acquisitions which contributed $1.9 million to revenue growth in 2023.

During 2023, revenues in our CEE geography decreased $56.2 million, or 71.0%, from the previous year. In 2023, revenues in CEE included $13.3 million of revenues from customers in Russia, compared to $64.7 million in 2022. On March 4, 2022, we announced our decision to discontinue our services to customers located in Russia and on July 26, 2023, we completed the sale of our remaining holdings in Russia to a third-party. As a result of this sale, the revenues from this geography are expected to dissipate in the future.

Revenues from customers in locations in our APAC region comprised 2.2% of total revenues in 2023, a level consistent with the prior year.

Discussion of revenues from 2022 as compared to 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Revenues by Customer Concentration

We have long-standing relationships with many of our customers and we seek to grow revenues from our existing customers by continually expanding the scope and size of our engagements. Revenues derived from these customers may fluctuate as these accounts mature, upon beginning or completion of multi-year projects or due to external economic environment trends. We believe there is a significant potential for future growth as we expand our capabilities and offerings within existing customers. In addition, we remain committed to diversifying our client base and adding more customers to our client mix through organic growth and strategic acquisitions, and over the long-term, we expect revenue concentration from our top customers to decrease.

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The following table presents revenues contributed by our customers by amount and as a percentage of our revenues for the periods indicated:

The following table shows the number of customers grouped by revenues recognized by the Company for each year presented:

Revenues by Service Offering

Our service arrangements have been evolving to provide more customized and integrated solutions to our customers where we combine 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.

The following table shows revenues by service offering as an amount and as a percentage of our revenues for the years indicated:

See Note 13 “Revenues” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information regarding our contract types and related revenue recognition policies.

Cost of Revenues (Exclusive of Depreciation and Amortization)

The principal components of our cost of revenues (exclusive of depreciation and amortization) are salaries, bonuses, fringe benefits, stock-based compensation, project-related travel costs and fees for subcontractors who are assigned to customer projects. Salaries and other compensation expenses of our delivery professionals are reported as cost of revenues regardless of whether the employees are actually performing services for customers during a given period. Our employees are a critical asset, necessary for our continued success and therefore we expect to continue hiring talented employees and providing them with competitive compensation programs.

We manage the utilization levels of our delivery professionals through strategic hiring practices, dynamic management of staff, and efficient staffing of projects. Some of these professionals are hired and trained to work for specific customers or on specific projects and some of our offshore development centers are dedicated to specific customers or projects. Our staff utilization also depends on the general economy and its effect on our customers and their business decisions regarding the use of our services.

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During the year ended December 31, 2023, cost of revenues (exclusive of depreciation and amortization) was $3.257 billion, representing a decrease of 0.9% from $3.287 billion reported last year. The decrease during the year ended December 31, 2023 compared to 2022, was primarily due to a decrease in compensation costs, other than stock-based compensation expense, resulting from a reduction in variable compensation expense attributable to a lower level of financial performance for the year, a 5.0% decline in the average number of production professionals and the impact from the Cost Optimization Program initiated in the third quarter of 2023. See Note 12 “Cost Optimization Program” for more information regarding the Company’s restructuring program. Other drivers that contributed to the year-over-year decrease were a decline in costs associated with our humanitarian efforts for Ukraine of $17.7 million and our unbilled business continuity resources of $5.3 million. The decreases were partially offset by higher expenses due to the impact of salary increases and promotions for existing delivery professionals, the relocation of employees to higher cost geographies, a $21.3 million increase in stock-based compensation expense, and a 1.2% unfavorable impact from changes in foreign currency exchange rates.

Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 69.4% and 68.1% during the years ended December 31, 2023 and 2022, respectively. The year-over-year increase is primarily due to lower utilization attributable to uneven demand for our services, a higher level of stock-based compensation expense, partially offset by the reduction in variable compensation expense attributable to a lower level of financial performance for the year, a decline in costs associated with our humanitarian efforts for Ukraine and unbilled business continuity resources.

Discussion of cost of revenues (exclusive of depreciation and amortization) from 2022 as compared to 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses represent expenditures associated with promoting and selling our services and general and administrative functions of our business. These expenses include the costs of salaries, bonuses, fringe benefits, stock-based compensation, severance, bad debt, travel, legal and accounting services, insurance, facilities including operating leases, advertising, and other promotional activities. Additionally, selling, general and administrative expenses contain costs of relocating our employees and various one-time and unusual expenses such as impairment charges.

During the year ended December 31, 2023, selling, general and administrative expenses were $815.1 million, representing a decrease of 6.6% as compared to $872.8 million reported last year. The decrease in selling, general and administrative expenses during 2023 compared to 2022 was primarily due to a $34.7 million decrease in personnel-related costs, other than stock-based compensation and severance expenses, resulting from a reduction in variable compensation expense attributable to a lower level of financial performance for the year and decreases in headcount, partially offset by the impacts from salary increases and promotions for existing professionals and relocation of employees to higher cost geographies. Other drivers that contributed to the year over year decrease were a $36.9 million decrease of expenses associated with our geographic repositioning of our workforce, and a $9.7 million decrease of expenses associated with our humanitarian efforts for Ukraine. The decreases were partially offset by a $26.5 million increase in stock-based compensation expense and a $29.0 million of employee separation costs incurred as part of the Cost Optimization Program initiated during the year ended December 31, 2023, See Note 12 “Cost Optimization Program” for more information regarding the Company’s restructuring program. Additionally, selling, general and administrative expenses for the year 2022 were impacted by the recognition of $19.6 million of impairment charges related to our long-lived assets in Russia, $17.1 million of charges related to employee separation costs in Russia, and $5.1 million of bad debt expense attributable to customers located in Russia.

Expressed as a percentage of revenues, selling, general and administrative expenses decreased 0.7% to 17.4% for the year ended December 31, 2023 as compared to the prior year primarily driven by reductions in Russia-related impairment charges, expenses associated with the geographic repositioning of our workforce, costs related to our humanitarian efforts for Ukraine, and variable compensation expense.

Discussion of selling, general and administrative expenses from 2022 as compared to 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Depreciation and Amortization Expense

Depreciation and amortization expense includes depreciation of physical assets used in the operation of our business such as computer equipment, software, buildings we purchased, leasehold improvements as well as various office furniture and equipment. Depreciation and amortization expense also includes amortization of acquired finite-lived intangible assets.

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During the year ended December 31, 2023, depreciation and amortization expense was $91.8 million, representing a decrease of $0.5 million from $92.3 million reported in the prior year. The decrease in depreciation and amortization expense was primarily the result of lower depreciation on furniture, fixtures, other equipment and computer hardware, partially offset by increased depreciation on software licenses and increased amortization of acquired finite-lived intangible assets. Expressed as a percentage of revenues, depreciation and amortization expense remained the same at 1.9% during the year ended December 31, 2023, as compared to 2022.

Discussion of depreciation and amortization expense from 2022 as compared to 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Loss on Sale of Business

On July 26, 2023, the Company completed the sale of its remaining holdings in Russia to a third-party. The Company recorded a loss on sale of $25.9 million during the year ended December 31, 2023, including the recognition of the accumulated currency translation loss related to this foreign entity that was previously included in Accumulated other comprehensive loss.

Interest and Other Income/(Loss), Net

Interest and other income/(loss), net includes interest earned on cash and cash equivalents, short-term investments, gains and losses from certain financial instruments, interest expense related to our borrowings, government grant income, and changes in the fair value of contingent consideration. Interest and other income/(loss), net increased from $10.0 million during the year ended December 31, 2022 to $51.1 million during the year ended December 31, 2023. This increase was largely driven by a $40.7 million increase in interest income from our cash and cash equivalents and short-term investments resulting from improved interest rates, and by an $8.3 million decrease in loss due to the change in fair value of contingent consideration, partially offset by a $3.2 million decrease in government grant income and a $2.6 million increase in interest expense.

Discussion of Interest and other income/(loss), net from 2022 as compared to 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Provision for Income Taxes

Determining the consolidated provision for income tax expense, deferred income tax assets and liabilities and any potential related valuation allowances involves judgment. We consider factors that may contribute, favorably or unfavorably, to the overall annual effective tax rate in the current year as well as the future. These factors include statutory tax rates and tax law changes in the countries where we operate and excess tax benefits upon vesting or exercise of equity awards as well as consideration of any significant or unusual items.

As a global company, we are required to calculate and provide for income taxes in each of the jurisdictions in which we operate. During 2023, 2022 and 2021, we had $325.7 million, $428.7 million and $404.9 million, respectively, in income before provision for income taxes attributed to our foreign jurisdictions. Changes in the geographic mix or level of annual pre-tax income can also affect our overall effective income tax rate.

Our provision for income taxes includes the impact of provisions established for uncertain income tax positions, as well as the related net interest and penalty expense. Tax exposures can involve complex issues and may require an extended period to resolve. Although we believe we have adequately reserved for our uncertain tax positions, we cannot provide assurance that the final tax outcome of these matters will not be different from our current estimates. We adjust these reserves after consideration of changes in facts and circumstances, such as the closing of a tax audit, statute of limitation lapse or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

The provision for income taxes was $119.5 million in 2023 and $87.8 million in 2022. The increase was primarily driven by a significant decrease in excess tax benefits recorded upon vesting or exercise of stock-based awards which were $19.8 million in 2023 compared to $35.1 million in 2022, as well as an increase in pre-tax income and U.S. state tax. The effective tax rate increased from 17.3% in 2022 to 22.3% in 2023 primarily due to the decrease in excess tax benefits recorded upon vesting or exercise of stock-based awards, as well as an increase in U.S. state tax and losses in certain foreign jurisdictions with no corresponding tax benefit.

Discussion of the provision for income taxes from 2022 as compared to 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

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Foreign Exchange Loss

For discussion of the impact of foreign exchange fluctuations see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Risk.”

Results by Business Segment

Our operations consist of three reportable segments: North America, Europe, and Russia. The segments represent components of EPAM for which separate financial information is available and used on a regular basis by our chief executive officer, who is also our chief operating decision maker (“CODM”), to determine how to allocate resources and evaluate performance. Our CODM makes business decisions based on segment revenues and segment operating profits. Segment operating profit is defined as income from operations before unallocated costs. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as an allocation of certain shared services expenses. Certain corporate expenses are not allocated to specific segments as these expenses are not controllable at the segment level. Such expenses include certain types of professional fees, certain taxes included in operating expenses, compensation to non-employee directors and certain other general and administrative expenses, including compensation of specific groups of non-production employees. In addition, the Company does not allocate stock-based compensation, amortization of intangible assets acquired through business combinations, goodwill and other asset impairment charges, acquisition-related costs and certain other one-time charges and benefits. These unallocated amounts are combined with total segment operating profit to arrive at consolidated income from operations.

We manage our business primarily based on the managerial responsibility for the client base and market. As managerial responsibility for a particular customer relationship generally correlates with the customer’s geographic location, there is a high degree of similarity between customer locations and the geographic boundaries of our reportable segments. In some cases, managerial responsibility for a particular customer is assigned to a management team in another region and is usually based on the strength of the relationship between customer executives and particular members of EPAM’s senior management team. In such cases, the customer’s activity would be reported through the respective management team member’s reportable segment. Our Europe segment includes our business in the APAC region, which is managed by the same management team.

On July 26, 2023, we completed the sale of our remaining holdings in Russia to a third party. As a result of this sale, we no longer have operations associated with this segment. See Note 2 “Impact of the Invasion of Ukraine” for more information.

Revenues from external customers and operating profit/(loss), before unallocated expenses, by reportable segments for the years ended December 31, 2023, 2022 and 2021 were as follows:

North America Segment

During 2023, North America segment revenues decreased $133.5 million, or 4.6%, from the previous year. Revenues from our North America segment represented 58.9% of total segment revenues, a decrease from 60.1% reported in the corresponding period of 2022. Acquisitions contributed $8.2 million to North America segment revenues during 2023. During 2023 as compared to 2022, North America segment operating profits decreased $68.5 million, or 11.6%, to $520.9 million. Expressed as a percentage of revenue, North America segment operating profit decreased to 18.8% in 2023 as compared to 20.3% in 2022. This decrease is primarily attributable to lower utilization, partially offset by a decrease in variable compensation expense as a percentage of segment revenues during 2023 compared to 2022.

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The following table presents North America segment revenues by industry vertical for the periods indicated:

During the year ended December 31, 2023, Software & Hi-Tech remained the largest industry vertical in the North America segment which was a result of the continued focus on engaging with our technology customers. However, a reduction in revenues from a former top 20 customer and overall declines in the technology sector in the U.S. during 2023 impacted the revenues in this vertical. Financial services grew 3.0% in 2023 compared to the prior year primarily due to growth in demand from a group of wealth management and insurance customers. Travel and Consumer declined 6.5% during 2023 compared to the prior year primarily due to declines from customers in the retail industry, partially offset by growth from our travel customers. During the year ended December 31, 2023, revenues from the Business Information & Media vertical experienced a decrease of 8.1% primarily due to declines from customers in the information providing and credit reporting sectors. Life Sciences & Healthcare declined 5.5% during 2023 compared to the prior year primarily due to a ramp down of a large transformation program at a customer that was previously one of our top 10 customers. Emerging Verticals experienced 16.6% growth during 2023 compared to the prior year due to growth from various customers in industries such as energy, education, manufacturing and automotive.

Europe Segment

During 2023, Europe segment revenues were $1.909 billion, reflecting an increase of $56.4 million, or 3.0%, from last year. Acquisitions contributed $2.2 million to Europe segment revenues during 2023. Revenues were positively impacted by changes in foreign currency exchange rates during 2023. Had our Europe segment revenues been expressed in constant currency terms using the exchange rates in effect during 2022, we would have reported revenue growth of 1.1%. Revenues from our Europe segment represent 40.7% and 38.4% of total segment revenues during 2023 and 2022, respectively.

During 2023, Europe segment operating profits increased $27.4 million, or 12.3% as compared to last year, to $250.6 million. Europe segment operating profit represented 13.1% of Europe segment revenues as compared to 12.0% in 2022. Europe segment operating profit was positively impacted by changes in foreign currency exchange rates and a decrease in variable compensation expense, partially offset by lower utilization during 2023 compared to 2022.

The following table presents Europe segment revenues by industry vertical for the periods indicated:

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Travel & Consumer remained the largest industry vertical in the Europe segment during the year ended December 31, 2023. The Europe segment benefited from 4.4% growth in Travel & Consumer during the year ended December 31, 2023, as compared to 2022, primarily due to increased demand from customers in the retail and distribution industries. During the year ended December 31, 2023, revenues in Financial Services experienced 2.4% growth primarily driven by increased revenues from insurance customers as well as customers who provide other financial services. Revenues in Business Information & Media decreased during 2023 primarily due to decreased demand from one of our top 10 customers. Revenue growth in Software & Hi-Tech during the year ended December 31, 2023, as compared to 2022, was largely attributable to the expansion of services provided to one of our top 20 customers as well as growth in customers outside of our top 100 customers. Revenues in Emerging Verticals grew 4.0% during 2023, with growth experienced from customers in the energy and automotive industries, and partially offset by declines from customers in the telecommunications industry.

Russia Segment

On March 4, 2022, we announced that we would discontinue services to customers located in Russia and would provide transition support for customers in this market. In April 2022, we began the process of a phased exit of our operations in Russia and on July 26, 2023, we completed the sale of our remaining holdings in Russia to a third party. As a result of this sale, the Company no longer has operations associated with this segment. See Note 2 “Impact of the Invasion of Ukraine” for more information regarding our decisions to no longer serve customers in Russia and exit our operations in Russia.

During the year ended December 31, 2023, revenues from our Russia segment decreased $57.0 million, or 78.0%, as compared to the corresponding period of 2022 and accounted for 0.3% of total segment revenues. During the year ended December 31, 2023, segment operating loss from the Russia segment was $5.9 million, representing an improvement of $7.6 million, as compared to a segment operating loss of $13.5 million in the corresponding period last year largely driven by higher costs incurred in the prior year related to Russia’s invasion of Ukraine and the Company’s decision to exit Russia. As a percentage of Russia segment revenues, the Russia segment’s operating loss increased to 36.5% during the year ended December 31, 2023, from 18.4% in the corresponding period of 2022 as we continued to decrease our revenues in the Russia segment.

Discussion of segment results from 2022 as compared to 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Effects of Inflation

Economies in many countries where we operate have periodically experienced high rates of inflation, including during 2023. Periods of higher inflation may affect various economic sectors in those countries and increase our cost of doing business there. We do not believe that inflation has had a material impact on our business, results of operations or financial condition to date. We continue to track the impact of inflation, particularly on wages, while attempting to minimize its effects through pricing and cost management strategies. A higher-than-normal rate of inflation in the future could adversely affect our operations and financial condition.

Liquidity and Capital Resources

Capital Resources

Our cash generated from operations has been our primary source of liquidity to fund operations, investments to support the growth of our business and share repurchases. As of December 31, 2023, our principal sources of liquidity were cash and cash equivalents totaling $2.036 billion, short-term investments totaling $60.7 million as well as $675.0 million of available borrowings under our revolving credit facility. See Note 10 “Debt” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding the terms of our revolving credit facility and information about debt.

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Cash Flows

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Our largest source of cash provided by operating activities is cash generated from our professional services that we provide to our customers. Our primary uses of cash from operating activities include compensation to our employees and related costs, payments for leased facilities, various general corporate expenditures and income tax payments. Since the invasion of Ukraine in 2022, our operating activities included using cash on humanitarian efforts for Ukraine and geographic repositioning of our workforce.

Cash provided by operating activities in 2023 was primarily driven by the Company's cash collections from customer contracts, which was partially offset by variable compensation payments, severance payments related to the Cost Optimization Program and other working capital outflows. Cash provided by operating activities in 2022 was primarily driven by the Company's cash collections from customer contracts, which were partially offset by variable compensation payments and EPAM’s humanitarian efforts for Ukraine and geographic repositioning.

Investing Activities

Our primary uses of cash from investing activities consist of purchases of computer hardware, software and office equipment, as well as investments into office buildings and new businesses. We also use cash for short-term investments and time deposits, and receive cash upon maturity of these deposits. Most of our investments are typically short-term and cash equivalent in nature but we may invest in longer term deposits if the terms are favorable. The cash used in investing activities during 2023 was primarily attributable to $28.4 million used for capital expenditures and $24.8 million used for the acquisitions of businesses, net of cash acquired. The cash used in investing activities during 2022 was primarily attributable to $81.6 million used for capital expenditures, an investment of $60.0 million in time deposits and $10.6 million used for the acquisitions of businesses, net of cash acquired.

Financing Activities

Cash used in financing activities mainly consists of repurchasing shares of EPAM common stock under a share repurchase program announced in 2023, payments of withholding taxes related to net share settlements of restricted stock units, repayments of debt, and settlements of the acquisition-date fair value of contingent consideration related to acquisitions of businesses. Cash provided by financing activities mainly consists of the proceeds from the purchases of shares under our ESPP and exercises of stock options issued under our long-term incentive plans as well as proceeds from debt. We typically do not rely on debt to supplement our cash flows. Net cash used in financing activities increased from 2022 to 2023 primarily due to $164.9 million of payments to repurchase our common stock.

Discussion of the comparison of the cash flows between 2022 and 2021 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” of our Annual Report on Form 10-K for the year ended December 31, 2022.

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Future Capital Requirements

We believe that our existing cash, cash equivalents and short-term investments, combined with our expected cash flow from operations will be sufficient to meet our projected operating and capital expenditure requirements for at least the next twelve months and that we possess the financial flexibility to execute our strategic objectives, including the ability to make acquisitions and strategic investments in the foreseeable future. However, the invasion of Ukraine, other various geopolitical events, and the related measures to contain their impact, have caused and may continue to cause material disruptions in financial markets and economies. These disruptions may increase our costs of capital, decrease returns on investment, and otherwise adversely affect our business, results of operations, financial condition and liquidity.

Our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors including the impact of the invasion of Ukraine, as described elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. To the extent that existing cash, cash equivalents, short-term investments, and operating cash flows are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business and there is no assurance that we would be able to raise additional funds on favorable terms or at all. Our ability to expand and grow our business in accordance with current plans and to meet our long-term capital requirements will depend on many factors, including the rate at which our cash flows increase or decrease and the availability of public and private debt and equity financing.

See Note 9 “Leases”, Note 10 “Debt”, Note 17 “Commitments and Contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding our various contractual obligations and capital expenditure requirements.

Off-Balance Sheet Commitments and Arrangements

We do not have any material obligations under guarantee contracts or other contractual arrangements other than as disclosed in Note 17 “Commitments and Contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K. We have not entered into any transactions with unconsolidated entities where we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us, or engages in leasing, hedging, or research and development services with us.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this annual report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Forward-Looking Statements” and “Part I. Item 1A. Risk Factors.” We assume no obligation to update any of these forward-looking statements.

Executive Summary

We are a leading global provider of digital platform engineering and software development services to many of the world’s leading organizations. Our customers depend on us to solve their complex technical challenges and rely on our expertise in core engineering, advanced technology, digital design and intelligent enterprise development.

We continuously explore opportunities in new industries to expand our core industry client base in software and technology, financial services, business information and media, travel and consumer, and life sciences and healthcare. Our teams of developers, architects, consultants, strategists, engineers, designers, and product experts have the capabilities and skill sets to deliver business results. Through increased specialization in focused verticals and a continued emphasis on strategic partnerships, we are leveraging our roots in software engineering to grow as a recognized brand in software development and end-to-end digital transformation services for our customers.

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Our global delivery model and centralized support functions, combined with the benefits of scale from the shared use of fixed-cost resources, enhance our productivity levels and enable us to better manage the efficiency of our global operations. As a result, we have created a delivery base whereby our applications, tools, methodologies and infrastructure allow us to seamlessly deliver services and solutions from our delivery centers to global customers across all geographies, further strengthening our relationships with them. To ensure safety and business continuity in the environment introduced by the COVID-19 global pandemic, many of our personnel have worked and continue to work productively through secure remote working arrangements so they can respond to the rapidly changing needs and demands of our customers. For further information on the various risks posed by the disruptions to our business structure, please read “Part I. Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

Business Update Regarding the War in Ukraine

On February 24, 2022, Russian forces attacked Ukraine and its people and EPAM has repeatedly called for an immediate end to this unlawful and unconscionable attack. EPAM’s highest priority is the safety and security of its employees and their families in Ukraine as well as the broader region, and we have continued to support relocating our employees to lower risk locations, both in Ukraine and to other countries where we operate. The vast majority of our Ukraine employees are in safe locations and operating at levels of productivity consistent with those achieved in 2021. As of December 31, 2022, Ukraine remains our largest delivery location with the most delivery professionals. Furthermore, we have maintained our $100 million humanitarian aid commitment to our people in Ukraine in addition to our other donations and volunteer efforts.

Prior to the attack in February 2022, Belarus and Russia were our second and third largest delivery locations by the number of delivery professionals, respectively. On April 7, 2022, the Company announced the beginning of a phased exit of our operations in Russia in close collaboration with our employees, contractors, and customers. We have discontinued services to certain customers located in Russia and on September 7, 2022, we executed an agreement to sell substantially all of our remaining holdings in Russia to a third party. As of December 31, 2022 and through the date of issuance of the financial statements, the long stop date of the agreement has passed and we are currently renegotiating the terms of that sale agreement as well as exploring other strategic alternatives. The timing and completion of a sale is uncertain and any sale would be subject to customary closing conditions, including regulatory approvals by the Russian government.

We expect to continue operating in Belarus while executing on our Belarus-specific business continuity plans. A significant number of our employees in Russia and Belarus have relocated, and we may assist in relocating employees to delivery locations in other countries in the future. Additionally, we continue to execute our business continuity plans and have sustained our hiring efforts across multiple locations in Eastern Europe, Central and Western Asia, India, and Latin America.

We own office buildings and lease office space in a number of cities in both Ukraine and in Belarus that we use for both internal functions and for delivering services to our customers. The impact of the war on our operations, personnel, and physical assets in Ukraine has had, and, along with any escalation of the war that includes Belarus’ territory or military, could continue to have, a material adverse effect on our operations. Actions taken by other countries, including new and stricter sanctions by Canada, the United Kingdom, the European Union, the U.S. and other companies and organizations against officials, individuals, regions, and industries in Russia and Belarus, and each of those country’s responses to such sanctions, including counter-sanctions and other actions, has had and could continue to have a material adverse effect on our operations. Customers have and may continue to seek altered terms, conditions, and delivery locations for the performance of services, delay planned work or seek services from alternate providers, or suspend, terminate, fail to renew, or reduce existing contracts or services, which could have a material adverse effect on our financial condition. Some of our customers have implemented steps to block internet communications with Russia, Ukraine, and Belarus to protect against potential cyberattacks or other information security threats, which has caused a material adverse effect on our ability to deliver our services to these customers from those locations. Such material adverse effects disrupt our delivery of services, cause us to shift all or portions of our work occurring in the region to other countries, restrict our ability to engage in certain projects in the region and serve certain customers in or from the region, and could negatively impact our personnel, operations, financial results and business outlook. Our Board of Directors continues its oversight of our strategic, geopolitical, and cybersecurity risks and the risks related to our geographic expansion. Our Board has received updates from management during both regular and special meetings, while also providing oversight of the risks associated with Russia’s invasion of Ukraine and other strategic areas of importance related to the war.

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Moving Forward

We continue to execute our business continuity plans and adapt to developments as they occur to protect the safety of our people and address impacts on our delivery infrastructure, including reallocating work to other geographies within our global footprint. We have engaged both our personnel and our customers to meet their needs and to mitigate delivery challenges. EPAM continues to operate productively in more than 50 countries and provides consistent high-quality delivery to our customers. Our global delivery centers have sufficient resources, including infrastructure and capital, to support ongoing operations. EPAM continues to rapidly respond to the difficult conditions in Ukraine while maintaining a focus on customers and long-term growth.

Implementation and execution of our business continuity plans, relocation costs, our humanitarian commitment to our people in Ukraine, and the cost of our phased exit from Russia have resulted in materially increased expenses during 2022. We expect some of those expenses will continue to occur in subsequent quarters for some time in the future. In addition to the charges recorded during 2022 related to our exit from Russia, based on the information available through the date of issuance of the financial statements, we expect to record a loss upon the earlier of classification of the assets and liabilities to be sold as held for sale or closing of a sale, and such loss is not expected to be material. Fluctuations in foreign currency exchange rates could impact the gain or loss the Company could recognize in the future. If unable to complete a sale, the Company could recognize other charges including restructuring costs.

We have no way to predict the progress or outcome of the attack against Ukraine because the conflict and government reactions change quickly and are beyond our control. Prolonged military activities, broad-based sanctions and counter-sanctions could have a material adverse effect on our operations and financial condition and there is significant uncertainty for our business outlook for 2023. The information contained in this section is accurate as of the date hereof but may become outdated due to changing circumstances beyond our control or present awareness.

For additional information on the various risks posed by the attack against Ukraine and the impact in the region, please read “Part I. Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

Overview of 2022 and Financial Highlights

The following table presents a summary of our results of operations for the years ended December 31, 2022, 2021 and 2020:

The key highlights of our consolidated results for 2022 were as follows:

•We recorded revenues of $4.825 billion, or a 28.4% increase from $3.758 billion in the previous year, negatively impacted by $151.1 million or 4.0% due to changes in certain foreign currency exchange rates as compared to the previous year.

•Income from operations grew 5.7% to $573.0 million in 2022 from $542.3 million in 2021. Expressed as a percentage of revenues, income from operations was 11.9% compared to 14.4%. During the year ended December 31, 2022, income from operations as a percentage of revenues was negatively impacted by incremental expenses associated with EPAM’s humanitarian efforts in Ukraine, the global repositioning of our workforce, unbilled business continuity resources, the costs associated with our phased exit from operations in Russia, and impairment of long-lived asset charges triggered by the decision to discontinue services to customers in Russia.

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•Our effective tax rate was 17.3% compared to 9.7% in the previous year. The increase in the effective tax rate for 2022 as compared to the prior year is primarily attributable to the decrease in excess tax benefits recorded upon vesting or exercise of stock-based awards and tax charges in 2022 resulting from changes to certain U.S. tax regulations, partially offset by one-time tax benefits in 2022 resulting from the Company’s decision to change the tax status and to classify certain of its foreign subsidiaries as disregarded entities for U.S. income tax.

•Net income decreased 12.9% to $419.4 million compared to $481.7 million in 2021. Expressed as a percentage of revenues, net income decreased 4.1% during 2022 compared to last year. Net income during 2022 was impacted by net foreign exchange losses, partially offset by the improvement in income from operations. Foreign exchange loss during 2022 was primarily driven by the impact of appreciation of the Russian ruble on the Company’s intercompany payables denominated in Russian rubles and U.S. dollar denominated assets held by our subsidiaries in Russia and losses from our foreign exchange forward contracts associated with the Russian ruble.

•Diluted earnings per share decreased 13.0% to $7.09 for the year ended December 31, 2022 from $8.15 in 2021.

•Cash provided by operations decreased $108.2 million, or 18.9%, to $464.1 million during 2022 as compared to last year. The decrease was largely driven by an increase in days sales outstanding during 2022, higher level of variable compensation payments made in 2022 based on 2021 performance, and cash outflows related to EPAM’s humanitarian support efforts in Ukraine and geographic repositioning.

The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), which require us to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our audited consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places significant demands on the judgment of our management.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our audited consolidated financial statements and other disclosures included elsewhere in this annual report. Additional information on our policies is in Note 1 “Business and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

Revenues — We recognize revenues when control of goods or services is passed to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Such control may be transferred over time or at a point in time depending on satisfaction of obligations stipulated by the contract. Consideration expected to be received may consist of both fixed and variable components and is allocated to each separately identifiable performance obligation based on the performance obligation’s relative standalone selling price. Variable consideration usually takes the form of volume-based discounts, service level credits, price concessions or incentives. Determining the estimated amount of such variable consideration involves assumptions and judgment that can have an impact on the amount of revenues reported.

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We derive revenues from a variety of service arrangements, which have been evolving to provide more customized and integrated solutions to customers by combining software engineering with customer experience design, business consulting and technology innovation services. Fees for these contracts may be in the form of time-and-materials or fixed-price arrangements. We generate the majority of our revenues under time-and-material contracts, which are billed using hourly, daily or monthly rates to determine the amounts to be charged directly to the customer. We apply a practical expedient and revenues related to time-and-material contracts are recognized based on the right to invoice for services performed.

Fixed-price contracts include maintenance and support arrangements, which may exceed one year in duration. Maintenance and support arrangements generally relate to the provision of ongoing services and revenues for such contracts are recognized ratably over the expected service period. Fixed-price contracts also include application development arrangements, where progress towards satisfaction of the performance obligation is measured using input or output methods and input methods are used only when there is a direct correlation between hours incurred and the end product delivered. Assumptions, risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and deferred revenues at each reporting period.

Revenues from licenses which have significant stand-alone functionality are recognized at a point in time when control of the license is transferred to the customer. Revenues from licenses which do not have stand-alone functionality are recognized over time. If there is an uncertainty about the receipt of payment for the services, revenue recognition is deferred until the uncertainty is sufficiently resolved. We apply a practical expedient and do not assess the existence of a significant financing component if the period between transfer of the service to a customer and when the customer pays for that service is one year or less.

We report gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues in the consolidated statements of income.

Business Combinations — We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate purchase price to the individual assets acquired and liabilities assumed. A substantial portion of the purchase price is typically allocated to goodwill and other intangible assets, which typically include customer relationships, software, trade names, non-competition agreements, and assembled workforce. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. The significant estimates and assumptions used include the timing and amount of forecasted revenues and cash flows, anticipated growth rates, customer attrition rates, the discount rate reflecting the risk inherent in future cash flows, and the useful lives for finite-lived assets. There are different valuation models for each component, the selection of which requires considerable judgment. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable but recognize that the assumptions are inherently uncertain.

We determine the fair value of contingent consideration using Monte Carlo simulations (which involve a simulation of future revenues and earnings during the earn-out period using management's best estimates) or probability-weighted expected return methods. Changes in financial projections, market risk assumptions, discount rates or probability assumptions related to achieving the various earn-out criteria would result in a change in the fair value of contingent consideration. Such changes, if any, are recorded within Interest and other income/(loss), net in the Company’s consolidated statements of income.

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 to the accounting for the business combination are recorded in earnings.

Recent Accounting Pronouncements

See Note 1 “Business and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding recent accounting pronouncements.

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Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

(1) Includes $47,470, $51,580 and $32,785 of stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020, respectively.

(2) Includes $52,439, $60,075 and $42,453 of stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020, respectively.

Revenues

We continue to expand our presence across multiple geographies and verticals, both organically and through strategic acquisitions. During the year ended December 31, 2022, our total revenues grew 28.4% over the previous year to $4.825 billion. This growth resulted from our ability to retain existing customers and increase the level of services we provide to them and our ability to produce revenues from new customer relationships. During the year ended December 31, 2022 we experienced a decrease in customer concentration as compared to the previous year, with revenues from our top five, top ten and top twenty customer groups decreasing as a percentage of total revenues. Revenues have been positively impacted by our acquisitions, which contributed 5.1% to our revenue growth, and negatively impacted by our decision to exit Russia and discontinue services to customers there by 3.7% and fluctuations in foreign currency exchange rates which decreased our revenue growth by 4.0% during the year ended December 31, 2022 as compared to the previous year.

We discuss below the breakdown of our revenues by vertical, customer location, service arrangement type, and customer concentration.

Revenues by Vertical

We assign our customers into one of our five main vertical markets or a group of various industries where we are increasing our presence, which we label as “Emerging Verticals.” Emerging Verticals include customers in multiple industries such as energy, utilities, manufacturing, automotive, telecommunications and several others.

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The following table presents our revenues by vertical and revenues as a percentage of total revenues by vertical for the periods indicated:

Travel & Consumer became our largest vertical during 2022, growing 47.4% as compared to 2021. Except for Software & Hi-Tech, which grew at a rate of 19.4% in 2022 over the prior year, all of our verticals grew over 20% in 2022 over the prior year.

Revenues by Customer Location

Our revenues are sourced from multiple countries, which we assign into four geographic markets and identify as Americas, EMEA, APAC and CEE. We present and discuss our revenues by customer location based on the location of the specific customer site that we serve, irrespective of the location of the headquarters of the customer or the location of the delivery center where the work is performed. Revenues by customer location is different from revenues by reportable segment in our consolidated financial statements included elsewhere in this annual report. Segments are not based on the geographic location of the customers, but instead they are based on the location of the Company’s management responsible for a particular customer or market.

The following table sets forth revenues by customer location by amount and as a percentage of our revenues for the periods indicated: