EPAM SYSTEMS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our Annual Report on Form 10-K for the year endedDecember 31, 2020 and the unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly 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" in this item and in "Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . We assume no obligation to update any of these forward-looking statements. In this quarterly report, "EPAM," "EPAM Systems, Inc. ," the "Company," "we," "us" and "our" refer toEPAM Systems, Inc. and its consolidated subsidiaries. "EPAM" is a trademark ofEPAM Systems, Inc. All other trademarks and service marks used herein are the property of their respective owners. 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. 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. 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. The COVID-19 global pandemic remained a significant source of disruption and uncertainty during the third quarter of 2021. To ensure both safety and business continuity, the vast majority of our personnel remain in productive and secure remote working arrangements so they are able to continue to respond to the rapidly changing needs and demands of our customers. During the third quarter of 2021, we continued to experience increased demand in our geographies, segments, and service offerings, as detailed below under the heading "Year-to-Date 2021 Developments and Trends," but we cannot accurately predict the extent to which the COVID-19 pandemic will continue to directly and indirectly impact our business, results of operations and financial condition. For additional information on the impact of the COVID-19 pandemic on our results for the first nine months of 2021, please see "Year-to-Date 2021 Developments and Trends" and "Liquidity and Capital Resources" below. For further information on the various risks posed by the COVID-19 pandemic, please read "Part I. Item 1A. Risk Factors" under the sub-heading "Risks Related to COVID-19" which is included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Year-to-Date 2021 Developments and Trends For the first nine months of 2021, our revenues were$2,650.7 million , an increase of 36.9% over$1,936.0 million reported for the same period of 2020. We have built an increasingly diversified portfolio across numerous verticals, geographies and service offerings which allowed us to continue to grow revenues despite challenges posed by the worldwide COVID-19 pandemic. Certain clients and certain industry verticals were adversely impacted by the worldwide COVID-19 pandemic in 2020. However, in 2021 we are experiencing strong growth across all of our verticals with all of the verticals growing above 30% year over year, with the exception of the Business Information & Media vertical which grew 14.2% year over year. 31
-------------------------------------------------------------------------------- Table of Contents Summary of Results of Operations The following table presents a summary of our results of operations for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands, except per share data and percentages) Revenues $ 988,539 100.0 %$ 652,243 100.0 %$ 2,650,680 100.0 %$ 1,935,985 100.0 % Income from operations $ 144,124 14.6 %$ 96,396 14.8 %$ 376,649 14.2 %$ 267,331 13.8 % Net income $ 115,656 11.7 % $
89,432 13.7 %
14.6 % 14.0 % 9.1 % 12.6 %
Diluted earnings per share $ 1.95 $ 1.53 $ 5.75 $ 4.14
The key highlights of our consolidated results for the three and nine months endedSeptember 30, 2021 , as compared to the corresponding period of 2020, were as follows: •Revenues for the third quarter of 2021 were$988.5 million , representing a 51.6% increase from$652.2 million reported in the same period last year. Revenue growth was strong in the third quarter of 2021 as a result of robust demand for our services as well as a favorable comparison to the third quarter of 2020 which was adversely impacted by the COVID-19 pandemic. The third quarter of 2021 was positively impacted by$5.8 million or 0.9% due to changes in certain foreign currency exchange rates as compared to the corresponding period last year. Revenues for the first nine months of 2021 were$2,650.7 million , or a 36.9% increase from$1,936.0 million reported in the corresponding period last year. Revenue growth in the first nine months of 2021 was positively impacted by$48.2 million or 2.5% due to changes in certain foreign currency exchange rates as compared to the corresponding period last year. Revenue growth also benefited from a favorable comparison to the first nine months of 2020 which was adversely impacted by the COVID-19 pandemic. Growth from acquisitions contributed$32.6 million and$54.5 million to our revenues for the three and nine months endedSeptember 30, 2021 , respectively. •Income from operations grew 49.5% and 40.9% to$144.1 million and$376.6 million during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the corresponding periods in 2020. Expressed as a percentage of revenues, income from operations for the third quarter of 2021 decreased to 14.6% compared to 14.8% in the third quarter last year and increased to 14.2% for the first nine months of 2021 as compared to 13.8% for the corresponding period in 2020. During the three and nine months endedSeptember 30, 2021 , income from operations as a percentage of revenues was positively impacted by reduced facility-related expenses as a percentage of revenues and negatively impacted by higher levels of accrued variable compensation. Income from operations as a percentage of revenues for the first nine months of 2020 was negatively impacted by an increase in Cost of revenues as a percentage of revenues attributable to temporary discounts provided to certain customers experiencing challenging economic conditions due to the impact of the COVID-19 pandemic which was partially offset by a reduction in travel-related expenses reported in Cost of revenues and a reduction in travel-related, recruitment, and facilities expenses reported in Selling, general and administrative expenses. •Our effective tax rate was 14.6% and 9.1% for the three and nine months endedSeptember 30, 2021 , respectively, and 14.0% and 12.6% for the three and nine months endedSeptember 30, 2020 , respectively. The increase in the effective tax rate in the three months endedSeptember 30, 2021 , as compared to the corresponding period in the prior year, is primarily attributable to lower excess tax benefits recorded upon vesting or exercise of stock-based awards as a percentage of pre-tax income, which were partially offset by a$3.4 million one-time benefit from the recognition of certain tax credits during the three months endedSeptember 30, 2021 . The decrease in the effective tax rate in the nine months endedSeptember 30, 2021 , as compared to the corresponding period in the prior year, is primarily attributable to higher excess tax benefits recorded upon vesting or exercise of stock-based awards as a percentage of pre-tax income as well as the one-time benefit from the recognition of certain tax credits during the three months endedSeptember 30, 2021 . 32 -------------------------------------------------------------------------------- Table of Contents •Net income increased 29.3% to$115.7 million for the three months endedSeptember 30, 2021 , compared to$89.4 million reported in the corresponding period last year. Expressed as a percentage of revenues, net income was 11.7% for the third quarter of 2021, a decrease of 2.0% compared to 13.7% reported in the corresponding period of 2020. Net income grew 40.5% during the nine months endedSeptember 30, 2021 as compared to the corresponding period in the prior year primarily due to the improvement in income from operations and the decrease in our effective tax rate. •Diluted earnings per share was$1.95 and$5.75 for the three and nine months endedSeptember 30, 2021 , respectively, an increase of$0.42 and$1.61 compared to the corresponding period last year. •Cash provided by operating activities was$287.7 million during the nine months endedSeptember 30, 2021 as compared to cash provided by operating activities of$385.0 million in the corresponding period last year. This decrease was largely driven by an increase in days sales outstanding and increased income tax payments during the first nine months of 2021 compared to the same period in 2020. The operating results in any period are not necessarily indicative of the results that may be expected for any future period. Critical Accounting Policies The discussion and analysis of our financial position and results of operations is based on our condensed consolidated financial statements which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements in accordance withU.S. GAAP requires us to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our estimates and judgments, including those related to revenue recognition and related allowances, impairments of long-lived assets including intangible assets, goodwill and right-of-use assets, income taxes including the valuation allowance for deferred tax assets, and stock-based compensation. Actual results may differ materially from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. During the three and nine months endedSeptember 30, 2021 , there have been no material changes to our critical accounting policies or in the underlying accounting assumptions and estimates used in such policies as reported in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 33 -------------------------------------------------------------------------------- Table of Contents 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 unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020
(in thousands, except percentages and per share data) Revenues
$ 988,539 100.0 %$ 652,243 100.0 %$ 2,650,680 100.0 %$ 1,935,985 100.0 %
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)(1) 653,374 66.1 % 423,388 64.9 % 1,756,430 66.3 % 1,266,730 65.4 % Selling, general and administrative expenses(2) 169,498 17.1 % 116,530 17.9 % 457,797 17.3 % 355,829 18.4 % Depreciation and amortization expense 21,543 2.2 % 15,929 2.4 % 59,804 2.2 % 46,095 2.4 % Income from operations 144,124 14.6 % 96,396 14.8 % 376,649 14.2 % 267,331 13.8 % Interest and other (loss)/income, net (5,325) (0.5) % 1,672 0.3 % 2,629 0.1 % 5,875 0.3 % Foreign exchange (loss)/gain (3,441) (0.4) % 5,896 0.8 % (5,835) (0.2) % 3,253 0.2 % Income before provision for income taxes 135,358 13.7 % 103,964 15.9 % 373,443 14.1 % 276,459 14.3 % Provision for income taxes 19,702 2.0 % 14,532 2.2 % 34,070 1.3 % 34,838 1.8 % Net income$ 115,656 11.7 %$ 89,432 13.7 %$ 339,373 12.8 %$ 241,621 12.5 % Effective tax rate 14.6 % 14.0 % 9.1 % 12.6 % Diluted earnings per share$ 1.95 $ 1.53 $ 5.75 $ 4.14 (1)Includes$12,174 and$10,854 of stock-based compensation expense for the three months endedSeptember 30, 2021 and 2020, respectively, and$34,552 and$23,796 of stock-based compensation expense for the nine months endedSeptember 30, 2021 and 2020, respectively. (2)Includes$17,013 and$12,620 of stock-based compensation expense for the three months endedSeptember 30, 2021 and 2020, respectively, and$43,086 and$30,998 of stock-based compensation expense for the nine months endedSeptember 30, 2021 and 2020, respectively. Consolidated Results Review Revenues During the three months endedSeptember 30, 2021 , our total revenues grew to$988.5 million or 51.6% compared to the corresponding period in 2020. Revenues have been positively impacted by growth from acquisitions, which contributed 5.0% to our revenue growth, and by fluctuations in foreign currency exchange rates which increased our revenue growth by 0.9% during the three months endedSeptember 30, 2021 as compared to the same period last year. Revenue growth slowed in the third quarter of 2020 as a result of deterioration in economic conditions for our customers related to the COVID-19 pandemic. During the nine months endedSeptember 30, 2021 , our total revenues grew 36.9% over the corresponding period in 2020. The first nine months of 2021 were positively impacted by growth from acquisitions, which contributed 2.8% to our revenue growth, and by fluctuations in foreign currency exchange rates which increased our revenue growth by$48.2 million or 2.5% due to changes in certain foreign currency exchange rates as compared to the corresponding period last year. Revenue growth slowed in the first nine months of 2020 as a result of deterioration in economic conditions for our customers related to the COVID-19 pandemic. 34 -------------------------------------------------------------------------------- Table of Contents Revenues by customer location for the three and nine months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands, except percentages) (in thousands, except percentages) North America(1)$ 591,368 59.8 %$ 389,976 59.8 %$ 1,589,087 60.0 %$ 1,161,742 60.0 % Europe 323,807 32.8 % 214,533 32.9 % 874,460 32.9 % 648,654 33.5 % CIS(2) 44,978 4.5 % 30,039 4.6 % 112,815 4.3 % 76,977 4.0 % APAC(3) 28,386 2.9 % 17,695 2.7 % 74,318 2.8 % 48,612 2.5 % Revenues$ 988,539 100.0 %$ 652,243 100.0 %$ 2,650,680 100.0 %$ 1,935,985 100.0 % (1)North America includes revenues from customers inNorth and South America . (2)CIS includes revenues from customers inRussia ,Belarus ,Georgia ,Kazakhstan , andUkraine . (3)APAC includes revenues from customers inEast Asia ,Southeast Asia andAustralia . During the three and nine months endedSeptember 30, 2021 ,the United States continued to be our largest customer location, with revenues increasing 51.9% to$564.1 million during the third quarter of 2021 from$371.4 million in the third quarter of 2020. During the nine months endedSeptember 30, 2021 , revenues inthe United States grew 36.9% to$1,514.6 million compared to$1,106.5 million in the same period of the prior year. The top three revenue contributing customer location countries inEurope were theUnited Kingdom ,Switzerland andNetherlands , generating$126.3 million ,$66.7 million and$39.6 million in revenues, respectively, during the three months endedSeptember 30, 2021 . Revenues from customers in these three countries were$77.5 million ,$50.4 million , and$28.8 million , respectively, in the corresponding period last year. Revenues in the European geography were positively impacted by strengthening of the euro and the British pound relative to theU.S. dollar during the three months endedSeptember 30, 2021 compared to the same period in the previous year. During the nine months endedSeptember 30, 2021 ,United Kingdom ,Switzerland andNetherlands performed asEurope's top revenue generating locations and contributed$332.5 million ,$198.0 million , and$109.3 million , respectively, compared to$251.9 million ,$144.2 million , and$82.0 million in the corresponding period of the prior year, respectively. During the three months endedSeptember 30, 2021 , revenues in the CIS geography included$42.7 million from customers inRussia , an increase of$14.7 million as compared to the corresponding period of 2020. The increase in revenues was primarily attributable to growth in the Financial Services vertical and positively impacted by the strengthening of the Russian ruble relative to theU.S. dollar during the three months endedSeptember 30, 2021 compared to the same period in the previous year. During the nine months endedSeptember 30, 2021 , customers inRussia comprised$106.1 million of the revenues in the CIS geography, an increase of$36.7 million over the corresponding period of 2020. During the nine months endedSeptember 30, 2021 , revenues in the CIS geography benefited from growth in Financial Services, particularly commercial banking, as well as the strengthening of the Russian ruble relative to theU.S. dollar compared to the nine months endedSeptember 30, 2020 . During the three and nine months endedSeptember 30, 2021 , revenues from customers in the APAC region increased by$10.7 million , or 60.4% and$25.7 million or 52.9%, respectively, over the corresponding periods of 2020, mainly due to growth in the Financial Services vertical. 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 customer services during a given period. Our employees are a critical resource, necessary for our continued success and therefore we expect to continue hiring talented employees and providing them with competitive compensation programs. 35 -------------------------------------------------------------------------------- Table of Contents During the three months endedSeptember 30, 2021 , cost of revenues (exclusive of depreciation and amortization) was$653.4 million representing an increase of 54.3% from$423.4 million in the corresponding period of 2020. The increase was primarily due to an increase in compensation costs largely driven by the 36.1% growth in the average number of production professionals during the three months endedSeptember 30, 2021 as compared to the same period in 2020. Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 66.1% and 64.9% in the third quarter of 2021 and 2020, respectively. The year-over-year increase is primarily due to a 1.5% increase as a percentage of revenues in personnel-related costs including stock-based compensation expense largely driven by a higher level of accrued variable compensation during the third quarter of 2021 as compared to the same period in 2020. During the nine months endedSeptember 30, 2021 , cost of revenues (exclusive of depreciation and amortization) was$1,756.4 million representing an increase of 38.7% from$1,266.7 million in the corresponding period of 2020. The increase was primarily due to an increase in compensation costs largely driven by the 26.4% growth in the average number of production professionals, a higher level of accrued variable compensation during the first nine months of 2021 as compared to the same period in 2020 and a 1.7% unfavorable impact from changing foreign currency exchange rates. Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 66.3% and 65.4% for the nine months endedSeptember 30, 2021 and 2020, respectively. The year-over-year increase is primarily due to a 1.7% increase in personnel-related costs including stock-based compensation expense as a percentage of revenues largely driven by a higher level of accrued variable compensation during the first nine months of 2021 as compared to the same period in 2020, partially offset by reduced travel and entertainment expenses. 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. In addition, we pay a membership fee of 1% of revenues generated inBelarus to the administrative organization of theBelarus High-Technologies Park . During the three months endedSeptember 30, 2021 , selling, general and administrative expenses were$169.5 million representing a 45.5% increase as compared to$116.5 million in the corresponding period of 2020. The increase in selling, general and administrative expenses was primarily driven by a$42.5 million increase in personnel-related costs including stock-based compensation expense. Expressed as a percentage of revenues, selling, general and administrative expenses decreased 0.8% to 17.1% for the three months endedSeptember 30, 2021 as compared to the same period from the prior year, primarily driven by reduced facility-related expenses as a percentage of revenues. During the nine months endedSeptember 30, 2021 , selling, general and administrative expenses were$457.8 million representing an increase of 28.7% as compared to$355.8 million reported in the corresponding period of 2020. The increase in selling, general and administrative expenses was primarily driven by an$87.7 million increase in personnel-related costs including stock-based compensation expense, partially offset by a$1.9 million decrease in facilities and infrastructure expenses. Expressed as a percentage of revenues, selling, general and administrative expenses decreased 1.1% to 17.3% for the nine months endedSeptember 30, 2021 as compared to the same period from the prior year primarily driven by reduced facility-related expenses as a percentage of revenues. Depreciation and Amortization Expense During the three and nine months endedSeptember 30, 2021 , depreciation and amortization expense was$21.5 million and$59.8 million , respectively, as compared to$15.9 million and$46.1 million , respectively, in the corresponding periods last year. The increase in depreciation and amortization expense is primarily the result of increased investment in computer equipment used by our employees. Expressed as a percentage of revenues, depreciation and amortization expense decreased to 2.2% during both the three and nine months endedSeptember 30, 2021 , as compared to 2.4% in both corresponding periods of 2020. Interest and Other (Loss)/Income, Net Interest and other (loss)/income, net includes interest earned on cash and cash equivalents and employee loans, gains and losses from certain financial instruments, interest expense related to our 2017 Credit Facility and changes in the fair value of contingent consideration. Interest and other (loss)/income, net decreased from a gain of$1.7 million during the three months endedSeptember 30, 2020 to a loss of$5.3 million during the three months endedSeptember 30, 2021 , which is primarily attributable to a$7.0 million increase in the charge from the change in fair value of contingent consideration reflecting improved expectations for the performance of certain acquisitions. There were no material changes in interest and other (loss)/income, net during the nine months endedSeptember 30, 2021 as compared to the same period in 2020. 36 -------------------------------------------------------------------------------- Table of Contents Foreign Exchange (Loss)/Gain For discussion of the impact of foreign exchange fluctuations see "Item 3. Quantitative and Qualitative Disclosures About Market Risk." 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 company operating in many countries, we are required to calculate and provide for income taxes in each of the jurisdictions in which we operate. Our provision for income taxes benefited from excess tax benefits recorded upon vesting or exercise of stock-based awards of$10.4 million and$9.2 million during the three months endedSeptember 30, 2021 and 2020, respectively. Our provision for income taxes benefited from excess tax benefits recorded upon vesting or exercise of stock-based awards of$52.8 million and$29.0 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Our effective tax rate was 14.6% and 9.1% for the three and nine months endedSeptember 30, 2021 , respectively, and 14.0% and 12.6% for the three and nine months endedSeptember 30, 2020 , respectively. The increase in the effective tax rate in the three months endedSeptember 30, 2021 , as compared to the corresponding period in the prior year, is primarily attributable to lower excess tax benefits recorded upon vesting or exercise of stock-based awards as a percentage of pre-tax income, which were partially offset by a$3.4 million one-time benefit from the recognition of certain tax credits during the three months endedSeptember 30, 2021 . The decrease in the effective tax rate in the nine months endedSeptember 30, 2021 , as compared to the corresponding period in the prior year, is primarily attributable to higher excess tax benefits recorded upon vesting or exercise of stock-based awards as a percentage of pre-tax income as well as a$3.4 million one-time benefit from the recognition of certain tax credits during the three months endedSeptember 30, 2021 . Results by Business Segment Our operations consist of three reportable segments:North America ,Europe , andRussia . 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 operating profit. 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 including theBelarus High-Technologies Park membership fee, 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. 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 its 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 management team's reportable segment. 37 -------------------------------------------------------------------------------- Table of Contents Segment revenues from external customers and segment operating profit, before unallocated expenses, for theNorth America ,Europe andRussia reportable segments for the three and nine months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) Segment revenues: North America$ 593,862 $ 391,605 $ 1,600,737 $ 1,167,536 Europe 350,080 231,418 938,733 695,056 Russia 44,597 29,220 111,210 73,393 Total segment revenues$ 988,539 $ 652,243 $ 2,650,680 $ 1,935,985 Segment operating profit/(loss): North America$ 122,232 $ 87,272 $ 327,595 $ 248,951 Europe 60,952 43,018 162,477 109,223 Russia 10,541 2,958 17,549 (2,168)
Total segment operating profit
North America Segment During the three months endedSeptember 30, 2021 , revenues for theNorth America segment increased$202.3 million , or 51.6%, compared to the same period last year and segment operating profit increased$35.0 million , or 40.1%, compared to the same period last year. During the three months endedSeptember 30, 2021 , revenues from ourNorth America segment were 60.1% of total segment revenues, an increase from 60.0% reported in the corresponding period of 2020. TheNorth America segment's operating profit margin decreased to 20.6% during the third quarter of 2021 from 22.3% in the third quarter of 2020. This decrease is primarily attributable to increases in personnel-related costs, largely driven by a higher level of accrued variable compensation. During the nine months endedSeptember 30, 2021 , revenues for theNorth America segment increased$433.2 million , or 37.1%, compared to the same period last year and segment operating profit increased$78.6 million , or 31.6%, compared to the same period last year. During the nine months endedSeptember 30, 2021 and 2020, revenues from ourNorth America segment were 60.4% and 60.3% of total segment revenues, respectively. As a percentage ofNorth America segment revenues, theNorth America segment's operating profit margin decreased to 20.5% during the nine months endedSeptember 30, 2021 as compared to 21.3% in the corresponding period of 2020. This decrease is primarily attributable to increases in personnel-related costs, largely driven by a higher level of accrued variable compensation. The following table presentsNorth America segment revenues by industry vertical for the periods indicated: Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 Dollars Percentage 2021 2020 Dollars Percentage Industry Vertical (in thousands, except percentages) Software & Hi-Tech$ 146,532 $ 100,847 $ 45,685 45.3 %$ 406,756 $ 303,385 $ 103,371 34.1 % Business Information & Media 100,536 84,384 16,152 19.1 % 280,120 246,085 34,035 13.8 % Financial Services 100,631 48,415 52,216 107.9 % 253,713 143,970 109,743 76.2 % Travel & Consumer 98,494 54,590 43,904 80.4 % 252,998 161,507 91,491 56.6 % Life Sciences & Healthcare 85,534 66,071 19,463 29.5 % 241,835 189,458 52,377 27.6 % Emerging Verticals 62,135 37,298 24,837 66.6 % 165,315 123,131 42,184 34.3 % Revenues$ 593,862 $ 391,605 $ 202,257 51.6 %$ 1,600,737 $ 1,167,536 $ 433,201 37.1 % 38
-------------------------------------------------------------------------------- Table of Contents During the three and nine months endedSeptember 30, 2021 compared to the same period in the prior year, revenues from each vertical in theNorth America segment, except Business Information & Media, grew in excess of 25%. Software & Hi-Tech remained the largest industry vertical in theNorth America segment, growing 45.3% and 34.1% during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the corresponding periods from the prior year. Financial Services grew 107.9% and 76.2% during the three and nine months endedSeptember 30, 2021 , respectively, due to growth in a wealth management customer that was previously one of our top 200 customers and is now one of our top 20 customers. Business Information & Media experienced slower growth during the three and nine months of 2021 compared to the prior year largely due to slower relative growth at several clients where revenues from certain engagements have plateaued. Life Sciences & Healthcare grew 29.5% and 27.6% during the three and nine months endedSeptember 30, 2021 , respectively, in part due to the addition of a significant new customer in 2021. Europe Segment During the three months endedSeptember 30, 2021 ,Europe's segment revenues were$350.1 million , representing an increase of$118.7 million , or 51.3%, from the same period last year. Revenues were positively impacted by changes in foreign currency exchange rates during the third quarter of 2021. Had ourEurope segment revenues been expressed in constant currency terms using the exchange rates in effect during the third quarter of 2020, we would have reported revenue growth of 49.9%.Europe's segment revenues accounted for 35.4% and 35.5% of total segment revenues during the three months endedSeptember 30, 2021 and 2020, respectively. During the third quarter of 2021, the segment's operating profit increased 41.7% to$61.0 million compared to the third quarter of 2020. Expressed as a percentage of revenues,Europe's segment operating profit decreased to 17.4% compared to 18.6% in the same period of the prior year. Segment operating profit was negatively impacted by increased personnel related costs, largely driven by a higher level of accrued variable compensation. During the nine months endedSeptember 30, 2021 , revenues for theEurope segment increased$243.7 million , or 35.1%, compared to the same period last year and segment operating profit increased$53.3 million , or 48.8%, compared to the same period last year. During the nine months endedSeptember 30, 2021 and 2020, revenues from ourEurope segment were 35.4% and 35.9% of total segment revenues, respectively. As a percentage ofEurope segment revenues, theEurope segment's operating profit increased to 17.3% during the nine months endedSeptember 30, 2021 from 15.7% in the corresponding period of 2020. During the first nine months of 2021,Europe's segment operating profit was positively impacted by changes in foreign currency exchange rates, predominantly the euro and British pound, as well as the recognition of$6.4 million in revenues from performance obligations satisfied in previous periods, partially offset by a higher level of accrued variable compensation. During the nine months endedSeptember 30, 2020 , segment operating profit was negatively impacted by temporary discounts provided to certain customers experiencing challenging economic conditions due to the impact of the COVID-19 pandemic. The following table presentsEurope segment revenues by industry vertical for the periods indicated: Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 Dollars Percentage 2021 2020 Dollars Percentage Industry Vertical (in thousands, except percentages) Financial Services$ 98,711 $ 68,419 $ 30,292 44.3 %$ 262,716 $ 202,668 $ 60,048 29.6 % Travel & Consumer 91,197 51,449 39,748 77.3 % 235,552 163,769 71,783 43.8 % Business Information & Media 71,953 55,228 16,725 30.3 % 197,142 171,712 25,430 14.8 % Software & Hi-Tech 27,103 17,492 9,611 54.9 % 72,010 53,803 18,207 33.8 % Life Sciences & Healthcare 10,374 7,963 2,411 30.3 % 36,505 22,651 13,854 61.2 % Emerging Verticals 50,742 30,867 19,875 64.4 % 134,808 80,453 54,355 67.6 % Revenues$ 350,080 $ 231,418 $ 118,662 51.3 %$ 938,733 $ 695,056 $ 243,677 35.1 % 39
-------------------------------------------------------------------------------- Table of Contents Financial Services remained the largest industry vertical in theEurope segment during the three and nine months endedSeptember 30, 2021 . Revenues in Travel & Consumer experienced higher growth during the three months endedSeptember 30, 2021 as compared to the corresponding period in 2020 primarily due to increased demand from customers in the retail and distribution industries. During the nine months endedSeptember 30, 2021 , revenues in Business Information & Media experienced slower relative growth at several clients where revenues from certain engagements have plateaued compared to the prior year. For the three and nine months endedSeptember 30, 2021 , the increase in revenues in the Software & Hi-Tech vertical is largely attributable to the expansion of services provided to one of our top 20 customers. For the nine months endedSeptember 30, 2021 , the increase in revenues in Life Sciences & Healthcare is largely due to expansion of services provided to a single healthcare customer. Revenues in Emerging Verticals experienced higher growth primarily attributable to growth in existing customers in the telecommunications, manufacturing and energy industries during the three and nine months endedSeptember 30, 2021 . Russia Segment During the three months endedSeptember 30, 2021 , revenues from ourRussia segment accounted for 4.5% of total segment revenues and increased$15.4 million , or 52.6%, as compared to the corresponding period in the prior year. The increase in revenues was primarily attributable to growth in the Financial Services vertical and positively impacted by the strengthening of the Russian ruble relative to theU.S. dollar. During the three months endedSeptember 30, 2021 , operating profit from theRussia segment was$10.5 million , representing an increase of$7.6 million , as compared to a$3.0 million operating profit in the corresponding period last year. This increase is attributable to a net benefit in the third quarter of 2021 as compared to the corresponding period of last year from revenues from performance obligations satisfied in previous periods and a benefit from the change in the valuation of the Russian ruble relative to theU.S. dollar. During the nine months endedSeptember 30, 2021 , revenues from ourRussia segment increased$37.8 million , or 51.5%, as compared to the corresponding period of 2020 and accounted for 4.2% of total segment revenues. During the nine months endedSeptember 30, 2021 , operating profit of theRussia segment was$17.5 million , representing an increase of$19.7 million , as compared to a$2.2 million operating loss in the corresponding period last year. This increase is attributable to a net benefit in the third quarter of 2021 as compared to the corresponding period of last year from revenues from performance obligations satisfied in previous periods and a benefit from the change in the valuation of the Russian ruble relative to theU.S. dollar. The following table presentsRussia segment revenues by industry vertical for the periods indicated: Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 Dollars Percentage 2021 2020 Dollars Percentage Industry Vertical (in thousands, except percentages) Financial Services$ 31,542 $ 19,881 $ 11,661 58.7 %$ 77,251 $ 49,695 $ 27,556 55.5 % Travel & Consumer 7,875 4,135 3,740 90.4 % 19,572 11,698 7,874 67.3 % Software & Hi-Tech 662 515 147 28.5 % 1,757 3,000 (1,243) (41.4) % Business Information & Media 500 402 98 24.4 % 1,323 1,201 122 10.2 % Life Sciences & Healthcare 155 169 (14) (8.3) % 534 217 317 146.1 % Emerging Verticals 3,863 4,118 (255) (6.2) % 10,773 7,582 3,191 42.1 % Revenues$ 44,597 $ 29,220 $ 15,377 52.6 %$ 111,210 $ 73,393 $ 37,817 51.5 % Revenues in theRussia segment are generally subject to fluctuations and are impacted by the timing of revenue recognition associated with the execution of contracts and the foreign currency exchange rate of the Russian ruble to theU.S. dollar. Revenues in the Financial Services vertical primarily benefited from increased revenues from customers in the banking sector during the three and nine months of 2021 compared to the same periods in 2020. Revenues in the Travel & Consumer vertical benefited during the three and nine months endedSeptember 30, 2021 from increased revenues from a single retailer. There have been no significant changes in the other verticals during the three and nine months endedSeptember 30, 2021 as compared to the same period in 2020. Currency fluctuations of the Russian ruble frequently impact results in theRussia segment. Ongoing economic and geopolitical uncertainty in the region and the volatility of the Russian ruble can significantly impact reported revenues and profitability in this segment. We continue to monitor geopolitical forces, economic and trade sanctions, and other issues involving this region. 40
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Effects of Inflation Economies in some countries where we operate, particularlyBelarus ,Russia ,Uzbekistan ,Kazakhstan ,Ukraine andIndia have periodically experienced high rates of inflation. Periods of higher inflation may affect various economic sectors in those countries and increase our cost of doing business there. Inflation may increase some of our expenses such as wages. It is difficult to accurately measure the impact it has or could have on our results of 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 and investments to support the growth of our business. As ofSeptember 30, 2021 , our principal sources of liquidity were cash and cash equivalents totaling$1,266.6 million as well as$275.0 million of available borrowings under our revolving credit facility. We have cash in banks inBelarus ,Russia ,Ukraine ,Kazakhstan ,Armenia ,Georgia andUzbekistan , where the banking sector remains subject to periodic instability, banking and other financial systems generally do not meet the banking standards of more developed markets and bank deposits made by corporate entities are not insured. As ofSeptember 30, 2021 , the total amount of cash held in these countries was$194.1 million and, of this amount,$65.3 million was held inBelarus . Cash in this region is used for operational needs and cash balances in those banks change with the operating needs of our entities in the region. We regularly monitor cash held in these countries and, to the extent the cash held exceeds amounts required to support our business operations, we distribute the excess funds into markets with more developed banking sectors. As ofSeptember 30, 2021 , we had outstanding borrowings of$25.0 million under the 2017 Credit Facility, and were in compliance with all covenants specified under the 2017 Credit Facility. OnOctober 21, 2021 , we replaced the 2017 Credit Facility with the 2021 Credit Agreement which provides for the 2021 Revolving Facility with a borrowing capacity of$700.0 million , with potential to increase the borrowing capacity up to$1,000.0 million if certain conditions are met. See Note 7 "Debt" of our condensed consolidated financial statements in "Part I. Item 1. Financial Statements (Unaudited)" for information regarding our debt. 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. 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. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain another credit facility. Based on currently available information and management's current expectations, we anticipate that we have sufficient cash on hand and sufficient access to capital to continue to fund our operations for a significant period of time. However, COVID-19 and related measures to contain its impact have caused material disruptions in both national and global financial markets and economies. The future impact of COVID-19 and the COVID-19 containment measures cannot be predicted with certainty and may increase our borrowing costs and other costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity. 41
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