Grid Dynamics Holdings, Inc.

everyone welcome to great dynamic second quarter 2022 earnings conference call i'm bing chiao head of investor relations at this time our participants are in this only mode join us on the call today a ceo lamma delicious and cfo a little de rodler following their prepared remarks we will open the call to your questions please note today's conference is being recorded Before we begin, I would like to remind everyone that this discussion will contain forward-looking statements. This includes our business and financial outlook and answers to some of your questions. Such statements are subject to the risks and uncertainties as described in the company's earnings release and other findings with the SEC. During this call, we will discuss certain non-GAAP measures of our performance. gap to non-gap financial reconciliation and supplemental financial information are provided in the earnings press release and the AK filed with SEC. You can find all the information I have just described in the investor relations section of our website. With that, I will now turn the call over to Leonard, our CEO.

Thank you, Bin. Good afternoon, everyone, and thank you for joining us today. Q2 2022 was another record revenue quarter of $77.3 million, and this marked the eighth consecutive quarter of record revenue in a company's history. I want to emphasize these results, which are definitely exceptional given the circumstances the world has been facing over the past five months. Grid dynamics executed flawlessly in transitioning a significant proportion of the workforce while continuing to deliver projects in a timely manner. I will go into details shortly. Three months ago, I committed that we will exit Russia. Today, I would like to report that we ceased Russian activities and we're now geographically more diversified, as well as continuing to expand across all our industry client verticals. More importantly, our customers demonstrating unwavering faith in grid dynamics capability. I'm confident of our strengths and our ability to successfully navigate the business in the future, despite the geopolitical challenges. As our quarterly results reported, we progressed across multiple fronts of our business. This includes scaling our global presence with new locations, expanding our partnerships and adding new customers. Great dynamic solid results over the past several quarters have shown the company incredible resilience in balancing back stronger from the global pandemic crisis first and recently from the war perpetuated by Russia. It is a true testament of the company's strong fundamentals, teamwork, and commitment to the business and the shareholders. On this call, we'll provide insights into the demand environment, global operations, and financial performance for the second quarter 2022, and also provide outlook for the third quarter. Again, in the second quarter, our revenue of 77.3 million well exceeded our expectations that we shared with you three months ago. We ended the second quarter with an adjusted EBITDA of $13 million, which is 17% of our revenue. The better than expected performance were due to a couple of factors. First, we witnessed stronger demand across our industry verticals and customers. Second, we had minimum disruption to billability as we transitioned out of Russia. And more importantly, customer interest in engaging our services around digital engineering continued to be strong in this quarter. During the quarter, our geographic footprint grew across the world. In Europe, our new office in Switzerland will become our European headquarters, while London and Amsterdam will continue to serve as customer-facing centers of excellence. India, Mexico, and Poland will play strategic roles in scaling delivery footprint over time. India, with its extensive talent pool, will offer an unmatched ability to scale our operations in the long term. Mexico, with its large pool of talent engineers and convenient time zone to our U.S.-based clients, offer an excellent near-shore presence. Several large clients have welcomed our near-shore strategy and have expressed interest in partnering with our Mexican operations. And finally, Poland, with Advantage being one of the largest country in Central Europe with a strong IT presence, we'll continue to support our operations as we scale in Europe. We also ramped up hiring of the engineering talent on several countries such as Romania, Armenia, and Serbia, and some others. Each of these countries offer a unique advantage in our global growth. In the quarter, there were several positive trends which I would like to share with you, and there are a few notable ones. Demand trends. In the second quarter, the demand across our verticals and customers was strong. This was indicated by the sequential and year-over-year growth across all of our industries and majority of our clients. As you know, the current macro recession concern has been on everyone's mind, and our clients have been no exception. Currently, we're not witnessing significant widespread headwinds. It's still more customer-specific in nature. And there are a couple of reasons for that. First, many of our clients' digital transformation initiatives are given higher priority and we're increasingly involved in a project of strategic importance in comparison to some of the past experience. Second, we're now a more diversified company. with less exposure to recession-sensitive retail brick and mortar business. Even within our retail business, there are mix shifting away from some of those sensitive areas. And finally, third, healthy pickup in our new logos over the several quarters enabled us to be more resilient as we go across a larger customer base. Coming to some additional second quarter segment commentary. Similar to last quarter, our largest technology customer continued to ramp aggressively and support our growth as we expanded into new geographies. Within our retail business, strong sequential growth was driven by our e-commerce friendly retail customers. At our largest CPG customer, we continue to grow. And more importantly, we finalized on several key programs, not just for this year, but for 2023 as well. We're bullish on our prospects and continue to leveraging our position as a strategic partner of many. Logo momentum. In the quarter, we added five new logos across industries. Of these, one was a global food manufacturing retailer, one was one of the largest distributor of beverages in the United States. One was a delivery service operation. We also had additional logos in technology and healthcare space. Our pipeline in the third quarter is healthy and I expect to share some significant logo wins next quarter. Partnerships. We're witnessing good momentum on the partnership front. In the second quarter, we saw healthy growth in our pipeline and expect partnerships to play increasingly important roles in our growth. During the quarter, we received an award from the Mac Alliance for the best healthcare project. Our capabilities and strengths are getting greater prominence across our partners' ecosystems, and this in turn is leading to the new opportunities. We're also enhancing our team by adding a senior sales executive to focus specifically on building opportunities with one of the top three cloud providers. And finally, some of the largest crowd provider partners will launch new product starter kit and enhance our competencies and specializations. During the quarter, Grid Dynamics delivered also some of the notable projects. For a global technology company, we built a centralized continuous integration platform. Our solution standardized best practices for collaboration among engineering teams and increases their productivity and transparency for the engineering leadership. The platform currently serves over a thousand engineers and is planned to be rolled out on a company-wide basis. At a global CPG company, we implemented a unifying interface system for wholesale orders. This system will not only significantly reduce the amount of manual work, but also speeds up order processing and fulfillment. As a key technology partner to a global cybersecurity company, Grid Dynamics helped to build the next generation cloud solution for the security incident and event management. Our solution migrated the on-premise storage model to the major cloud platform. We built a high-volume, high-velocity security event ingestion pipeline, anomaly detection, and behavior analytics. The solution enables a competitive edge in the marketplace by offering near infinite scale, speed, and low cost of ownership. We're one of the largest manufacturing services company. We developed an intelligent cloud-based supply chain platform that provides real-time visibility across the entire ecosystem. It covers the whole process from planning to delivery and utilizes big data, machine learning and predictive analytics. The system allows to practically identify and quantify potential risk losses and suggest mitigation options with the proper cost estimates. Currently, our client uses the system to manage tens of thousands of the suppliers across the globe. With that, let me turn the call over to Anil, who will discuss Q2 results in more details. Anil?

Thanks, Leonard. Good afternoon, everyone. Our second quarter revenue of 77.3 million exceeded our guidance of 72 to 73.5 million and was up 8.3% on a sequential basis and 62.2% on a year-over-year basis. The better-than-expected revenue in the quarter was driven by strong demand for our services across industry verticals. During the second quarter, retail, our largest vertical, representing 32.9% of revenues, grew 9.2% on a sequential basis and 100% on a year-over-year basis. The strong sequential and year-over-year growth was driven by strength across our customer base from e-commerce friendly and brick-and-mortar retailers as they continue to focus on digital transformation initiatives. Our TMT vertical was our second largest vertical and represented 30.2% of our second quarter revenues and grew 9.1% on a sequential basis and 45.2% on a year-over-year basis. We witnessed strength across our customer base. Additionally, during the quarter, one of our largest technology customers aggressively grew as we expanded into new geographies. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 20.8% of our revenue in the second quarter and grew 7.4% on a sequential basis and 62.5% on a year-over-year basis. The growth during the quarter primarily came from the ramp at our largest CPG customer. Finance represents 6.5% of revenue, increased 11.5% on a sequential basis, and grew 24% on a year-over-year basis. And finally, the other segment represented 9.6 of our second quarter revenue and was up 2.8% on a sequential basis. The growth came from healthcare as well as our new customers. We exited the second quarter with a total headcount of 3,763, up from 3,671 employees in the first quarter of 2022, and up from 2,510 in the second quarter of 2021. In the second quarter, we hired aggressively across our locations in Europe, India, and North America. This headcount addition was offset by a couple of factors. First, as we exited Russia, there were headcount predictions that included ramp down of overhead and administration personnel. Second, we scaled down our bench of engineers, which had grown to compensate for any war-related supply disruptions. As we progress through the second half of the year, we expect our headcount to continue to expand. At the end of the second quarter of 2022, our total US headcount was 326, or 9% of the company's total headcount, and remained on the same level compared to the first quarter of 2022. and down 11% in the year-ago quarter. The year-over-year decline as a percentage of the total headcount was largely driven by greater mix of our non-U.S. headcount, our non-U.S. headcount, which we sometimes refer to as offshore, located in Central and Eastern Europe, U.K., Netherlands, and Mexico, and other locations was 3,437, or 91%. In the second quarter, revenues from our top 5 and top 10 customers were 44.2%, and 60.2% respectively. During the same period a year ago, our top five and top 10 customer concentration was 45.4% and 62.3% respectively. The diversification across our top five and top 10 was driven by a combination of factors that included new lower ramp, industry diversification, and our acquisition. During the second quarter, we had a total of 208 customers, down from 213 customers in the first quarter and 212 customers in the year-ago quarter. The sequential decline in our customers was largely driven by our commercial business, or DOCS, which we acquired in December of 2020. As a reminder, we only count the revenue-generating customers in the quarter and do not include customers who were inactive during the quarter. Moving to the income statement, our GAAP gross profit during the quarter was $28.9 million or 37.3%, up from $26.8 million or 37.5% in the first quarter of 2022, and up from $19.8 million or 41.5% in the year-ago quarter. On a non-GAAP basis, our gross profit was $29.1 million or 37.7%, up from $27 million or 37.8% in the first quarter of 2022, and up from $19.9 million or 41.8% in the year-ago quarter. The sequential and year-over-year increase in gross profit was largely driven by increase in revenues. Non-GAAP EBITDA during the second quarter that excluded stock-based compensation, depreciation and amortization, expenses related to geographic reorganization transaction other related costs were 13.3 million or 17.2 percent of revenue up from 11.4 million or 15.9 percent in the first quarter of 2022 and up from 9.7 million dollars or 20.4 percent in the year ago quarter the sequential increase in ebita was due to a combination of higher levels of revenue and flattish operating expenses Our gap net loss in the second quarter totaled a loss of $13.2 million or loss of 20 cents based on a share count of 67 million shares compared to the first quarter loss of $2.7 million or a loss of 4 cents per share based on 67 million shares and a loss of $1.5 million or a loss of 3 cents per share based on 54 million shares in the year-ago quarter. The sequential and year-over-year Increase in gap net loss was largely due to higher levels of stock-based compensation and geographic organization costs offset by higher levels of revenue. During the second quarter, we incurred $6 million in geographic reorganization costs. On a non-gap basis, in the second quarter, our non-gap net income was $8.2 million, or 12 cents per share based on 70 million diluted shares, compared to the first quarter of 2022 non-GAAP net income of $6.9 million or 10 cents per diluted share based on 70 million diluted shares and $6.1 million or 10 cents per diluted share based on 61 million diluted shares in the year-ago quarter. The key reasons for the increase in the non-GAAP net income on a sequential basis were higher levels of revenue and flattish operating expenses. The increase in the non-GAAP NIT income in comparison to the year-ago quarter was largely from higher levels of revenue partially offset by higher operating expenses. On June 30, 2022, our cash and cash equivalents total $150 million, down from $153.3 million in the first quarter of 2022, and up from $144.4 million in the fourth quarter of 2021. During the second quarter, we paid down our line of credit to the amount of $5 million. Additionally, in the second quarter, we accrued short-term liabilities of roughly $3 million that we expect to pay out in the third quarter. We also invested $1 million into a technology company. Coming to the third quarter guidance, we expect revenues to be in the range of $78.5 million to $80 million. we expect our non-GAAP EBITDA in the third quarter to be in the range of 12.6 million to 13.6 million, or 16% to 17% of revenue. For Q3 2022, we expect our basic share count to be in the 67 to 68 million range, and our diluted share count to be in the 70 to 71 million range. That concludes my prepared remarks. Bin, we're ready to take questions.