Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Green Dynamic 3rd Quarter 2022 Earnings Conference Call. I am Bin Jiang, Head of Investor Relations. At this time, all participants are in listen-only mode. Joining us on the call today are CEO Leonard Delicious and CFO Anil Dhratala. 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 today's discussion will contain forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainty as described in the company's earnings release and other filings with ICC. During this call, we will discuss certain non-GAAP measures of our performance. Gap to non-gap financial reconsolations 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, Ben. Good afternoon, everyone, and thank you for joining us today. Q3 2022 was another record revenue quarter of $81.2 million, and this marked the ninth consecutive quarter of record revenue in the company's history. We performed exceptionally well across multiple areas. Additionally, our third quarter results exceeded our guidance with respect to the revenue and profitability. For the first time as a public company, we surpassed our target operating model of 40% gross margin and 20% EBITDA margin on a non-GAAP basis. The better than expected performance was due to a couple of factors. First, During the quarter, we witnessed strong demand across some of our large technology customers as they continued to ramp on both existing and new programs. And second, we witnessed strong momentum with recent logo wins. Notably, we entered the fourth quarter in 2023 with a very robust pipeline for the new client business. Customers are even more seeking to partner with Grid Dynamics for their strategic digital transformation initiatives. And we're increasingly viewed as a company that can provide scalable, high quality engineering. I'm confident of our strengths and believe the company is well positioned to grow successfully. Let's talk about locations. In Poland, Our second largest delivery country, our profile and status has been elevated as a technology leader in the Polish business community. We're now fully functional across the four largest cities in Poland, Warsaw, Kraków, Gdańsk and Wrocław. Great Dynamics internships expand across all these locations. In addition, Poland's great support of Ukraine has resulted in our offices hosting a substantial number of Ukrainian employees. During the quarter, I'm happy to highlight that the Green Dynamics Leadership Team was invited by the United States Ambassador to Poland to lead the roundtable business discussion with U.S. corporations, Polish academia, and other institutions during the visit to Warsaw. This is a true testament of the company's strengths and we expect such recognitions to help us in recruiting high quality talent and attracting new global customers who are operating in Poland and other European countries. In India, we completed the incorporation and are now directly hiring on our payroll. We have augmented our leadership with across HR, delivery and operations and partnered with one of the leading universities for internships. In a couple of weeks, we're opening our new office in one of the premium location in Hyderabad's Knowledge Park and expect our presence in this location to help us in attracting and recruiting high quality talent. We also ramped up hiring of engineering talents in several countries, such as Mexico, Serbia, Armenia, Romania, and others. In each of these countries, we offer a unique advantage for our global growth. During the quarter, we expanded our relationship with the university and hired our first group of interns in Armenia and Romania While we're expanding offices in Serbia, we're also opening two new engineering centers in the two cities in Romania. As you all know, over a couple of past quarters, we executed flawlessly in transitioning a significant proportion of our workforce while continuing to deliver projects in a timely manner. And I'm happy to report We continue to operate across all our geographies without any disruptions. Furthermore, with our distributed delivery model, projects are spread over across different geography regions, thereby lowering the geographic delivery risks. Our company has always been at the forefront of emerging technologies. Within the IT service industry, we're one of the first companies to embrace cloud engineering, big data, machine learning, as well as other innovative products and offerings for large enterprise clients. We continue to maintain our technology leadership and always keep R&D at the center of our service offerings. Our chief technical officer with his team spearhead a number of strategic initiatives to support growing customer digital transformation demand. Regarding the personnel, we have hired subject matter experts to build expertise in selected verticals, such as manufacturing, supply chain, life science, and financial services, as well as insurance. Regarding capabilities, we've made a substantial progress in building custom IP solutions, targeting specific industry verticals. These include accelerators and engineering implementation frameworks, such leveraging distributed agile, cloud and DevOps, as well as automation. Such initiatives clearly demonstrate the reduction of implementation risks and customer costs. In the quarter, There were several positive trends and I want to share with you a few of the notable ones. Demand trends. In the Q3, we witnessed enhanced budget scrutiny across customer bases with some retail clients being more sensitive. We expect the trend to persist in Q4. Meanwhile, The majority of our clients continue to invest in revenue generating programs, which tend to be more insulated from macro headwinds. In addition, Q3 revenue also benefited from our new logo business development. And based on the current trends in Q4, we expected to continue strengths from the new logos. Coming to some additional third quarter segment commentary. Our technology segment was the largest during the quarter. And similar to the Q2, some of our largest technology customers continued to ramp aggressively and support our growth as we expanded into new geographies. Our financial segment grew healthy as we benefited from new programs tied to wealth management applications. Logo momentum. In the third quarter, we added several new logos across industries, which included a Fortune 500 climate control equipment manufacturer, a top specialty retail, and a large online consumer platform. I'm happy to report that in September, we signed new contracts and started engaging with two Fortune 30 companies. One is a global automotive manufacturer, And another one is the leading membership only discount chain. We received revenues from these two customers starting October. European business expansion. During the quarter, we made a good progress with our European clients. Cybersecurity is one of our strategic focus areas. We expanded business with a number of cybersecurity software companies. In addition, We witnessed a strong ramp with a global footwear company. We also continued to scale our business with the large UK-based home improvement chain. And finally, we secured new business with a major Nordic truck manufacturer. New business pipeline. We entered the fourth quarter in 2023 with a robust pipeline of new logos and strong demand across our non-retail verticals. On the new logo front, We're witnessing strong momentum and expect adding more logos in Q4 than we've done in Q3 this year. At some of our new large customers, we also witness faster ramp up as they're willing to scale business more rapidly. We're expanding our business within existing programs and we expect to contribute from them meaningfully in 2023. Partnerships. Partnerships are increasingly playing an important role in our ability to attract new clients. In the Q3, 12 new logo wins came through our partnership channel. We also made progress in our large cloud partners. With Microsoft Azure, we were confirmed gold status. At AWS, we were recognized as a launch partner for their EKS delivery program, which focuses on application modernization across enterprises. At Google Cloud Platform, we have one of the largest number of specialization and more all IT service providers. In addition to hyperscalers cloud partners, we strengthen our alliances with SaaS and product companies in digital commerce, data, and advanced analytics. M&A. M&A continues to be an important component of our growth strategy. As a reminder, our M&A focuses on capabilities, key customers, and delivery locations. In early September, we successfully concluded raising primary capital. One of the key reasons for this raise was M&A. Our current pipeline is robust and we're actively exploring multiple acquisition opportunities to expand our capabilities, complemented with our geographic expansion strategy. During the quarter, Redynamics delivered some notable projects. Number one, for a global technology company, we proposed, designed, and implemented Snowflake integration to run business intelligence reports on petabytes of data. As a result, end users were provided with enhanced reporting capabilities to drive the company's business and operational decisions. This solution met all the required data service level agreements for large scale data management and resolved previously observed challenges in maintenance capacity and scalability. For a global technology leader in the cloud space, Green Dynamics was a key partner in the development of one of the core B2B products dedicated to artificial intelligence driven product discount capabilities. Great dynamics contribution included end-to-end quality engineering of the product and end customer onboarding tool suite. The product gives end users a tailored product discovery experience and dramatically increases conversion through better search and recommendations relevancy. At a leading financial service firm, we help the client to modernize the primary customer portal. Our solution provides greater flexibility and speeds up integration processes with each business unit. The modernized portal provides end users also with a more streamlined experience and highlights financial products and services relevant to their needs. For one of the largest manufacturing service company, we developed an intelligent cloud-based module for their supply chain management system. This module aggregates information about excessive stock, matches this against the contractual terms, and allows to generate claims. It's currently in production and has helped our client in collecting additional revenues. With that, let me turn the call over to Anil will discuss Q3 in more details. Anil?

Thank you, Leonard, and good afternoon, everyone. Our third quarter revenue of $81.2 million exceeded our guidance range of $78.5 million to $80 million and was up 4.9% on a sequential basis and 40.1% on a year-over-year basis. During the quarter, our revenue was negatively impacted by the weaker Euro and British pound against the US dollar. On a constant currency basis, our revenue growth on a sequential and year-over-year basis was 5.8% and 43.1% respectively. The better than expected revenue in the quarter was driven by strong demand from our large technology customers and revenue contribution from recent logo wins. TMT, our largest vertical, represented 32.4% of our third quarter revenues and grew 12.6% on a sequential basis and 49.7% on a year-over-year basis. We witnessed strength across our customer base with some of our largest technology customers where we grew business across existing new programs. During the third quarter retail, our second largest vertical represented 31.1% of our revenues and decreased 0.8% on a sequential basis and grew 38.3% on a year-over-year basis. The sequential decline was largely driven by some customers who were more cautious in spending with the ongoing macro concerns. We expect these concerns to persist in Q4 at some of these customers. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 19.8% of our revenue in the third quarter and decreased 0.2% on a sequential basis and grew 43.3% on a year-over-year basis. The slight decline on a sequential basis came from the decline at some customers, and this was offset by growth at our largest CPG customer. Finance represented 7.5% of revenue, increased 20.3% on a sequential basis, and grew 16.3% on a year-over-year basis. On a sequential basis, we witnessed growth across most of our customers tied to financial services, banking, and insurance. And finally, the other segment represented 9.2% of our third quarter revenue and was up 1.1% on a sequential basis. We exited third quarter with a total headcount of 3,746, down from 3,763 employees in the second quarter of 2022, and up from 2,884 in the third quarter of 2021. The headcount reduction was driven by a couple of factors. First, at a company-wide level, we streamlined our engineering bench. Second, In the quarter, our pace of hiring moderated to align with demand. That said, our average billable headcount increased on a sequential basis in the third quarter over the second quarter, and this partially contributed to the increase in revenue. At the end of the third quarter of 2022, our total US headcount was 322, or 9% of the company's total headcount, and remained on the same level compared to the second quarter of 2022, and down from 11% on a year-ago quarter. The year-over-year decline as a percentage of the total headcount was largely driven by greater mix of non-US headcount. Our non-US headcount, which we sometimes refer to as offshore, located in Central Eastern Europe, UK, Netherlands, and Mexico, and other locations, was 3,424, or 91% of our total headcount. In the third quarter, revenues from our top five and top 10 customers were 44.5% and 61.1% respectively. In the second quarter, our top five and top 10 customer concentration was 44.2% and 60.2% respectively. And during the same period a year ago, our top five and top 10 customer concentration was 42% and 58.2% respectively. During the quarter, we had a total of 200 customers, down from 208 customers in the second quarter and 215 customers in the year-over-quarter. The sequential decline in our customers was largely driven by our commercial business, or DOCS, which we acquired in December 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 $32.7 million or 40.3%, up from $28.9 million or 37.3% in the second quarter of 2022, and up from $25.3 million or 43.6% in the year-ago quarter. On a non-GAAP basis, our gross profit was 33 million, or 40.7%, up from 29.1 million, or 37.7% in the second quarter of 2022, and up from 25.4 million, or 43.9% in the year-ago quarter. The sequential increase in gross margin as a percentage of revenue was driven by a combination of third quarter seasonality with more working days and favorable FX trends with the stronger dollar. Non-GAAP EBITDA during the third quarter that excluded stock-based compensation, depreciation, and amortization expenses related to geographic reorganization, transaction and other related costs was 17.1 million or 21.1% of revenue, up from 13.3 million or 17.2% in the second quarter of 2022, and up from 12.5 million or 21.6% in the year-ago quarter. The sequential increase in EBITDA, both in terms of dollars and percentage of revenue, was due to a combination of higher levels of revenue flattish operating expenses, and favorable FX trends. Our gap net lost in the third quarter totaled 6.7 million or a loss of 10 cents based on a share count of 69 million shares compared to the second quarter loss of 13.2 million or 20 cents per share based on 67 million shares and a loss of 0.5 million or one cent per share based on 63 million shares in the year-ago quarter. The sequential and year-over-year increase in GAAP net loss was largely due to higher levels of stock-based compensation and geographic reorganization costs offset by higher levels of revenue. On a non-GAAP basis, in the third quarter of our non-GAAP net income was 11 million or 15 cents per share based on 72 million diluted shares compared to the second quarter of 2022 non-GAAP net income of 8.2 million or 12 cents per diluted shares based on 70 million diluted shares and 7.9 million or 11 cents per diluted share based on 69 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 net income in comparison to the year-ago quarter was largely from higher levels of revenue, partially offset by higher levels of operating expenses. Now coming to the balance sheet, on September 30, 2022, Our cash and cash equivalents totaled $255.2 million, up from $150 million in the second quarter of 2022 and up from $144.4 million in the fourth quarter of 2021. During the quarter, we conducted a primary share offering and raised $115 million, of which $109.5 million was received by the company. Coming to the fourth quarter guidance, we expect revenues to be in the range of $77 million to $78 million. With this, our full year 2022 revenue expectations will be in the range of $307 million to $308 million, or 45% to 46% growth on a year-over-year basis. we expect our non-GAAP EBITDA in the fourth quarter to be in the range of 16.4% to 17% or $12.6 million to $13.2 million. For 4Q 2022, we expect our basic share count to be in the 74 to 75 million range and our diluted share count to be in the 77 to 78 million range. That concludes my prepared remarks. Bin, we're ready to take questions.