Grid Dynamics Holdings, Inc.

Good afternoon, everyone, and welcome to Green Dynamics' fourth quarter and full year 2022 earnings conference call. I'm Bing Jiang, head of investor relations. At this time, our participants are in listen-only mode. Joining us on the call today are CEO Leonard Lifshitz and CFO Anil Dhradala. Following their prepared remarks, we'll 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 reconciliations 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. 2022 was one of the best years in terms of revenue and growth in the company's history. Our revenue grew by 47% on the year-over-year basis and almost tripled since 2020, which was the first year of being a public company. This is a phenomenal achievement in spite of horrific war in Ukraine as well as macroeconomic challenges. And by the way, this week also marks the one-year anniversary of the Russian invasion of Ukraine. The last 12 months have been a test to the company's resilience and strengths, and our commitment in ensuring the safety of our employees, uninterrupted delivery of our customers' projects, and inquiry new businesses at the same time. Whether it was evacuating and relocating thousands of employees and their families, seizing all our operations in Russia, opening and expanding offices in Poland, India, Mexico, Serbia, Armenia, Romania, Jamaica, and other countries, and executing our M&A strategy with a new acquisition, as well as completing integration or acquisitions from the past years. And our accomplishments have been nothing less than spectacular. I'm very proud of being part of Grid Dynamics. I would like to thank all employees in making our company the greatest place to work for. As you can see with our results, that we published a short time ago, our Q4 2022 revenue and adjusted EBITDA exceeded our expectations that we provided to all of you in November. Most importantly, this was the second consecutive quarter of performing at our target operating model, both on the gross margin and EBITDA margin front on a non-GAAP basis. The better than expected performance was due to a couple of factors. As we indicated in early November at our last earnings call, we experienced the softness of some of our customers. During the quarter, however, we witnessed stronger than expected demand across some of our existing customers as they continued to ramp on both existing and new programs. In addition, we had a record high new logos. In a nutshell, our viewpoint of the microactive softness in the fourth quarter was more cautious than it was turned out to be. In many ways, we view the current reset across the demand environment as a significant opportunity for great dynamics. Some sectors and customers, especially in technology space, overestimated the post-pandemic demand rebound and are recalibrating their growth investments. Others are seeking ways of leveraging digital transformation solutions in achieving their revenue objectives in a cost-efficient manner. During such periods, Customers increasingly focus on value and meaningful contributions from their IT service partners. We're seeing some of these trends playing out favorably as our customers rationalize their roster of IT partners and focus on differentiated solutions. More importantly, As the industry comes out of the current downward cycle, these trends will offer significant opportunities for growth and we are positioning ourselves to benefit from this going forward. It is in this context that I'm happy to share with you for the first time, Grid Dynamics Gigacube initiative. This is our strategic blueprint that lays out the framework for a company towards a $1 billion revenue. Within the company, we have all personalized the plan, which involves all part of the organization that includes sales, R&D, marketing, engineering, operations, and M&A. I will talk about this later in my prepared remarks. Let's talk about locations. In India, we inaugurated our permanent office in Hyderabad. Our first batch of 30 plus interns from the top university across the country has started their work at our local headquarters in Hyderabad. The response and feedback from our university partnerships have been very positive and over time we expect to scale our internship program in India. Complementing to our India operations is our recent acquisition of Texas-based Mutual Mobile, which has Indian operation also centered around Hyderabad. Mutual Mobile has over 175 employees, and we're in the process of integrating the offices. We continue to ramp up hiring of engineering talents in Europe. Over the last 12 months, our headcount in Poland, Serbia, and Armenia has almost tripled. Similar to our other locations, we expect our relationship with universities and higher interns across these regions. In the quarter, there were several trends, and I want to share with you some of the notable ones. The main trend. In the fourth quarter, similar to the third quarter, we witnessed continued budget scrutiny and demand softness across some of our clients. Even at some point of our larger clients, we also have seen some slowdown. That said, from our perspective, there has been no significant changes in grid dynamics viewpoint since October on how clients are reacting to the current situation. As you may recall, we're very vocal in our commentary around the demand environment. We're announcing our third quarter results in November. It was also reflected in our cautious fourth quarter guidance in which we highlighted softness in demand. Additionally, in the fourth quarter, our new logos contributed meaningfully and offset some of the softness in the existing business. Coming to some additional first quarter segment commentary. Our technologies segment was the largest during the quarter. The growth in the quarter was driven by a combination of large technology customers, which are growing, as well as new logo revenue contribution. Our retail business was slightly up from last quarter and performed again better than our expectations. In the quarter, we also benefited from strong performance from a large global footwear company, a business we have recently won. And finally, our finance segment grew as we continued to make inroads from wealth management applications at our largest banking client. Logo momentum. We closed the fourth quarter with the highest number of new logos in the company's history. During the quarter, we added 13 new enterprise customers with our organic business. Some of the more notable ones to mention include two top tier global Fortune 30 companies, as well as one of the Canada's largest food and pharmacy chain. We're very proud of our achievements in the current environment, and this is a testament of grid dynamics differentiation and value we bring to our customers. Delivery location support. Another important point worth highlighting is related to our delivery operation and how supportive our customers have been in the transitional process. Over the past 12 months, we executed flawlessly in transitioning a significant portion of the workforce while continuing to deliver projects in a timely manner. More importantly, Our customers have not shifted existing programs to our competitors nor terminated business with us due to concern around our delivery locations and our abilities to meet project deadlines. Our new business development efforts are robust as indicated by record year of new logos in 2022. Bottom line. While the challenges were immense, we were not distracted in our business with existing new clients. As we look at 2023, we believe these trends will continue to persist and continue to be bullish on our prospects with new customers. European business. During the quarter, we made good progress with our European clients. As I highlighted earlier, at a global foodware company that we signed recently with a strong ramp in the fourth quarter is on the track of becoming one of our largest European customers in 2023. During the fourth quarter, we also added one of the largest automotive part manufacturing based out of Germany. At our largest European account that sells essential household goods, an industry that has been traditionally recession-proof, um we grew substantially in the fourth quarter and we are working on the three-year roadmap to move from monolith to composable architecture partnership partnerships continue to be an important part of our growth and has become a significant contributor to lead generation During the quarter, we made progress with our tier one partnership players with more competitiveness and certifications. With Amazon AWS, we're now their advanced consulting partner and on track of becoming a premier partner later this year. Additionally, we achieved the service delivery designation for Amazon EKS and AWS cloud migration. With Google, We're one of the very few premier partners with a seven specialization and 40 plus expertise related to Google Cloud. We continue to be primary partner for experimentation of discovery artificial intelligence for retail, Google solution offering for product search and recommendations. With Microsoft Azure, we launched new starter kits to accelerate enterprise migration. And finally, at Commerce Tools, our premier partnership continues to grow around composable commerce solutions that enable global brands to engage with their customers. Mergers and acquisitions. On the M&A front, as you all know, on December 23rd, 2022, we announced the acquisition of Mutual Mobile based out of Austin, Texas with delivery operations out of India. Mutual Mobile is a design and digital platform engineering service company specializing in mobile user experience, product design and augmented as well as virtual reality capabilities the company has focused on healthcare automotive and financial services industry it's also added 175 highly skilled talent to our operations we're already working on the cross-selling opportunities and expect to leverage each other customer base beyond mutual mobile our pipeline for mna opportunities is robust and we are actively exploring multiple opportunities. More importantly, recent change changes in a micro environment have led to more attractive pricing on M&A front, and we look forward to sharing more updates in 2023. As we highlighted in the past, our M&A strategy focuses on capabilities, key customers, and delivery locations. Now about Project GigaQ. Coming to our billion-dollar revenue strategic initiative, which we termed as the Grid Dynamics Gigacube Initiative. As the name implies, there are three dimensions to the plan, in which each dimension, there are three focus areas. Number one. three industry expansion. Within the industry verticals, our focus will be to expand in three areas, life science and pharma, financial services and insurance, and industrial and manufacturing. While we have clients in each of these industry verticals, for the company to scale to 1 billion in revenue will require greater focus on building practices around each of these areas. To enable this vision, we're developing industry-specific solutions based on our robust consulting and co-innovation approach. These solutions are spearheaded by the subject matter experts, which we hire both from the industry and consulting worlds. Our expansion in the three core industries, in addition to serving a broad technology audience, will allow us to smoothen the typical volatility in the industry-wide innovation and technology adoption cycles. Number two, three-time geographies. Customers are increasingly seeking partners that can match the pace of their business. running 24 hours a day. This means building presence across the globe will enable organizations to realize their need with distributed yet integrated teams across three major geographies. It will significantly accelerate time to market with our clients, our onshore and nearshore presence in Americas and Central Europe, is complemented by india-based delivery as you may recall from our last quarterly commentary we continue to make investments in mexico poland and india number three business technology and data intersect leading enterprises differentiate themselves by innovating at the intersection of business technology and data. Grid Dynamics is poised to be a preferred partner for such enterprises because we possess the critical capabilities required for such innovations. Increasingly, our customers are turning to Grid Dynamics to assist with co-innovation at the business level. We're bolstering our consulting capabilities through hiring subject matter experts in selected industries. These investments are helping us to improve the positioning with existing customers and shorten the sales cycle with the new ones by offering starter kits and accelerators. Our investment in the end-to-end digital commerce have rewarded us with deep, meaningful relationships with key customers across industries. We're looking forward to introducing more domain-specific frameworks that are similar in scope. From day one, Grid Dynamics has always been known as a technology company which helped enterprises to realize the promise of cloud computing. The race to out-innovate the competition through technology continues. Our customers are navigating the change of the economic cycle and technological proneness will continue to be relevant to the clients themselves. Infrastructure prices decline while wedges continue to climb. with the help of our cloud native partners and our modern application development practice we're uniquely positioned to enable our customers to do more with less investments the wave of digital transformation brought us a flood of data best performing businesses are data driven However, this requires effectively processing data and incorporating it in the decision-making process. While fully automated decision-making process is still in the future, artificial intelligent knowledge agents are invaluable to make sense of the data. and they augment the traditional data organization practices by servicing the relevant information to the consumers in their preferred modality. AI-assisted product design driven by generative AI models is already successfully used by some of our customers. In the B2B business, we continue to incorporate AI capabilities into our manufacturing service offerings, including visual controls and predictive maintenance. We'll continue to enable our customers to face whatever shifts the future may bring with confidence, as well as prepare for them to grow. During the quarter, Grid Dynamics delivered some notable projects. For a global technology company, we built a flexible data collection platform to acquire aggregated or raw and serialized data and images from the supply chain for further data visualization and analysis. This platform allowed our client to connect around 60 suppliers and more than 150 varieties of the products to control production quality as well as equipment condition. This is the site agnostic solution, which provides strategic value to the client. At a global CPG company, we implemented controls, procedures, and automation, which enabled this customer to restrict access to personally identifiable informational data. We're still providing their engineering teams autonomy to deploy changes at will. Our solution allowed the customer to onboard one of the geographies to the global e-commerce platform, reducing costs of maintenance and bringing their business capabilities to the global standard. For a global multi-brand restaurant company, Green Dynamics helped to build a brand agnostic unified data platform that services various needs of data analysis. Our solution improves their time to market by reorganizing their PODs, improving DevOps processes and various facets of engineering discipline. We helped the client to optimize their workload and switch to more automated cluster usage to save approximately $500,000 per year spendings on data ingestion platform. At a leading membership only big box retailer, we assisted the company to improve their mobile application architecture. This application is designed to help onboard new lines of business easily and add warehouse functions onto a single application. We expect this solution will lead to major improvements in customer satisfaction, along with providing a single interface to all that this brand offers. And now, let me turn the call to Anil, who will discuss Q4 results in more details. Anil?

Thanks, Leonard. Good afternoon, everyone. Our fourth quarter revenue of $80.6 million exceeded our guidance range of $77 million to $78 million and was down by 0.7% on a sequential basis and up 21.1% on a year-over-year basis. On a constant currency basis, our revenue growth on a sequential and year-over-year basis was a decline of 0.8% and a growth of 23.6%, respectively. The 248 bps headwind to revenue growth on a year-over-year basis was due to the strengthening of the dollar relative to the euro and British pound, while on a sequential basis, the stronger euro resulted in a 10 bps tailwind, respectively. The better-than-expected revenue in the quarter was driven by growth at some of our large customers combined with contributions from new logos. Our largest vertical represented 33.7% of our fourth quarter revenues and grew 3.1% on a sequential basis and 38.8% on a year-over-year basis. We continue to witness growth at some of our large technology customers. New logos also contributed during the quarter. During the fourth quarter, retail, our second largest vertical, represented 31.8% of our revenues grew 1.6% on a sequential basis and 17.4% on a year-over-year basis. The sequential increase was driven by revenue contributions from some of our recent logos. Within this vertical, we continue to see customers being cautious in spending with the ongoing macro concerns. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 17.5% of our revenue in the fourth quarter and decreased by 12.3% on a sequential basis and grew 3.4% on a year-over-year basis. The decline on a sequential basis came from our large customers as they readjusted their spending levels to the current macro environment. Finance represented 7.7% of revenue and increased 2.8% on a sequential basis and was up 30.6% on a year over year basis. The growth in the quarter came from our banking customers where we continue to grow with their programs tied to wealth management. And finally, the other segment represented 9.3% of our fourth quarter revenue and was down 0.2% on a sequential basis. We exited the fourth quarter with a total headcount of 3,798, up from 3,746 employees in the third quarter of 2022, and up from 3,274 in the fourth quarter of 2021. The sequential increase of 52 employees or 1.4% was largely due to increase from our acquisition of Mutual Mobile that contributed over 175 employees in the quarter. The increase from 2021 was largely due to a combination of improving demand resulting in headcount increase combined with our acquisition of Mutual Mobile. At the end of the fourth quarter of 2022, our total US headcount was 338 or 9% of the company's total headcount. This was similar to the 9% in the third quarter and was down from 9.9% in the year ago quarter. The year-over-year decline as a percentage of the total headcount was largely driven by greater mix of non-U.S. headcount. The non-U.S. headcount, which we sometimes refer to as offshore, located in Central and Eastern Europe, U.K., the Netherlands, Mexico, and other locations, was 3,460, or 91.1%. In the fourth quarter, revenues from our top five and top ten customers were 43%. versus 44.5% and 61.1% in the third quarter. During the same period a year ago, our top five and top 10 customer concentration was 42% and 57.7% respectively. The increase in concentration across our top five and top 10 on a year-over-year basis was largely driven by increase in concentration from our top customers, primarily in the technology vertical. During the fourth quarter, we had a total of 218 customers, up from 200 in the third quarter, and 221 customers in the year-ago quarter. Fourth quarter customers included 16 coming from our recent acquisition of Mutual Mobile. As a reminder, we only count the revenue-generating customers in the quarter and do not include customers who are inactive during the quarter. Moving to the income statement, our GAAP gross profit during the quarter was $32.3 million, percent versus 32.7 million or 40.3 percent in the third quarter of 2022, and up from 27.3 million or 41.1 percent in the year-ago quarter. On a non-GAAP basis, our gross margin was 32.7 million or 40.6 percent versus 33 million or 40.7 percent in the third quarter of 2022 and up from 27.6 million or 41.4% in the year-ago quarter. On a year-over-year basis, the decrease in gross margin as a percentage was largely due to higher levels of bench. Non-GAAP EBITDA during the fourth quarter that excluded stock-based compensation, depreciation and amortization, Expenses related to geographic reorganization transaction related costs was 16.5 million or 20.4% down from 17.1 million or 21.1% in the third quarter and up from 11.6 million or 17.4% in the year-ago quarter. The year-over-year increase in EBITDA, both in terms of dollars and percentage of revenue, was largely due to a combination of higher levels of revenue, flattish operating expenses, and favorable FX trends. Our gap net loss in the fourth quarter total, a loss of $6.7 million, or a loss of $0.09, based on a share count of 74 million shares compared to the third quarter loss of $6.7 million, or a loss of $0.10 per share, based on 68.6 million shares and a loss of $3.7 million or 5 cents per share based on 65.7 million shares in the year-ago quarter. The 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 fourth quarter, our non-GAAP net income was 10.5 million or 14 cents per share based on 76.5 million diluted shares compared to the third quarter non-GAAP net income of 11 million or 15 cents per diluted share based on 71.9 million diluted shares and $7.1 million or 10 cents per diluted share based on 71.7 million diluted shares in the year-ago quarter. The increase in non-GAAP net income in comparison to the year-ago quarter was largely driven from higher levels of revenue, partially offset by higher operating expenses. On December 31st, 2022, our cash and cash equivalents totaled $256.7 million, up from $255.2 million in the third quarter of 2022, and up from $144.4 million on December 31st, 2021. The key reason for the increase on a sequential basis was operating cash flows, offset by a recent acquisition of Mutual Mobile, which closed on December 23rd, 2022. The key reason for the increase on a year-over-year basis was primarily our share offering and raised $150 million, of which $109.5 million was received by the company, and that was partially offset by the acquisition of Mutual Mobile. Coming to the first quarter guidance, we expect revenues to be in the range of $78 million to $80 million. We expect non-GAAP EBITDA in the first quarter to be in the range of $10 million to $11 million. For the first quarter, 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 are now ready to take questions.