Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Green Dynamics First Quarter 2023 Earnings Conference Call. I'm Bin 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 Dharadala. 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-GAF measures of our performance. Gap to non-gap financial recalculations 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. As you have seen from our results that we published a short time ago, our Q1 2023 revenue and profitability were the high end of the expectations that we provided in February. In the current environment, I'm delighted with our results. This is a testament of grid dynamics strengths and value we bring to our clients. There were many positives in the quarter. Grid dynamics continue to provide comprehensive partnerships with many clients. Momentum at winning new logos in the first quarter with global tier ones. Meaningful contribution from our recent logo wins toward revenue. Success with our geographical diversification strategy. India became one of our largest delivery countries. I would like to also to emphasize operational progress with our giga cube strategy that will propel the company toward a billion dollar revenue. I will talk about each of these elements in my prepared remarks and Q&A. On the macro front, our viewpoints have remained consistent since November 2022. We're in the midst of a cautionary spending environment across industry verticals. Clients are closely looking at the health of their own business and making short-term investment decisions. Well, this has resulted in volatility across some of our client and industry verticals. Recession-resistant industries continues to invest. Despite the near-term uncertainties, in many ways we view the reset across the demand environment as a significant opportunity for us. During times when the customers are recalibrating their gross investments and now they are seeking a way of leveraging digital transformation solutions and achieving their revenue objectives in a cost-effective manner, Green Dynamics adapts to the changing environment. This is something we have witnessed in previous economic cycles, and this time is no exception to the trend. Last quarter, we shared with you for the first time our GigaCube initiative. I'm happy to report that during this quarter, we made good progress across multiple aspects, including personnel, processes, and customers. Recently, we won business at a pharmaceutical company and a global financial service company by leveraging our expertise and the target verticals of the GigaCube initiative. As you know, GigaCube is our strategic blueprint that lays out a framework for our company toward billion-dollar revenue. In many ways, the GigaCube is one of the most important strategic initiatives reshaping the company. It involves all parts of the organization that include sales, R&D, marketing, operation, and M&A. At its core, there are four key business drivers which are guiding our effort. First, our investment in technology innovation that drive our customers' growth and optimizes their costs. Second, our efforts in moving from our historic 2, 5, 10 million dollars per customer revenue to 5, 10, 20 million dollar revenue model. Third, we introduced Follow the Sun model where engineering teams simultaneously collaborate across our three key geographies in North America, Europe, and India. And finally, fourth, partnerships with notable cloud providers and domain specialists to drive business and large deals. Coming to our locations. As you all know, we have delivery locations across the globe. Our Follow the Sun strategy enables our clients to be served in an uninterrupted fashion around the clock. In India, we have been scaling our operations. Our new office in the technology park in Hyderabad is operational and now staffed by employees that include from our recent acquisitions. With employees from mutual mobile and next-year technologies, as well as our own organic expansion, India is now one of our top geographies from a headcount perspective. Furthermore, with the acquisition of next-year technology, in addition to a strong presence in Hyderabad, we now have access to a large, talented pool of engineers in Chennai. As you may know, Chennai is a key automotive and manufacturing hub in India, and we expect to leverage as we expand our manufacturing supply chain industry vertical. Additionally, our integration with Mutual Mobile is in full swing, and we have started to implement synergies across engineering operations and other backend functions. We continue to ramp up hiring of the engineering talent in Europe. Over the last 12 months, our headcount in Poland, Serbia, and Armenia has almost tripled. Similar to our other locations, we expanded our relationship with universities and hired interns across these countries and others. In the quarter, there were several trends, and I would like to share with you some of the notable. Demand trends. In the first quarter, similar to the fourth quarter, we witnessed continued budget scrutiny and demand softness across some of our clients. That said, we did see some patterns emerging across our customer base. First, customers are taking a closer look at reviewing their roster of IT partners. In many cases, they have rationalized their relationship by cutting down a number of partners they work with. For a substantial number of our clients, Green Dynamics has been nominated as a preferred vendor. Secondly, customers are increasingly diversifying their projects to lower cost offshore locations with an ultimate mandate to preserve the engineering quality. Such trends play to our favor as we have a global delivery footprint and location of choice for our clients. And finally, third, clients are increasingly focused on the business-critical initiatives that bring immediate results. This is the area which we are successfully partnering with our clients with our differentiated offering. Logo Momentum. We started the year strong and closed the first quarter with a total of new nine enterprise customers in our organic business. This excludes the customers from our recent acquisitions and our commercial business. Some of our notable ones to mention include a global sport apparel company, a US-based telecommunication company, a global biotech and pharma company, a major outdoor lifestyle company, as well as an enterprise edge to cloud convergence company. We're very proud of our achievements, and this is a testament of our differentiation and value we bring to our customers. Technology highlights. Innovative technologies have always been key drivers of the growth and success for grid dynamics. And we're excited to share the recent developments. As part of our generative artificial intelligence offering the researchers from green dynamics labs partner with our customers to employ large language models and text guided image generation to the applications in product design wealth management data harmonization and customer support With the domain solutions, we released our inventory allocation optimization solution, and we continue to strengthen our portfolio of supply chain analytics and order management offering. We continue to expand and deepen our service offering and partnership in the semantic search and composal commerce space, with starter kits and accelerators that enable our customers to quickly and easily implement these cutting-edge technologies. Delivery location support. In the first quarter, our delivery operations remained flawless. Like previous quarters, clients continued to support our geographic diversification in terms of the location for the engineering support, but not shifted any of the existing programs to our competitors or have witnessed our clients terminating business with us due to concern around delivery location and our ability to meet product and project deadlines. But the new clients They have a choice of our 13 countries where we can deliver projects and scale. As we look further in 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 in expanding our European footprint. In cybersecurity space, we designed and delivered a single sign-on connector for a cloud-native order application system company. For a leading cybersecurity company specializing in passwordless solutions, we supported their cloud-based products to scale and serve large enterprises. On the digital commerce front, we're leading several modernization initiatives in collaboration with multiple Mac Alliance partners. Examples include transformation from a monolithic to composed architecture for a global footwear brand and UK-based luxury brand. Partnerships. Partnerships continue to be an important part of our growth and have become a significant contributor to lead generation. During the quarter, we made progress with our tier one partnership players with more competencies and certifications. A significant portion of our new enterprise clients came from our partnerships. With AWS, we qualified for a program that allows us access to large cloud migration initiatives by Amazon. With Microsoft Azure, we qualified for new specializations that will result in access to new clients and opportunities. Our partnerships will focus on building alliances with companies that will enable faster transition of enterprises to composable and intelligent architecture in areas of innovation like digital commerce and supply chain. Following this strategy, we established new partnerships with a marketing software platform and a supply chain platform during the quarter. M&A. On April 18, 2023, we announced the acquisition of Nexphere Technology based out of Tampa, Florida with delivery locations in Hyderabad and Chennai, India. This comes close to our acquisition of Mutual Mobile in December 2022. NextFear is an end-to-end custom engineering software company with 18 years of experience and serving clients across industries. The company has built a good reputation and proven tech record across the healthcare, fintech, CPG and manufacturing. These industries are key to grid dynamics, giga cube strategy of diversifying and growing to a billion dollar revenue company. It also adds 200 plus employees to our operations. We're excited about the cross-selling opportunities and expect to leverage each other customer base. Beyond the exterior technologies, our pipeline for M&A opportunities is robust and will work actively exploring multiple industries. As we highlight in the past, our M&A focuses on capabilities, key customers, and delivery locations. During the quarter, Grid Dynamics delivered some notable projects. For a global technology company, we built a quality monitor application, which enabled their engineers to quickly develop new features with high quality, improved user experience and enhanced maintainability of existing solutions. By utilizing a modernized code base, this application increased test coverage and introduced advanced capabilities. We expect this solution will allow our client to deliver new features with faster time to market and achieve higher end user satisfaction. For a leading financial and investment service company, Green Dynamics developed a new rebalancing application, which was used to adjust the portfolio's asset allocation to the level defined by investment plan. Sophisticated mathematical algorithms were implemented for the optimization of rebalancing results. Our solution helped the client to reduce their rebalancing time from days to minutes while still achieving the same excellent performance. At the major automotive manufacturer, we participated in launching a cloud-based foundation platform for the client's e-commerce channel. The platform aims to establish a unified global approach to reinforce the brand image and provide an optimal shopping experience with consistent product information and price. We expect it to serve as a foundation for other strategic initiatives, such as direct-to-consumer sales, zero-emission vehicles. For a mundane national food and beverage company, 3Dynamics selected technology and developed a computer vision mobile application for inventory management and competitor analysis for use by merchandise. Built of tailored machine learning model, this solution is able to process images on the edge with mobile devices in offline mode, reducing cloud consumption costs. After a successful rollout, in certain markets, this mobile application has been approved for a global rollout. I want to bring investor attention to three important points. First, over the past 15 years, we have seen multiple economic cycles. With every economic cycle, Green Dynamic has been a net beneficiary of its customers' wallet share, and this economic cycle is no exception. Second, our current pipeline of new customer engagements continues to be strong. We started this year with nine enterprise clients that we expect to ramp up meaningfully over the time. With the remainder of 2023, I'm bullish on our new clients' opportunities. And finally, the third, we have operationalized our GigaCube initiative and see a clear path toward continuing growth. Now, let me turn the call over to Anil who will discuss Q1 results in more detail. Anil?

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenue of 80.1 million was slightly higher than our guidance range of 78 million to 80 million and was up 12.1% on a year-over-year basis. On a constant currency basis, our year-over-year growth was 13.7%. The 160 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. During the quarter, we witnessed growth from existing customers as well as new local revenue contributions offset by macro-driven caution from others. TMT, our largest vertical, represented 33.5% of our first quarter revenues and decreased 1.3% on a sequential basis and grew 25% on a year-over-year basis. On a sequential basis, we witnessed some caution at some of our TMT customers. This was offset by growth, both from existing and new logos. During the first quarter retail, our second largest vertical representing 31.7% of our revenues decreased 1% on a sequential basis and grew 9% on an year-over-year basis. Within the retail vertical, on a sequential basis, we witnessed growth from areas such as home improvement and specialty retail, offset by softness at brick and mortar departmental stores. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 15.8% of our revenue in the first quarter, a decrease of 10.2% on a sequential basis, and 15.6% 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. The finance vertical represented 8.1% of revenue, an increase of 4.3% on a sequential basis, and was up 43.9% on a year-over-year basis. The growth in the quarter came from our banking customers, where we continued to grow with their programs tied to wealth management. And finally, the other segment represented 10.9% of our first quarter revenue and was up 17.5% on a sequential basis. The strong sequential growth was driven by our healthcare and pharma customers. We exited the first quarter with a total headcount of 3,744, down from 3,798 employees in the fourth quarter of 2022. and up from 3,671 in the first quarter of 2022. The sequential decrease of 54 employees or 1.4% was largely due to our efforts in rationalizing our non-engineering headcount. The increase from 2022 was largely due to a combination of improving demand resulting in headcount increase combined with our acquisitions. At the end of the first quarter of 2023, our total US headcount was 304, or 8.1% of the company's total headcount. This was slightly down from 8.9% in the fourth quarter and 8.7% in the year-ago quarter. The sequential and year-over-year decline as a percentage of the total headcount was largely driven by growth at our offshore locations, resulting in greater mix of non-US headcount. Our non-US headcount located in the Central and Eastern Europe, India, UK, the Netherlands and Mexico, and other locations was 3,440, or 91.9%. In the first quarter, revenues from our top 5 and top 10 customers were 40.8% and 60.4% respectively, versus 42.8% and 58.3% in the same period a year ago. During the first quarter, we had a total of 220 customers, up from 218 in the fourth quarter and 213 in the year-ago quarter. During the quarter, we witnessed growth in new logos from our organic enterprise business. 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 $28.6 million or 35.7% versus $32.3 million or 40.1% in the fourth quarter of 2022 and up from $26.8 million or 37.5% in the year-ago quarter. On a non-GAAP basis, our gross margin was $29 million or 36.3% versus $32.7 million or 40.6% in the fourth quarter of 2022 and up from 27 million or 37.8% in the year-ago quarter. The decline in gross margin as a percentage on a sequential basis, both on a GAAP and non-GAAP basis, was largely due to higher levels of bench. Non-GAAP EBITDA during the first quarter that excluded stock-based compensation, depreciation and amortization, restructuring, and expenses related to geographic reorganization, transaction, and other related costs was 10.8 million or 13.5% versus 16.5 million or 20.5% in the fourth quarter and down from 11.4 million or 15.9% in the year-ago quarter. The sequential decrease in non-GAAP EBITDA was largely due to a combination of lower levels of gross margin as a percentage combined with higher operating expenses. On the operating expense front, most of the increase relative to the fourth quarter was from our acquisition of Mutual Mobile. Our GAAP net loss in the first quarter totaled a loss of $8 million or a loss of 11 cents based on a share count of 74.5 million shares compared to the fourth quarter loss of $6.7 million or a loss of 9 cents based on a share count of 74 million and a loss of $2.7 million or 4 cents per share based on 66.9 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 higher operating expenses offset by higher levels of revenue. On a non-GAAP basis, in the first quarter, our non-GAAP net income was $6.5 million or $0.08 per share based on 77.1 million diluted shares compared to the fourth quarter non-GAAP net income of 10.5 million or $0.14 per share based on 76.5 million shares and $6.9 million or $0.10 per diluted share based on 70.2 million diluted shares in the year-ago quarter. The decrease in the non-GAAP net income in comparison to the year-ago quarter was largely from higher levels of revenue, partially offset by higher operating expenses. On March 31, 2023, our cash and cash equivalents totaled $258.4 million, up from $256.7 million in the fourth quarter of 2022. The key reason for the increase on a sequential basis was increase in operating cash flow, offset by payments from net share settlement of vested stock awards. Coming to the second quarter guidance, we expect revenues to be in the range of $76 million to $78 million. We expect our non-GAAP EBITDA in the second quarter to be in the range of $10 million to $11 million. For Q2 2023, we expect our basic share count to be in the range of 75 to 76 million shares and our diluted share count to be in the range of 78 to 79 million. That concludes my prepared remarks. Then we are ready to take questions.