Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Green Dynamics' second 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 Duranula. 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. GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and the AK filed with ICC. 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 as you have seen from our published results

Greedynamic second quarter revenue was in our guidance range, and non-GAAP EBITDA significantly exceeded expectations. Also, on a GAAP basis, we achieved record net income since becoming a public company. Our results are commendable and reflect the company's unrelentless commitment to our clients. There were some noteworthy trends, including strong new logo wins, meaningful contributions from logos that we won over the past couple of quarters, and deeper relationships with our partnership ecosystem. This has been a recurring theme for the past several quarters and reflect the strengths of our offering. Additionally, a significant interest and engagement with our clients on artificial intelligence initiatives continue to positively impact our business. With our GigaCube initiative, we operationalized many KPIs across the company. On the macro, our opinions have remained unchanged. During the quarter, with many of our clients, we witnessed continued recalibration of spending priorities and investments. Also, Customers continue to transition their projects from higher cost locations to lower cost offshore locations. And this is a plane to our favor as we have a global delivery footprint in locations of choice for our clients. During the quarter, we ensured our spending level aligned with the current demand environment and this discipline paid off with our second quarter profitability. We're also witnessing three important trends that lead us to the incrementally positive conclusions. These trends are expected to play out in the third quarter too. First, the magnitude of resets across our customers are diminishing. Second, we're seeing stabilization in business across the majority of our accounts. And finally, thirdly, our forms of new engagements both with the new clients and existing clients are on the rise. This includes enhanced activities with partnerships, engagements on artificial intelligence, and willingness of new logos to work with us on their digital transformation needs. While certainties persist and it's too early to make any definitive commentary around demand snapback, We believe underlying trends are moving in the right direction, leading us to the incrementally positive view. Yet, we remain conservative in our third quarter outlook. As I highlighted in the past, coming out of economic cycles, grid dynamics is stronger as the company proves to be a reliable partner in delivering our customers' business objectives in an efficient manner. Also, the current economic cycle has provided us a great opportunity to realign and organize according to our GigaCube initiatives. This includes adding new talent across different industry verticals, both in sales and city organizations. We're also witnessing great access to high quality talent as our strengths and differentiation became more visible across the industry. Over the past couple of quarters, we have incrementally invested in our engineering resources toward building new R&D artifacts, accelerators, and artificial intelligence capabilities. There are many positive trends with our technology organization. This includes several exciting opportunities with AI. Generdive AI has been front and center across a broad range of clients, and we're witnessing exponential interest in our enterprise AI solutions, particularly in generative AI, including conversational AI, data harmonization solutions, and others. We're currently engaged in multiple billable projects, and we've created a robust portfolio of demos, capabilities, and solutions. Our R&D organization completed nine AI projects during the quarter, We are currently involved with over 20 enterprise clients. As a reminder, Green Dynamics AI engagements are based on more than seven years of internal research and successful implementations. With our generative AI offering, we partner with customers to employ large language models and prompt guided image generation to the application in product design and visualization, as well as knowledge retrieval, wealth management, and customer service. During the quarter, we announced a significant global partnership with Google Cloud to develop and implement innovative generative AI solutions. This partnership will result in incremental customer wins for Grid Dynamics in the second half of 2023 and beyond. Also, this partnership is a reflection of Grid Dynamics' position as an industry leader in AI. Green Dynamics will leverage Google Cloud Vertex AI, a platform that incorporates powerful foundational large language models and advanced image generation capabilities. With this partnership, we expect to significantly accelerate and develop innovative AI solutions across the financial services and insurance, manufacturing, and life science pharma industries. On the GigaCube initiative, we continue to make good progress. As you know, GigaCube is a strategic blueprint that lays out a framework for our company to over a billion dollar revenue. It involves all parts of our organization that include sales, R&D, marketing, operations, as well as M&A. We made some exciting additions to our team. This includes a senior sales leader and specialty sales executive across automotive, pharma, and insurance. These additions will accelerate our new industrial vertical penetration, highlighted in our GigaCube initiatives. In the quarter, there were several notable trends, and I would like to share with you some of them. Logo momentum. In the second quarter, we signed nine large enterprise clients. This brings the new enterprise logos added in 2023 total to 18. Additionally, we added new customers from our recent acquisitions. We believe Q2 client acquisition is a further testament of our competency and the confidence for large global enterprises to sign up with Green Dynamics in the current environment. Some of the most notable ones to mention include a leading digital payment service company, a global consumer healthcare company, a global athletic wear company, a global hotel and hospitality chain, and a North American art and craft chain. We're very proud of our achievements, and this is a testament of our differentiation value we bring to our customers. Delivery location support. Moving to our delivery operations, our execution remains flawless. At some more recent logo wins, we were able to quickly put together and ramp up dedicated teams across our global delivery locations. Additionally, our integration with NextSphere and Mutual Mobile is in a full swing and have started to implement synergies across engineering, operations, and other backend functions. Today, our customers have a choice of over a dozen countries across North America, Central Europe and India. Our Follow the Sun strategy enables our clients to be served in an interruptive fashion around the clock. Clients support our geographic diversification and choice of locations for engineering support. European business. During the quarter, we made good progress in expanding our footprint across industry verticals with our European clients. As a global specialty automotive part company, we're implementing a major composable commerce modernization platform. And another global automotive entire company, we're involved in a significant digital transformation initiative tied to automotive tire wear and tear predictive maintenance using data engineering and analytics. With artificial intelligence, we also engaged with a high-end apparel company in Netherlands in automating process descriptions using product attributes and images. And finally, with European-based global truck manufacturer, we're starting a project to modernize deal management system in a very near future. Partnerships. They will continue to be an important part of our growth and have become a significant contributor to lead generation. In addition to the Generative AI partnership with Global Cloud that I spoke a few minutes ago, we're also working with many of our clients across industry verticals as they move from advanced rural concepts to real-world business transformation solutions. Our relationship with Microsoft Azure and AWS are expanding in the future. Grid Dynamics has been recognized for its advanced specialization by Microsoft, which earned us the membership of Microsoft Azure migration and modernization program. Additionally, we continue to invest in growing number of independent software vendor partnerships in supply chain, digital experience, marketing, and commerce domains. We're expecting and enhancing the value we deliver across the entire C-suite. We are engaging with chief operating officer, chief market officer, chief product officer, and others. M&A. With M&A, the integration with our acquisition of NextSphere technologies, which we acquired on April 18, 2023, is working well. To remind you, this acquisition strengthened our presence in strategic verticals such as healthcare, fintech, and manufacturing. I'm happy to report that in a short time of three plus months, we were able to integrate the operational backend functions. Additionally, we're able to relocate the employees in Hyderabad to the new constructed Green Dynamics office. We also have an office in Chennai as well. We're currently working on a business development synergies and expect to start cross-selling across our customer base in the next couple of quarters. Beyond our recent acquisitions, the pipeline for M&A opportunities is robust. We're actively working on multiple opportunities and will be happy to provide updates as the time becomes right. As a reminder, our M&A focuses on capabilities, key clients, and delivery locations. During the quarter, Green Dynamics delivered some notable projects. At the renowned financial services and wealth management firm, we're piloting an innovative AI-based knowledge management platform. This platform offers thousands of financial advisors with direct access to the firm's vast enterprise data via natural languages. Leveraging retrieval augmented generation technology and leading large language models, the platform will improve productivity of financial advisors and help them to create highly personalized updates and offerings to their clients. For a leading global technology company, we successfully executed a massive migration of user segmentation pipelines to a new cloud data platform. These pipelines play a crucial role in processing an extensive range of data signals, encompassing diverse aspects such as user demographics, spending deciles, usage frequencies, and more. This solution ensures better scalability to address growing amounts of data and fault tolerance. At a prominent membership-only chain, we modernized their mobile app to enable and enhance better security, frictionless payments, and user experience. The effort resulted in an increase in the browse-to-pay conversion and substantially reduced the uninstall rate by a factor of 7x. Currently, the Mumble app is serving tens of millions of shoppers in the United States. For a major CPG brand, we delivered a solution that significantly shorted checkout time in their physical stores, even for orders with many small items. It uses existing security tags to scan shopping bags and requires minimum modification to the store layout or POS hardware. Once deployed across the client's 900 plus stores, it has potential to significantly decrease labor costs and increase customer satisfaction. With that, let me turn the call over to Anil, who will discuss Q2 results in more detail. Anil?

Thanks, Leonard. Good afternoon, everyone. Our second quarter revenue of $77.3 million was within our guidance range of $76 million to $78 million that we provided to you all in our earnings call in May and reiterated it on June 6th. On a year-over-year basis, both on a reported and constant currency, the growth was flat as the impacts of currency movements were negligible. On a sequential basis, our revenue declined by 3.4%. During the quarter, we witnessed headwinds from some of our customers as they continued to rationalize their spending levels. During the quarter, new local revenues contributions offset macro-driven caution from others. During the second quarter, retail, our largest vertical representing 33.7% of our revenues, increased by 2.5% on a sequential basis and grew 2.3% on a year-over-year basis. Within the retail vertical, on a sequential basis, we witnessed growth from areas such as home improvement, department stores, and specialty retail. TMT, our second largest vertical, represented 31.2% of our second quarter revenues, decreased by 10% on a sequential basis, and grew 3% on a year-over basis. On a sequential basis, we witnessed continued caution at some of our large TMT customers, This was offset by growth both from existing and new logos. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 14.1% of our revenue. In the second quarter, a decrease of 14% on a sequential basis and 32.4% on a year over year basis. The decline on a sequential and year over year basis came from some of our large customers as they readjusted their spending levels to the current macro environment. The finance vertical represented 8.7% of revenues, an increase of 3.6% on a sequential basis, and 33.7% on a year-over-year basis. The growth in the quarter came from a combination of financial technology customers as well as new logos. And finally, other segment represented 12.3% of our second quarter revenue and was up 10.1% on a sequential basis. The strong sequential growth was driven by growth at our healthcare and pharma customers. We exited the second quarter with the total headcount of 3,862 up from 3,744 employees in the first quarter of 2023 and up from 3,763 in the second quarter of 2022. The sequential increase of 118 employees, or 3.2%, was largely due to our recent acquisition of Nixware Technologies, which we acquired in April. At the end of the second quarter of 2023, our total US headcount was 317, or 8.2% of the company's total headcount. This remained on the same level compared to 8.1% in the first quarter of 2023. and slightly decreased from 8.7% in the year-ago quarter. The year-over-year slight decline as a percentage of total revenue was largely driven by growth at our offshore locations, resulting in greater mix of non-US headcount. Our non-US headcount located in Central Eastern Europe, India, UK, the Netherlands, Mexico, and other locations was 3,545, or 91.8%. In the second quarter, revenues from our top five and top 10 customers were 37.6% and 56.6% respectively versus 44.2% and 60.2% in the same period a year ago respectively. During the quarter, we had a total of 216 customers down from 220 in the first quarter of 2023 and up from 208 in the year ago quarter. The decline in customers on a sequential basis was largely from our commercial business, which focuses on smaller customers. During the quarter, we signed nine new logos from our enterprise business. Moving to the income statement, our GAAP gross profit during the quarter was $28.3 million, or 36.6% versus $28.6 million, or 35.7% in the first quarter of 2023. and down from 28.9 million or 37.3% in the year-ago quarter. On a non-GAAP basis, our gross margin was 28.8 million or 37.3% versus 29 million or 36.3% in the first quarter of 2023 and down from 29.1 million or 37.7% in the year-ago quarter. The increase in gross margin as a percentage on a sequential basis, both on a GAAP and non-GAAP basis, was largely due to higher utilization of engineering resources. Non-GAAP EBITDA during the second quarter that excluded stock-based compensation, depreciation and amortization, restructuring and expenses related to geographic organizations, Transaction and other related costs was $12 million or 15.5% up from 10.8 million or 13.5% in the first quarter of 2023 and down from 13.3 million or 17.2% in the year-ago quarter. The sequential increase in non-GAAP EBITDA was largely due to a combination of higher levels of gross margin as a percentage compared with lower operating expenses. On an year-over-year basis, the decline in non-GAAP EBITDA was driven by increase in operating expenses from our recent acquisitions. Our GAAP net income in the second quarter totaled $2.6 million, or at $0.03 based on a basic share count of 75.1 million shares, compared to the first quarter loss of $8 million, or $0.11, based on a basic share count of $74.5 million and a loss of $13.2 million or loss of 20 cents per share based on 67.1 million basic shares in the year-ago quarter. The year-over-year increase in GAAP net income was largely due to lower levels of stock-based compensation and significant decrease in geographic reorganization expenses. On a sequential basis, the increase in gap net income was largely driven by reduction in stock-based compensation expenses. On a non-gap basis, in the second quarter, our non-gap net income was $7 million or 9 cents per share based on 76.9 million diluted shares compared to the first quarter non-gap net income of 6.5 million or 8 cents per share based on 77.1 million diluted shares and $8.2 million or 12 cents per diluted share based on 69.9 million diluted shares in the year-ago quarter. The increase in non-GAAP net income from the second quarter was largely due to higher gross margins and lower operating expense. The decrease in the non-GAAP net income in comparison to the year-ago quarter was largely from higher levels of operating expenses. On June 30, 2023, our cash and cash equivalents totaled $246.2 million, down from $258.4 million in the first quarter of 2023. The key reason for the decrease on a sequential basis was due to the all-cash acquisition of Nexphere Technologies, which was made on April 18th. Coming to the third quarter guidance, we expect both revenues and non-GAAP EBITDA to be at similar levels to what we guided for Q2 in May. We expect revenues to be in the range of $76 million to $78 million, and non-GAAP EBITDA to be in the range of $10 million to $11 million. For the third quarter, we expect our basic share count to be in the $75 to $76 million range, and for diluted share count, we expect it to be in the 78 to 79 million range. That concludes my prepared remarks. Bin, we are ready to take questions.