Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Greek Dynamics' third 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 Duranla. 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 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 published results, Redynamics' third quarter revenue and non-GAAP EBITDA were within guidance range and exceeded Wall Street expectations. Our results reflect the company's unrelentless commitment to our existing clients and our continued ability to execute to our stated goals. There was a lot of activity during the quarter. This includes strong momentum with new clients, great traction with artificial intelligence projects as it continues to garner significant interest across our customer base, and progress with our GeoCube initiatives as we continue to operationalize it across the company. On a macro, the demand environment points to a level of stabilization. While we still have some ways to go before calling it a strong snapback or back to normalized levels of demand, I'm more optimistic than I was three months ago. In many ways, this is what's not expected, as enterprises need to spend toward their business imperatives that include digital transformation initiatives. In other words, for enterprises to remain competitive, they need to spend on crucial business digital transformation needs. Over the past three quarters, you have seen that our revenue has been flourished. As we highlighted before, the general trend we encountered are from the headwinds with a handful of customers, which are offset by other existing customers and new logos. Going forward, we observe the headwind trend reversal. This is incrementally positive, and we anticipate company's growth in 2024. Now, if I were to look at the billable headcount trends, some positive trends are emerging. Over the past six weeks, we have seen a steady rise in billable headcount. Additionally, the demand for these billable headcounts started coming from existing logos. Last but not the least, new logos and recent logos continue to trend in the right direction. Once again, the underlying fundamentals are pointing in the right direction, which leads us to be incrementally positive. So, in summary, I would like to leave you with three thoughts on the demand environment. First, the magnitude of resets across our customer is diminishing. Secondly, for the vast majority of the accounts, business is stable. And third, momentum without new engagements is robust. Now coming to the fourth quarter. We're more than one month into the fourth quarter, and the summary thoughts I have shared with you today extend to the fourth quarter as well. Our billable headcount continues to grow, our AI activity is robust, and the magnitude of declines from the handful of customers continue to diminish. We continue to invest in our engineering resources toward building new R&D artifacts, accelerators, and AI capabilities. During the quarter, there was a lot of activities with our technology organization, including continued interest in our broad technology offering, including AI. During the quarter, we completed multiple enterprise AI and generative AI projects. With our generative AI efforts, our R&D initiatives resulted in several new solutions. These include GNI for intelligent document processes and GNI for software development. With our billable projects, we continue to be engaged across the spectrum of our clients with a multitude of solutions. These projects are at the different stages of development that include global financial institutions, retailers, hotel chains, and automotive suppliers. Our strength has always been our engineering training around leading technology specializations. To support the strong demand for AI skill sets, we have established a comprehensive AI training program. Our AI curriculum is segmented across three tracks and ranges from introductory AI to more advanced features. Engineers are going through the rigorous program which takes up to several quarters to complete the entire curriculum. As a reminder, Green Dynamics AI engagements are based on more than seven years of internal research and successful implementations. With our journey of AI offering, we partner with customers to employ large language models and prompt guided image generation for the applications in product design and visualization, knowledge retrieval, wealth management, and customer support. On the GigaCube initiative, we continue to make good progress. As you know, GigaCube is our strategic blueprint that lays out a framework for our company toward a billion-dollar revenue goal. During the quarter, we made some key fires across our CTO organization and sales organization. Our effort continues to focus on industry verticals, such as manufacturing, pharmaceuticals, and BFSA. In the quarter, there were several trends, and I want to share with you some of the notable ones. Logo Momentum. In the third quarter, we signed 10 new enterprise customers. This brings the new enterprise logos added in 2023 to a total of 28. We believe Q3 client acquisition is a further testament of our competency and the confidence for large global enterprises to sign up with us in the current environment. Some of the more notable ones to mention include a global food company, global automotive parts supplier, a large direct-to-consumer home improvement solution provider, a large office supply retail company, a US-based insurance company, and European tax advisory company. Our strong momentum is the testament of our differentiation and value we bring to our customers. Delivery location support. We operate in 18 countries, spanning across North America and Europe. We also continue to expand in India and adding another engineering center location, which is a testament of Green Dynamics being a truly global company. Our Follow the Sun strategy enables our clients to be supported in uninterrupted fashion around the clock. Clients embrace our geographic diversification and choice of locations for the engineering system. During the quarter, we're able to quickly put together and ramp up dedicated teams across our global delivery locations for some of the new and recent clients. Additionally, our integration with NextSphere and Mutual Mobile is in a full swing. And we have started to implement synergies across engineering operations and back-end offices going into the joint sales activities. European business. During the quarter, we made a good progress in expanding our footprint across industry verticals with the new European clients. We completed a major digital commerce platforming for a global footwear company delivered on time and within the budget. We're leveraging experiences to develop similar competencies across other industry verticals. Additionally, we're implementing a large composable commerce modernization platform for a global specialty auto parts company and a mission to modernize their B2C business. Leveraging our expertise, partnerships, and references, we expect to expand our brand in the market. For a large medical device company, we're launching initiative in data engineering and generative AI to tackle challenges related to data inefficiency and governance. And the goal is to enhance the efficiency of sales reporting process. Partnerships. Partnerships continue to be a vital part of our growth and have become increasingly important in our long-term plan toward becoming a billion-dollar company. We currently have over a dozen partners with whom we work. Of these, only half of them contribute revenue meaningfully on an individual basis. This also means that there is a significant scope to scale as we tap into this larger opportunity in the partnership ecosystem. We have extended our partnership with the hyperscalers to the AI and GenAI offering, and we're actively developing solutions and accelerators on BART and Vertex CI from Google, Azure OpenAI from Microsoft, Amazon Bedrock from AWS. Additionally, we continue to invest in growing independent software vendor partnerships in supply chain, digital experience, marketing, and commerce domains. This effort aims to enhance the value we provide to executives in the C-suite, including CEOs, CMOs, and chief product officers. In the third quarter, of our 10 new enterprise logos, three came from our partnership relationships. In addition, last quarter, we announced a significant global partnership with Google Cloud to develop and implement innovative general AI solutions. We have been diligently working on leveraging Google Cloud's Vertex AI, a platform that incorporates powerful foundation, large language models, and advanced image generation capabilities. Building on that, this quarter we were invited to participate in Google's Next Leadership Forum, where we expanded our business relationships. During the quarter, Grid Dynamics delivered some notable projects. In manufacturing, for one of the world's largest tire manufacturer, we've piloted an AI-based platform for tire recognition, health evaluation, and predictable maintenance. The platform is based on deep learning and was delivered as a cloud-based solution to the dealers. The goal of the solution is to significantly simplify predictive maintenance, and enable seamless integration with downstream applications. For one of the world's largest technology companies, we successfully designed and implemented a cutting-edge intelligent tool for measuring and allocating computing infrastructure that combines on-premises data centers with public cloud. Our solution measures resource utilization 360 view of spending. This framework empowers our client with substantial savings in their cloud and on-premise infrastructure spending. At a leading European-based footwear manufacturer, Grid Dynamics was selected as the primary technology partner for their high-profile composable commerce replatforming product. By seamlessly integrating best-of-breed cloud-native products, we'll leverage AWS platform to architect a cutting-edge solution that boasts scalability, flexibility, and future-proof capabilities. Our solution will enable the client in addressing creating key capabilities that will drive customer acquisition and retention, branding, as well as process efficiency optimization. At one of the largest beverage distribution companies in North America, Green Dynamics built a framework for a new enterprise cloud platform. This significant program will be the basis for their company's multi-year digital transformation strategy. The program intends to enhance user experience across multiple sales channels, ensure dynamic scalability, and technology readiness for building custom applications to enable new business capabilities. With that, let me turn the call over to Anil, who will discuss Q3 results in more detail. Anil.

Thanks, Leonard. Good afternoon, everyone. Our third quarter revenue of 77.4 million was within our guidance range of 76 million to 78 million and exceeded Wall Street expectations. On a sequential basis, our revenue grew modestly and was down 4.6% on a year-over-year basis. Relative to last quarter, we saw greater stabilization across the majority of our accounts. During the third quarter, retail, our largest vertical, representing 34.3% of revenues, increased by 2% on a sequential basis and grew 5.1% on a year-over-year basis. Within 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 30.7% of our third quarter revenues, decreased by 1.5% on a sequential basis and 9.9% on a year-over-year basis. On a sequential basis, we witnessed continued caution at some of our larger TMT customers. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 12.5% of our revenue in the third quarter, a decrease of 11.1% on a sequential basis and 39.8% 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. That said, at our largest CPG customer, we're witnessing stabilization, and this should benefit us in the fourth quarter. The finance vertical represented 9.4% of revenue, an increase of 8.2% on a sequential basis, and 20.2% on a year-over-year basis. The growth in the quarter came from a combination of financial technology customers and new logos. And finally, the other segment represented 13.1% of our third quarter revenue and was up 6.1% on a sequential basis. The strong sequential growth was driven by both from new logos and existing customers that spanned across healthcare distribution and the restaurant industries. We exited the third quarter with a total headcount of 3,823 versus 3,862 employees in the second quarter of 2023 and up from 3,746 in the third quarter of 2022. At the end of the third quarter of 2023, Our total U.S. headcount was 322, or 8.4% of the company's total headcount. This remained at the same level compared to 8.2% in the second quarter of 2023 and slightly decreased from 8.6% in the year-ago quarter. Our non-U.S. headcount located in Europe, North America, and India was 3,501, or 91.6%. In the third quarter revenues from our top five and top 10 customers were 36.8% and 54% respectively versus 44.5% and 61.1% in the same period a year ago, respectively. We witnessed continuous diversification and greater contributions from our recently acquired logos. During the third quarter, we had a total of 224 customers up from 216 in the second quarter of 2023 and up from 200 in the year-ago quarter. The increase in customers on a sequential basis was largely from our core enterprise business. Moving to the income statement, our GAAP gross profit during the quarter was $28.2 million or 36.4% and remain almost unchanged compared to $28.3 million or 36.6% in the second quarter of 2023 and down from $32.7 million or 40.3% in the year-ago quarter. On an odd gap basis, our gross margin was $28.7 million or 37% versus $28.8 million or 37.3% in the second quarter of 2023 and down from $3 million or 40.7% in the year-ago quarter. The decrease in gross margin as a percentage on a year-over-year basis, both for GAAP and non-GAAP, was largely due to a combination of FX headwinds, cost associated with expansion in new geographies, and investments in AI-related expertise. Non-GAAP EBITDA during the third quarter that excluded stock-based compensation, depreciation, and amortization, restructuring, and expenses related to the geographic reorganization. Transaction and other related costs was 10.7 million or 13.9% of sales down from 12 million or 15.5% of sales in the second quarter of 2023 and down from 17.1 million or 21.1% of sales in the year-over-quarter. Our gap net income in the third quarter totaled 0.7 million or one cent based on a basic share count of 75.5 million shares compared to the second quarter income of $2.6 million or 3 cents based on a basic share count of 75.1 million and a loss of $6.7 million or a loss of 10 cents per share based on 68.6 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 non-GAAP basis in the third quarter, our non-GAAP net income was 5.9 million or 8 cents per share based on 77.3 million diluted shares compared to the second quarter non-GAAP net income of 7 million or 9 cents per share based on 76.9 million diluted shares and 11 million or 15 cents per diluted share based on 71.9 million diluted shares in the year ago quarter. Coming to the balance sheet, On September 30, 2023, our cash and cash equivalents totaled $253.7 million, up from $246.2 million in the second quarter of 2023. Coming to the fourth quarter guidance, we expect revenues to be in the range of $76 million to $78 million. We expect non-GAAP EBITDA in the fourth quarter to be in the range of $10 million to $11 million. For the fourth quarter, we expect our basic share count to be in the range of 76 to 77 million shares and diluted share count to be in the range of 78 to 79 million. That concludes my prepared remarks. Ben, we're ready to take your question.