Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Green Dynamics' fourth quarter and full year 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 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 bill good afternoon everyone and thank you for joining us today as you have seen from our published results green dynamics for square revenues were above our guidance range and exceeded wall street expectations it was another quarter of solid execution and continued focus on our stated goals. The quarter witnessed a lot of activities, both in sales and CTO organizations, the two key areas within the company where we invested significantly in 2023. On the sales side, our industry-centric efforts are playing off across all the verticals. In 2023, we added 33 new logos, which is a strong testament to our differentiation in a year where customers were more selective toward business to digital providers. With respect to the CTO office, our scientists and architects are heavily engaged with clients across the spectrum of innovative solutions, including AI, to drive meaningful business outcomes. To that end, we released several new functional accelerators across industry verticals, which have resulted in greater engagements across both new and existing customers. In supply chain, manufacturing, pharmaceutical, and financial services, which is area of focus with our GigaCube initiatives, the ability to offer unique and differentiated offerings has resulted in accelerated acceptance across a wide range of customers. To support the strong demand for AI skills, we established comprehensive AI training programs. I'm happy to report that over 25% of our engineers are trained in generative AI. how AI curriculum is rigorous and is segmented across three tracks, ranging from introductory AI to more advanced topics. It may take up to several quarters to complete the entire curriculum. On the macro front, I'm happy to report that the demand environment is improving. The demand trends are directionally consistent with my commentary over the last couple of quarters. While we're yet to get back to normalized levels of growth, we're moving in the right direction. In many ways, the sequential growth with our first quarter revenue guidance reflects our sentiment. We've also seen the positive trends with our four company-specific factors. First, we see customers either choosing to maintain their current level of spending or moderately improve with increases in investment. While we witnessed a similar trend last quarter, The fact that the customers demonstrate more stability is an important step in getting back to historically normalized levels of growth. This is reflected in the steady rise in the billable headcount trends from our existing locus. Second, drops in revenue across some of our large existing customers are moderating. To put it in perspective, in 2023, the considerable revenue headwinds we faced were limited to a handful of existing customers. We anticipate this trend will diminish in 2024. This bodes well for the company's growth in 2024. Third, our partnership-driven revenues are growing steadily. In 2023, roughly 13% of our revenues came from partnerships. We accelerated the investment into partnership programs a couple of years ago. I'm bullish on expanding and monetizing more partnership opportunities in 2024 and beyond. And finally, fourth, our new logo momentum. In 2023, we accelerated investment in a broader industry-specific created dedicated sales team to pursue new logos and opportunities. We expect this to continue to be an important component of our growth in 2024. Our Follow the Sun strategy has been successful with our clients. Today we serve our customers from 18 countries and our global footprint fully aligns with our customer needs. Now coming to the first quarter of 2020. We are almost two months into the quarter and the commentary that I shared with you today extends to the first quarter too. Our billable headcount continues to grow, our AI activity is robust, and the headwinds from a handful of clients continue to diminish. We believe underlying trends are moving into the right direction. As we enter 2024, our city organization is highly focused on expanding our capabilities highlighted in our GeoCube strategy. This includes building new R&D innovations, accelerators, and AI solutions. During the first quarter, we made good progress with approval concepts and customer projects related to artificial intelligence. An internal R&D innovation lab, which we call Grid Labs, has generated several functional accelerators and AI-related artifacts. To date, AI is infused across practices and industries, as well as customers, representing over 80% of our revenues are engaged with Grid Dynamics on AI initiatives, and more than 50% of our new engagements have an AI component. These include industry verticals beyond which we have historically been strong, such as supply chain and manufacturing, financial services, and pharmaceuticals. Some of our new AI innovations include pricing applications, Internet of Things analytics, visual quality control, and industrial vision launch language models. 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 models in a variety of applications. These include prompt guided image generation, product design and visualization, knowledge retrieval, wealth management, and customer support. In the fourth quarter, there were several notable trends, and I want to share with you some of them. Logo momentum. In the fourth quarter, we signed five new enterprise customers. This brings the number of new enterprise logos in 2023 to 33 ones. This is a record number of new logos for us and is a testament to our reputation with large global enterprises. Of the new enterprise customers we signed in the quarter, one is the largest omnichannel specialty retailer, one is a large insurance company, and one is a software company focused on revenue management for the healthcare industry. Delivery location support. Our Follow the Sun strategy continues to be guiding principle in enabling our clients to be served in an uninterrupted fashion around the clock. I'm proud of our ability to serve our customers across 18 countries spanning across North America, Europe, and India. In India, I'm happy to report that we're opening an office in Bengaluru. This brings the total number of Indian offices to three, which includes Hyderabad and Chennai. Our clients have successfully engaged with great dynamics in leveraging our presence and expansion in India. In Europe, we continue to expand our footprint in Poland and Romania. In Poland, our growth is increasingly driven by partnerships with the client local centers. With respect to our recent acquisitions, we complete all the engineering integration by the end of Q1. European business. Europe continues to be strategic to our growth. In 2023, our revenue from Europe was roughly 20% of our total revenue with customers across industry verticals. During the quarter, we made good progress in expanding our footprint across industry verticals with our existing and European clients. To highlight some notable achievements during the quarter, let me point out that with a leader in legal and tech services, we are partnering use GNI technology and build a global data platform to accelerate the ability to serve their customers with reviews and publishing of contracts. In a large UK-based retailer, we signed a multi-year contract to modernize their e-commerce platform. At a global auto part company, we expect to roll out their composable commerce modernization platform across other brands within Europe. For a large medical device company, we're launching initiatives in data engineering and generative AI. The goal is to enhance the efficiency of sales reporting processes. And finally, at the large clean energy company, we're enhancing their sustainable ESG initiative. Partnerships. As I highlighted before, partnerships are increasingly playing an important role in our growth and our long-term plan for becoming a billion-dollar company. Let me remind you, In 2023, partnerships contributed to 13% of our overall revenue. Again, this is impressive given that we embarked on this strategy in 2021, and within a short period of two years, we have achieved such impressive results. Notably with our partners, AI is becoming a core element of our joint go-to-market strategy. Looking forward to 2024, we have strong momentum with hyperscalers and linear digital commerce SaaS companies, as well as other specialized software providers. Our focus is to capture greater wallet share. GigaCube initiative. With GigaCube, we continue to make a good progress. As you know, GigaCube is our strategic blueprint that lays out a framework for our company toward a billion dollar in revenue. We operationalize the GigaCube via four key areas. Knowledge management. partnerships, new vertical focus, and winning larger deals. In each of these fronts, we made progress both in the Q4 and the full 2023. With our knowledge management efforts, we have cataloged over 100 important delivery case studies that are being used across pre-sales, sales, and delivery organizations. This is important. We accelerated the proliferation of our learnings from each project and program to ensure that the whole company benefits from it. During the quarter, Grid Dynamics delivered some notable projects. For a leading global technology company, Grid Dynamics enhanced the Recommendation Engine, one of the largest online streaming services, with successfully implementing cutting-edge machine learning heuristic techniques to enhance the quality of the data used by Recommendation Engine. Our engagement covered end-to-end machine learning processes, including model engineering, evaluation, deployment, and post-production efficacy monitoring. This resulted in significant improvements in the relevance of recommendations and the system's capability to self-adjust in real-time. For one of the largest auto part distribution retail company, Green Dynamics has been actively engaged in the modernization of the product catalog, which enables search and browse functionality. Our solution uses generative AI to correct product images, generate descriptions, correct categorization, enhance attributes, and highlight discrepancies in the product details. As a result, this client expects to improve customer conversion and user experiences, leading to increase in sales across both B2B and B2C channels. For a multinational financial service provider, Grid Dynamics leads a cybersecurity program to onboard over 400 custom-built application to SailPoint IdentityIQ platform. The solution enables our client with a full lifecycle of identity and access management, ensuring proper duty separation to meet the latest security compliance standards. We expect to expand this project during the next phase and onboard another over 1,000 applications to this platform. For a global automotive manufacturer, Green Dynamics developed a cloud-native e-commerce platform based on robust microservices architecture. This platform enables an intuitive end-to-end user experience and promotes in-house financing to car shoppers, which anticipates to increase the vehicle sales through the digital channel. With that, let me turn the call to Anil, who will discuss Q4 results in more

Thanks, Leonard. Good afternoon, everyone. Our four-quarter revenue of $78.1 million was slightly ahead of our guidance range of $76 million to $78 million and exceeded Wall Street expectations. On a sequential basis, our revenue grew 0.8% and was down 3.1% on a year-over-year basis. Relative to last quarter, we saw greater stabilization across the majority of our accounts. During the fourth quarter, retail, our largest vertical representing 31.5% of our revenues decreased by 7.4% on a sequential basis and by 4.2% on a year-over-year basis. On a sequential basis, the decline was largely from specialty retail offset by strength in home improvement. TMT, our second largest vertical, represented 31% of our fourth quarter revenues 10.9% on a year-over-year basis. On a sequential basis, the growth was largely driven by some of the large technology customers. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 12.4% of our revenue in the fourth quarter, flat on a sequential basis, and decreased stabilization at our largest CPG customer and growth at other customers. The finance vertical represented 10.6% of revenue, an increase of 13.4% on a sequential basis, and 32.6% 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 14.5% of our fourth quarter revenue and was up 11.5% on a sequential basis. The sequential growth was driven by strength across multiple customers, some of them in the healthcare and restaurant industries. We exited the fourth quarter with a total headcount of 3,920 versus 3,823 employees in the third quarter of 2023. and up from 3,798 in the fourth quarter of 2022. At the end of the fourth quarter of 2023, our U.S. headcount was 331, or 8.4% of the company's total headcount. This remained on the same level compared to the third quarter of 2023 and slightly decreased from 8.9% in the year-ago quarter. Our non-U.S. headcount located in Europe, Americas, and India In the fourth quarter, revenues from our top 5 and top 10 customers were 39.7% and 55.3% respectively, versus 43.2% and 60.4% in the same period a year ago, respectively. We witnessed continuous diversification and greater contribution from our recently acquired lows. During the fourth quarter, we had a total of 218 customers down from 224 in the third quarter of 2023 and flat in the year-ago quarter. The declines were largely from our commercial customers offset by growth in our enterprise million or 36% and remain flat compared to 28.2 million or 36.4% in the third quarter of 2023 and down from 32.3 million or 40.1% in the year-ago quarter. On a non-GAAP basis, our gross profit was $28.6 million or 36.6% versus $28.7 million or 37% in the third quarter of 2023 and down from $32.7 million or 40.6% in the year-ago quarter. The decrease in gross margin as a non-GAAP basis was largely due to a combination of FX headwinds, costs associated with expansion into new geographies, and other investments. Non-GAAP EBITDA due to the fourth quarter that excluded stock-based compensation Restructuring expenses related to geographic reorganizations, transaction and other related costs was $10.7 million or 13.7% of sales versus $10.7 billion or 13.9% of sales in the third quarter of 2023 and down from $16.5 million or 20.4% of sales in the year-ago quarter. The year-over-year decline in non-GAAP EBITDA as a percentage was largely due to a combination of decline in gross margins, increase in operating expenses related to acquisitions, and investments into our sales organization. Our GAAP net income in the fourth quarter totaled 2.9 million, or 4 cents, based on basic share count of 75.7 million shares, compared to the third quarter income of 0.7 million, or 1 cent, based on a basic share count of 75.5 million and a loss of 6.7 million or 9 cents per share based on 74 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 costs. On a non-GAAP basis, in the fourth quarter, on 78 million diluted shares compared to the third quarter non-GAAP net income of $5.9 million or $0.08 per share based on 77.3 million diluted shares and $10.5 million or $0.14 per diluted share based on 76.5 million diluted shares in the year-ago quarter. On December 31, 2023, our cash and cash equivalents totaled $257 up from 253.7 million in the third quarter of 2023. Coming to the first quarter guidance, we expect revenues to be in the range of 77 million to 79 million. We expect our non-GAAP EBITDA in the first quarter to be in the range of 9.5 million to 10.5 million. For Q1 2024, we expect our basic share count to be in the 76.5 to 77.5 million range, and our diluted share count to be in the 78.5 to 79.5 million range. That concludes my prepared remarks. Bin, we are ready to take questions.