Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Grid Dynamics' first quarter 2024 earnings conference call. I'm Cary Savas, Director of Branding and Communications. At this time, our participants are in listen-only mode. Joining us on the call today are CEO Leonard Lifshitz and CFO Anil Dharadla. Following their prepared remarks, we will open the call to your questions. Please note that 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 in a 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 the SEC. 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 8 filed with the SEC. You can find all the information I just described in the investor relations section of our website. I now turn the call over to Leonard, our CEO.

Thank you, Kerry. Good afternoon, everyone. And thank you for joining us today. As you have seen from our published results, Green Dynamics first quarter revenues were above our guidance range, and we exceeded Wall Street expectations, both in revenue and un-gapped EBITDA. With another quarter, of solid execution. Our results clearly show that our focus is steadily paying off and we continue to move forward our stated goals of revenue growth and profitability. During the first quarter, we witnessed improving demand trends across the majority of our customers. While the demand environment is not bad to support growth level that we are in digital transformation industry have seen, science point out to the right direction. Customers are increasingly willing to engage with us on their crucial and time-sensitive programs and share their outlooks and roadmaps. In the first quarter, we witnessed a significant milestone. We've reached the highest number of billable engineers in the company's history. This also reflected in the revenue outlook for the second quarter. During the first quarter, we also secured two multi-million dollar deals with enterprise customers. One of them, a market leader and especially retail vertical, and the other one is an insurance vertical, a key focus area of our GigaCube strategy. We continue to make progress in our joint go-to-market efforts with our partners. Partnerships contribution is an all-time priority. and it has increased by more than 20% in comparison to the fourth quarter of 2023. We continue to be very positive on our partnerships and expect continued contribution. I'm also happy to announce that we were recognized by the Everest Group as a leader in its inaugural Google Cloud Services Specialist, which is Peak Metrics Assessment Report. This achievement validates our capabilities as a specialist in Google Cloud services, an area of expertise for several years. This is a clear recognition of the differentiated capabilities we offer our clients to drive their digital transformation agenda. In the course of time, I'm confident that more independent third parties will recognize our strengths across other capabilities and service offers. coming to AI. Customers are increasingly incorporating AI in their projects and requirements. Additionally, some of our customer GenAI projects have become meaningful engagements. As a large financial institution, our GenAI project has been successfully completed, and we expect that platform to go live in the second quarter. At the same time, we're not only using AI technologies with our clients, but also within our internal systems, Last week, with soft launch, our website that incorporates AI features. Our users visiting Green Dynamics website will now be able to use natural language queries to find company-related information. This includes Green Dynamics capability, work with perform at our clients, case studies, and others. Now let me make some more detailed comments about the demand environment. For many, our reported results and commentary over the past couple of quarters may appear more positive than many of our peers. There are some key reasons for that, and in my opinion, that it makes Green Dynamics unique across the IT industry. First, in the current economic cycle, spending is under heightened scrutiny. This in turn has resulted in many clients consolidating their IT partners and tightly coupling their investors with corporate performance goals. Renaming strengths and reputation for technology leadership, engineering prowess, and delivery excellence positions us as a trusted partner, often leading us to gain business at the expense of the competition. As an example, in 2024, at two of the Fortune 1000 retailers, Green Dynamics was selected as one of the two partners for all digital engineering programs. Additionally, as a large Fortune 500 telecom company, after evaluating dozens of assistance suppliers, they choose Green Dynamics for all the customer-facing applications. One of the key applications that we are rolling out at scale includes a mobile app for new customer self-installations and provisioning. Second, Now, rapidly evolving world, a company's ability to adapt and integrate new technologies define its relevance and competitive edge. With the relentless progression of disruptive technologies, business must innovate or risk obsolescence. Moreover, in a landscape marked by rising capital costs, the efficiency and speed in which innovative solutions are brought to the market are crucial. Read&X has been at the forefront of helping enterprises scale their operations through numerous technological advancements over the past two decades. The deep knowledge and robust capabilities position us not just to adapt to the change, but to drive it forward. As an example, At the large financial institution that I mentioned before, the AI assistant for financial advisors that we implemented is poised to dramatically enhance both customer experience and the efficiency of financial advice. We anticipate that this capability, when industrialized, could save the wealth management industry billions of dollars. Notably, at this financial institution, one of the few selected partners after vendor consolidation exercise in 2023, further underscoring our pivotal role in their crucial and strategic programs. Now coming to the second quarter. Positive trends that I highlighted regarding the first quarter extend into the second. Our customer activity is picking up. Engineering billable headcount continues to grow. Customers have heightened AI These factors formulate the basis for our continued positive outlook as we look into the second quarter and remainder of 2024. On CTO front, Grid Labs, our internal innovation center, completed multiple projects and initiatives. Our researchers and architects are engaged across the spectrum of innovation that include AI, data, machine learning, and commerce solutions. Like previous quarters, our architects and CTO team were instrumental in opening new accounts with new clients. As a reminder, Green Dynamics AI engagements are based on more than seven years of internal research and successful implementation. With our generative AI offering, we partner with customers to employ large language models and prompt guided image generation to the applications in product design, visualization, knowledge retrieval, wealth management, and customer service. In the quarter, there were several trends, and I want to share with you some of the notable ones. Logo momentum. Building up on our success in 2023, in the first quarter, we signed five large new enterprise customers. Of the new enterprise customers we signed in the quarter, One is a leading North American pet company. One is an American high-end sport apparel and accessory company. One is a global consumer goods company focused on personal care and health products, an energy manufacturing and service company, and one is a large multinational confectionery manufacturer. I believe each of these logos have the potential to become large top accounts, and I'm looking forward to seeing these initiatives too. Delivery location support. Grid dynamics follow the SANS strategy provides the framework of scaling our global locations. India, one of the key locations, has been growing at a rapid pace and is in top three countries and in terms of the headcount. Last quarter, I highlighted the opening of the third office in India. This location in Bangalore is quickly becoming popular with our clients. In the first quarter, we had multiple visits from our U.S.-based clients across all our key offshore locations. We continue to attract high-quality talent out of universities, and our activities with internships, hackathons, and dynamic talks are paying off. Additionally, we brought on an industry veteran to lead our India operation, And with his addition, I'm confident of many positive things happening in India. In Europe, Poland continues to be our anchor point. And in Latin America, Mexico remains the key location to support our clients seeking near shore capabilities. European business. Our European business is steadily diversifying beyond traditional areas of strength, such as retail and CPG. Additionally, the pipeline of the business is more distributed with clients spread over mainland Europe. For a global auto parts company, we are rolling out their Composable Commerce Modernization Platform across several brands within Europe, supporting them by establishing a multi-location global team structure. In Q1, we successfully delivered an ESG initiative for a large clean energy company. At many clients, GenAI continues to be a door opener. Additionally, several of our customers have transitioned from exploratory and proof of concepts to commercial build-outs. For example, at a leading legal and tech service company, we are building a flagship platform for their new market. For a global international medical device company, we continue working on multiple initiatives to improve sales efficiency. In 2023, partnerships contributed to 13% of our overall revenue and we aim to increase that share to at least 16% in 2024. Partnerships with hyperscalers and leading software vendors is a key part of our GigaCube strategy. In the first quarter, we made progress with our go-to-market efforts with our partners and upgraded our status with a major hyperscaler. At AWS, we achieved the AWS World Architecture Partner status. The program enables Grid Dynamics to provide its client with an audit of their platform architecture, ensuring they are configured correctly in accordance with the best practices. With NVIDIA, we're exploring go-to-market initiatives for the first time. During the quarter, Grid Dynamics delivered some notable projects. For a leading global technology company, we created a test automation toolkit that improved the efficiency and effectiveness of the testing processes. Featuring a collection of independent modules, each with unified interface, the client was able to streamline the testing process and enjoy greater visibility into testing outcomes. This project enabled the client issue resolution taken from days down to minutes, leading to faster time to market and ultimately enhancing the quality of the final product. For a leading internet and cloud company, we streamline the release preparation process for high priority apps in its app store. We develop tools that enable the client to submit releases that foster better communication between departments. These tools help accelerate the app release process, which enable the client to better predict release timing, monitor updates, and improve the overall user experience. For a major CPG brand, we implemented an omnichannel warehouse automation platform. This platform unifies several software interfaces, which dramatically lowers the cost of integrating new distribution centers in the client network, while also supporting the unique fulfillment requirements of wholesale retail and digital channels. In addition, we implemented a wholesale order platform that lowers the cost of serving new wholesale clients. Both of these platforms are expected to be expanded to multiple geographies in upcoming months. For a global automotive manufacturer, we began a project aimed at improving interactions with dealers. Through the use of micro front-ends and AI-enabled personalized experiences, this project will enable dealers to deliver more comprehensive sales and services to their end customers. customers. With that, let me turn the call over to Anil, who will discuss QR results and more details. Anil?

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenue of 79.8% industry vertical, our finance and other verticals were the strongest, both on a year-over-year basis and sequential growth basis. During the first quarter, our retail and T&T were the two largest verticals at 30.9% and 30.1% of our revenues, respectively. Our retail vertical remained flat on a sequential basis and decreased by 3% on a year-over-year basis. On a sequential basis, we witnessed growth TMT remained flat on a sequential basis and decreased by 10.4% on a year-over-year basis. Coming to our largest customer in our TMT vertical, it grew both on a sequential and year-over-year basis. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 12% of our revenue in the first quarter, a decrease of 1.2% on a sequential basis and 24.4% on a year-over-year basis. On a sequential basis, our largest CPG customer grew in the quarter, and this was offset by decrease at other customers. The financial vertical represented 12.8% of revenue, an increase of 23.7% on a sequential basis, and 57.2% on a year-over-year basis. During the quarter, we witnessed growth across most of our customers that range from financial, technology, banking, and insurance. Our newly disaggregated healthcare and pharma represented 3.8% of our revenue showed decline of 10.5% on a sequential basis and 4.5% decrease on a year-over-year basis. And finally, the other vertical represented 10.4% of our first quarter revenue and was up 4.5% on a sequential basis and 50.1% on a year-over-year basis. of them in the clean energy and legal space. We ended the first quarter with a total headcount of 3,892, down from 3,920 employees in the fourth quarter of 2023 and up from 3,744 in the first quarter of 2023. In comparison to the fourth quarter, we exited our first quarter with a higher billable headcount due to improving demand. At the end of the first quarter of 2024, our total US headcount was 332 or 8.5% of our company's total headcount versus 8.1% in the year-ago quarter. Our non-US headcount located in Europe, Americas, and India was 3,560 or 91.5%. In the first quarter, revenues from our top five and top 10 customers were 39.6% and 55% During the first quarter, we had a total of 210 customers down from 218 in the fourth quarter of 2023 and 220 in the year-over-quarter. During the quarter, we added several customers, some of which Leonard referred to in his prepared remarks. The quarterly decline in the number of customers was primarily driven by our continued efforts to rationalize our portfolio of non-strategic customers. Moving to the income statement, Our GAAP gross profit during the quarter was 27.7 million or 34.7% compared to 28.1 million or 36% in the fourth quarter of 2023 and down from 28.6 million or 35.7% in the year-over-quarter. On a non-GAAP basis, our gross profit was 28.1 million or 35.3% down from 28.6 million or 36.6% in the fourth quarter of 2023 and down from 29 million or 36.3% in the year-over-quarter. The decrease in gross margin as a percentage on a sequential basis was driven by a combination of first quarter seasonal increase in employee-related costs and FX headwinds. Non-GAAP EBITDA during the first quarter that excluded stock-based compensation, depreciation and amortization, restructuring and expenses related to the geographic reorganization, transaction and other related costs was 10.3 million or 12.9% of sales versus 10.7 million of 13.7% of sales in the fourth quarter of 2023 and down from 10.8 million or 13.5% in the year-old quarter. The decline in non-GAAP EBITDA was largely due to decrease in gross margins. Our GAAP net loss or a loss of 5 cents based on basic share count of 76.2 million shares compared to the fourth quarter income of 2.9 million or 4 cents based on a basic share count of 75.7 million and a loss of 8 million or 11 cents per share based on 74.5 million basic shares in the year-ago quarter. The year-over-year decrease in gap net loss was largely due to lower levels of stock-based compensation and decrease in provision of income taxes partially offset by depreciation and amortization. On a non-gap basis, in the first quarter, our non-gap net income was $5.2 million or $0.07 per share based on 78.4 million diluted shares compared to the fourth quarter non-gap net income of $5.7 million or $0.07 per share based on 78 million diluted shares and 6.5 million, or 8 cents per share, based on 77 million shares in the year-ago quarter. On March 31, 2024, our cash and cash equivalents totaled $249.4 million, down from $257.2 million in the fourth quarter of 2023. Coming to our second quarter guidance, we expect revenues to be in the range of $80 million to $82 million, We expect our non-GAAP EBITDA in the second quarter to be in the range of 10.5 million to 11.5 million. For the second quarter of 2024, we expect our basic share count to be in the range of 77 to 78 million and our diluted share count to be in the range of 79 to 80 million. That concludes my prepared remarks. We are now ready to take questions.