Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Grid Dynamics' second 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. Gap to non-gap financial reconciliations and supplemental financial information are provided in the earnings press release and the 8-K 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. Green Dynamics second quarter results were above our guidance range and exceeded Wall Street expectations, both in revenue and non-GAAP EBITDA. We achieved important milestones in the quarter. I'm happy to report that our second quarter revenue was the highest in the company's history and all of it was in organic nature. We also exited the second quarter with the highest number of billable engineers in the company history. The strong results were due to the strengths from both existing and new customers and are commendable given the recent backdrop of economic cycles. It is a clear testament that Green Dynamics' efforts to stay the course and maintain laser focus in delivering value to our customers is paying off. Our stated goals around the company growth, profitability, and becoming a billion-dollar revenue company remain unchanged. In many ways, our second quarter revenue growth of 4% on a sequential basis reflects the company's differentiation. Last quarter, I highlighted the key factors influencing our growth and discussed how we're uniquely positioned across the IT industry. These were, first, our revenue represents a small proportion of our customers' overall spend and therefore the opportunities for growth are significant. Second, the new deals that we're winning are tied up to our customer key area of focus and in many cases are mission critical. Third, across the majority of our customers, we are seeing their spending level either being maintained at the current level or increasing. And finally, fourth, the headwind we were facing last year were driven by drops of the handful customers. This trend has reversed, and many of those customers have reverted to growth. There are many exciting trends that are shaping our business, some of which I will share with you today. More importantly, I believe these trends will persist in shaping the company both in the second half of 2024 and leading into 2025 to a brighter future. Now coming to the demand environment. Similar to the first quarter, we witnessed improving demand across the majority of our customers. Incrementally, last quarter, when customers were more focused on sharing their outlook and forecast plans, this quarter they were more willing to release their budgets to implement those plans. We benefited from the trend in this quarter and expect that such trend to continue as the year progresses. Now coming to the third quarter. Trends that I highlighted regarding the second quarter extend into the next quarter as well. We have already seen that in March of July, our customer activity, engineering building headcount, AI activities continue to be robust. We believe this formulates the basis for our continued positive outlook as we look at the third quarter and the remaining of 2024. We are in what I call the post-vendor consolidation environment. As we highlighted, over the last two to three quarters, customers have been scaling back on the number of IT vendors they work with. As an example, in one of the global brands, they plan to reduce the number of IT providers by more than two-thirds, with GreenLynx being one of the remaining strategic partners. With this customer and many more in similar situations, there is a heightening interest in partnering with IT vendors that are strong in technology and catalysts for them to achieving the business goals, both in revenue and a cost cycle. Time and again, our technological and operational excellence has risen to the top. I'm also thrilled to announce that in the second quarter, Green Dynamics won four industry awards across a range of the categories, including most innovative project and best composable e-commerce project, among others. This widespread industry recognition reinforces our company as a benchmark of engineering excellence in digital transformation and empowering businesses to navigate the complexities of the modern technology landscape with agility and innovation. We expanded our AI capabilities considerably and now have approximately 30 solutions and service offerings targeting Fortune 500 companies across various industries. These solutions focus on enhancing revenue and reducing costs for enterprises. On the revenue side, our solutions focus on innovative customer experiences and enhance marketing, pricing, and product decisions. And on the cost side, the focus is centered on efficiency improvements and better regulatory compliance. Our broad offering position as well to positively impact the business results of our clients. we're witnessing a significant pickup in customers wanting to engage us on MVPs and pilot programs beyond the initial approval concepts. Our sales pipeline continues to show robust growth with dozens of active AI opportunities in the progress. Enterprises are increasingly seeking to incorporate AI in their business processes as well as services and platforms. It's worth noting that we continue to adopt and develop AI tools and best practices to improve the productivity of our own engineers. This goes beyond just coding copilots, extending to tools specifically designed for legacy modernization, test automation, and quick prototyping. These internal advancements not just boosting our efficiency, but also enhance our ability to deliver cutting edge AI solutions to our clients. Let me highlight a few Noteworthy Gen AI projects for the second quarter. At a top workforce solution company, we are developing a comprehensive AI ops and data platform. This platform will host numerous AI applications for job seekers, recruiters, and business owners, significantly enhancing the efficiency and effectiveness of the workforce management process. At one of the largest U.S. auto parts provider, we're using GenAI to harmonize and enrich large commerce catalogs. This streamlines the product onboarding process, and additionally, it analyzes product attributes, create consistent product titles, and descriptions that resonate with brand value. This leads to enhanced customer experience and higher sales through all channels. Additionally, for a leading European regulatory compliance firm, we are developing an AI-enabled solution which streamlines the product certification process. This project showcases how AI can significantly enhance efficiency in complex regulatory environments. With our CTO organization, during the quarter, there was significant activity both in AI and non-AI areas. This included the completion of eight programs across AI, data, machine learning engineering, commerce solutions, and search. Some of the projects completed including intelligent document processing tailored for the financial industry, conversation-powered interior design assistance, and like previous quarters, Our architects and CTO team were instrumental in opening new accounts. In the quarter, there were several trends I would like to share some of the notable ones with you. Logo momentum. In the second quarter, we signed new six logos, many of them being very large enterprises. Of these customers, we signed in a quarter one as a leading North America supplier of home improvement, one as a large American consumer goods focus on personal and household products, one of the largest lifestyle global company, and a European-based large department store chains. Partnerships are at an all-time high at 17% of revenue contribution in the first half of 2024. The quality and quantity of our partnership leads are changing. There are three noteworthy trends that are shaping our partnership business. First, our commitment to technology innovation and engineering excellence has resulted in greater appreciation by global enterprise customers. This has resulted in grid dynamics being chosen at many of our partners, tier one customers. Second, our relationship with our partners are evolving. We're now more engaged in strategic discussion with senior management of our key partners. Third, at an operational level, we have an enhanced level of collaboration between the sales and market teams and grid dynamics, as well as our partners. All these translated into more opportunities that include GenAI initiatives and our entry into the global projects and program across industry verticals. Delivery location support. During the quarter, we made progress across multiple areas with our global strategic delivery organizations. As we highlighted in the past, our Follow the Sun strategy provides the framework of scaling our global locations. With Bangalore operationalized, we now have three fully functional locations in India. India is now in our top two countries by headcount and supports multiple accounts with over a dozen of them being key accounts. Our focus on acquiring high-quality talent out of universities and our activities with internships, hackathons, dynamic talks continue during the quarter. In Europe, Poland continues to be the anchor point and in Mexico we continue to support our customers seeking near shore capabilities. European business. With roughly mid-teens of our revenue, Europe continues to be strategic to our growth. Our AI heritage and GNI expertise continue to attract enterprise customers who are serious about adapting GNI to enable business process efficiencies and improve customer experiences. At one of our clients, a leader in food and pharma testing, we started development of AI-based search solutions. In addition to our AI wins, we provide a platform modernization roadmap to a major UK-based retailer customer that supports their expansion and we were able to migrate their existing homegrown and commerce platform to the cloud. An existing global auto parts company were launching a composable commerce B2C solution orchestrated using MAG technologies. We expect this effort will continue in Q3 to enable the client to consolidate their technology landscapes and scale the business. During the quarter, Grid Dynamics delivered some notable projects. At a leading global technology company, we modernized their data analytics platform, including data governance and data pipeline throughput. This ensured compliance with strict data privacy and security regulations. Our efforts led to reduced infrastructure costs and improved overall performance. For a leading home improvement retailer, we modernized the legacy monolithic commerce platform, which opened the path to implement AI-enabled services such as search on the Azure platform. For a major CPG brand, we implemented a wholesale order platform for its North American business, significantly reducing manual labor associated with processing and validating orders. This platform integrates order flow data in a client's next-generation ERP system, streamlining operations and enhancing efficiency. For a leading automotive parts supplier, We migrated product data to automotive industry standards and consolidated B2B as well as B2C search capabilities on a common platform. This will improve overall customer experience and enhance product sales. It's also the first step for the company rolling out a conversational AI Shopping Assistant. For a global footwear brand, we launched 40 country-specific sites in under six months, providing localized features for in-country personalization, shipping, and fulfillment. This achievement was made possible by leveraging the underlying Mac architecture we developed, further extending our long-term relationship with the brand. 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 results were solid as we exceeded our expectations, both on revenue and non-GAAP EBITDA. Our second quarter revenue of $83 million was ahead of our guidance range of $80 million to $82 million, and our non-GAAP EBITDA of $11.7 million was ahead of our guidance range of $10.5 million and $11.5 million. The strong results were driven from a wide range of customers across industry verticals. During the second quarter, our retail and TMT were the two largest verticals at 32.2% and 28% of our revenues, respectively. Our retail vertical grew 8.7% and 2.9% on a sequential and year-over-year basis, respectively. On a sequential basis, we witnessed growth for multiple customers in the specialty retail and home improvement space. TMT decreased by 3.3% and 3.6% on a sequential and year-over-year basis respectively. On a sequential basis, the decline largely came from a couple of factors that included decline in revenue from a technology startup in the security space. 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 11.9% of our revenue in the second quarter, an increase of 3% on a sequential basis, and a drop of 9.5% on a year-over-year basis. Revenues from the top three customers in our CPG and manufacturing vertical grew on a sequential basis. Our finance vertical was the strongest, both on a sequential and year-over-year basis, similar to last quarter, the growth from customers across the FinTech and insurance space. Our newly disaggregated healthcare and pharma represented 3.8% of our revenues and showed a 5% increase on a sequential basis and 14.8% decrease on a year-over-year basis. And finally, the other vertical represented 9% of our second quarter revenue and was down 10.6% on a sequential basis and up 26.7% on a year-over-year basis. We ended the second quarter with a total headcount of 3,961, up from 3,892 employees in the first quarter of 2024 and up from 3,862 in the second quarter of 2023. At the end of the second quarter of 2024, our total US headcount was 347 or 8.8% of the company's total headcount versus 8.2% in the year-ago quarter. Our non-US headcount located in Europe, Americas, and India was 3,614 or 91.2%. In the second quarter, revenues from our top five and top 10 customers were 38.5% and 57% respectively versus 37.6% and 56.6% in the same period a year ago respectively. During the second quarter, we had a total of 208 customers down from 210 in the first quarter of 2024 and 216 in the year ago quarter. During the quarter, we added several customers, some of which Leonard referred to in his prepared remarks. The year-over-year 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 $29.6 million or 35.6% compared to $27.7 million or 34.7% in the first quarter of 2024 and $28.3 million or 36.6% in the year-ago quarter. On a non-GAAP basis, our gross profit was $30.1 million or 36.2% up from $28.1 million or 35.3% in the first quarter of 2024 and up from $28.8 million or 37.3% in the year-ago quarter. The increase in gross profit, both in dollar and as a percentage on a sequential basis, was mainly driven by a combination of higher levels of revenue and better utilization of engineering resources. are non-GAAP EBITDA during the second quarter that excluded stock-based compensation, depreciation and amortization, restructuring and expenses related to geographic reorganization, transaction and other related costs was 11.7 million or 14.1% of sales, up from 10.3 million or 12.9% of sales in the first quarter of 2024 and down from 12 million or 15.5% in the year-ago quarter. The increase on a sequential basis was largely due to higher revenues, partially offset by increase in operating expenses. Our gap net loss in the second quarter was 0.8 million or a loss of one cent based on basic share count of 76.6 million shares compared to the first quarter loss of 3.9 million or a loss of five cents based on a basic share count of 76.2 million and an income of 2.6 million or three cents per share based on 75.1 million basic shares in the year ago quarter. Our sequential decrease in gap net loss was largely from higher gross profit, lower levels of stock-based compensation, and this was partially offset by provision for income taxes. On a non-GAAP basis, in the second quarter, our non-GAAP net income was 6 million or 8 cents per share based on 77.9 million diluted shares compared to the first quarter non-GAAP net income of 5.2 million or 7 cents per share based on 78.4 million diluted shares and 7 million or 9 cents per share based on 76.9 million diluted shares in the year-ago quarter. On June 30, 2024, our cash and cash equivalent totaled $256 million, up from $249.4 million in the first quarter of 2024. Coming to the third quarter guidance, we expect revenues to be in the range of $84 million to $86 million. We expect non-GAAP EBITDA in the third quarter to be in the range of $12.3 million to $13.3 million. For Q3 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.