Grid Dynamics Holdings, Inc.

Good afternoon, everyone. Welcome to Grid Dynamics' third 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 Livshitz, CFO Anil Dharadla, and COO Yuri Grislov. Following the prepared remarks, we will open up 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-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. Grid Dynamics reported another solid quarter as positive trends continued to favorably influence our business. Our third quarter results were above our guidance range and exceeded Wall Street expectations, both in revenue and non-GAAP EBITDA. More importantly, our revenue and profitability were the highest in a company's history. Similar to the second quarter, we exited the third quarter with a record billable engineering headcount. Customers, both existing and new, are contributing to our strong results which is a testament to our technology differentiation and delivery excellence. The addition of Argentina-based mobile computing enhances our follow-the-sun capabilities, and the acquisition of UK-based JAXT elevates our industry expertise in banking and financial services. With both acquisitions, our teams have started working together, and I expect them to generate immediate, scalable synergies starting in the fourth quarter. There are many trends shaping the company, both in the fourth quarter of 2024 and in 2025. Some notable ones I will share with you today. As we exit 2024, our long-term targets around the company's growth, profitability, and technical leadership remains unchanged. Now coming to the demand environment. Similar to the first half of 2024, demand trends improved across our customers. In the third quarter, we witnessed our customers funding key programs and initiatives. At many of our customers, there is a sense of urgency to complete projects by the end of the year. Numerous initiatives that were held back during the economic cycles are being prioritized for completion. This is something we witnessed across a wide range of customers and industries. In many ways, the foundation of the third quarter demand trends were set up in the first half of the year. If you recall from my last quarter commentary, I highlighted the first quarter was characterized by customers focusing on sharing their outlooks and forecast plans, but not aggressively spending. In the second quarter, customers were more willing to release budgets and implement their plans. Bottom line, the positive demand environment that we witnessed in the third quarter was a result of steady improvements over the past couple of quarters, and we expect it to continue into the fourth quarter and beyond. We set a new record for partnership influence revenues. Year-to-date, partnership revenue contribution is 18% of the total revenue. Our focus on hyperscalers paid off, with three of the largest being in the top five for the partnership revenue. As I pointed out earlier, we are thrilled to welcome JAXA and mobile computing to Great Dynamics. Each company brings in a unique set of capabilities. Founded in 2013, JAXA is known for delivering complex end-to-end solutions from design and user experience to deep functionality and ongoing managed services. Their specializations in mission-critical platforms and products for leading banks and financial institutions make them a strategically important addition to Grid Dynamics. especially as global demand for reliable, scalable, future-proof data solutions continue to grow. Their focus on risk platform, structured products, equity derivatives, and financial reporting is highly complementary to our current offering in financial services, which adds into our portfolio some of the world's richest banks and financial institutions. The acquisition of mobile computing expands Green Dynamics' global footprint and follows the Sun delivery model. Founded in 1998, mobile computing is recognized as a leader in digital transformation over a comprehensive suite of solutions spanning industries including manufacturing, CPG, and financial services. By adding this talented team in Argentina, our clients now have expanded options in Americas, complementing our established presence in the United States, Mexico, and Jamaica. During the last earnings call, I shared some insight around vendor consolidation across many of our clients. Over the past 12 months, customers have been scaling back on the number of IT vendors they work with. During the third quarter, the majority of vendor consolidation efforts across customers were completed. Grid Dynamics technology and operation excellence is highly valued and this helped us join a short list of strategic partners for those customers. Now turning to our AI initiatives. I'm pleased to report that our AI capabilities continue to gain significant traction across our customer base. We've substantially expanded our AI portfolio and now have over 30 service offerings and solutions specifically targeting Fortune 500 companies across various industries. These solutions are designed to drive both top-line growth and bottom-line efficiency for our enterprise clients. On the revenue side, we are focused on innovative customer experiences and enhanced marketing, pricing, and product decisions. On the cost side, our solutions center on efficiency improvements and enterprise knowledge management. What's particularly encouraging is the evolution we're seeing in our AI engagements. While previous quarters were dominated by POCs and user-facing pilot programs, this quarter marked a significant shift as more projects move into the full production environment. Our pipeline of AI opportunities has grown to more than 100 active opportunities, representing a 50% increase from the last quarter. This growth reflects the increasing enterprise readiness to move beyond experimentation to implementation of AI solutions at SCIM. Currently, we are seeing particularly strong demand in three areas of AI. AI-based search, conversational AI, and catalogue enrichment. This demand is driven by rapidly evolving customer expectations as interactions with AI-based assistants become more commonplace in both consumer and enterprise contexts. To support this growing demand, we are expanding our partnerships with hyperscalers, building specialized accelerators based on their foundational models and AI-based services. Internally, we continue to invest in our own AI capabilities. We have made significant strides in improving our engineering productivity through the implementation of AI coding assistance. This enhances our delivery efficiency and ensures our teams stay at the forefront of AI technology implementation. Now let me share a few examples of our AI programs at large enterprises. At one iconic retailer, we've launched an AI solution that streamlines their product catalog management by automatically extracting and harmonizing product attributes from unstructured data, significantly improving operational efficiency and data quality. For one of the largest US auto parts provider, we are implementing an advanced AI assistant that connects customers with the store associates through instant messaging. This solution incorporates visual auto part recognition and conversational part finding capabilities, enhancing both customer experience and operational efficiency. At one of the largest beverage companies, we are developing a conversational knowledge AI platform focused on improving employee productivity by providing intelligent access to corporate knowledge and streamlining internal processes. These implementations showcase our ability to deliver AI solutions that drive meaningful business outcomes across diverse industry verticals. As we look ahead, we remain confident in our positioning as a leader in enterprise AI implementation, supported by a growing pipeline and expanding partnership ecosystem. In the quarter, there were several trends and I want to share some of the notable ones. Number one, logo momentum. In the third quarter, we signed six new logos, which are large enterprises. Of these customers, we signed in a quarter, one is a global food product and hospitality distribution company, another one is an automotive part company, and another one is one of the largest grocery retailers in Europe. Partnerships. Revenues driven by strategic partnerships have shown sustained growth, contributing 18% of our total revenue in the first three quarters of 2024. In response to this positive trend, we're investing in adjoined sales and marketing and collaborating closely with hyperscale and SaaS providers. These efforts span across critical areas such as digital commerce, application modernization, data platforms, and engineering services, allowing us to tap into an even broader range of opportunities. Additionally, our partners are emerging as critical channels for seizing opportunities in artificial intelligence and generative AI. as demand in these areas continue to rise. To further strengthen our footprint, we're actively deploying our AI and generative AI accelerators across hyperscaler platforms and marketplaces, enhancing accessibility and engagement for clients seeking advanced AI solutions. In the expansion, Our Follow the Sun strategy provides the framework of scaling our global locations. India is now in our top two countries by headcount, and it is an integral part of our global delivery model. Bandalore, our third location in India, is now scaling its team, has been a successful addition to our Indian operation. We're scaling relationship with India-based GCCs. Recently hosting a technology and innovation forum attended by more than a dozen GCCs. European business. With roughly mid-teens of our revenue, Europe continues to be strategic to our growth. We are increasing our footprint with the European division of our large global accounts. We're also expanding our business with joint go-to-market strategies with hyperscale across all our services. We are witnessing significant AI adoption trend with clients engaging us to assess their AI and data platform capabilities in preparation for building AI platforms that will support multi-year business transformations. A major UK-based retail customer is engaging us not only on the e-commerce transformation, but also on their cloud migration journey this year. In Q4, we're launching a composable commerce B2C solution for a major auto part distributor. We're working toward helping them further modernize and consolidate their complex technology landscape into 2025. During the quarter, Grid Dynamics delivered some notable projects. A leading global technology company sought a solution to maintain user data in compliance with privacy regulations. Grid Dynamics successfully implemented a consolidated system, enabled centralized monitoring and management of data sets and user workflows. The UI application has been widely adapted across multiple cross-functional teams within the organization. The new system provides business teams with a standardized method to ensure data sets meet current regulatory requirements. It also maintains a comprehensive audit trails for any changes, enhancing transparency and accountability. A leading financial and investment services company, aimed to enhance experience on its internal web portal, which serves over 10,000 financial advisors. The goal was to improve search result accuracy by understanding financial advisors' intent and delivering the most relevant information. The solution incorporates a do-no-harm analysis to ensure reliability. This feature prioritizes accuracy over completeness by withholding results which the system cannot confidently provide correct information. Grid Dynamics implemented the solution leveraging AWS and NVIDIA technology stack. We recently introduced a contactless payment system for a major US DIY retailer, enabling customers to complete purchases quickly and securely with the tap of their phone or a card. This solution enhances the shopping experience by reducing checkout times and minimizing physical contact. The rollout is underway across more than 2,000 stores with overwhelmingly positive customer feedback. This upgrade underscores the impact of Redynamic's work on our clients' business operations. We successfully launched passwordless biometrics based identification that leverages cutting edge authentication standards to enable users to securely authenticate their online payments using biometric data such as fingerprints and our facial recognition in Summer Olympics, starting from proof of concept to production in the record time of six months. With that, Let me turn the call to Anil, who will discuss Q3 results in more detail.

Thanks, Leonard. Good afternoon, everyone. Our third quarter results were solid as we exceeded our expectations, both on revenue and non-GAAP EBITDA. During the third quarter, we recognized a record revenue of 87.4 million that was organic and ahead of our guidance range of 84 million to 86 million. Our non-GAAP EBITDA of 14.8 million exceeded our guidance range of 12.3 million and 13.3 million. The better than expected results were driven by a combination of factors that included strength from existing and new customers and operational efficiencies. During the third quarter, our retail and TMT were the two largest verticals at 34.1% and 27.7% of our revenues respectively. Our retail vertical grew 11.4% and 12.4% on a sequential and year-over-year basis respectively. On a sequential basis, we witnessed growth from multiple customers in the specialty retail, home improvement space, and department stores. TMT saw an increase of 4.1% and 1.9% on a sequential and year-over-year basis, respectively. Similar to last quarter, our largest customers in TMT vertical grew both on a sequential and year-over-year basis. Here are the details of the revenue mix of other verticals. Our finance vertical was the strongest, both on a sequential and on a year-over-year basis, and grew by 12.7% and 94% respectively. As a result, its share in total revenues increased to 16.2% in the third quarter of 2024. Similar to last quarter, the growth was from customers across the FinTech and insurance space. Our CPG and manufacturing representing 11.2% of our revenue in the third quarter remained relatively flat on a sequential basis and increased 1.4% on a year-over-year basis. Our healthcare and pharma representing 2.9% of our revenues decreased 20.5% and 26.9% sequentially and on a year-over-year basis respectively. And finally, the other vertical represented 7.9% of our third quarter revenue and was down 6.9% on a sequential basis and up 3% on a year-over-year basis. We ended the third quarter with a total headcount of 4,298, up from 3,961 employees in the second quarter of 2024, and up from 3,823 in the third quarter of 2023. At the end of the third quarter of 2024, our total U.S. headcount was 345, or 8% of the company's total headcount, versus 8.4% in the year-ago quarter. Our non-U.S. headcount located in Europe, Americas, and India was 3,953, or 92%. In the third quarter, revenues from our top five and top 10 customers were 39.8% and 59.2% respectively versus 36.8% and 54% in the same period a year ago, respectively. During the third quarter, we had a total of 201 customers down from 208 in the second quarter of 2024 and 224 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 32.7 million or 37.4% compared to 29.6 million or 35.6% in the second quarter of 2024 and 28.2 million or 36.4% in the year-ago quarter. On a non-GAAP basis, our gross profit was 33.3 million, or 38%, up from 30.1 million, or 36.2% in the second quarter of 2024, and up from 28.7 million, or 37% 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. Our non-GAAP EBITDA during the third quarter that excluded stock-based compensation, depreciation and amortization, restructuring and expenses related to geographic reorganization, transaction and other related costs, was 14.8 million or 16.9% of sales up from 11.7 million or 14.1% of sales in the second quarter of 2024 and 10.7 million or 13.9% 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 income in the third quarter was 4.3 million or 5 cents per share based on a diluted share count of 78.8 million shares compared to the second quarter loss of 0.8 million or 1 cent per share based on a diluted share count of 76.6 million. and an income of 0.7 million, or one cent per share based on 77.3 million diluted shares in the year-ago quarter. Our sequential increase in GAAP net income was due to higher gross profit, lower levels of stock-based compensation, and lower provision from income taxes. On a non-GAAP basis, in the third quarter, our non-GAAP net income was 8.1 million or 10 cents per share based on 78.8 million diluted shares compared to the second quarter non-GAAP net income of 6 million or 8 cents per share based on 77.9 million diluted shares and 5.9 million or 8 cents per share based on 77.3 million diluted shares in the year-ago quarter. On September 30th, 2024, our cash and cash equivalents totaled 231.3 million, down from 256 million in the second quarter of 2024. Coming to the fourth quarter guidance, we expect revenues to be in the range of 95 to 97 million. We expect our recent acquisitions contributing 10% of the total revenue. We expect our non-GAAP EBITDA in the fourth quarter to be in the range of 13.5 to 15.5 million. For Q4 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 80 to 81 million. That concludes my prepared remarks. We are ready to take your questions.