Q3 2020 Grid Dynamics Holdings Inc Earnings Call

One of them before.

Companies are increasingly focused on improving efficiencies across their sales lifecycle and upgrade sheets by leveraging data driven solutions, our customers demand three dynamics duties in data science.

David Engineering and artificial intelligence.

And now coming back to the third quarter.

We witnessed growing demand for our expertise as customers steady increase their investments in digital transformation.

This was not specific to any one market, but rather widespread across industry verticals.

In each of the three months of the third quarter, our revenue grew sequentially.

With September being the fourth consecutive month of the group.

Most important.

In October we saw the sales upward trend leading.

Moving on to be confident in Q4 outlook and momentum total recovery, so recall that lever.

And beyond.

Unprofitability product.

It was a strong pickup in our margins from the second quarter. This.

This was driven by two key factors.

The first was tied to increase utilization rate across the company.

And the second was from a greater mix of offshoring.

While we expect these trends to continue providing tailwinds to our business in the fourth quarter reinstatement of compensation as well as strategic sales force hires may offset some of the game.

And he will provide more color around the margin movements in the fourth quarter.

Our non retail business was 77% of revenue and grew 10% on a sequential basis.

Also importantly, this part of the business has grown double digits sequentially in each of the third quarters of 20 Twond.

The continuous trends you made during the pandemic crisis, clearly validates the importance of digital transformation.

Now coming to our retail segment witnessed a strong sequential growth from the second quarter as our retail customers opened their stores and resumed operations that set the growth was not consistent across retail customers with majority of retailers still working with the smaller 80 budgets for the remainder.

One to two points lower anticipated a pickup in revenue in Q4, we do not expect achieving great coverage levels of revenue business and retail.

During the quarter.

We also delivered some notable projects.

Number one.

We assisted and enhance the revenue over leading search technology company by integrating its search engine at several large enterprises in the United States as a part of their partnership to improve online customer experience code product search and please.

Number two.

Regardless of CPG companies optimize their in house cloud data platform.

This resulted in 75% improvement in vacancy of data processing and significant reduction in costs associated with infrastructure and maintenance now.

Number three.

The leading digital advertising company, we've built a marketing platform using our expertise with data science and data each year.

One of the tangible outcome of our efforts for the customer increasing the conversion by 44%.

One more of them as new as retailers, we've build a customized local platform, replacing an existing platform that was expenses and inefficient.

Our implementation.

Focus on enhancing customer experience leading to improvements in customer satisfaction.

And the current economic environment consumers are increasingly demanding a robust digital might experience to shop for goods and services and this is just one example, how COVID-19 has become the catalyst to digital Princeridge.

You wouldn't during this time of uncertainty and uneven customer demand, we continue to execute very well in adding new customers, especially in our higher growth verticals.

During this quarter greater Nellix added five new logos, we will reach for our considerable significant players what is in the medical device technology space. Another one is in the home improvement sector.

And the last but not least want is the global financial technology payment platform says.

We believe these programs have the potential of becoming large customers over time.

Additionally, we continue to make good progress on customer diversification.

During the quarter to our top five clients were in the technology space and one each in CPG retail and in Fintech.

Our top clients during the quarter were Apple and Google.

With that let me turn the call over to our new who will discuss third quarter results in more details and you.

Thanks, Lynette good.

Good afternoon, everyone let.

Let me start by summarizing our third quarter 2020 results.

Total revenue of third quarter was $26.3 million, an increase of 18% sequentially and decline of 16% year over year and exceeded our guidance range of 24.5 million.

26 million.

Other than financial all segments grew over the second quarter with strong quarter over quarter growth coming from CPG manufacturing detailed and the other segment.

Technology media and telecom, commonly referred to as technology was the largest vertical in the quarter.

Our non retail business now representing 77% of revenues in the third quarter was up 10% on a sequential basis and 47% on a year over year basis.

Key highlights for our technology segment, which represented 48% of our revenues and grew 6% on a sequential basis and 45% on a year over year basis.

And CPG manufacturing that represented 13% of our revenue and grew 36% on a sequential basis and 146% on a year over year basis.

Here are the details of the revenue mix.

Revenue for the three months ended September Thirtyth 2020 from our retail segment was 23% of our total revenue a drop of 33 percentage points over the year ago quarter.

During the quarter, we witnessed a sequential pickup in revenues from this segment as most of the retailers started engaging with some of the E commerce retailers growing more rapidly.

The technology segment was 48% of total revenue up from 28% of revenue in the year ago quarter.

Finance.

What's 20, 12% of revenue.

Up from 10% of revenue in the year ago quarter, and CPG and manufacturing was 13% up from 4% of revenue in the year ago quarter. Finally, the other segment was 4% of revenue up from 2% in the year ago quarter.

We exited the third quarter was 1204 employees down from the second quarter headcount of 1237 and at the level of 1350 employees in the third quarter 2019.

The sequential decline was largely from the effects of the restructuring program initiated a couple of quarters ago that spilled over into the early part of the third quarter.

At the end of the third quarter 2020, our total US head count was 249 people or 21% of the company's total headcount, while our non us headcount, which we sometimes referred to as off shore located in the central and Eastern Europe locations was 955 or 79%.

Revenue from our top five and top 10 customers were 60% and 78% respectively. During.

The wide utilization as revenue picked up in the third quarter.

Second graders share of offshore <unk> engineers as customers increasingly sought to work with our offshore locations.

Third cost savings from lower levels of spend as restrictions continue to be in place and finally fort the increased in number of working days.

And just did EBITA during the quarter that excluded stock based compensation was $4.2 million or 16% of revenue down from $7 million or 22% of revenue in the third quarter year ago.

The decline was mainly due to decline in revenues combined with increased operating costs, such as public company costs.

Our GAAP net income totaled a lasso $1.1 million or a loss of two cents per diluted share.

Based on 49 7 million shares compared to a GAAP net income of $4.5 million or 20 cents per diluted share based on 22.7 million shares in the year ago quarter.

On a non-GAAP basis, our net income was 2.5 million or five cents per diluted share based on 49.7 million shares compared to 5.1 million or 23 cents per diluted share based on 22 7 million chairs.

The decline in gap and non-GAAP income was due to a combination of reasons highlighted earlier, both on the gross margin and operating expense front.

Our cash cash equivalent in short term investments totaled $126 5 million up from 123 million in the second quarter and 42 million as of December 31, 2019.

A sequential increase in the current quarter was due to continued positive cash generation aided by aged accounts receivable payments from some of our higher risk customers.

The significant increase from December 31, 2019 balance was primarily due to the successful merger between <unk> and grid dynamics on March five 2020.

As you may recall in the second quarter, we'd reserved a total of point $8 million for allowance of doubtful accounts.

Over the past three months, we have received payments from our high risk customers and continued to be engaged with them to ensure they fulfill their payment obligations.

Based on our latest review, we're lowering our reserves $2.4 million to a final amount.

For a million dollars.

Coming to the queue for guidance.

We are providing revenue guidance for the fourth quarter and expect revenues to be the range of 27 7 million to 28 7 million.

And that concludes our prepared remarks, operator, please open the line for questions.

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EBIT margin expansion as we talked in our prepared comments.

Our utilization just went up.

If you recall Q2 revenues dropped off and we're kind of coming back to our pre corporate level. So that was the big movement on the.

Q3 front.

As we go into Q4 from a modeling point of view or what I would say is that.

A couple of things across our.

Cogs and Opex combined.

Sure sure No book.

So.

The.

High level picture.

He's pretty much straight forward.

There's an increased amount of spending with greed and mix.

All major debt.

Clients as well as the ULA claims required more recent Oh I.

I would not call it seasonal I think that it may reflect some of the.

You know expectations from.

College situation to invest more into do show, but there are many of the projects are long planned term programs and which were either not affected all accelerated as of recently.

And they are broadening the nature from.

The data side of the business analytics.

The official intelligence.

Data plus the big data the broader number two or more of marketing related to really the projects as well.

Some of the partnership with qualification sales I would say, it's a very broad.

Segment.

Very comprehensive capabilities and.

That's.

I would say bill.

The rate will continue to expand both forward.

Great. That's helpful. Leonard and then just a quick follow up just to understand kind of similar.

The underlying dynamics in the retail sector a bit more clear.

Clearly there there's more on premise sales going on this quarter with stores open and the like but just from your perspective, and perhaps especially with some of your department store retail customers how.

How do you see their business models changing over time towards more E commerce versus.

Brick and mortar sales and how do you see that opportunity with those those particular types of retailers.

Changing over time relative to their business models do we need the brick and mortar.

Locations to bounce back materially or you know.

Can we rely more on the E commerce side of their business.

Going forward, Thanks, a lot.

Sure.

It's a very long question. So let me try to break it up into things.

We see a new trend of emerging projects as well as client or little bit more E commerce driven in E Commerce sales.

And then how long or large or some of these initial projects and what is the pathway for additional work with some of these customer.

Very good.

Good do you like.

So there are a couple sectors I in my presentation I kind of name that several of those new customers a very large enterprises.

And.

Pretty much all of them have a potential growth if you'll recall was still continue to execute them. Two 510 million dollar strategy as we go and expenses best that earlier engagements with our clients.

And certainly all of them fall into the category more than two but it's a couple of them definitely a good candidates to go that's five and perhaps $10 million.

Due to some of the changes may have implemented I know that this is.

A slightly different dynamic for grid, because you have the public company costs rolling on but.

But is there an opportunity going forward to think about the business and expenses somewhat differently and and an opportunity here.

And they come and go from there.

Yeah. Thanks for your question Maggie So as you would expect right everyone are working out of home.

So we're not traveling there are a lot of travel restrictions in an it services company as you would expect people.

People move around.

You have accommodations hotels, I mean, there's a hosted variety of costs.

I want to add that I think it would be good to also realize that as we expanding all of sure Ah hiring and it's accelerates very quickly.

There are some costs associated with revenue will increase but.