Q1 2021 Grid Dynamics Holdings Inc Earnings Call
[music].
For dynamics Holdings, Inc. First quarter 2021 earnings call at this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder.
This conference is being recorded it is now my pleasure to introduce your host Lilly Astra Nova head of Investor Relations. Thank you you may begin.
Good afternoon, welcome to grid dynamics first quarter 2021.
From school before we begin let me remind everyone that today's discussion will contain forward looking statements based on our current assumptions.
Patients mbd, including our second quarter 2021 financial guidance the growth of grid business, Oh objectives and business strategy as well as other forward looking statements.
You can refer to the disclosure at the end of companies from press release and form 8-K filed with the Securities and Exchange Commission to day for information about forward looking statements will be made on this call.
All statements made today reflect our current expectations on it and we undertake no obligation to update annual guidance to reflect the events that will mature after this call.
You can learn more about the specific risk factors that could cause our results.
To differ materially from today's discussion in the risk factors section of the company's form 10-K filed on March 2021, and in the subsequent periodic reports that the company filed for that because you see.
During this call we will discuss certain non-GAAP measures of our performance GAAP to non-GAAP financial reconciliations and supplemental information.
<unk> provided in the earnings press release, and 8-K filed with the SEC. This call is also available via webcast you can find all the information I have just described in the Investor Relations section on grid dynamics website.
On the call today.
T O on line with mission and Stifel I knew the Rockies.
Following their prepared remarks, we will open the call to your question with that let me turn the call over to Leonard.
Thank you Lilly.
Good afternoon, everyone and thank you for joining us today.
I'm excited to share my thoughts on <unk>.
Wow, Great dynamics is making strides that crosses business and highlight the progress we have made.
With you.
Two months ago.
On the call today.
Provide highlights on.
First quarter results.
We're with you.
We had a weakness in their growth business on the demand for them.
You talked about the trends there shaping our sector in the quarter and 2021.
When we spoke with you all in March.
The weighted commentary.
On the demand environment, both for the first quarter.
For your 2021.
Well as highlighted reasons well all be eligible.
Good day on the call I'm happy to reiterate OIBDA positive cuddled.
Sure Vin.
And Furthermore, our strong first quarter results and guidance for the second quarter COVID-19.
Indicate a robust demand environment, where customers are actively seeking our services for strategic digital transformation projects.
The current industry verticals.
Now coming to the first quarter on.
I'm very pleased to report the highest revenue quarter for me historically been at.
He was.
Our recent acquisition of Ducks. This was an all time high quarter.
In the first quarter on revenue of $39 1 million included $6 million of revenue from Doug and me.
It was higher than our guidance range of 35 to 36.
6 million Boes.
Both Doug and non ducks revenue exceeded our expectation.
As demand picked up across all our vertical industries.
I indicated last year.
Q1, 'twenty one is important milestone achieved in this quarter, our revenue exceeded pre COVID-19 level.
Q1 'twenty two.
There are many positive trends in this quarter and I wanted to share with you some of the notable one.
In each of three months of the first quarter.
Revenue were higher than our expectations for.
For the end of January weakness.
Significant pick up from customer activities as digital transformation initiatives took center stage.
While there are several reasons for this we believe the positive economic outlook, improving customer sentiment and catch up on spending at some customers who held back in 2020 have been key reasons.
Additionally for many customers' digital transformation initiatives have elevated to become mandatory.
Based on our customer engagements and interactions. We believe these positive trends will persist leading us to be incrementally positive for the rig.
Major of 2021.
There's been an uptick in demand for pellets across multiple states, while there is something where we'd miss last quarter with a greater demand for data science specialists and big data engineers.
This quarter the demand spread across a wide spectrum of engineering skill sets.
Example of these signals from them and backend engineers, the walks and quality engineers as well will increase our focus on hiring expanding all internship offerings and training grid dynamics in juniors.
During the first quarter, we added a total of 162 people.
Over the fourth quarter of 2020.
Our head count reached 2006.
Inquiry.
Our workforce continues to extend offshore.
As we built dedicated offshore sensors for them.
Low customer locations.
The first quarter with 88% of our workforce in offshore locations I hope for.
86% in the last quarter and 81% in the quarter.
Year of growth as we highlighted last quarter. The combination of continued focus on cost efficiencies grid acceptance of remote work and the ability to step in skilled delivery teams quickly have been key factors, we expect the trend to reverse as was globally term to normal.
See in the United States and customers see grid, the collaboration with onshore presence.
During the quarter, we added six new logos on our core organic business with all of them contributing revenue in this quarter Jordan TMT space one in healthcare one in services one on the specialty retail and one on CPG.
As you all know in December 2020, we acquired Ducks and as we highlighted box customers Tim toward the start ups and mid market customer base. During the quarter. We had a total of 180 for customers out of which 48 customers were part of organic growth.
Revenue for our top five customers in the quarter.
50% this was down from 64% while revenues from the same quarter a year ago.
The diversification of customer revenues was largely driven by a combination of our continued success in ramping new logos going deeper with existing customers and our recent acquisition of debt within our top five clients.
You are in the TMT space. One is in banking was CPG and one is retail.
During the quarter, we launched an accelerator in partnership with AWS. This partnership enables our customers towards modern data platform based on Amazon's cloud and rollout advanced data analytics capability and short Timeframes.
Customers reported all accelerated can reduce implementation times from months to days.
During the quarter with three customer wins across CPG and manufacturing Mark.
Now we're coming for some segment comment.
At 47% on first quarter revenues, Jim he continues to be our largest vertical.
The other two last quarter.
Our largest customers continue to focus on expanding offshore delivery offices, we agreed on it.
That's it.
We see those customers a return to revenue growth.
The fourth quarter.
Going forward, we continue to believe GM.
<unk> will continue to be our largest vertical and the focus will be complemented by acquisition of index, where.
With two thirds of its revenue derived from the TMT industry work.
Two per cent or first quarter revenue CPG in minutes at true continued to assure a robust growth both on the sequential and year over year.
Underpinning this strong growth was our success at one of the largest global.
CPG, Brent, which became one of the largest customers of grid dynamics in the first quarter.
Lighting and I'll call in March we entered 2021 with key design wins at this customer and expect to maintain strong momentum in 2021.
At 23% of the first quarter revenue retail business continued to weakness growth over last quarter. Within this segment income was friendly brands to continue driving the growth in the quarter, while the brick and mortar department stores continue to be an expense.
During this quarter with their day.
Deliver on some of the notable purchases.
For a California based enterprise search company.
Free artificial intelligence powered search engine solutions to many of the world's largest brands.
Since as a company and improving search quality.
Our solutions were in the area of full text search and we use cemented query policy to improve the overall performance.
We also expect that customer to deploy this offering across various industries.
For a technology company in the field of computer accessibility, we help to create a product that detects accessibility issues in mobile.
It extends our product offering of declining volume.
Until recently covering Webb for me.
The moving valuable product was delivered in the record time of two months of Latino customer to announce it release before around there from.
In the broader context, the product will help bring the attention of companies to assess the ability of limitation in the application and make digital technology available to everyone.
For any EMEA based online marketplace, we implemented a modern search engine based on open source technology to help overcoming the challenge of recruiting product of interest during the browsing experience.
The blood flow has been developed tune and make radio for go lives in a SaaS based scheduled for.
Only nine weeks.
The scale and the right product is the most critical part of channel users by the Huber.
With grid dynamics search technologies, the company will be able to effectively attract absorbed in routine more and more business to growth.
For one of the largest U S based on manufacturing company grid, the Nymex architecture and engineering team developed a groundbreaking new concept of new lifestyle platform that was released for the public in Q1 2021.
<unk> mimics.
The market needs and brought to the client a versatile knowledge of west of the best practices and CPM.
It's a very successful start to the recent partnership.
With that.
Let me turn the call over to Neil who will discuss Q1 results more deals.
Thanks, <unk> good afternoon, everyone.
Our first quarter revenue of $39 1 million exceeded our guidance range of 35 million to $36 5 million.
It was up 30% on a sequential basis and 21% on a year over year basis, excluding revenues from docs, which contributed $6 5 million revenues in the first quarter on <unk>.
$32 6 million increased by 12% on a sequential basis and slightly up on year over year basis.
The better than expected revenue in the quarter was driven by a pickup in demand across industry verticals.
Similar to the last couple of quarters, our technology vertical was the largest vertical in the quarter as Leonard pointed out this was not only the highest quarterly revenue, but also the quarter that Mark the company and returning back to pre COVID-19 revenue levels.
In the first quarter, our non retail business now representing 77% of revenues was up 36% on a sequential basis on 85% on a year on year basis.
During the quarter on our retail segment, representing 23% of other revenues grew 14% on a sequential basis.
The growth in the quarter was largely driven by our top e-commerce friendly retail client and to a lesser extent by others.
Spite other 14% sequential growth retail was down 45% on a year over year basis.
Our technology vertical represented 37% of first quarter revenues and grew 28% on a sequential basis and 43% on a year over year basis.
Within this segment some of our largest technology customers reverted to sequential growth over the fourth quarter as they ramped their offshore operations with us.
Here are the details other revenue mix of other segments.
Our CPG and manufacturing represented 22% other revenue in the first quarter and grew 41% on a sequential basis and 300% on a year over year basis.
As <unk> pointed out in his opening comments the strength came from our engagement with a global CPG brand that is in the midst of ramping key digital transformation programs going forward incremental program wins combined with ramping of existing programs and this clients make us bullish in this segment in 2021.
Financial represented 9% of revenue and grew 14% on a sequential basis and declined 15% on a year over year basis.
The sequential growth in the financial segment was driven by ramp programs and a key financial customer that had witness decline in the last couple of quarters.
And finally, the other segment represented 10% of our first quarter revenue and was up 103% on a sequential basis largely from faster than expected ramps and some of our recent client wins.
We exited the first quarter with a total head count of 2056 people up from 1890 for the fourth quarter of 2020 and up from 1357 in the first quarter of 2020.
The 9% sequential increase in head count was largely a reflection of the improving demand environment that resulted in head count increase across all our regions.
At the end of the first quarter of 2021, our total USA Com was 253 people or 12% of the company's total head count down from 14% in the fourth quarter and down from 19% in the year ago quarter, our non U S income, which we sometimes refer to us offshore located in.
Central and Eastern Europe locations was 1800 <unk> people are 88%.
In the first quarter revenues from our top five and top 10 customers were 50% and 67% respectively.
During the same period, a year ago, our top five and top 10 customer concentration was 64% and 86% respectively.
The decline was driven by a combination of new logo rent continued industry diversification and our recent acquisition of docs.
During the quarter, we had a total of 180 for customers 48 from our organic business and the remaining 136 from our <unk> acquisition.
Within our organic business, we had a total of 48 paying customers during the quarter up from 43 in the fourth quarter and up from 37 in the first quarter of 2020.
As a reminder, we only count the revenue generating customers in the quarter and did not include customers who were enacted during the quarter.
Relative to the fourth quarter, we added six new logos to in the technology segment, one in CPG, one in retail and two in the other segment.
Moving to the income statement and including our recent acquisition.
Our GAAP gross margin during the quarter was $15 $3 million on 39, 2% up from $12 3 million or 47% in the fourth quarter of 2020 and up from $9 8 million on 32% in the year ago quarter.
On a sequential basis the decline in gross margin as a percentage was from a combination of factors that included headwinds from fewer working days increased head count costs from hiring and a full quarter.
Of our recent acquisition of <unk>, which has operated at lower margins.
On a non-GAAP basis, our gross margin was $15 4 million or 39, 5% up from $12 4 million or 41% in the fourth quarter of 2020 and up from $11 $5 million on 35% in the year ago quarter.
The sequential decline in the non-GAAP gross margin as a percentage was driven by the same factors, which were highlighted earlier.
Adjusted EBITDA during the quarter.
Net excluded stock based compensation depreciation and amortization.
Transaction and other related costs was $5 3 million on.
For 13, 4% up from $4 1 million or 13, 7% in the December quarter.
And up from 3 million or nine 4% in the year ago quarter.
The slight sequential drop in EBITDA as a percentage of revenue was largely due to lower gross margins combined with higher operating expenses.
Additionally, on the year ago quarter, our business was impacted by the pandemic related headwinds, resulting in lower levels of EBITDA both on.
In terms of dollar amounts as well as a percentage.
Our GAAP net loss in the first quarter total $2 1 million or a loss of <unk> based on a share count of 52 million shares compared to the fourth quarter loss of $4 7 million or a loss of <unk> 10 per share based on 50 million shares.
And the loss of $4 6 million or a loss of <unk> 16 per share based on 30 million shares in the year ago quarter.
The sequential decrease in GAAP net loss was a combination of factors that included higher revenue from a full quarter of docs and lower stock based compensation expense.
On a non-GAAP basis in the first quarter. Our non-GAAP net income was $3 1 million or five cents per share based on 60 million diluted shares compared to the fourth quarter non-GAAP net income of $2 2 million or four cents per diluted.
Share based on 55 million shares and $1 $9 million on <unk> per diluted share based on 34 million diluted shares in the year ago quarter.
On a non-GAAP basis, the increase from the fourth quarter was largely due to a full quarter of revenue contribution from docs.
Our cash cash equivalents and short term investments total $100 million.
Down from $113 million on December 31, 2020.
And down from $121 million on March 31, 2020.
The sequential decline in the current quarter was largely due to tax withholding obligations related to issuance of shares in connection with vested awards. The year over year decline was primarily due to the acquisition of dogs, which was paid in cash.
Coming to the first quarter guidance, we expect revenues to be in the range of $40 5 million to $42 million. This includes $5 5 million in revenue contribution from our recent acquisition of Docs, we expense our adjusted EBITDA in the second quarter to be in the range of six.
To $6 3 million.
For the full year 2021.
We expect our revenue to be at least $165 million.
This includes a contribution of $23 million from docs.
Yes.
For the second quarter, we expect our basic share count to be in the $54 million to $55 million range and our diluted share count to be in the $62 million to $63 million range.
That concludes my prepared remarks.
Operator, we are now ready to take questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is on the question queue. You May press star two if you'd like to share with your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one on that please poll for your questions.
Yeah.
Our first question comes from the line of my on Tandon with.
Needham <unk> company. Please proceed with your question.
Good evening, Hi, Leonard on Orlando, you congrats on the quarter.
I wanted to start with just the guidance, obviously very strong momentum coming out of <unk>. The <unk> guidance looks good on a full year does as well.
Does call for a pretty sharp deceleration in the second half if I'm doing my math right just wanted to get a sense. If that's just.
Being conservative at this juncture in the euro or is there something else that is impacting the second half outlook relative to the strong momentum in the first half.
Right.
Mike. Thank you very much great question look I mean, we just started the year.
If you see our guidance is at least.
That dollar amount right and obviously, our first quarter was strong.
Come back and give you an update but based on the business momentum and.
Just the.
The tone of the business.
We feel pretty positive for 2021 look I mean this is our best guesstimate right now.
As we said, we'll come back in three months and obviously hopefully give some more positive news.
Got it no that's understandable.
Mike This is Lauren.
Yeah.
More color on it.
We had a very good quarter last year.
This quarter was even better.
Good visibility in Q2, obviously with risk to remain to be a little bit more conservative just to make sure we get them all defects, but yes, absolutely. There is no immediate for assumed deceleration.
<unk>.
Got it that's very helpful. And then just as a quick follow up I wanted to get some other.
The other on the supply side of the equation there had been some concerns expressed by other it services companies in terms of being able to attract enough talent. There is clearly a war for digital talent pressure on attrition and wage inflation. So any perspective on that would also be very helpful. How you're managing some of these headwinds you meet increasing demand.
Sure Ryan.
Well you actually.
On two or three questions right. So.
Let's just make sure we will have other people chance just the same question because I suspect there'll be more people talking about the same just a high level first of all on the talent.
You're right.
Always a pressure above.
Getting the right people for the company.
We are getting more and more demand on the variety of skill sets come true.
On existing and new customers.
To some extent we've been preparing for that.
We build a strong pipeline income from the internship programs from partnerships.
For people additional hiring.
What I hear some other company.
Companies talk about the projects one of the benefit it has for that.
Our model of London, and helps us because we started many projects with.
With a handful of people and then building on top of it so I believe.
Scalability on definitely.
Even though it's it's.
Industry challenge grid and is well prepared.
Great.
Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
Thanks, Congrats on the results.
I'm wondering on the EBITDA margin.
What's holding you back from are creating uncertainty and the EBITDA margin guidance for the full year and it's something in the low teens tomorrow for Q1, and your Q2 guide a reasonable expectation for the full year.
The momentum on margins as well at the same time for a bit caution about some of the.
Which mean that'd be a favorable to the industry not degree day ma'am.
And and Ah, while I'm very optimistic about the next steps beyond the queue too and information we have guidance for the very promising to 21, we're just trying to be a bit Ah rational how we can peso salts if you recall.
Got into the eye of the storm last year.
I made a comment that you know despite all day, you know headwinds I'm going to hit the.
Recover on revenue into you want and that that kinda was really far fetched for most of the guys was cheered the share but now we are.
Out of the game.
And then we're talking to one of those quarterly discussion about when we're gonna get back to some stupid on margins and I mentioned, let's wait for Q2 resolved so, let's wait and see how that things will turn out.
Okay. Thanks for that and then when you think about your vertical and obviously there is good growth and the other segments is there anything that you know some for articles click on there that are congrats drivers could be a breakout that we should keep an eye on and what does it take to re and.
[noise] decorate a financial services segment as well thank you.
Yeah, So Ah Maggie you're right there are a couple of.
Now certain dynamics happy with certain customers, they're not getting to a point, where you know we want to break it out as a separate vertical largely because there went off but these are related to some of the design when summer program When's, a customer with me I had over the <unk>.
You know 12 months.
We have you know particular customer in online delivery of course trees, and we have another customer in the you know.
The closest I can come in the food delivery you know business.
So yes, there are a couple of those things and and what time will will break it up on the financial you know if you look at our business. We don't have as many customers, perhaps as we have with the T. M T and other things. So these handful of customers when they moved they have a meaningful.
Impact we solve this one particular customer reverting back to program growth and that impacted us and as you may recall last quarter, we even talked about a global insurance customer. So we're trying to diversify.
Within different subsegment on the financial industry.
Yes, and I think.
Thank you.
It's a good over for.
Uhm review, but other things, which I Wanna bring.
Bringing attention to is that some of grid dynamics accelerators solutions integrated uhm practices coming from a more traditional industries start accelerating with additional expansion during the call the time and the other day that goes in the demand for what grade was.
Able to deliver start spreading across multiple ordered on so I think I'm a meal is fair to say, it's a little bit early to call the sub groups, but to summarize they're very much some communists in terms of our cortisone Doe capabilities, just you're moving into the new fields. Okay. Thanks.
Hi.
Thanks.
Thank you. Our next question comes from the line of Joseph Stacey What's Canaccord. Please proceed with your question.
Hey, guys good afternoon.
From a good result.
Maybe we talk first on that large C. P T customer that you called out I know it.
For fast growth customer for you right now.
Is that customers still growing or you know how do you see the evolution you know in terms of.
The new constitution from from that customer playing out overtime in a couple of follow up.
Very good question.
I I believe.
What you're asking is it kind of a temporary ramp up or it's a longer term growth well.
There are a couple of aspects, which we're currently in the in the Jordan work for we're very proud to be not just for implementation.
Nation partner with having a fever.
The table and a variety of the Roadmaps and a new innovation, which this guaranteed P. G customer is demanding which goes for the areas of business cause you were currently on them.
Not present as well as some of the global international opportunities jointly with this customer. So you know I would have this you know the magic Crystal ball to say, how and when this.
Exploration will continue but we definitely see the continue demand and based on my expectation was customer will continue to grow for.
That's helpful on her and then.
On a six new logo in in in general.
When you look at the sales pipeline.
Now what are you seeing in terms of you know sizes of enterprises hearing days in where it Friday day in about the same are they growing.
You know do the six new logo with kind of have to.
Capability become top customer of overtime or [noise].
Any color you can provide there'll be helpful.
Sure sure so.
First of all on your other kornblum.
[noise] mentioned on the name the logos, which we haven't just signed a contract with but generated revenue. So hopefully but at the same time next quarter will give you even more color and for now I believe it's for my idea and I've got something that we don't have money in the bank yet.
So this six specific customers I would say that come from the mid to upper age Ah I wouldn't call any one of them to be like a super giant at this point, however was very encouraging some of them.
Some of the customers, which were previously engaged with picking up. Thank you want to the level, where we would be more comfortable to add them to the top tier in the second half of this year also some of their contract with just sorry.
Starting again without revenue, yet we share huge potential to be an old.