Q3 2021 Grid Dynamics Holdings Inc Earnings Call
Greetings and welcome to the grid dynamics third quarter 2021 earnings call.
At this time all participants are in a listen only mode.
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.
Please note that this conference is being recorded I.
And now I'll turn the conference over to your host Lilly I sure Nova head of Investor Relations you may begin.
Good afternoon.
Welcome to great dynamic that's quarter of 2021 conference call.
To begin let me remind everyone that today.
This discussion will contain forward looking statements based on our current assumptions expectations and beliefs.
Including our fourth quarter for you guys in 'twenty, one financial guidance.
Awesome, Great dynamics business, all objected and business strategies as well as either directly you can see.
You can refer to the disclosure at the end of the company's press release and form 8-K filed with the Securities and Exchange Commission today.
For information about forward looking statements that will be made on this call.
All statements made today reflect our current expectations only and.
We undertake no obligation to update any of them to reflect events that will occur after this call.
You can learn more about the specific risk factors that could cause our actual results to differ materially from today's discussion in the risk factors section of the company's Form 10-Q filed on August six 2021 and in subsequent periodic reports that the company filed with the SEC.
During this call we will discuss certain non-GAAP measures of outperformance.
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.
This call is also available via webcast.
You can find all the information I have just described in the Investor Relations section of great dynamics that stake.
Joining us today on the call, our CEO languishes, and CFO and Neil the Rattler.
Following their prepared remarks, well open the call to your questions with that let me turn the call over to Leonard.
Think of Lilly.
Good afternoon, everyone and thank you for joining us today.
<unk> had another good quarter with multiple parties get categories shaping our results.
More importantly, and speaking with you all three months ago, we have made solid progress across multiple fronts.
With this backdrop I'm excited to share a few highlights of third quarter results.
Insights into the underlying business trends.
Talk about how the company is well positioned to lead.
Significant digital transformation.
Both in the near and long term.
They'll come into the third quarter results.
I'm very pleased to report another record quarter of revenue and our company.
This marks the third consecutive quarter of reporting record revenue.
First quarter revenue of 50 $749 million.
She likes to do.
The organic litany of $44 $1 million was higher than our guidance range of 39 recorded in the half a million dollars.
Our recent acquisitions revenue of $13 $8 million exceeded our expectation of 11.
In the quarter weakness, both interest across the customer base and engaging all services and digital transformation and they shouldn't be extended stage priority across.
The enterprise World.
Based on the current demand trends, we enter into the fourth quarter and.
2022 with <unk>.
Crew mental counseling and expect the company to continue being the preferred partner for all customers.
Accomplishments would have not been possible without the efforts of our dedicated employees and I would like to thank all of them, they're continuous hard work and dedication.
There are many positive trends in third quarter.
And I want to share with you some of the notable.
We were supposed to robust demand the cross sells.
This was highlighted by double digit sequential growth rates across most of our verticals.
Furthermore, the strong trends exceeded all expectations as highlighted by the outperformance relative to a culture.
Customers are investing aggressively in digital transformation, Michigan with a deep sense of urgency.
As we highlighted in the past it's been driven by several factors that include improving customer sentiment greater shift toward digital commerce and confused that jud and spending cuts.
Customers, who held back in 2020.
Basically the business pipeline and customer at this moment.
This year strong and we entered 2020 do with incremental.
Demand for the skill sets continues to be robust and during the quarter. We started to see the efforts that were put in place around scaling retail acquisitions could be paying off.
These included increase in capacity.
Extending our geographic locations and aggressively ramping up.
It should grow.
What we would describe universe.
We expect to double the number of interim in 2020, one over 'twenty and again more than doubled in 2022.
During the third quarter with a total of 374 people or the second quarter to now hit song reached $2 884 degrees.
We picked up momentum on the new logo front as well.
Added seven new logos to our getting with all of them contributing risks.
This brings our total year to date, New logo addition to it and.
It is harder than 16, new logos, we added.
R 22.
20, <unk> of the seven three.
We were fortune 502, global Oklahoma comfort.
Columns of the clients in the quarter reached 250.
But they don't adopt like clients to more in the TMT space, one was CPG and retail our concentration in our top clients continued to decline and you can choose to extend our business with new customers go deeper with existing customers and leverage on new acquisitions during the quarter.
Revenue from our top five customers was 42% down from 60% of our revenues in the same quarter a year ago. Our continued efforts around customer diversification of their new logo Lilly run.
And pain.
During the quarter, we made some strategic hires on the sales front across the United States. Additionally, we have made progress integrating ourselves organization across our recent acquisitions and organic business. The focus continues to be around implementing and then it has value strategy by partnering with them.
<unk> clients during the quarter benefited from cross selling.
Consumers starting to assume that now combined technical synergies excuses.
On the partnership front.
Our plan of building deeper relationships with the major cloud providers recently.
A press release highlighting the name as earnings go club Premier partner status for your partner status as a testament to the differentiation that creates an image problem.
Even though these partnerships are crucial and scaling our business excel going to accelerating new enterprise logo acquisitions in the third quarter. We started rolling out the P. O G model for all client engagement. There are many married benefits of the party engagement model that includes.
Efficiencies better cost control and greater flexibility and deliberate the services to clients.
Green dynamics, Claude isn't autonomous gross functional team managed by a dedicated experienced team leader multiple cards could be working with the same cost during the third quarter. We started rolling out of the park model that some of the larger customers and going forward. We expect this form.
We'll use to continue to increase.
Now coming to some segment commentary.
It's 32%.
The third quarter Rubin, our retail business and merged our largest vertical in the quarter.
Underpinning the strong sequential growth with our gaming business in the fourth quarter of tacit knowledge revenue.
During the quarter, we've been strong growth across all retail customers as they aggressively investing into E. Commerce platforms in many ways. The retail industry is undergoing interest formation as customer increasingly shifting their spending better towards online.
With dealers across the industry ranging from the e-commerce friendly apparel brands home improvement specialists and traditional brick and mortar retailers are positioned ourselves with strong online presence in the center of their online strategy is building out large robust cloud platforms with specialized artificial intelligence and machine.
<unk> learning solutions for optimal product placements areas, where we have built a strong reputation.
Leading experts.
30% of our third quarter revenue TMT grew 39% on an annual basis and was our second largest vertical.
The growth in the quarter was across all customer base without technology customers fueling the growth.
Similar to the last couple of quarters, our Gov TMT customers continued to focus on the expanding of shorten delivery.
It's 19%.
Third quarter revenue CPG and manufacturing continued to assure a bus growth both on a sequential and year over year base.
Underpinning this was growth from logos outside the largest CPG customer and a full quarter of revenue contribution coming from that knowledge acquisition.
Within this vertical we continue to be involved with large global breadth.
Our focus on enhancing direct consumer correct.
Our largest CPG customers engaged in the new significant projects there are expected to rollout in Q4 and 2022.
During the quarter, Great and then we do have some very notable approach.
Number one.
At a global Technology company, where arc, Australia, and built a reactive such system for detecting fraudulent advertisement activity. The system is skilled to successfully provide the magnitude and then from creation to decision with the fraction of time from the previous to Jewish.
System provides significant savings do the substantial improvement in AD ranking.
Number two CRO.
One of the largest U S home improvement Rutile is green de Minimis deliberate visualization to her room renovation, but youll discover.
Our team designed implemented and rolled out a tool that allows visualization the use of specific products and color silk in a customer environment.
Making it easier for a consumer to make a choice with Brookfield life and eliminated the necessity to physically enter.
That's cool.
This led to an increase in customer sales conversion and significantly reduced Basel III core environment specific product groups.
Number three.
Well one of the fastest growing tele medicine company.
And then instead of implemented the initial version of a new unified platform that integrates patient doctor communication solution customer Oracle and marketing tools in a single environment.
This will allow maximizing speed to market of new features as well as to keep maintenance and support costs are under control.
Number four.
For a major U S manufactured enterprise, we have implemented inadequate for decent agreed dynamics analytical data platform accelerated developed jointly with AWS.
The platform has already been deployed for one of the largest business segment.
And finally, we're increasingly finding himself claimed central rules in influencing and shaping our customers' growth strategies.
The key question every enterprise asks to be.
Is how.
With scale, our online presence and how do we stay relevant in the business. We believe that the effective response to these questions rely on building high quality robust digital commerce solutions, they're scalable adaptable and.
Reliable grid.
Great dynamics for DNA is built around designing and implementing the.
Solutions.
As we approach 2022, our G&A will propel green dynamics to scale and strengthen our <unk>.
Business positioning and our reputation in the market.
With that let me turn the call over to our new who will discuss Q3 results in more detail. Thank you.
Thanks, Leonard and good afternoon, everyone.
Our third quarter revenue of $57 9 million exceeded our guidance range of 50 to $51 5 million and was up 21, 5% on a sequential basis and 120% on a year over year basis, excluding revenues from our acquisitions of docks and tacit knowledge, which cause.
Contributed $13 8 million in the quarter, our organic revenue of $44 $1 million was up 14, 8% sequentially and 67, 3% on a year over year basis, and exceeded our guidance of $39 million to $40 $5 million.
Better than expected revenue in the quarter was driven by strong demand for our services across industry verticals.
During the third quarter retail our largest vertical representing 31, 5% of our revenues grew 43, 5% on a sequential basis and 198, 2% on a year over year basis, the strong sequential and year over year growth was driven by strength across our customer.
Faced with e-commerce friendly and brick and mortar retailers continuing focusing on digital transformation initiatives.
Additionally, we benefited from a full quarter of revenue contribution from tacit knowledge.
On a year over year basis, the growth was driven by continued improvements in our retail vertical combined with revenue contributions from our acquisition, which we made from the fourth quarter onwards.
Our TMT vertical was our second largest vertical and represented 34% of our third quarter revenues and grew nine 2% on a sequential basis and 39, 2% on a year over year basis.
Growth in the quarter largely came from some of our large TMT customers will continue to ramp their offshore operations with us.
Here are the details of the revenue mix of other verticals, our CPG and manufacturing represented 19, 3% number in revenue in the third quarter and grew 13, 2% on a sequential basis and 233, 9% on a year over year basis.
The growth during the quarter, primarily came from ramp of new customers combined with contributions from tacit knowledge.
Finance represented 9% of revenue and grew 28, 3% on a sequential basis and 69% on a year over year basis.
The sequential growth in the financial vertical was largely driven by a combination of growth from our large national customers combined with ramping programs from recently added customers.
And finally, the other segment represented nine 8% of our third quarter revenue and was up 15, 9% on a sequential basis.
This vertical we witnessed continued ramps up at some of our recent client wins.
We exited the third quarter with a total headcount of 2884 up from 2510 employees in the second quarter of 2021.
And up from 1204 employees in the third quarter of 2020.
The sequential increase of 374 employees or 14, 9% was largely due to increase in engineering headcount from improving demand.
The increase from 2020 was largely due to a combination of improving demand, resulting in head count increase combined with our acquisitions of tacit knowledge and docs.
At the end of the third quarter of 2021, our total U S. Head count was 293 employees or 10% of the company's total head count.
This was slightly down from 11 person in the second quarter and significantly down from 21% in the year ago quarter.
Our non U S head count, which we sometimes refer to as offshore located in central Eastern Europe U K, the Netherlands, and Mexico locations was 2591 or 19%.
In the third quarter revenues from our top five and top 10 customers were 42% and 58, 2% respectively.
During the same period, a year ago, our top five and top 10 customer concentration was 59, 9% and 77, 7% respectively.
The decline was driven by a combination of new local ramp.
<unk> industry diversification and acquisitions of docs and tacit knowledge.
During the third quarter, we had a total of 215 customers with 55 coming from our organic business and the remaining 160 from our tacit knowledge and docs acquisitions.
Our organic business customer count of 55 was up from 51 in the second quarter of 2021 and up from 42 in the third quarter of 2020.
As a reminder, we only count revenue generating customers in the quarter and do not include customers who were inactive during the quarter.
Relative to the second quarter, we added seven new logos to the TMT vertical to in the financial vertical and four and the other vertical which included two global pharma companies.
Moving to the income statement.
Our GAAP gross margin during the quarter was $25 $3 million or 43, 6% up from $19 eight.
$8 million or 41, 5% in the second quarter of 2021 and up from $11 2 million or 42, 4% in the year ago quarter.
On a sequential basis the increase in gross margin as a percentage was from a combination of factors that included tailwind for more working days in billable hours favorable offshore mix and a full quarter of our recent acquisition of tacit knowledge.
On a non-GAAP.
Our gross margin was $25 $4 million or 43, 9% up from $19 9 million or.
Our 41, 8% in the second quarter of 2021, and up from $11 $2 million or 42, 6% in the year ago quarter, let's see.
Sequential increase in our non-GAAP gross margin as a percentage was driven by the same factors highlighted earlier.
Non-GAAP EBITDA during the third quarter that excluded stock based compensation depreciation and amortization transaction and other related costs was $12 $5 million or 21, 6% up from $9 $7 million or 24% in the second quarter of 2021 and up from four.
$2 million or 15, 8% in the year ago quarter.
The sequential increase in EBITDA as a percentage of revenue was largely due to leverage on higher levels of revenue and gross margin tailwind offset by higher operating expenses.
Additionally, in the year ago quarter, our business was recovering from pandemic related headwinds, resulting in lower levels of EBITDA. Both in dollar terms as well as person teach.
Our GAAP net loss in the third quarter totaled a loss of $25 million or a loss of one based on a share count of 63 million shares.
Parent to a second quarter loss of $1.5 million or a loss of three cents per share based.
Based on 54 million shares and a loss of $1 $1 million or two cents per share based on 50 million shares in the year ago quarter.
The sequential decrease in GAAP net loss was largely due to higher levels of revenue, both organic and acquisition offset by increases in operating expenses.
On a non-GAAP basis in the third quarter, our non-GAAP net income was $7 $9 million Alright, 11 cents per share based on 69 million diluted shares compared to the second quarter non-GAAP net income of $6 1 million or 10 cents per share based on 61 million diluted.
Chairs and $2 $5 million or five cents per share based on 52 million diluted shares in the year ago quarter.
The key reason for the increase in non-GAAP net income was similar to GAAP net income, which included leverage from higher revenues and a full quarter of tacit knowledge revenues offset by smaller increases in operating expenses.
Turning to the balance sheet on September 32021, our cash cash equivalents and short term investments totaled $199 million up from $68 million in the second quarter of 2021.
Sequential increase in our cash position was from our secondary offering and redemption of warrants.
Coming to the fourth quarter guidance, we expect revenues to be in the range of 58 million to $59 million. This includes $12 5 million in acquisition revenue.
We expect our non-GAAP EBITDA in the fourth quarter to be in the range of $9 million to $9 $9 million.
Based on our fourth quarter guidance for full year 2021 we expect our revenues to be in the range of $202 million to $203 million. This includes a.
The contribution of $42 million from our acquisitions.
The fourth quarter 2021, we expect our basic share count to be in the range of $65 million to $66 million.
And our diluted share count to be in the $72 million to $73 million range.
That concludes my prepared remarks, operator, we are ready to take questions.
Thank you.
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One moment, please while we poll for questions.
Our first question comes from the line of my uncle turned on with Needham <unk> Co. You May proceed with your question.
Thank you good evening, congrats on a strong quarter.
One or two.
Kick things off with just based on the pipeline and the pace of deal activity.
Do you believe that growth can continue to run above trend and how does that play.
Play into your thinking about 'twenty two at this juncture.
Thank you Martin and thank you for your kind words.
So.
It's like challenges recruiting entertaining talent are you looking at new delivery hubs, just maybe some parts around how do you address those challenges to meet the strong demand climate. Thank you.
Sure sure.
Yeah well.
It's it's very hard to ignore the scale of the business across the entire industry and you know demand continues to grow.
From Greenville amongst perspective.
I believe we are well prepared we have extended our recruiting cable Louis time, but we also built.
Very strong training facilities, both virtual and in place.
Multiple locations.
University internship programs.
Growing faster than the other with acquisitions weird broadening our engineering centers and we continue to add more so stay tuned I mean, obviously, we look at very high quality places, where the school engineering talent and Drake University was killed so too we're still smaller.
And I think that capacity and capability.
The ability I'm. Good then.
We are positioning good at this point.
Soon as expectations and Ah Ah positioning and it looks today I'll balance with them as well accept.
Okay. Thanks for that color Leonard and then on the gross margin and <unk> talked about the the bumped from tacit and the bump from the offshore mix and these feel like a little bit more kind of structural item I'm wondering how you know attrition trends in utilization trends are are.
Doctoring into higher looking at at gross margin going forward and what's kind of the the right level that we should be thinking about for the normalized business.
<unk> [laughter], so as far as B Q3 is concerned may I get your so 210 bits increase right. So we did see a pickup and you know some of the utilization trends some offshore.
We as you rightly pointed out we had some tests you can mix there and of course Q3 in terms of work and get some sleep better as we get into Q4 I think the key question is around utilization of our engineering resources, but.
But I think when you look at you know, we're still maintaining our longterm target model of 40 20. So you should we be at our target model in the near term you know I think I think I feel comfortable to say it but again you know it. It's all a function of you know how utilization plays out.
How the macro environment is there so as we come into 20th 22 will take a look once again and you know update everyone. On you know whether we have to revisit that from a longterm point of view, but for now I think we're we're moving in the right direction.
Thank you both.
Thanks, Thank you.
Our next question comes from <unk>, Brian Burgeon with Cowan you May proceed with your question.
Hi, guys good afternoon.
Leonard I was hoping you could dig in here a little bit more on the the pod model that you're talking about so can you go into details run really the operational benefits that gives the great and also.
As well as the financial benefits potentially but that structure can give you as you scale it.
Right.
Goodbye.
If somebody would ask the question why should be here. So it's it's a very it's very insightful because.
Essentially product or you have a good company servicing clients for a long time and the the question becomes where we can call. It as a business model versus education, but I mean, we do a lot of custom development, we do a lot of you know.
In terms of the demand versus supply I would not differentiated retail and CPG from other verticals I would say demand is everywhere, where a notable experts.
Delivering the.
Variance in the digital Commerce is a global to these particular two verticals others just continue to build the relationship with green dynamics to Uh Huh.
There are major supply chain issues across the globe, but it's not what we're about we're about the capabilities the technical excellence and system integration, we're delivering to their clients. So when they come to US is that just because they may struggle with.
Certainly you know talent.
They're coming to us for a full service deliverables from influencing their decision technical consultancy business partnership, but which is growing and obviously with the delivery.
Delivery capability, so I would say that as.
Global demand grows our relationships just getting strengths and says you know just because they started over the children's because they'd be coming to market much more quickly.
Okay. Thank you.
Sure.
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Our next question comes from the line of Josh Seigler with Cantor Fitzgerald You May proceed with your question.
Hi, good afternoon, congratulations on the stellar results.
My first question is on pricing so how receptive have your clients been in negotiations for incremental price or events recently.
Yes.
Well every customer will love to give us more money.
On a serious note.
Not always the case, but more important is again, it's the value of the business look.
The the the reason inflation the pricing inflation that market in Green dynamics, obviously bring more high quality resources and engineering capabilities combined with our project excellence to enhance the customer's performance two to me is obviously the margins are healthy.
But it's because we are aligning our pricing and business offering whether it's.
Bard model, whether it's a TNF model, whether it's a fixed bid model aligns with the customer returns. So it's it's a it's always a win win where not just jacking their prices are giving something crazy number customers do they understand the value, we're bringing to become more and more disproportional and that's where I feel comfortable that our relationship.
Beneficial is the price continue to be a factor of just limit. This is relationship and we have multiple organizational multiple service centers broader capabilities, which just enhanced that kind of partnership.
Great. That's very helpful color. Thank you and then I would like to address the sales force side, we've been talking about this for a couple of quarters and build out of the Salesforce you've made a couple of strategic hires there are you starting to see that pay off are they starting to bring in new logos and what do you think that ramp will be like as we move into 2022.
Yeah. Thank you.
Actually.
It's a good point that we will continue to increase and enhance.
<unk> vertical here it looks like it's back to its pre pandemic run rate. So I was wondering if that means that most of the clients in the vertical have now returned back to their pre pandemic run rate or how you've been able to win incremental worked here for new logos or cross sales and secondly is the retail vertical continues to recover.
Over.
Towards pre pandemic levels after some clients haven't gotten back to those levels yet.
What kind of overall growth tailwind should provide you heading into next year.
Yes sure.
I think you know.
Alright.
It's a pretty comprehensive point of view, if you look at three months.
Got a big jump on the retail if you look at the nine months.
The technology is still has a solid lead.
I believe there is a recovery of the retail.
There is continued growth on the CPG or one of the jump on the reporting was one of our COO.
Uh huh.
Client, which.
They are affected by it.
Pandemic.
Is doing well and metric did very well yesterday on the on the market. So there is a catch up game Glen into the E Commerce, and we have some international retail clients as well.
You guys have on the balance sheet now can you buy update or an overview on how the pipeline looks resume currently.
Sure sure Oh very good.
You almost asked a question I would like to answer so first of all gossip and dogs are very different company. That's it knowledge is cause they're very similar technical kind of position you with green dynamics will be different <unk> different work in terms of their partnership they're they're kind of you know.
Complementing guys with the various to park you shouldn't commerce, Susan other, especially Europe showed the definitely at cinergy, especially when the global which is doing the one a big.
Project and Miss quarters says will report the next quarter. According to it. It's it's very good it's very close on the on the top leadership with that we can get it for a decoration basically they help us with what we call now a commercial sale. So a lot of what clients on the smallest site.
I would like to see more has you know project with a smaller group of people and especially globally and I think you know, but at this point dax's become in the driver for you know the.
The relationship more based on a commercial situation then oh traditional expertise in enterprise and technology now global 500 type of relationships. So we're happy with both of them were pushing strongly on back to being a.
Higher generator not on the off the new leads by the Scaleable business I believe that there was a couple of customers, which we can actually again, maybe next water talk more about which seems to be more notable but that relationship is going well as well and you'll need to deliver to work in the margins, but with X, but that's something we are in progress.
As far as your Lemonade, obviously, we have cash we're looking carefully to what we can you know add to all pipeline. We just acquired a very strong emanate tell is one of the guys from the company, which was supposed to go public but didn't look due to the largest acquisition and now segment.