Q1 2022 Grid Dynamics Holdings Inc Earnings Call

Unknown Speaker: -centers by the end of Q2 expect the relocation of Russian employees to be complete.

Unknown Speaker: Since talking to you last time, we have made significant progress on expanding our geographic footprint across Europe, North America and Asia.

Unknown Speaker: In Europe, we've not only been expanding our existing allocations, but also adding new ones. Due to our increased presence, we opened our office in Switzerland which will become our European headquarters.

Unknown Speaker: Our existing engineer locations in Poland, Serbia, Mexico and Armenia are witnessing strong engineering growth and we have doubled our effort to our new talent in these locations.

Unknown Speaker: Our newer locations are also ramping up.

Unknown Speaker: We are about to open a few more locations very soon, which we'll inform you. In addition to hiring new employees, some locations are receiving a substantial number of relocated engineers from Russia.

Unknown Speaker: During the quarter, we started <unk> our hiring in India, which included formation of our core Indian leadership team. We have chosen Hyderabad to be our Indian headquarter due to several benefits such as: location, talent and infrastructure. With a help of our partners, we have added close to 100 engineers. Our Indian <unk> employees have started becoming billable and have been working with our teams across North America and Europe, engaging with our clients. In addition, to secure and <unk> our partners, we have been hiring directly as we have established our brand and developing as we speak. As we highlighted in advance, India will play a strategic role in our long-term growth and I expect to exit this year with rough 1,000 engineers in the country. Our Indian growth is not just center around locations, we also focus on a unified brand of high quality engineering teams

Speaker 1: Spread across the world and this context, our Indian basedteen will be a part of our global organizations. Now, coming into the first quarter, our revenue of $71.4 million, while exceed our expectations and we shared, which we shared with you last quarter, and was higher than our mid quarter update on temple 6, we ended the first quarter with an adjusted EBITDA of 11.7, represented gross roughway of three times in the same period of the previous year. The better than expected growth this quarter was due to several texures. First, we will a stronger demand across our industry verticals and customers. Second, aggressive high across location resulted in higher billable headcome. More important, underpinning this trends was the strong customer interest in engaging rate dynamic services around digital engineering, as these proam to take the central stage priority across the press world.

Speaker 1: In the first quarter, there were several positzant trends which I would like to share with you, including some of the normal ones. First, good demand trends. In the first quarter, the demand across our verticals and customers was going strong. This was indicated by the growth across most of our industries and majority of our customers.

Speaker 1: During the quarter some of our largest technology customers continuue to grow with rdynamics as we expanded into new geographies and we see continued interest from the new technology plants.

Speaker 1: At our retail vertical. We saw growth across a e-commerce-friendly apparel retailers along with our traditional brick-and-morning departance store customers.

Speaker 1: Cpg manufacturingr was our fastest growing vertical in the quarter. As a weakness, continued growth at our largest CPG customer.

Speaker 1: Number 2: continued headcount increase. During the quarter we haded about 400 employees, making as one of the largest headcount increase in the company's eastory. We have miscontinued demand for headcount across our customer base. The majority of this has been due to the effort and scaling talent acquisition in the region outside of Eastern Europe .

Speaker 1: We continue to create our inversion programs in Central Europe , in North America.

Speaker 1: Number three logo amenda on new addition to our ganic business continues to be robustin theacquirter we had six new auust. Of these six new auust, four of them, or an ntmg spacenumber four partnershipps.

Speaker 1: And in addition to our ganing sales developmentour efforts on the partnership front, our pay off. In the first quarter we achieved the advanced Tier partnership with AWS and launch of price optimization started kit with Google. Could also build a strong networkable partners like commerce tools to help the Tier one clients transform their digital commerce platforms to modern architecture.

Speaker 1: When forward, we believe partnerships are going to play increasingly important roles in our growth. In final number 5: expansion-related spending.

Speaker 1: As I highlighted in my comments earlier, where midst of growth, we're opening new locations and offices on the world and aggressless scaling our highic across Indian, North America and europewhile this has been part of our uststrategy alone, the war has made us accelerate the progress of expansion. A good example is India, where have moved out timeline almost a year. We believe this section are necessary for us to become a company with a global scale. It leg bring on more location of global delivery. Footprint will add cost, will compensate that our time well Cal of operation in each of our allocations and make that global more significant scalable offerings to all clientsduring the quarter. bretics delivery notutical projectsnumber one and our global technology company.

Speaker 1: We have implemented and analytic solution that predicts customer behavior bas machines ING approach. This system utilizes a combination of streaming, ve and cloud technologies, providing faster execution to significant reduce resource consumption compared to traditional approachthis system was design a collaboration between the data science of platform teams and manages thousandars of jobs and data sets.

Speaker 1: Another example for a large U's specialty retailer. We introduced cutting age, artificial intelligence and machine learning management technology system.

Speaker 2: New clou-based platform offers declineed easier better, faster data management or the legacy approach, which openened new possibilities for their specific recommendations, analytics and customer behavior prediction solutions.

Speaker 2: For another retail brand. We are building a state-of-the AR soffter to invent their legacy. Inventory managementsystem.

Speaker 2: Our partnership has already helped the cine to transform their supply chain function and it will further improve their digital marketplace capability in improve cost, cost efficiency, inventory visibility and ultimate customer experience.

Speaker 2: In last but not the least, that a global pharmaceutical company, we implemented and expects experience recommendation solutionwhich analyzze historic direction data and provides recommendations for Healthcare personnel to engage across marketing automation platforms. The solution has already been deployed in four distinct markets, worldware.

Speaker 2: With that, let me the call over to our new, who will discuss Q1 results in more detailsthankyouthanks letter. Good afternoon everyone. Our first quarter revenues of 71.4 million exceed our guidance provided in our mid-quarter updates of at least 65 million on April six and was up 7% on a sequential basis and 82% on a year-over-year basis. The better-than-expected revenue in the quarter was driven by strong demand for our services across industry verticals and customers.

Speaker 3: During the first quarter. Retail, our largest vertical, representing 33% of our revenues cruel. 7% on a sequential basis: one point zero five three four zero zero zero zero zero zero zero zero zero zero zero one thousand% on a year-over-year basis.

Speaker 3: The strong sequential in year-over-year growth was driven by strength across our customer base, with e-commerce friendly and brick-and-mortar retailers continuing to focus on ditionital transformion initiatives.

Speaker 3: Our commungy vertical was our second largest verticaldement, represented 30% of our first quarter admic crew lpoint, 6% on a Sequent two basis and 48 pointy-eight percent on a year-over-year basis.

Speaker 3: Growth in the quar and MAR came from. Some of our large CD customers will continue to grow with us as we exptended into new geographieshere the details of the revenue Mi some other verticals: our CPG and manufacturing represented 21% of our revenue in the first quarter and grou 10% on a sequential basis and 72% on a year-over-year basis.

Speaker 3: The growth during the quarter primarily came from brand and our largest CPG customer.

Speaker 3: Finance represented 6% of revenue, decreased 5% on a sequential basis, include 32% on a year-over-year basis.

Speaker 3: And finally, the other segment represented and put 1% of our first quarter revenue and was up 7% on a sequential basis. Within this vertical, we witnessed continued ramps at some of our farmine heicid cents.

Speaker 3: We exited the first quarter, the total had come with 303.671 thousand, up from 3274 employees in the fourth quarter of 2021, and enough from 2056 in the first quarter of 2021.

Speaker 3: The sequential increase of 397 employees, or 12%, was largely due to increase in engineering the headcount from improvement demand. The increase from 2021 foot largely dge combination of improving demand resulting in the headcount increased, combined with their acquisition of taxes knowledge.

Speaker 3: At the end of the first quarter. twent thousand and 22 our total U's. That come with 318, or 9% of the company's socital headcount. This was slightly down from 10% in the fourth quarter in downton, 12% in the year ago quarter.

Speaker 3: The year-over-year declined as a percentage of the total. thataccomp was largely driven by renter mix of offshore engineers to the overall headcount.

Speaker 3: Our non-u's headcount which we sometimes referred to as offshore located in Centrum emastternfrom Europe OK in Netherlands Mexico and other locations was 3353 or 91% and.

Speaker 3: In the first quarter, revenues from our top five and top 10 customers were 43% and 58%. Risk tiidney.

Speaker 3: During the same period the year go, our top five and top 10 customer concentrations were 50% and 67% respecticively.

Speaker 3: The diversification across our top five and top 10 were driven by a combination of factors that include, in us over renamp, industry diisification and our acquisition.

Speaker 3: During the first quarter we had a total of 213 customers, down from 221 customers in the port qucallter. Of this, hundred and 95 team from our organic business in 18 camp from asseset.

Speaker 3: The sequenceial of declining in our customers was largely driven by our commercial business, are DS, which we acquired in December of 2020. in the first quarter of 2021, our total customer comp was 184 customers.

Speaker 3: The year-over-year increase was driven by growthing customers across their business, but did not inclclude any customers from Tacit, and it was acquired in the second quarter of 2021.

Speaker 3: As a reminder, we only count the revenue-generated customers in the quarter and do not include customers who were inactive during the quarter.

Speaker 3: Moving to the income statements, our GAAP gross margins during the quarter was 26.8 million, are 38% down from 27.3 million or 41% in the fourth quarter. twent thousand and 21, and not from 15.3 million or 39% in the year of quarter.

Speaker 3: On a non-GAAP basis, our gross margin was 27 million or 38%, down from 27.6 million per 41% in the fourth quarter of 2021 and up from 15.4 million, or 40% in the year ago quarter.

Speaker 3: nongaap EBITDA during the first quarter that excluded stock based competition depreciation and amortization expenses related to the ongoing conflict in Ukraine. Transactions and other related cost was $11.4 million or 16% down from 11.6 million per 17% in the fourth quarter of 20 20 one and that' from five point two million or 13% in a year ago quarter during the quarter. The one 10 charges reflects related to the conflcept in yearu krating was roughly one million dollars. The sequential of decrease in EBITDA as a percentage of revenue was largegly due to a combination of declining post margin percentage highateded earlier and higher operating expensesour GAAP net lossin the fourfirst quarter. The loss two point seven million are a loss of four cents based on a share count of 67 million shares compared to the fourth quarter loss of.

Speaker 3: three point six million, or five cents per share, based on 66 million shares, and a loss of two point one million or four cents per share, based on 52 million shares. In the year ago quarter. The sequenceial increase in gap net loss was markedin due to higher revenue and lower operating expenses, offset by the lower gross margin in higher taxes.

Speaker 3: On a year-over-year basis. The increase in gap net losses from the combation of higher levels of revenue offset by higher levels of subk compensation, operating expenses and taxes.

Speaker 3: On a non-GAAP basis in the first quarter are: non-GAAP net income almost six point nine million per tens per share, based on seventey million to year pictshares, compared to the fourth quarter non-GAAP net income almost seven point one million per Tencent per picture, based on se toaccummillion shares.

Speaker 3: And three point one million or five cent perd. That share, based on 16 million due ited shares, can be year ago quar. The key is in for the decrease in non-GAAP netting come on a sequential basis was higher operating expenses, and the increase in non-GAAP netincome in compression to the year ago quarter was largely from highon levels of revenue, partially offset by higher operating expenses.

Speaker 3: Coming to the balance sheet, on March thir, ty-first, twent thousand and 22 our cash and cash millions to moveop 153 million up from hundred and 44.4 million. In this fourth quarter of 2021, the key regance of increased was larly from higher cash opering profit combined with our drawdown of roughly timiling in from our life of credencenow coming to the second quarter, iteidance.

Speaker 3: We expect revenus to be in the range of 70 Q toseventy-three five thousand and we expect our non-GAAP EBITDA in the second quarter to be the range of I five million to 11 million, or 13% or 15%.

Speaker 3: For the second quarter of 2022, we expect our base share count to be in the range of 67 to 68 million and our delired sha count to be in the range of 71 to 72 million shares.

Speaker 3: That consudes my prepared remarks, then we are ready to take questions.

Speaker 4: Yes.

Speaker 4: Thank you anneil, since Leonard.

Speaker 5: At we kal to the KA session. I will announce your name first.

Speaker 5: Please turn out your camera and eturn out you, Mexico.

Speaker 5: Then you will be able to ask questions.

Speaker 5: Our first question comes from the line of my young pendant from needm.

Speaker 6: Please go ahead. Your ly is open.

Speaker 7: Hi.

Speaker 8: To address.

Speaker 9: Sorry about that, gettingyou guys going to be okay.

Speaker 10: Yes we.

Speaker 9: Great Thank you so much. First Leonard, and an ill Congratulations on the quarter. Great job navigating, but was, I'm sort, a very trying.

Speaker 9: Environment over the last several months and I just wanted to first start with the demand side. It seems demands really strong across. The Board could you maybe speak to the monthly trajectory that you saw through the quarter and into the second quarter. Maybe a helppl us frame. What the second half might look like you may not getting formal guidance any kind of framework to think about the rest of the year. Thank.

Speaker 1: All right, and I think we're back in businessesall right, Thank.

Speaker 11: I'll get my question. I didn't because there was but concluses and sorry, can you just my pointed? You repeated sure, okay.

Speaker 11: So I was just basically going to the first oillations on a great job. You gu have done a tremendous job of navigating what was a very difficult situation.

Speaker 9: I wanted to just pivot to the demand side- it seemed demands really strong across the board- wanted to get your thoughts on, maybe the monthly trends that you've seen into two Q and even they're not getting form of guidance for the back half of the year. How should we think about the trajectory of growth into the second half and for all of 2020 twowell, think you- sorry was a little bit of glitch So in a miscongressionationthe. The key point for us is obviously we would don't guide the second half of the year because of congenius and services.

Speaker 1: You know, and we stay very bullish and very positive because not only we were able to overcome some of the initial challenges, but we also to a continues demand from our clians, which embrace our new locations, our new capabilities as well as, you know, existing locations as well. So the demand is strong, the demands across pre lun, all the verticals. So I would say that you know, we are cautiously optimistic because you know disruptions. It's one area, U's economy is another 1, But at this point we are fairly bullish going forward, knowing that the variances are so pretty complexgot it, and maybe I ll just switch to the pricing question. Have you seeing pricing liverage come through and is enough to mitigate our?

Speaker 9: Maybe helps soften the impact of the wage inflation impact and I'm sure you're seeing as you look at scalear headcount in different geographies. Yes, I mean it is still a relatively small company compared to the joants report- the colossal challenges with the inflation and price erosion on this thing where a technology company in digital space customers are favoring the long-term innovative digital transformation.

Speaker 1: We mentioned before introducing our part models and some complexity of customers to be resolved by very efficient return investment grid and tees. I think the customers bothte with the Ward to broad grid with a good opportunities. We do see obviously some wage inflation is' mostly driven by structures when obviously a new location we build the team up but we expected to be tapered as as we scale operations. So overall were' comfortable to see in general the behavior of reid dynamics in a relative scale to others.

Speaker 9: Great Thank you so much, and conrat again. I'll get back in queue being.

Speaker 6: Thank you, mayike. Our next question comes from itally, from will Blair, maybe you lies open.

Speaker 12: I can hearre me okaythis year. Congratulations from may as well. The cur execution and Gi us investigated. If you possibly could missing a little bit more clear than only uncertain timesi'm curious about: as you move your employee to different cost geographies and you ramp up in different cost geography, how quickly are you engaging in pricing conversations and changes with your clients? And then, what would the impact of some about curity on less margins in the first quarter?

Speaker 10: Well the gross margins have various factors and probably I would say that you can make some more specific comments on that when it comes to pricing and you kind of kind of follow the line part. Obviously there are discussions.

Speaker 1: But there discussion, not because of, was because of relocation, it's because of the value of the projects.

Speaker 1: We become a global company with a broad service offering.

Speaker 13: And not only what are flexible with the system approach to the value of pricing, but it's also customers understand that there are certain key budgets which are driven by again return their investmentthe competition is always fiir.

Speaker 2: What we have not seen so far. Customers do their run away from us the very supportive grater dynamics. We're trying to let say, debate the price. I think it's they operator with as very professional way as we do with them. Certainly cas require perhaps a higher pricing from the.

Speaker 2: From the value we don't base a pricing OK. You know you move engineer for exlocation allocation. You pay them something big difdifferentfering. I mean here going to have to compensate with that's not how how you deal with the ccurrents you look at the system approach a holistic approach and which you do to create a complxished global teams without pod model. Fixed model pricing and with the services would provide it becomes natural. So you know I've been on the side. You may ve been on the client side for very a long time. The best thing customers appreciate we you look at their value then just trying to make dollars here there and again I'm pretty bullish going forward. The customer receptive with you know being fair to greet the namics because we're being value to that so you know maybe you'll address the mon here. So as you know there was about 402 B comppetion on that non gotap basis between Q4 and Q1. Now remember that season it's largely driven by the month of January where we have.

Speaker 3: Of the season and then we have a shorter month in February . So typically that's what we see. So, as letonter pointed out, it is more of the seasonal trend. You should not extrapolate anything on the price in front and that's something that we work our way through now. As you look at any quarter, and even So, this year you know we start off with that bottom in generanate picks up in February and then you have another pickup in March. So comes back again.

Speaker 13: Very good. Let me you always ask the right question. Last time you ask my question about the new customer right, it was very time. So on Monday will be in indiaand we have a management team we're scaling out of as well. In our own office, we have great partners. There's not just a focus on India, it's overwhelming.

Speaker 1: Kind of concentration of efforts, both from the planner relationship to hiring process, to boarding the process. It's too early to say how this scale will factactually affect the business. I mean we hiire people, but not to the scale. You know we're talking about the hundreds and thousand people over time. What's important is the first few resolves what- I'm glad there's some very senior people in india- joint green dynamics. So when we go to the office we cut the room we will actually see some very strong presence of experts. To me is like any strategy comes with the, you know heading the keep tellent in, keep telling is a business leadership, technical leadership, operation leadership. We are getting that already within a few weeks since we started. So there's a support there. We are getting support from the local authorities. Now great dynamics, is unique in own way, you know we.

Speaker 1: As we mentioned. As I mentioned in my statement, we pull the timeline by a year. It doesn't mean we have not been engaged with India and I've learned lessons from other companies. I ve no lessons from the company who tried to jump into India and do things or Indian company trying to jump into Europe , So we've been prepared. That will tell how successful this. The first signs are very encouraging, but I think we'll have more color in one quarter.

Speaker 10: Okay Thank you. Very caveled in the city, Thank you.

Speaker 6: Thank you. maynext question comes from the line right PO from plethank. Take my question and like the reiterate really impressive corarter from you guys. Given those circumstances. I D like to start with your talent strategy and some of your new geographies. You kind of quickly pivoy your workforce in the places like kind of armenia, India. What have you put in place? The kind of Bill, or recruit the same high level engineers, have the same value prop, have that growth culture ASIs it something that comes naturally or is it something that you guys have had to really invest in piveror into?