Q2 2022 Grid Dynamics Holdings Inc Earnings Call
Good afternoon, everyone. Welcome to Grid Dynamics Second Quarters 2022 earnings conference call. I'm Ding Jiang, Head of Investor Relations.
At this time, our participants are in base only mode. Join us on the call today of CEO's lemon delicious and shareful energy rather.
Following their prepared remarks, we will open the card to your questions.
Please note, today's conference is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain overlooking statements.
This includes our business and financial outlook and answers to some of your questions.
Such statements are subject to the risks and uncertainties that describe it in the company's earnings release and other findings which there should be seen.
During this call, we will discuss certain NANGAAP measures of our performance.
Gap to none, got financial reconciliation and supplement of financial information of provided in the earnings press release and the AK file that we sent you.
You can find all the information I have just described in the Investor Relations section of the call back site.
With that, I will now turn the call over to Leonard, our CEO .
Thank you, Billy.
Good afternoon everyone and thank you for joining us today.
Q2 2022 was another record revenue quarter of $77.3 million and this marked the eighth consecutive quarter of record revenue in the company's history.
I want to emphasize these results, which are definitely exceptional given the circumstances the world has been facing over the past five months.
Grid dynamics executed flawlessly in transitioning a significant proportion of the workforce while continuing to do projects in a timely manner.
I'll go into details shortly.
Three months ago, I committed that we will exit Russia.
Today, I would like to report that we seized Russian activities, and we are now geographically more diversified, as well as continuing to expand across all our industry outlined verticals.
More importantly, our customers demonstrating on wearering faith in greed and image capability. On wearering faith, greed and image capability.
I am confident of our strengths and our ability to successfully navigate the business in the future despite the geopolitical challenges.
As our quarterly results reported, we progressed across multiple fronts of our business.
This includes scaling our global presence with new locations, expanding our partnerships, and adding new customers.
Green and MXSOT results, or the past seven quarters, have shown the company incredible resilience in balancing back stronger from the global pandemic crisis first, and recently from the war perpetuated by Russia. And recently from the war perpetuated by Russia.
It is a true testament of the company strong fundamentals, teamwork and commitment to the business and the shareholders. In Top Machines you will mark it.
On this call, we'll provide insights into the demand environment, global operations, and financial performance for the second quarter 2022, and also provide an outlook for the third quarter.
Again, in the second quarter our revenue of $77.3 million well exceeded our expectations that we shared with you three months ago.
When at the second quarter, when adjusted, it was about $13 million, which is 17% of all revenue. $13 million, which is 17% of all revenue.
The better than expected performance would you to a couple of factors.
First, we will be stronger to demand across in the steppion fields.
Second, we have minimum disruption to billability as we transition out of Russia.
And more importantly, customer interest in engaging our services are on digital engineer, who can join to be strong in this quarter.
During the quarter, our Gerard Fouffin grew across the world. In Europe , our new office in Switzerland will become our European headquarters, while London and Amsterdam will continue to serve as customary patients and Joseph Excelles.
India, Mexico and Poland will place strategic roles in scaling delivery footprint.
India with the extensive talent pool will offer an unmatched ability to scale operations in the long term. Mexico with a large pool of talent engineers and convenient towns on to our US-based clients over in the next linear short press.
There are a lot of clients to welcome our nearshore strategy and express interest in partnering with our Mexican operation.
And finally Poland, with its advantage being one of the largest countries in Central Europe , with a strong IT presence, we'll continue to support our operations as with scale in Europe .
We also ramped up hiring of the Italian in several countries such as Romania, Armenia, Serbia and some others.
Each of these countries offer a unique advantage in our global growth.
In the quarter, there were several positive trends.
which I would like to share with you and there are few notable ones.
Dimension.
In the second quarter, the demand across our verticals and customers was strong.
This was indicated by the sequential and year-over-year growth across all of our industries and majority of our plants.
As you know, the green macro recession concern has been on everyone's money. Now clients have been no exception.
Currently, we are not witnessing significant widespread headwinds.
It's still more customer-specific than it should.
and there are a couple reasons for that.
First, at many of our clients, digital transformation initiatives are given higher priority and we are increasingly involved in a project of strategic importance in comparison to some of the best experiences.
Second, we're now a more diversified company with less exposure to recession-sensitive, retail, brick and mortar business. Increasing recession in the Amazon Army, tomatoes and retail, brick and mortar business. more of business.
Even within our retail business, there are mix shifting away from some of those sensitive areas.
And finally, third, healthy pickup in our new logos for the several quarters enabled us to be more resilient as we go across a larger customer base.
Coming to some additional second quarter segment commentator.
Similar to last quarter, our largest technology customers continue to ramp aggressively and support our growth as we expand it into new geographies.
Within our retail business, strong sequential growth was given by our e-commerce brand that retailedFest??
At our largest CPG customer, we continue to grow and more importantly we finalized on several key programs not just for this year but for 2023 as well.
We're bullish on our prospects and continue to leveraging our position as a strategic partner of many.
Local moment.
In the quarter, we added five new logos across industries.
Of these, one was a global footwear manufacturer, one was one of the largest.
distributor of beverages in the United States.
One was the delivery service operation. We also have additional logos in technology and healthcare space.
our pipeline in the third quarter is healthy.
And I expect to share some significant logo wins next one.
What the hell?
We're witnessing good momentum on the partnership front.
In the second quarter, we saw a healthy growth in our pipeline and expect partnerships to play increasingly important roles in our growth.
During the quarter, we received an award from the MEC Alliance for the Best Healthcare Project.
Our capabilities and strengths are getting greater prominence across our partner's ecosystems and this in turn is leading to the new opportunities. We will also enhance our team by adding a senior sales executive to focus specifically on building opportunities in one of the top three cloud pro-writers. We will also enhance our team's program. We will enhance our team's
And finally, some of the largest crowd provider partners will launch new product products starter kits and enhance our competences and specializations. And enhance our competences and specializations.
During the quarter,
Read the dynamics, deliver it also some of the notable projects.
For a global technology company, we build a centralized continuous integration platform. We build a centralized continuous integration platform.
Our solution.
standardize best practices for collaboration and one engineer in teams and increases their productivity and transparency for the engineering leadership.
The platform currently serves over 1,000 engineers in its plan to be rolled out on a company-wide piece. The platform is now in its plan to be rolled out on a company-wide piece.
At a global CPC company, we implemented a unified interface system for wholesale orders. The system will not only significantly reduce the amount of manual work, but also speeds up order and processing in full shows.
As a key technology partner to a global cybersecurity company, Redonamix helped to build the next generation cloud solution with a security incident and event management.
A solution migrated the on-premise storage model to that major cloud platform.
We built a high-volume, high-velocity security event ingestion pipeline.
anomaly detection and behavior analytics.
The solution enables a competitive edge in the marketplace by offering near infinite scale, speed and low cost of purchase.
We are one of the largest manufacturing services companies. We developed an intelligent cloud-based supply chain platform that provides real-time visibility across the entire ecosystem.
It covers the whole process from planning to delivery and utilizes big data, machine learning, and predictive analytics.
The system allows to break and identify, a quantified potential of reach losses and suggest mitigation options with the proper cost estimates. And suggest mitigation options with the proper cost estimates.
Currently, our client uses the system to manage tens of thousands of the suppliers across the globe.
With that,
let me turn the call over to Anil
who will discuss Q2 results in more details. Anil?
Thanks, Leonard. Good afternoon, everyone. Our second quarter revenue of $77.3 million exceeded our guidance of 72 million dollars.
to $73.5 million and was up 8.3% on a sequential basis and 62.2% on a year-over-year basis. The better than expected revenue in the quarter was driven by strong demand for services across industry verticals.
During the second quarter, we tailed our largest vertical representing 32.9% of revenues, drew 9.2% on a sequential basis, and 100% on a year-over-year basis. The strong sequential and year-over-year growth was driven by strength across our customer base from e-commerce-friendly and brick-and-mortar retailers as we continued to focus on digital transformation initiatives.
Our TMT vertical was our second largest vertical and represented 30.2% of our second quarter of news and grew 9.1% on a sequential basis, and 45.2% on the year of year basis.
We witnessed strength across our customer base.
Initially, during the quarter, one of our largest technology customers aggressively grew as we expanded into new geographies. zeh
Here are the details of the revenue links of other verticals.
Our CPG and manufacturing represented 20.8% of our revenue in the second quarter and grew 7.4% on a sequential basis and 62.5% on an euro-veer basis.
The growth during the quarter primarily came from the ramp at our largest CPG customer.
Finance represents 6.5% of revenue, increased 11.5% on a sequential basis, and grew 24% on an EOV basis. And grew 24% on an EOV basis.
And finally, the other segment represented 9.6 of our second quarter revenue and was up 2.8% on a sequential basis. The growth came from healthcare as well as our new customers.
We exited the second quarter with the total head count of 3,763 up from 3,671 employees in the first quarter of 2022 enough from 2,510 in the second quarter of 2021. enough from 2,510 in the second quarter of 2021.
In the second quarter, we hired aggressively across our locations in Europe , India, and North America.
This headcount addition was offset by a couple of factors.
First, as he exited Russia, there were head contradictions that included ramped down of overhead and administration personnel.
Second, we scaled down our Bence of Engineers, which had grown to compensate for any war-related of light-sirctions.
As we progress through the second half of the year, we expect our headcount to continue to expand.
At the end of the second quarter of 2022, our total US headcount was 326, or 9% of the company's total headcount, and remained on the same level compared to the first quarter of 2020.
22 and down 11% in the year go quarter. The year over here decline is a percentage of the total head count was largely driven by greater mix over US non US head count, our non US head count, which we sometimes refer to as offshore located in central and Eastern Europe , UK and other lands in Mexico and other locations was 3,000, 437 or 91%.
In the second quarter, revenues from our top five and top 10 customers were 44.2% and 60.2% respectively. buzzing.
During the same period a year ago, our top five and top 10 customer concentration was 45.4% and 62.3% respectively.
The diversification across our top five and top 10 was driven by a combination of factors that included new lower ramp, industry diversification and our acquisition.
During the second quarter, we had a total of 208 customers down from 213 customers in the first quarter and 212 customers in the year will go quarter.
The sequences that climb in our customers was largely driven by our commercial business or docs, which we acquired in December of 2020.
As a reminder, we only count the revenue generating customers in the quarter and do not include customers.
who were inactive during the quarter.
Moving to the income statement, our GAT gross profit during the quarter was $28.9 million, or 37.3% up from $26.8 million or $37.5% in the first quarter of 2022, and up from $19.8 million or $41.5% in the year of low quarter. On a non-GAT basis, our gross profit was $29.1 million. On a non-GAT basis, our gross profit was $29.1 million.
are 37.7% off from $27 million or $37.8% in the first quarter of 2022, and up from $19.9 million or 41.8% in the year of Go-Quarter.
The sequential and euro of your increase in growth profit was large-driven by increase in remnants.
Now get EBITDA during the second quarter that excluded stock based compensation depreciation and hammeredization.
Expenses related to geographic reorganization transaction, other related costs were 13.3Million or 17.2% of revenue up from 11.4Million or 15.9% in the first quarter of 2022. Enough from 9.7Million dollars or 20.4% in the year ago quarter. The sequential increase in E-penables due to a combination of higher lessons of revenue and flattish operating expenses.
Our gap net loss in the second quarter totaled a loss of $13.2 million or loss of 20 cents based on a share count of 67 million shares, compared to the first quarter loss of $2.7 million or a loss of 4 cents per share based on 67 million shares and a loss of $1.5 million or a loss of 3 cents per share based on 54 million shares in the year ago quarter. The sequential linear of your.
Increase in gap net loss was largely due to higher levels of stock based compensation and geographic organization costs offset by higher levels of revenue. During the 2nd quarter, we incurred 6M dollars in geographic reorganization costs.
On a non-gap basis, in the second quarter, our non-gap net income was $8.2 million or 12 cents per share based on 70 million diluted shares compared to the first quarter of 2022 non-gap net income was $6.9 million or 10 cents per diluted share based on 70
million diluted shares and $6.1 million or 10 cents per diluted share based on 61 million diluted shares in the year ago quarter. The key reasons for the increase in the non-gap income on a sequential basis were higher levels of revenue and flatish operating expenses.
The increase in the non-gap net income comparison to the year ago quarter was largely. The increase in the non-gap net income comparison
From higher levels of revenue partially often by higher operating expenses. Often by higher operating expenses.
On June 30, 2022, our cash and cash equivalents total $150 million, down from $153.3 million in the first quarter of 2022, and up from $144.4 million in the fourth quarter of 2021.
During the second quarter, we paid down our line of credit to the amount of $5 million.
Additionally, in the second quarter, we accrued short-term liabilities of roughly $3 million that we expect to pay out in the third quarter. We also invested $1 million into a technology company.
Coming to the third quarter guidance, we expect revenues to be in the range of $78.5 million to $80 million.
We expect our non-GAAP EBITDA in the third quarter to be in the range of $12.6 million to $13.6 million or 16% to 17% of revenue.
For Q3 2022, we expect our basic share count to be in the 67 to 68 million range and our diluted share count to be in the 70 to 71 million range.
That concludes my prepared remarks. Ben, we're ready to take questions.
Thank you, Daniel.
As we go to the Q&A session of this call, I will first announce your name. At that point, please unmute your line and turn on the camera.
Our first question comes from Puni Jan from J. E. Morgan.
Your life is open.
Hey, can you hear me?
Yes, thank you. Okay, please turn on your camera. Okay, please turn on your camera.
I'm trying to, it's not allowing me to.
sorry um a nice quarter like really nice quarter um
I just had like a quick question. Like is active relocation of employees or projects away from Eastern Europe completely behind you now? And should we expect you to operate in like a steady state from here onwards? three.
It's more as a statement than a question thing, good to hear from you. Yes, of course, Russia is behind us. I mean, there are still a lot of...
Uncertain this in the region as you know war as far from bit over
We look very optimistically as we grow our position in a, let's say outside of the traditional risk area, we still feel very committed to Ukraine and continue to operate from Ukraine. But with the diversity of the workforce and scalable capability, we see a very positive reaction from our clients.
And then as we think about the macro environment, specifically over the last few months, are there any differences in client behavior or their priorities across different verticals? Maybe like retail CPG clients might be more impacted from inflation versus like tech vertical or other verticals? Like have you seen any changes in client behavior or their spending pattern type of project to execute a cost different one?
There will be some softness. I mean, this is the reality of the world. We're more diversified. We're more
If you noticed, we believe in our growth.
We also are positioned.
more strategically than before, not ever, but before. And I believe that the importance is how deeply you're entrenched with the customer execution of the strategy.
One thing about retail generally, because I'm sure this question will come back again.
the e-commerce related or more e-commerce driven enterprises in the retail CBG space.
are more capable to extend.
the variance on the market than somebody who is much more brick and mortar or dependent.
Yes sir, thank you. Okay, of course, thank you.
Next, we need...
Next question comes from my attendant from Eden.
my attendance from either. Please go ahead.
Great, Leonard and I know it's good to see you. Congratulations on the quarter.
I just wanted to ask you about the guidance coming off this really strong second quarter performance. If you look at 3Q guidance, it does call for a deceleration. Maybe you could speak to that and also any sort of framework to think about for Q and maybe I'll be a little greedy here, ask about any initial indications for 23 as well.
All right, so I'm going to start a little bit on a high level rank and then I'll have a little bit more color on the guidance.
So.
By nature, as you know, we are conservative.
We would like to be conservative because, as you know, from the week after we became a public company, the world got into turmoil in March 2020 and seems like never stopped.
We look at macro indicators, we look at other factors, and we just want to make sure that we react properly.
the growth
and profitability.
Go hand to hand. We want to make sure we continue responsibly. We continue with the ability to scale and my big focus remains to be on the technology innovation regardless of region where we are, still about client or friends. Still about client or friends.
So I believe that we are on the path to continue to grow.
But in terms of specific sensitivity of variants in terms of the forecasting, I think, and you, I think, which I mean, please. Sure, thank you, Leonard. And, thanks for the question. You're right. As you go from Q2 to Q3, you all know how the quarter shifts of, which is a strong sequence of drugs.
I think Leonard summarized very well. Look, I mean, we look at all our clients, we look at their forecast and we are in an environment where there's a lot of moving parts. So, you know, there's nothing fundamental. There's no loss in clients, there's no loss in business, there's no loss, you know, in any customers. Basically, a thumbs up analysis of how we're looking and giving the best forecast as we can, you know, at this stage. Again, look, we'll see how the macro plays and we'll come.
here on that will be the whole thank you of course
I wanted to start seeing what caused the issues.
So there are certainly answers and there he is.
There are cost issues on one side, there is actually a bit of a
tailwind, stronger dollar, big fundamentals. Fundamentals, obviously, when you...
scale the teams and you're moving from cost up, to another course of pursuing.
The driver is how well you position with attracting the audience, which becomes a tip of the speed.
So we believe we prepared
for key countries which describe them.
or remarks. So we have the mission.
When we look at more senior talent, there's obviously there is always more culture. We're growing, we're still a fairly young company and I tell you from a customer perspective, there is a fair level of understanding on the high quality and performance teams on a strategic project.
We're not out of the woods from the world, but we're certainly very comfortable with balance. It raises the talent playing relationship.
Thank you. Appreciate it.
Thank you, Eric. Thanks for it. Next question from the live of Maddie Nolan from Will & Blair. Thank you. Thank you. Thank you. Thank you.
Please go ahead.
Hi guys, Jesse on for Maggie congrats on a nice course. We had a couple of questions for you guys on talent. So first, how progress is going in India and Mexico? I know we've been talking about expansion plans.
in those geographies recently. So, I'll take a question and obviously zero relevant. I'll be if when we look next.
It's steady. We're growing. I see more and more relation with university. I see more and more contracts with the clients. But it's proportional.
with India
and disproportionate growth.
And that's a very sweetish one, Vakesh.
Let's say today the growth is a little bit slower than we'd like to see it, not because it's a issue for us, but we had to go through incorporation.
We're direct hiring now. We got through all the hoops with the quality of partners helping. We've got all the help partners helping. We've got all the help partners helping.
So that's going well.
The other factor which plays the role over the picture is, you may have noticed, we went for some catastrophic event in one of the countries.
So far, I can look at the resilient delivery in the quality of the efficiency of the environment they are in strong.
most of the Russian and Jesus relic here.
and Ukrainian team performs well in other countries as well. So while we see India growing, this absolute demand is in line with, I would say more continued growth. We will give you the updates to grow, the good thing over the formality and I think it's for sure. The Indian grid dynamics will be the same quality, the same performance, the same abilities, any other which is, and that's what we're accomplishing. That's what.
Full stand direct.
That's helpful color. And then, if I follow up, I'll have to touch on attrition. So if you adjust out the exit, how did attrition end in this quarter? And what are your things that the putting takes there? And what are your things that the putting takes there?
Well, I think I knew summarized quite well.
In some areas it's actually slow because, you know, during the term time people try to hold to the leadership of the company. I think I respect a lot how we manage and operate.
So I believe that malnutrition is pretty in life, I would say, if not pleasing to some extent.
But involuntary for known reasons which were mentioned and you'll emphasize increase obviously higher than others. But I'm very comfortable with the direction.
of our retention and workforce.
Very good. Thanks for taking my questions.
Thanks, Jesse.
Yeah, question is from Brian Bergen from Cohen. Your line is open, please go ahead.
Hi, good afternoon. It's good to see you all. Why did this follow up on the adding footprint here first? Can you just get some color on how you see the gold footprint miss evolving? Really, I guess as you exit the year, can you give any sense of a rough accomplishment that just where your classrooms are going to be? Just where your classrooms are going to be?
Well, as you know, Brian , we guide quarter over quarter, right? This is a more philosophical question, the end of the year, boy. When is the end of the year? And what company you got to work for? There's a lot of cases in the world. Congrats on that position. So the reality is we are now generic footprint.
Right, so we emphasize that India and Poland, those strategic growth, that is, you know, as well. We are not nearly to call, excuse me, India and Mexico today as locations. We have a very strong, continued Ukraine, and we're gonna stay very strongly with Ukraine, our engineering talent, Ukraine, deserves the support as much as we but we grow elsewhere. Right, so come.
Certainly got a bump as you can see that quite Russian engineers there so did Ermin.
But where are today and where are we going to be by the end of the year? Where are we going to be next year? It's actually a fundamental question.
So I didn't want to say generic regions because region is a very brushstroke. So I wanted to be kind of narrowing down. India, Mexico, Poland, the growth. Ukraine, going to be behind. Right? I'm going to form around. And of course, from the priority of the business, which is very important. Just remains exception, strong, pray for us. But as you see, we're building a bit more focus on Europe . Again, we mentioned the headquarters in Switzerland.
We emphasized that London and Antelope is from girl fitting more business races in Europe . And that kind of will also tailor a little bit more to the global extra that you as we go. Global extra that you as we go.
Okay, so on the margin. So just trying to understand some of the partnerships that you've built here and it'll be the financial implications around those. So understand, you know, you're using published partners to talent in New Orleans, places like India. From a financial perspective, is there a significant cost that flows through the model this year as it was about? And just trying to think about as go forward, return to profitability, prior war levels like profit, or whether there's anything else that we need to consider in our relationship.
So you asked me a cool question about my partners in the business development side, which is super exciting. And you take it down to, you know, partners supply side. So it's okay. I'll take the third question from But on the partners on the supply side, it's to say in In you and in alluded before we have this fully operational direct Organization so the price for the growth will be direct course for the needs and under have reliable parts and they will be
still contributing, but I believe from the financial perspective, not going to be a very significant impact. But again, Anil, do you want to do? No, I think I think that's exactly right. Because so we will have a two prong strategy, as Leonard said, going direct and partnering with these. And as we scale up, you know, the real partner diminishes. And also, there's also transfer of those partners to our direct hiring tools. So whatever we were giving them goes back in our.
That's fair. Leonard, since you opened it up, I'll ask about your corporate development business. I know you do organically, but just how are you thinking about potential M&A environment? It's not exactly about the partners, but it's okay. M&A strategy is very critical. In this very critical case, when I look at the broader world, we have very ambitious plans to finish. Our investment primary goes from the...
by point of innovation, but initially to the specific
related fields. And when we talk about it's a combination of knowledge and knowledge and business acumen, and we're focusing more and more on the core knowledge in the verticals we enhance. We're expanding in cyber security, flychains, high signs, areas where you don't build...
Acuments??.
So when we look at that area, that's a phenomenal focus in M&A. One is, again, part of the regional strategy, chicken tongue question where you wanna be on the growth. And I think that is very clear. We wanna make sure it's financially efficient, a very reasonable for the shareholders, but overall it's one of priorities in that we will continue to grow. The operational growth, but from the operational growth.
Okay, appreciate the detail. Thanks.
Right.
Next question from Ryan Potter from Citibank. Please go ahead.
I'll take a question and then we can record her.