Grid Dynamics Holdings, Inc. (NASDAQ:GDYN) Q3 2023 Earnings Call Transcript

Grid Dynamics Holdings, Inc. (NASDAQ:GDYN) Q3 2023 Earnings Call Transcript November 4, 2023

Bin Jiang: Good afternoon, everyone. Welcome to Grid Dynamics Third Quarter 2023 Earnings Conference Call. I’m Bin Jiang, Head of the Investor Relations. At this time, all participants are in a listen-only mode. Joining us on the call today are CEO, Leonard Livschitz; and CFO, Anil Doradla. Following their prepared remarks, we will open the call 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 forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainties as described in the company’s earnings release and other filings with the SEC.

During this call, we will discuss certain non-GAAP measures of our performance. 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. You can find all the information I have just described in the Investor Relations section of our website. With that, I will now turn the call over to Leonard, our CEO.

Leonard Livschitz: Thank you, Bin. Good afternoon, everyone, and thank you for joining us today. As you have seen from our published results, Grid Dynamics third quarter revenue and non-GAAP EBITDA were within guidance range and exceeded Wall Street expectations. Our results reflect the company’s unrelentless commitment to our existing clients and our continued ability to execute to our stated goals. There was a lot of activity during the quarter. This includes strong momentum with new clients, great traction with artificial intelligence projects as it continues to garner significant interest across our customer base and progress with our GigaCube initiatives as we continue to operationalize it across the company. On the macro, the demand environment points to a level of stabilization.

While we still have some ways to go before calling it a strong snapback or back to normalized levels of demand I’m more optimistic than I was three months ago. In many ways, this is what not unexpected, as enterprises need to spend toward their business imperatives that include digital transformation initiatives. In other words for enterprises to remain competitive, they need to spend on crucial business, digital transformation needs. Over the past three quarters, you have seen that our revenue has been flattish. As we highlighted before, the general trend we encountered are from the headwinds with a handful of customers, which offset by other existing customers and new logos. Going forward, we observed the headwind trend reversal. This is incrementally positive, and we anticipate the company’s growth in 2024.

Now if I were to look at the billable headcount trends, some positive trends are emerging. Over the past six weeks, we have seen a steady rise in the billable headcount. Additionally, the demand for these billable headcount started coming from existing logos. Last but not the least, new logos and recent logos continue to trend in the right direction. Once again, the underlying fundamentals are pointing in the right direction, which leaves us to be incrementally positive. So in summary, I would like to leave you with three thoughts on the demand environment. First, the magnitude of resets across our customer is diminishing. Secondly, for the vast majority of the accounts, business is stable. And third, momentum with our new engagement is robust.

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Q&A Session

Now coming to the fourth quarter, we’re more than one month into the fourth quarter, and the summary thoughts I have shared with you today extend to the fourth quarter as well. Our billable headcount continues to grow. Our AI activity is robust and the magnitude of declines from the handful of customers continues to diminish. We continue to invest in our engineering resources towards building new R&D artifacts, accelerators and AI capabilities. During the quarter there was a lot of activities with our technology organization, including continued interest in our broad technology offering, including AI. During the quarter, we completed multiple Enterprise AI and Generative AI projects. With our Generative AI efforts, our R&D initiatives resulted in several new solutions.

These include Gen AI for intelligent document processes and Gen AI for software development. With our billable projects, we continue to be engaged across the spectrum of our clients with a multitude of solutions. These projects are at different stages of development that include Global Financial Institutions, Retailers, Hotel Chains, and Automotive suppliers. Our strength has always been our engineering training around leading technology specializations. To support the strong demand for AI skillsets, we have established a comprehensive AI training program. Our AI curriculum is segmented across three tracks and ranges from introductory AI to more advanced features. Engineers are going through the rigorous program which takes up to several quarters to complete the entire curriculum.

As a reminder, Grid Dynamics AI engagements are based on more than seven years of internal research and successful implementations. With our generative AI offering, we partner with customers to employ large language models and prompt-guided image generation to the applications in product design & visualization, knowledge retrieval, wealth management, and customer support. On the GigaCube initiative, we continue to make good progress. As you know, GigaCube is our strategic blueprint that lays out a framework for our company towards a $1 billion revenue goal. During the quarter we made some key hires across our CTO organization and sales organization. Our efforts continue to focus on industry verticals such as manufacturing, pharmaceuticals, and BFSI.

In the quarter there were several trends and I want to share with you some of the notable ones: Logo momentum: In the third quarter we signed 10 new enterprise customers. This brings the new enterprise logos added in 2023 to a total of 28. We believe Q3 client acquisition is a further testament of our competency and the confidence for large global enterprises to sign up with us in the current environment. Some of the more notable ones to mention include a Global food company, a Global Automotive Parts Supplier, a large direct-to-consumer home improvement solution provider, a large Office Supply Retail company, a U.S. based insurance company, and a European tax advisory company. Our strong momentum is the testament of our differentiation and value we bring to our customers.

Delivery location support: We operate in 18 countries spanning across North America and Europe. We also continued to expand in India and adding another engineering center location, which is a testament of Grid Dynamics being a truly global company. Our “Follow-the-Sun” strategy enables our clients to be supported in an uninterrupted fashion around the clock. Clients embrace our geographic diversification and choice of locations for engineering support. During the quarter we were able to quickly put together and ramp up dedicated teams across our global delivery locations for some of new and recent clients. Additionally, our integration with NextSphere and Mutual Mobile is in full swing and we have started to implement synergies across engineering, operations, back-end offices going into the joint sales activities.

European business: During the quarter, we made good progress in expanding our footprint across industry verticals with new European clients. We completed a major digital commerce re-platforming program for a global footwear company, delivered on time and within the budget. We are leveraging experiences to develop similar competencies across other industry verticals. Additionally, we are implementing a large composable commerce modernization platform for a global specialty auto parts company, and a mission to modernize their B2C business. Leveraging our expertise, partnerships, and references, we expect to expand our brand in the market. For a large medical device company, we’re launching initiatives in data engineering and Generative AI to tackle challenges related to data insufficiency and governance.