Grid Dynamics Holdings, Inc. (NASDAQ:GDYN) Q4 2023 Earnings Call Transcript

Grid Dynamics Holdings, Inc. (NASDAQ:GDYN) Q4 2023 Earnings Call Transcript February 22, 2024

Grid Dynamics Holdings, Inc. misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.08. GDYN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Bin Jiang: Good afternoon, everyone. Welcome to Grid Dynamics Fourth Quarter and Full Year 2023 Earnings Conference Call. I’m Bin Jiang, Head of the Investor Relations. At this time, all participants are in 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, Ben. Good afternoon, everyone, and thank you for joining us today. As you have seen from our published results, Grid Dynamics’s fourth quarter revenues were above our guidance range and exceeded Wall Street expectations. It was another quarter of solid execution and continued focus on our stated goals. The quarter witnessed a lot of activities, both in sales and CTO organizations, the two key areas within the company where we invested significantly in 2023. On the sales side, our industry-centric efforts are paying off across all the verticals. In 2023, we added 33 new logos, which is a strong testament to our differentiation in a year where customers were more selective toward business to digital providers.

With respect to the CTO office, our scientists and architects are heavily engaged with clients across the spectrum of innovative solutions, including AI, to drive meaningful business outcomes. To that end, we released several new functional accelerators across industry verticals, which have resulted in greater engagements across both new and existing customers. In supply chain manufacturing, pharmaceutical and financial services, which is area of focus with our GigaCube initiatives, the ability to offer unique and differentiated offerings has resulted in accelerated acceptance across a wide range of customers. To support the strong demand for AI skills, we established comprehensive AI training programs. I’m happy to report that over 25% of our engineers are trained in generative AI, our AI curriculum is rigorous, and is segmented across three tracks, ranging from introductory AI to more advanced topics.

It may take up to several quarters to complete the entire curriculum. On the macro front, I’m happy to report that the demand environment is improving. The demand trends are directionally consistent with my commentary over the last couple of quarters. While we’re yet to get back to normalized levels of growth, we’re moving in the right direction. In many ways, the sequential growth with our first quarter revenue guidance reflects our sentiment. We’re also seeing the positive trends with our four companies’ specific factors. First, we see customers either choosing to maintain their current level of spending or moderately improve with increases in investment. While we witnessed a similar trend last quarter, the fact that the customers demonstrate more stability is an important step in getting back to historically normalized levels of growth.

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Q&A Session

This is reflected in the steady rise in the billable headcount trends from our existing levers. Second, drops in revenue across some of our large existing customers are moderating. To put it in perspective, in 2023, the considerable revenue headwinds we faced were limited to a handful of existing customers. We anticipate this trend will diminish in 2024. This bodes well for the company’s growth in 2024. Third, our partnership-driven revenues are growing steadily. In 2023, roughly 13% of our revenues came from partnerships. They accelerated the investment into partnership programs a couple of years ago. I’m bullish on expanding and monetizing more partnership opportunities in 2024 and beyond. And finally, fourth, our new logo momentum. In 2023, we accelerated investment in a broader, industry-specific created, dedicated sales team to pursue new logos and opportunities.

We expect this to continue to be an important component of our growth in 2024. Our follow the sun strategy has been successful with our clients. Today, we serve our customers from 18 countries and our global footprint fully aligns with our customer needs. Now coming to the first quarter of 2024. We’re almost two months into the quarter and the commentary that I shared with you today extends to the first quarter too. Our billable headcount continues to grow, our AI activity is robust, and the headwinds from a handful of clients continue to diminish. We believe underlying trends are moving into the right direction. As we enter 2024, our CTO organization is highly focused on expanding our capabilities highlighted in our GigaCube strategy, this includes building new R&D innovations, accelerators, and AI solutions.

During the fourth quarter, we made good progress with the proof of concepts and customer projects related to artificial intelligence. Our internal R&D innovation lab, which we call Grid Labs, has generated self-functional accelerator and AI-related artifacts. Today, AI is infused across practices in industries, as well as customers representing over 80% of our revenues are engaged with Grid Dynamics on AI initiatives, and more than 50% of our new engagements have an AI component. These include industry verticals beyond which we historically have been strong, such as supply chain and manufacturing, financial services, and pharmaceuticals. Some of our new AI innovations include pricing applications, Internet of Things analytics, visual quality control, an industrial vision large language models.

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 models in a variety of applications. These include prompt-guided image generation, product design and visualization, knowledge retrieval, wealth management, and customer support. In the first quarter, there were several notable trends, and I want to share with you some of them. Logo momentum, in the fourth quarter, we signed five new enterprise customers. This brings the number of new enterprise logos in 2023 to [indiscernible] This is a record number of new logos for us and is a testament to our reputation with large global enterprises.

Of the new enterprise customers we signed in the quarter, one is the largest omni-channel specialty retailer, one is a large insurance company, and one is a software company focused on revenue management for the healthcare industry. Delivery location support, our follow the sun strategy continues to be guiding principle in enabling our clients to be served in an uninterrupted fashion around the clock. I’m proud of our ability to serve our customers across 18 countries spanning across North America, Europe, and India. In India, I’m happy to report that we’re opening an office in Bengal. This brings the total number of Indian offices to three, which includes Hyderabad and Chennai. Our clients have successfully engaged with Grid Dynamics in leveraging our presence and expansion in India.

In Europe, we continue to expand our footprint in Poland and Romania. In Poland, our growth is increasingly driven by partnerships with the client local centers. With respect to our recent acquisitions, we complete all the engineering integration by the end of Q1. European business. Europe continues to be strategic to our growth. In 2023, our revenue from Europe was roughly 20% of our total revenue with customers across industry verticals. During the quarter, we made good progress in expanding our footprint across industry verticals with our existing and new European clients. To highlight some notable achievements during the quarter, let me point out that with a leader in legal and tech services, we are partnering to use Gen AI technology and build a global data platform to accelerate the ability to serve their customers with reviews and publishing of contracts.

And a large UK-based retailer, we signed a multi-year contract to modernize their e-commerce platform. As a global auto part company, we expect to roll out their composable commerce modernization platform across other brands within Europe. For a large medical device company, we are launching initiatives in data engineering and generative AI. The goal is to enhance the efficiency of sales reporting processes. And finally, at the large clean energy company, we are enhancing their sustainable ESG initiative. Partnerships. As I highlighted before, partnerships are increasingly playing an important role in our growth and our long-term plan toward becoming a billion-dollar company. Let me remind you, in 2023 partnerships contributed to 13% of our overall revenue.

Again, this is impressive given that we embarked on this strategy in 2021 and within a short period of two years we have achieved such impressive results. Notably with our partners, AI is becoming a core element of our joint go-to-market strategy. Looking forward to 2024, we have strong momentum with hyperscalers and leading digital commerce SaaS companies, as well as other specialized software providers. Our focus is to capture greater wallet share. GigaCube initiatives, with GigaCube we continue to make good progress. As you know, GigaCube is our strategic blueprint that lays out a framework for our company toward a billion-dollar in revenue. We operationalize the GigaCube via four key areas: knowledge management, partnerships, new vertical focus and winning larger deals.

In each of these fronts we made progress, both in the Q4 and in full 2023. With our knowledge management efforts, we have catalogued over 100 important delivery case studies that are being used across pre-sales, sales and delivery organizations. This is important. We accelerate the proliferation of our learnings from each project and program to ensure that the whole company benefits from it. During the quarter, Grid Dynamics delivered some notable projects. For a leading global technology company, Grid Dynamics enhanced the recommendation engine, one of the largest online streaming services. We successfully implemented cutting-edge machine learning, heuristic techniques to enhance the quality of the data used by recommendation engine. Our engagement covered end-to-end machine learning process including model engineering, evaluation, deployment and postproduction efficacy monitoring.