Grid Dynamics Holdings, Inc. (GDYN) Q1 2021 Earnings Call Transcript

Greetings, and welcome to the Grid Dynamics Holdings, Inc. First Quarter 2021 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lilia Chernova, Head of Investor Relations. Thank you. You may begin.

Good afternoon. Welcome to Grid Dynamics' First Quarter 2021 Earnings Conference Call. Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations, and beliefs, including our second quarter 2021 financial guidance, the growth of Grid Dynamics' business, our objectives and business strategies as well as other forward-looking statements. You can refer to the disclosure at the end of the company's earnings 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.

Thank you, Lilia. Good afternoon, everyone, and thank you for joining us today. I'm excited to share my thoughts on how Grid Dynamics is making strides across its business and highlight the progress we have made since we spoke with you a few months ago. On the call today, I will provide highlights of our first quarter results, share with you what we are witnessing across our business on the demand front and talk about the trends that are shaping our second quarter in 2021. When we spoke with you all in March, we provided commentary around the demand environment, both for the first quarter and the full year 2021 as well as highlighted reasons for our upbeat outlook. Today, on the call, I'm happy to reiterate the positive catalysts we shared then. Furthermore, our strong first quarter results and guidance for the second quarter clearly indicate a robust demand environment where customers are actively seeking our services for strategic digital transformation projects across different industry verticals. Now coming to the first quarter. I'm very pleased to report the highest revenue quarter in the history of Grid Dynamics. Even after factoring out our recent acquisition of Daxx, this was an all-time high quarter. In the first quarter, our revenue of $39.1 million included $6.5 million of revenues from Daxx, and it was higher than our guidance range of $35 million to $36.6 million. Both Daxx and non-Daxx revenues exceeded our expectations as demand picked up across all our vertical industries.

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenue of $39.1 million exceeded our guidance range of $35 million to $36.5 million and was up 30% on a sequential basis and 21% on a year-over-year basis. Excluding revenues from Daxx, which contributed $6.5 million, revenues in the first quarter of $32.6 million increased by 12% on a sequential basis and were slightly up on a year-over-year basis. The better-than-expected revenue in the quarter was driven by a pickup in demand across industry verticals. Similar to the last couple of quarters, our technology vertical was the largest vertical in the quarter. As Leonard pointed out, this was not only the highest quarterly revenue, but also the quarter that marked the company returning back to pre-COVID revenue levels. In the first quarter, our non-retail business, now representing 77% of revenues, was up 36% on a sequential basis and 85% on a year-over-year basis. During the quarter, our retail segment, representing 23% of our revenues, grew 14% on a sequential basis. The growth in the quarter was largely driven by our top e-commerce-friendly retail clients and, to a lesser extent, by others. In spite of a 14% sequential growth, retail was down 45% on a year-over-year basis.

Our first question comes from the line of Mayank Tandon with Needham & Company.

Congrats on the quarter. I wanted to start with just the guidance. Obviously, a very strong momentum coming out of 1Q. The Q2 guidance looks good. And the full year does as well. It does call for a pretty sharp deceleration in the second half, if I'm doing my math right. Just wanted to get a sense if that's just being conservative at this juncture in the year or if there is something else that is impacting the second half outlook relative to the strong momentum in the first half?

Right. Mayank, thank you very much for your question. Look, we just started the year. If you see our guidance, it is at least that dollar amount, right? Obviously, our first quarter was strong, and we'll come back and give you an update. But based on the business momentum and just the tone of the business, we feel pretty positive for 2021. This is our best guesstimate right now. As we said, we'll come back in three months, and hopefully, give some more positive news.

Got it. That's understandable.

Mayank, this is Leonard. Just more color on it. As you know, we had a very good quarter last year. This quarter is even better. We have a good visibility in Q2, obviously, but we still remain to be a little bit more conservative just to make sure we get the facts. But you're absolutely right; there's no immediate foreseen deceleration, by all means.

Got it. That's very helpful. And then just as a quick follow-up, I wanted to get some color on the supply side of the equation. There have been some concerns expressed by other IT services companies in terms of being able to attract enough talent. There's clearly a war for digital talent, pressure on attrition, and wage inflation. So any perspective on that would also be very helpful—how you're managing some of these headwinds that you mentioned, including demand?

Sure, Mayank. Well, you actually asked two or three questions, right? So let's just make sure we will have other people a chance to ask the same question because I suspect there will be more people talking about the same. Just at a high level, first of all, on the talent. You're right. There's always pressure about getting the right people to the company. We are getting more and more demand on a variety of skill sets coming through existing and new customers. We have been prepared for that. We built a strong pipeline that comes from the internship programs, some of the partnerships, and additional hiring. I hear some other companies talk about the projects. One of the benefits that our model has is it helps us because we're starting many projects with a handful of good people, and then we build on top of it. I believe there's scalability. Definitely, even though it's an industry challenge, Grid Dynamics is well prepared.

Our next question comes from the line of Maggie Nolan with William Blair.

Congrats on the results. I'm wondering about the EBITDA margin. What's holding you back from or creating uncertainty in the EBITDA margin guidance for the full year? And is something in the low teens, similar to Q1 and your Q2 guide, a reasonable expectation for the full year?

Yes. Thanks a lot for the question, Maggie. So if you look at the full year, right, I mean, there are a couple of moving parts here. Number one is that we've made an acquisition in Daxx, right? And there are some levels of investments and some programs that we're looking at, so the focus is around there. The second thing is that, as you know, we've been investing in programs within the company, whether it's Salesforce, whether it's building up new lines of business. There’s that element there. And the third thing is that, look, we still have a little bit of retail business, right? So some of the moving parts there. As we proceed with every quarter, I think things are going to get better. We will come to some point where we'll give out more longer-term visibility on the EBITDA. We're taking one step at a time. At the right moment, we'll revert to providing a little bit more color.

And Maggie, a little bit more color on that. So similar to what Mayank asked about the acceleration, we project positive trend momentum on our margins as well. At the same time, we're a bit cautious about some of the trends that are impacting the industry, not just us. While I'm very optimistic about the next steps beyond Q2, the information we have guides us to a very promising 2021, which we are trying to be a bit rational about how we can pace ourselves. As you recall, when we got into the storm last year, I made a comment that despite all these headwinds, I would hit full recovery of revenue in Q1. At that time, it was a little bit forecast for most of the guys. We have weathered the storm, and now we are ahead of the game. And then, we're talking about one of those quarterly discussions about when we're going to get back to some EBITDA margins. I mentioned, let's wait for Q2 results. So let's wait and see how things will turn out.

Okay. And then, when you think about your verticals, obviously, there was good growth in the other segments. Is there anything that sub-verticals within there that are good growth drivers that could be a breakout that we should keep an eye on? And what does it take to reinvigorate the financial services segment as well?

Yes. So Maggie, you're right. There are a couple of certain dynamics happening with certain customers. They're not getting to a point where we want to break it out as a separate vertical, largely because they're one-off. But these are related to some design wins or program wins or customer wins we had over the past twelve months. We have a particular customer in online grocery delivery, and we have another customer in the food delivery business. So yes, there are a couple of those things. And with time, we'll break it out. On the financial side, if you look at our business, we don't have as many customers as we do with TMT and other segments. So these handful of customers, when they move, they have a meaningful impact. We saw with this one particular customer reverting back to program growth, which impacted us. As you may recall, last quarter, we even talked about a global insurance customer. So we're trying to diversify within different subsegments of the financial industry.

Yes. Thank you, Anil. It's a good overall review. But another thing, which I want to bring attention to, is that some of Grid Dynamics' accelerators, solutions, and integrated practices coming from more traditional industries are starting to accelerate with the digital expansion during this period into other verticals. The demand for what Grid was able to deliver is starting to spread across multiple verticals. I think, Anil is fair to say it will be early to call the subgroups. But to summarize, they're very much synchronous in terms of our horizontal capabilities just to move into new fields.

Our next question comes from the line of Joseph Vafi with Canaccord.

Maybe we can talk first about that large CPG customer that you called out. I know it's a fast growth customer for you right now. Is that customer still growing, or how do you see the evolution in terms of revenue contributions from that customer playing out over time? And then I'll have a couple of follow-ups.

It's a very good question, Joe. I believe what you're really asking is whether it’s kind of a temporary ramp-up or if it's a longer-term growth. There are a couple of aspects that we are currently working on together. We are very proud to be not just an implementation partner, but we have a seat at the table and a variety of roadmaps and new innovations that this Daxx CPG customer is demanding, which goes into the areas of business where we currently are not present, as well as some of the global international opportunities jointly with this customer. So I wouldn't have a magic crystal ball to say how and when the acceleration will continue. But we definitely see continuous demand. Based on my expectation, this customer will continue to grow.

That's helpful, Leonard. And then, on those six new logo wins and in general kind of when you look at the sales pipeline, what are you seeing in terms of sizes of enterprises you're engaging with? Are they staying about the same? Are they growing? Do these six new logos have the capability to become top customers over time? Any color you can provide there would be helpful.

Sure. So first of all, Anil earlier mentioned, we only name the logos which we haven’t signed contracts with but have generated revenue. Hopefully, by the same time next quarter, we'll give you even more color. For now, I believe that there is an idea not to talk about something that we don't have money in the bank yet. These six specific customers, I would say, are coming from the mid to upper range. I wouldn't call any one of them a supergiant at this point. However, what was very encouraging is that some of them—some of the customers that we were previously engaged with—started ramping up in Q1 to a level where we would be more comfortable adding them to the top-tier in the second half of this year. Also, some of the contracts we tied again without revenue yet, we see huge potential to also make the top ten. So two parts: the ones we talked about, six, are probably mid to upper range, while some of the others we’ve just expanded upon have very high expectations for the second half of the year.

Got it. And then, maybe, I guess I could probably do the math, but Anil, what do you have built into the guide for Daxx growth rate this year, or are you being conservative there?

Yes. So look, as you see, we had—on the Daxx front, we haven't changed a lot. We provided everyone a snapshot of Daxx. We're in the earn-out period right now. We're slowly integrating the company, both from a sales and delivery point of view. So we've taken a little bit of conservative approach as we integrate, as we understand this company better. So we have kept the Daxx numbers at least on an out-quarter stable, and we'll just update you. So yes, at this stage, we've just taken that approach.

Our next question comes from the line of Bryan Bergin with Cowen and Company.

I wanted to follow up on the new engagements and the new accounts. How would you characterize the speed of the project activity among the new customers? I'm curious if there's been any notable shift in the project ramp trajectory of the new clients relative to what you had seen historically.

All right. Thanks, Bryan. I knew this was a philosophical question with a thematic outcome. So it's all definition about what a new customer is. As you know, when we acquire a great new customer, most of the time, it's still an expense. So I assume you are more referring to the customers we captured in the last quarters and how we expand them. From that perspective, there has been significant acceleration on expansion and demand. The reason I'm saying this is not just in terms of percentages. Anil mentioned to you that the percentage of contribution from the top five or top ten has reduced, but it's also on the versatility of the projects. What we are able to do has expanded beyond their regional area origination with a higher speed. Part of this relates to traditional businesses like specialization in cloud migration, automation, and data analytics. Our introduction of a broader pod-based solutions—bringing teams to engage in new projects as we reach customers—is actually leading momentum for us, allowing us to look comfortable in the future without over reliance on just a few top clients, which you may have seen in the past.

Okay. That's helpful. And then on traditional retail, in the context of just the reopening momentum in the U.S., how have your conversations with the brick-and-mortar customers on the legacy ones evolved over the last two months, given the relative improvement in their business prospects? Is there anything happening there? Anything built in?

Yes. So there is, I would say, a little bit of a phenomenon, which you picked up. In the last six weeks, we've strongly started getting quite a bit more demand from those two guys, especially one of the two who departed from us that way in March last year. We're willing to support them. Some of the smaller, more focused customers never stopped investing with Grid. But I do see a pickup. Now being conservative on the whole brick-and-mortar service and more e-commerce-friendly retailers coming into play, we did not project as much growth for them because we wanted to see market viability. However, in the last six weeks, we have seen a couple of very strong demands from brick-and-mortar retails. But that's on top of what we already reported.

Our next question comes from the line of Josh Siegler with Canter Fitzgerald.

Congrats on the quarter. Would you please provide any sort of progress on the sales build-out and productivity with that salesforce?

All right. Productivity and Salesforce. So it's the first time I'll talk openly. We have been reporting to the investor community for several quarters our continuous investment in the sales force. We're still in progress. We are able to capture some senior sales experienced people with good backgrounds, and we continue to close some of them. We're very selective in terms of how we expand the front of senior relations, especially in terms of quality, but it's an investment. We've also accelerated our marketing touch. We improved SEO, direct marketing campaigns, and webinars. We combined, I would say, the Salesforce expansion with improvements in existing customer communications. We find that there's some feedback that some of the really interesting clients of large caliber reached out to Grid Dynamics almost immediately. I'd say the full investment recovery or ROI from the Salesforce expansion will come a little later this year with more personalized approaches. However, I have to say that even in Q1, our funnel going forward has been promising.

Great. That's very helpful. Could you also please provide an update on your capital allocation? What are you seeing in the market regarding potential future acquisitions?

You want to know what's happening with acquisitions? One thing is, it's a great market for both acquirers and acquisition companies. Grid Dynamics has been stating that we continuously look for new regions, new technology, and expansion capabilities. We closed one deal this December. Obviously, we are going to have more great opportunities for Grid. Some of them you may have picked up, but we recently filed to show that we'll be doing some fundraising in due time. That indicates that our appetite is growing as we see more and more fit for Grid Dynamics across multiple fronts.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Livschitz for any closing remarks.

Thank you, everybody, for joining us on the call today. Our first quarter results were strong, and as we executed well against our guidance. I’m proud of Grid Dynamics' team and their continued hard work toward achieving the goals. The demand environment is robust. Customers continue to prioritize their digital transformation initiatives. We are working very hard to ensure we keep up with the demands for talent. Our strong comeback from the second half of 2020 onwards is a testament to Grid Dynamics' ability to quickly adapt to our customer needs, and our core strengths and capabilities are not tied to any specific industry vertical. We started 2021 with incremental confidence, and we look forward to giving you a business update in three months. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.