Grid Dynamics Holdings, Inc. (GDYN) Q4 2021 Earnings Call Transcript

Welcome to Grid Dynamics Fourth Quarter and Full Year 2021 Earnings Call. Please note that this is being recorded. I will now turn it over to our host, Bin Chiang, Head of Investor Relations. Thank you. You may begin.

Good afternoon. Welcome to Grid Dynamics Fourth 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 first quarter 2022 financial guidance, the growth of Grid Dynamics business, our objectives and business strategy 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. All statements made today reflect our current expectations only. And we undertake no obligation to update any of them to reflect the events that will occur after this call. You can learn more about the specific risk factors that could cause our actual results to differ materially from today's discussion in the Risk Factors section of the company's Form 10-Q filed on November 4, 2021, and the subsequent periodic reports that the company filed 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 8-K filed with the SEC. This call is also available via webcast. You can find all the information I have just described in the Investor Relations section of Grid Dynamics website. Joining us today on the call are CEO Leonard Livschitz and CFO Anil Doradla. Following their prepared remarks, we will open the call to your questions. With that, let me turn the call over to Leonard.

Thank you, Bin. Good afternoon, everyone, and thank you for joining today. And under any other circumstances, this would be a phenomenal discussion about how we performed in Q4 and how successful 2021 was for Grid. But it's not that important at this moment. We are in a war. And what I'm going to do right now is tell you how Grid Dynamics operates in this condition in Ukraine, how we deal with our people, and how we provide uninterrupted work for our company. Before I do that, I will still walk you through all the results of our year and give you an example of how we perform. I will then come back to relate the questions about how Grid Dynamics deals with the situation we are facing right now. I also want to take questions together with Anil. On that note, I want to provide our business and financial performance for the fourth quarter and full year 2021 and provide our outlook for the coming Q1 quarter 2022. As you have seen from our solid fourth quarter results published this afternoon, I am very pleased to report another record revenue in our history. This marks the fourth consecutive quarter of reporting record revenue. Before I get into the highlights of Q4, I wanted to make some comments on our 2021 accomplishments, as it has been an important transformation year for the company. With over $200 million in annual revenue, we almost doubled our revenue from last year. Our organic business, which grew to more than 50% of the previous year, is now on a quarterly run rate over 2x compared to June 2020, which was during the pandemic. We added 22 new logos in the year, accelerating our client additions over the previous year and setting a positive backdrop. Our partnership announcements with cloud providers, such as Google and Amazon, have elevated our status in the industry. Our two acquisitions made in December 2020 and May 2021 have enhanced our capability and offerings. We executed an equity offering that not only raised cash for the company but also enhanced liquidity for our shareholders. We have significantly exceeded everyone's expectations and set such a high level of execution, which is a testament to our strong fundamentals as well as differentiation, and, more importantly, the hard work and dedication of our people. I am very proud of our entire team across the globe for their hard work, and I would like to thank each one of them for their efforts in making 2021 a truly remarkable year. Now we come back to the war. How does it relate to our business? As you all know, on February 24, Russia launched an invasion against Ukraine. The situation is ongoing. What we've been doing is monitor very closely. But not just monitoring; we are actually participating in the lives of our people to take them out of harm's way. We activated our business continuity plan (BCP) that defines actions to be taken by the company at different levels of business risk. Sadly, we had to test our plan going back to 2014. Because of our experience, we will continue to update it. The main focus is on the safety of our employees and the continuity of our clients' business. As the war unfolds, our top priority has been to ensure the safety of all our employees. On that front, I am happy to say the majority of our employees in Ukraine are safe and accounted for. In Ukraine, we have roughly 1,400 employees stretched across the country, and we are addressing their needs in multiple ways. To begin, we have offered our employees the choice to work from their preferred locations. We are helping in various ways, including transportation, shelter, food, and medical help. Some of our employees have chosen to stay in their locations and have been sheltering in place with their families. Others have moved towards the western part of Ukraine, Poland, Moldova, and other locations. As of today, the majority of our employees have relocated to the western part of Ukraine, and their families are on their way to safety in neighboring countries. Additionally, we continue to accelerate the process to bring the remaining employees and their families to safety as situations permit. We are also adding delivery capacity to minimize disruptions to our client projects. On this, we have been working on multiple fronts. First, we are stepping up our hiring process across all geographic locations, including Mexico, Poland, Moldova, Serbia, and Armenia. Secondly, we achieved a significant milestone with our expansion of delivery operations in India. This week, we announced the creation of Grid Dynamics India via a strategic partnership with Sigma Infotech. We are excited that this opportunity will present us with the best path for entry and growth in India. We anticipate having our first set of billable employees in India in a very short period of time. Over time, we plan to grow our presence in India to achieve at least 500 or more people capacity. I stress the focus on the high talent and goodwill in partnership with our great employees who will currently work in India. The third highlight I want to mention is how our employees have done well beyond their call of duty. Across all our geographies, our employees have shown tremendous team spirit and have stepped up by taking additional responsibility with client projects. They work day and night. They step up to ensure that clients are satisfied to the best of our capabilities. The percentage of our business rollout is growing daily, and it is playing an important role. It’s a testament to our culture and illustrates how resilient and collaborative our engineers are and how they care about each other. I believe our size and delivery DNA positions us well in navigating through the current situation. Since founding the company, we have ensured that client projects and mainstream resources are not concentrated in any single geographic location. For a smaller company, disruptions and client work due to resource concentration would have had a major impact on the business. In cases where dynamics have been distributed, we are set to provide the best possible support to clients. The potential impact is of hundreds of people, not thousands, nor tens of thousands. Given that we are in over 12 countries and spanning 15 time zones, we have access to large labor pools. Bottom line, we are more nimble and can address capacity issues as quickly as possible. It is a very difficult time, not just for Grid Dynamics but also a test for humanity. To my delight, our customers have proven to be outstanding partners and have shown tremendous support to our company and our employees. We engage with all our customers on a daily basis and have not seen any loss of customers so far. Conversely, our customers are stepping up and helping us with logistics. They are patient and committed. In addition to our business relationships, they are participating and contributing to the charities established by Grid Dynamics. Again, it’s a testament to years of relationships and our track record of being a reliable, intelligent, and committed partner. Now coming to the fourth quarter, we finished this year strongly with revenue of $66 million, representing 120% year-over-year growth, significantly exceeding our expectations shared from last quarter. We ended the fourth quarter with adjusted EBITDA of $11.6 million, representing growth over 3x compared to the same period in the prior year. On a sequential basis, our revenue grew 15%. The market is one of the strongest in the first quarter in terms of sequential growth rate. As you know from our previous commentary around seasonality, our fourth-quarter growth is a bit more modest, less than over one-third. Nevertheless, the quarter has performed better than expected. We witnessed strong demand across all our industries and verticals. We have seen growth through our organic business as well as acquisitions. The efforts we made to enhance the supply chain during 2021 resulted in a significantly higher billable headcount. Underpinning this trend was the strong customer interest in engaging our services around digital engineering, as these programs take center stage across the enterprise world. In the fourth quarter, there were several positive trends, and I want to share a few of them. Please understand that under current circumstances, some of the comments may not be as important as they seemed just a few weeks ago. Nevertheless, I want to point out that demand trends across all segments continue to grow, and there is healthy demand across all our verticals. During the fourth quarter, our large technology customers continued to aggressively dedicate their work to Grid Dynamics. Retail had another strong sequential quarter and was the largest vertical in Q4. We saw strength from our home improvement clients along with e-commerce-friendly apparel retailers. On the CPG and manufacturing front, we continued to leverage our expertise in digital commerce. Our investments in areas such as order fulfillment and supply chain led to interest from CPG and manufacturing clients, including some top players in this vertical. The demand within other verticals was primarily driven by healthcare and pharmaceutical clients. We've seen a huge demand for talent, as the search for skilled professionals continues to be robust. That said, on the supply side, our scaling talent acquisition at the beginning of 2021 has significantly paid off, largely reflected in our ability to convert a large number of engineers into billable positions and resulted in 15% sequential growth in revenues. On the internship front, we have made solid progress by partnering with top universities. In 2021, we doubled the number of internships compared to 2020, and we expect to continue to grow our headcount. Our new organization saw our organic business continue to be robust. In this quarter, we added five new logos, bringing our total to 22 additions for the full year, as I mentioned to you before. Of this five new logos, two were in B2B retail, one in healthcare, one in media, and one in apparel retail. Our product-oriented delivery model has been increasingly accepted by our larger clients, and these trends in February drove our capabilities to build larger teams across multiple offshore organizations. I am happy to report that in Q4, a Fortune 500 pharma company was able to select a dedicated offshore location as a center of excellence in the area of data science and artificial intelligence. We expect this trend to continue favorably as clients across industry verticals increasingly see the benefits. Additionally, acquisition revenue in the quarter was higher than expected as both DAS and Daxx elevated demand across the board. I’m pleased to report that integration efforts with both companies are playing out as expected. At this point, I can report that we have fully completed the acquisition and integration of DAS, and it is now entirely part of Grid Dynamics in every facet of the business. We rolled out a strategy around expanding our salesforce in early 2021 and in Q4, we made several strategic sales hires across the United States. This focus was centered around hiring senior salespeople who can leverage their experience and expertise with their industry connections. In addition to strengthening our geographic coverage, we have invested in bringing people with domain knowledge in verticals such as insurance, fintech, and pharma. I'm excited to see these senior people onboard and look forward to continuing to grow our business in 2022. In Q4, we made substantial growth in a number of major R&D initiatives, including ramping up our accelerator offerings, enhancing our presales technology and capabilities, and scaling our consulting practices to meet all the growing demand from our clients. As we look into 2022 and beyond, we aim to enhance our capabilities further and create more platform solutions to win larger deals for the company. During the quarter, Grid Dynamics delivered some notable projects. For example, for a global technology company, we built a complex system to predict device failure directly on the company’s mission-critical production lines. This system integrates IoT data using streaming technology, analyzes the data with machine learning modeling, and provides real-time decisions. We expect the system to evolve over time and be rolled out across most of their product lines. Additionally, for a global CPG brand, we helped integrate their systems with a third-party distribution center provider, thereby significantly increasing their retail supply chain capacity in North America. Our efforts have led to several benefits, including increased revenues, customer satisfaction, and prevention of stockouts, especially during peak demand periods. Furthermore, for one large U.S. luxury retailer, Grid Dynamics developed and delivered a new product-edge mobile application targeted at a customer segment that historically had not adopted digital shopping. This invite-only application is designed with experience, recommendations, and personalization to enhance digital engagement and revenue, guiding the retailer in becoming a more digitally prominent brand while continuing to invest in this strategic initiative. Lastly, for a traffic solution manufacturer, we applied data analytics technology to enhance data management capabilities and traffic control systems used by clients. The system collects information from a wide range of IoT sensors deployed around cities and on vehicles. Grid Dynamics built several business cases related to scripting analytics and enhanced user interfaces. The new features enabled by our solution have become a competitive advantage and allowed this customer to attract new clients. Before I turn the call over to Anil, I want to remind you again that during the Q&A session, both of us will be happy to provide as much insight as we can and demonstrate how incredibly resilient Grid Dynamics has remained in the industry. I am incredibly proud of my employees who work day and night under very difficult circumstances and also grateful to my clients who are outstandingly supportive and generous partners. I would like to hear more from our investors about their contributions to helping Grid Dynamics and supporting Ukraine as well. Thank you. Now I will turn the call over to Anil, who will discuss Q4 results in more detail.

Thanks, Leonard. Good afternoon, everyone. Our fourth quarter revenue of $66.5 million exceeded our guidance range of $58 million to $59 million and was up 14.9% on a sequential basis and 20.9% on a year-over-year basis. Excluding revenues from our acquisitions of Daxx and Tacit, which contributed $15.2 million in the quarter and was higher than our guidance of $12.5 million, our organic revenue of $51.3 million was up 16.4% sequentially and 76% on a year-over-year basis, exceeding our guidance of $45.5 million to $46.5 million. The better-than-expected revenue in the quarter was driven by strong demand for our services across industry verticals. During the fourth quarter, retail, our largest vertical, representing 32.9% of our revenues, grew 19.7% sequentially and 182% year-over-year. The strong sequential and year-over-year growth was driven by strengths across our customer base, with e-commerce-friendly brick-and-mortar and home improvement retailers focusing on digital transformation initiatives. Our TMT vertical was our second-largest vertical, representing 29.4% of our fourth quarter revenues and grew 11.2% sequentially and 83.3% year-over-year. Growth in the quarter largely came from some of our large TMT customers who continue to ramp their offshore operations with us. As for the details of the revenue mix of other verticals, our CPG and manufacturing represented 20.5% of our revenue in the fourth quarter and grew 21.6% sequentially and 120% year-over-year. The growth during the quarter primarily came from large global brands along with new customers. The finance vertical represented 7.2% of revenue and declined 8.5% sequentially, but was up 62.5% year-over-year. The sequential decline in the financial vertical was largely driven by a decrease from some of our insurance and banking clients. Finally, the other segment represented 10% of our fourth quarter revenue and was up 18.8% sequentially. Within this vertical, we continued to ramp at some of our recent client wins in the healthcare space. We exited the fourth quarter with a total headcount of 3,274, up from 2,884 employees in the third quarter of 2021 and up from 1,894 in the fourth quarter of 2020. The sequential increase of 390 employees, or 13.5%, was largely due to increases in engineering headcount and improving demand. The increase from 2020 was due to a combination of improving demand resulting in headcount increases, combined with our acquisitions of Tacit Knowledge. At the end of the fourth quarter of 2021, our total U.S. headcount was 324, or 10% of our company’s total headcount. This was similar to the percentages in the third quarter and down from 14% year-over-year. The year-over-year decline as a percentage of the total headcount was largely driven by greater offshoring by our clients. Our non-U.S. headcount, often referred to as offshore, located in Central and Eastern Europe, the U.K., Netherlands, and Mexico, stood at 2,950 or 90%. In the fourth quarter, revenues from our top 5 and top 10 customers were 42% and 57.7%, respectively. During the same period a year ago, our top 5 and top 10 customer concentrations were 53.9% and 73.7%, respectively. The diversification across our top 5 and top 10 accounts was driven by a combination of factors, including new client ramp-ups, industry diversification, and our acquisitions. In the fourth quarter, we had a total of 221 customers, with 58 coming from our organic business and the remaining 163 coming from our Tacit and Daxx acquisitions. Our organic business customer count of 58 was up from 55 in the third quarter of 2021 and up from 43 in the fourth quarter of 2020. As a reminder, we count revenue-generating customers in the quarter and do not include customers who are inactive during the quarter. Moving to the income statement, our GAAP gross margin during the quarter was $27.3 million or 41.1%, up from $25.3 million or 43.6% in the third quarter of 2021 and up from $12.3 million or 40.7% in the year-ago quarter. On a sequential basis, the roughly 300 basis points decline in the gross margin as a percentage of revenues was due to a combination of factors, including fewer working days from the holiday season and increased hiring during the quarter. On a non-GAAP basis, our gross margin was $27.6 million or 41.4%, a change from $25.4 million or 43.9% in the third quarter of 2021 and up from $12.4 million or 41% in the year-ago quarter. The sequential decrease in non-GAAP gross margin percentage was driven by the same factors mentioned earlier. Non-GAAP EBITDA during the fourth quarter, excluding stock-based compensation, depreciation and amortization, and transaction-related costs, was $11.6 million or 17.4%, down from $12.5 million or 21.6% in the third quarter of 2021 and up from $4.1 million or 13.7% in the year-ago quarter. The sequential decrease in EBITDA as a percentage of revenue was largely due to a combination of the decline in gross margin percentage highlighted earlier and increased operating expenses. In the year-ago quarter, our business was recovering from pandemic-related headwinds, resulting in lower levels of EBITDA, both in dollar amounts as well as percentage. Our GAAP net loss in the fourth quarter totaled $3.6 million or a loss of $0.05 based on a share count of 65.7 million shares compared to a loss of $0.5 million or a loss of $0.01 per share based on 62.6 million shares in the third quarter and a loss of $4.7 million or a loss of $0.10 per share based on 49.7 million shares in the year-ago quarter. The sequential increase in GAAP net loss was largely because of higher stock-based compensation related to the annual performance share award. On a year-over-year basis, the decrease in GAAP net loss was a combination of higher revenue, offset by increased stock-based compensation and operating expenses. On a non-GAAP basis, our fourth-quarter non-GAAP net income was $7.1 million or $0.10 per share based on 71.7 million diluted shares, compared to a non-GAAP net income of $7.9 million or $0.11 per diluted share based on 69.5 million diluted shares in the third quarter, and $2.2 million or $0.04 per diluted share based on 54.9 million diluted shares in the year-ago quarter. The primary reasons for the decline in non-GAAP net income on a sequential basis were higher operating expenses. The increase in non-GAAP net income compared to the year-ago quarter was mainly driven by higher revenue levels, partially offset by increased operating expenses. As of December 31, 2021, our cash and cash equivalents totaled $144 million, up from $113 million on December 31, 2020. The key reasons for the increase were the combination of the redemption of public and private warrants, capital raised from a primary offering, liquidity shares, and higher cash generation in the business. Now coming to the guidance, for the first quarter of 2022, we expect revenues to be in the range of $55 million to $60 million. We expect our non-GAAP EBITDA for the first quarter to be in the range of 8% to 12%, or $4.4 million to $7.2 million. For Q1 2022, we expect our basic share count to be in the range of 69 million to 70 million and our diluted share count to be in the range of 72 million to 73 million. That concludes my prepared remarks. Operator, we are ready to take questions.

And before we begin our question-and-answer session, I'm going to turn the floor back over to Mr. Chiang for some additional comments.

Thank you, Operator. Before we jump to the Q&A session, I would like to show you a short video effect about our employees and their families currently in Ukraine. Thank you. Operator, we are ready for the Q&A session.

Our first question comes from Mayank Tandon with Needham.

First and foremost, Leonard, good to hear that your employees are staying safe during what is obviously a tragic situation. So that’s very comforting to hear. And also, congratulations on coming out with a strong finish in fiscal '21. I wanted to start by asking about your capacity. When you talk about being able to scale in other markets, could you talk about how much extra capacity you have available in some of the other regions that can take on the extra workload? Additionally, as you think about expanding into other hubs, will that be more of an organic effort or a combination of M&A and organic?

I would say there are several parts to this answer. First and foremost, we are scaling organizations both in Central Europe and in Latin America organically. That has been happening even before the war. We just accelerated the process as a result of the BCP plan. The scaling of our operation in India will first come with partnerships. We have been discussing several companies from a BOT perspective. In advance of the events, we accelerated those discussions, which is why you heard about the announcement. We will continue to grow in this manner. In Europe and Latin America, there is a combination of relocating people and organic growth. In India, it will grow rapidly by leveraging existing partnerships.

Got it. That’s helpful. And then maybe, Anil, could you break down the 1Q outlook in terms of your expectations for March? Is it reasonable to think of March as a near-term monthly run rate for at least the second quarter until capacity builds up and you are able to scale in some of the other regions to meet demand?

Sure. Thanks for your question, Mayank. Look, beyond the first quarter, we haven't given guidance. But I'll give you a couple of points for perspective. The guidance we provided on the revenue and EBITDA front is based on the full months of January and February. As expected, we have made some predictions for March. On the EBITDA front, our EBITDA would have been much stronger, but as you know, we are incurring costs moving people around. We don't yet know what portion of these expenses will be a one-time charge versus what will appear in our P&L over time. As we move through the year, I can say that the demand environment is solid, the capacity is improving, and our operational metrics are strengthening. Leonard, maybe you can add more detail?

Yes. As Anil mentioned, we've been quite conservative in Q1, not necessarily because of all the capacity constraints, but because of the costs associated with logistics. We have not sorted out what will be a one-time charge. Of course, we have costs associated with scaling organizations. At this point, I want to express my full gratitude to our clients for their patience and diligence in helping to support the accelerated utilization and efficiency of our organizations, not only in Europe but around the globe.

Our next question will come from Josh Siegler with Cantor Fitzgerald.

Yes. We want to reiterate our thoughts are with your impacted employees today and for the past month. My first question follows that line of thought. Has there been any disruption in your ability to actually pay these impacted employees, both in Ukraine as well as in Russia?

Payments and salaries?

Okay. Payment is not an issue at this point. Again, the BCP planning happened in advance of these events. The situation in the region has been escalating for some time, and we ensured that we have sufficient cash reserves in both countries.

Understood. This is super helpful. And given the recent decrease in valuations across public markets, how is Grid viewing the private markets right now? Has the acquisition market improved? Do you have any updated thoughts on those lines?

Well, frankly, acquisition is not my top priority in the last six days, right? But partnerships are. The market situation has changed, and of course, the impact on Grid Dynamics stock is not equal. We had our peak on December 27, and then we faced a correction associated with the market. There is a bit of panic related to Eastern Europe. Some coverage has increased further, pointing out that Grid Dynamics is a weak link, which is far from the case. We were in a blackout period. Today, I can assert with high confidence that our resilience from 2014 and other disruptive events continues to build. As for partnerships, the investment and M&A landscape is shifting.

Our next question comes from Maggie Nolan with William Blair.

I wanted to acknowledge your strong results, and more importantly, everything you are doing for your employees. First, could you provide us some quantitative or qualitative insights into the economics of your deal with the partner in India? There will be many factors that can impact the margins of those projects, so any color you could provide would be helpful.

What you saw in the announcement is just the tip of the iceberg. There are numerous partnerships in India in progress. Our CTO has been assigned as the acting head of Grid Dynamics India and is on his way there. We started discussions with a very strong partner to kick off the process. We have several others lined up for the coming weeks. The economics of the relationship will depend on how well we can conclude the hiring, as this involves hiring under Grid Dynamics auspices. The most important part is that we are as demanding on quality and capability from our Indian colleagues as we always have been with the company. So obviously, the metrics are stringent. However, we are confident that the number of hires will reach the hundreds.

Do you think you’ll have the ability to bring on new clients in the coming year as you balance that with your focus on business continuity and existing clients?

We just signed a new customer today. It's a very interesting world. I believe in humility; it’s essential. However, at this time, we need to be visible. At the same time, if we do not plan for future growth, we will not succeed. In terms of our client base, I can share an allegory. During our evacuation efforts, we had our first child born in the transition in our office. So we have our own Grid Dynamics child. We can deliver babies in our office, and we can bring new customers to Grid Dynamics. I'm committed to continue growing the business.

Our next question comes from Puneet Jain with JPMorgan.

I would like to hear about the actions taken to ensure the safety of your employees. From a risk management perspective, how quickly can you pivot delivery away from Russia, Ukraine, and Moldova if clients begin to view these regions as high-risk long-term? You mentioned on the call that Ukraine accounts for about 42% of your headcount. How do you see that distribution changing over the long term?

I thought you meant 24%, not 42%. But it's close enough. Yes, we have 24% of our team in Ukraine. Obviously, we have fewer employees there now. As for the other countries you mentioned, the process would involve our BCP plan. We have significantly increased our capacity in Serbia and are scaling operations in Romania, Armenia, and Mexico as well. However, for the safety and security of our employees, I will not provide specific details on who goes where. As the plan unfolds, we will keep you updated, but it's a multi-phase process, especially in the midterm.

Understood. That’s helpful. With many companies relocating to Poland, Romania, and ramping up operations there, could you discuss the supply environment in those countries, especially Poland?

We have three locations in Poland: Krakow, Rodslov, and Gdansk. The supply of talent is always tight for skilled professionals, regardless of location. The key factor is the intellectual alignment with the company and the quality of relationships. We continue to hire in Poland regularly, not just among the local Polish population but also among individuals who have migrated here. People can talk about neutrality, but I'm a straightforward person; there is no neutrality. We strongly support Ukraine in their defense against the aggressor. It's wartime, and individuals who chose freedom long ago see us as a beacon of support, helping us in the region. As for Romania, time will tell—we've just scratched the surface, so I don't want to speculate until we collect more facts.

Our next question comes from Ryan Potter with Citi.

I'd like to reiterate that I hope all your employees are staying as safe as possible. Could you provide an update on client sentiment? How have clients reacted to the situation? Can you quantify how many clients have requested to move out of Ukraine and Russia versus those taking a wait-and-see approach? For those who have requested to move, how much do you think is a permanent risk-off situation versus a temporary move?

Great questions. Let me start with how clients feel about Grid Dynamics. A client leader reached out to me today and said, 'I want to keep your talent. You have incredible people.' This means we are blessed with all our customers. They support us and are patient as we work on our continuity plans. The productivity for the majority of our clients increased from the 50s to upwards of 80%. We are monitoring our progress daily. There is a trust in us, and they want to see progress. Clients are resilient and generous with their donations—they're aiding our efforts to maintain business continuity.

That's good to hear. Regarding Russia, have you seen any impact from announced sanctions on your Russia business? Could you broadly explain how business in Russia is conducted, including any cash held there and how you pay employees? Also, if you could quantify the number of employees you have in Russia versus the 1,400 in Ukraine, that would be helpful.

Firstly, we do not conduct any business in Russia with Russian clients and have never done so. There is no relationship regarding sanctions with unsanctioned companies in Russia. Secondly, even at peak times before the war, our engineering headcount in Russia was considerably smaller than in Ukraine, and it continues to decline. For the sake of our employees' privacy, I won't announce where they are and what they do. However, our engineers are all Grid Dynamics engineers, and we care deeply about them. The BCP plan is focused on moving individuals around, ensuring their safety. Regarding payments, we have sufficient reserves in Russia. Part of the BCP plan includes optimizing the relocation of engineers today and for their families in the future.

Our next question comes from Bryan Bergin with Cowen.

Nice work on the quarter and keeping your people safe. My first question for you pertains to Mexico and LATAM. Can you discuss your development efforts there? Is the model you're pursuing in India—via this strategic partnership—something you could also leverage in those regions?

Thank you, Bryan. First, our strategy has been to grow organically in LATAM. We started in Mexico through acquisition, and our office in Guadalajara is doing very well. You are right to think proactively. Discussions located in various strategic relationships are underway, as part of our BCP plan, which encompasses broader LATAM, including several countries in Southern Europe. Those relationships will continue to advance over time due to our overall strategic roadmap. Had it not been for the conflict, we would have been discussing our ambitious $1 billion vision plan, which is comprehensive. We must seize the opportunities presented and fulfill our objectives.

Given the custom nature of your work, we understand that moving from team to team and onboarding new members is challenging. You did mention the distributed nature of your teams, which certainly helps. Are there any other methods or lessons learned from prior events, like COVID, that enable you to be as resilient as you are in navigating this operational disruption?

Yes, our team has been distributed well before the pandemic. My strategy has long focused on ensuring that there are no single-use teams, projects, or locations affiliated. Concentration carries considerable risks. The primary objective is to distribute locations, capabilities, and training opportunities widely. This strategy was reflected in our university training and internship efforts, establishing Grid University. Custom classes are introduced to facilitate indirect learning. The major aspect has been coaching. Our top-tier talent is encouraged to spread through the consultancy model. Some investments you have seen in Q4 were allocated for ramping up our R&D teams, enabling us to consolidate training across diverse locations and clients.

Ladies and gentlemen, that appears to be our final question. I’ll now turn the floor over to Mr. Leonard Livschitz for closing remarks. Thank you.

Thank you, everybody. In such a difficult time, it's hard to underestimate the efforts of everyone around me. I want to extend a special thank you to the amazing Grid Dynamics team. You are my heroes. I want to recognize our partners who are exceptionally generous. I didn’t mention all of them today, but I appreciate the goodwill, appreciation, and respect shared. I also want to thank our customers. This is an incredible group of individuals. I have connected with senior leaders whose support is unprecedented, even during regular times. Many of our client stakeholders have contributed significantly to our charitable efforts. They are acting as business individuals, telling us that our resilience will determine our success moving forward. I also want to open up the opportunity for investors to join forces and support Grid Dynamics. With your backing and involvement, we can rebound and grow faster than ever experienced before. I’d like to thank all the good people around the globe — we must strive for peace and fight for it. Peace is crucial not only for our businesses but for our children and future generations. Thank you once again for standing with Grid Dynamics. I want to end by saying that every human being is Ukrainian today because that’s a symbol of future hope. Glory to Ukraine. Thank you very much.

Thank you.

Thank you. And with that, that concludes today's webcast. Have a great evening.