Greetings and welcome to Grid Dynamics First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference call is being recorded. It is now my pleasure to turn the conference over to [ Lilly Tranova ]. Thank you. You may begin.

Good afternoon and welcome to Grid Dynamics First Quarter 2020 Earnings 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 2020 financial guidance, the growth of Grid Dynamics' business, objectives and other business strategies as well as other forward-looking statements. Please refer to the disclosure at the end of the company's earnings press release and Form 8-K filed with the SEC today for information about forward-looking statements that may be made or discussed on this call. All forward-looking statements made today reflect our current expectations only. We undertake no obligation to update any statements to reflect the events that occur after this call. For a discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion, please refer to the Risk Factors section of the company's Form 10-Q filed on May 11, 2020, and proxy statement filed on February 5, 2020, and in subsequent periodic reports that the company files with the Securities and Exchange Commission. Also, 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 issued today and the 8-K filed with the SEC. Today's call is also available via webcast. You can find all the information I have just described on the Investor Relations section of Grid Dynamics' website. 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. With that, let me turn the call over to Leonard.

Thank you, [ Lilly ], and good afternoon, everyone. Thank you for joining us today. We're excited by hosting our first call as a public company, albeit under unique circumstances given the COVID-19 situation. I would like to thank the entire Grid Dynamics global team for their dedication and hard work in achieving the significant milestone of becoming a public company, and to all our investors for their ongoing support. On today's call, we'll discuss our first quarter results, our assessment of the demand environment, along with the impacts of COVID-19, company-wide initiatives put in place to manage the near-term and our plans to leverage opportunities in the current crisis. Before we begin, however, the past few months have posed unprecedented challenges for communities around the world, and our hearts go out to all those affected by the COVID-19 pandemic. On behalf of Grid Dynamics, I want to express my gratitude to all the essential and frontline workers for their hard work and sacrifice for the benefit of everyone. Now turning to some first quarter financial highlights. Total revenue for the first quarter was $32.5 million, an increase of 24% year-over-year and 2% sequentially. Our GAAP net income was a loss of $4.6 million or a loss of $0.09 per diluted share, and non-GAAP net income was $1.9 million or $0.04 per diluted share. We exited the quarter with a total customer count of 37, up from 24 in the first quarter 2019. With 13 customers that were added over the last 12 months, we're across market verticals with half of them belonging to the technology space. Given that it typically takes 6 months to 12 months to ramp revenues at large clients, we expect the revenue contribution from these clients to continue to increase in the second half of…

Thanks, Leonard. Good afternoon to everyone, and I hope everyone is staying safe and healthy. Let me start by summarizing our first quarter 2020 results. Our revenues for the first quarter was $32.5 million, implying a year-over-year growth of 24% and a sequential growth over the fourth quarter 2019 of 2%. As Leonard highlighted in his opening remarks, while business trended favorably in January and February, towards the latter part of March, we started witnessing the impacts of COVID-19 on our business. Absent that exogenous slowdown, our revenues and EBITDA performance would have even been stronger. Coming to the details of the revenue mix. Revenues for the 3 months ended March 31, 2020, from retail segment was slightly less than 50% of the total revenue, a drop of over 10 percentage points over the same quarter of 2019, and the first time in Grid Dynamics' history that this vertical falls below 50%; technology was 29% of total revenue, up from 26% of revenue in the year ago quarter; financial was 12% of revenue, up from 10% in the year ago quarter; CPG and manufacturing was 6%, up from 2% of revenue in the year ago quarter; and finally, the other segment was 3% of revenue, up from 2% of revenue in the year ago quarter. All segments of our business grew on a year-over-year basis, with technology, finance, CPG and manufacturing and other segments significantly outpacing the growth in the retail segment. We exited the first quarter 2020 with 1,357 employees, down from the fourth quarter headcount of 1,430 and up from 1,149 employees in the first quarter of 2019. The sequential decline in headcount was driven by a restructuring program that we initiated to align the headcount with the current business environment. In the first quarter of 2020, our…

[Operator Instructions] Our first question comes from Maggie Nolan with William Blair.

I wanted to ask about your frequency of touchpoints with clients in this environment. Are you starting to get a sense of how much of the spend reduction that you're seeing and form your Q2 guidance is kind of that initial shock from COVID versus how it may progress over time? Or is there still a large level of uncertainty there?

Thank you, Maggie. Obviously, it's a first question and first answer on my side. So the point of view I have in the situation is kind of aligned with what you described. There was definitely a sharp and bold first reaction from the client, and that's understandable. However, as the time settled, everybody is engaged on their own way to -- on the path of recovery. We stay in a very close touch with all our customers, some who have better clarity about how they're going to proceed. Some of them less. As you know, as in -- the country and individual states are heading to some opening from the quarantine, will have a better results of their process thinking as we go forward. At this point of time, we're in touch. We have a good line of communication. We're waiting for more specifics.

And then you mentioned that the customers had responded in a variety of ways, whether it be pushing out some clients asking for extended payment terms. I'm wondering what the conversations have been around pricing and your ability to see that pricing power that you've enjoyed kind of hold up in this environment. If there's any distinction amongst customers there as well?

Well, we don't provide a specific guidance for individual customers and the pricing. In general, I definitely see some flexibility of the way our customers, especially retail customers, respond in a situation like that. We're in cash preservations. We're making investments where it's appropriate. But I don't see a trend on pricing pressure as much on the terms. Definitely some customers inquiring about longer terms, which will be, again, assessed accordingly as the situation with customers will be more clear, as I mentioned in the question before. So to summarize the point is there is a pressure -- there's more pressure in terms for some of the customers. However, we act accordingly with each individual customer according to our relationship and partnership.

And then on the expense side, you've already taken some initial actions, it sounds like to do some restructuring and protect those margins. What was the impact of some of that, that you may have seen in the March quarter versus how we can expect that to play out in the June quarter? And then what are some of your levers, both kind of on the people-related expenses, but also on the operating side, even beyond what you may have engaged in already?

Good. I'll have 2 parts of the answer. First, I'll do myself. Second, I'll ask Anil to jump in with the numbers. But fundamentally, even though the situation unfolded rapidly, we had some planning in place a little bit ahead just to understand how the situation will unfold. So we made certainly a couple of very key decisions, and the first decision is we kept most of our people in place in order to return with total extent because we believe the majority of this first knee jerk reactions are going to be recovered, especially demand from digital part. And the business continues to grow even in the -- some toughest segments, like retail department stores. At the same time, the challenge always comes with the fact that March, typically in our business, is the -- kind of amounts of inflection of the growth. As you know, our business, there's some -- a little bit of seasonality, and March promises to be the growth, which is it has been, but not to the extent we obviously expected a couple of weeks. So it impacted our numbers on Q1 profitability, but also it required us some of the realignment of the extra resource we planned for growth in Q2 compared with Q1. So we did have some adjustments. We implemented some other cost actions I talked about. But most important, there's no dramatic impact on our capability and we decided that we're going to weather the storm with the balance sheet we have. We have a lot of good indicators on the promises of growth, particularly from non-retail business, which has grown quite a bit. And the second part of the question in terms of the numbers and outlook for June, I would let Anil to speak. Anil?

Yes, Maggie, Leonard qualitatively summarized what our efforts were. As you can see, we had a little bit of a restructuring that we kicked off in late Q1. The minute we saw the kind of outlook, we reacted very quickly and we kicked off a little restructuring program. And the benefits of that, obviously, will fall into Q2. On Q2, what we've done is, as Leonard pointed out, the workforce has been kept intact based on our outlook. But what we've done is that we've tied up -- on the spending front, all discretionary spending has been put on hold. So when it comes to the levers, it's -- as we go into the second half of the year, obviously, we'll see how things play out. But in terms of going from Q1 to Q2, we have taken some of these initiatives to align our costs with the current business environment.

And are there further initiatives that you intend to push forward? And what are some of those potentially that could still take place going forward?

Well, look. I mean right now, as we said, we've given some Q2 guidance. We have a couple of models that we have laid out towards the second half of the year. We have several options that we could look at. But for now, we're just focused on Q2, ensuring that we execute well on Q2. But we do have a couple of options, and it will depend upon how the environment looks like and the return of the demand environment.

I want to add one more thing to Anil. So Maggie, I have a strong belief, aligned with the management team of the company, that we see a good opportunity for Grid Dynamics to leverage the situation, where more and more businesses are turning into the digital transformation, accelerating it. So as we're expanding our customer projects, we're adding more fuel in the fire with capabilities in data science, data engineering, machine learning, artificial intelligence, the number of projects we're doing. So I would say my priority right now is to invest to grow. And this is -- includes, first, recovery and then expansion. So while Anil gives you the -- kind of what I call defensive-conservative approach, which is absolutely critical, I'm more bullish on our capabilities to expand more of the business' new customer acquisitions.

Very good. Congrats on this first quarter even in unusual circumstances. It's exciting to hear your voices.

Thank you, Maggie.

Thank you, Maggie.

Our next question comes from Drew Kootman with Cantor Fitzgerald.

I was hoping, since this is the first call, you briefly touched on it. But maybe just a little more color on the broader dynamics that you see in digital? And what gives you guys the competitive advantage over peers?

Thank you, Drew. It's good to hear you, and thank you for bringing a question, which is very critical for our existence. We are a unique company in the sense that we are pure-play digital company. We have a very strong technical capabilities, ability to solve complex issues with our clients. We build our vertical knowledge in retail, which we scaled now outside of retail. It's not only about individual technology knowledge, but about the strong teams and project manager associated with that. We leveraged our onshore/offshore model quite well and continue to do so. We invested not only to build a strong engineering team across Central and Eastern Europe, but also build local capabilities in the United States. As you noticed, we have more than 20% of our engineering workforce working from the United States. So a combination of technical skills on the senior -- the client system management, adding more new capabilities as well as a strong onshore presence makes us feel very good going forward. And on top of it, obviously, our cash availability helps us to build stronger and weather the storm as we always do.

Great. And then maybe you could provide some color on what you're seeing over the last few weeks, maybe even by like a week-by-week basis. Just trying to -- I know everything kind of fell off at the end of March. But just around how clients are reacting? What you saw in April, did it start to recover? Are you starting to see stabilization? Just any color maybe in April and even as we start in May.

All right. Well, thank you, Drew. I will not be storytelling more because it's a little bit hard to go by -- week-by-week. But of course, my wife as a CEO, I do day by day. I would say that there are a couple of key milestones in this world where -- is that in late March was obviously a big surprise. A lot of things happened in a very uncertain way, so as the first week of April, I would say. As April unfolded, there are more and more understanding in terms of how the business is going to be going forward. And to our success in terms of retooling, we made almost instant transformation to a work-from-home environment. So people were safe. People -- we have all their laptops and all the environments at home, and that certainly helped us to kind of stabilize and to stay in the business. The customer -- some of our customers were very understanding that environment is different. So they trust our security capabilities, trust our teams. So we were able to, in some sense, to build the business, working from home without loss of productivity. And as you go to the late April and early May, I definitely see some of the recovery modes. Don't forget that we added some customers in late Q1, but I would say also now as well. So there's definitely a positive trend. Now you saw our forecast, that's already the guidance in Q2 right now. So time will tell how all these initiatives will come into the financial capitalization on that. But in terms of structure or control, I think Grid is operating in, I would say, a good and reliable operation environment. Anil, do you have anything to add?

No, no. I think, Drew, the key point that Leonard pointed out was that the 5 accounts that we talked about, and I think that we should not overlook because these are global accounts that have a significant impact in the long-term on our business. And to witness these 5 new accounts in this environment coming to us is a core testament of our expertise, our ability to assist these global companies in their journey for digital transformation, and more importantly, us tied to revenue-generating opportunities. So all these things put together, I believe, we're seeing in a subsegment of our customers even an acceleration of some of their digital transformation. So we have seen, like we've seen in the financial crisis, coming out of this, companies like us come out stronger. So I think that's what I believe.

Perfect. And then final question for me. Just any color on how you see the impact to the pipeline? Or if it does strengthen in the near term, just as people look to digital if it takes a little hit? And then how quickly it gets back?

Well, again, I think -- we'll explain it. I will talk about the strategic part and Anil probably can give a little bit more color on the specifics, if he chooses so. I do see a return on the pipelines from new opportunities. Now some of them are not immediate. What I'm trying to say is, as we have large Fortune 1000 companies and big enterprises, some of the planning started immediately now. But we probably will see some of the fruits of that in the second half of the year. Also, like I mentioned in one of the previous questions from Maggie, great expertise in the depth of digital and cloud and data sectors attracted those big guys, who realized that they can go slow into the digital world. And then just -- it's not just a traditional e-commerce. We're talking about things like brands, which are stepping up, and in some cases, extending beyond the retail department stores. We're talking about manufacturing companies, with supply chain become absolutely vital, did not so work but we're expanding on that. There are some very unique opportunities and skills we apply into the platforms related to the ad tech. So it's a very broad initiative. Anil, anything from your side?

No, no. I think you summarized it well. I think the key message here, from my point of view, it is across the industries. The other thing that we've seen is, and Leonard talked in his opening remarks, the knowledge and the experience that we've developed over the years with the retail, we're seeing the benefits with many of these other industries right now. And that's what we've been seeing in the near term and will continue to see.

And the last but not the least, Drew, is technology sector. I would say that, that's the fastest growth we see there, even right now. So it's an incredible dynamic in this particular sector we observe.

Perfect. Appreciate the color, and congrats on the first quarter.

Thanks a lot, Drew.

Thanks.

Our next question comes from Tim Savageaux with Northland Capital Markets.

A question, I want to focus back on retail for a moment. And I think you made a comment on this, so I'm not sure I got it. In terms of the guidance, are you -- is all that weakness focused on retail? Are you -- I thought you might have commented you're essentially taking it out of the numbers. And beyond that, recognizing kind of the initial reaction is to cut, are you seeing any indications of any kind of secondary reactions to sort of refocus on e-commerce and digital transformation amongst your retail customers? And I have a follow-up.

So...

Thanks, Tim. Well, I would let Anil to answer the first part. I will do the second one. How about that, Anil?

Yes. Yes. So Tim, so when you look at our guidance, yes, we're not going to get into specific breakdowns by segment. But it's fair to say that we've taken a very conservative look on retail. And we believe that there's little or no downside from what we've said. So we've derisked some of the retail part as we go into Q2.

Yes. And I believe the second part, Tim, if I'm not mistaken, was about some color of the e-commerce. So e-commerce exist and will exist and will continue to expand. There are absolute vital initiative from every retailer to recover and continue to exist is -- in e-commerce. The visiting players and new players, even in some of the most difficult times, our retail clients use our application. They're absolutely vital for their business today. And they will be continuing investing in those ones. We can't provide exactly the color because, frankly, it's -- again, maybe in the very beginning, we have -- we are staying in touch, but we need to see how the environment will unravel. But from the perspective of e-commerce, I would not cross it out at all. It's a big part of our DNA, and we'll continue to invest and grow e-commerce.

Okay. Great. And I want to follow-up on the new customer additions, which is pretty impressive in this environment. But -- and you mentioned these are pretty large organizations that may take a little time to get going. But is there any way relative to your current customer base or in any way that you choose to kind of size the potential aggregate contribution from those new customers, either this year or down the line, as they ramp to what you think their full potential might be? And then I have one more follow-up after that.

Yes, of course. So there are 2 parts of it. We always talk about that we are focusing on large enterprising, and our strategy is to build large relationship with the customers, higher revenue, meaning stronger relationship and more strategy with that. And that's been always reflected in how many customers we have, 1 plus million, 2.5 plus, 5 plus and all those stuff. So by default, majority of our focus on this customer, in the upper category to be $5-plus million, $10-plus million is a potential. Very seldom when we go and look at smaller customers, we do the -- we have some technology innovation, which helps our customers to utilize with, agreed -- and have agreed to understand that particular trend. So I would say that all 5 customers fall in the category of the upside and upper size of the revenue going forward. How soon it's going to happen, obviously, time will tell. But all of them continue to be in the -- category part of around $10-plus million of our business from the upside for Grid Dynamics.

Great. And then last question from me. I mean it would seem to be a pretty opportune environment for acquisitions given potential disruptions among smaller organizations and a strong balance sheet that you're coming into this with. Should we expect that it's likely that we'll see something along those lines in calendar '20? And I wonder if you could comment on the type of -- the profile of your target acquisition, maybe in general, not necessarily specific to this. But what our expectation should be with regard to kind of the size of organizations you might be looking at?

Thank you, Tim. So it's a great question, and it's obviously a very important part of our strategy. We are centered both on geographic expansion as well as expansion in the new verticals. We believe that the part of the M&A strategy has -- will bring us opportunities, both in 2020 and going forward. At this point, it's very hard to specifically zero on individual yields because we're exploring a broad number of opportunities. Again, we're not trying to fish at the bottom of the pond. We're looking for the great synergy and great upside, which comes from, like I mentioned before, the verticals and new geographic expansion. And we'll continue to brief the investor as we progress. So that's my position right now. Anil, do you want to add?

No, no. I think that's the key thing. My observation, Tim, has been that -- as you know, I've been here for a short time. The opportunities that this company has in terms of the M&A is pretty robust. I mean there are a lot of opportunities. And you're right, in this environment, we'll have more opportunities. So it's a question, as Leonard says, ensuring that we get the right fit, which is the right size. And more important, the DNA is consistent with our DNA.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Leonard Livschitz for closing comments.

Thank you, everybody. This concludes Grid Dynamics first earnings call. We had a turbulent quarter behind us, wrestling with the dual challenge of building a newly minted public company while experiencing the unprecedented disruption of COVID-19. Our strong Q1 performance, combined with a swift and decisive action to help alleviate the near-term unpredictability, gives me confidence in midterm business recovery. We have implemented a number of external and internal initiatives designed to boost our competitiveness. The number of new clients and new programs under such a strict quarantine environment is a testament of Grid Dynamics' value in the world of accelerating digital transformation. I want to thank my customers for their trust in Grid Dynamics, our employees for unconditional support and intelligent contribution, and our shareholders for their patience and support. Stay healthy, everyone.

This concludes today's conference, and we thank you for your participation.