Good day, ladies and gentlemen, and welcome to the Grid Dynamics' Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. I would now like to turn this call over to Ms. Lilly Tranova of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Grid Dynamics Fourth Quarter and Full Year 2020 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 2021 financial guidance, the growth of Grid Dynamics business, our objective 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 SEC today for information about forward-looking statements that will be made on this call.

Thank you, Lilly. Good afternoon, everyone, and thank you for joining us today. I'm excited to share my thoughts on how the company is making stripes across its business and then highlight the progress we have made since we spoke with you all several months ago. More importantly on this call today, I will share my perspective on the full-year 2020, how it has shaped us as a company leading to the present and why the future is exciting and we are all set well for 2021 and beyond. In many ways, 2020 was a unique year. Grid Dynamics went public on March 1, but in a very short time of two to three weeks after going public, we have faced an unprecedented crisis from the global pandemic. Many of our retail customers were severely impacted especially brick and mortar department stores. As the second quarter results highlight, the retail business was down 75% sequentially and on a year-over-year basis, brick and mortar more department store customers were down even more substantially. Despite the headwinds, we bounced back and underpinning the strong recovery, we took some very important decisions. Our immediate focus was to preserve our core engineering team and prepare for the possibility of a prolonged impact from the pandemic. We are exploring in the business development efforts toward non-retail opportunities. We initiated a number of strategic R&D projects and co-invested with some of our larger clients.

Thanks, Leonard. Good afternoon, everyone. Let me start by summarizing our fourth quarter 2020 results. Total revenue for the fourth quarter was $30.1 million that included roughly $1 million from our recent acquisition of Daxx. Excluding revenues from Daxx, revenues in the fourth quarter of $29.1 million increased by 11% on a sequential basis and declined by 9% on a year-over-year basis and exceeded our guidance range of $27.7 million to $28.7 million. Other than our technology media and telecom commonly referred to as technology and financial verticals, all segments grew over the third quarter with strong quarter-over-quarter growth coming from CPG manufacturing, retail and the other segment. Similar to the last couple of quarters, our technology vertical was the largest vertical in the quarter. Excluding the contribution from Daxx in the fourth quarter, our non-retail business now representing 73% of revenues in the fourth quarter was up 6% on a sequential basis and 49% on a year-over-year basis. During the fourth quarter and excluding Daxx, our retail segment representing 27% of our revenues grew 26% on a sequential basis. The growth in the quarter was largely driven by one of our top ecommerce-friendly retail clients and to a lesser extent by other retail clients. In spite of a 26% quarter-over-quarter growth, retail was down 56% on a year-over-year basis. Within the segment, while we are seeing a steady come back from some of our retail clients, we are not witnessing a return to pre-COVID levels of business from some of our historical top customers. Our outlook and forecast for 2021 takes this factor into consideration and our forward guidance is not predicated on the come back from these retail clients. Our technology vertical excluding Daxx represented 37% of our fourth quarter revenues and grew 21% on a year-over-year basis, but was down 16% on a sequential basis. The key reason for the sequential decline was greater shift towards offshoring at some of our larger technology clients and all of the headcount increased during the quarter, it was not enough to offset the revenue decline. We expect the offshoring trends at our technology customers to continue on over the next couple of quarters and expect continued headcount increase.

At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Mayank Tandon with Needham & Co. You may proceed with your question.

Thank you. Good evening. Congrats, Leonard and Anil.

Thanks, Mayank.

From closing of 2020, I wanted to just start with the demand; curious in terms of the pipeline and the pace of deal conversions. Relative to say maybe a few months ago, as you've gone through the budgeting cycle of clients, what are you hearing now from customers in terms of their visibility and propensity to spend on digital projects?

Hi Mayank. This is Leonard. Thank you for your question. I would say there are two parts of the answer. The first part is we definitely see the uptick and uptick in the number of verticals. So we do have engaged ourselves a better number of opportunities. On the other hand, I would say we'll get a much better visibility on the conversion as the first quarter transition in Q2. As you know during February, it's a lot of conversational time, it's a lot of projections. Like I said, we're excited about the product but it will have much better visibility as we move to Q2.

Got it. I just wanted to switch over to obviously revenue looks really good on the EBITDA side, I think you mentioned a few factors. Obviously, the Daxx acquisition does have some dilution in terms of profitability. How should we think about EBITDA trajectory beyond the first quarter into Q2 and then really in terms of framing the EBITDA outlook for the full year, any guidance around that?

Sure. Thanks for your question, Mayank. Let's just break the whole EBITDA question into couple of parts. When you look at our guidance for the first quarter, it's around 7% to 9% or 8% at the point. Couple of assumptions that we had there. As you know Q1 tends to be, a seasonal factor comes in. We typically start off at lower level and work our way up. In a nutshell, the answer to your question is, we're going to start off here and as the year progresses, we're going to see expansion. Also, in Q1, just to give you a little perspective, we have fewer working days. The holiday season in the Central and Eastern European are in early January. Also, there is a little bit more robust hiring going on because the demand environment is shaping up well and obviously that all works. Finally, we got our acquisition of Daxx, which has lower gross margins and EBITDA margins and will have a full quarter. Also, as we've said over the past couple of quarters, we've got some strategic plans. We're going to be building up our sales force, we're building up our training internship programs. So those are kind of the investments for the growth point of view, but as we come out of Q1, you should start seeing expansion as we go into Q2 onwards.

Great. And then, just finally in terms of revenue, again a very healthy outlook on an organic basis as well. How should we think about the breakdown between the various levers that you have in terms of pricing, utilization, and then headcount growth, and given the recent hiring trends, it would suggest that hiring is probably back to some level of normal levels for you, but just would love to get a breakdown of those three drivers of revenue for 2021. Thank you.

Sure. Well, anytime you look forward some of big units, remember, a year ago, we were very excited of March 1st and then March 17 happen. So, let me be a little bit more subtle to restrain my excitement, but I would say that our hiring right now it's above a traditional level. There is a lot of demand, especially if you think about it, our three key areas of our capabilities with growth, one relates to the cloud migration, digital transformation area. The second one relates to the customer data relationship and data science and machine learning. The third one relates to the areas of customer experience, which is the beyond-user experience come with that great capabilities in artificial intelligence. All these areas require not just robust pipeline but the significant investment and growth in the technology capability of our workforce. I would say we are growing fast. In terms of the utilization levels, I think we're back to normal again. If you look at where we were last year, we were a little bit behind some of the areas where we had to make an investment. So, I don't see a problem there. And what was the third area, I'm sorry, you said -- you asked about headcount utilization and?

Leonard, just your comments around pricing, what you're seeing on the pricing front in terms of trends? Thank you.

So, well, a lot of customers has different approach towards pricing. If you look at the areas where we excel the most, there is a huge demand for keeping doing this. We offer the solutions, we offer the accelerators, we offer our own pods as our team excels from just regular engagement. So, I would say that we see healthy uptick in our pricing relationships as well.

Thank you so much. Congrats on the quarter.

Mike, I just wanted to give you a little bit perspective for everyone on the full year. So, if you look at our core grid growth that's at least 21.5% and 134, if you do the math right. We're starting off the year and obviously, we'll have incremental updates in the course of the quarter. We did a bottoms-up analysis and when we actually looked at our full year, the commonly 85/10/5 rule that we usually talk about. The year is going to be shaping out more or less like that in the sense that as you know, most of our revenues come from customers who have been there for some time. Just to give you a little bit more color there. We do expect technology to do well. We expect it to be the largest. We're bullish on CPG and some pickup on retail, but we'll see how retail plays out for this full year. But, yes, I mean the overall environment looks good and we'll obviously give you updates.

Great. Thank you so much.

Our next question comes from the line of Joseph Vafi with Canaccord. You may proceed with your question.

Hey guys, good afternoon. Great results, nice outlook. Just wondering if we could talk on the business development front a little bit, any progress or anything notable in Q4 relative to sales force, hiring, or development there? Then maybe some commentary on, I think you said your five new logo wins, maybe a little color on how those deals came about? Then I have a follow-up. Thanks.

Sure. Well, we talked about it last quarter. Since that we added more capabilities from the sales side in the various regions, particularly in the South Texas. We added more capabilities in the Midwest and on the East Coast. So, certainly the investment is there and it's started picking off. In terms of distribution of the customer base, I already said that they came from basically a number of different verticals and again, I would not totally say that we are absolutely vertical agnostic. But if you summarize at areas of expertise, anybody right now who moves into the broader digital world drives about the same level of demand. So, our skills are universal. We also added to our business development process, some additional twist with respect to the competencies in the specific specialization areas. So we tend to work in as a cross-functional business approach, which combines the business competency and technical competency in particular areas and industries, combined with the territorial presence and the relationship on their own base we developed. And finally, we significantly see uptick from our marketing campaign. We see that our positioning from a webinar resumed our direct dialog with the client. So, it's a very broad initiative and we see them progress.

Okay. And then on the Daxx front; if I recall, I think they have a more European customer base. I wondering if Daxx has been part of the company for a little while, what you see as opportunities in leveraging them in terms of joint sales capabilities or how you see the growth in the docs business in 2021 relative to how they might have been as a stand-alone. Then just one more on Daxx; I know the margins were a little lower, if there is a strategy for lifting that this year and moving forward? Thanks very much.

So, Joe, it's in the citation. Well, let me do the highlights. The first and foremost, you're absolutely correct. The focus in Europe, it's been a very strong appetite point for Grid Dynamics to proceed with the acquisition. If you look at the previous ownership structure of the company, there were several individuals from Netherlands. So, The Netherlands position is historically strong and they have sales split, presence in the country. So that helps followed by I think Germany will be another good example build good reputation. The way how we cooperate, it's a number of points. First and foremost, we specialize in the system approach, not just the implementation part, but also the project management, technology leadership, the architecture work. So, what we able to complement and expand the service that will come beyond this with new capability. The touch points are different, we focus on our technology startup, we're focused on a broader-based customers, they have great FCAI engine . So, they definitely help us with the lending part, and we are starting to work to do the expansion with a couple of good example. On the other hand, the cooperation backwards works well too because if you look at some of the opportunities with our clients and more qualified technical engineering, Daxx capabilities are very good hiring machine works as well. Those are kind of highlights in terms of the cooperation year term. So mostly it's very good to say will be less than 3 months to get the so far and it's been very positive. If you think about being under limitation, we all are having the engineering team in Ukraine, it's been very beneficial with an engineering team in Ukraine. So, I would say the integration is going well and the final point is the US customers, definitely we're helping to take the lead as well.

Right. Thank you very much, Leonard.

Our next question comes from the line of Bryan Bergin, Cowen. You may proceed with your question.

Hi, good afternoon. Thank you. I want to follow up on head count. So, certainly, a big increase on an organic basis that you had in the quarter. Can you talk about how you thought the operating model performed on boarding that many, anything to call out there? Are we comfortable with that rate of expansion? What locations specifically are you increasing that offshore presence?

Brian, you always smartly positioned questions, okay. Well, we can share some of the part of our kitchen, but Grid Dynamics has its own proprietary methods of bringing up to speed capabilities of people and one of the very key element is we all practice. So, when we have technology practices in offshore locations, it's easier to absorb and integrate people. As we mature, they have the training information already available for them to get up to speed much quicker. So, if you think about onboarding people, the process is fast in general. The other part is we start getting a good workforce influx from our graduated people from the internship program and that program is gaining momentum. Then people been with us on the training program for some months and they get into the workforce faster. Some of the additional attributes comes from obviously banks helping us in some areas. When you look at geography, it's pretty much across all the Eastern and Central European countries. Part of it is because some of our large clients and the time of the distance work becoming more comfortable, we agreed to expand our of part of technical teams globally. So, we are able to scale the momentum by extending more of an international team EBITDA concentrating as we've done in the past at the customer location. So, it duly works well. I think that we will be preparing for that. I just -- there is also this year we'll say the rate of growth will only accelerate.

That's good. Then on just on margin here. So, the composition of your margin assumptions taking Daxx into account, how should we be thinking about gross margin levels, as you get a full quarter here in 1Q and then as you walk through 2021 and then also further down, how should be thinking about the pace of G&A operating leverage as our scale?

Yes, thanks for the question, Brian. So, as we get a full quarter of that the margin impact is going to be there, if you look at the differential between them and as well, both the gross margins and operating margins or EBITDA margins are lower than grid and the gross margin from the differential is more than the EBITDA margins, largely because their business model is slightly designed differently. So, as we fall into Q1, we will have a full quarter of impact and obviously you have a seasonal impact from our core business. So that's why you're going to see a little bit more near-term movement on the gross margin front, but as we go into the second quarter onwards. There is obviously leverage in our model and that will offset and then over time as we understand some of the more nuances and certainties of Daxx, you know, there is going to be some leverage there. But as we've also seen, there's just so many moving parts right now because we are having the offshoring trend which should be a tailwind and that's going to be there. Plus, we've got all the investments that Leonard talked about for our growth. When I look at the gross margin, yes, we're going to see a downside in Q1. It's going to be lower than our Q4, but then from there, we're going to pick it up. The leverage in the model over time obviously is going to come from, as you know, we have several million dollars of public company costs, which is there. Daxx is primarily located in the Ukraine area; so there is some leverage there that we could be exploring that will actually play out over the course of the year.

Okay, thanks. One last clarification, just on the tech clients you mentioned and the sequential decline from 3Q to 4Q. That was entirely due to the shift to more offshore. So just the per capita impact, no other changes in relationships?

No, from that relationship, the relationships are as robust, Brian. As a matter of fact, they're going deeper and if you look at the year-end, of course, for some of these larger declines there and furloughs to the right here and shutdowns, there is the offshoring component which is kind of a risk designation of debentures, so to speak. There was a little bit of a movement there. As you are going to Q1 onwards, we are going to see a pickup. So, we're very bullish of the sector and the relationships. Leonard, do you want to add anything to that?

Yeah, there is one of the subtle sector, which you need to take into consideration. If you guys recall going through some of the challenges of 2020, we made some of the aggressive temporary cost reduction by reducing the compensations for going bonuses other stuff and in Q4, we came back to full compensation model. So, there is some transition relates to that as well. So, I think it's not unusual when you see a little bit of Q4 kind of situation. As you know, it's early time of the year, yet early next year where how this is combined in this facility for growing fast but there was a cost added because we restated our company competitions.

Thanks, guys.

Thanks, Brian.

Our next question comes from the line of Maggie Nolan with William Blair. You may proceed with your question.

Hi, thank you. Nice to see the positive trends. I'm wondering, are you expecting to see a change in the mix going forward between onshore versus offshore delivery given that you just moved work from that tech client offshore and then how willing are your clients to embrace offshore delivery and does that typically change over the life of the relationship?

Thank you, Maggie. We don't have a crystal ball to see what the future is going to do for us and we've been trying to convince number of customers for a long time that the offshore combination could be more favorable from the performance and efficiency perspective. Some of them are a little bit resistant that. They tried to if it works. What is going to happen when country will come back to the normal operating mode and people will come back to the offices, I would say that of the same kind of uptick back to try to bring more people in the either offices or same time zones; so we leave this on some return to the previous model but I don't think it's going to completely move back to the conservative onshore . I think we proved ourselves to be efficient, we supported the customer trends in their demands for responded to their other areas of operation as well as client management, data management, etcetera. So, I extremely like the balance. We still need to have onshore presence. I've always been saying that having some good quality top leadership on architecture including the management is very helpful to communicate in most efficient way. So, we will continue to invest in onshore hiring. We don't stop. It may not be at the customer offices, but still in the United States or near shoring however they are definitely welcome, but for now, the trend is that we grow fast in offshore locations.

Thanks, Leonard. Then, after what period of time are your sales professionals really truly productive? With that sales force ramping and you're starting to see those investments play out, should we expect to see a meaningfully higher level of new logo additions in 2021?

This is answer myself really don't like answering. It depends. We've put a lot of effort to do the best we could bring onboard, so the fruits of their relationships still require engagement time because of the great dynamics model. It's high quality. It's specialized services which expansion would reduce; so I would say 69 months, it's the kind of range where we're used to seeing some good traction. Again, remember, we are not prickling some small engaged for the top technology companies to have enterprises and global businesses. So, I would say that sometimes we're likely to get some of the faster, sometimes it takes a little bit longer, but again, we invest in the long-term relationship. So, so how we've been satisfied what we invested.

All right, thank you for taking my question.

Thanks, Maggie.

Our next question comes from the line of Tim Savageaux with Northland Capital Markets. You may proceed with your question.

All right. Good afternoon. Hey, I have some questions on the acquisition. On the Daxx acquisition and really how indicative we should consider that in terms of what you might be interested in doing heading forward or is this kind of more of a one-off opportunity and I say that just because of some of the metrics here. You looked to have paid something around the revenue level that you're guiding for next year, assuming that's the case here, obviously trading at several times that same thing with regard to enterprise value per employee in terms of acquisitions or may be paying a 10th of what you're trading, on the other hand, revenue per employee does seem to be lower than historically where you'd like to be. So, with all those mind, are there opportunities to bring those revenue metrics up in line with where Grid is historically and our from your perspective, as you look at it now, are there a bunch of other Daxx's out there?

Thank you, Tim. I'm thinking about the best way to describe the situation. As you might have known or not we ended at Eastern Europe and Central Europe for the acquisitions for quite a long time and this is not the first time we have been having conversation with Daxx. Not some time ago earlier, we -- we look at very different set of matrices for a number of acquisitions. We cast our net wide. The areas where we were looking for -- this will -- includes European market -- European friendly looking for engineering. But there are also some specializations, some central packages, features would be more assuring but some features sticking to set verticals. So, I think it's very difficult to guess the next step if we're just trying to make a conclusion based on this one acquisition. We obviously continue to good companies. I would say that no such things as mainly Daxx and I think this acquisition has different flavor but when you see us winning the next one and after that diff profiles; like I said, our strategy was not two years ago. Now when we're trying to get our balance sheet the most efficient way to expand the company well, and it's very important to diversify type of investments, which you will see. One important point I want to make also, the revenue matrix of dollar per employee and Daxx is little bit harder to gauge because there are -- pretty much all of the work is done in Eastern Europe. So when Grid Dynamics was then working in combination with United States and Eastern-Central Europe, business models were different. It's a great acquisition. Very excited about it, we got great people and then the time of college, we got very friendly relationship between the integration groups, but we will see some of the different phenomenon going forward.

Great. And if I could follow-up quickly and I think you may have alluded to this earlier. I'm not sure I quite got it though. As you add the acquisition revenue and how does that impact your mix across verticals. It seemed like technology was a big focus there, but just want to make sure I got that right?

Yes. Tim, if you look at Daxx's exposure, just to give you a kind of a sense, roughly 60% of their business is in the TMT space. They tend to be more areas like high-tech software, cyber security, logistics and retail is about 12% give or take, financial services is about 10% and they've got other areas such as healthcare, life sciences, energy and other things. They're more diversified, but most of their revenues come from TMT. So, coming back to your question. As we look at 2021 and beyond, that's why we feel incrementally confident that our technology vertical will continue to be the largest in 2021.

Okay. Thanks very much.

Thank you, Tim.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Leonard Lipschitz, CEO. Thank you for closing remarks.

Thank you everybody for joining us on the call today. 2020 will be remembered as a dramatic for all of us in the many ways and that goes even for our company. For investors, we persevered and recovered. And it was a year where the company was tested under unique situations, and as our results over the last three quarters have shown, we have successfully managed it. While the pandemic is not yet over, as we enter 2021, there are many reasons to feel positive, to feel excited. With the pandemic slowly resigning , as many people get vaccinated and the global economy recovers, businesses get back to normal level operations; we feel confident in Grid Dynamics prospects in 2021. Look forward to sharing with you the business update in May, during our next quarterly earnings call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.