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 will be a phenomenal discussion about how we performed in Q4 and how successful for 2021 year was for Grid. But it's not that important at this moment. We are in war. And what I'm going to do right now, I'm going to tell you how Grid Dynamics operate 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 these results of our year and give you an example of how we perform. And then I come back to relate the questions how Grid Dynamics deals in the situation we are right now. And then I will take questions together with Anil. On that note, I want to provide you business and financial performance for fourth quarter, 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'm very pleased to report another record quarter revenue in our history. And 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 and how it has been an important transformation year for the company. At over $200 million in annual revenue, we almost doubled the revenue of last year. Organic business, which grew more than 50% of the previous year, is now a quarterly run rate over 2x in comparison to June 2020, which was during the pandemic. We had 22 new logos in the year, accelerate our client new addition over the previous year and setting a positive…

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 to earn 20.9% on a year-over-year basis. Excluding revenues from our expectations of Daxx and taxes, 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 and exceeded 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% on a sequential basis and 182% on a year-over-year basis. The strong sequential and year-over-year growth was driven by strength across our customer base, with e-commerce friendly brick-and-mortar and home improvement retailers continue focusing on digital transformation initiatives. Our TMT vertical was our second largest vertical and represented 29.4% of our fourth quarter revenues and grew 11.2% on a sequential basis and 83.3% on a year-over-year basis. Growth in the quarter largely came from some of our large TMT customers who continue to ramp their offshore operations with us. Here are 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% on a sequential basis and 120% on a year-over-year basis. The growth during the quarter primarily came from large global brands along with new customers. Finance represented 7.2% of revenue and declined 8.5% on a sequential basis, but was up 62.5% on a year-over-year basis. The sequential decline in the financial vertical was largely driven by the decline at some of our insurance and…

And before 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 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 in obviously what's a very tragic situation. So that's very comforting to hear. And also coming out on the quarter and a strong finish with fiscal '21. I wanted to start by just asking you in terms of the capacity. When you talk about being able to scale other markets, could you talk about how much capacity you have sort of extra capacity in some of the other regions that are able to maybe take on the extra workload? And then as you think about expanding into other hubs, will that be more of an organic effort? Or will that be maybe a combination of M&A and organic?

So I would say there are several parts of this answer to this question. So 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 the operation in India comes first with the partnerships. We have been in discussion with several companies, again, from the M&A, from BOT perspective. In advance of the events, and we accelerate them, that's why you've heard that about the announcement. And we'll continue to do so. So while in Europe and in Latin America, it's a combination of relocating people and organic growth. In India, is going to be growing quite rapidly by leveraging the partnerships we have.

Got it. That's helpful. And then maybe, Anil, I don't know if you could break down the 1Q outlook in terms of your expectation for March. And is it reasonable to think of March, maybe the run rate there as maybe the near-term monthly run rate for at least the second quarter until the capacity builds up and then you're able to scale in some of the other regions to be able to meet demand.

Sure. Thanks for your question, Mayank. So look, beyond the first quarter, obviously, we've not given guidance. But I'll give you a couple of points to get the perspectives. Look, the quarter, the guidance that we gave out, both on the revenue and EBITDA front, is with the full month of January and February. And obviously, we've made some expectations on March. On the EBITDA front, our EBITDA would have been much stronger. But as you know, we are spending certain amounts of money as we move people around. And we just don't know how much of it will be a onetime charge versus how much of it will be in our P&L. As we go into the course of the year, I can just leave a couple of things and maybe Leonard can give a little bit more color. The demand environment is solid. The capacity is improving. Our operational metrics are improving. And Leonard, maybe you could add to that.

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 all the logistics. We haven't sorted out what is going to be a onetime charge we will continue to do. Obviously, there are costs associated with the continued scaling of the organizations. At this point, I really want to appreciate the fact and been my full heartfelt gratitude to the -- our clients, because they're very patient. And they work very diligently with us to continue to see that accelerated utilization and efficiency of our organizations, not only in Europe but around the globe.

And our next question will be coming from Josh Siegler with Cantor Fitzgerald.

Yes. And we just want to reiterate our thoughts are with your affected employees today and for the past month. So my first question is following along 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 as well?

Payment and the salaries.

Okay. payment -- not at this point. Again, the BCP plan planning has happened in advance of the events. The situation, as you know, in the region, has been mounting for some time. So we provide sufficient cash reserves in both of those countries.

Understood. This is super helpful. And then with 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 along those lines?

Thank you. Well, frankly, right now, the acquisition is not my top priority in the last 6 days, right? But the partnerships are. The market situation, the market deterioration, and of course, the impact on Grid Dynamics start is not equal, right? We had our peak on December 27, and then we had a correction associated with the market. And then there is a bit of a panic related to the Eastern Europe. Some coverage was increasing even more by pointed that Grid Dynamics is a weaker link, which, as you see today and you will see in a continuous event, it's by far not the case. Well, we were in a blackout period, what can I say, right? Today, I can say with the high confidence that our resilience from 2014 and other very disruptive events continue to build up. So partnerships, relationships, we will see when we get out of the hole this situation of the world, how we're going to resume. Obviously, the list is growing. But the regions of investment for M&A obviously shifted.

And our next question comes from Maggie Nolan with William Blair.

I wanted to acknowledge your strong results, and more importantly, everything that you're doing for your employees. The first, I wanted to know if you could give us maybe quantitatively or qualitatively some idea of the economics of your deal with the partner in India. There's obviously going to be a lot of puts and takes on the margin of those projects. So any color you could provide there would be helpful.

Well, would you -- I mean, what you saw on announcement, it's just a tip of the iceberg. There are number of partnerships in India in progress. If you noticed, our CTO has been assigned as the acting Head of Grid Dynamics of India. He is on his way. We started with a very generous partner to kick off the process. We have several more in the next weeks to come. The economics of the relationship will depend how well we are able to conclude the hiring, because it's really hiring under Grid Dynamics auspices as a partnership. And the most important part is we are as demanding on the quality and capability of our Indian colleagues as we always has been with the company. So obviously, the pull is tight. However, we're confident that the number of hires will go into the hundreds.

Okay. And then do you think you'll have the ability to bring on new clients in the coming year as you kind of balance that with your focus on business continuity with your existing client base?

Well, we just got a new customer today. It's a very interesting world. I believe in a humility, and humility must prevail. But at the time of the world, we need to be visual. At the same time, if we don't plan for the great hope of the future, we would not succeed. And in terms of the client base, I can give you allegory. During the evacuation of the people, we got the first child delivered during the transition in our office. So we have a Grid Dynamics child. So we can deliver kids in our office. We can bring new customers to Grid Dynamics. I'm very committed to continue to grow the business.

And our next question from the phone comes from Puneet Jain with JPMorgan.

I would like to hear like the actions you took to ensure safety of all of your employees. But from a risk management perspective, how quickly you can remix delivery away from Russia, Ukraine, Moldova if clients start attaching like a higher risk profile to those regions over the long term? Like you talked about on the call like Ukraine is about 40 -- 42% headcount. So how -- where do you see that mix going over the long term?

Yes. I thought you meant 24%, not 42%. But it's close enough, right? So yes, we have 24%. Now obviously, we have lesser number. And as far as other countries you mentioned, the process involved the BCP plan. Both countries you mentioned are associated with that particular plan. We have increased our capacity in Serbia significantly. We have increased our capacity to scale into Romania as well as Armenia and other countries and also Mexico. But because of the safety and security of our employees of other countries, I would not get into the very specific details, who goes where. But as the plan unfolds, we'll keep you briefed. But it's a multi-facet, multiphase process. So when you talk about long-term, I'm talking about the midterm.

Understood. No. That's helpful. And with many companies trying to relocate and close to Poland, Romania, and increasingly ramp at those locations, can you talk about like supply environment in those countries, especially in Poland, for you?

Well, we have 3 locations in Poland. We have 3 offices. We have Krakow. We have Rodslov and we have Dunsk. The supply is always tied for the smart people no matter where they are. The question is the intellectual alignment with the company, the quality of the relationship. And in our case, it's also camaraderie. We continue to hire people in Poland on a regular basis, and not only among the local Polish population, but among people who migrated earlier. People can talk about neutrality. I'm a straightforward person. There's no neutrality. We stand strongly behind Ukraine and their defense against the aggressor. It's a war time. So people who chose the freedom a long time ago, they see that maybe we are one of the beacon of that support, and it helps us in the country. Now Romania, I think the time will tell. We just scratch the surface so I don't want to speculate until we get facts.

And our next question comes from Ryan Potter with Citi.

I'd like to reiterate, I hope all your employees are staying as safe as possible. Just want to get an update on client sentiment thus far. I guess how have clients reacted to the situation thus far? Is there any way you can characterize or quantify how many clients have as for works and move out of Ukraine and Russia versus how many are more in kind of a wait-and-see approach? And from people who have asked to move, if any, how much do you think is like permanent, like risk off situation versus kind of a temporary move?

Very good. So there are like 3 or 4 questions you have in this one, right? So let me start with the first one. How do clients feel about Grid Dynamics? I would bring a citation of one of the leader or one of the clients who send me today. I wanted to keep your talent. You are incredible. You have great people. So we'll do as much as we can to maintain that continuity, which means that, so far, we're blessed with all of our customers. Having relationship going over the years give us the breathing room in how the customers react. First, they stand strongly behind us. They support us. They're patient. We work on continuity plans. The productivity in majority of the clients went from 50s to 80% plus. And we're monitoring daily. So there is a trust in us. They want to see progress. But they're resilient. They're generous with their donations. And they're generous to support our billings and continue to grow with us. So that's when it comes to the clients. The risk and permits and all this stuff, look, it's a case by case. People displaced, but people are not away from networks. We have built a significant redundancy in our networking capability globally. So even people who are displaced -- and again, from safety and security, I would not mention all the places we are, they're functional. And in many cases, the redundancy comes in when they go to the safety, they work in a much more comfortable environment, especially when their families, their kids and their pets are also taken care of. So it's a psychological plus infrastructure capabilities of grid Dynamics.

Got it. That's good to hear. And on Russia, in terms of the impact of sanctions, have you guys seen any impact from the announced sanctions so far on your Russia business? And could you, I guess, broadly kind of go over financially how business in Russia is kind of conducted, if there's any cash held there or how you pay your employees and whatnot? And I guess just one more thing. If you could quantify how many employees are in Russia. I know you said 1,400 in Ukraine, but if you could put it down in Russia too, that would be helpful.

Very good. It sounds like you're from the intelligence office. All right. So first of all, we do not conduct any business in Russia with Russian clients, and never have it. So there's no relationship with any sanctions or unsanctional companies in Russia. #2, at the peak time, even the pre -- obviously, prewar, the count in Russian engineering was substantially smaller than Ukraine, and it continues to decline. Again, for sake of them, I don't want to know -- I don't want to tell where they are and what they do because it's not just sanctions from outside. It's inside of the Russian behavior. One thing I can tell you that all my engineers are Grid Dynamics engineers. And we put utmost care to get them on the harm's way. And harm's way are not necessarily coming from the bell feet. So I stand behind all my engineers even though my heart and soul is stand with Ukraine as a country. So part of the BCP plan, moving people around. As far as payment is concerned, again, we have sufficient reserves in Russia. But part of the BCP plan and payments are associated with optimizing the leaving of the engineers not only today, but there will be with the families in the future. So I would say, like follow me in some point of time, we'll keep you updated. That's one of the top priority. Obviously, after the safety and security of our people in Ukraine.

And our next question comes from Bryan Bergin with Cowen.

Nice work on the quarter and in keeping your people safe. First question I have for you, just Mexico and LatAm, can you talk about your development efforts there? And is the model that you're going to pursue in India with this strategic partnership, is that also something you can leverage there as well to help?

Thank you, Bryan. Well, let's split it on 2 parts. The strategy has been to grow organically in LatAm. And we started with Mexico through the acquisition, and that office in Guadalajara is growing very nicely. However, as always, you're very proactive of your thinking. And there are discussions, which, again, part of the BCP plan, for selling very strategic relationships. It doesn't just go into the specific countries. It goes into this, I would say, broader LatAm, which includes also various countries, right? It also extends into Europe, into the Southern Europe. Those relationships are being, I would say, conditioned over time because of our strategic plan. Again, had it not been for that war, we'd be talking about my $1 billion vision plan, which is very comprehensive. So we just have to carve the chance of excitement and go very disciplined to execute the scale and continue. So that's what I would say today.

Okay. Okay. And then just given the custom nature of the work, we understand it's obviously a challenge to move from team to team and new members. You did talk about the distributed nature of your teams though, which certainly helps. Are there also other methods or learnings that you've had from COVID and other prior events that enable you to be as resilient as you are here in navigating this operational disruption?

Thank you. That's a very good point. So yes, so our team has been distributed way before COVID. My strategy has been for years not a single team, a single project, single location. There are many risks associated with the concentration, right? So the #1 objective was, all the locations, all the capabilities, all the trainings have to be distributed. That was reflected with our university training, right, the internship programs, Grid University. So we created a lot of custom classes which are obviously unwind and allow people to go and learn indirectly somewhere. The big part is the coaching. Our top senior talent, obviously, is the most senior one from the company experiences. And they have been moving very, very broadly into the consultancy model. That's why some of the investments you've seen in Q4 was associated with Rajiv and his team, when we know a substantial number of people to scale the R&D, not from just innovative perspective, but also to be able to consolidate, train people across multiple locations and multiple clients. That's where we are experiencing right now.

And 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 undermine any effort of everyone around me. I want to say a special thank you to the amazing Grid Dynamics team. You guys are my heroes. I want to say thank you for our partners who are very generous. Again, today, I didn't name all of them, but there are incredible amount of goodwill and appreciation and respect. I want to thank our customers. This is the amazing group of people. I've been accessing the senior leadership of such magnitude, which we have not even experienced you in the regular times. I've seen so many clients individuals who contributed to our charity. But more than that, they act as business people, understanding that resilience of Grid Dynamics will be resulted in the success of our business going forward. I also want to give an opportunity to investors to join the forces and to provide Grid Dynamics support. With your support, with your attention, we'll be able to rebound and grow faster than we ever experienced. Again, I want to thank all the good people around the world. We need not only trade for peace. We need to fight for peace. The peace is the future not only of our businesses, but our children and generations to come. And I thank you, again, for everybody to stand with Grid Dynamics. So with that, I want to say that every human being is Ukrainian today because that's association with the future hope. And I want to say, which is becoming not just the words, but the symbol, glory to Ukraine. Thank you very much.

Thank you.

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