Good afternoon, everyone. Welcome to Grid Dynamics' First Quarter 2022 Earnings Conference Call. I'm [ Bin Chiang ], Head of Investor Relations. [Operator Instructions] 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. Please note, today's conference is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain forward-looking statements. This includes our business and financial outlook and answers to some of your questions. Such statements are subject to the risks and uncertainties as described in the company's earnings release and other filings 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 the 8-K filed with the SEC. You can find all of the information I have just described in the Investor Relations section of our website. With that, I will now turn the call over to Leonard, our CEO.

Thank you, [ Bin ]. Good afternoon, everyone, and thank you for joining us today. Q1 2022 was another record revenue quarter of $71.4 million, and this marked the fifth consecutive quarter of reporting record revenue in the company's history with an excellent precedent that we achieved this in the backdrop of the ongoing war that Russia started on February 24. Exactly 2 years ago, we encountered a different but very difficult situation. As you may recall, a significant portion of our revenue was lost due to the impact of COVID at our retail customers. When we faced the challenge, we took actions immediately and addressed the issues head-on, which resulted in a company quick turnaround and pivoting back to growth. We are taking the same aggressive approach toward addressing the challenges thrown at us with the current war and the actions we have taken over the past couple of months have placed Grid dynamics in a stronger position. Since speaking with you, roughly 60 days ago, we have made tremendous progress on multiple fronts of our business. This includes growing our business at the existing and new customers, expanding our partnerships by relocating employees and their families, expanding our global presence with new locations and ramping our hiring in our existing locations. More importantly, we executed seamlessly in ensuring continuity of services at our clients. Our clients are appreciative of our efforts and we have received overwhelming support from all of them. During these times, our employees have stepped up and have also demonstrated tremendous team spirit. This exceptional teamwork and solid execution has resulted in our productivity levels across the entire company coming back to pre-war levels. The teams have been working relentlessly in ensuring our business continued uninterrupted and I would like to thank each and every…

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenues of $71.4 million exceeded our guidance provided in our mid-quarter update of at least $65 million on April 6 and was up 7.3% on a sequential basis and 82.5% on a year-over-year basis. The better-than-expected revenue in the quarter was driven by strong demand for our services across industry verticals and customers. During the first quarter, Retail, our largest vertical representing 32.6% of our revenues grew 6.6% on a sequential basis, and 163.4% 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 and brick-and-mortar retailers continuing to focus on digital transformation initiatives. Our TMT vertical was our second largest vertical and represented 30% of our first quarter revenues and grew 9.6% on a sequential basis and 48.8% on a year-over-year basis. Growth in the quarter largely came from some of our large TMT customers who continue to grow with us as we expanded into new geographies. Here are the details of the revenue mix on other verticals. Our CPG and manufacturing represented 21% of our revenue in the first quarter and grew 9.9% on a sequential basis and 71.7% on a year-over-year basis. The growth during the quarter primarily came from ramp at our largest CPG customer. Finance represented 6.3% of revenue, decreased 5.3% on a sequential basis and grew 31.7% on a year-over-year basis. And finally, the other segment represented 10.1% of our first quarter revenue and was up 6.9% on a sequential basis. Within this vertical, we witnessed continued ramps at some of our pharma and healthcare clients. We exited the first quarter with a total headcount of 3,671, up from 3,274 employees in the fourth quarter of 2021, and up from 2,056 in the first quarter of…

[Operator Instructions] Our first question comes from the line of Mayank Tandon from Needham.

Can you guys hear me okay?

Yes, we can hear you.

Great. First, Leonard and Anil, congratulations on the quarter, great job navigating what was, I'm sure, a very trying environment over the last several months. I just wanted to first start with the demand side. It seems demand is really strong across the board. Could you maybe speak to the monthly trajectory that you saw through the quarter and into the second quarter? Maybe help us frame what the second half might look like even though you're not giving formal guidance. Any kind of framework to think about the rest of the year. Did you guys get my question?

I didn't because I was blocked completely, sorry. Can you just...

Why don't you repeat it?

Sure. Okay. So I was just basically going to the -- first, congratulations on a great job. You guys have done a tremendous job of navigating what was a very difficult situation. I wanted to just pivot to the demand side. It seems demand is really strong across the board. I wanted to get your thoughts on maybe the monthly trends that you've seen into 2Q. And even though you're not giving formal guidance for the back half of the year, how should we think about the trajectory of growth into the second half and for all of 2022?

Okay. Well, thank you. Sorry, it was a little bit of a technical glitch. So -- and I missed congratulations. Mayank, the key point for us is, obviously, we don't guide the second half of the year because of continuous uncertainties. And we stay very bullish and very positive because, not only were we able to overcome some of the initial challenges, but we also see a continuous demand from our clients, which embrace our new locations, our new capabilities as well as existing locations as well. So the demand is strong. The demand is across pretty much all the verticals. So I would say that we are cautiously optimistic because disruptions is one area, U.S. economy is another one. But at this point, we are fairly bullish going forward, again, knowing that the variances are still pretty complex.

Got it. And maybe then I'll just switch to the pricing question. Have you seen pricing leverage come through? And is it enough to mitigate or maybe help soften the impact of the wage inflation impact that I'm sure you're seeing as you look to scale your headcount in different geographies?

Yes. I mean Grid Dynamics is still a relatively small company compared to the giants which report the colossal challenges with inflation and price erosion and all these things. We're a technology company in the digital space. Our customers are favoring the long-term innovative digital transformation. We mentioned before introducing our pod models and some complexity of customers to be resolved by very efficient return investment Grid Dynamics teams. I think the customers worked their wallet to provide Grid with the good opportunities. We do see obviously some wage inflation. It's mostly driven by structures when obviously, you're new in location, you're building team up. But we expect it to be tapered as we scale operations. So overall, we're comfortable to see in general, the behavior of Grid Dynamics in a relative scale to others.

Our next question comes from Maggie Nolan from William Blair.

Can you hear me okay?

Yes, ma'am.

Great. Congratulations from me as well. Just excellent execution and keeping us as updated as you possibly could have made things a little bit more clear during a really uncertain time. I'm curious about as you move your employees to different cost geographies and you ramp up in different cost geographies, how quickly are you engaging in pricing conversations and changes with your clients? And then what was the impact of some of that disparity on gross margins in the first quarter?

Well, the gross margins have various factors and probably I would say that Anil can make some more specific comments on that. When it comes to pricing, you're kind following the Mayank part. Obviously, there are discussions, but there are discussions not because of wars and because of relocation, because of the value of the projects. We've become a global company with a broad service offering. And not only we are flexible with the system approach to the value of our pricing, but also customers understand there are certain key budgets, which are driven by, again, return on their investments. The competition is always fierce. What we have not seen so far, customers either run away from us, they are very supportive of Grid Dynamics, or trying to, let's say, debate the pricing. I think it's -- they operate with us in a very professional way as we do with them. Relocation require perhaps a higher pricing from the value. We don't base our pricing, okay? You move engineer from X location, Y allocation, you pay them something different, and here you go, you have to compensate for that. That's not how you deal with the clients. You look at the system approach, a holistic approach and what you do is create complex global teams and with our pod model or fixed model pricing and with the services we provide, it becomes natural. So I've been out on the side. Maggie, I have been on the client side for a very long time. The best thing customers appreciate when we look at their value than just trying to make a dollar here or there. And again, I'm pretty bullish going forward that customer reception would be fair to Grid Dynamics because we're bringing value to them. So Anil, maybe you'll address the margin.

Sure. So as you know, there was about 402 bps compression on a non-GAAP basis between Q4 and Q1. Now remember, that's seasonal. It's largely driven by the month of January, where we have a holiday season, and then we have a shorter month in February. So typically, that's what we see. So as Leonard pointed out, it is more of a seasonal trend. You should not extrapolate anything on the pricing front. And that's something that we work our way through. Now as you look at any quarter and even so this year, we start off with that bottom in January, it picks up in February, and then you have another pickup in March, so it comes back again.

Okay. And then, on your ramp in India, can you give us some more detail? Are you primarily hiring experienced employees in India? And where are you sourcing talent from particularly as you think about [indiscernible] of partnerships to get closer to that [ 4,000 ] employee goal that you mentioned?

Very good. Well, Maggie, you always ask the right question. Last time you asked me a question about the new customer, right? It was very timely. So on Monday, I will be in India. And we have a management team. We're scaling our office. We'll open our own office. We have great partners. There's not just a focus on India, it's overwhelming kind of concentration of effort, both from the client relationship to hiring process to onboarding the process. It's too early to say how the scale will factually affect the business. I mean we hired people, but not to the scale -- we're talking about hundreds and thousands of people over time. What's important is the first few results, but I'm glad there are some very senior people in India that joined Grid Dynamics. So when we go to the office, we'll cut the ribbon. We will actually see some very strong presence of experts. To me, it's like any strategy that comes with having the key talent. And key talent is a business leadership, technical leadership, operational leadership. We were getting that already within a few weeks since we started. So there is a support there. We're getting support from the local authorities. Now Grid Dynamics is unique in so many way. We -- as we mentioned -- as I mentioned in my statement, we pulled the timeline by a year. It doesn't mean we have not been engaged with India. And I've learnt lessons from other companies. I've learned lessons from the company who tried to jump into India and do things or Indian company trying to jump into Europe. So we've been prepared. Time will tell how successful it is. The first signs are very encouraging, but I think we'll have more color in 1 quarter.

Next question comes from the line of Ryan Potter from Citi.

I'd like to reiterate, really impressive quarter from you guys, given the circumstances. I'd like to start with your talent strategy in some of your new geographies. As you kind of quickly pivot your workforce into places like kind of Armenia and India, what have you put in place to kind of be able to recruit the same high level of engineers, have the same value prop, have that growth culture? Is this something that comes naturally or is it something that you guys have had to really invest in -- put labor into?

Thanks, Ryan. So obviously, pulling in the timeline by 1 year, it would be kind of unfair for me to say that it's all been planned, right? So we had some teams, but we had such an amazing leadership team. And again, some of the key elements of the route comes with the leadership. As I said, I'll come back to that color on India in a quarter. When it comes to Armenia, we started the process of building Armenian location in Q3 last year. Again, our global strategy involves mix of the talent. A lot of very talented Armenian engineers are in the United States, and I know quite a few of them. We picked the locations not only by existing talent but capability of scaling talent, right? So Armenia is a country -- and in many others, you will hear from us going forward, it's been in planning for a long time. In addition, right now, Armenia is one of the countries which serves as a relocation of Russian engineers. So it's a good mix of some of the existing talent and some of the new talents. So location is growing really nicely. Our Head of the Global Delivery, Vadim Kozyrkov is right now in Europe. And we're just executing super fast, but the foundation, we've been planning for a long time. So there's only 1 recipe for the talent; it's universities, your relationship with the young talent, internship. We're already having internship programs in the locations you mentioned.

Got it. That makes sense. And I guess sticking on some of those newer geographies. In terms of like the margin front, are you guys initially happy to offer more kind of competitive wages to attract talent other than employees that might be relocating from Russia? And I guess, how do the kind of gross margins in some of these newer geos compare versus some -- what you've seen in some of your more scalable geographies over time?

There is no clear formula. This is the statistical evidence, which is driven by the reputation of the leadership in the local location and the scale of the team. There are always some opportunistic people who like to explore a nonlinear personal benefit. Again, without mentioning all the details, but like I said, we've been in Armenia for a few quarters just to explore market, [ ones and twosies ] and pick up people. But we have some amazing partners. We have some incredible partners in Armenia. And time will tell you, they're very enthusiastic. Grid Dynamics is a beacon of technology and when we go to the regions, we have so much overwhelming support. It's not another call center or another kind of body shop or outsourcing. And forgive me, so there's no offence of those things. But we're a beacon of technology and people embrace us. But there are some excess of pain, of course, there is. You have to invest. But it's investing into the top-tier talent, we drive everybody else. So there is a somewhat potential -- the [ pressure ], we talk about it. But I'm not going to go to speculate it's going to take quarters or years or forever, it's too early to say. The overall trend, obviously, that the faster you want to gain the top talent, more expenses there. But on an overall scale, we become anywhere at one of the, I would say, formidable player once we get enough young talent through the college programs and [ Tier 1 ] hires, I think that balances out. So I think the key for you to think about it, when you just start having a quantitative leap for Grid Dynamics, then you understand that location becomes more settled. And of course, as you go West, there is more pressure on the pricing. That's why we're going to Latin America, going to Mexico. But the talent is not cheap anywhere. And again, Grid Dynamics is driven by that.

Next question comes from Puneet Jain from JPMorgan.

Let me also congratulate you on navigating these issues and it's commendable that you added higher organic revenue on a year-on-year basis in Q1 than you did in Q4. That's not what we expected, given the challenges you faced. Let me ask about demand environment, specifically, on backdrop of today's market reaction and multiple overhangs in macro economy like inflation, oil price, supply challenges. Are you seeing any signs in any of the verticals of slowing macro economy? And if you can remind us how the business -- how you expect the business to operate if there is like a slowdown or if there is like a recession over the near term?

Yes. Yes. So there's always a question of gloom and doom, right? So we had gloom and doom 2 years ago. We had COVID which impacted Grid Dynamics very rapidly. One of the learning lesson is always differentiation, right? The TMT is heading the quantitative numbers. But you also noticed that Retail is picking up. This is a different Retail. We've learned the lesson from brick-and-mortar guys, so we're kind of becoming more diverse and the pharmaceuticals coming, and manufacturing coming, we have the CPG guys. It's always a question about discretionary spending, right? But first, people work with their wallets, means the consumers, right? So I noticed today, like, Facebook freezes their hiring, for example. So we're not naive. We understand, as inflation goes up, there will be some level of adjustments. Now what level of recession, how complex it'd become, which area it's going to take, we don't know. But we know, we are need to be defense. And that's one of the reason you see our forecast to be somewhat conservative. Now some people ask us, why are you more aggressive than others? [indiscernible], I'm sorry. So the definition of conservative means that we are taking into account how diverse we need to be. We're adding Europe, we added Switzerland as our European headquarter, we are fully absorbing right now. So we don't use the word Daxx anymore, it's part of Grid. Daxx has completed their period of the transition. So we're blending the forces. We're adding more focus on our markets. So there will be impact. If somebody tells you, don't worry about it, this is just another blip, no, we're conservative, we are flexible, we are focusing on building our bench in the area of the most decisive impact on our clients. And we assess our critical positioning with the clients in the area where we are doubling down.

And let me switch gears a little bit, ask about margins. Given the changing delivery mix, how should we think about normalized margins for the company in steady-state when maybe next year or over -- or some time after that, as well as how should we think about incremental margins? If there is revenue upside in the near term, how should we think about incremental margins of that high revenue that you generate?

Okay. So I'll let, of course, Anil, to have a joyful answer on the margin, I'll also talk about margin. So he loves talking about -- I live with margins every single day, right? So margin is a blood line of the company, right? I mean no matter what people say, I've increased my revenue 10x. I'm an old school guy, right? You feed yourself and the team from what you earn. You've got to be responsible for the earnings, right? So the first indicator is always the gross margin, right? So if the gross margin started getting more wobbly, you need to understand where it comes from. And that's usually a testament of how well your customers respect you. You can always look at the adjustments and you play with adjustments, I'm an old school guy, right? Like our Q1 onetime charges is probably the lowest you can imagine. And our COGS charge is miniscule. It'd be a little bit different in the next quarter. We'll see how it is. But I'm a straightforward guy. You eat from what you earn. So the gross margin is what I'm focused the first. And there is a little pressure right now but the seasonality played some role. So again, we'll see where it goes through the next couple of quarters. And right now, there are early indications that some of them -- some of the early investments in new locations are not as terrifying, as you guys paint a good picture, but again, not concerned. The second part is on EBITDA margin on a non-GAAP basis, right? So the value of the total company comes down to the earnings. And non-GAAP EBITDA for me, it fundamentally is how much I invest into what I invest. I'm not starting and investing in…

Yes. So look, I mean, Puneet, what just Leonard shared with you is the true DNA of the company. So it's sacrosanct when we look into our margin structures, right? Now you asked us about the normalized long term. So at this stage, there is no reason for me to change my long-term margin targets that we've laid out. So we're not even going to revise that and do that. Now as Leonard pointed out, in the near term, as we get scale in these -- some of these locations, obviously, we're going to be investing a little bit. But it's not something that is dramatic, right, in the bigger scheme of things because our whole approach towards engineering is driven by value. So again, at this stage, the way we are looking at our business is very focused on the margins, but not overtly -- how do I say, we're always concerned, but it is not something that -- our model is not changing. Let's leave it at that.

Next question comes from Bryan Bergin from Cowen.

This is Zack Ajzenman on for Bryan. First question from us is just kind of looking to get some more on-the-ground insights, perhaps as it relates to client conversations. The revenue trajectory certainly speaks to it -- certainly speaks for it. But just nearer to the ground, I'm trying to get a sense of what clients are saying now. Larger clients continue to grow. Where else are these large clients taking you? And how much nervousness is there as it relates to doing business out of Ukraine today?

How are the good clients -- large clients taking us? To the larger revenue, I guess, that's the fastest answer. No, look, larger customers are the customers who's been with us -- been with Grid Dynamics for most of the long time. It's not the customers, but the leadership of the customers. So the larger customers are actually more supportive and more positive on reaction of Grid Dynamics because many of them lived through 2014, right? And many of them lived through 2020. They trust our judgments, not blindly. I mean there were a lot of security audits and all these conversations and how we're going to manage the business. And there are multiple risks. Look, I would be the last person who say there are no risks. There are always risks. There's a war. Nobody is safe. But who tells other people in other countries are safe. Until we win, there's no fundamental safety. So when we deal with the customer, we plan for contingency, we plan for redundancy. And I would say the big clients are very simple. The bigger question, which actually Maggie had asked me last earnings call, how are the new customers? This is interesting. You've seen the new logos and some of them are very reputable logos, like not everyone, they're reputable enterprises, big guys. Smaller guys are a little bit more able to take the risk because of our quality work. They say, okay, worst come worst, we'll do the value, right? The bigger guys go steps deeper, but they know our reputation and they assess our growth. So the only question is around the smaller guys who may be growing a little bit more careful because we've continuously proven how we go. But there are numbers of them is growing too. Remember, over time, we build a better mousetrap. But the big guys, knock on wood, they've been tremendous.

That's helpful. And then switching gears, looking to dig deeper into the IT services partnerships that were formed since over the past month or 2. Can you talk about how Grid is using these partnerships to help sustain delivery capabilities? And maybe at a high level, can you provide some color around the economics as it relates to these relationships? And how might these partnerships evolve over the medium to long term?

So you're not talking about our business partnerships. You're specifically referring to India. Is that correct?

Yes. And there were also some announcements, intra-quarter, as it relates to partnerships in the U.S.

I'm not sure of the partnership in the U.S. The partnership with the U.S. company is for India. So everything is around India. So what we are trying to -- what we were making the comments is about -- so there are 2 different parts. We have a huge number of network partnership with build the business. They're top-tier names, all the big guys, Amazon and Google and Microsoft and big guys in the commerce space and software. I mean, it's incredible. When it comes to the partnership we announced, they were related to how quickly we can scale the business in India, and we have several partners who've been very much, I would say, vital for our early success. We plan in advance the relationship going forward in terms of how we're going to turn those partnerships into the build-up for a transfer relationships or other forms to maintain the continuity of our headcount. And right now, I can tell you that from the very short period of time, it's been just north of 2 months, so far so good. Now the pudding -- the proof is in the pudding, and the pudding will come sometime next year when all these is going to be one big Grid Dynamics. But I'll tell you from the agreement perspective from both [indiscernible], it's going to be -- it looks very good. And I mean India, as I mentioned before. I meet all these partners, I meet all the decision makers, and we are constantly in a communication. So that to me is a vital part of our kick-start, but the future of Grid Dynamics in India is Grid Dynamics of India.

Next question comes from the line of Josh Siegler from Cantor Fitzgerald.

Leonard, Anil, I'd like to reiterate congratulations for the very strong execution this quarter. And actually I wanted to dive a little bit deeper into this outperformance. So with the strong print and excellent guidance, can you walk us through some specific areas of your business that are currently outperforming your initial expectations for the year? Are there specific verticals that are driving higher demand than you initially expected? And do you believe the demand environment is still benefiting from a post-COVID tailwind?

Well, very philosophic. So post-COVID, if you read the press every day, we have every other day and you call it -- what do you call it, afterparty? Right? I'm not making fun of it, but the measures sometimes and people still need to be very careful, right? So the industry opened up, people mentioned recession is the next one. I think the general demand for Grid Dynamics services is across all the industries. We've been traditionally very strong in e-commerce. And the good news, the time we recall Grid Dynamics is a retail supplier, it's gone. We are the specialists in digital transformation, in cloud migrations, in data analytics and artificial intelligence, in front end, all these things, mobile technologies and automation of all kind of different levels. So yes, still e-commerce is a big part of it. But if you think about and you get a little bit more now customers in manufacturing and in finance and in pharmaceutical, they all come for the same thing. How can we enhance our business experience, user experience, even supply chain experience, logistics and all other facets. So I believe that I would not pinpoint on a single industry. What I would say that the biggest thing for Grid Dynamics from the beginning of the year, which continues through the war, continues through kind of lessened constraints with the COVID -- I wouldn't call it end of COVID, so lessened constraints on the COVID is that, okay, can we trust Grid Dynamics with all these complexities, all the demand on our skills, all our own decision-making versus much bigger guys? And when people start building the hands-on experience with our first project, the overwhelming answer is yes. So the biggest thing I have right now is just working with the logistics of new locations while taking the demand book together. I would say that, again, the Q2 will be a testament to many of those variances. Some other guys say, let's wait for next year. Look, we live day by day. We're nimble and a very humble company. All I can tell that our customers do not question our capabilities. They sometimes just want to make sure they're in the same mind to give us all this ownership of the project. And our biggest contribution we have is co-locating in operational capabilities, our own teams with the client teams. And we've learned over the years that there's no better way to earn the trust of the client is to make client inclusive in your projects and train them how to manage business, sometimes post-Grid, sometime together with Grid. So that's the answer to your question. So the final summary is we have demand across all our verticals today.

Great. The other issue I'd like to talk -- touch on is logo growth. So new logos remained very strong this quarter despite the ongoing geopolitical headwinds to your supply. Are you starting to see the impact of your sales force build-out? And can you provide some insight on how you expect the pace of new logos to continue into 2Q?

Well, I had my meeting with the Head of Sales yesterday, right? And the very short answer, I'm never satisfied with the scale of growth. I believe that what's important is the demand is not tapering, and we are adjusting our model how to scale with existing plans versus how to provide the growth for the new clients. Obviously, the sales force has grown. I think what has improved, we are more like Ukraine, we're fighting while we mature. And that's the path to victory. And one area of maturity is, we have much more materials, immediate proof points, test cases, all these [indiscernible], which are enhanced out of the sales force. One of the biggest change, and I talked about it in a couple of earnings calls before, is our investment into Rajeev's, who is our CTO, technology organization. We have a global technology organization, which, at its innovative center, presales activities, but also the generation of all the architects. So I see that our turnaround from perspective of engaging with the clients actually getting to the projects, become faster and requires less hands-on kind of nurturing by the top technology guys. To me, that's a success, it means the scaling is in the process. So that's where I see the logos with. But I don't think I will ever be satisfied with the rate of growth.

That will be all of the Q&A session for today. I will now turn the call back to Leonard for closing comments.

Thank you, everybody, for joining us on the call today. Our first quarter results and our second quarter guidance prove that we're a company that can deliver under difficult situations. This is a testament of Grid Dynamics' capabilities and offerings that clients continue to seek and appreciate. The demand environment is robust, and our expansion to different geographies has played well and continues to be on track. As I said in my previous interactions, while the current geopolitical situation causes uncertainty, I'm confident of Grid Dynamics' strengths and our ability to navigate successfully. I look forward to giving you a business update in the next 3 months. Thank you.