Good afternoon, everyone. Welcome to Grid Dynamics First Quarter 2023 Earnings Conference Call. I'm Bin Jiang, Head of Investor Relations. At this time, all participants are in listen-only mode. Joining us on the call today are CEO, Leonard Livschitz; and CFO, Anil Doradla. Following their prepared remarks, we will open the call for 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 the answers to some of your questions. Such statements are subject to the risks and uncertainties 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 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. As you have seen from our results that we published a short time ago, our Q1 2023 revenue and profitability were at the high end of the expectations that we provided in February. In the current environment, I'm delighted with our results. This is a testament of Grid Dynamics' strength and value we bring to our clients. There are many positives in the quarter. Grid Dynamics continued to provide comprehensive partnerships with many clients, momentum at winning new logos in the first quarter with global Tier 1s, meaningful contribution from our recent logo wins towards revenue, success with our geographical diversification strategy. India became one of the largest delivery countries, I would like also to emphasize operational progress with our GigaCube strategy that will propel the company toward $1 billion revenue. I will talk about each of these elements in my prepared remarks and Q&A. On the macro front, our viewpoints have remained consistent since November 2022. We're in the midst of a cautionary spending environment across industry verticals. Clients are closely looking at the health of their own business and making short-term investment decisions. While this has resulted in volatility across some of our client in industry verticals, recession-resistant industries continues to invest. Despite the near-term uncertainties, in many ways, we view the reset across the demand environment as a significant opportunity for us. During times when the customers are recalibrating their gross investments, another second way of leveraging digital transformation solutions and achieving the revenue objectives in a cost-effective manner, Grid Dynamics adapts to the changing environment. This is something we have witnessed in previous economic cycles, and this time is no exception to the trend. Last quarter, we shared with you for the first…

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenue of $80.1 million was slightly higher than our guidance range of $78 million to $80 million and was up 12.1% on a year-over-year basis. On a constant currency basis, our year-over-year growth was 13.7%. The 160 bps headwind to revenue growth on a year-over-year basis was due to the strengthening of the dollar relative to the Euro and British pound. During the quarter, we witnessed growth from existing customers as well as new logo revenue contributions, offset by macro-driven caution from others. TMT, our largest vertical represented 33.5% of our first quarter revenues and decreased 1.3% on a sequential basis and grew 25% on a year-over-year basis. On a sequential basis, we witnessed some caution at some of our TMT customers. This was offset by growth both from existing and new logos. During the first quarter, retail, our second largest vertical representing 31.7% of our revenues decreased 1% on a sequential basis and grew 9% on a year-over-year basis. Within the retail vertical, on a sequential basis, we witnessed growth from areas such as home improvement and specialty retail, offset by softness at brick-and-mortar departmental stores. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 15.8% of our revenue in the first quarter, a decrease of 10.2% on a sequential basis and 15.6% on a year-over-year basis. The decline on a sequential basis came from our large customers as they readjusted their spending levels to the current macro environment. The finance vertical represented 8.1% of revenue, an increase of 4.3% on a sequential basis and was up 43.9% on a year-over-year basis. The growth in the quarter came from our banking customers, where we continue to grow with their programs tied to wealth management.…

Thank you, Anil. As we go to the Q&A session, I will first announce your name, at this point, please unmute yourself and turn on your camera. Our first question comes from the line of Josh Siegler from Cantor Fitzgerald. Your line is open, Josh.

Yes, hi, Leonard, hi Anil. Thanks for taking my questions today. Great to see that nine new enterprise customers come in. As we progress through 2023, how are you thinking about the balance between increasing wallet share with existing clients versus going out and winning new logos?

All right. Thank you, Josh. So the new clients is a good news for us. It's been going on for a while. Our strategic focus on the domain expertise, which is a part of our GigaCube strategy is paying off as well as our partnerships. So I feel confident in the growth business and acquisition of the new enterprise clients. When it comes to the wallet share with existing customers, I would say this is more driven by the customer budgets. I haven't seen a decline in the world this year in terms of a business where we are really participating. But I also have seen the mix positioning of the clients in terms of getting into the new business budgets. So I would say I'm very confident on the growth of the new accounts. We'll have to see how the current existing business will continue to expand.

Understood. That's helpful color. And then given the more cautious spending environment, specifically for cyclical verticals, is your sales team actively spending more time targeting the more secular verticals and you expect them to become a larger and larger part of the mix moving forward?

Well, yes, you always treat your customers with respect of the historic positioning, right? So when it comes to the new clients, as you can see, we expand beyond our traditional CPG retail business quite actively. There is more work driven by fintech. The manufacturing segment, we see more, which I discussed before pharmaceutical, there're more notable research work done by cybersecurity and generative AI, all the good stuff. With existing customers, there's a little bit of, I would say, uncertainty across all the segments. I think it's driven by the leadership. From the old time, you look at the leaders in each corresponding sectors, they're stronger and they invest more. The companies will need little bit less strong position they're getting a little bit of jittery. So yes, of course, we focus on a global footprint wages from traditional business. But if you look at generally e-commerce perspective and our minimized brick-and-mortar business, I would say that even the traditional B2C business is continuing to be viable, but of course, B2B becomes more and more critical.

Yes, understood. Thank you very much, Leonard.

Of course.

Thank you, Josh. Our next question comes from the line of Mayank Tandon from Needham. Please go ahead.

Thanks, Bin. Good evening, Leonard and Anil. I wanted to just start with your guidance on Q2 calls for a modest sequential decline. And I know you're giving guidance for the full-year, but just any color on what you might expect in the back half of the year given client visibility, the interest from them on pursuing further digital transformation engagements, if the macro conditions don't worsen from here, is there an expectation that we could actually see subsequential growth in the back half of 2023?

Yes, Mayank, thank you for asking the question. Obviously, the last line of Anil's prepared remarks probably is the most noticeable, right? So if you take our guidance for Q1, we had our end of the year reporting, I would say, closer to the end of the quarter. And we tried to play the fair game to be as accurate as we can. When you have more disparity is a little bit difficult, but we kind of been right there. When we look at the Q2 for the subsequent quarter, we had an internal discussion where we want to be in terms of guidance. We're still two months, almost two months away from the end of the quarter. And some of our clients are having the budgetary year starting around June, July. In the past more traditional years, the stability and forecasting of the business usually ends around early year, right, even for the customers for whom budgetary year starts first of the year. They usually have completed by November. This year, we've seen quite a variety of the decisions. It's not a pushback. It's basically unclarity and unclarity made us to be a little bit more conservative. So saying that, we are quite confident in a business acquisition, what sometimes happen, some of the business suddenly brings out more which is happening. And some of the business suddenly has a little bit of a delay of the budget. So we decided that for sake of being conservative and fair to you guys and to the market, we wanted to be a little bit more conservative on the revenue. If you noticed, we have not reduced the guidance on our profit. One more thing about the notable guidance for the year, I think some of the industry are a little bit confused. We have never gotten into guidance for full year since we started the company. That's how it works for the COVID days and other things. We may get to that at one point of time, but we have not suspended any guidance. We just feel that in our line of business, we are more accurate and more, I would say, responsible regarding quarter at the time at this moment.

Understood. Well, let me ask you this. So if conditions do get worse, is there levers in the model that you can pull to protect profitability? In other words, in terms of gross margins and EBITDA margins, do you have the ability to manage profitability in the midst of continued revenue pressures?

Well, it's not the first downturn in the world. We always stay profitable. The foundation of the business is the balance between investment and fiscal responsibility, right? And I'm not just talking about the margin play. I'm talking about the cash flow play. Again, we have a very significant amount of the cash on the balance sheet, but that's really for more strategic acquisition perspective, not for sponsoring the business. So one element about, I would say, the dials are how much investment into the GigaCube, $1 billion strategy we have, right? So on engineering perspective, we're very comfortable. We maintain some bench with trained people. On an overhead perspective, there's a little bit of indolence sometimes because we move into broader regions. We had to invest into India and some of the other European countries, Mexico. So we take a note of it. So when you see the reduction, some downward the total headcount, that's a result of more efficient operation of the non-engineering workforce. The other dials are investment into sales and technology. Technology organization is our absolute foundation of the DNA, and I'm preserving it to even through the downturn, right? So we bring more projects, more accelerators, more innovations. And now everybody jumping on generative AI, we've been doing work in this field for years. So we're doing the actual commercial projects without creating a lot of excitement, which is make money on that, right? So yes, there is a risk always about a further potential downturn in the market. We have balancing those kind of elements. But the core of the company preserving the educated technology team, scaling the Indian business, adding more solutions with, I would say, more with a fewer on the technology side and having a strong ties with the clients. One more important notable thing is because our strength is in the consultancy of the technology relation with the customers, kind of end of COVID, give us a little bit more benefit because now we're spending more time with the clients face to face, we're able to resolve some of those issues real time. Of course, in some cases, as you probably mentioned, there were some of the discounts associated with the projects, but only in a very strategic manner where we see a growth after some of those relationships being established. I hope I gave you a very comprehensive answer.

Very helpful, thank you so much.

Of course.

Mayank, thanks for the question. Next question comes from Puneet Jain from JPMorgan. Please go ahead.

Hi, thanks for taking my question. Are you seeing any changes to the competitive intensity in the industry, maybe some of your peers, other vendors are more hungry for growth and might be using pricing as a level. Broadly, like what do you expect for pricing? Is it like enough to offset wage inflation and other margin headwinds over the near term?

Our main competitor is VMO, vendor management organization, right? So all our clients, all our engineer organization, all the business organization, they are fully aligned with Grid Dynamics strategy. And it always remains our strength. We move from fuel from one region to another region and yet that kind of DNA relationship stays. When it comes to vendor management, they're typically having their decision coming all the way from the top when it's purely financial. Then of course, rate card plays its role. It plays its role in some short-term decisions in some decisions, very short term, like instantaneous decision and then the people come back because the value is still preserved. I think one of the defense mechanism is continue to bring more fixed bid and related projects. We also this followed the Sun strategy is paying out. So where we see that there is need to be more scale in terms of the organization, we're adding people from the regions. We have not been present before, like Mexico and especially India. And India business growing nicely, too. But again, no form or shape, even under pressure, we're not positioning ourselves as a commodity business. It's a spiral. Sometimes you're listening to plan so my God, it's all temporary. Just let's give a lot of incentives to the client. It doesn't work because then you have the conflict with your own methodology. So yes, we have our competition and is vendor management. We are aggressively positioning ourselves. We look at where the purely it's I would say, budget communications. And one of the notable things Puneet, we have more and more relationships with the C level client representatives. That's a big transformation in the past, I would say, six to nine months. We meet not only with the technology leaders but with the top leaders, the guys who are listed in Bloomberg. And those people sometimes need a little bit guidance and time to understand their own future to some extent. So yes, there are all kind of things happening, but overall, our vector is still positive, as I described.

Got it. And with the second India-based acquisition in recent times, is your India delivery at a point where you can get to the goal of 1,000 or so employees organically from here on? And should we expect like change in M&A focus towards some of these new technology areas, whether it's generative AI and whatever. Like are there any even like private companies which are specialists in this generative AI given it's such a new area?

Okay, Puneet, first part, I almost hired you. Second part, I'm not sure. So the first one, I'm 100% with you. I gave a guidance to Indian team to grow organically. This is 100%. You're very observed. This 1,000 people I mentioned before, it's continuing to grow, and we're not just going to do tuck-ins for sake of tuck-ins. Now to be respectful to both Mutual Mobile and Next Sphere, they have their own core competency. We're complementing with the Mutual Mobile, their user experience knowledge is already directed plugged in into our clients. Next Sphere, it's a little bit too early to say. However, the growth is going to be driven by investment in the technologies. Now why I am saying the second part, I'm not so sure. So with the journey of AI and the whole artificial intelligence research has been a core part of Grid Dynamics for a long time. We are looking for domain expertise, not technology expertise when we're looking for M&As because the core engineering group is still about mathematics, as you know, and we continue to build this capacity. Rajeev's team is very strong. By the way, guys, a little bit of kind of self-promotion. In November, we will have the first Grid Dynamics Investor Conference. And so I still a little bit was under Bin, but since Puneet, you're very important with the question, we'll bring the management team in, and you will have time to face the entire management team in a very, I would say, complex dialog. It's still a few months ahead, but I want to make sure that from the strategic M&A perspective, Grid Dynamics will continue to use our balance sheet focused on four domains, and that's going to be the strategy going forward. So thank you for that question.

We look forward to attending the event. Thank you.

Thank you.

Okay. Wonderful. So thank you, Puneet. Thanks for the question. Next question comes from Bryan Bergin from TD Cowen. Please go ahead.

All right. Good afternoon guys. Thank you. First question, just wanted to dig in on TMT client sentiment. If you can give us a sense on how some of the conversations have progressed here in recent weeks, particularly among some of the larger tech clients, I'm curious just how prevalent the uncertainty is in that base and how your conversations are informing you on the potential for slower spending, the duration of potentially slower spending in that group?

Okay. Well, the TMT spectrum is broader. So it's a bit of a bifurcated question. So there are some customers, the few of the very notable one, to a high-level dialog. And it goes into the fintech area and it goes into the technology mainstream area. And we are kind of I would say, even gaining momentum. Remember, when tough time is a bit more uncertain, and it's certainly uncertain, people see guidance from somebody who they respect for whatever reason it is. So we have very good conversation. But it's not a secret. There are a few guys who are having a bit of a complexity in their own camp. We are patient. We're trying to find the leadership, which is going to be a little bit more stable. But in certain cases, with some of the TMT clients when they fire a very large group of FTEs, they need some time to figure out their own positioning. And one of the earlier question was the comment is, what do you guys do with the priorities? Our priority on the ones who know what they want to do, and with the ones who need a little bit of time, we're a little bit more in a defense position to make sure that we get there when the time arrived and they're ready for the strategy. But yes, the technology sector in my view for Grid Dynamics is a bit bifurcated.

Okay. Makes sense. And then just on the workforce. So you had some comments earlier certainly about protecting that engineering quality that you have, it looks like you did shift into R&D a bit here from an expense base. Can you just talk about your efforts there? And then just give us a sense of your hiring plans over the next couple of quarters?

Hiring sense, we're always hiring. This has been the mantra, by the way. It's an interesting thing because you look at the delta, right? So you're adding new companies and you reduce some of your headcount and you're balancing right now. So the question is why majority of reduction is coming from non-engineering. And it may sound, did you have so much overhead? No, we don't. But the work has shifted tectonically some of those organizations, right? And those are not just a low number of people. So our first objective was always to save lives of people, but then you need to efficiently operate organization. So as we grow, obviously, there's investment into India and there's less investment into some of the non-engineer organization, bench or protecting engineers. There are threefolds. First, number one. To be clear what bench is, I would say close to be billable and how you get to billability. So our work with our clients continue to be very much the personal touch because we want to understand that any kind of short-term -- probably field and if there is a project which tends we probably address with the people. So that one has always been going well with the Grid. We understand how to manage that. The second part is the R&D accelerators. To some extent, we are delight to achieve, we build a core team of architects, which we defined a number of projects, which are very critical, as accelerators going forward, and he never has enough people. It's a natural of the R&D organization and service business. I run a large R&D organization, in the product companies, it's a little bit more attention there. Grid Dynamics has a big hybrid of the world. We are very respectful R&D organization. So we tend to take some of the projects and accelerate their evolution to the release. So we even had a little bit of a program management feature on all this AI generative stuff, on innovative cloud accelerators. We have a ton of partnerships. We're adding some of those features to our partners. So I think that those things are addressing number two. Number three is something right, nobody wants to talk about, right? It's the old philosophy of one, two, three, right, or A, B, C. We looked at our capability and capacity. And we add some people to the training and the new technologies, especially the young folks because we're continuing to invest into the internship program. But there is some people, we need to and that usually happens through very careful analytical process and it's continuous process. So I would not say it's an accelerator or something special, but that machine works in a full on all these directions, I just described to you.

Okay, thanks for the detail.

Thank you, Bryan. Next question comes from Ryan Potter from Citi. Please go ahead.

Hi, thanks for taking my question. I want to start on the banking turmoil that was seen towards the end of the quarter. I know you've mentioned, or you had in your slides in the past that Silicon Valley Bank was a client. So I guess, has there been any like direct headwinds from the banking terminal obviously across Silicon Bank or any other banks? And do you expect any secondary impacts to show up in any of your other client verticals from that banking turmoil?

Well, I'm not sure of the message about Silicon Valley Bank. We have a 10 full guys working there. It's so immaterial. I didn't even for a second. I was wondering where you're asking me about, yes, we have a few people there. They're still there. And we have a small project which is going on, we're not going to get into details on this business. It's a very innovative, very strategic visionary in the Bay area, but we have over grown Bay area from a very long time ago, right? So from the priorities of growing business, we are now in the much larger banking and wealth management and fintech companies, and you probably know one of them, you're sitting there. And we are really into the global situation. Now I'm not going to be an oracle of what's going to happen with regional banking because we have no business there. But my personal opinion is what you see with the banking system, which you see with the Federal Reserve, what you see with other things, it's again, this jittering, to some extent, some maybe more as a rumor driven than effect driven, which kind of affects other customers. So some of the, I would say, sooner recession fears are been going on for too long, people just nervous.

Got it. Thanks. I guess just shifting to some of your sales success. Can you guys agree how much of your growth in 1Q is coming from some of your recent logos that you won versus existing clients and also what's embedded in 2Q versus like new clients versus existing clients and how that compares to what you've normally seen in the past in terms of your growth algorithm?

Well, there's a lot of questions in one question. Okay. Let me dissect that. So first, on the growth on the new clients versus existing clients. If you noticed in my prepared remarks, I mentioned five, 10, 20. So Ryan, that's not unreasonable to focus on that right now. We've always given people, our own teams a year to grow to about $2 million business. We see that ramp up as fast. So that's why this kind of call it five, 10, 20 is becoming more a mantra for the business. So yes, recently acquired businesses tend to grow faster. So that's one of the key observations that's different from, I would say, a few years ago. More acquired new businesses tend to be more strategic in terms of their needs. Remember, our strategy of over years, and you've been part of it, was talking about land and expand. We don't talk about that much anymore because we're not lending. We're getting into the agreements with the projects from the beginning. So that's kind of what things. But I think you asked a couple more things. So if you be kind to just add one because at the end of your question, you asked something else as well.

No, I think you covered it. It's mostly just how much growth is coming from new clients versus existing clients now versus what you've historically seen in terms of your revenue growth?

Yes. So I will comment on that a little bit as well. There is more growth in new accounts. There are some of the existing accounts continue to grow, but many of them right now are in this variable stage. So it's kind of up and down. But if you trend with the newer acquired business, the acceleration is more pronounced.

Got it, thanks.

Thanks for your questions, Ryan. Next question comes from Kate Kronstein from William Blair. Your line is open.

Thanks for taking my questions. My first question was on the pickup in bench this quarter. Was that expected? Or did that come as a surprise? Can you dive into that a little bit?

Maybe Anil will answer because we don't have a pickup on bench. I don't know where that comes from. Anil?

So I think, Kate, you must be referring to my comments, right, when we talked about as we went from Q4 to Q1, right? Yes. So there are a couple of things also going on there. And let me take that question from a gross margin point of view, perhaps that's where you're going with that. So historically, if you look at the last couple of years, right, as you go from Q4 to Q1, you might have seen some of that, right? In Q1, we're retaining some of our engineering resources. There's a little bit of a transition going out. And as Leonard pointed out, we worked through some of our non-engineering headcount, too. So there was a little bit some of these interplays work through this resulting in some of that margin pressure. Now as we go into Q2, we get into a slightly different part. As in the course of the year, you see historically, when you look at our margin trends, they move up on the upward trend. And you'll see that trend as we go in the course of the year.

Okay. So it's more margin than a bench hit. Okay, it makes sense. Thank you.

Great. Thank you, Anil. That's helpful. And then my second question is just on India in general, it's grown pretty significantly over the past few quarters and the two recent acquisitions only expand that. How are you guys managing that scale? And then what is the long-term value proposition for your operations there?

Okay. Well, that was kind of debated and discussed in the past quarters quite significantly. So of course, it's a growth. We had no people in India a year ago. So we grew infinite number of percentage points. It's still in a relatively small organization. When you look at the way how we operate in India region, it's the same business model. Delivery management, have operational management. We have recruited all the staffing is done. What benefited us from making those two acquisitions, we were able to inherit some additional experience management. So it's not just the headcount, engineering and not just accounts, even though if somebody would ask me a question, so what's so good about next year, we'll keep focusing on India. These guys bring us more into the life science and the medical field as well as the manufacturer. So there is all this. But also the purely good operational experts in delivery and organization. So we need to grow purely organically a bit of a hit and miss. We are very comfortable we're poised for growth. We're adding more staffing. And one more notable thing, we started with Hyderabad as our core organization. We continue to grow it. We mentioned in our remarks that Chennai will become the second growth of the company. Again, for a reason, I worked with the guys from IIT Madras for a quarter of a century. It's an excellent position for automotive business, which will grow for industrialization. But we also have some people with smaller groups, but also in hand in Bangalore. So I think a year from now, when we look again on our business positioning, it will be a very substantial portion of our company growth and will truly be to the definition of Follow the Sun strategy where all three regions will be all adequately positioned for taking the job around the clock.

Okay, great. Thank you both.

Thank you.

Thank you, Kate. Ladies and gentlemen, that will be all of the Q&A session for today. I will now pass the call back to Leonard for the closing comments.

Thank you, everybody for joining us on the call today. As our first quarter results highlighted, we continue to successfully execute our stated goals. With a strong technical foundation and flawless delivery, our values resonate strongly with our clients. I believe 2023 is a difficult year for the company as we come out stronger from the current economic cycle. We have operationalized our GigaCube initiative, have a clear path toward our stated goal of becoming a $1 billion revenue company in the future. I look forward to giving you a business update in August. Thank you.