Good afternoon, everyone. Welcome to Grid Dynamics' First Quarter 2024 Earnings Conference Call. I'm Cary Savas, Director of Branding and Communications. At this time, our 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 to your questions. Please note that 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 our financial outlook, and the answers to some of your questions. Such statements are subject to the risks and uncertainty 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 the information I just described in the Investor Relations section of our website. I now turn the call over to Leonard, our CEO.

Thank you, Cary. Good afternoon, everyone and thank you for joining us today. As you have seen from our published results, Grid Dynamics' first quarter revenues were above our guidance range and we exceeded Wall Street expectations both on revenue and non-GAAP EBITDA. It was another quarter of solid execution. Our results clearly show that our focus is steadily paying off and we continue to move forward our stated goals of revenue growth and profitability. During the first quarter, we witnessed improving demand trends across the majority of our customers. While the demand environment is not back to support growth level that we and digital transformation industry have seen, science point out to the right direction. Customers are increasingly willing to engage with us on their crucial and time sensitive programs and share their outlooks and roadmaps. In the first quarter, we witnessed a significant milestone. We've reached the highest number of billable engineers in the company's history. And this is also reflected in the revenue outlook for the second quarter. During the first quarter, we also secured 2 multimillion dollar deals with enterprise customers, one of them a market leader in the specialty retail vertical and the other one is in insurance vertical, a key focus area of our GigaCube strategy. We continue to make progress in our joint go to market efforts with our partners. Partnerships contribution is at all time high. And it has increased by more than 20% in comparison to the fourth quarter of 2023. We continue to be very positive on our partnerships and expect continued contribution. I'm also happy to announce that we were recognized by the Everest Group as a leader in its Inaugural Google Cloud Services Specialists, which is PEAK Matrix Assessments report. This achievement validates our capabilities as a specialist…

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenue of $79.8 million was ahead of our guidance range of $77 million to $79 million and exceeded Wall Street expectations. On a sequential basis, our revenue grew 2.2% and remained flat on a year-over-year basis. While we witnessed growth for multiple customers across every industry vertical, our finance and other verticals were the strongest, both on a year-over-year basis and sequential growth basis. During the first quarter, our retail and TMT were the 2 largest verticals at 30.9% and 30.1% of our revenues respectively. Our retail vertical remained flat on a sequential basis and decreased by 3% on a year-over-year basis. On a sequential basis, we witnessed growth from specialty retail. TMT remained flat on a sequential basis and decreased by 10.4% on a year-over-year basis. Coming to our largest customer in our TMT vertical, it grew both on a sequential and year-over-year basis. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 12% of our revenue in the first quarter, a decrease of 1.2% on a sequential basis and 24.4% on a year-over-year basis. On a sequential basis, our largest CPG customer grew in the quarter and this was offset by decrease in other customers. The financial vertical represented 12.8% of revenue, an increase of 23.7% on a sequential basis, and 57.2% on a year-over-year basis. During the quarter, we witnessed growth across most of our customers that range from financial, technology, banking and insurance. Our newly disaggregated healthcare and pharma represented 3.8% of our revenue, showed a decline of 10.5% on a sequential basis and 4.5% decrease on a year-over-year basis. And finally, the other vertical represented 10.4% of our first quarter revenue was up 4.5% on a sequential basis and 50.1%…

Hello, everyone. As we go through the Q&A session of this call, I will first announce your name. At that point, please unmute your mic and turn on your camera. Our first question today comes from Puneet Jain of JPMorgan. Puneet, the line is open. Go ahead, please.

And a really nice set of results here. So let me ask what drove the upside relative to the guidance? You grew sequentially in first quarter and then expect growth in the second quarter as well. What drove those positive trends given many data points such as the continued sluggishness in the spending environment in this industry?

Good to having you on our call. Well, it didn't come as a surprise to us. As you recall, at the end of the report last time when we talked about the results of 2023, I kind of hinted that the continued growth is going to happen. So I'm still bullish not only on guidance for Q2, but subsequent growth as we go forward. We'll be happy to discuss some of those subtleties. But ultimately, what Grid Dynamics really sees is that despite continuous scrutiny around the budgets from the major global companies, there is a demand for institutionalize the additional technology spendings. So if you look at the last 18 months, a lot of companies clamped down all the spendings. Now we see the opening comes to basically innovate and generate more competitive advantages by stepping up into the unique area relates to the data management, machine learning, obviously, some AI modules. But more important, this whole comprehensive question, how to tie the business value with a predictable nature of the digital side of the business. So that's why we see kind of notable examples of the clients who started with us in 2023 or even more stable clients who've been with us for a longer time now have projection of the budgets for extended period of time with Grid Dynamics as part of their journey. The other thing which we mentioned in the remarks that we see that some of the reduction of the preferred suppliers started paying some dividends to Grid Dynamics, staying on the kind of a cutting edge of work with the clients, relentlessly pushing the proposals of tying technology and business goals. And again, they're paying off because we are being awarded with a longer-term business to come.

And Puneet, building up on your comment on where did all the upside come, I think the way we could characterize this, when we met you guys in late February, we have a certain outlook. And as the time evolved and as the business evolved, we see improvements across. So while I would say that we saw it more widespread relative to what our expectations were. Obviously, that has showed up in the results.

Yes. No, it's great. Like it's just -- like I was just curious because the upside or the positive trend seemed different from many other companies that have reported in this results. Let me ask longer term, like so beyond this years, we get a lot of questions from investors about AI headwinds, like that AI creates opportunities to be more productive in coding efforts. How should we think about new normal growth for the sector given increasing AI adoption?

Well, obviously, this question comes back every time we discuss not only with investors but more notably with the clients, right? At this moment, the choice of the models, platforms, copilots, still remain very broad. And as we have been engaging in as you know, well, Grid Dynamics in open source solutions, together with the more traditional models, we explore multiple venues. We work with the clients who understand and appreciate Microsoft stack or for that matter, the AWS. We -- obviously, we retied with the partnership with Google in multiple fronts. But even the others, like, for example, the Meta version of the open source product like Llama, we apply our general broader knowledge of what we believe is the right for the customer, including their own capabilities, their own models, the trainability of those models, the specialization of domains and basically verticalize the proposals where we test those models and expand across the technical capabilities on a horizontal slice. So it's a disruptive world. And one of the good things for Grid Dynamics, if you look at our 18 years of history, we strive in a disruption time. This is where we're talking about not just peers; we're talking about this world of innovation. Everybody talks about it, but when it comes to the clients, they just -- they don't want to just clarity. They want to arise. And that goes way beyond the white papers and hypotheses. You need to work with them diligently to see how their attempts to build in systems actually convert into the proven results because the variances are still large. So I would believe that we are at the forefront of those innovations, not mentioning the partnership. We have the key players, not only the hyperscalers, but actually the leaders in AI space including hardware.

The next question goes to Mayank Tandon at Needham.

Let me start with a question on the guidance. So Anil, if I take the top end of the guidance, that assumes a nice acceleration sequentially. Just building off that, should we expect further acceleration in the back half? I know you're not giving formal guidance, but just maybe anecdotally or qualitatively, any color on what you're hearing from clients? Is this sustained acceleration or are we still sort of in this uneven climate where it's a little bit hard to predict?

So Mayank, let me give the official answer and Leonard will jump into more qualitative. Look, we do one quarter at a time, right? In Leonard's prepared remarks, he made some comments, right? And again, if you look at the trends over the last couple of quarters, it's very consistent with what we are doing. I don't want to say anything beyond our guidance in Q2. But fair to say we are positive for 2024. But Leonard, I'll let you talk about maybe a little bit more on that.

So Mayank, it's always the weight is on my shoulders. So I'll -- let me tell you this. We continue to hire and expand. The headcount you see right now doesn't fully reflect the growth because we were able to optimize the headcount toward -- gearing toward new demand. So if you look at the number of billable headcount, which is constantly growing and growing week after week, I just got new results of April, right? So it all looks good. We are basically applying some of the productivity tools internally to make sure we can reach to a broader audience of engineers, to reach the goals internal capabilities, and that includes all 3 main facets. The internship program, Grid University and Grid Lab. So on a supply side, we're fully prepared for growth. On the demand side, look, I'm bullish beyond Q2. That's very clear. Now when I gave a guidance in February that it's going to be the record quarter, that kind of fills in the range. So without speaking, you may get some conclusions where we're going to be. Again, we're only in the first month. So we are comfortable with our guidance, right? And if we go further, I believe we will crush the market from our capabilities. Now whether we're going to crush the market from the numbers, that would take a little time. But some people were questioning why I was not smiling last couple of quarters. Now you got my smile. So that's probably the best indication where our technology capability is geared toward to our business.

Then I have a quick follow-up. Anil, I wanted to ask you about margins. If I look at gross margins, this is probably the lowest that we've seen at least in recent history. Could you sort of square that with where utilization is, pricing conversations? What's driving that? And if demand does start to improve, should we expect margins to follow suit?

So coming to your second part, the answer is yes, right? There is leverage in the model. Now without going through all the numbers and finer details, there are many moving parts to it. There's an FX impact also as we have some of these costs that was a headwind. And you know over the last 12 months what is going on across the industry, right, across our evolution. That has had some impacts, and you're seeing that. And more importantly, Q1 tends to be seasonally a quarter where you have some of the payroll-related issues, employee-related taxes hit us. So every year, you see that, obviously, with the revenue trends being the way they are, you see a little bit more, I would say, a little bit more on the margin front pressures in Q1. But again, as the year evolves and you can see this even with our guidance, we will move in the right direction. Again, from a long term, our model has not changed, but we'll just have to work through it over the next couple of quarters.

Mayank, do you want more details or you're okay with the answer? So if you do want more details, the thing is Central Europe is more expensive than Eastern Europe. Everybody knows it. It's well known secret. So as we grow our position in Poland and other countries around the region, obviously, there was a penalty associated with the incremental cost. We added the variance in the Mexico. We had inflated peso situation. But the key resolution for our business, obviously, with the growth of India, that's where we believe our marginality is evidently improving. But there is another thing, it's we're actually striving right now for a significant improvement of the marginality in Europe as well. Now we have a broader country with more stable workforce. Sadly, now, the war in Ukraine continues to ravage, but we are reducing our dependency and we'll continue to invest into the more, what I call, stable territories. So I would say that seasonality, which Anil told you about reflects our current status quo. I believe, in Q2, we will see some pick up. But also, to me, this 2040 model, even though it seems quite remote right now, the revenue will need to demonstrate our catch-up on the margin, not adversely planted. We are not intending to buy the business because technology is so critical, then the value of what we do has to propagate to the results, right? So as revenue grows, I see the margin improvement. The other part of this, not only in the margin or EBITDA side, we have not lowered our technology investment, which, again, it's a trade-off. You need to persevere the flatness, which was quite long. So we're bullish, but the numbers will tell you the true story.

Great job on the quarter.

Thank you, Mayank.

The next question comes from Bryan Bergin of Cowen. Bryan, the line is open. Please go ahead.

Zack Ajzenman on for Bryan. First question on demand. Are you comfortable that historic large clients that have caused pressure in the recent past are at least stable here, offering that foundation for growth reacceleration as new enterprise logos, one over the next last 12 months continue to scale?

All right. Let me take the first part. I think Anil will go to the second part. There is no evidence today of any large customer declining with Grid Dynamics. We're in April, we kind of understand the trend of this year. Knock on the wood and things do happen. But it's stable to positive. So we'll continue to generate the new enterprise clients. Well, have you noticed, we did reduce a bit of those smaller clients in the commercial side because there is a dichotomy that goes on, survival of the fittest. So some of the small guys are actually struggling with their innovation and funding. But nevertheless, we expand the market, too. So if you look at our growth, it goes not just traditionally with the CPG and retail, but it's also expanding quite a bit into the fintech part of the BFSI player are gaining momentum in the life science supply chain. We got our first good step into the insurance business, and it happens on a stable to positive foundation of our major lead clients.

So Zack, building upon that, I'll just reiterate it slightly different. Your observation is astute and right on. If you look at our second quarter guidance, we're reverting to year-over-year growth right after that trend has reversed after a couple of quarters. And the underlying trends point that out very well, both in terms of existing and new ones. New clients were always good for us, right? The existing clients moved the needle for us, and that is changing now.

And then the follow-up on GenAI. Obviously, interest here continues to swell. We've also heard anecdotes that it has impacted the pace of client decision-making as customers try to figure out what to do with the technology. If you're seeing this, what do you think needs to happen for this trend to loosen up?

Very loaded question. I can get you entertained with having this distinguished CFO answering. Fun for me to watch. So I mentioned in the first remarks when we talked with Puneet that Grid Dynamics goes very broad. And the benefits Grid Dynamics sometimes are not trivial from the purely direct savings. So we have one of the very large legal customer. And when they're doing a lot of simplification of the work. Time will tell how good the savings will be. We implemented a big portion of the work with the financial wealth management plan, but they're a enterprise type of solution. When it comes to purely Generative AI, it's almost anecdotal right now, which projects will combine some of the work from the communicational part, right? So there are many things Grid Dynamics has done in the past. We did natural language process vector search. We're doing all kind of features now enabled by AI. So I would say that to be very precise, the scale of the result with the model has been more solidified with the bespoke custom solutions are becoming more evident. But if you use a generic model without proper understanding of the ways, then people may not see all the results right away.

Our next question comes from Josh Siegler at Cantor Fitzgerald. Josh, the line is open, please proceed.

First and foremost, congratulations on the strong results here. I was wondering if you could dive a little bit deeper into new geographies that you're particularly excited about as you progress through the year from a demand perspective.

Well, as a demand, U.S. market remains to be the most critical for us. So there's no question about it. If you look even at Center of Gravitas, we are actually scaling our technical competence centers beyond Bay area. We're zeroed in on Dallas for a while. We're getting our office and capabilities in Atlanta area. We are very strongly present in Jersey, Boston expansion. And of course, Midwest as well as not only the California but also Arizona following the trend of the expansion of some of our clients as well as the trend of the stacks on the software side driven by the major hardware companies. So it's a revolutionized technology in the U.S. where we are stronger. So that's very clear. Saying that Europe is starting to pay some dividends. It's a bit below my ambitions yet in terms of the growth in Europe, but we see that the traction in Europe and the first wins come outside of our traditional retail sense. And I'm not talking about small deals. I'm talking about consistent growth. And we see that pick up in manufacturing. We see that pick up in growing and approaching automotive industrial part. And outside of these 2 regions, we have, I would say, the first, I would say, discussions; it's not tangible yet. But the big part of our growth engagement happened with our clients, both United States and European captive centers in India. So India has become our revenue growth through the influence of the local innovative technology centers, which are part of the global companies. We just announced hiring of our Head of India as well. So I would say there's a brushstrokes; that's how I see the demand environment regionally.

And then I was also curious, I probably ask this far too often, but would love to get a better understanding for how you're thinking about M&A currently? If there's been any shift in terms of your perspective on inorganic growth since last we talked.

Okay. Anil?

You see M&A at the end of the day is when we announced, we announced that the proof is in the pudding when we have. If you look at the pipeline, if you look at the activity, it continues to be robust. If I look back at the last, call it, 7, 8 months, and we did a little bit of analysis what is going on in our M&A. We would have liked to announce a couple of deals before. We see certain trends, whether it is through some of non-strategics who are willing to maybe be a little bit more aggressive. We see -- in many cases, we're very -- our standards are very high which means that unless we really feel that there's a strategic fit, capability fit, we're just not going to do it. And more importantly, in the last 12 months, as Leonard pointed out, we did not buy revenues. So we're not going to be using that as an excuse. We really want to ensure that we get the fit. At this stage, as I said, the pipeline is there. We will announce when we have to announce. But as I said, the proof is in the pudding these things come.

Our next question comes from Ryan Potter of Citigroup. The line is open. Go ahead, Ryan.

You mentioned in your prepared remarks some of the successes you've had with some of your larger enterprise lines in terms of earning wallet share. What do you believe are some of the drivers of this success? Do you believe it's solely based on your capability that you're continuing to take share or do you believe since clients are also turning to more because of your more global delivery model with your follow the sun approach?

It's a bit of both. We definitely see the turnaround of the customers, as I mentioned earlier, in one of those Q&A discussion that our clients need to invest in innovation. So that's kind of a demand driven from that. But on the other hand, is those smaller projects on the technology side, AI, still digital, some of the migration partnerships, enhancing their features, their implementation parts have been proven successfully. So when it comes to the budgeting innovation, it's very hard. At the same time, if nothing else, that's Q1 is for. Remember, in the old time, it was a Q4 deal, right? People kind of start defining their budgets in Q4. Now it's happening more in Q1 time frame, which has kind of worked with kind of tail of some of the proof of concepts and the small innovation project from us because those models and the expansion of the tools related to technology actually works very well. And I would say that at least 6 or 7 clients, they actually created this demand for innovation. And then you have to be, in some cases, a bit more proactive. In some cases, you participate in the bids. But more important than not, the technical leaders of the clients look at us from the history of the recent engagements to understand what we suggest. So things are converting. And this may not be a very straight answer to the question you asked, but just to summarize it, it's both, client wants more and we offer more. And that combination helps us to stay on a growth trajectory.

You touched a couple of times on the finance vertical? In particular, you saw pretty strong growth there in the quarter. So obviously, could you comment on some of the drivers of the success you're seeing there? Is it with certain types of clients, certain types of projects and then kind of the opportunity you see in that vertical going forward?

Yes. So it's a fintech to the larger size of the growth. And as you know, Grid Dynamics still has a certain scope of the strategic clients. So they are not infinite. So -- but they're very formidable. So and a few of them, we see that continued growth and actually, to some extent, exponential growth. Now we're reaching, I would say, critical mass. And why? We're not like -- we're not creating a new fintech models, right? We just work on the projects and we combine the open source capability with a partnership, which will continue to expand on their specialized tools, which based on our internal development allows us to offer the PODs. So the teams of people who are basically driving not just innovation, but given ROI successes. And that actually turns as a result in a scalable revenue. So the fintech is by far is the biggest impact, and it will continue for the foreseeable future. The other area, which I like, again, it's less evident from the numbers, but it start creeping up. It's a wealth management and a broader sales. In the broader sales, because, as you know, the more and more people are kind of putting money into the various investments and technology drives its automation beyond belief, right? So many, many things go beyond the advisers who have only so much capacity. So as a whole industry, it's going through the breakthrough innovation. It's a little bit too early to talk about insurance or our contribution to insurance, but it's another lag of the growth we see. So fintech, wealth management, insurances.

The next question is from Maggie Nolan.

You continue to have nice new logo additions. I was curious about the pace of conversion to revenue? Are there any patterns in either delays in the conversion or a pick up in the conversion time for new logos or any bookings across your client base.

So in Q1, there was a pick up. Every quarter, we're talking about trade-offs between acquiring new clients and then potentially may be tightening the budget with existing clients, right? When we have more stable platform of the existing clients, the pick ups are more honorable because we can actually double down on a work with these guys without firefighting on an existing logo front. Now it doesn't mean we reduce an eye on the existing clients. It's just because it's more predictable process. So we have more capabilities on the technology side. We have a better approach again, with our own AI tools for the hiring. So that we are bringing people on board and train them much faster pace than ever and retain, by the way, as well. And we also -- so we can scale more. And we also have the reputation, which helps us with some of the new clients through obviously, referrals. That's always the big thing. The other one through the -- our marketing, I would say, technical marketing. And the third one through our partnerships. So if you look at the scale, rate of growth, and of course, in each of those channels, it's a bit different propagation. But the traditional land-and-expand model are going from innovation projects to the scalable business, a bit improved and now some of those projects scale virtually from the get go.

And Maggie, adding one point, if you recall in Leonard's prepared remarks, he talked about some large deals, right? And some of this was even with new logos that helped us.

And then it seemed like, to me, the theme of the quarter is maybe stabilization and even slight improvement. So I wanted to double-click on the CPG and manufacturing vertical to better understand the dynamic there on one of maybe the more of the pain points and whether or not you expect that trend to continue from here.

So as you know, over the last couple of quarters, CPG vertical had a certain cadence of growth driven by some of our larger CPG. What we are seeing there is there are many moving parts, but the good news is that, #1, one of our largest CPG has not only stabilized but has reverted in growth in the quarter. And obviously, that has -- aiding to that, we've had a couple of other logos. How it plays out every 90 days, every vertical, as you know, Maggie, depends right? I mean -- but it's fair to say CPG, manufacturing, like the rest of the industry, things have stabilized and we are more positive.

Yes. I don't know why both guys use the word stabilization and some of the numbers go up and down, but it's a tremendous upside. I mean the logos we just acquired, for example, from that particular field, they not only go from get-go, but the tasks are extremely ambitious. So I think if you look at, for example, January, February, they may kind of a bit mask the dynamics. But I see that this whole spectrum of the CPG clients are expanding. Now manufacturing, I agree with you. We're not stable yet. So I would actually separate those 2 things. So CPG, shutting up quite a bit and some of those big industrial guys. Manufacturing, I think we have work to do for Q2 and more. So I'm very, very bullish on CPGs and manufacturing, we have work to do.

Ladies and gentlemen, this concludes the Q&A session for today's call. I will now pass the call back to Leonard, our CEO, for closing comments.

Thank you, everybody, for joining us on today's call. Our first quarter results continue the theme we highlighted in the past, steady improvement in our business. While the current economic uncertainties cannot be overlooked, we're highly focused on execution and wallet share at our new and existing customers. The rise of AI and the paradigm shift in the way enterprises use technology to leapfrog from their current levels requires to work with a competent partner. Our capabilities, history of solving complex business problems with technology and our track record of making positive effects to our customers positions Grid Dynamics well. Our future looks bright, and I look forward to share all the exciting news in the next earnings call. Thank you.