Grid Dynamics Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 8 speakers on the call.

Operator

Good afternoon, everyone. Welcome to Gridynamic's 2nd 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 Licious and CFO, Anil Doravla.

Operator

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 the answers to some of your questions. Such statements are subject to the risks and the uncertainty as described in the company's earnings release and other filings with the SEC.

Operator

During this call, We will discuss certain non GAAP measures of our performance. GAAP to non GAAP financial reconciliations and supplemental financial information provided in the earnings press release and the 8 ks filed with the SEC. You can find all the information I have just described in the Investor Relations section of

Speaker 1

our website.

Operator

With that, I will now turn the call over to Leonard, our CEO.

Speaker 1

Thank you, Ben. Good afternoon, everyone, and thank you for joining us today. As you have seen from our published results, Gridynamics' 2nd quarter revenue was in our guidance range and non GAAP EBITDA significantly exceeded expectations. Also, on a GAAP basis, we achieved record net income since becoming a public company. Our results are commendable and reflect the company's unrelentance commitment to our clients.

Speaker 1

There were some noteworthy trends, Including strong new logo wins, meaningful contributions from logos that we won over the past couple of quarters and deeper relationships with our partnership ecosystem. This has been a recurring theme for the past several quarters And reflect the strengths of our offering. Additionally, a significant interest and engagement with our clients on artificial intelligence initiatives Continue to positively impact our business. With our GigaCube initiative, we operationalized Many KPIs across the company. On the macro, our opinions have remained unchanged.

Speaker 1

During the quarter, with many of our clients, we witnessed continued recalibration of spending priorities and investments. Also, customers continue to ship projects from higher cost locations to lower cost offshore locations. And this is a plane to our failure as we have a global delivery footprint in locations of choice. During the quarter, we ensured our spending level aligned with the current demand environment and is disciplined paid off with our 2nd quarter profitability. We're also witnessing 3 important trends that lead us to the incrementally positive conclusions.

Speaker 1

These trends are expected to play out in the Q3 too. First, the magnitude of resets across our customers are diminished. 2nd, we're seeing stabilization in business across the majority of our accounts. And finally thirdly, our forms of new engagements, both with the new clients and existing clients are on the rise. This includes enhanced activities with partnerships, Engagements on artificial intelligence and willingness of new logos to work with us on their digital transformation needs.

Speaker 1

While uncertainties persist and it's too early to make any definitive commentary around demand snapback, We believe underlying trends are moving in the right direction, leading us to the incrementally positive view. Yet, we remain conservative in our Q3 outlook. As I highlighted in the past, Coming out of economic cycles, Grid Dynamics is stronger as the company improves to be a reliable partner in delivering our customers' business objectives in an efficient manner. Also, the current economic cycle has provided us a great opportunity to realign is organized according to our GigaCube initiatives. This includes adding new talent across different industry verticals, both in sales and Citi Organizations.

Speaker 1

We're also witnessing great access to high quality talent As our strengths and depreciation became more visible across the industry. Over the past couple of quarters, we have incrementally invested In our engineering resources, we're building new R and D artifacts, accelerators and artificial intelligence capabilities. There are many positive trends with our technology organization. This includes several exciting opportunities with AI. Generative AI has been front and center across a broad range of clients and we are witnessing exponential interest In our enterprise AI solutions, particularly in generative AI, including conversational AI, data harmonization solutions and others.

Speaker 1

We are currently engaged in multiple billable projects and have created a robust portfolio of demos capabilities and solutions. Our R and D organization completed 9 AI project during the quarter and we are currently involved with over 20 enterprise clients. As a reminder, Gridynamics' AI engagements are based on more than 7 years of internal research and successful implementations. With our generative AI offering, we partnered with customers to employ large language models And prompt guided image generation to the application in product design and visualization as well as knowledge retrieval, Wealth Management and Customer Soup. During the quarter, we announced a significant global partnership with Google Cloud to develop and implement innovative generative AI solutions.

Speaker 1

This Partnership will result in incremental customer wins for Grid Dynamics in the second half of twenty twenty three and beyond. Also, this partnership is a reflection of Grid Dynamics' position as an industry leader in AI. GreetDynamics will leverage Google Cloud Vertex AI, a platform that incorporates powerful foundational large language models and advanced image generation capabilities. In this partnership, we expect to significantly accelerate and Innovative AI solutions across the financial services and insurance, manufacturing and life science pharma industries. On the Giga Cube initiative, we continue to make progress.

Speaker 1

As you know, Giga Cube is a strategic blueprint that lays out a framework For our company to over $1,000,000,000 revenue. It is in most all parts of organization that includes sales, R and D, marketing operations As well as M and A. We made some exciting additions to our team. This includes a senior sales leader and specialist sales executive across automotive, pharma and insurance. These additions will accelerate our new industrial vertical penetration highlighted in our GearCube initiatives.

Speaker 1

In the quarter, There were several notable trends, and I would like to share with you some of them. Local momentum. In the Q2, we signed 9 large enterprise clients. This brings the new enterprise logos added in 2023 total to 18. Additionally, we added new customers from our recent acquisitions.

Speaker 1

We believe Q2 client acquisition It's a further testament to our competency and the confidence for large global enterprises to sign up with Grid Dynamics in the current environment. Some of the most notable ones to mention include a leading digital payment service company, a global consumer healthcare company, A global athletic wear company, a global hotel and hospitality chain and a North American art and craft change. We're very proud of our achievements and this is a testament of our differentiation in value going to our customers. Delivery allocation support. Moving to our delivery operations.

Speaker 1

Our execution remains flawless. At some more recent logo wins, we were able to quickly put together and ramp up dedicated teams across our global delivery locations. Additionally, our integration with Nexphere and Mutual Mobile is in a full swing and have started to implement synergies across engineering, operations and other back end function. Today, our customers have a choice of over a dozen countries Across North America, Central Europe and India, Follow the Sound strategy enables our clients to be served In an interrupting fashion, around the clock. Clients support our geographic diversification and change our locations for engineering support.

Speaker 1

European Business. During the quarter, we made good progress in expanding our footprint across industry verticals with our European clients. As a global specialty automotive part company, we're implementing a major composable commerce modernization platform. At another global automotive and tire company, we're involved in a significant digital transformation initiative Thank you, automotive tire wear and tear predictive maintenance using data engineering and analytics. With artificial intelligence, We also engaged with a high end apparel company in Netherlands in our domaining process description using product attributes and images.

Speaker 1

And finally, with European based global truck manufacturer, we are starting a project to modernize deal management system in the very near future. Partnerships. They will continue to be an important part of our growth and have become a significant contributor to lead generation. In addition to the generative AI partnership with Google Cloud We spoke a few minutes ago. We're also working with many of our clients across industry verticals as they move from advanced to real world business transformation solutions.

Speaker 1

Our relationship with Microsoft Azure and AWS are expanding in the future. Gridynamics has been recognized for its advanced specialization by Microsoft, which earned us the membership of Microsoft Azure Migration and Modernization Program. Additionally, we continue to invest in growing number of independence of vendor partnerships In supply chain, digital experience, marketing and commerce domains, we're expecting and enhancing The value we delivered across the entire C suite. We are engaging with Chief Operating Officer, Chief Market Officer, Chief Product Officer Hi, Malabarz. M and A.

Speaker 1

With M and A, the integration of our acquisition of NexSphere Technologies, which we acquired on April 18, 2023 is working well. To remind you, this acquisition strengthens our presence in strategic verticals such as healthcare, fintech and manufacturing. I'm happy to report that in the short time of 3 plus months, We were able to integrate the operational backend functions. Additionally, we're able to relocate the employees in HydroVet to the new Constructed Gridynamics office. We also have an office in Chennai as well.

Speaker 1

We are currently working on a business development synergies and expect to start cross selling across our customer base in the next couple of quarters. Beyond our recent acquisitions, The pipeline for M and A opportunities is robust. We're actively working on multiple opportunities and we'll be happy to provide updates as the time becomes, sorry. As a reminder, our M and A focuses on capabilities, key clients and delivery locations. During the quarter, Gredynamics delivered some notable projects.

Speaker 1

As a renowned financial services and wealth management firm, We're piloting an innovative AI based knowledge management platform. This platform offers Thousands of financial advisors with direct access to the firm's best enterprise data via natural languages. Leveraging retrieval augmented duration technology and leading large language models, The platform will improve productivity of financial advisors and help them to create highly personalized updates and offerings to their clients. We're a leading global technology company. We successfully executed a massive migration of user segmentation pipelines to a new cloud data platform.

Speaker 1

These pipelines play crucial role In processing an extensive range of data signals encompassing diverse aspects such as user demographics, spending deciles, Usage frequencies and more. This solution ensures better scalability to address Growing amounts of data and fault tolerance. At a prominent membership only chain, We modernized their mobile app to enable and enhance better security, frictionless payments and user experience. The effort resulted in an increase in the browse to pay conversion And substantially reduced the uninstall rate by a factor of 7x. Currently, the mobile app Serving tens of millions of shoppers in the United States.

Speaker 1

For a major CPG brand, We delivered a solution that significantly shortened checkout time in their physical stores even for orders with many small items. It uses existing security tags to scan shopping bags and requires minimum modification to their store layout or POS hardware. Once deployed across the clients' 900 plus stores, has potential to significantly decrease labor costs and increase customer service. With that, let me turn the call over to Anil, who will discuss Q2 results in more detail. Anew?

Speaker 2

Thanks, Leonard. Good afternoon, everyone. Our Q2 revenue of $77,300,000 was within our guidance range of $76,000,000 to $78,000,000 that we provided to you all in our earnings call in May and reiterated it on June 6. On a year over year basis, Both on a reported and constant currency, the growth was flat as the impacts of currency movements were negligible. On a sequential basis, our revenue declined by 3.4%.

Speaker 2

During the quarter, we witnessed headwinds from some of our customers as they continue to rationalize the spending levels. During the quarter, new global revenues contributions offset macro driven caution from others. During the 2nd quarter, retail, Our largest vertical representing 33.7 percent of our revenues increased by 2.5% on a sequential basis and grew 2.3% on a year over year basis. Within the retail vertical, on a sequential basis, we witnessed growth from areas such as home improvement, Department Stores and Specialty Retail. TMT, our largest 2nd largest vertical represented 31.2% Our Q2 revenues decreased by 10% on a sequential basis and grew 3% on a sequential basis.

Speaker 2

On a sequential basis, we witnessed continued caution At some of our large TMT customers, this was offset by growth both from existing and new logos. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 14.1% of our revenue In the Q2, a decrease of 14% on a sequential basis and 32.4% on a year over year basis. The decline on a sequential and year over year basis came from some of our large customers as they readjusted their spending levels to the current macro environment. The finance vertical represented 8.7% of revenues, an increase of 3.6% on a sequential basis and 33.7% on a year over year basis.

Speaker 2

The growth in the quarter Came from a combination of financial technology customers as well as new logos. And finally, other segment represented 12.3% of our 2nd quarter revenue And was up 10.1% on a sequential basis. The strong sequential growth was driven by growth in our healthcare and pharma customers. We exited the 2nd quarter with a total headcount of 3,860 2, up from 3,744 employees In the Q1 of 2023 and up from 3,763 in the Q2 of 2022. The sequential increase of 118 employees or 3.2% was largely due to our recent acquisition of Nexvir technologies which we acquired in April.

Speaker 2

At the end of the Q2 of 2023, our Total U. S. Headcount was 317 or 8.2 percent of the company's total headcount. This remained on the same level compared to 8.1 percent in the Q1 of 2023 and slightly decreased from 8.7% in the year ago quarter. The year over year Slight decline as a percentage of total revenue was largely driven by growth at our offshore locations resulting in greater mix of non U.

Speaker 2

S. Headcount. Our non U. S. Headcount located in Central Eastern Europe, India, UK, the Netherlands, and other locations was 3,005 or 45 or 91.8%.

Speaker 2

In the 2nd quarter, revenues from our top five And top 10 customers were 37.6% and 56.6%, respectively, versus 44.2% and 60.2% in the same period a year ago, respectively. During the quarter, we had a total of 2 16 customers, Down from 220 in the Q1 of 2023 and up from 208 in the year ago quarter. The decline in customers on a sequential basis was largely from our commercial business, which focuses on smaller customers. During the quarter, we signed 9 new logos from our enterprise business. Moving to the income statement, Our GAAP gross profit during the quarter was $28,300,000 or 36.6 percent versus $28,600,000 or 35.7% in the Q1 of 2023 and down from $28,900,000 or 37.3% in the year ago quarter.

Speaker 2

On a non GAAP basis, our gross margin was $28,800,000 or 37.3 percent versus 29,000,000 or 36.3% in the Q1 of 2023 and down from $29,100,000 or 37.7% in the year ago quarter. The increase in gross margin as a percentage on a sequential basis, both on a GAAP and non GAAP basis was largely due to higher utilization of engineering resources. Non GAAP EBITDA during the Q2 that excluded Stock based compensation, depreciation and amortization, restructuring and expenses related to geographic reorganizations, Transaction and other related costs was $12,000,000 or 15.5 percent, up from $10,800,000 or 13.5% in the Q1 of 2023 and down from $13,300,000 or 17.2% in the year ago quarter. The sequential increase in non GAAP EBITDA was largely due to a combination of higher levels of gross margin as a percentage compared with lower operating expenses. On a year over year basis, the decline in non GAAP EBITDA was driven by increase in operating expenses from our recent acquisitions.

Speaker 2

Our GAAP net income in the 2nd quarter totaled 2,600,000 or a $0.03 based on a basic share count of 75,100,000 shares compared to the 1st quarter loss of $8,000,000 or $0.11 based on a basic share count of 74,500,000 and a loss of $13,200,000 or loss of $0.20 per share based on 67,100,000 basic shares in the year ago quarter. The year over year increase in GAAP net income was largely due to lower levels of stock based compensation and significant decrease in geographic reorganization expenses. On a sequential basis, the increase in GAAP net income was largely driven by a reduction in stock based compensation expenses. On a non GAAP basis, in the 2nd quarter, our non GAAP net income was $7,000,000 or $0.09 per share based on 76 Based on 77,100,000 diluted shares and $8,200,000 or total per diluted share based on 69,000,000 diluted shares in the year ago. The increase in non GAAP net income in the 2nd quarter was largely due to higher gross adds and lower operating expense.

Speaker 2

The decrease in the non GAAP net debt year on quarter was largely from higher levels of operating expenses. On June 30, 2023, our cash and cash equivalents totaled $246,200,000 down from $258,400,000 in the Q1 of 2023. The key reason for the decrease on a sequential basis was due to the Allcash acquisition of Mixware Technologies, which was made on April 18. Coming to the 3rd quarter guidance, We expect both revenues and non GAAP EBITDA to be at similar levels to what we guided for Q2 in May. We expect revenues to be in the range of $76,000,000 to $78,000,000 and non GAAP EBITDA to be in the range of $10,000,000 to $11,000,000 For the Q3, we expect our basic share count to be in the 75,000,000 to 76,000,000 range.

Speaker 2

And for diluted share count, we expect it to be in the $78,000,000 to $79,000,000 range. That concludes my prepared remarks. Ben, we are ready to take questions.

Operator

Thank you, Anil. As we go to the Q and A session, I will first announce your name. At this moment, please unmute your line and turn on the camera. Our first question comes from the line of Puneet Jain from JPMorgan. Please go ahead.

Speaker 3

Hey, thanks for taking my question. Leonard, like you talked about like 20 clients who you are providing some sort of AI services, which I believe is out of total of 100 enterprise customers, that would be like 20% of total customers to whom you are providing generative dialysis. So can you talk about what type of services you are providing to those clients in AI? And since some of these customers also outsource to your peers as well, how are you going to win share in AI at those times?

Speaker 1

Thank you, Bill. Well, it's quite a comprehensive question. So thank you for pointing out the percentage. So We're quite proud that we are still in basically at the cradle of AI expansion revolution. We already capture a substantial percentage of our client base.

Speaker 1

So the projects we have started, Some of them actually run from before the AI was defined as a modernization of technologies. We've been knowing of the our own investments in machine learning, data science, Large models, data forming and other features. So now when it kind of becomes More as a part of creating some tangible monetization for the clients, we've seen some trends where we actually participate. 1st and foremost, generative AI, it's only a subset of work we do. Since we Our focus on large enterprises mostly.

Speaker 1

The ultimate definition for us, it's the enterprise artificial intelligence, Which comes with the supply chain of predicted models for the supply and demand, Logistics Travel, the variances of the forecast and others. When it comes to the Well, management financial companies, it's basically accelerating the adjustments which relate to the personal bespoke portfolios. We will talk about medical clients in areas of Pharmaceutical Life Science, this is related to their own models, which help them to accelerate the decision on certain internal critical development And so on and so forth, not to forget about the love at consumer world where most of the work is B2C. So far, I mentioned B2B mostly. In the B2C world, it's a lot of customer consumer behaviors, which are scaling to the Very large amount of the preparation, we anticipate a significant cost savings associated with those business.

Speaker 1

Now in terms of our competition, it's absolutely true. I mean, everybody stands up and say we are the leaders in artificial intelligence. We are taking more modest approach. We're looking at more and more proven cases of the ROIs. In other words, where the customer Financial gains start becoming tangible.

Speaker 1

So we do quite a few forward concepts, but I think one of the key advantage of Gridynamics Since we started this initiative over 7 years ago, some of the fully convertible analytics comes into fruition even as we So we'll continue to update you, Vinit and the team and we look very bullish on expansion in the United States.

Speaker 3

Got it. Thanks for a comprehensive answer as well. So let me ask about new logo contribution. You have talked about in the past 80 85, 10.5 model. So given like the strong client activity, new logo contribution that you are seeing, Is that at a point where you'd expect to be in any normal year, like the new client contribution?

Speaker 3

And I understand the remaining 95% of business is weak, but our new clients are at a point where you would expect Them to be in a normal year?

Speaker 1

Very good question. Very good number. The reality is You know yourself well that some of the traditional clients, which started at the high a year ago, I have reduced the standards, right? So the reason why it's important that we reported 18 new clients Enterprise level since the beginning of the year, we expect that second half of the year monetization will come in a full swing. Now we tend to be continuously cautious because the first projects were not all of them, but I feel that we're still in the land and expand mode.

Speaker 1

There are hyperscaler engagements for their cloud transformation with some Notable ISDs, some of them come into the work with related to the defined project like in the payment systems. But there are few we started much higher level. So we see that the numbers are increasing, but I want to make sure that fiber is beaten Not because the 85 goes down, but because the absolute value returns. So but the answer is yes, more likely we will see the higher contribution.

Speaker 3

Thank you.

Operator

Thank you. Thank you, Puneet. Our next question comes from Josh Zeigler from Cantor Fitzgerald. Please go ahead.

Speaker 4

Yes. Hi. Thanks for taking my question today. First, I'd like to start on AI, just given its significance. And obviously, it's gaining a lot of traction.

Speaker 4

So are you seeing any specific interest from any one vertical over another for AI solutions or is it broad demand? And further, is Grid's AI solutions helping to provide a nice strong pipeline for future new logo additions.

Speaker 1

Okay. Well, the area we've been known for, for a very long time with The retail, the bespoke brands, the more of the B2C side of business, The momentum is enormous because the results are easy to verify on a very short term, right? So We've been leaders in our natural language processing for a long time. And now when it comes to large language models, We continue to be in a leadership position. So that space just from the percentage of our businesses is pretty huge.

Speaker 1

The upcoming and expanding the business in the supply chain, that's obviously It's a subset of the manufacturing. It's becoming more and more substantial for us. It's a global momentum in the life science. That's Certainly, a big momentum, which is going to be what I tell my team with or without us. So we better be chopping our pencils with a customer that's for models for them, Which we are in the early stage, but it's working.

Speaker 1

And the area of the pretty much everything by but the tech itself. And the reason I want to emphasize the tech part is because we are together partnering to provide the solutions For the enterprise AI. So enterprise AI really falls on the enterprise side. The tech companies have their own models, right? So There is a combination of the open source models and the proprietary models with the manufacturing And the FinTech and what I said, the life science is becoming more and more trend.

Speaker 1

Those 2 would be very competitive The races, which we participate on both sides with the partners and the other part which becomes very critical for us is actually cybersecurity. We've been investing into cybersecurity for a while. Now it becomes even more critical where some of the normal AI Discoveries are happening simultaneously with massive number of data sets in ProEdge. And finally, The cloud is one part of it, but a lot of computational and capabilities will run on a Defined and it continued to grow on enterprise and working on that enterprise capabilities become More and more critical. So it's really a technical market front and we are very bullish in terms of our positioning with our clients.

Speaker 4

Understood. That's helpful color. Thank you very much. And then in your prepared remarks, I believe you mentioned driving higher utilization from your employees, which is helping to foster those higher gross margins. Can you provide some more color on this?

Speaker 4

And do you expect these levels Elevated utilization to remain as we move into the back half of twenty twenty three?

Speaker 1

Well, It's never good enough, right? You're building your business momentum and you're always thinking about What is going to be the business momentum to the next level when the inflection point Thus hit a material return to growth. So we are doing massive retraining of the people, At the same time, our own predictable models, which we build internally in terms of understanding the profitability of the business, help us to Feel better the skill sets of the people. So in other words, when we get projects going, we have much Lower level of delays between turning people into profitable business versus the involvement then into Interacting new project. And it's notable when you get a new enterprise plans, you can wait for months till the people become trained and capable to implement.

Speaker 1

So That's probably the biggest impact which we'll continue to foster internally how to fit the training and capability of our engineering workforce On the project level, system level with the clients.

Speaker 2

Just adding one statement to that, Josh, I think that's a very key statement that Leonard put because That's the leverage in the market going forward, right? We have the resources. We have the capabilities. And as we see Some of these demand trends come back, you'll see all these people to work and then that'll have an impact a positive

Speaker 4

Understood. Thank you very much. Appreciate it.

Speaker 1

Thank you,

Operator

Josh. Thanks for your question. Our next question comes from Maggie Nolan from William Blair.

Speaker 5

Your

Operator

line is open.

Speaker 6

Hi, Leonard. Hi, Neil. So on AI, it's pretty clear that you have years' worth of expertise kind of building up to this moment. Should we expect to see any Any perceptible pickup in dollar spend or investment in AI or Gen AI? And then what would that look like in terms of magnitude?

Speaker 1

Yes. So the magic wand is here, but the crystal ball is not. So we do have all the tools necessary to scale the business. It's really how it's becoming more as a consultancy play, right? Because The ability to build the model, scale the model, creating the predictable recommendation is there.

Speaker 1

Depending on the business, the financial benefit may vary because it takes some time not only to train the model, but verify the financial impact Because there are other variances besides just optimization of the forecasting and other stuff, for example, The market trends, the competitive trends for our clients. So what they try to take projects Rather than massive transformation at this point, and they went around those cases at least what we are involved. So there are sizable dollars, But I almost remember when we moved the cloud transformation from on prem To private cloud, to hybrid cloud, to the public cloud, now kind of reversing the trend for a lot of those computational capabilities. So I see that we're going to have a bit of a step. Right now, we're in the early stage where dollars are still limited, but the projects are notable, But I think it's going to roll up into the sizable part of the business, which means one of the important factor for us, there are many questions I ask, what's the role of the software engineers?

Speaker 1

Will the future require less of IT people and how those IT people will look like? And we would not call Grid Dynamics IT engineers. We are highly trained, Intellectually developed professionals in a data and software development space, in a cloud space, which means that while the industry goes through transformation, we are expanding more and more into meeting the match From the capabilities and it's relatively beneficial to us versus some more traditional IT suppliers.

Speaker 6

Thanks, Leonard. And Anil, the margins were strong this quarter. I'm wondering if you can talk a little bit about Specific drivers of operating expenses, is there a possibility that these trend lower over the next couple of quarters?

Speaker 2

Thanks for the question, Maggie. So as you saw, this quarter we had roughly 200 bps of expansion on the EBITDA side, right? We saw gross margin expanding, driven by comments that we had in our prepared remarks around greater utilization of the engineers. And then also on the operating front, you saw it go down by about $1,000,000 largely driven by the fact that given the environment that we're in, we're just prioritizing our investments and spend. Now as we go into the back half of the year, our approach continues to be Cautious on the spending.

Speaker 2

But that said, certain initiatives and projects that we deem as essential are being prioritized. So we will see how things play out on the revenue side, on the demand side. Obviously, there's a lot of leverage there, but we'll go 1 quarter at a time and the hope and the aspiration is from a margins point of view, We should see some tailwinds.

Speaker 6

Thank you, guys.

Speaker 1

Thank you, Mike.

Operator

Thank you, Mike. Next question comes from Bryan Bergin from TD Cowen. Please go ahead.

Speaker 7

Hey, guys. Good afternoon. Good to

Speaker 2

see you.

Speaker 7

I wanted to start on kind of existing base and industry expectations as you go into the next Quarter. So can you talk about what you're seeing in the existing client base, whether you are seeing signs of stabilization that are becoming a little bit more broad based? And specifically, if you can kind of key in on TMT and CPG as you plan for the Q3.

Speaker 1

So Brian, I would not select any specific vertical. I think it's pretty much goes across all of them at this point. We do see stabilization. On the technology space specifically, it's a little bit more client to client vary, but mostly because they are giants, Right. So one department goes a little bit more active in spending, the other one takes a little bit backseat.

Speaker 1

But From the CPG, it's no different than manufacturing or life science. We see that dynamics Our conversations start becoming more deterministic by dollars for investment. And recently, we won a couple of very notable RFPs, which is kind of great for us anyways because that's something we are doing A little bit more aggressive. And we see that the companies are start preparing. There's anticipation Then there will be an inflection point in Q4, maybe even late Q3.

Speaker 1

But those are a little bit more speculative. We Reflect our guidance based on the facts. But I would say that from the dynamics of the engagement with existing glass Because new customers you already know were doing fine, but it doesn't create that inflection from their short term revenue perspective. So, we do believe there is going to be some positive momentum coming in.

Speaker 7

Okay. That's good to hear. And then a generative AI question for you, but more so on internal. So, can you just talk a bit more about how you're applying generative AI, Obviously, early proof of concepts internally. Any early measures of success you can share around developer productivity?

Speaker 7

And I also wondered your viewpoint on really a high level question, whether you think that this technology can potentially reduce the competitive benefits of scale? Meaning, do you see this as an opportunity for some of the smaller, more specialized vendors to have a leg up in competitive positioning Versus some of the large scale local players?

Speaker 1

Well, let me start with the last one. Of course, I would love to tell you there is nobody in the world better than That's saying, the big guys can invest big dollars. Big dollars can lead to big failures because this is not the time to compete on the size of investment per se. It's a house Investment, the models must be proven. You can't prove the models till there is a sizable result in the industry and you need to remove the bias, the noise.

Speaker 1

I hope anybody who've done their modeling, they realize that how sensitive the environment of the Forecasting to the boundary condition, to the variance and all this stuff. And you need to really look at the consistent correlation. So that's on a more technical side. See, I do believe on a laser focused engagements rather than a growth base, announcements that we're going to put X1000000000 of dollars. Now seeing what we do internally, there are a lot of things happening.

Speaker 1

So first of all, on the quote itself, It's not a secret. Like people say, the code could be developed with natural commands, With augmentation of the code, the quality controls, the automation to the next level where there's, I would say artificially driven factors. Again, internally, it always works great because it's we're paying for ourselves. But the importance to test those samples of the codes with the clients. What did say and I mentioned just before you asked this question, in terms of the productivity, in terms of selection of I mean, the skill sets map, which we've been using for a long time, there's a lot of guesswork there.

Speaker 1

I think it's becoming a little bit more Deterministic by using the stochastic processes on the large models. So we do believe that internal productivity increases, but our focus It's on experimenting the models, also on a whole substitutions and the ability to implement The independent software vendor products into the major stream.

Speaker 7

Okay. That's clear. Thank you.

Operator

Thanks, Brian. Thank you, Brian. Our next question comes from Ryan Potter from Citi. Please go ahead.

Speaker 5

Yes. Hey, guys. Thanks for taking my question. I want to start on pricing. I was wondering if you could give some color on how pricing trends have kind of evolved over the past Few quarters, are clients pushing back more on price or is it becoming more of a foreign criteria in the new logo wins?

Speaker 5

And have you also seen any increased adoption of your VIX fee or POD models? Yes.

Speaker 2

Sure. Thanks for the question. Look, this is a question that we've answered in the past and there's no exception to that even today. Clients always want better price, right? I mean, that is always one of those internal themes.

Speaker 2

I think what we go back to every client is value per dollar spent, whether it's On some of these cutting edge technologies, whether it is some of these difficult problems to solve. And time again, we prove ourselves to be a partner of choice where the value of dollar that they spend is high. Now in the current environment, as we have macro Headwinds, we have. As we've seen in the past, if there is some incremental pressure with the clients, we have a talk with them on 1 on 1 basis. We have sometimes short term arrangements where we accommodate some of their requests and then we revert back to historical levels.

Speaker 2

I would say that from a pricing point of view, nothing has fundamentally changed long term. But in the short term, there's a little bit of a give and take As some of our clients also face pressure and we being good partners of them help them out. I don't know, Leonard, what do you want to add?

Speaker 1

Yeah, think the color is probably on the back of the mind of all you guys. How we're dealing with the pricing coming out of India? Did I take it out of your mouth or I'm just volunteering too much? Why? Because it's no secret when you move your force From Central Eastern Europe and you scale India, the biggest question becomes what's your pricing position?

Speaker 1

Well, We've done few acquisitions already. We're expanding an existing team. I think we're holding the pricing well and this is because Our teams are extremely well trained and intertwined. We hire good quality people, intertwined with European organization. So we don't necessarily run just project for one region.

Speaker 1

We're truly global follow the sun strategy. As we're getting more and more involved with the Indian offices of our clients, which is, by the way, a great addition to our business, we'll see how it's going to hold. But we maintain the focus on hiring top people, creating the consultancy approach that all our people kind of work The same quality around the world and also maintaining the high quality of the interns. So right now, it's fine. I think what Anil was telling you is a generic trend, but I'm quite proud that we implement our GigaCube approach with the fall of the sun Very consistently across all the regions.

Speaker 5

Got it. Following up on delivery and Giga Cube, In the earnings deck, it looks like you added 5 additional countries to your remix like Spain, Portugal, Turkey. Were these organic additions or do they come through acquisitions? And then more broadly, can you kind of discuss your Strategy around delivery expansion and diversification.

Speaker 1

Well, We have not added these countries as a big centers of engineering yet. There is a mix of local Hi, Eric. With some of the relocated people. And we review each center with a Great filter in terms of the synergies with other locations. And I recently visited Pretty much all of the countries you just named.

Speaker 1

And I'm not a collector of the geographies. It's one of those things you put You work with a suitcase, which has a little sticker from every country you visit, right? That's what the tour is, Not for the business. We need to make money in every place we go, and we need to bring the value with the local partners. So number one Guiding factor for the new countries is the relationship with the universities.

Speaker 1

That's in the early stage we met some very key notable universities. And as those relationship will prosper, then we can say definitively how scalable Those new countries will be. But certainly, the young talent is there. I would say that as I repeated multiple times, we're not creating Shelters for people to relocate, I mean, that's just the one part. We need to be a homegrown organization with a homegrown relationship with Universe.

Speaker 1

So I will tell and we'll keep you updated. But right now, the focus from the overall growth is unquestionably India, Mexico and in Central Europe is going between Poland, Romania and Serbia to We have a good team in Armenia. We have still a good team in Ukraine and a few other places. But As we expand, we need to take all these factors into consideration. I will keep you posted.

Speaker 1

Got it.

Speaker 7

Thanks, Kian.

Operator

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

Speaker 4

Thank you. Good evening. I had a couple of questions. First was, you didn't comment on the 4th quarter specifically. So just curious, Are there fewer billing days as we're modeling our 4th quarter revenue off the 3rd quarter?

Speaker 4

I just want to make sure we check on that, one. And secondly, we've been hearing from certain companies, some of your peers that there's that potential for a budget flush given the sort of pent up demand that's building. Any commentary on that to help us frame the Q4?

Speaker 2

Sure. So you bring 2 things, which have Opposing effects, right? You're absolutely right. Q4 tends to be from a billing days point of view across the industry, and we're no exception. Now in the past, being a smaller company with high growth, one off client, if they start growing also the timing of some of these projects Can actually impact the movement from Q3 to Q4, but in general, yes, from a number of days point of view, there is a little bit of a decline.

Speaker 2

Now the second point that you bring up is budget flush, which is a very good point and that is something we all have to see as an industry. Like what we saw in previous cycles, if you don't spend it, you lose it, right? There's a little bit of that going on. So I don't want to comment upon Q4 at this stage, right. We're doing 1 quarter at a time.

Speaker 2

But these two points that you bring up are very valid And it's part of our oil planning process as we look into the business.

Speaker 1

Yes. One more just quick comment on that. In the very early of this session, Puneet asked A question about the contribution of the new clients. So that's one of the area where we see also the contribution Later in the year, whether it's going to be a larger or medium, time will tell in a month or 2. So we'll talk about this in November.

Speaker 1

And from the existing customers, I would not call it the budget flush. And the reason being is We find that more and more as we grow through the diversity of the industries, they tend to have fiscal years Not necessarily aligned with the calendar years. What we do see for the Q4 is what's missing from the investments Earlier in the year, they may consider to start this slightly earlier. But again, as Anil said, it's a bit speculative, But it's not without a

Speaker 4

reason. That's helpful color. Then my second question is really more Housekeeping. 1, Anil, what was the revenue contribution from the acquisition in the second quarter? Was that for the full quarter?

Speaker 4

And then also really good to see the stock compensation expense come down as a percentage. Should we assume that as the run rate going forward or Should we expect further drops maybe more in line with industry peers?

Speaker 2

So I'll start with the second question. Yes, the way you should model is, I'll let 7 we had about 7.1 year this quarter, right? So plus 9 is around that range for the remainder of the year. So that's A good observation that you made. In terms of the new logos and I mean New acquisition revenue contribution, as you know, Nexperia was acquired on April 18, right?

Speaker 2

And as we said in the last quarter to kind of Low to mid single digits is what you should be looking at from a contribution point.

Speaker 4

Sorry, just to be clear, low single digits in terms of Absolute dollars, right? First of each. Got it. Great. Thank you so much.

Operator

Thank you. Thank you. Thank you, Mayank. Thanks for your question. Ladies and gentlemen, that will be all of the Q and A session today.

Operator

At this moment, I will pass the line back to Leonard for closing remarks.

Speaker 1

Thank you everybody for joining us on the call today. We continue to focus on executing towards our stated goals. There are many reasons to feel positive about our business. GreetDynamics' strong execution, technology leadership and flawless delivery set us up extremely well coming out of this economic spike. Our clients continue to place their confidence in our abilities and we continue to execute towards our plan Gearing for a $1,000,000,000 revenue company.

Speaker 1

Recent trends with AI only validate our technology strengths And I look forward to sharing with you many new and exciting updates in November. Thank you.

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Earnings Conference Call
Grid Dynamics Q2 2023
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