GDYN 2024Q1

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 with 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 the support growth level that we and the digital transformation industry have seen, signs point out in 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. This is also reflected in the revenue outlook for the second quarter. During the first quarter, we also secured two multimillion-dollar deals with enterprise customers, one of them a market leader in the specialty retail vertical and the other one in the 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. Our partnership contribution is at an all-time high, having 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 the PEAK Matrix Assessments report. This achievement validates our capabilities as a specialist in Google Cloud Services, an area of expertise for several years. This is a clear recognition of the differentiated capabilities we offer our clients to drive their digital transformation agenda. Over time, I'm confident that more independent third parties will recognize our strengths across other capabilities and service offerings. Coming to AI, customers are increasingly incorporating AI in their projects and requirements. Additionally, some of our customers in GenAI projects have become meaningful engagements. At a large financial institution, our GenAI project has been successfully completed and we expect that the platform to go live in the second quarter. At the same time, we're not only using AI technologies with the clients but also within our internal systems. Last week, we soft-launched our website that incorporates AI features. Our users visiting Grid Dynamics' website will now be able to use natural language queries to find company-related information. This includes Grid Dynamics' capability work performed at our clients, case studies, and others. Now let me make some more detailed comments about the demand environment. For many, our reported results and commentary over the past couple of quarters may appear more positive than many of our peers. There are some key reasons for that. In my opinion, that is what makes Grid Dynamics unique across the IT industry. First, in the current economic cycle, spending is under heightened scrutiny. This in turn has resulted in many clients consolidating their IT partners and tightly coupling their investments with corporate performance goals. Grid Dynamics' strengths and reputation for technology leadership, engineering prowess, and delivery excellence position us as a trusted partner, often leading us to gain business at the expense of the competition. As an example, in 2024, at two of Fortune 1000 retailers, Grid Dynamics was selected as one of the two partners for all digital engineering programs. Additionally, at a large Fortune 500 Telecom company, after evaluating dozens of existing suppliers, they chose Grid Dynamics for all their customer-facing applications. One of their key applications that we're rolling out at scale includes a mobile app for new customer self-installations and provisioning. Second, in a rapidly evolving world, a company's ability to adapt and integrate new technologies defines its relevance and competitive edge. With the relentless progression of disruptive technologies, businesses must innovate or risk obsolescence. Moreover, in a landscape marked by rising capital costs, the efficiency and speed at which innovative solutions are brought to market are crucial. Grid Dynamics has been at the forefront of helping enterprises scale their operations through numerous technological advancements over the past two decades. The deep knowledge and robust capabilities position us not just to adapt to the change but to drive it forward. As an example, at a large financial institution that I mentioned before, the AI assistant for financial advisors that we implemented is poised to dramatically enhance both customer experience and the efficiency of financial advisors. We anticipate that this capability, when industrialized, could save the wealth management industry billions of dollars. Notably, at this financial institution, we were one of the few selected partners after a vendor consolidation exercise in 2023, further underscoring our pivotal role in their crucial and strategic programs. Now coming to the second quarter, the positive trends that I highlighted regarding the first quarter extend into the second quarter. Our customer activity is picking up. Engineering billable headcount continues to grow. Customers have heightened AI interest. We believe these factors formulate the basis for our continued positive outlook as we look into the second quarter and remainder of 2024. On the CTO front, Grid Labs, our internal innovation center, completed multiple projects and initiatives. Our researchers and architects are engaged across the spectrum of innovation that includes AI, data, machine learning, and commerce solutions. Like previous quarters, our architects and CTO team were instrumental in opening new accounts with new clients. As a reminder, Grid Dynamics' AI engagements are based on more than seven years of internal research and successful implementation. With our Generative AI offering, we partner with customers to employ large language models and prompt guided image generation for applications in product design, visualization, knowledge retrieval, wealth management, and customer service. In the quarter, there were several trends, and I want to share with you some of the notable ones. Logo momentum: Building upon our success in 2023, in the first quarter, we signed five large new enterprise customers. Of the new enterprise customers we signed in the quarter, one is a leading North American pet company, one is an American high-end sports apparel and accessory company, one is a global consumer goods company focused on personal care and health products, and one is an energy manufacturing and service company, and one is a large multinational confectionery manufacturer. I believe each of these logos has the potential to become large top accounts, and I'm looking forward to seeing these initiatives scale. Delivery location support: Grid Dynamics' follow-the-sun strategy provides the framework for scaling our global locations. India, one of the key locations, has been growing at a rapid pace and is in the top three countries in terms of headcount. Last quarter, I highlighted the opening of the third office in India. This location in Bangalore is quickly becoming popular with our clients. In the first quarter, we had multiple visits from our U.S.-based clients across all our key offshore locations. We continue to attract high-quality talent out of universities, and our activities with internships, hackathons, and dynamic talks are paying off. Additionally, we brought on an industry veteran to lead our India operations, and with his addition, I'm confident of many positive developments in India. In Europe, Poland continues to be our anchor point, and in Latin America, Mexico remains the key location to support our clients seeking nearshore capabilities. European business: Our European business is steadily diversifying beyond traditional areas of strength such as retail and CPG. Additionally, the pipeline of business is becoming more distributed with clients spread over mainland Europe. For a global auto parts company, we are rolling out their composable commerce modernization platform across several brands within Europe, supporting them by establishing a multi-location global team structure. In Q1, we successfully delivered an ESG initiative for a large clean energy company. At many clients, GenAI continues to be a door opener. Additionally, several of our customers have transitioned from exploratory and proof of concepts to commercial build-outs. For example, at a leading legal and tech service company, we are building a flagship platform for their new markets. For a global international medical device company, we continue working on multiple initiatives to improve sales efficiency. Partnerships: In 2023, partnerships contributed to 13% of our overall revenue, and we aim to increase that share to at least 16% in 2024. Partnerships with hyperscalers and leading software vendors is a key part of our GigaCube strategy. In the first quarter, we made progress with our go-to-market efforts with our partners and upgraded our status with the major hyperscalers. At AWS, we achieved the AWS Well-Architected Partner status. This program enables Grid Dynamics to provide its clients with an audit of their platform architecture, ensuring they're configured correctly and in accordance with best practices. With NVIDIA, we are exploring go-to-market initiatives for the first time. During the quarter, Grid Dynamics delivered some notable projects. For a leading global technology company, we created a test automation toolkit that improved the efficiency and effectiveness of the testing processes. Featuring a collection of independent modules, each with a unified interface, the client was able to streamline the testing process and enjoy greater visibility into testing outcomes. This project enabled the client to resolve issues from days down to minutes, leading to a faster time to market and ultimately enhancing the quality of the final product. For a leading internet and cloud company, we streamlined the release preparation process for high-priority apps in its app store. We developed tools that enable the client to submit releases that foster better communication between departments. These tools help accelerate the app release process, allowing the client to better predict release timing, monitor updates, and improve the overall user experience. For a major CPG brand, we implemented an omnichannel warehouse automation platform. This platform unifies several software interfaces, which dramatically lowers the cost of integrating new distribution centers and their client network while also supporting the unique fulfillment requirements of wholesale, retail, and digital channels. Additionally, we implemented a wholesale order platform that lowers the cost of serving new wholesale clients. Both of these platforms are expected to be expanded to multiple geographies in the upcoming months. For a global automotive manufacturer, we began a project aimed at improving interactions with dealers through the use of micro frontends and AI-enabled personalized experiences. This project will enable dealers to deliver more comprehensive sales and services to their end customers. With that, let me turn the call over to Anil, who will discuss Q1 results in more detail. Anil?

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 two 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 a 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 a 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, showing a decline of 10.5% on a sequential basis and 4.5% decrease on a year-over-year basis. Finally, the other vertical represented 10.4% of our first quarter revenue, which was up 4.5% on a sequential basis and 50.1% on a year-over-year basis. The sequential growth was driven by strength across multiple customers, some of them in the clean energy and legal space. We ended the first quarter with a total headcount of 3,892, down from 3,920 employees in the fourth quarter of 2023 and up from 3,744 in the first quarter of 2023. In comparison to the fourth quarter, we exited our first quarter with a higher billable headcount due to improving demand. At the end of the first quarter of 2024, our total U.S. headcount was 332, or 8.5% of our company's total headcount versus 8.1% in the year-ago quarter. Our non-U.S. headcount located in Europe, Americas, and India was 3,560 or 91.5%. In the first quarter, revenues from our top 5 and top 10 customers were 39.6% and 55.3%, respectively, versus 40.8% and 60.4% in the same period a year ago, respectively. During the first quarter, we had a total of 210 customers, down from 218 in the fourth quarter of 2023 and 220 in the year-ago quarter. During the quarter, we added several customers, some of which Leonard referred to in his prepared remarks. The quarterly decline in the number of customers was primarily driven by our continued efforts to rationalize our portfolio of non-strategic customers. Moving to the income statement, our GAAP gross profit during the quarter was $27.7 million, or 34.7% compared to $28.1 million, or 36% in the fourth quarter of 2023 and down from $28.6 million, or 35.7% in the year-ago quarter. On a non-GAAP basis, our gross profit was $28.1 million, or 35.3%, down from $28.6 million or 36.6% in the fourth quarter of 2023 and down from $29 million, or 36.3% in the year-ago quarter. The decrease in gross margin as a percentage on a sequential basis was driven by a combination of first quarter seasonal increases in employee-related costs and FX headwinds. Non-GAAP EBITDA during the first quarter, that excluded stock-based compensation, depreciation and amortization, restructuring, and expenses related to the geographic reorganization, transaction and other related costs was $10.3 million or 12.9% of sales versus $10.7 million or 13.7% of sales in the fourth quarter of 2023 and down from $10.8 million or 13.5% in the year-ago quarter. The decline in non-GAAP EBITDA was largely due to a decrease in gross margins. Our GAAP net loss in the first quarter was $3.9 million, or a loss of $0.05 based on a basic share count of 76.2 million shares compared to the fourth quarter income of $2.9 million, or $0.04, based on a basic share count of 75.7 million and a loss of $8 million, or $0.11 per share based on 74.5 million basic shares in the year-ago quarter. The year-over-year decrease in GAAP net loss was largely due to lower levels of stock-based compensation and a decrease in provision of income taxes, partially offset by depreciation and amortization. On a non-GAAP basis, in the first quarter, our non-GAAP net income was $5.2 million, or $0.07 per share based on 78.4 million diluted shares compared to the fourth quarter non-GAAP net income of $5.7 million, or $0.07 per share based on 78 million diluted shares and $6.5 million, or $0.08 per share based on 77 million shares in the year-ago quarter. On March 31, 2024, our cash and cash equivalents totaled $249.4 million, down from $257.2 million in the fourth quarter of 2023. Coming to our second quarter guidance, we expect revenues to be in the range of $80 million to $82 million. We expect our non-GAAP EBITDA in the second quarter to be in the range of $10.5 million to $11.5 million. For the second quarter of 2024, we expect our basic share count to be in the range of 77 million to 78 million and our diluted share count to be in the range of 79 million to 80 million. That concludes my prepared remarks. We are now ready to take questions.

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 the 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 have 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 continued growth is going to happen. So I'm still bullish not only on guidance for Q2 but subsequent growth as we go forward. I'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 to institutionalize the additional technology spending. So if you look at the last 18 months, a lot of companies clamped down on all the spending. Now we see the opening comes to basically innovate and generate more competitive advantages by stepping up into the unique areas related to data management, machine learning, and obviously, some AI modules. But more importantly, this whole comprehensive question of how to tie the business value with a predictable nature of the digital side of the business. So that's why we see 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 projections of the budgets for an extended period of time with Grid Dynamics as part of their journey. The other thing which we mentioned in the remarks is that we see some of the reduction of the preferred suppliers starting to pay some dividends for 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 are paying off because we are being awarded 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 had a certain outlook. 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, it's great. I was curious because the positive trend seems different from what we've seen in many other companies reporting these results. Looking at the long term, we receive many questions from investors about the challenges AI presents, but also how it creates opportunities for increased productivity in coding efforts. How should we consider new normal growth for the sector in light of rising AI adoption?

This question often arises in discussions with both investors and clients. Currently, the range of models, platforms, and copilots is quite extensive. As you are aware, we are actively engaging with Grid Dynamics on open source solutions alongside traditional models, exploring various options. We collaborate with clients who appreciate the Microsoft stack as well as AWS. We have strengthened our partnership with Google across several initiatives. Additionally, we are exploring alternatives like Meta's Llama in the open-source space. We leverage our broader expertise to determine what is best for the customer, taking into account their capabilities, models, and the trainability of those models, and tailoring our proposals to their specific sectors. This environment is disruptive. Looking at our 18-year history, Grid Dynamics excels during times of disruption. We are at the heart of innovation discussions, and clients seek more than just clarity; they desire tangible outcomes. Engaging diligently with them is crucial to ensure their efforts in building systems yield real results, as there is still considerable variability in outcomes. We position ourselves at the forefront of these innovations and maintain partnerships with key players, including hyperscalers and AI leaders, encompassing both software and 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, the responsibility is always on me. We continue to hire and expand. The current headcount doesn't fully reflect our growth because we have optimized our workforce to meet new demand. If you look at our billable headcount, it's consistently increasing week by week, and our latest results for April are promising. We're implementing productivity tools to engage a wider audience of engineers and enhance our internal capabilities, which involves our internship program, Grid University, and Grid Lab. On the supply side, we are well-prepared for growth. On the demand side, I'm very optimistic about beyond Q2. When I mentioned in February that it would be a record quarter, that gives a good indication of our trajectory. We're still in the first month, so we stand by our guidance. I truly believe we can outperform the market with our capabilities. It may take some time to see that reflected in the numbers. Some people asked why I wasn’t smiling in the past few quarters, but now you can see my optimism. That’s a strong indication of how our technology aligns with our business goals.

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 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, and 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, pressure on the margin front 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 a 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 Mexico. We had an inflated peso situation. But the key resolution for our business, obviously, with the growth of India, is where we believe our marginality is evidently improving. But there is another thing: we're actually striving right now for a significant improvement in marginality in Europe as well. Now we have a broader country with a 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 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 pickup. 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, is 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 acceleration as new enterprise logos one over the 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 wood; things do happen. But it's stable to positive. So we'll continue to generate 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 players 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 differently. 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. 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. The benefits Grid Dynamics sometimes are not trivial from the purely direct savings. So we have one of the very large legal customers, 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 an 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 kinds of features now enabled by AI. So I would say that to be very precise, the scale of the results with the model has been more solidified with the bespoke custom solutions 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 demand, the U.S. market remains the most critical for us. So there's no question about it. If you look even at the Center of Gravitas, we are actually scaling our technical competence centers beyond the Bay Area. We're zeroed in on Dallas for a while. We're getting our office and capabilities in the Atlanta area. We are very strongly present in Jersey, Boston expansion. And of course, the Midwest as well as not only 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 growth in Europe, but we see that 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. We see that pick up in manufacturing. We see that pick up in growing and approaching the automotive industrial part. And outside of these two regions, we have, I would say, the first 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 channel 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 brushstroke; 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 of 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?

M&A ultimately comes down to what we announce; the evidence will be clear when we make our moves. The activity in our pipeline remains strong. Reflecting on the past seven to eight months and analyzing our M&A activity, we had hoped to announce a couple of deals sooner. We're noticing certain trends, including non-strategic players who may be more aggressive. However, our standards remain high, meaning we won't proceed unless we see a clear strategic fit and capability match. Importantly, as Leonard mentioned, we have not acquired revenues in the last 12 months, and we won't use that as a justification. Our focus is on ensuring the right fit. Right now, the pipeline is solid, and we will announce when the time is right. Ultimately, the results will speak for themselves; these opportunities will 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 discussions that our clients need to invest in innovation. So that's kind of a demand driven from that. But on the other hand, those smaller projects on the technology side, AI, still digital, some of the migration partnerships, enhancing their features, and their implementation parts have been proven successful. So when it comes to the budgeting innovation, it's very hard. At the same time, if nothing else, that's what Q1 is for. Remember, in the old times, 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 the tail of some of the proof of concepts and the small innovation projects from us because those models and the expansion of the tools related to technology actually works very well. I would say that at least six or seven 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 importantly, 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: clients want more, and we offer more. 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 kind of the opportunity you see in that vertical going forward?

Yes. So it's the fintech sector that is the larger size of the growth. And as you know, Grid Dynamics still has a certain scope of strategic clients. So they are not infinite. But they're very formidable. 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 creating new fintech models, right? We just work on the projects, and we combine the open-source capability with a partnership which expands our specialized tools, based on our internal development, allowing us to offer the PODs. So the teams of people who are basically driving not just innovation but giving ROI successes. That actually translates into scalable revenue. So the fintech sector is by far 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 is starting to creep up, is wealth management and broader sales. In the broader sales, as you know, the more and more people are putting money into various investments and technology drives its automation beyond belief. So many things go beyond the advisers who have only so much capacity. The entire industry is going through breakthrough innovations. It's a little early to talk about insurance or our contribution to insurance, but it's another lag of the growth we see: fintech, wealth management, and insurance.

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 pickup in the conversion time for new logos or any bookings across your client base?

So in Q1, there was a pickup. Every quarter, we're talking about trade-offs between acquiring new clients and then potentially tightening the budget with existing clients, right? When we have a more stable platform of existing clients, the pickups are more honorable because we can actually double down on working with these clients without firefighting on an existing logo front. Now it doesn't mean we reduce our eyes on the existing clients; it's just because it's a more predictable process. We have more technology capabilities, a better approach again with our own AI tools for hiring. So that we are bringing people on board and training them at a much faster pace than ever and retain them as well. We also have the reputation, which helps us with some of the new clients through referrals. That's always a big thing. The other one through our marketing, I would say, technical marketing. And the third one through our partnerships. 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 of going from innovation projects to the scalable business is 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.

Over the last couple of quarters, the CPG vertical experienced a consistent growth pattern driven by some of our larger CPG clients. What we are observing is a number of factors at play, but the positive news is that one of our largest CPG clients has not only stabilized but has also shown growth this quarter. Additionally, we've welcomed a couple of other new clients. The situation changes every 90 days within each vertical, as you know, so it varies. However, it's reasonable to say that CPG and manufacturing, like the rest of the industry, have stabilized, and we have a more optimistic outlook.

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 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 two things. So CPG, showing 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 in 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 working 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.