GDYN 2023Q1

Good afternoon, everyone. Welcome to Grid Dynamics First Quarter 2023 Earnings Conference Call. I'm Bin Jiang, Head of Investor Relations. At this time, all participants are in listen-only mode. Joining us on the call today are CEO, Leonard Livschitz; and CFO, Anil Doradla. Following their prepared remarks, we will open the call for your questions. Please note today's conference is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. During this call, we will discuss certain non-GAAP measures of our performance. GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and the 8-K filed with the SEC. You can find all the information I have just described in the Investor Relations section of our website. With that, I will now turn the call over to Leonard, our CEO.

Thank you, Bin. Good afternoon, everyone, and thank you for joining us today. As you have seen from our results that we published a short time ago, our Q1 2023 revenue and profitability were at the high end of the expectations that we provided in February. In the current environment, I'm delighted with our results. This is a testament to Grid Dynamics' strength and the value we bring to our clients. There are many positives in the quarter. Grid Dynamics continued to provide comprehensive partnerships with many clients, momentum at winning new logos in the first quarter with global Tier 1s, meaningful contribution from our recent logo wins towards revenue, success with our geographical diversification strategy. India became one of the largest delivery countries; I would like also to emphasize operational progress with our GigaCube strategy that will propel the company toward $1 billion in revenue. I will talk about each of these elements in my prepared remarks and Q&A. On the macro front, our viewpoints have remained consistent since November 2022. We're in the midst of a cautionary spending environment across industry verticals. Clients are closely looking at the health of their own business and making short-term investment decisions. While this has resulted in volatility across some of our clients in industry verticals, recession-resistant industries continue to invest. Despite the near-term uncertainties, in many ways, we view the reset across the demand environment as a significant opportunity for us. During times when customers are recalibrating their gross investments, another second way of leveraging digital transformation solutions to achieve revenue objectives in a cost-effective manner, Grid Dynamics adapts to the changing environment. This is something we have witnessed in previous economic cycles, and this time is no exception to the trend. Last quarter, we shared with you for the first time our GigaCube initiative. I'm happy to report that during this quarter, we made good progress across multiple aspects, including personnel, processes, and customers. Recently, we won business at a pharmaceutical company and a global financial service company by leveraging our expertise and the target verticals of the GigaCube initiative. As you know, GigaCube is our strategic blueprint that lays out the framework for our company toward $1 billion in revenue. In many ways, the GigaCube is one of the most important strategic initiatives reshaping the company. It involves all parts of the organization that include sales, R&D, marketing, operations, and M&A. At its core, there are four key business drivers guiding our efforts. First, our investment in technology innovation that drives our customers' growth and optimizes their costs. Second, our efforts in moving from our historic $2 million, $5 million, $10 million per customer revenue to a $5 million, $10 million, $20 million revenue model. Third, we introduced the Follow-the-Sun model where engineering teams simultaneously collaborate across our three key geographies: North America, Europe, and India. Finally, fourth, partnerships with notable cloud providers and domain specialists to drive business and large deals. Coming to our locations. As you all know, we have delivery locations across the globe. Our Follow-the-Sun strategy enables our clients to be served in an uninterrupted fashion around the clock. In India, we have been scaling our operations. Our new office in the technology park in Hyderabad is operational, now staffed by employees that include those from our recent acquisitions. Employees from Mutual Mobile and Next Sphere Technologies, as well as our own organic expansion, have made India one of our top geographies from a headcount perspective. Furthermore, with the acquisition of Next Sphere Technologies, in addition to a strong presence in Hyderabad, we now have access to a large talented pool of engineers in Chennai. As you may know, Chennai is a key automotive and manufacturing hub in India, and we expect to leverage it as we expand our manufacturing supply chain and distribution. Additionally, our integration with Mutual Mobile is in full swing, and we have started to implement synergies across engineering, operations, and other back-end functions. We continue to ramp up hiring of engineering talent in Europe. Over the last 12 months, our headcount in Poland, Serbia, and Armenia has almost tripled. Similar to our other locations, we expanded our relationship with universities and hired interns across these countries and others. In the quarter, there were several trends, and I would like to share some of them in more detail. Demand trends: In the first quarter, similar to the fourth quarter, we witnessed continued scrutiny and demand softness across all our clients. That said, we did see some patterns emerging across our customer base. First, customers are taking a closer look and reviewing their roster of IT partners. In many cases, they have rationalized their relationships by cutting down a number of partners they work with. For a substantial number of our clients, Grid Dynamics has been nominated as a preferred vendor. Second, customers are increasingly diversifying their projects to lower-cost offshore locations with an ultimate mandate to preserve engineering quality. Such trends play to our favor as we have a global delivery footprint and location of choice for our clients. Finally, third, clients are increasingly focused on the business-critical initiatives that bring immediate results. This is an area where we are successfully partnering with our clients with our differentiated offering. Logo momentum: We started the year strong and closed the first quarter with a total of nine new enterprise customers in our organic business. This excludes the customers from our recent acquisitions and our commercial business. Some of our notable ones include a global sports apparel company, a U.S.-based telecommunications company, a global biotech and pharma company, a major outdoor lifestyle company, and an enterprise edge-to-compute cloud conversions company. We're very proud of our achievements, and this is a testament to our differentiation and the value we bring to our customers. Technology highlights: Innovative technologies have always been key drivers of the growth and success for Grid Dynamics, and we are excited to share the recent developments. As part of our generative artificial intelligence offering, resources from Grid Dynamics Labs partner with our customers to employ large language models and text-guided image generation in their applications in private design, wealth management, data harmonization, and customer support. For the domain solutions, we released our inventory allocation optimization solution, and we continue to strengthen our portfolio of supply chain analytics and order management offerings. We continue to expand and deepen our service offering and partnership in the semantic search and composable commerce space with startup kits and accelerators that enable our customers to quickly and easily implement this cutting-edge technology. Delivery location support: In the first quarter, our delivery operations remained flawless. Like previous quarters, clients continue to support our geographic diversification and choose location for the engineering support, but have not shifted any of the existing programs to our competitors nor have we witnessed our clients terminating business with us due to concerns around delivery location and our ability to meet product and project deadlines. With the new clients, they have a choice of our 13 countries where we can deliver projects at scale. As we look further into 2023, we believe these trends will continue to persist and continue to be bullish on our prospects with new customers. Europe business: During the quarter, we made good progress in expanding our European footprint in the cybersecurity space. We designed and delivered a single sign-on connector for a cloud-native order application system company. For a leading cybersecurity company specializing in passwordless solutions, we supported their cloud-based products to scale and serve large enterprises. On the digital commerce front, we are leading several modernization initiatives in collaboration with multiple MACH Alliance partners. Examples include transformation from a monolithic to a composable architecture for a global footwear brand and a U.K.-based luxury brand. Partnerships: Partnerships continue to be an important part of our growth and have become a significant contributor to lead generation. During the quarter, we made progress with our Tier 1 partnership players with more competencies and certifications. A significant portion of our new enterprise clients came from our partnership. With AWS, we qualified for a program that allows us access to large cloud migration initiatives by Amazon. With Microsoft Azure, we qualified for new specializations that will result in access to new clients and opportunities. Our partnerships will focus on building alliances with companies that will enable faster transitions for enterprises to composable and intelligent architecture and areas of innovation like digital commerce and supply chain. On this strategy, we established new partnerships with a marketing software platform and a supply chain platform during the quarter. M&A: On April 18, 2023, we announced the acquisition of Next Sphere Technologies based out of Tampa, Florida, with delivery locations in Hyderabad and Chennai, India. This comes close to our acquisition of Mutual Mobile in December 2022. Next Sphere is an end-to-end customer engineering software company with 18 years of experience in serving clients across industries. The company has built a good reputation and proven track record across healthcare, fintech, CPG, and manufacturing. These industries are key to Grid Dynamics' GigaCube strategy for diversifying and growing to a $1 billion revenue company. It also adds 200-plus employees to our operations. We're excited about the cross-selling opportunities and expect to leverage each other's customer base. Beyond Next Sphere Technologies, our pipeline for M&A opportunities is robust, and we'll actively explore multiple opportunities as we highlighted in the past; our M&A focuses on capabilities, key customers, and delivery locations. During the quarter, Grid Dynamics delivered some notable projects. For a global technology company, we built a quality monitor application, which enables their engineers to quickly develop new features with an improved user experience and enhanced maintainability of existing solutions. By utilizing a modernized codebase, this application increased test coverage and introduced advanced capabilities. We expect this solution will allow our clients to deliver new features with faster time to market and achieve higher end-user satisfaction. For a leading financial and investment services company, Grid Dynamics developed a new rebalancing application, which was used to adjust a portfolio's asset allocation to the level defined by the investment plan. Sophisticated and mathematical algorithms were implemented for the optimization of rebalancing results. Our solution helped the client reduce their balancing time from days to minutes while still achieving the same excellent performance. For a major automotive manufacturer, we participated in launching a cloud-based foundation platform for the client's e-commerce channel. The platform aims to establish a unified global approach to reinforce the brand image and provide an optimal shopping experience with consistent product information and pricing. We expect it to serve as a foundation for other strategic initiatives, such as direct-to-consumer sales and zero commission vehicles. For a multinational food and beverage company, Grid Dynamics selected technology and developed a computer vision mobile application for inventory management and competitor analysis for use by merchandise. Built with a tailored machine learning model, this solution is able to process images on the edge with mobile devices in offline mode, reducing cloud consumption costs. After a successful rollout in certain markets, this mobile application has been approved for a global rollout. I want to bring investor attention to three important points. First, over the past 15 years, we have seen multiple economic cycles. With every economic cycle, Grid Dynamics has been a net beneficiary of its customers' wallet share, and this economic cycle is no exception. Second, our current pipeline of new customer engagements continues to be strong. We started this year with nine enterprise clients that we expect to ramp up meaningfully over time. For the remainder of 2023, I am bullish on our new client opportunities. Finally, third, we have operationalized our GigaCube initiative and see a clear path toward continued growth. Now let me turn the call over to Anil, who will discuss Q1 results in more detail.

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenue of $80.1 million was slightly higher than our guidance range of $78 million to $80 million and was up 12.1% on a year-over-year basis. On a constant currency basis, our year-over-year growth was 13.7%. The 160 bps headwind to revenue growth on a year-over-year basis was due to the strengthening of the dollar relative to the Euro and British pound. During the quarter, we witnessed growth from existing customers as well as new logo revenue contributions, offset by macro-driven caution from others. TMT, our largest vertical, represented 33.5% of our first quarter revenues and decreased 1.3% on a sequential basis and grew 25% on a year-over-year basis. On a sequential basis, we witnessed some caution at some of our TMT customers. This was offset by growth both from existing and new logos. During the first quarter, retail, our second largest vertical representing 31.7% of our revenues, decreased 1% on a sequential basis and grew 9% on a year-over-year basis. Within the retail vertical, on a sequential basis, we witnessed growth from areas such as home improvement and specialty retail, offset by softness at brick-and-mortar departmental stores. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 15.8% of our revenue in the first quarter, a decrease of 10.2% on a sequential basis and 15.6% on a year-over-year basis. The decline on a sequential basis came from our large customers as they readjusted their spending levels to the current macro environment. The finance vertical represented 8.1% of revenue, an increase of 4.3% on a sequential basis and was up 43.9% on a year-over-year basis. The growth in the quarter came from our banking customers, where we continue to grow with their programs tied to wealth management. Finally, the other segment represented 10.9% of our first quarter revenue and was up 17.5% on a sequential basis. The strong sequential growth was driven by our healthcare and pharma customers. We exited the first quarter with a total headcount of 3,744, down from 3,798 employees in the fourth quarter of 2022 and up from 3,671 in the first quarter of '22. The sequential decrease of 54 employees or 1.4% was largely due to our efforts in rationalizing our non-engineering headcount. The increase from 2022 was largely due to a combination of improving demand, resulting in headcount increases, combined with our acquisitions. At the end of the first quarter of 2023, our total U.S. headcount was 304 or 8.1% of the company's total headcount. This was slightly down from 8.9% in the fourth quarter and 8.7% in the year-ago quarter. The sequential and year-over-year decline as a percentage of the total headcount was largely driven by growth in our offshore locations, resulting in a greater mix of non-U.S. headcount. Our non-U.S. headcount located in Central and Eastern Europe, India, the U.K., the Netherlands, and Mexico and other locations was 3,440 or 91.9%. In the first quarter, revenues from our top 5 and top 10 customers were 40.8% and 60.4%, respectively, versus 42.8% and 58.3% in the same period a year ago. During the first quarter, we had a total of 220 customers, up from 218 in the fourth quarter and 213 in the year-ago quarter. During the quarter, we witnessed growth in new logos from our organic enterprise business. As a reminder, we only count the revenue-generating customers in the quarter and do not include customers who are inactive during the quarter. Moving to the income statement. Our GAAP gross profit during the quarter was $28.6 million or 35.7% versus $32.3 million or 40.1% in the fourth quarter of 2022 and up from $26.8 million or 37.5% in the year-ago quarter. On a non-GAAP basis, our gross margin was $29 million or 36.3% versus $32.7 million or 40.6% in the fourth quarter of 2022 and up from $27 million or 37.8% in the year-ago quarter. The decline in gross margin as a percentage on a sequential basis, both on a GAAP and non-GAAP basis, was largely due to higher levels of bench. Non-GAAP EBITDA during the first quarter that excluded stock-based compensation, depreciation and amortization, restructuring and expenses related to geographic reorganization, transaction, and other related costs was $10.8 million or 13.5% versus $16.5 million or 20.5% in the fourth quarter and down from $11.4 million or 15.9% in the year-ago quarter. The sequential decrease in non-GAAP EBITDA was largely due to lower levels of gross margin as a percentage, combined with higher operating expenses. On the operating expense front, most of the increase relative to the fourth quarter was from our acquisition of Mutual Mobile. Our GAAP net loss in the first quarter totaled a loss of $8 million or a loss of $0.11 based on a share count of 74.5 million shares compared to the fourth quarter loss of $6.7 million or a loss of $0.09 based on a share count of 74 million and a loss of $2.7 million or $0.04 per share based on 66.9 million shares in the year-ago quarter. The year-over-year increase in GAAP net loss was largely due to higher levels of stock-based compensation and higher operating expenses, offset by higher levels of revenue. On a non-GAAP basis, in the first quarter, our non-GAAP net income was $6.5 million or $0.08 per share based on 77.1 million diluted shares compared to the fourth quarter non-GAAP net income of $10.5 million or $0.14 per share based on 76.5 million shares and $6.9 million or $0.10 per diluted share based on 70.2 million diluted shares in the year-ago quarter. The decrease in the non-GAAP net income in comparison to the year-ago quarter was largely from higher levels of revenue, partially offset by higher operating expenses. On March 31, 2023, our cash and cash equivalents totaled $258.4 million, up from $256.7 million in the fourth quarter of 2022. The key reason for the increase on a sequential basis was an increase in operating cash flow, offset by payments from the net share settlement of vested stock awards. Coming to the second quarter guidance, we expect revenues to be in the range of $76 million to $78 million. We expect our non-GAAP EBITDA in the second quarter to be in the range of $10 million to $11 million. For Q2 2023, we expect our basic share count to be in the range of 75 million to 76 million shares and our diluted share count to be in the range of 78 million to 79 million. That concludes my prepared remarks. Bin, we are ready to take questions.

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

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

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

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

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

Yes, understood. Thank you very much, Leonard.

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

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

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

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

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

Very helpful, thank you so much.

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

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

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

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

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

We look forward to attending the event. Thank you.

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

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

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

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

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

Okay, thanks for the detail.

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

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

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

Got it. Thanks. I guess just shifting to some of your sales success. Can you share how much of your growth in Q1 is coming from some of your recent logos versus existing clients, and also what's embedded in Q2 versus new clients versus existing clients? How does that compare to what you've normally seen in terms of your growth algorithm?

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

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

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

Got it, thanks.

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

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

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

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

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

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

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

Okay, great. Thank you both.

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