GDYN 2022Q4

Good afternoon everyone. And welcome to Grid Dynamics Fourth Quarter and Full Year 2022 Earnings Conference Call. I am Bin Chiang, Head of Investor Relations. At this time all participants are in a listen-only mode. Joining us on the call today are CEO, Mr. Leonard Livschitz; and the CFO, Anil Doradla. 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 uncertainties described in the company’s earnings release and other filings with the SEC. During this call, we’ll 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. 2022 was one of the best years in terms of revenue and growth in the company's history. Our revenue grew by 47% on a year-over-year basis, and almost tripled since 2020, which was the first year of being a public company. This is a phenomenal achievement, in spite of the horrific war in Ukraine, as well as macroeconomic challenges. And by the way, this week also marks the one-year anniversary of the Russian invasion of Ukraine. The last 12 months have been a test of the company's resilience and strength and our commitment to ensuring the safety of our employees, uninterrupted delivery of customers' projects, and acquiring new businesses at the same time. Whether it was relocating thousands of employees and their families, ceasing all our operations in Russia, opening and expanding offices in Poland, India, Mexico, Serbia, Armenia, Romania, Jamaica, and other countries, and executing our M&A strategy with a new acquisition, as well as completing integration of acquisitions from the past years. Our accomplishments have been nothing less than spectacular. I'm very proud of being part of Grid Dynamics. I would like to thank all employees for making our company the greatest place to work for. As you can see with our results that we published a short time ago, our Q4 2022 revenue and adjusted EBITDA exceeded our expectations that we provided to all of you in November. Most importantly, this was the second consecutive quarter of performing at our target operating model, both on the gross margin and EBITDA margin front on a non-GAAP basis. The better-than-expected performance was due to a couple of factors. As we indicated in early November, at our last earnings call, we experienced softness at some of our customers. During the quarter, however, we witnessed stronger-than-expected demand across some of our existing customers as they continued to ramp on both existing and new programs. In addition, we added record high new logos. In a nutshell, our viewpoint of the microeconomic softness in the fourth quarter was more cautious than it turned out to be. In many ways, we view the current reset across the demand environment as a significant opportunity for Grid Dynamics. Some sectors and customers, especially in the technology space, overestimated the post-pandemic demand rebound and are recalibrating their growth investments. Others are seeking ways of leveraging digital transformation solutions and achieving their revenue objectives in a cost-efficient manner. During such periods, customers increasingly focus on value and meaningful contributions from their IT service partners. We're seeing some of these trends playing out favorably, as our customers rationalize their roster of IT partners and focus on differentiated solutions. More importantly, as the industry comes out of the current downward cycle, these trends will offer significant opportunities for growth. And we're positioning ourselves to benefit from this going forward. It is in this context that I'm happy to share with you for the first time Grid Dynamics' Giga Cube initiative. This is our strategic blueprint that lays out the framework for our company towards a $1 billion revenue. Within the company, we had operationalized the plan, which involves all parts of the organization that includes sales, R&D, marketing, engineering, operations, and M&A. We'll talk about this later in my prepared remarks. Let's talk about locations. In India, we inaugurated our permanent office in Hyderabad. Our first batch of 30 plus interns from the top university across the country has started their work at our local headquarters in Hyderabad. The response and feedback from our university partnerships have been very positive, and over time we expect to scale our internship program in India. Complementing our Indian operations is our recent acquisition of Texas-based Mutual Mobile, which has Indian operation also centered around Hyderabad. Mutual Mobile has over 175 employees, and we're in the process of integrating the offices. We continued to ramp up hiring of engineering talent in Europe. Over the last 12 months, our headcount in Poland, Serbia, and Armenia has almost tripled. Amongst our other locations, we expect our relationship with universities and higher interest across these regions. In the quarter, there were several trends, and I want to share with you some of the notables. Demand trends in the fourth quarter, similar to the third quarter, we witnessed continued budget scrutiny and demand softness across our clients. Even at some point of our larger clients, we've also seen some slowdown. That said, from our perspective, there have been no significant changes in Grid Dynamics' viewpoint since October on how clients are reacting to the current situation. As you may recall, we were very vocal in our commentary around the demand environment, which we announced in our third quarter results in November. That was also reflected in our cautious fourth quarter guidance, in which we highlighted softness in demand. Additionally, in the fourth quarter, our new logos contributed meaningfully and offset some of the softness in the existing business. Adding some additional fourth quarter segment commentary, our technologies segment was the largest during the quarter. The growth in the quarter was driven by a combination of large technology customers, which are growing as well as new lower revenue contributions. Our retail business was slightly off from last quarter and performed again better than our expectations. In the quarter, we also benefited from strong performance from a large global footwear company, a business we have recently won. And finally, our finance segment grew as we continue to make inroads in wealth management applications, with our largest banking client. We closed the fourth quarter with the highest number of new logos in the company's history. During the quarter, we added 13 new enterprise customers with our organic business. Some of the more notable ones to mention include two top-tier Global Fortune 30 companies, as well as one of Canada's largest food and pharmacy chains. We're very proud of our achievements in the current environment and this is a testament to Grid Dynamics' differentiation and the value we bring to our customers. Another important point worth highlighting is related to our delivery operation and how supportive our customers have been in their transitional process. Over the past 12 months, we executed flawlessly in transitioning a significant portion of the workforce while continuing to deliver projects in a timely manner. More importantly, our customers have not shifted existing programs to our competitors nor terminated business with us due to concern around our delivery locations and our abilities to meet project deadlines. Our new business development efforts are robust, as indicated by a record year of new logos in 2022. Bottom line, while the challenges were immense, we're not distracted in our business with existing and new clients. As we look toward 2023, we believe these trends will continue to persist and we remain bullish on our prospects with new customers. During the quarter, we made good progress with our European clients. As I highlighted earlier, the global footwear company that we signed recently witnessed strong ramp in the fourth quarter and is on track to become one of our largest European customers in 2023. During the fourth quarter, we also added one of the largest automotive manufacturers based out of Germany. At our largest European account that sells essential household goods and operates in an industry that has been traditionally recession-proof, we grew substantially in the fourth quarter and we are working on a three-year roadmap to move from monoliths to composable architecture. 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 competitiveness and certifications. With Amazon AWS, we're now their advanced consulting partner and on track to become a premier partner later this year. Additionally, we achieved the service delivery designation for Amazon EKS and AWS cloud migration. With Google, we're one of the very few premier partners with seven specializations and over 40 expertise related to Google Cloud. We continue to be the primary partner for the implementation of Discover Artificial Intelligence for Retail, Google's solution offering for product search and recommendations. With Microsoft Azure, we will launch new starter kits to accelerate enterprise migration. And finally, at Commerce Tools, our premier partnership continues to grow around composable commerce solutions that enable global brands to engage with their customers. On the M&A front, as you all know, on December 23, 2022, we announced the acquisition of Mutual Mobile based out of Austin, Texas, with delivery operations out of India. Mutual Mobile is a design and digital platform engineering service company specializing in mobile user experience, product design, and augmented as well as virtual reality capabilities. The company has focused on healthcare, automotive, and financial services industries. It has also added 175 skilled talents to our operations. We are already working on cross-selling opportunities and expect to leverage each other's customer base. Beyond Mutual Mobile, our pipeline for M&A opportunities is robust, and we are actively exploring multiple opportunities. More importantly, recent data changes in the microenvironment have led to more attractive pricing on the M&A front and we look forward to sharing more updates in 2023. As we highlighted in the past, our M&A strategy focuses on capabilities key to customers and delivery locations. Now about Project Giga Cube. Turning to our billion-dollar revenue strategic initiative we termed the Grid Dynamics' Giga Cube initiative. As the name implies, there are three dimensions to the plan, and with each dimension, there are three focus areas. Number one, three industry expansion. Within the industry verticals, our focus will be to expand in three areas: life sciences and pharma, financial services and insurance, and industrial and manufacturing. While we have clients in each of these industry verticals, for the company to scale to $1 billion in revenue will require greater focus on building practices around each of these areas. To enable this vision, we're developing industry-specific solutions based on our robust consulting and co-innovation approach. These solutions are spearheaded by the subject matter experts who were hired both from the industry and consulting worlds. Our expansion in the three core industries, in addition to serving a broad technology audience, will allow us to smoothen the typical volatility in the industry-wide innovation and technology adoption cycles. Number two, three times geographies. Customers are increasingly seeking partners that can match the pace of their business running 24 hours a day. This means building a presence across the globe will enable organizations to realize their needs with distributed yet integrated teams across three major geographies. We will significantly accelerate time to market with our clients; onshore and nearshore presence in the Americas and Central Europe is complemented by India-based delivery. As you may recall from our last quarterly commentary, we'll continue to make investments in Mexico, Poland, and India. Number three, business technology and data intersect. Leading enterprises differentiate themselves by innovating at the intersection of business technology and data. Grid Dynamics is poised to be the preferred partner for such enterprises because we possess the critical capabilities required for such innovations. Increasingly, our customers are turning to Grid Dynamics to assist with co-innovation at the business level. We're bolstering our consulting capabilities through the hiring of subject matter experts in selected industries. These investments are helping us to improve the positioning with existing customers and shorten the sales cycle with new ones by offering starter kits and accelerators. Investment in end-to-end digital commerce has rewarded us with deep meaningful relationships with key customers across industries. We're looking forward to introducing more domain-specific frameworks that are similar in scope. From day one, Grid Dynamics has always been known as a technology company that helps enterprises realize the promise of cloud computing. The race to out-innovate the competition through technology continues. How customers navigate the change of the economic cycle and technological promise will continue to be relevant to the clients themselves. Infrastructure prices declined, while wages continue to climb. With the help of our cloud-native partners and our modern application development practice, we're uniquely positioned to enable our customers to do more with fewer investments. The wave of digital transformation has brought us a lot of data. Best-performing businesses are data-driven; however, this requires effectively processing data and incorporating it into the decision-making process. While fully automated decision-making processes are still in the future, artificial intelligent knowledge agents are invaluable to make sense of data. They augment traditional data organization practices by servicing the relevant information to consumers in their preferred modality. AI-assisted product design driven by generative AI models is already successfully used by some of our customers. In the B2B business, we continue to incorporate AI capabilities into our manufacturing service offerings, including visual controls and predictive maintenance. We will continue to enable our customers to face whatever shifts the future may bring with confidence, as well as prepare them to grow. During the quarter, Grid Dynamics delivered some notable projects. For a global technology company, we built a flexible data collection platform to acquire aggregated or raw and serialized data and images from the supply chain for further data visualization and analysis. This platform allowed our client to connect around 60 suppliers in more than 150 varieties of products to control production quality as well as equipment condition. This is a site-agnostic solution, which provides strategic value to the client. At a global CPG company, we implemented controls, procedures, and automation, which enabled this customer to restrict access to personally identifiable information while still providing their engineering teams autonomy to deploy changes at will. Our solution allowed the customer to onboard one geography to the global e-commerce platform, reducing costs of maintenance and bringing their business capabilities to the global standard. For a global multi-brand restaurant company, Grid Dynamics helped build a brand-agnostic unified data platform that services various needs of data analysis. Our solution improves their time to market by reorganizing their PODs, enhancing their operational processes, and various facets of engineering discipline. We helped the client to optimize their workload and switch to more automated cluster usage to save approximately $500,000 per year on spending on the data ingestion platform. At a leading membership-only big box retailer, we assisted the company in improving their mobile application architecture. This application is designed to help onboard new lines of business easily and add warehouse functions onto a single application. We expect this solution will lead to major improvements in customer satisfaction while providing a single interface to all that this brand offers. And now let me turn the call to our Anil, who will discuss Q4 results in more detail. Anil?

Thanks, Leonard. Good afternoon, everyone. Our fourth quarter revenue of $80.6 million exceeded our guidance range of $77 million to $78 million, and was down by 0.7% on a sequential basis and up 21.1% on a year-over-year basis. On a constant currency basis, our revenue growth on a sequential and year-over-year basis was a decline of 0.8% and a growth of 23.6%, respectively. The 248 basis points 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, while on a sequential basis, the stronger euro resulted in a 10 basis points tailwind. The better-than-expected revenue in the quarter was driven by growth at some of our large customers combined with contributions from new logos. TMT, our largest vertical represented 33.7% of our fourth-quarter revenues and grew 3.1% on a sequential basis and 38.8% on a year-over-year basis. We continued to witness growth at some of our large technology customers. New logos also contributed during the quarter. During the fourth quarter, retail, our second-largest vertical represented 31.8% of our revenues, grew 1.6% on a sequential basis, and 17.4% on a year-over-year basis. The sequential increase was driven by revenue contributions from some of our recent logos. Within this vertical, we continue to see customers being cautious in spending with the ongoing macro concerns. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 17.5% of our revenue in the fourth quarter, and decreased by 12.3% on a sequential basis, and grew 3.4% 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. Finance represented 7.7% of revenue and increased 2.8% on a sequential basis, and was up 30.6% 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 9.3% of our fourth-quarter revenue, and was down 0.2% on a sequential basis. We exited the fourth quarter with a total headcount of 3,798, up from 3,746 employees in the third quarter of 2022 and up from 3,274 in the fourth quarter of 2021. The sequential increase of 52 employees or 1.4% was largely due to an increase from our acquisition of Mutual Mobile, which contributed over 175 employees in the quarter. The increase from 2021 was largely due to a combination of improving demand resulting in headcount increase, combined with our acquisition of Mutual Mobile. At the end of the fourth quarter of 2022, our total US headcount was 338, or 9%, of the company's total headcount. This was similar to the 9% in the third quarter and was down from 9.9% in the year-ago quarter. The year-over-year decline, as a percentage of the total headcount was largely driven by the greater mix of non-U.S. headcount. The non-U.S. headcount, which we sometimes refer to as offshore, located in Central and Eastern Europe, UK, The Netherlands, Mexico, and other locations was 3,460, or 91.1%. In the fourth quarter, revenues from our top five and top ten customers were 43.2% and 60.4%, respectively, versus 44.5% and 61.1% in the third quarter. During the same period a year ago, our top five and top ten customer concentration were 42% and 57.7%, respectively. The increase in concentration across our top five and top ten on a year-over-year basis was largely driven by increasing concentration from our top customers, primarily in the technology verticals. During the fourth quarter, we had a total of 218 customers, up from 200 in the third quarter and 221 customers in the year-ago quarter. Fourth quarter customers included 16 coming from the recent acquisition of Mutual Mobile. 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 $32.3 million, or 40.1%, versus $32.7 million, or 40.3% in the third quarter of 2022, and up from $27.3 million, or 41.1% in the year-ago quarter. On a non-GAAP basis, our gross margin was $32.7 million, or 40.6%, versus $33 million, or 40.7% in the third quarter of 2022 and up from $27.6 million, or 41.4% in the year-ago quarter. On a year-over-year basis, the decrease in gross margin as a percentage was largely due to higher levels of bench. Non-GAAP EBITDA during the fourth quarter that excluded stock-based compensation, depreciation and amortization expenses related to geographic reorganization, transaction and other related costs was $16.5 million, or 20.4%, down from $17.1 million, or 21.1% in the third quarter and up from $11.6 million, or 17.4% in the year-ago quarter. The year-over-year increase in EBITDA, both in terms of dollars and percentage of revenue was largely due to a combination of higher levels of revenue, flat operating expenses, and favorable FX trends. Our GAAP net loss in the fourth quarter totaled a loss of $6.7 million, or a loss of $0.09, based on a share count of 74 million shares compared to the third quarter loss of $6.7 million, or a loss of $0.10 per share, based on 68.6 million shares and a loss of $3.7 million or $0.05 per share based on 65.7 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 geographic reorganization costs, offset by higher levels of revenue. On a non-GAAP basis in the fourth quarter, our non-GAAP net income was $10.5 million or $0.14 per share based on 76.5 million diluted shares, compared to the third quarter non-GAAP net income of $11 million or $0.15 per diluted share based on 71.9 million diluted shares and $7.1 million or $0.10 per diluted share based on 71.7 million diluted shares in the year-ago quarter. The increase in non-GAAP net income in comparison to the year-ago quarter was largely driven by higher levels of revenue, partially offset by higher operating expenses. On December 31, 2022, our cash and cash equivalents totaled $256.7 million, up from $255.2 million in the third quarter of 2022 and up from $144.4 million on December 31, 2021. The key reason for the increase on a sequential basis was operating cash flows offset by the recent acquisition of Mutual Mobile, which closed on December 23, 2022. The key reason for the increase on a year-over-year basis was primarily our share offering, which raised $115 million, of which $109.5 million was received by the company. That was partially offset by the acquisition of Mutual Mobile. Coming to the first quarter guidance, we expect revenues to be in the range of $78 million to $80 million. We expect non-GAAP EBITDA in the first quarter to be in the range of $10 million to $11 million. For the first quarter, we expect our basic share count to be in the 74 to 75 million range, and our diluted share count to be in the 77 to 78 million range. That concludes my prepared remarks. Ben, we are now ready to take questions.

Thank you, Anil. Our first question comes from Josh Siegler from Cantor Fitzgerald. Please go ahead, Josh.

Yes. Hi. Thanks for taking my question today. Congratulations on strong execution this quarter. This quarter, you added the most new logos you've ever achieved in a single quarter. So I was wondering if you could provide some additional color on how you've been able to achieve such significant new logo growth and how your current pipeline looks like into 2023.

Thank you, Josh. Well, it just didn't happen overnight. We've been basically providing the guidance throughout 2022 that despite all the challenges related to the war and other impacts, we continue to deploy more focused offerings to the clients and we diversified the product base of our clients. When we announce our re-dynamic Giga Cube, our billion dollar plan, it's basically the beginning of rationalizing the value of the company, which is driven by more depth of this specific knowledge related to the verticals and the clients. It kind of comes down to when you’re looking for potential clients, those focusing on their budgets for 2023 were able to secure the positions.

Understood, appreciate the color there. And then Anil, how are you thinking about your capital allocation strategy as you progress into 2023? The company is sitting on a significant amount of cash. So would you consider increasing the pace of M&A in the future, perhaps faster than what we saw in 2022?

Well, Josh, you saw late December, we had one announcement, right, which added certain capabilities and certain delivery. Leonard in his prepared remarks, and his press release clearly highlighted that M&A is an important area. And the pipeline is robust. Some of these prices are coming to a little bit more reasonable level. So we're actually going to be very focused. Also the key point here is that we've got some initiatives for growing our company to a billion dollars, right. So we are going to be prioritizing our focus on growth, and that's going to be another aspect. I think, between these two, that’ll keep us pretty busy in 2023 and beyond.

Understood, thank you, and congratulations again.

Thank you, Josh.

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

Hey, thanks for taking my question, and congrats on a good quarter. Let's just start off with the macro. Regarding the macro how have buying conversations kind of evolved over the last few months given that saw a sequential decline in revenue in the outlook? Are you seeing anything relevant delays in decision-making that your peers have called out? And also any kind of color you can give on trends you are seeing for the first few weeks of the year.

There are a number of questions in one question, right. So as we mentioned in the Q3 earnings call, we foresaw some of the weakness coming from the market. We were limited, maybe to caution, but we hit the timing right. Starting December, as companies in pretty much in a consumer-related business specifically start planning their budgets for 2023, they took a very precautionary stance. So we've seen those declines. As I said, we're prepared to handle them. And you go through a bit of a downturn with one client by addressing more priorities to the other growing clients. But overall, the situation of December certainly expanded into January and February. I can't say we are already like at the bottom of that event situation or not. But most of the budgets are pretty clear. I believe that our guidance indicates that even though there's a little bit of an organic sequential decline, it's not very unexpected at all. And if you add some of the new potential clients, we're looking bullish for the year; however, for the quarter, we do see a little bit of softness with some of the clients.

Got it. And thanks for providing all the color and commentary on your position. On the vertical expansion and increased focus on consulting in particular, how much of a subject matter expertise would you say you already have in-house versus the need to sort of go out and hire? Also, regarding the three verticals you want to expand into, what exposure do you have with those verticals?

So if you look at the results of 2022, from the cost perspective, and even Q4, for that matter, the largest growth of the spending happened in city office, in that area of building more artifacts and solutions around accelerating some of the projects with the clients specifically in new areas, but also attracting a number of specialized subject matter experts. The best way to do this is to actually get them engaged with the clients in building this kind of consultative report which results in the growth of the business, based on defined roadmaps. And that's what we're doing. I couldn't say that we're completed or fulfilled; I think there will be continuous expansion. But this is the progress that has already resulted in capturing some new clients in the life science space specifically in pharma and I was very glad to see that. As far as financial services, right now, it's more FinTech and some very notable FinTech payment system clients, which is again, it's a great space for us because a lot of foundational horizontal expertise is there. We just need to turn more into the application for this specific vertical depth. In the area of industrial and manufacturing, that has always been my kind of area, but also distilled to the company capabilities of managing an ever-changing and now ever-streamlining supply chain. So supply chain data knowledge, data management and integrating AI capabilities related to industrialization helps us to grow this space too.

Got it? Thanks again.

Thank you, Ryan.

All right, thanks, Ryan. Next question comes from Puneet Jain from JPMorgan. Your line is open.

Hey, thanks for taking my question. And nice quarter. Is much of the employee relocation behind you, and more importantly, are your client-facing and client delivery teams in a steady state right now?

Okay. Well, it's never over till it’s over. We are definitely done with Russia for a long time. The situation with Ukraine is more fluid. I mean, we've done quite a bit of work in Q4. As you know, it was a little bit of a scare from the global information about the Russian attack against Ukraine's infrastructure. We've been preparing for potentially that issue, because we're kind of from that region. So we built a lot of capacity on generators, satellite links, and other equipment necessary to operate. But fundamentally, the contribution of the total headcount from Ukraine continues to decline, because we expand out the areas; saying that all the people, knock on wood, are operating in a fully operational environment, in the safety of various distributed locations. We are going to be at the one-year anniversary of the start of the war. So if you look back, it's an incredible transformation. But we are not looking to be victims. The winners are not victims; winners are people who put their path first and succeed, both in a war environment and in the company itself. So we listen to the clients. We expand allocations. India has been our growth area; Mexico has been a growth area. But the European priorities and Central Europe continue to expand as well. So I would not say we've ended already with all the relocations, but we're certainly in a much more controllable way than perhaps other companies. We don't see this as a detriment to fulfill our client obligations.

All right, and then the new logos that you won recently—13 new clients added in Q4—and expansion at existing customers. How should we think about ramps at those accounts, like the add-on work or additional work you might receive? Can those new businesses drive sequential growth starting from Q2?

Very good. I would probably start from the end just because there's a little poison pill about Q2. I can't say Q2 or Q3 or maybe even Q1 for some of them, because you see there’s a little variance on that guidance for Q1. But fundamentally, what's very important, I think this is key. As we grow, as we expand and mature, you've been with us for a while. I've been always talking about a two, five, ten strategy—2 million, 5 million, 10 million—talking about customer positioning. As we're maturing in the business for the big enterprises, we're kind of switching; it’s not really something in the script today, but you ask a very valuable question. So driving the team into the new formula, what is more like 5, 10, 20—I'm not talking squares or any other multiples. It’s just basically that the new clients need to get to 5 million, instead of 2 million, because they're very substantial clients. And by doing this, actually there are several folds. One of them is our increased relationship on partnerships, both with hyperscalers and some notable software integrators, which kind of gets us in the midst of their client key work. The other one is, as I mentioned in one of the earlier questions, there was good prep work done. Now I hate to say it, this is just one of those, the biggest disappointments: you put a lot of effort and then something happens. I can't say it will never happen, but I think we're much more optimistic with the approach we're taking now than ever. And also the marking machines are working because it's not anymore just word of mouth or all the stuff. There are some of the approaches we have accepting now major potential accepting our methodology, especially with consultancy and reach out to us. The bottom line, I can't say the date, but I definitely say this: keep in your mind this 5, 10, 20. And when the time comes, you can actually put my value there.

Thank you a lot.

Thanks. Our next question comes from the line of Maggie Nolan for William Blair. Please go ahead.

Hi, thanks. Congrats, guys. Anil and Leonard, can you talk a little bit about the cadence of the year and anything we should keep in mind for seasonality or year-over-year comparisons, or just in general, first half or second half expectations?

Well, Anil told me very clearly do not get diverted from the script. Obviously, we do—everything we do is a bottom-up analysis and analytics. Just because we are analytical and we think through the process in advance doesn't mean it guarantees that whatever we think is going to happen. Everybody talks about the second half of the year being significantly more cadence than the first half of the year. To me, I'm not an economist and I'm not a hockey player, so hockey stick is not my favorite approach. I think the transparency of customer relationships and budgets gives us some understanding where we are in the first half of the year. It's a tough period of time. However, as we grow the number of customers, we are also getting some of the few customers who already budgeted work for us, which I didn't mention before, they came as a result of switching some work to Green, which is especially amazing during the time when people are tightening their budgets. So we do see some progress there. I think we're going to fight tooth and nail for Q1, Q2, and also as Anil mentioned, there will be some notable acquisitions coming in. But the approach we take with this great Giga Cube plan is we're diversifying more and more—not just consumer-focused business, but from B2C to B2B, and globalization is our approach with clients. I'm bullish for the year and you've seen my statement in the press release; I've thought through that, and people are getting tougher through the years. I believe our customers are gaining more and more respect for who we are and what we do.

Sure, thanks, Leonard. And then what about just the pricing environment and your expectations for 2023, as well as any impact from the changes in your delivery times versus last year?

Yeah. So it's always the toughest question. Historically, we've always seen that there are two extremes come in. There's always wage inflation, and we mitigated wage inflation by building stronger and stronger internal programs on internships with universities and our Grid Dynamics training process. We've balanced some of these cost increases with homegrown teams. Now we moved to some of the more expensive locations—from, let's say, Eastern Europe to Central Europe. So yes, there's certainly an impact in working with the clients. We need to prove, and we are proving, that the value we're bringing is exponential. So we’re focused more on working in a fixed project and pod relationships. It’s really not about the cost per engineer, but ROI on a project basis. The other challenge we're taking for this year, going forward, is to prove that our Indian operation is a state-of-the-art capability organization, just judging by what interns were taken from the schools. Again, there's a little bit of a reaction from the MOs when it comes to “all your needs are going to be really cheap.” We are just working through the value of organizations globally. In the pricing side, I am sure some of you will inquire further about this after the call with Anil.

Thank you.

Sure.

Thanks, Maggie.

Thank you. Next question comes from Bryan Bergin from Cowen. Your line is open.

Hey, guys. Good to see you. I wanted to start on the outlook first. Can you just talk about some of the underlying assumptions related to the key industries in that Q1 outlook, particularly the tech clients? Just want to get a sense of current contracting dynamics there and just your visibility into their spending plans.

Anil, you did not answer a single question. I'll give you a few seconds; I'll jump in. So if you look at our Q1 guidance, as Leonard pointed out, we have some contribution from the acquisition, and for modeling purposes, you can have—it’s an insignificant contribution, less than 2.5% somewhere in that range in Q1. So looking at going from Q4 to Q1, there’s some seasonal aspects of the business, so I'll just put that aside. Beyond that, what we are seeing is a couple of movements. We have our new logos, right? That’s actually contributing and providing us a little bit of a cushion. The new logos are spread across the landscape. When you look at the more consumer-centric businesses, you're seeing a little bit of a flattening to some extent, but there is a certain amount of conservativeness, caution, whatever it is, in some of the things. When you look at some of our tech guys, as the prepared commentary pointed out, we’re moving in the right direction. We’re gaining more and more, and again within that we’ve got some new clients too. So I just want to add color, as I promised Bryan. Even when I’ve been asked this question when I was on Bloomberg Radio, what’s going on with your friends from Silicon Valley? They’re firing left and right. The comment is, well, nobody really knows what's going on in the individual minds of leaders. I’m humbled to even make a comment publicly about what I think about it. But there was a little bit of an overextension, right? Grid Dynamics is a very conservative company. When we approach our clients, we don’t only consider what’s happening now but what type of work will carry us through the good and bad times. There are always risks. But what we see with the selection of work with the same notable clients—I’m not just talking about the most conservative premier clients but other tech clients—they suddenly see a big void because they rushed to hire and now they rush to let people go. This doesn’t mean they're not profitable and doesn’t mean their budgets are less. We’re not directly tied to that commercial revenue stream. So it means that our work is more distributed. I don't see that type of rundown of the work, which was noticeable with the retail clients. So overall, I would say at the frontline of all the big news, for our position is more controllable than for the overall industry, I would say. That’s my sentiment. I don't see that decline.

Okay. I appreciate all that. And then just from a delivery standpoint, can you talk about how your delivery operations are evolving, if at all, as you add more scale and new regions? I’m curious if the pod structure—the pod model that you have—has evolved a bit as you bring in these new regions on stream and how you're bringing the teams together?

Right. I would say European countries are in negligible disruption. Frankly, if you look, Bryan, in terms of whether it's Poland or Romania, Serbia or Armenia, first of all, it's mixed with the employees who were relocated from Russia and Ukraine. But also there is a contingency of work. We’ve been an area where I understand locations. There's a well-developed process. As you know, Mexico has been with us for a while, so again, it's more or less involved; it’s more connected to the near-shoring approach. In terms of India, there are ideological questions about how we’re dealing with India, especially in growing numbers. The answer remains the same. I've been doing this, integrating businesses for 30 years—when I was driving my research labs at Midwest and adding big contingents from Europe and Asia, particularly India. I’ve been involved in the service business for 30 years. The number one solution is, first of all, very clear communication. Second, we know some of the key people from Europe to India for rotational, very significant assignments. They actually work with the team, with projects and also with the capabilities of just the hiring, recruiting, and delivery process. So far, we haven't seen glitches. The speed of work we can do better, but with the quality of work, I have not seen any issues until now.

Okay, appreciate all the color. Thank you.

Thanks, Bryan.

Thank you, Bryan. Next question comes from Mayank Tandon from Needham. Please go ahead.

Great. Thanks. Congrats on the quarter. Just very quickly, I wanted to ask in terms of your revenue growth—so even though you're not giving guidance, and Leonard talked about the pricing environment—how do you think about utilization and headcount growth organically? Is that something you expect to drive at this point? Or is it maybe a little premature, given some of the visibility issues because of the macro?

Thank you for giving me a little broader question, because there's a big difference between utilization and headcount growth. Utilization-wise, we're always focused on maximizing utilization. Our engineering capabilities, when they're managed or whether it’s a direct involvement in the E&M work or the more complex projects, are one of the key positive factors for delivery. So I'm pretty bullish on utilization. The second factor, though, has delivered different connotations in the first half of the year. I made an investment to retain some of the key employees, who have been potentially downsized from some work in the last month or two because of their very strong knowledge and their historic capabilities, and we redeployed them on some of the specialized work related to creating accelerators and some core work. I call it virtually internal acquisition of talent. That work has been planned prior to the economic micro impacts affecting the industry. So when we talked about it in Q3, we already were planning. So I would say that on the total organic, not M&A organic account growth, I don't see a huge drive early in the year because we do have a good senior pipeline. We did not slow down the internships; we were just more selective in new hiring. And of course, with utilization and engineering, that's the key metrics where the plans are holding. So it's kind of three aspects: dry powder, utilization, and top talent to build vertical capabilities for our new initiative.

Got it? That's very helpful. And then just maybe a quick word, Leonard or Anil, on the supply side. How is the environment today? I would imagine it's a little bit easier to find quality people, given the skillset requirements, and then any comments on attrition levels that you've seen recently. Just give us some context around that. Thank you.

On the attrition side, you don't need to be a wizard—right, it's lower. When the time is tough, people don't run away. But for Grid Dynamics, it's not as dramatic. Remember, even in very good times, we didn't have major spikes in voluntary attrition. There was a spike of involuntary attrition with the transition out of Russia, but on voluntary attrition we’re more or less down. So we see some drop, but it's also important to understand what type of talent we retain and grow. We embarked in late 2021 on a heavy internship program. That's our main feeding line for young talent. Senior people are growing from within and retraining. The market attention is twofold: either kind of mid-level people who need to be deployed for special skills, or those very specialized architects and subject matter experts for the new industries or new verticals. So that kind of talent we acquire. I think the last one has become way more accessible, right, because there is a great talent pool of people thanks to reduced environment from those big tech companies specifically. Everything else is more or less balanced. So I don't think there’s a huge drop or increase right now; I think it’s just a normal operation. And perhaps the financial pressure is a little bit less rather than talk about the number of capable candidates.

Okay, thank you so much.

Thank you.

Thank you, Mayank.

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

Thank you, everybody, for joining us on the call today. We exit 2022 with many accomplishments. And while we start off the year with some macro-related uncertainty, I'm confident that our strong technological foundation and the value that we bring to our clients will position Grid Dynamics stronger. Grid Dynamics has been a net beneficiary of economic down cycles. Based on our pipeline of the new client engagements and discussions we're having with our existing clients on the large and complex platforms, I'm optimistic about our prospects. I look forward to giving you a business update in May. Thank you very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect.

Goodbye.