Greetings, and welcome to the Grid Dynamics Holdings, Inc. First Quarter 2021 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lilia Chernova, Head of Investor Relations. Thank you. You may begin.

Good afternoon. Welcome to Grid Dynamics' First Quarter 2021 Earnings Conference Call. Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations and beliefs, including our second quarter 2021 financial guidance, the growth of Grid Dynamics' business, our objectives and business strategies as well as other forward-looking statements. You can refer to the disclosure at the end of company's earnings press release and Form 8-K filed with the Securities and Exchange Commission today for information about forward-looking statements that will be made on this call.

Thank you, Lilia. Good afternoon, everyone, and thank you for joining us today. I'm excited to share my thoughts on how Grid Dynamics is making strides across its business and highlight the progress we have made since we spoke with you a few months ago. On the call today, I will provide highlights of our first quarter results, share with you what we are witnessing across our business on the demand front and talk about the trends that are shaping our second quarter in 2021. When we spoke with you all in March, we provided commentary around the demand environment, both for the first quarter and the full year 2021 as well as highlighted reasons for our upbeat outlook. Today, on the call, I'm happy to reiterate the positive catalysts we shared then. And furthermore, our strong first quarter results and guidance for the second quarter clearly indicates a robust demand environment where customers are actively seeking our services for strategic digital transformation projects across different industry verticals. Now coming to the first quarter. I'm very pleased to report the highest revenue quarter in the history of Grid Dynamics. Even after factoring out our recent acquisition of Daxx, this was an all-time high quarter. In the first quarter, our revenue of $39.1 million included $6.5 million of revenues from Daxx, and it was higher than our guidance range of $35 million to $36.6 million. Both Daxx and non-Daxx revenues exceeded our expectations as demand picked up across all our vertical industries.

Thanks, Leonard. Good afternoon, everyone. Our first quarter revenue of $39.1 million exceeded our guidance range of $35 million to $36.5 million and was up 30% on a sequential basis and 21% on a year-over-year basis. Excluding revenues from Daxx, which contributed $6.5 million, revenues in the first quarter of $32.6 million increased by 12% on a sequential basis and slightly up on a year-over-year basis. The better than expected revenue in the quarter was driven by a pick up in demand across industry verticals. Similar to the last couple of quarters, our technology vertical was the largest vertical in the quarter. As Leonard pointed out, this was not only the highest quarterly revenue, but also the quarter that marked the company returning back to pre-COVID revenue levels. In the first quarter, our non-retail business, now representing 77% of revenues, was up 36% on a sequential basis and 85% on a year-over-year basis. During the quarter, our retail segment, representing 23% of our revenues, grew 14% on a sequential basis. The growth in the quarter was largely driven by our top e-commerce-friendly retail clients and to a lesser extent by others. In spite of a 14% sequential growth, retail was down 45% on a year-over-year basis.

Our first question comes from the line of Mayank Tandon with Needham & Company.

Congrats on the quarter. I wanted to start with just the guidance. Obviously, a very strong momentum coming out of 1Q. The Q2 guidance looks good. And the full year does as well. It does call for a pretty sharp deceleration in the second half, if I'm doing my math right. Just wanted to get a sense, if that's just being conservative at this juncture in the year, or is it something else that is impacting the second half outlook relative to the strong momentum in the first half?

Right. Mayank, thank you very much for your question. Look, I mean, we just started the year. If you see our guidance is at least that dollar amount, right? And obviously, our first quarter was strong, we'll come back and give you an update. But based on the business momentum and just the tone of the business, we feel pretty positive for 2021. Look, I mean, this is our best guesstimate right now. As we said, we'll come back in 3 months, and obviously, hopefully give some more positive news.

Got it. That's understandable.

Mayank, this is Leonard. Just more color on it. As you know, we had a very good quarter last year. This quarter is even better. We have a good visibility in Q2, obviously, but we still remain to be a little bit more conservative just to make sure we get the -- all the facts. But you're absolutely, there's no, like, immediate foreseen deceleration, by all means.

Got it. That's very helpful. And then just as a quick follow-up, I wanted to get some color on the supply side of the equation. There have been some concerns expressed by other IT services companies in terms of being able to attract enough talent. There's clearly a war for digital talent pressure on attrition and wage inflation. So any perspective on that would also be very helpful how you're managing some of these headwinds that you made including demand?

Sure, Mayank. Well, you actually asked 2 or 3 questions, right? So let's just make sure we'll have other people a chance to ask the same question because I suspect there'll be more people talking about the same. Just a high level, first of all, on the talent. You're right. There's always a pressure about getting the right people to the company. And we're getting more and more demand on a variety of skill sets coming through existing and new customers. Something been prepared for that. We built a strong pipeline comes from the internship programs, some of the partnerships, additional hiring. hear some other companies talk about the projects. And one of the benefits that our model of and extend helps us because we're starting many projects with handful of good people, and then we build on top of it. So I believe there's scalability. Definitely, even though it's industry challenged, Grid Dynamics is work prepared.

Our Next question comes from the line of Maggie Nolan with William Blair.

Congrats on the results. I'm wondering on the EBITDA margin. What's holding you back from or creating uncertainty in the EBITDA margin guidance for the full year? And is something in the low-teens, similar to Q1 and your Q2 guide, a reasonable expectation for the full year?

Yes. Thanks a lot for the question, Maggie. So if you look at the full year, right, I mean, there are a couple of moving parts here. Number one is that we've made an acquisition in Daxx, right? And there are some levels of investments and some programs that we're looking at. So the focus is around there. The second thing is that, as you know, we've been investing in programs within the company, whether it's Salesforce, whether it's building up new lines of business. So there's that element there. And the third thing is that, look, we still have a little bit amount of retail business, right? So some of the moving parts there. As we proceed with every quarter, I think things are going to get better. We will come to some point where we'll give out more longer-term visibility on the EBITDA. But we're taking one step at a time. And at the right amount, we'll revert to providing a little bit more color.

And Maggie a little bit more color on that. So similar to what Mayank asked about the acceleration, we project the positive trend momentum on our margins as well. At the same time, we're a bit cautioned about some of the trends, which mean that we to the industry, not to. And while I'm very optimistic about the next steps beyond the Q2 and information we have guides us to the very promising 2021, which is trying to be a bit rational how we can pace ourselves. As you recall, when we got into of the storm last year, I made a comment that despite all these headwinds, I'm going to hit the full recovery of revenue in Q1. And at that time, it was a little bit forecast for most of the guys. We the ship, and now we are ahead of the game. And then we're talking one of those quarterly discussion about when we're going to get back to some EBITDA margins. And I mentioned, let's wait for Q2 results. So let's wait and see how the things will turn out.

Okay. And then, when you think about your verticals, obviously, there was good growth in the other segments. Is there anything that sub verticals within there that are good growth drivers could be a breakout that we should keep an eye on? And what does it take to reinvigorate the financial services segment as well?

Yes. So Maggie, you're right. There are a couple of certain dynamics happening with certain customers. They're not getting to a point where we want to break it out as a separate vertical, largely because they're one-off. But these are related to some of design wins or program wins or customer wins we had over the past 12 months. We have a particular customer in online delivery of groceries, and we have another customer in the -- the closest the food delivery business. So yes, there are a couple of those things. And with time, we'll break it out. On the financial, if you look at our business, we don't have as many customers perhaps as we have with the TMT and other things. So these handful of customers, when they move, they have a meaningful impact. We saw with this one particular customer reverting back to program growth and that impacted us. As you may recall, last quarter, we even talked about a global insurance customer. So we're trying to diversify within different subsegments of the financial industry.

Yes. And I think -- thank you, Anil. It's a good overall review. But other thing, which I want to bring attention to, is that some of Grid Dynamics' accelerators, solutions, integrated practices coming from more traditional industries, start accelerating with the digital expansion during the time into other verticals, and the demand for what Grid was able to deliver starts spreading across multiple verticals. I think, Anil is fair to say, it will be early to call the subgroups. But to summarize, they are very much synchronous in terms of our horizontal capabilities just to move into the new fields.

Our next question comes from the line of Joseph Vafi with Canaccord.

Maybe we talk first on that large CPG customer that you called out. I know it's a fast growth customer for you right now. Is that customer still growing, or how do you see the evolution in terms of revenue contributions from that customer playing out over time? And then I'll have a couple of follow-ups.

It's a very good question, Joe. I believe, what you're really asking is it kind of a temporary ramp up or it's a longer-term growth. Well, there are a couple of aspects, which we're currently in the joint work. We are very proud to be not just on the implementation partner, but having a -- the table and a variety of the road maps and a new innovation, which this Daxx CPG customer is demanding, which goes into the areas of business, which we currently are are not present, as well as some of the global international opportunities jointly with this customer. So I wouldn't have the magic crystal ball to say how and when the acceleration will continue. But we definitely see the continuous demand. And based on my expectation, this customer will continue to grow.

That's helpful, Leonard. And then, on those 6 new logo wins and in general kind of when you look at the sales pipeline, what are you seeing in terms of sizes of enterprises you're engaging with? Are they staying about the same? Are they growing? Do these 6 new logos kind of have capability to become top customers over time? Or any color you can provide there would be helpful.

Sure, sure. So first of all, Anil earlier mentioned, we only name the logos which we haven't just signed the contract with, but generated revenue. So hopefully, by the same time next quarter, we'll give you even more color. And for now, I believe that there is my idea not to talk something that we don't have money in the bank yet. So these 6 specific customers, I would say, that come from the mid to upper range. I wouldn't call any one of them to be like a supergiant at this point. However, what was very encouraging, some of them -- some of the customers, which we're previously engaged with, start ticking up in Q1 to the level where we would be more comfortable to add them to the top-tier in the second half of this year. Also some of the contracts we just tied again without revenue yet, we see a huge potential to be also top 10. So 2 parts. The ones we talked, 6, they probably mid to upper range. Some of the guys were just expanded on, I have a very high expectation for the second half of the year and then to come.

Got it. And then, maybe, I guess, I could probably do the math, but Anil, what do you have built into the guide for Daxx growth rate this year, or are you being conservative there?

Yes. So look, I mean, as you see, we had -- on the Daxx front, we haven't changed a lot. We provided everyone a snapshot of Daxx. We're in the earn-out period right now. We're slowly integrating the company, both from a sales and delivery point of view. So we've taken a little bit conservative approach as we integrate, as we understand this company a little better. So we have kept the Daxx numbers at least on an out-quarter same, and we'll just update you. So yes, at this stage, we've just taken that at front.

Our next question comes from the line of Bryan Bergin with Cowen and Company.

I wanted to follow-up on the new engagements and the new accounts. How would you characterize the speed of the project activity among the new customers? I'm curious if there's been any notable shift in the project ramp trajectory of the new clients relative to what you had seen historically.

All right. Thanks, Bryan. I knew this was a philosophical question with a thematic outcome. So it's all definition about what new customer is. As you know, when we just acquire a great new customer, most of the time, it's still and expense. So I assume you more refer to the customers we captured the least quarters in how we expand them. From that perspective, there has been a significant acceleration on expansion and demand. And the reason I'm saying is it's not just in terms of percentages. I mean, Anil mentioned to you that percentage of contribution from top 5 or top 10 reduced, but it's also on a versatility of the projects. What we are able to do, which we have not been probably as successful in the past, but shift and expand beyond their regional area origination with a higher speed. And part of it relates to the traditional businesses like specialization in the cloud migration, automation. A lot of related to the data analysis, data analytics, modern world for machine learning or specializations. Our introduction of a broader pod based solutions, in our case, we're bringing the teams to engage in new projects as we get to the customers. So I would say, that's actually leading momentum for us to look comfortable in the future without over the reliance on just a few top clients, which you may have seen the case in the past.

Okay. Okay, that's helpful. And then on traditional retail, so in the context of just the reopening momentum in the U.S., how have your conversations with the brick-and-mortar customers on the legacy ones, how have those evolved over the last 2 months just given the relative improvement in their business prospects? Is there anything happening there? Anything built-in?

Yes. So there is, I would say, a little bit of a phenomenon, which you picked up. In the last 6 weeks, we strongly started getting quite a bit more demand with those two guys, especially one of the two guys who departed from us that irrational in March last year, right? So I mean, we're able and willing to support them. Some of the smaller guys, more focused customers, they never stopped investing with Grid. But I do see a pickup. Now being conservative on the whole brick-and-mortar service and more e-commerce-friendly retailers coming to the play, we did not project as much growth of these guys because we wanted to see machine's ability, right? But I pooled with you last 6 weeks, we did a couple of very, very strong demands from the brick-and-mortar retails. But that's on the top of what we already reported.

Our next question comes from the line of Josh Siegler with Canter Fitzgerald.

Congrats on the quarter. Would you please provide any sort of progress on the sales build out and productivity with that salesforce?

All right. Productivity and Salesforce. So it's the first time we'll talk, so welcome to the . We have been reporting to the investor community in the past several quarters our continuous investment in the sales force. We're still in the progress. We are able to capture some senior sales experienced once people with a good roll backs, and we continue to close some of them. We're very selective in terms of how we expand on the front of the senior relations, especially in time of quality, but it's an investment. We also accelerated a marketing touch. We improved SCOs, a direct marketing campaign, whereas webinars are doing the modelers. So we also combined, I would say, the Salesforce expansion with improvement on existing customer communications as well. We find that actually, there's some feedback, which some of the really interesting clients of the large caliber reached out to Grid Dynamics almost full. So I would say, the full investment recovery or ROI from the Salesforce will come a little bit later this year with more personal touch. But I have to see -- I have say that even this Q1 from the funnel going forward has been promising.

Great. That's very helpful. Could you also please provide an update on your capital allocation? What are you seeing in the market regarding potential future acquisitions?

You want to know what's taking acquisitions? So I have to say, one thing is it's a great market for both acquirers and acquisition companies. Grid Dynamics has been stating quite continuously that we look at the new regions, new technology, expansion and then capabilities. We closed one deal this December. Obviously, we are going to have more great opportunities for Grid. Some of them, you may have picked up, but we recently filed to show that we'll be doing some of the fundraising in due time. And that tells you that appetite grows for us as we see more and more fit for Grid Dynamics across multiple fronts.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Livschitz for any closing remarks.

Thank you, everybody, for joining us on the call today. Our first quarter results were strong and as we executed well against our guidance. And I'm proud of Grid Dynamics' team with their continued hard work toward achieving the goals. The demand environment is robust. Customers continue to prioritize their digital transformation initiatives. And we are working very hard to ensure we keep up with the demands of talent. Our strong come back from the second half of 2020 onwards is a testament of Grid Dynamics' ability to quickly adapt our customer needs, and our core strengths and capabilities are not tied to any specific industry vertical. We started 2021 with incremental confidence, and we look forward to giving you a business update in 3 months. Thank you, very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.