Grid Dynamics Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Grid Dynamics provides digital engineering, software development, technology consulting, and data analytics services, primarily to large enterprises. Financial amounts below are in U.S. dollars; “m” means millions.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $80.1m | $71.4m | +12.1% |
| Gross profit / margin | $28.6m / 35.7% | $26.8m / 37.5% | Margin down 1.8 percentage points |
| Operating income (loss) | $(6.0)m | $0.2m | Deteriorated |
| Net income (loss) | $(8.0)m | $(2.7)m | Loss increased $5.3m |
| GAAP diluted loss per share | $(0.11) | $(0.04) | — |
| Operating cash flow | $11.7m | $9.5m | +$2.2m |
| Capital expenditures | $1.6m | $1.7m | — |
| Cash and cash equivalents, March 31 | $258.4m | $153.3m | Year-over-year comparison |
Non-GAAP EBITDA was $10.8m (13.5% of revenue), versus $11.4m (15.9%) a year earlier. Non-GAAP net income was $6.5m and non-GAAP diluted EPS was $0.08, compared with $6.9m and $0.10, respectively. These are company-defined non-GAAP measures and should be considered alongside GAAP results.
At March 31, 2023, total assets were $419.6m, current assets $330.1m, current liabilities $50.4m, and total liabilities $59.7m. The company had no borrowings outstanding under its $30m revolving credit facility and reported compliance with its covenants. The facility matures in March 2025. Cash increased $1.6m during the quarter; financing cash outflow of $8.9m mainly reflected tax withholding on vested stock awards.
Material changes and business drivers
- Revenue growth reflected higher business volumes from existing and new customers and the Mutual Mobile acquisition, completed in December 2022. Revenue was flat sequentially versus Q4 2022, according to management.
- Cost of revenue rose 15.4%, faster than revenue, and gross margin declined. Management attributed higher costs primarily to personnel supporting increased revenue.
- Operating expenses rose 30.1% to $34.6m. General and administrative expense increased 28.4%, principally from stock-based compensation, wages and bonuses, facilities, intangible amortization, and transaction and transformation costs.
- Stock-based compensation increased to $13.3m from $8.7m. The company also recorded $0.8m of transaction and transformation-related costs, $0.7m of geographic reorganization costs, and $0.4m of restructuring costs.
- Other income was $1.7m, versus other expense of $0.7m, largely reflecting income from money market funds. Despite a pretax loss of $4.3m, the company recorded $3.7m of income tax expense. It used a discrete tax-rate method because it could not reliably forecast ordinary income; the filing cites Section 162(m) limitations and foreign inclusion adjustments.
- Technology, Media and Telecom revenue increased to $26.8m; Retail revenue was $25.4m; CPG/Manufacturing declined to $12.6m. North America generated $63.9m of revenue and Europe $15.9m.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management said the $258.4m cash balance was sufficient for expected operating, investing, and financing needs for at least 12 months from the filing date. Management noted that future cash needs could change and that additional financing, if needed, might not be available on acceptable terms.
- Management cited macroeconomic uncertainty and cautious customer spending, particularly in CPG/Manufacturing. The company also identified seasonality, wage and talent pressures, utilization, and customer demand as factors affecting growth and margins.
- Ukraine-related geopolitical risk could disrupt personnel, service delivery, infrastructure, banking, or customer work. The company reported relocating employees and reallocating work; as of May 2023 it had no personnel or client services in Russia.
- Customer concentration remains significant: the largest customer contributed 13.9% of Q1 revenue and the top five 40.8%. Many contracts are time-and-materials and can be terminated on limited notice.
- Foreign currency exposure is unhedged. Approximately 34.9% of Q1 combined cost of revenue and operating expenses was denominated in currencies other than the U.S. dollar.
- On April 18, 2023, after quarter-end, the company acquired NextSphere Technologies for approximately $16.7m net of cash acquired, with up to $2.0m of potential earn-out consideration. Purchase accounting was not yet finalized.
- The company reported no material legal proceedings and no amounts accrued for contingencies. It disclosed no material changes in internal control over financial reporting and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth and customer demand continue, particularly in CPG/Manufacturing, and how concentration among major customers evolves.
- Whether gross margin and non-GAAP EBITDA recover as operating expenses, labor costs, and utilization change.
- The magnitude and duration of stock-based compensation, restructuring, integration, and geographic reorganization costs.
- The effective tax burden and forecasting uncertainty, given tax expense despite a pretax loss.
- Integration, earn-out, and financial effects of the NextSphere acquisition, alongside the results of Mutual Mobile.
- Cash availability across jurisdictions and exposure to geopolitical events, foreign exchange movements, and banking risks.