Grid Dynamics Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company provides digital transformation, software engineering, and data analytics services to enterprise customers. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $77.3 | $77.3 | $157.4 | $148.7 |
| Gross profit / margin | $28.3 / 36.6% | $28.9 / 37.3% | $56.9 / 36.1% | $55.6 / 37.4% |
| Operating income (loss) | $1.3 | $(10.8) | $(4.7) | $(10.6) |
| Net income (loss) | $2.6 | $(13.2) | $(5.3) | $(15.9) |
| Diluted EPS | $0.03 | $(0.20) | $(0.07) | $(0.24) |
| Non-GAAP EBITDA | $12.0 / 15.5% | $13.3 / 17.2% | $22.8 / 14.5% | $24.7 / 16.6% |
Q2 revenue was essentially flat year over year and declined $2.7 million sequentially, which management attributed largely to macroeconomic conditions and lower customer demand. First-half revenue grew 5.8%; management said acquisitions contributed to growth while organic business declined. Q2 gross margin fell 0.7 percentage points year over year. First-half gross margin declined 1.3 points.
Q2 GAAP profitability improved substantially year over year, principally alongside lower stock-based compensation and geographic reorganization costs. Other income was $3.0 million in Q2 and $4.7 million for the first half, compared with other expense in the prior-year periods. Management attributed the change to interest and money-market fund income and a $2.6 million fair-value reduction in Mutual Mobile contingent consideration. First-half income tax expense was $5.4 million despite only $0.03 million of pretax income; the filing says the effective tax rate was not meaningful and describes use of a discrete-rate method because forecasts were sensitive and difficult to estimate.
Non-GAAP measures are company-defined and exclude items including stock-based compensation, restructuring and geographic reorganization costs, transaction costs, and other income or expense. Q2 non-GAAP EBITDA was lower year over year, which management attributed mainly to increased operating expenses from acquisitions; it increased sequentially, attributed to improved operating efficiencies.
Cash, liquidity, debt, and capital
- Cash and cash equivalents were $246.2 million at June 30, down $10.6 million from December 31, 2022. Current assets were $321.5 million and current liabilities $53.5 million.
- First-half operating cash flow was $22.6 million, compared with $15.3 million a year earlier. Investing cash outflow was $21.6 million, including $17.8 million net cash paid for NextSphere; capital expenditures were $3.8 million.
- Financing cash outflow was $13.4 million, largely reflecting tax withholding on vested equity awards. The company reported no debt outstanding under its $30 million revolving credit facility and was in compliance with its covenants.
- Management believes existing cash is sufficient for expected operating, investing, and financing needs for at least 12 months from the filing date. The company notes that some cash is held in jurisdictions with less stable banking systems and that deposits may exceed insured limits.
Material changes, outlook, and risks
- On April 18, 2023, the company acquired NextSphere for $25.2 million of purchase consideration, including $24.3 million cash paid at closing and $0.9 million estimated contingent consideration. The earnout can reach $2.0 million and depends on performance targets. Purchase accounting remained provisional.
- Retail and Technology, Media and Telecom were the largest Q2 verticals. CPG/Manufacturing revenue declined 32.4% year over year amid customer-specific factors and more cautious spending. Q2 revenue from the top five customers fell 15.0% year over year; they still represented 37.6% of revenue. One customer contributed 14.0%.
- The filing provides no specific revenue or earnings guidance. Management cited macroeconomic uncertainty and weaker demand; it also noted seasonal effects on quarterly results. The company targets voluntary attrition in the mid-teens, but the filing gives no actual period attrition rate.
- Material risks include continued conflict and geopolitical uncertainty involving Ukraine and nearby regions, customer concentration and discretionary technology-spending reductions, competition for skilled staff, foreign-exchange exposure (not hedged), and acquisition integration and contingent-payment valuation. The company said its former Russian subsidiary was liquidated and it no longer performs client services from Russia.
- Management reported disclosure controls and procedures were effective as of quarter-end and no material change in internal control over financial reporting during the quarter. The company reported no material legal proceeding and no material contingency accrual.
Important facts for investors to verify
- Whether demand stabilizes and organic revenue returns to growth, particularly in CPG/Manufacturing, and how much reported growth depends on acquisitions.
- Whether gross-margin pressure and lower non-GAAP EBITDA persist, and how management’s non-GAAP adjustments compare with GAAP results.
- The drivers and sustainability of other income, including interest income and contingent-consideration fair-value changes, and the unusually high tax expense relative to first-half pretax income.
- NextSphere’s contribution, integration progress, final purchase-price allocation, and any earnout payments.
- Customer concentration, foreign-exchange sensitivity, and operational exposure to geopolitical and regional banking risks.