Grid Dynamics Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Grid Dynamics provides digital engineering and IT services, primarily to large enterprises. Figures below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $81.2m | $57.9m | $229.9m | $144.7m |
| Gross profit / margin | $32.7m / 40.3% | $25.3m / 43.6% | $88.3m / 38.4% | $60.4m / 41.7% |
| Operating income (loss) | ($4.8m) | $2.0m | ($15.4m) | $1.6m |
| Net income (loss) | ($6.7m) | ($0.5m) | ($22.5m) | ($4.1m) |
| Diluted loss per share | ($0.10) | ($0.01) | ($0.33) | ($0.07) |
| Non-GAAP EBITDA | $17.1m / 21.1% | $12.5m / 21.6% | $41.7m / 18.2% | $27.5m / 19.0% |
| Non-GAAP net income | $11.0m | $7.9m | $26.2m | $17.0m |
Revenue grew 40.1% year over year in Q3 and 58.8% for the first nine months, primarily reflecting increased billable headcount and hours. Management reported Q3 revenue up 4.9% sequentially and described it as the ninth consecutive quarter of sequential growth. Cost of revenue grew faster than revenue, contributing to lower gross margins.
Cash flow, liquidity and capital
- Cash and cash equivalents were $255.2m at September 30, 2022, compared with $144.4m at December 31, 2021. Management said cash was sufficient for expected operating, investing and financing needs for 12 months from the filing date.
- Nine-month operating cash flow was $19.6m, versus $14.7m in 2021. Investing cash outflow was $5.4m, compared with $33.6m, which included the prior-year Tacit acquisition.
- Financing provided $98.5m, including $109.5m net proceeds from the September 2022 public offering; cash also funded $6.9m of acquisition-related contingent consideration payments. Cash increased by $110.8m over the nine-month period.
- No debt was outstanding at quarter-end. The company had a secured revolving credit facility of up to $30m, with a potential increase to $50m, maturing in March 2025; it reported compliance with its covenants.
- Current assets were $319.4m and current liabilities $31.6m. Total liabilities were $39.3m and stockholders’ equity $350.8m.
Material changes and notable items
- Q3 operating expenses rose 60.6% year over year to $37.4m; general and administrative expense increased 65.0% to $28.2m. For the first nine months, operating expenses rose 76.3% to $103.7m.
- Stock-based compensation was $17.6m in Q3 and $42.6m for the first nine months, compared with $9.1m and $21.5m, respectively, in 2021. It was a major contributor to the GAAP/non-GAAP earnings difference.
- Geographic reorganization expense related to the Ukraine war and relocation efforts was $2.7m in Q3 and $9.6m for the first nine months. Management cited relocation costs and higher personnel costs as factors affecting margins.
- The September offering issued approximately 6.6m shares at $17.50 per share and raised $109.5m net. Shares outstanding were 74.0m at September 30, up from 66.9m at year-end 2021.
- The company paid $6.9m in contingent consideration related to prior acquisitions; no contingent consideration remained payable at quarter-end. It also adopted lease accounting on January 1, 2022, recognizing operating lease assets and liabilities.
Business, outlook and risks
- In Q3, Technology, Media and Telecom represented 32.4% of revenue, exceeding Retail at 31.1%. North America generated $68.1m of Q3 revenue. Time-and-material contracts generated $75.1m of the quarter’s $81.2m revenue.
- Customer concentration remains significant: the top five customers accounted for 44.5% of Q3 revenue and the top ten for 61.1%. Two customers each exceeded 10% of Q3 revenue.
- The filing provides no specific forward revenue, earnings or margin guidance. Management stated that cash resources should cover expected needs for 12 months, while noting future funding could be needed if circumstances change.
- Grid Dynamics said it had ceased client services in Russia, relocated employees and work where possible, and expanded or planned delivery capacity in Switzerland, Armenia and India. Prolonged conflict, sanctions, regional instability or disruption to personnel, banking and service delivery could materially affect operations.
- Other identified risks include macroeconomic weakness and inflation, talent availability and wage costs, foreign-exchange fluctuations (the company does not currently hedge), customer and industry concentration, seasonality, and cybersecurity and data-protection exposure. Management reported disclosure controls were effective and no material change in internal control during the quarter.
- Income tax expense was $3.4m in Q3 despite a pretax loss of $3.3m. The company used a discrete tax-rate method, citing difficulty reliably forecasting ordinary income and geopolitical uncertainty.
Most important facts for investors to verify
- Whether revenue growth can continue while gross margins recover from the year-over-year declines.
- How much of adjusted earnings depends on excluding stock-based compensation and Ukraine-related reorganization costs; review the company’s non-GAAP reconciliations alongside GAAP results.
- Whether customer concentration, particularly the two customers above 10% of revenue, changes materially.
- Progress and costs of workforce relocation and geographic expansion, and any continuing effects of the Ukraine conflict or sanctions.
- Use of offering proceeds, share-count growth and potential future dilution, alongside the company’s cash generation and stated 12-month liquidity outlook.