Grid Dynamics Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company provides digital engineering and IT services, primarily to large enterprises. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $77.3 million | $47.7 million | $148.7 million | $86.8 million |
| Gross profit | $28.9 million | $19.8 million | $55.6 million | $35.1 million |
| Gross margin | 37.3% | 41.5% | 37.4% | 40.5% |
| Operating income/(loss) | $(10.8) million | $1.4 million | $(10.6) million | $(0.4) million |
| Net income/(loss) | $(13.2) million | $(1.5) million | $(15.9) million | $(3.5) million |
| Diluted GAAP loss per share | $(0.20) | $(0.03) | $(0.24) | $(0.07) |
- Revenue rose 62.2% year over year in Q2 and 71.3% in the first half. Management attributed growth primarily to higher billable headcount and hours; Q2 revenue was also up 8.3% sequentially from Q1.
- Margins weakened as cost of revenue grew faster than revenue, including higher personnel costs and employee relocation costs associated with the war in Ukraine.
- Operating expenses rose 115.7% in Q2, led by general and administrative expense, which increased 122.7% to $30.7 million. The company cited higher stock-based compensation, wages and bonuses, facilities and amortization, and Ukraine-related geographic reorganization.
- Stock-based compensation was $16.4 million in Q2 and $25.0 million for the first half, versus $6.7 million and $12.3 million, respectively, a year earlier.
- Non-GAAP EBITDA was $13.3 million in Q2 (17.2% margin) and $24.7 million for the first half (16.6%). Non-GAAP net income was $8.2 million and $15.2 million, respectively. These non-GAAP measures exclude, among other items, stock-based compensation and geographic reorganization costs and should be considered alongside GAAP losses.
- First-half operating cash flow was $15.3 million, compared with $6.7 million a year earlier. Investing cash outflow was $4.2 million; financing cash outflow was $4.4 million. Cash increased by $5.7 million to $150.0 million from $144.4 million at year-end 2021.
- At June 30, cash was $150.0 million and total liabilities were $45.2 million. The company had no borrowings outstanding. Its secured revolving facility provides up to $30 million, with a possible increase to $50 million, and matures in March 2025; the company reported compliance with its covenants.
Material changes and business developments
- Revenue growth was broad, with Retail the largest Q2 vertical at 32.9% of revenue, followed by Technology, Media and Telecom at 30.2%. North America generated $63.7 million of Q2 revenue; Europe generated $13.6 million.
- Top five customers represented 44.2% of Q2 revenue, down from 45.4% a year earlier; the top ten accounted for 60.2%. Two customers each contributed more than 10% of Q2 revenue.
- Personnel totaled 3,763 at June 30, up from 2,510 a year earlier. Most were in Central and Eastern Europe, the U.K. and the Netherlands.
- The company adopted the new lease accounting standard on January 1, 2022, recognizing operating lease right-of-use assets and liabilities. At June 30, operating lease liabilities totaled $4.7 million.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or margin guidance. Management described customer demand as healthy and said digital transformation initiatives supported growth; it also said $150.0 million of cash was sufficient for expected needs for at least 12 months from the filing date.
- The company ceased remaining operations and client services in Russia, relocated employees and work, and expanded delivery capacity in Switzerland, Armenia and India. It recorded $6.1 million of geographic reorganization costs in Q2 and $7.0 million in the first half. Continued conflict, sanctions, service disruption, employee safety and further relocation costs remain significant uncertainties.
- Other key risks include customer and industry concentration, seasonal demand, talent retention and wage inflation, macroeconomic and inflationary pressures, and unhedged foreign-currency exposure. Management reported that 35.1% of first-half cost of revenue and operating expenses were denominated in currencies other than the U.S. dollar.
- The company recorded income tax expense despite GAAP pre-tax losses: $1.7 million in Q2 and $3.9 million in the first half. It used a discrete effective tax rate method, citing forecast sensitivity and geopolitical uncertainty.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company was not party to a material legal proceeding and recorded no contingency accruals.
Important facts for investors to verify
- Whether revenue growth can be sustained while reversing gross-margin declines and controlling operating expenses.
- The scale, duration and financial effects of Ukraine-related relocation and reorganization, including the transition away from Russia-based delivery.
- The persistence and composition of stock-based compensation and its dilution effects; 67.3 million common shares were outstanding at June 30, 2022.
- Customer concentration, renewal and project exposure, and the ability to maintain utilization as the workforce expands.
- Cash conversion, receivables collection and the effect of foreign-exchange movements; the company does not currently hedge currency exposure.
- The basis for non-GAAP adjustments and tax estimates, and the company’s ability to remain profitable on a GAAP basis.