Grid Dynamics Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Grid Dynamics provides digital engineering, software development, and data analytics services, primarily to large enterprises. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $77.4 | $81.2 | $234.8 | $229.9 |
| Gross profit / margin | $28.2 / 36.4% | $32.7 / 40.3% | $85.0 / 36.2% | $88.3 / 38.4% |
| Operating income (loss) | $0.1 | $(4.8) | $(4.5) | $(15.4) |
| Net income (loss) | $0.7 | $(6.7) | $(4.7) | $(22.5) |
| Operating cash flow | Not separately presented for the quarter | $33.5 | $19.6 | |
| Cash and cash equivalents, at period end | $253.7 at September 30, 2023 | $256.7 at December 31, 2022 |
Q3 diluted GAAP EPS was $0.01, versus a loss of $0.10 a year earlier; nine-month diluted EPS was a loss of $0.06, versus a loss of $0.33. Q3 non-GAAP EBITDA was $10.7 million (13.9% of revenue), compared with $17.1 million (21.1%); nine-month non-GAAP EBITDA was $33.6 million (14.3%), versus $41.7 million (18.2%). These are non-GAAP measures and should be considered alongside GAAP results.
At September 30, current assets were $326.1 million and current liabilities $52.5 million. The company had no borrowings under its $30 million revolving credit facility, was in covenant compliance, and reported no outstanding debt. The facility matures March 15, 2025. Nine-month investing cash outflow was $23.4 million, including $17.8 million for the NextSphere acquisition, net of cash acquired. Financing cash outflow was $14.5 million, largely reflecting taxes withheld on vested stock awards.
Material changes versus comparable periods
- Q3 revenue declined 4.6% year over year and was flat sequentially, which management attributed primarily to macroeconomic conditions and weaker customer demand. Nine-month revenue grew 2.1%, largely reflecting acquisitions.
- Q3 gross margin fell 3.9 percentage points year over year to 36.4%; nine-month gross margin declined 2.2 points to 36.2%, as costs grew faster than revenue.
- For the quarter, Retail revenue increased 5.1% year over year, while Technology, Media and Telecom declined 9.9% and CPG/Manufacturing declined 39.8%. For nine months, CPG/Manufacturing revenue fell to $33.2 million from $47.1 million.
- Q3 GAAP net income improved from a year-ago loss, with lower stock-based compensation and geographic reorganization costs contributing. Operating expenses declined, particularly general and administrative expense. Non-GAAP EBITDA nevertheless decreased year over year and sequentially, with management citing lower revenue and increased operating expenses.
- Operating cash flow increased to $33.5 million for nine months, which management attributed to lower days sales outstanding and improved collections. Cash declined $3.0 million from year-end.
- Top-five customers accounted for 36.8% of Q3 revenue, down from 44.5% a year earlier; the largest customer accounted for 14.3%. The company reported 265 customers for the first nine months, versus 242 a year earlier.
Outlook, commentary, and risks
- The filing provides no specific revenue or earnings guidance. Management said $253.7 million of cash was expected to fund currently expected operating, investing, and financing needs for at least 12 months from the filing date.
- Management cited cautious customer spending amid macroeconomic uncertainty, including marked weakness in CPG/Manufacturing and reduced activity at some larger TMT customers. Retail customers may also slow discretionary spending during the holiday season.
- NextSphere was acquired in April 2023 for $25.2 million total consideration, including contingent consideration. In Q3, the company concluded performance targets for NextSphere and Mutual Mobile would not be achieved and reduced both earnout liabilities to zero. The resulting $4.2 million fair-value gain was included in other income and benefited reported results.
- The nine-month effective tax rate was 240.0%; the company used a discrete effective tax rate method because it could not reliably forecast ordinary income and geopolitical uncertainty made the annual-rate method unreliable. Tax expense was $8.0 million on a $3.3 million pretax profit.
- Principal disclosed risks include the Ukraine conflict and regional geopolitical instability, macroeconomic pressure on client technology spending, customer and industry concentration, talent retention and utilization, acquisition integration, cybersecurity and data protection, and foreign-exchange exposure. About 38% of combined cost of revenue and operating expenses was denominated in currencies other than the U.S. dollar; the company does not currently hedge currency exposure.
- The company reported no material ongoing legal proceedings and no material amounts accrued for contingencies. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue demand stabilizes and whether CPG/Manufacturing and larger TMT accounts recover or weaken further.
- Whether gross margin and non-GAAP profitability improve, and how much reported earnings depend on stock-based compensation adjustments and other exclusions.
- The sustainability of operating cash flow and collections, alongside acquisition spending, share-award tax withholding, and cash held in higher-risk banking jurisdictions.
- Whether NextSphere and Mutual Mobile deliver expected strategic and financial benefits; acquisition purchase-price allocations remain provisional.
- The effects of the unusually high tax provision, foreign-exchange movements, Ukraine-related disruption, and customer concentration on future results.