Grid Dynamics Holdings, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2021. Grid Dynamics provides digital engineering and IT consulting services, primarily to Fortune 1000 companies. The unaudited interim results are prepared under U.S. GAAP; management cautions that quarterly results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $39.1 million | $32.5 million |
| Gross profit / gross margin | $15.3 million / 39.2% | $9.8 million / 30.2% |
| Operating loss | $1.8 million | $7.0 million |
| Net loss / diluted loss per share | $2.1 million / $0.04 | $4.6 million / $0.16 |
| Non-GAAP EBITDA | $5.3 million (13.4% margin) | $3.0 million (9.4% margin) |
| Non-GAAP net income / diluted EPS | $3.1 million / $0.05 | $1.9 million / $0.05 |
| Operating cash flow | $3.0 million provided | $2.9 million used |
| Cash and cash equivalents at period end | $99.9 million | $121.5 million |
At March 31, 2021, total current assets were $126.6 million and current liabilities were $18.0 million. The company reported no debt. Cash was down $12.9 million from year-end 2020, principally reflecting $15.3 million of tax withholding payments related to net settlement of vested stock awards. Investing cash outflow was $0.9 million, mainly for equipment and software.
Material changes versus the prior comparable period
- Revenue increased 20.6% year over year, including $6.5 million from Daxx, acquired in December 2020. Excluding Daxx, management reported revenue of $32.6 million, slightly above Q1 2020, and described it as a return to pre-COVID levels.
- Gross margin rose 9.0 percentage points to 39.2%, which management attributed mainly to improved billable utilization and a greater mix of offshore delivery.
- Operating loss narrowed by $5.3 million and net loss narrowed by $2.5 million. General and administrative expense rose 14.5% to $12.3 million, mainly due to Daxx and acquired-intangible amortization; total operating expenses increased only 1.6%.
- Operating cash flow improved by $5.9 million to positive $3.0 million. Financing cash flow was negative $15.1 million, compared with positive $82.9 million in Q1 2020, when it primarily reflected business-combination proceeds.
- Top-five customer revenue concentration declined to 50% from 64%. Technology, Media and Telecom represented 36.8% of revenue; Retail fell to 22.6% from 49.6% a year earlier.
Outlook, management commentary, risks and unusual items
- Management said current cash was sufficient for expected operating, investing and financing needs for at least 12 months from the filing date. No specific revenue or earnings guidance was provided.
- Management cited strengthening business momentum, three consecutive sequential-growth quarters, and increased customer focus on digital transformation. It also reported $6.5 million of Q1 revenue contribution from Daxx, which had 486 personnel and 136 customers included in the reported customer count.
- COVID-19 continued to pose uncertainty, particularly through retail customer performance, customer payment capacity and possible project delays. Most employees remained remote; management reported minimal delivery disruption.
- Customer concentration remains material: the top ten customers accounted for 67% of revenue, and two customers individually represented at least 10%. Talent availability, attrition, utilization and wage inflation may affect growth and margins.
- Foreign-exchange exposure is unhedged; operating costs are substantially incurred in Central and Eastern Europe. Management disclosed sensitivity of operating income to ruble and zloty movements.
- Stock-based compensation was $5.7 million, up from $4.8 million; approximately $37.3 million remained to be recognized. Potential common shares were excluded from GAAP diluted loss per share as anti-dilutive. The company also made a warrant exchange for 2.2 million common shares and recorded a $0.9 million expense from the change in fair value of private warrants.
- All sponsor and underwriter earnout shares vested during Q1 after stock-price targets were met. Management reported disclosure controls effective and no material change in internal control over financial reporting; no material legal proceedings or contingency accruals were reported.
Important facts for investors to verify
- How much of future revenue growth is organic, given Daxx’s contribution and the disclosed sequential comparisons?
- Whether improved gross margin and utilization persist, and how personnel costs, attrition and wage inflation affect profitability.
- Customer concentration, retail recovery and collection of receivables; three customers each exceeded 10% of accounts receivable and unbilled receivables at quarter-end.
- The cash impact of equity-award tax withholding, future stock-based compensation and potential dilution from outstanding awards and warrants.
- Integration and performance of Daxx, including its contribution to revenue, margins and customer diversification.
- Foreign-exchange, COVID-19, geopolitical, privacy/security and regulatory risks, and the expected balance-sheet impact of adopting lease accounting guidance, which management expected to be material but had not quantified.