Business context and reporting period
Grid Dynamics Holdings, Inc. (NASDAQ: GDYN) provides digital engineering and IT consulting services, primarily to Fortune 1000 companies. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; amounts are in U.S. dollars unless noted. Comparability is affected by acquisitions of Daxx (December 2020) and Tacit (May 2021).
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $57.9m | $26.3m | $144.7m | $81.2m |
| Gross profit / margin | $25.3m / 43.6% | $11.2m / 42.4% | $60.4m / 41.7% | $29.4m / 36.2% |
| Operating income (loss) | $2.0m | $(1.7)m | $1.6m | $(11.9)m |
| Net loss | $(0.5)m | $(1.1)m | $(4.1)m | $(7.9)m |
| GAAP diluted loss per share | $(0.01) | $(0.02) | $(0.07) | $(0.18) |
| Non-GAAP EBITDA | $12.5m (21.6% margin) | $4.2m (15.8%) | $27.5m (19.0%) | $8.4m (10.4%) |
| Non-GAAP net income | $7.9m | $2.5m | $17.0m | $4.8m |
Q3 revenue rose 120% year over year; management reported 21.5% sequential growth, with revenue excluding acquisitions up 67.3% year over year. Daxx and Tacit contributed $13.8m in Q3 and $29.7m over nine months. Nine-month operating cash flow was $14.7m, versus $3.0m; investing cash outflow was $33.6m, including $30.6m for Tacit; financing cash inflow was $105.6m. Cash and equivalents were $199.3m at September 30, 2021, versus $112.7m at December 31, 2020. Current assets were $240.9m and current liabilities $24.2m. The company reported no debt.
Q3 operating income turned positive and gross margin improved year over year. However, GAAP net loss persisted: nine-month income tax expense was $4.7m despite pretax income of $0.6m, reflecting an unusually high effective tax rate (829.8%). Q3 tax expense was $2.6m against pretax income of $2.1m. Stock-based compensation was $9.1m in Q3 and $21.5m for nine months. Non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Material changes and notable items
- Revenue growth reflected post-pandemic recovery, higher billable headcount and utilization, and acquisitions. Management said Q3 was the company’s highest-revenue quarter to date and the fifth consecutive quarter of sequential growth.
- Gross margin increased 1.2 percentage points in Q3 and 5.5 points for the nine-month period. Management attributed improvement mainly to better utilization and a greater mix of offshore delivery.
- Q3 customer mix shifted: retail represented 31.5% of revenue and technology, media and telecom 30.4%. Top five customers were 42.0% of Q3 revenue, down from 59.9% a year earlier; top ten were 58.2%, versus 77.7%.
- Tacit was acquired for approximately $37.0m, including $33.6m cash and estimated contingent consideration. Its results contributed approximately $9.5m revenue and $1.7m net income from acquisition through September 30. Purchase-price allocation remained preliminary; goodwill recorded was $20.6m. Contingent payments depend on revenue and EBITDA targets, with a maximum potential Tacit earn-out of $5.0m.
- A July follow-on offering generated $78.3m net proceeds for the company; 5.5m newly issued shares were included in the 11.6m-share offering, with the balance sold by existing stockholders. Warrant exercises also generated $48.1m in cash during the nine months; no warrants remained outstanding at quarter-end.
- Management said cash on hand was sufficient for expected operating, investing and financing needs for at least twelve months from the filing date. No specific revenue or earnings guidance was provided.
Outlook, risks and contingencies
Management cited strong customer demand for digital transformation, but warned that growth and margins depend on recruiting, retaining and effectively deploying skilled IT personnel. Talent shortages and retention pressure were increasing; compensation inflation and lower utilization could weigh on profitability. The company also highlighted customer concentration, short-term and terminable project contracts, seasonality, competition, acquisition integration and execution, and ongoing uncertainty from COVID-19. It does not currently hedge foreign-currency exposure; currency movements in its operating regions can affect margins. International operations also expose it to political, regulatory, banking and sanctions-related risks.
The company stated that no material legal proceeding was pending and no amounts were accrued for legal contingencies. It expects adoption of the lease accounting standard in 2022 to have a material balance-sheet impact, but had not quantified it. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting. A subsequent-event note reports that an October 2021 business-combination share adjustment resulted in 0.1m additional shares issued and 0.9m shares released from escrow.
Investor verification priorities
- Assess how much reported growth and customer-base expansion is organic versus acquired, and whether post-acquisition growth and integration benefits persist.
- Track billable utilization, hiring and attrition, wage increases, and their effects on gross margin and operating profitability.
- Reconcile GAAP losses and unusually high tax expense with management’s non-GAAP profitability measures; review the tax-rate outlook and stock-based compensation dilution.
- Monitor top-customer and retail concentration, receivable collection and unbilled receivables, and contingent acquisition consideration.
- Review cash generation after acquisition spending and equity financing, and assess foreign-exchange, geopolitical, COVID-19 and lease-adoption exposures.