Grid Dynamics Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. The company provides digital engineering and IT consulting services, principally to Fortune 1000 businesses.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $47.7 | $22.4 | $86.8 | $54.8 |
| Gross profit / margin | $19.8 / 41.5% | $8.4 / 37.5% | $35.1 / 40.5% | $18.2 / 33.2% |
| Operating income (loss) | $1.4 | $(3.2) | $(0.4) | $(10.2) |
| Net loss | $(1.5) | $(2.2) | $(3.5) | $(6.8) |
| GAAP loss per diluted share | $(0.03) | $(0.04) | $(0.07) | $(0.17) |
Q2 revenue rose 113.1% year over year; first-half revenue grew 58.3%. Management attributed growth to improved demand and billable headcount and hours, as well as Daxx and Tacit acquisitions. Together, those acquisitions contributed $9.3 million of Q2 revenue and $15.8 million in the first half. Excluding acquisition contributions, Q2 revenue was $38.4 million, up 71.6% year over year.
Gross margin improved year over year, which management attributed primarily to higher workforce utilization and a greater mix of offshore delivery. Q2 GAAP operating income was positive, but the company still reported a net loss, including a $2.8 million income-tax provision. That provision included a $0.5 million discrete charge from remeasuring UK deferred taxes after a tax-rate change. First-half operating results remained slightly negative.
Non-GAAP Q2 EBITDA was $9.7 million (20.4% margin), versus $1.2 million (5.4%) a year earlier; first-half non-GAAP EBITDA was $15.0 million versus $4.2 million. Non-GAAP net income was $6.1 million in Q2 and $9.2 million for the first half, compared with GAAP net losses. These non-GAAP measures exclude items including stock-based compensation and transaction-related costs and should be considered alongside GAAP results.
- Cash flow: First-half operating cash flow was $6.7 million, versus cash used of $0.9 million in 2020. Investing used $32.5 million, principally reflecting the Tacit acquisition; financing used $18.9 million, primarily for tax withholding on vested equity awards.
- Liquidity and debt: Cash and cash equivalents were $68.0 million at June 30, 2021, down from $112.7 million at year-end 2020. Current assets were $107.5 million and current liabilities $25.2 million. The company reported no debt outstanding.
- Other balance-sheet items: Total assets were $173.1 million and total liabilities $30.1 million. Goodwill was $35.3 million and net intangible assets $20.3 million, both increased in connection with acquisitions.
Material changes and notable items
- On May 29, 2021, Grid Dynamics acquired Tacit Knowledge for approximately $37.0 million, including $33.6 million cash at closing and $3.4 million estimated contingent consideration; potential contingent cash consideration is capped at $5.0 million. Purchase-price allocation remained preliminary. Tacit added about 180 employees and contributed approximately $2.5 million revenue and $0.5 million net income after acquisition through June 30.
- Q2 revenue mix broadened: the top five customers represented 45.4% of revenue, down from 66.7% a year earlier. The top ten represented 62.3%, versus 84.5%. The reported customer count included many customers acquired with Daxx and Tacit.
- Stock-based compensation was $6.7 million in Q2 and $12.3 million in the first half, up from $3.7 million and $8.5 million, respectively. The filing reported approximately $32.2 million of unrecognized stock-based compensation expense at June 30.
- Net cash declined in part because of $18.9 million of tax withholding payments related to equity awards. Common shares outstanding increased from 50.9 million at year-end to 54.7 million at June 30.
- Following SEC staff guidance on SPAC warrants, the company classified private warrants as liabilities and recorded fair-value changes; it said prior-year errors were not material. The first-half cash-flow statement includes an $0.8 million warrant fair-value adjustment.
Outlook, risks, and contingencies
The filing provides no specific revenue, earnings, or margin guidance. Management said demand was strong across verticals, described Q2 as the company’s highest-revenue quarter to date, and noted four consecutive quarters of sequential revenue growth. It also identified employee retention and shortages of available talent as challenges as the business recovered.
Management said June 30 cash, together with proceeds from the subsequent offering, was sufficient for expected operating, investing, and financing needs for at least 12 months from the filing date. On July 6, 2021, the company completed a follow-on offering that generated $78.3 million of net proceeds for the company; selling stockholders also sold shares but received no proceeds for those sales. On July 28, the company announced redemption of 2.8 million then-outstanding public warrants unless exercised by August 30; exercise at $11.50 per share could generate approximately $31.9 million if all were exercised.
Principal risks include customer and industry concentration despite recent diversification; competition to recruit and retain skilled employees; short-term, terminable customer engagements; seasonal demand; continued COVID-19 effects; acquisition integration and preliminary purchase accounting; and foreign-exchange and geopolitical exposure in operating regions. The company does not currently hedge foreign-currency exposure. It also cited cybersecurity, data privacy, regulatory, and tax risks. Two senior executives resigned in June: the CTO and the EVP of Customer Success, who became a consultant. The company reported no material legal proceedings or accrued amounts for contingencies. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported growth and margin improvement is organic versus attributable to Daxx and Tacit, and whether acquired operations sustain expected performance.
- Whether utilization, talent availability, compensation costs, and elevated stock-based compensation affect future margins and dilution.
- Customer concentration and collections trends: accounts receivable rose to $29.1 million from $16.9 million at year-end, and unbilled receivables to $4.0 million from $1.8 million.
- The final Tacit purchase-price allocation, contingent-consideration outcome, and acquired goodwill and intangible-asset valuations.
- The effect of the post-quarter share offering and warrant redemption on share count, dilution, and cash; confirm the distinction between company-issued shares and shares sold by existing holders.
- The sustainability of non-GAAP profitability relative to GAAP results, particularly given substantial stock-based compensation and the Q2 tax provision.