GRID DYNAMICS HOLDINGS INC

Previous wording

The following discussion and analysis of the financial condition and results of operations of Grid Dynamics Holdings, Inc. should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2023, which has been filed with the Securities and Exchange Commission (“SEC”) on February 29, 2023.

Current wording

The following discussion and analysis of the financial condition and results of operations of Grid Dynamics Holdings, Inc. should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2023 included in the Company's Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on February 29, 2023.

Previous wording

In April 2022, Grid Dynamics also announced it would cease remaining operations in the Russian Federation. We have worked towards the safe and expedient relocation of willing employees and ongoing management of projects to eliminate delivery impact to clients. As of May 2023, our former subsidiary in Russia is liquidated and we are not performing any client services from Russia.

Current wording

In April 2022, Grid Dynamics also announced it would cease remaining operations in the Russian Federation. We have worked towards the safe and expedient relocation of willing employees and ongoing management of projects to eliminate delivery impact to clients. As of May 2023, our former subsidiary in Russia was liquidated, and we are not performing any client services from Russia.

Previous wording

Grid Dynamics’ ability to retain and expand its relationships with existing customers and add new customers are key indicators of its revenue potential. The total number of customers for the six months ended June 30, 2024 was 220 down from 247 for the six months ended June 30, 2023. Grid Dynamics’ procurement of new customers has a direct impact on its ability to diversify its sources of revenue and replace customers that may no longer require its services. Grid Dyna mics has a relatively high level of revenue concentration with certain customers and constantly works toward decreasing those levels. During the three and six months ended June 30, 2024 and 2023, one customer accounted for 10% or more of Grid Dynamics’ revenues in each of the periods indicated. We expect to continue our focus on maintaining our long-term relationships with customers while diversifying our customer base.

Current wording

Grid Dynamics’ ability to retain and expand its relationships with existing customers and add new customers are key indicators of its revenue potential. New customers have a direct impact on Company’sability to diversify sources of revenue and replace customers that may no longer require its services. At the same time, the Company continuously works towards rationalization of its portfolio of non-strategic customers. This work resulted in a decrease in the total number of customers from 265 for the nine months ended September 30, 2023 to 229 during the same period a year ago.

Previous wording

The following table presents revenues concentration by amount and as a percentage of our revenues for the periods indicated:

Current wording

The following table presents revenue concentration by amount and as a percentage of our revenues for the periods indicated:

Previous wording

Revenues by Verticals. We assign our customers into one of our five main vertical markets or a group of various industries where we are increasing our presence, which we label as “Verticals”. In the first quarter of 2024, we disaggregated Healthcare and Pharma as a separate vertical due to its growing importance and materiality to the Company. The following table presents our revenues by vertical and revenues as a percentage of total revenues for the periods indicated:

Current wording

Revenues by Verticals. We assign our customers into one of our five main vertical markets or a group of various industries where we seek to increase our presence, which we label as “Verticals”. In the first quarter of 2024, we disaggregated Healthcare and Pharma as a separate vertical due to its growing importance and materiality to the Company. The following table presents our revenues by vertical and revenues as a percentage of total revenues for the periods indicated:

Previous wording

Revenue growth was driven by increased demand across a wide range of customers that included fintech and insurance customers.

Current wording

Our Finance vertical showed the most significant growth on both a quarterly and nine-month basis, reflecting our strategic focus on expanding this market. During the three and nine months ended September 30, 2024, Finance revenues almost doubled, reaching $14.2 million and $37.0 million, respectively, compared to $7.3 million and $20.6 million in the corresponding periods of 2023. Revenue growth was driven by increased demand across fintech and insurance customers. As a result, the Finance vertical represented 16.2% and 14.8% of total revenues during the three and nine months ended September 30, 2024, respectively, compared to 9.4% and 8.8% in the prior-year periods.

Previous wording

Our CPG and Manufacturing vertical decreased 9.5% from $10.9 million during the second quarter of 2023 to $9.8 million during the three months ended June 30, 2024. On a year-to-date basis, the decline of $4.1 million or 17.5% was largely driven by a combination of macro-related uncertainty resulting in a more cautionary outlook towards spending and customer specific factors at some of our larger customers.

Current wording

Our CPG and Manufacturing vertical remained relatively stable, with a slight increase of 1.4% from $9.7 million during the third quarter of 2023 to $9.8 million during the three months ended September 30, 2024. Over the corresponding nine-month periods, the decline of $4.0 million, or 12.0%, was largely driven by a more cautionary outlook towards spending and customer-specific factors at some of our larger customers.

Previous wording

The Healthcare and Pharma vertical showed a slight decrease during the three and six months ended June 30, 2024 of $0.5 million and $0.7 million, respectively, reaching $3.2 million, or 3.8% of total revenues during the second quarter of 2024 and $6.2 million, or 3.8% or total revenues during the six months ended June 30, 2024.

Current wording

The Healthcare and Pharma vertical showed a small decrease during the three and nine months ended September 30, 2024 of $0.9 million and $1.6 million, respectively, reaching $2.5 million, or 2.9% of total revenues, in the third quarter of 2024 and $8.7 million, or 3.5% or total revenues, during the nine months ended September 30, 2024.

Previous wording

Our Other vertical continued to steadily grow both on the quarterly and year-to-date basis. Revenues for the second quarter of 2024 grew 26.7% compared to the corresponding period of 2023 and reached $7.5 million. Revenues for the six months ended June 30, 2024 grew 38.1% compared to the corresponding period of 2023 and reached $15.8 million. Revenue increase was driven by increased demand from our existing and new customers.

Current wording

Lastly, our Other vertical continued to grow on a year-over-year basis. Revenues for the third quarter of 2024 grew 3.0% compared to the corresponding period of 2023 and reached $6.9 million. Revenues for the nine months ended September 30, 2024 grew 25.1% compared to the corresponding period of 2023 and reached $22.8 million. The increase was driven by increased demand from both existing and new customers. The Other vertical contributed 7.9% and 9.0% of total revenues for the three and nine months ended September 30, 2024, compared to 8.7% and 7.7%, respectively, in the prior year.

Previous wording

During the three months ended June 30, 2024 our cost of revenues was $53.5 million, an increase of $4.4 million or 9.0% from $49.0 million in the corresponding period of 2023. On the year-to-date basis our cost of revenues grew $5.1 million or 5.1%, reaching $105.6 million for the six months ended June 30, 2024. The increase in our cost of revenues was due to a combination of increased headcount and higher compensation for some relocated employees.

Current wording

During the three months ended September 30, 2024, our cost of revenues was $54.7 million, an increase of $5.4 million, or 11.0%, from $49.3 million in the corresponding period of 2023. Our cost of revenues grew $10.5 million, or 7.0%, reaching $160.3 million for the nine months ended September 30, 2024, as compared to the prior year period. The increase in our cost of revenues was due to a combination of increased headcount and higher compensation for some relocated employees.

Previous wording

Sales and marketing expenses represent spending associated with promoting and selling of our services. These expenses comprise of personnel costs, including performance bonuses and stock-based compensation, marketing events, travel expenses, as well as depreciation and amortization expenses related to such activities.

Current wording

Sales and marketing expenses represent spending associated with promoting and selling our services. These expenses are comprised of personnel costs, including performance bonuses and stock-based compensation, marketing events, travel expenses, as well as depreciation and amortization expenses related to such activities.

Previous wording

During the three and six months ended June 30, 2024, our sales and marketing expenses increased by $1.3 million and $3.0 million, respectively, as compared to the same periods in 2023 and reached $7.3 million and $14.6 million. Expressed as a percentage of revenues, our sales and marketing expenses increased by 1.1% and 1.6%, respectively, in the periods indicated above. The changes were largely driven by our investments in our sales and marketing organization including investments in sales personnel and new sales initiatives.

Current wording

During the three and nine months ended September 30, 2024, our sales and marketing expenses increased 11.2% and 20.7% over the prior year periods, reaching $6.8 million and $21.4 million, respectively. Our sales and marketing expenses were $6.1 million and $17.7 million during the three and nine months ended September 30, 2023, respectively. Expressed as a percentage of revenues, our sales and marketing expenses remained almost unchanged, reaching 7.8% and 8.5% for the three and nine months ended September 30, 2024, as compared to the prior year periods. The increases in our sales and marketing expenses were largely driven by our investments in our sales and marketing organization including investments in sales personnel and new sales initiatives.

Previous wording

General and administrative expenses remained relatively on the same level during the three months ended June 30, 2024 reaching $18.1 million in 2024 compared to $17.7 million in the year ago quarter. During the six months ended June 30, 2024, our general and administrative expenses decreased to $39.7 million, representing a decline of $2.8 million or 6.6% as compared to $42.5 million reported in the corresponding period of last year. The decrease in the first half of 2024 was largely due to lower levels of stock-based compensation expenses. As a result, expressed as a percentage of revenues, our general and administrative expenses decreased by 1.1% and 2.7% to 21.8% and 24.3% during the three and six months June 30, 2024, respectively, compared to 22.9% and 27.0% in the year ago periods.

Current wording

General and administrative expenses increased 4.6% during the three months ended September 30, 2024, reaching $19.3 million in 2024 from $18.5 million in the prior year period. During the nine months ended September 30, 2024, general and administrative expenses decreased to $59.0 million, a decline of $2.0 million, or 3.2%, as compared to $60.9 million in the corresponding period of last year. The decrease in the nine-month period of 2024 was largely due to lower levels of stock-based compensation expenses. As a result, expressed as a percentage of revenues, our general and administrative expenses decreased by 1.8% and 2.3% to 22.1% and 23.6% during the three and nine months September 30, 2024, respectively, compared to 23.9% and 25.9% in the year ago periods.

Previous wording

Other income/(expense), net represent interest earned on our cash and cash equivalents, including money market funds, interest expense related to our borrowings, foreign exchange gains and losses as well as changes in the fair value of contingent considerations and investments in equity securities.

Current wording

Other income/(expense), net represents interest earned on our cash and cash equivalents, including money market funds, interest expense related to our borrowings, and foreign exchange gains and losses as well as changes in the fair value of contingent consideration and investments in equity securities.

Previous wording

During the three months ended June 30, 2024 we recognized a provision for income tax of $3.5 million compared to $1.7 million in the same period of 2023. During the first half of 2024, we recognized a provision for income tax of $4.5 million compared to $5.4 million during the six months ended June 30, 2023. The difference in the tax provision was attributable mainly to Section 162(m) compensation deduction limitations and foreign inclusion adjustments.

Current wording

During the three months ended September 30, 2024, we recognized a provision for income tax of $1.3 million compared to $2.6 million in the same period of 2023. During the nine months of 2024, we recognized a provision for income tax of $5.8 million compared to $8.0 million during the same period of 2023. The difference in the tax provision was attributable mainly to Section 162(m) compensation deduction limitations and foreign inclusion adjustments.

Previous wording

The following table presents the reconciliation of Grid Dynamics’ Non-GAAP EBITDA to its consolidated net loss, the most directly comparable GAAP measure, for the periods indicated:

Current wording

The following table presents the reconciliation of Grid Dynamics’ Non-GAAP EBITDA to its consolidated net income (loss), the most directly comparable GAAP measure, for the periods indicated:

Previous wording

(2)Geographic reorganization includes expenses connected with military actions of Russia against Ukraine and the exit plan announced by the Company and includes travel and relocation-related expenses of employees from the aforementioned countries, severance payments, allowances as well as legal and professional fees related to geographic repositioning in various locations. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

Current wording

(2)Geographic reorganization includes expenses connected with military actions of Russia against Ukraine and the exit plan announced by the Company and includes travel and relocation-related expenses of employees from the aforementioned countries, severance payments, and allowances as well as legal and professional fees related to geographic repositioning in various locations. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

Previous wording

(3)We implemented a restructuring plan during the first quarter of 2023. Our restructuring costs comprises of severance charges and respective taxes, and are included in General and administrative expenses in the Company’s unaudited condensed consolidated statements of loss and comprehensive loss.

Current wording

(3)We implemented a restructuring plan during the first quarter of 2023. Our restructuring costs are comprised of severance charges and respective taxes, and are included in General and administrative expenses in the Company’s unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

Previous wording

(4)Other (income)/expense, net consist primarily of gains and losses on foreign currency transactions, fair value adjustments, and other miscellaneous non-operating expenses as well as other income consists primarily of interest on cash held at banks and returns on investments in money-market funds.

Current wording

(4)Other (income)/expense, net consists primarily of gains and losses on foreign currency transactions, fair value adjustments, and other miscellaneous non-operating expenses as well as other income consisting primarily of interest on cash held at banks and returns on investments in money-market funds.

Previous wording

The following table presents a reconciliation of Grid Dynamics’ Non-GAAP diluted EPS and its Non-GAAP net income to its consolidated net loss for the periods indicated:

Current wording

The following table presents a reconciliation of Grid Dynamics’ Non-GAAP diluted EPS and its Non-GAAP net income to its consolidated net income (loss) for the periods indicated:

Previous wording

(2)Geographic reorganization includes expenses connected with military actions of Russia against Ukraine and the exit plan announced by the Company and includes travel and relocation-related expenses of employees from the aforementioned countries, severance payments, allowances as well as legal and professional fees related to geographic repositioning in various locations. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

Current wording

(2)Geographic reorganization includes expenses connected with military actions of Russia against Ukraine and the exit plan announced by the Company and includes travel and relocation-related expenses of employees from the aforementioned countries, severance payments, and allowances as well as legal and professional fees related to geographic repositioning in various locations. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

Previous wording

(3)We implemented a restructuring plan during the first quarter of 2023. Our restructuring costs comprises of severance charges and respective taxes, and are included in General and administrative expenses in the Company’s unaudited condensed consolidated statements of loss and comprehensive loss.

Current wording

(3)We implemented a restructuring plan during the first quarter of 2023. Our restructuring costs are comprised of severance charges and respective taxes, and are included in General and administrative expenses in the Company’s unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

Previous wording

(4)Other (income)/expense, net consist primarily of gains and losses on foreign currency transactions, fair value adjustments, and other miscellaneous non-operating expenses as well as other income consists primarily of interest on cash held at banks and returns on investments in money-market funds.

Current wording

(4)Other (income)/expense, net consist primarily of gains and losses on foreign currency transactions, fair value adjustments, and other miscellaneous non-operating expenses as well as other income consisting primarily of interest on cash held at banks and returns on investments in money-market funds.

Previous wording

Our principal source of liquidity continues to be cash generated from our operations. Additionally, on March 15, 2022, we entered into an agreement establishing a revolving credit facility with JPMorgan Chase Bank, N.A., as an administrative agent for the lenders. The revolving credit facility provides us with $30.0 million of available borrowing capacity. See Note 7 “Debt” in the notes to our condensed consolidated financial statements in “Part I. Item 1. Financial Statements (Unaudited)” of this Quarterly Report for information regarding our debt.

Current wording

Our principal source of liquidity continues to be cash generated from our operations. Additionally, on March 15, 2022, we entered into an agreement establishing a revolving credit facility with JPMorgan Chase Bank, N.A., as an administrative agent for the lenders. The revolving credit facility provides us with $30.0 million of available borrowing capacity. See Note 7 “Debt”

Previous wording

As of June 30, 2024, Grid Dynamics had cash and cash equivalents amounting to $256.0 million compared to $257.2 million at December 31, 2023. Of this amount, $28.2 million and $21.2 million, respectively, was held outside the United States, and included among others Switzerland, the U.K., Netherlands, India, Armenia, Mexico, Poland and other countries. We did not have any debt outstanding under the revolving credit facility at any balance sheet date presented. We believe that our cash and cash equivalents balance and cash generated from operating activities will be sufficient to fund currently expected levels of operating, investing and financing expenditures for a period of twelve months from the date of this filing. However, if our resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing, which may be subject to conditions outside of our control and may not be available on terms acceptable to our management or at all.

Current wording

As of September 30, 2024, Grid Dynamics had cash and cash equivalents amounting to $231.3 million compared to $257.2 million at December 31, 2023. Of this amount, $38.7 million and $21.2 million, respectively, was held outside the United States, and included among others Switzerland, the U.K., Netherlands, India, Armenia, Mexico, Poland and other countries. We did not have any debt outstanding under the revolving credit facility at any balance sheet date presented. We believe that our cash and cash equivalents balance and cash generated from operating activities will be sufficient to fund currently expected levels of operating, investing and financing expenditures for a period of twelve months from the date of this filing. However, if our resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing, which may be subject to conditions outside of our control and may not be available on terms acceptable to our management or at all.

Previous wording

Operating Activities. Net cash provided by operating activities for the six months ended June 30, 2024 decreased by $8.7 million to $13.9 million from $22.6 million provided in the same period of 2023, driven by changes in timing of the employee-related compensations in some of the offshore locations and timing of some customers’ payments.

Current wording

Operating Activities. Net cash provided by operating activities for the nine months ended September 30, 2024 decreased by $10.4 million to $23.1 million from $33.5 million provided in the same period of 2023, driven by changes in working capital, including timing of some customers’ payments.

Previous wording

Investing Activities. Net cash used in investing activities during the first half of 2024 primarily reflects our capital expenditures that increased from $3.8 million during the six months ended June 30, 2023 to $5.8 million in the current year quarter. Net cash used in investing activities during the first half of 2023 was primarily affected by payment of $17.8 million for the acquisition of NextSphere.

Current wording

Investing Activities. Net cash used in investing activities during the nine months ended September 30, 2024 primarily reflects the acquisition of JUXT that resulted in the payment of $32.1 million, net of cash acquired. Additionally, our capital expenditures grew by more than 50% and reached $9.1 million during the nine months ended September 30, 2024 compared to $5.6 million in the prior year period. Net cash used in investing activities during the nine months ended September 30, 2023 was primarily affected by payment of $17.8 million, net of cash acquired, for the acquisition of NextSphere.

Previous wording

Financing Activities. Net cash used in financing activities in the six months ended June 30, 2024 was $7.9 million and reflected the tax withholding obligations due to issuance of shares in connection with vested awards that was $4.9 million lower compared to 2023. We also benefited from proceeds from exercise of stock options that increased by $0.7 million compared to the first half of 2023.

Current wording

Financing Activities. Net cash used in financing activities in the nine months ended September 30, 2024 was $7.8 million, $6.7 million lower than during the same period in 2023, and reflected the tax withholding obligations due to issuance of shares in connection with vested awards.