Grid Dynamics - Earnings Call - Q2 2025

Executive Summary

• Record revenue of $101.1M (+21.7% YoY; flat QoQ) and GAAP diluted EPS of $0.06; non-GAAP diluted EPS of $0.10. Management highlighted AI-first strategy with AI & Data at 23% of H1 organic revenue, growing ~3x faster than overall organic business.
• Versus Wall Street: EPS modestly beat consensus ($0.10 vs $0.098*) while revenue was slightly below ($101.1M vs $101.3M*); non-GAAP EBITDA of $12.7M was within the company’s guided range. Values retrieved from S&P Global.*
• Guidance: Q3 revenue $103–$105M and non-GAAP EBITDA $12–$13M; full-year 2025 revenue maintained at $415–$435M.
• Key catalysts: accelerating enterprise AI adoption, finance vertical strength (revenues doubled YoY), and expanding hyperscaler partnerships (Google traction in Europe). Watch for margin trajectory given FX headwinds, increased engineering investments, and fixed-price contract timing.

What Went Well and What Went Wrong

What Went Well

• AI-first execution and pipeline momentum: “AI and data was 23% of the company's overall organic revenue… growing almost three times faster than our overall organic business”. CEO emphasized enterprise-wide AI adoption and Grid’s role as an AI-native partner.
• Vertical strength and mix: Finance became the second-largest vertical at 25.1% of revenue, doubling YoY; TMT up 6.7% QoQ and 8.4% YoY; Retail remained largest at 29.2%.
• Partnerships and delivery scale: Partnerships influenced 17.9% of Q2 revenue with growing traction, notably with Google in Europe; headcount rose to 5,013 (+26.6% YoY), supporting growth and follow-the-sun delivery.

What Went Wrong

• Gross margin compression: GAAP gross margin fell to 34.1% (from 36.8% in Q1 and 35.6% in Q2’24), driven by FX headwinds, increased engineering hiring ahead of growth, and fixed-price contract timing.
• FX headwinds and cost impacts: Net FX impact approx. $1.4M; non-GAAP EBITDA margin declined to 12.6% (from 14.5% in Q1 and 15.6% in Q4) on FX and lower gross margin.
• Customer count rationalization: Total customers declined to 194 (from 204 in Q1 and 211 in Q4) as the company exited non-strategic smaller accounts; minor infant mortality through hyperscaler-led trials noted.

Transcript

Speaker 3

At this time our participants are in listen only mode. Joining us on the call today are CEO Leonard Livschitz, CFO Anil Doradla, CTO Eugene Steinberg, COO Yury Gryzlov, and SVP Americas Vasily Sizov. Following the prepared remarks, we will open the call to your questions. Please note that today's conference call is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain forward looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainty as described in the company's earnings release and other filings with the SEC. During this call, we will discuss certain non-GAAP measures of our performance. GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and the 8-K filed with the SEC.

You can find all the information I just described in the Investor Relations section of our website. I now turn the call over to Leonard, our CEO.

Speaker 5

Thank you, Cary. Good afternoon, everyone, and thank you for joining us today. I'm delighted to report another record quarter in revenue. Our second quarter revenue of $101 million was another all-time high, driven by the continued growth in our engineering building headcount. More importantly, we're witnessing a strong pipeline of opportunities across industry verticals. I will talk more about it in my prepared remarks. Grid Dynamics is aligning every aspect of its business with an AI-first approach. This includes infusing AI into go-to-market strategies, service offering delivery, and talent management. We're doing that while preserving and expanding our core essence around high-caliber technology consulting and engineering services. While traditional programs face increased scrutiny, innovation-centric initiatives are being prioritized from a spending perspective. Enterprises are actively seeking AI-native partners capable of driving and leading adoption within the enterprise environment.

Furthermore, traditional functional structure within large enterprises are often lacking the adaptability needed for efficient cross-functional decision making regarding AI implementations encompassing both technology and business aspects. This is precisely where Grid Dynamics plays a crucial role, empowering organizations to accelerate AI adoption at enterprise scale. I'm happy to report that in the first half of 2025, AI and data was 23% of the company's overall organic revenue. The AI and data practice is growing almost three times faster than our overall organic business. I am excited to see the growth in pipeline of opportunities as we enter the quarter with accelerated business momentum. This is the basis for our positive business outlook, even though microeconomic uncertainties persist. I'm also pleased to report on the progress with our recent acquisitions.

JUXT has significantly elevated our industry expertise in banking and financial services, attracting considerable interest from global banking based in the United States. In the second quarter, a U.S.-based global bank continued to be a top 10 customer, and that was the reason the financial services vertical remained our second largest. Mobile Computing has enhanced our follow-the-sun capabilities and talent acquisition effort, successfully integrating engineering teams to support our U.S. enterprise accounts. Our partnership influence revenues reached 17.9% of the total revenue in Q2 2025, and we continue to experience increased traction with all hyperscalers, notably with Google in our European business. We begin implementing a modular B2B digital search solution built on Microsoft Azure for one of the largest worldwide brewing companies.

We also have launched AI expert agents at a Tier one investment bank to perform in-depth code quality and security reviews as a part of the software development lifecycle. Our India expansion continues to be a strategic highlight. India is now among our two top countries by headcount and has emerged as a hub for multi-agent, multimodal platform engineering, demonstrating strong talent attraction and upskilling. Our internship program also shows strong momentum with over 16,000 applicants and high placement rates into the billable roles across the majority of our customers. There is a profound impact of AI on the way they're planning their future initiatives and programs. Customers now expect a flavoring of AI across all of their service offerings, even traditional ones. We firmly believe the workforce pyramid of the IT industry space is shifting towards senior talent and AI-centric agents.

As you know, Grid Dynamics workforce pyramid is more weighted toward senior, more experienced engineers in comparison to our peers in the IT industry. Our alignment in the workforce along with a technology-centric DNA positions us well as enterprises embrace AI. Given the critical role of AI, I would like to emphasize Grid Dynamics unique market position. It's important for investors to remember that our company's core values are built upon a strong foundation in data and data platforms as well as expertise in large-scale data engineering for Fortune 1000 enterprises. I will now turn the call over to Eugene Steinberg, our Chief Technology Officer, to elaborate on the important topic of AI.

Speaker 6

Eugene, thank you Leonard. Good afternoon everyone. I'm delighted to share how Grid Dynamics is actively retooling for an AI-first future where AI capabilities are embedded into every aspect of our operations and service delivery from the ground up rather than added as an afterthought. We are methodically building on a strong foundation of a decade of data and AI experience. We are expanding our key AI capabilities and strategic partnerships. We are delivering production-ready solutions with proven ROI for enterprise clients, we are innovating with major customers and building considerable experience across agentic AI platforms and solutions and AI-first software delivery lifecycle. The investments we made are yielding positive results, many of which I'll discuss today. Grid Dynamics' whole AI framework is based on four foundational pillars. Let me walk you through each. First, AI-powered business transformation.

We are delivering immediate and measurable impacts from our engagements in the areas of customer engagement, enterprise operations, and manufacturing. Conversational commerce is redefining customer engagements by driving hyper-personalized customer experiences. Our search solutions have become a key entry point for many new client relationships in retail and CPG industries. From there, we often expand to build conversational commerce capabilities. Our efforts routinely yield conversion improvements of over 5%. This success leads to follow-on engagements that average 2.3x the initial project value as clients expand AI adoption across additional business units. We have specialized domain solutions for many sub-verticals that have been particularly differentiating. Take auto parts search for example. Our fitted auto parts search capabilities have established Grid Dynamics as a preferred partner for most leading auto parts retailers.

With over 150 AI search specialists deployed across customer projects, we are demonstrating our ability to grow within existing accounts while delivering measurable business impacts. Agentic AI significantly enhanced efficiency for a major financial services company by automating intelligent processes and facilitating data-driven decisions. Previously, the cost of covering the vast number of tier 3 customers was prohibitive for digital sales. Our B2B customer 360 agent now conducts exhaustive research, aggregating client data from diverse sources such as CRM, contact databases, and spreadsheets. These detailed profiles integrate automated risk alerts, AI-powered insights, and intelligent recommendations informed by prior interactions, ultimately leading to improved customer retention and business growth. This initiative is expected to free up about 20% of seller capacity, allowing for a high-touch approach with more clients and accelerated time to revenue within the manufacturing sector.

We implemented the remaining useful life prediction system for a leading industrial equipment manufacturer, which enhances maintenance planning and reduces unplanned downtime. We have also delivered facility modeling with G code generation for a global technology company, optimizing manufacturing processes and improving production efficiency. The rise of physical AI is fundamentally transforming the industrial robotics landscape, leading to the replacement of legacy robotic platforms with modern AI-enabled solutions. We collaborate with innovative platform providers such as Vandelbots, enhancing their offerings with advanced AI components for inspection, welding, and precision manufacturing applications. This represents a new and promising revenue stream for our company. Second, AI and agentic AI platforms. We partner with large enterprises to develop in-house bespoke agentic AI platforms. For instance, we are collaborating with a leading global payment technology company and a multinational beverage giant to construct comprehensive AI platforms.

These platforms empower our clients to create a full spectrum of AI agents, both low code and high code, within a secure, scalable environment. They offer an expanding ecosystem of tools for agents to access enterprise data and systems. This platform-first strategy enables us to see substantial expansion opportunities by building AI solutions on top of the platforms we.

Speaker 1

Develop.

Speaker 6

Third, AI-first SDLC. As enterprises embrace AI-first mentality, the entire approach to the software development lifecycle, SDLC, is shifting. Last month we introduced our proprietary AI-centric Grid Dynamics AI Native, or GAIN, engagement model and we are driving strong adoption of AI-first SDLC methodologies across Grid Dynamics. What is particularly exciting is that this enables our expansion into previously inaccessible market segments. Labor-intensive legacy systems modernization projects that additionally required large volumes of relatively low-skilled labor are now within our reach. This represents a significant market expansion opportunity as we can now compete for projects that were previously economically unfeasible. For example, we are migrating 16,000 data processing jobs for a global technology leader using a small specialized team equipped with AI-first SDLC tooling. AI-first SDLC has dramatically improved our pre-sales and client acquisition.

We now create high-quality proof of concepts and prototypes in hours, not weeks, significantly boosting conversion rates and shorter sales cycles. For example, when a leading specialty pet retailer requested a computer vision solution to automate fish counting in aquariums, previously requiring manual fish transfer between tanks, our AI-first development team delivered a working prototype the next day. Fourth, Grid Dynamics process efficiency. Beyond client-facing complications, we are leveraging AI to transform our own internal operations. Our in-house agentic AI platform is transforming and automating every aspect of our operations, including knowledge management, talent sourcing, project management, contract reviews, and HR functions. AI is fundamental to driving our client business forward. Our continuous commitment to the AI-first future is unwavering and I'm excited about the road ahead. I will now turn the call over to Vasily Sizov, our SVP of Americas, to discuss some notable project highlights from the quarter.

Speaker 0

Thank you, Eugene. Good afternoon everyone. I am pleased to highlight some important accomplishments from the quarter that illustrate the value of our work for a leading global technology company. We modernized their data processing infrastructure by migrating Spark and Scala workflows from a legacy scheduling system to a next generation cloud platform. We developed a comprehensive data validation framework to ensure data consistency, optimized compute resource usage, and created reusable templates that accelerate future migrations to containerized environments. This initiative significantly improved platform stability and performance, reduced operational risks, and established the foundation for scalable, efficient development of future data driven capabilities. Another example, we partnered with a leading multinational technology company to develop hermetic C tool chains for their ML portfolio. This foundational initiative established a highly reproducible, reliable, and efficient C build environment across their machine learning programs.

Our team led the strategic architectural shift to a fully harmonic C build system, delivering a tenfold improvement in build reliability, a 25% reduction in operational costs, and significant developer velocity gains for complex CPU and GPU accelerated workloads. We are developing an AI platform for a leading home improvements retailer, serving as the foundation for generative AI tools that assist customers with how to guidance and product inquiries. Already in production, this virtual assistant offers project inspiration, design concepts, product comparisons, and expert recommendations for both do it yourself and professional users. The solution is expected to drive significant improvements in conversion rates and average order value, particularly in maintenance and repair and aesthetic upgrades. For one of the top fintech companies, we developed a spectrum of AI initiatives to showcase advancements across domains.

A multi agent marketplace validates temporal as a scalable execution platform for complex multi agent interactions, offering robust observability and reliability. A travel desk agent creates stateful agents with advanced memory components that generate personalized long term itineraries, overcoming context limitations through sub task execution. Another AI-based solution leverages public reviews to accurately categorize miscoded merchants, identifying system misuse and potentially increasing revenue through corrected interchange fees. Thank you. With that, let me turn the call to Anil, who will talk about our financials.

Speaker 2

Thanks, Vasily. Good afternoon, everyone. We recorded the second quarter revenue of $101.1 million, slightly higher than the midpoint of our $100 million to $102 million guidance. On a year-over-year basis, this represents a growth of 21.7% excluding the impact of our recent acquisitions. The year-over-year growth was 6.3% both on a quarter-over-quarter and year-over-year basis. There were roughly 73 bps and 40 bps of FX-related tailwinds, respectively. Non-GAAP EBITDA came in at $12.7 million, within our guidance range of $12.5 to $13.5 million in the second quarter of 2025. Negative impacts on our cost from FX fluctuations occurred both on a quarterly and year-over-year basis. As you know, over the past months the U.S. Dollar has weakened against most of the currencies. Grid Dynamics is exposed to a currency basket across Europe, Latin America, and India.

We have a natural hedge against some of these currencies, and the net impact of it was approximately $1.4 million. Looking at the performance of our verticals, retail remained our largest vertical, contributing 29.2% of total revenues for the second quarter of 2025. Revenues in this vertical grew 10.4% year over year, primarily driven by demand from our existing specialty retail customers and new customer engagements on a sequential basis. However, revenues declined by 6.2%, largely from home improvement customers. The finance vertical accounted for 25.1% of total revenues in the quarter and remained our second largest vertical. Revenues grew 1.4% sequentially and doubled year over year. The substantial year-over-year growth was primarily driven by increased demand from our fintech customers along with contributions from our 2024 acquisitions that brought in global banking customers.

TMT accounted for 24.9% of total revenues for the quarter, with the growth of 6.7% quarter over quarter and 8.4% compared to the same period last year. The largest growth driver was increased demand from our technology customers. Turning to the remaining verticals, CPG and manufacturing represented 10.5% of quarterly revenues. While revenues remain flat in absolute values, sequentially it increased 7.7% year over year, primarily due to contributions from our recent acquisition. Other vertical contributed 7.8% of total revenues, reflecting sequential growth of 10.1% and a 4.6% increase compared to the second quarter of 2024. The year over year increase primarily came from customers tied to agriculture, marketplace, and service provider subverticals, and finally the healthcare and Pharma made up 2.5% of our revenues for the quarter.

We ended the second quarter with a total headcount of 5,013, up from 4,926 employees in the first quarter of 2025 and up from 3,961 in the second quarter of 2024. At the end of the second quarter of 2025, our total U.S. headcount was 359, or 7.2% of the company's total headcount, versus 8.8% in the year ago quarter. Our non-U.S. headcount located in Europe, Americas, and India was 4,654, or 92.8% in the second quarter. Revenues from our top 5 and top 10 customers were 37.5% and 57.3%, respectively, versus 38.5% and 57% in the same period a year ago, respectively. During the second quarter, we had a total of 194 customers, down from 204 in the first quarter of 2025 and 208 in the year ago quarter.

The decline in the number of customers was primarily driven by our continued efforts to rationalize our portfolio of non-strategic customers. Moving to the income statement, our GAAP gross profit during the quarter was $34.5 million, or 34.1%, compared to $37 million, or 36.8%, in the first quarter of 2025 and $29.6 million, or 35.56%, in the year ago quarter. On a non-GAAP basis, our gross profit was $35.1 million, or 34.7%, compared to $37.6 million, or 37.4%, in the first quarter of 2025 and up from $30.1 million, or 36.2%, in the year ago quarter. On a sequential basis, the decline in the gross margin was largely from FX and wins, increased engineering headcount to support future growth, and timing of costs related to some fixed price contracts.

Non-GAAP EBITDA during the second quarter that excluded interest income, expense, provision from income taxes, depreciation and amortization, stock-based compensation, restructuring expenses related to geographic reorganization, and transaction and other related costs was $12.7 million, or 12.6% of revenues, down from $14.6 million, or 14.5% of revenues, in the first quarter of 2025 and up from $11.7 million, or 14.1%, in the year over quarter. Sequential decline in EBITDA was largely due to the decline in gross profit and FX headwinds. The increase on a year over year basis was largely due to higher revenues, partially offset by increase in operating expenses and FX fluctuations.

Our GAAP net income in the second quarter was $5.3 million or $0.06 per share based on a diluted share count of 86.4 million shares, compared to the first quarter net income of $2.9 million or $0.03 per share based on a diluted share count of 87.8 million and a net loss of $0.8 million or $0.01 per share based on 76.6 million diluted shares in the year-ago quarter. On a non-GAAP basis in the second quarter, our non-GAAP net income was $8.3 million or $0.10 per share based on 86.4 million diluted shares, compared to the first quarter non-GAAP net income of $10 million or $0.11 per share based on 87.8 million diluted shares and $8.5 million or $0.11 per share based on 77.9 million diluted shares in the year-ago quarter.

On June 30, 2025, our cash and cash equivalents totaled $336.8 million, up from $325.5 million on March 31, 2025. Now coming to the guidance. Over the past couple of quarters, the majority of enterprise clients across industry verticals have taken a certain degree of caution with traditional digital transformation spending. This is something we've seen across our customer base. That said, innovation-led projects are client priorities from a spending point of view, and Grid Dynamics has been one of the key beneficiaries of this trend. Coming to the third quarter guidance, we expect revenues to be in the range of $103 to $105 million. We expect our recent acquisitions contributing approximately 12% of the revenues. We expect our third quarter non-GAAP EBITDA to be in the range of $12 million to $13 million.

For the third quarter of 2025, we expect basic share count to be in the range of 84 to 85 million and our diluted share count to be in the range of 87 to 89 million. We are maintaining our full year revenue outlook of $415 to $435 million. All of this despite an estimated low double-digit annual % reduced revenue from cautionary spending on traditional business, which we projected early in the year, and it was affected by uncertainty with the macro environment. In spite of these events, we continue winning innovation-led projects and grow overall revenue. As Leonard pointed out, roughly 23% of our business is tied to AI and data. This momentum around AI and business is growing, and we expect this to be higher in the quarters to come. That concludes my prepared remarks. We are ready to take questions.

Speaker 3

Thank you, Anil. As we go into the Q and A session of this call, I will first announce your name. At that point, please unmute yourself and turn on your camera. First up is Mayank Tendon of Needham. Go ahead, Mayank.

Thank you. Can you guys hear me okay?

Speaker 2

Yes, we can, Mayank.

Great. I wanted to just maybe focus a little bit more on the pipeline and the pace of deal conversion. If you could just talk about as you look at the guidance for the rest of the year and let's take the midpoint for example, how much of the revenue would you say is in the bag under contract and how much do you actually still have to go out and win? Just kind of give us a sense of your confidence level in terms of getting to your guidance range.

Maybe Leonard, if you want I can kick off and then we can add. Yeah. Mike, look, last quarter there was this question right when we talked about $415 million to $435 million. What we talked about is when you look at the low end of our guidance, that will be reached by some of the working time benefits that we see. We still maintain that there is obviously organic growth. If you look at the low end of our guidance, for example, if you model something to the effect of a high single digit for the full year in organic growth and we maintain this momentum of about 12% from our acquisitions, that gets you to the low end of the guidance, which is a good place to be. We also said that there are two things that are happening.

There are other new pipeline of business which I'm sure Leonard and the team will talk about, but there are other opportunities that are there. As you go from the low end of the guidance to the high end of the guidance, obviously there is a little bit more on expectations on the acquisitions. With that I'll pass it on.

Great. Should I continue?

Yeah, go ahead, continue on.

Okay. I guess my follow up question would be around just some of the key underlying drivers of the model. How should we think about the pricing climate? How much more leverage do you have on utilization and what are your hiring plans, just given some of the demand trends you talked about? If you could just touch on those three metrics, that would be helpful from a modeling standpoint.

Speaker 1

Yeah, let me take it because Anil is not in the room. The connection itself. Mayank, first of all, let me finish the first part of your question. The pipeline is very robust. We have a little bit of a conservative point of view because if you remember when we were last time at the earnings call, we were talking about very good and indeed that was a very optimistic part of the growth. We want to be cautious because you don't know, a lot of macro impact happened like a couple of months. Even though we finished the quarter at a solid record number, still it was not to the full expectation where it would be. The pipeline which was created in Q2 is extremely good. Again, jumping forward, the July numbers look positive. I don't want to jinx it if I jinx it again.

We look optimistic for the second half of the year quite a bit because the convergence of the projects, especially related to any kind of data and AI platforms, is growing fast. We're talking about three times more than regular business. The reality is almost all the customers across our universe are taking on the business associated either with the innovative projects or with substantial migrations. We're talking about not just POCs or quite, quite big projects. Some hyperscalers help us with that as well. When we look at how much in the bag versus how much is a bit of a stretch, Anil mentioned to you about the low end to getting from low end to the mid range require quite a bit of effort and at this point we just stay on the range. I think we'll have much better view by the end of the quarter.

Right now we're very optimistic on the new big deals. At the same time, coming back to your second part, how we structured the pricing around it, the business associated with it, there are several aspects. First of all, we'll talk about our GAIN (Grid Dynamics AI Native) engagement model. When we are engaged with the technology innovative projects, as you can imagine, the price point of favor because clients are trying to reach the goal of their internal value add to the business and also the cost system. There's a little bit of a competition for the talent. As you know, Grid Dynamics is quite well positioned. Now on the traditional business there are various factors. We see a lot more pressure right now from the clients to scale the business with Grid Dynamics, particularly in India. The cost structure, the price structure in India is different.

As you see, we continue to grow our headcount but it's not even more proportional, at least at this point, to where we were where we were purely driven by European engineering. Also, with the global follow the sun model, we're signing the deals across various regions, particularly in Europe and in Latam, which again has a different pricing model. It's very hard to kind of create a common denominator for all these factors. We see the vector is solid. We went through negotiations most of all for this year, but very soon we'll start negotiations for 2026. What's very important, we also address it that with the weakening U.S. dollar, some of the value factors for the European engineering cannot be addressed by purely time and material.

The fixed bid, the, you know, our pods and now with the GAIN work, it becoming very, very, you know, very much into the, into the solution base. That kind of gives us more positive attributes how we build the business. Overall, to summarize it, we bet heavily on our AI and data business to grow. It's a fantastic positioning where we are today with our technology capability. If you want clarification, I'll do more but I try to cover very broad base in one answer that's great.

I'll pass it on. Thank you so much for that. Appreciate it.

Speaker 3

Thank you, Mayank. Next up is Puneet Jain of JP Morgan. Go ahead, Puneet.

Speaker 2

Thanks for taking that question. I wanted to ask about, like Eugene, I think you talked about how AI is changing the nature of work, specifically in this traditional SDLC cycle. Can you talk about need for training or hiring employees differently? It feels like your high experience within your workforce should be helpful. I'd like to know your thoughts. I'd like to hear how you think you might have to hire or train employees differently as you prepare Grid Dynamics for this changes to a traditional SDLC.

Yes, thank you, Puneet. Great question. This is not something which we started to do just today, right? We started to do it quite some time ago, preparing for AI's future. As we already said, we've always been a little bit top heavy on our talent, making a strong preference to the more senior, more capable, more, I would say, broadview engineers. In the new AI-first software development life cycle, the engineers who are working on their actual projects are supported by the AI agents which are actually writing code and making modification to the code base. They are acting as judges, right? The deep experience of engineers helps to determine whenever the suggestions which are made by the agent is a good or bad suggestion. This is where we see a lot of value which is coming from more senior engineers.

At the same time, we invested quite a bit into the, I would say, AI-native engineers who have grown with those AI agents from the very beginning of their careers. They very natively are coming out of our internship already armed with the understanding of those solutions. Our platform, which we are developing right now, which we call GAIN, it's a combination of the technology. It's not only about coding. It's all through the whole cycle of development, starting from requirement, understanding and gathering, and ending with deployment and testing of a solution in production. It's all supported by the different kinds of AI agents and engineers. Senior engineers and AI engineers are supervising cross agents and correcting them and guiding them through this process. Our Grid U training program is preparing those engineers with, like we traditionally said, prompt engineering.

Right now it's more like a context engineering, like a little bit new term in the industry which everybody's using to help U.S. agents to be successful and to drive them further. That's a shorter review.

Speaker 1

Now.

Speaker 2

That's great, like context engineering. We've been hearing that term a lot these days. I appreciate the response. Obviously, from an investor standpoint, we get a lot of questions on reasons for slower growth in broader IT services, whether it's macro, whether it's AI. Let me ask that question this way. You have, say, verticals, for example, financial services, which has been doing great, and then verticals like retail, healthcare, CPG, not as great. Are there any differences in AI adoptions across these verticals? Would you say that growth difference across those verticals is purely a function of macro or sector-specific challenges?

Speaker 1

Puneet, I'll let other people talk about more specific. I think it's a very fundamental question. There's no slowdown on AI adoption across all the verticals. What happened is in certain verticals we're gaining momentum because the existing business, the traditional business, the cloud migration, the new platforms and software development continues to expand while they adapt AI and AI platform. We have our own homegrown platforms, we use our partnership. There's a lot of stuff that's going on. You know, we even start getting some press from our participation adoption of physical AI. We're really at the cutting edge of all this. There are some other verticals where the traditional business has been somewhat muted and obviously because the retail and CPG was a substantial part of our business and there are some traditional large legacy business which has participation in brick and mortar.

Not mentioning all this emotions around the tariff strategies, they're slowing down on traditional software development, infrastructure expense and all this stuff. They continue to invest into AI project. If you noticed, Anil brought in some flavor talking about where could have been if that business would be slowed down. It would be way above the upper range of the guidance. It was leaked and what we see right now is there is a redeployment of resources in more traditional conservative fields which the, I would say, potential expansion is a little bit limited where the other more aggressive expansion combined with the traditional steady hat in other industries. The bottom line conclusion, AI growth supports Grid Dynamics growth wholeheartedly. We have more than one platform. We have internal platform, external where we participate in many activities which actually pay decent dollars but that's muted.

Current business in some of the more traditional areas start dragging a little bit down and is driven by those macros.

Speaker 2

Okay, thank you.

Speaker 3

Thank you, Puneet, for your questions. Next up is Brian Bergen of TMT Cower. Go ahead, Brian.

Hey guys, thanks for taking the question. Wanted to ask on the GAIN (Grid Dynamics AI Native) engagement model, can you talk about the early client testing reception to that model, and how are you thinking about how fast this ultimately gets adopted in your business? What I'm specifically curious about is as it gets adopted by more, what's the impact going to be on the financial profile of the business as we think about growth and gross margin?

Speaker 0

All right, maybe let me address this question. Thank you, Brian, for the question. I would say first that we definitely see increasing demand for new types of engagements and AI-powered engagements. This definitely should fuel future growth. That's the first statement. As for the particularly GAIN implementation, as Eugene mentioned, it's a very comprehensive, I would say holistic approach on how you approach software development lifecycle by embracing both processes, technical tools, team composition, and also the new commercial model. As a matter of fact, right now we already apply certain aspects of this new platform at selected customers. Primarily, the easiest thing for us is basically to bring this platform and process into fixed price engagements, which basically doesn't require the customer to rethink the VMO process on how they engage us.

From that perspective, we already see benefits by primarily reducing the timelines, which allows us to be more competitive also on the pricing side. As for the full-fledged GAIN implementation including the commercial, we are in the phase of fine-tuning this whole model because it's truly an innovative thing. VMOs are not ready yet. It will be a learning curve for them, and it will be a learning experience for us to fine-tune that. The good thing is that we are talking to actually two out of our top 15 customers right now on starting piloting this model as soon as we make the process as smooth as possible to go into production.

Speaker 1

Margin question, Brent. I think what Vasily is, Vasily is a kind of a foundational father of the model. You know, and running Americas gives him a bit of an upper, you know, upper hand with others. When I was in Chicago at the conference, first time I briefly mentioned the, you know, ideas and turns out obviously we're not alone. What's important is approving the pudding, how much business we generate. What's more important is how beneficial it becomes to the client and green and equity. I would not talk about directly gross margin. I was talking, I would refer to the profit margin as we grow and it will, you can retranslate it back because it includes the partial ownership of the people, Gradient platforms as proving, proving the conceptual business basically become a technology consultant to the client, understanding their business flavor of those verticals.

We're trying to prove a very interesting point which you guys were torching us from the beginning of AI, that the engineers will disappear and how the new world is going to work, what it's going to do to us and this is going to be very important. If we scale this program properly, it will substantially increase revenue per person. Why would it be is because we can use our top talent, which is growing, but obviously never enough. Right. I mean, you see some of the notable big companies throwing these 8-digit, 9-digit numbers right into the people. Now for us, since we have such a good pyramid growing up, we force the clients to think what's important to them. What's important to them is not own individual talent, but having a partnership with Grid Dynamics which makes measurable results.

Those two clients which Vasily mentioned, they're far along the way. The reason they realize why it's important is because the pace of innovation substantially increases with the time and surpasses their ability internally to even conceptualize the business. We're innovating, deploying, and analyzing business at the same time. The key point of that today actually, if you look at the crux of the GAIN offering and value as a data platform. Because without a reliable and logical dedicated data platform on a client side, the business will be risky because the conversion may not be as valuable for the business. I would look at the revenue per person as we scale our company rather than purely margin, which obviously would be addressed by increasing margin as well.

Okay, makes sense. I get that. Just in the near term, we'll talk about near term margin then just understanding demand is choppy. You do have, you've increased headcount again. How are you balancing keeping quality bench for a growth recovery and potentially investing around kind of non billable R&D right now versus kind of optimizing cost structure? Can you just talk about that dynamic in the near term specific at 2025.

Speaker 2

Anil, you have the numbers as you would expect. I'm laughing, Brian, because this is exactly what we're doing day in and day out right now. It's something very interesting that we're doing within the company. There are two very important things that I'm working on. One is, as you pointed out, there is a certain degree of financial discipline that we have to embark upon in the short term to ensure that, you know, as a public company we have to just work on. There's another mandate that Leonard has given me, which is we have to double down and invest into future technologies, into future platforms, and future personnel. There are two parts of my whole kind of balancing act, so to speak. The focus that we're looking at is we are creating specialized pools of labor that are targeting certain specific technologies.

I'm sure the group here can talk a lot more, whether it is a hyperscaler or whether there's some AI-specific things. We've developed internal platforms, so there's a lot of activity going on on our tooling side to build these accelerators and platforms. On the AI side, while we're doing that, we're taking a very closer look at our utilization benchmark on our more traditional side of the business. From that point of view, obviously we're ensuring that we are a little bit more cost optimized. That's how we're working on it. Actually, if you look at from my Q2 to Q3, some of my increased costs is because of investments in some of this engineering talent too.

Speaker 1

Brian, let me be very blunt because Anil is trying to be a little bit elusive and this is my absolute concrete determination. We will need to be the top leaders in an AI implementation offering to the clients. I know as a public company we need to do a certain cleanup and we're doing the cleanup, but we're doing the cleanup only to open up more capabilities. As far as I'm concerned, as you know how renaming stock has deteriorated for whatever reason you guys decided to. To me it's like look, I don't want to go back to where I was three months ago. I want to go five times more than I was three months ago.

The reason being is the value we're going to add to the system is going to be disproportional to everything we've done till the digital transformation with the cloud migration and public clouds took off and we're actively participating by co-developing the key products with our major partners. Answering your question, we will do the housekeeping and Anil will have to make sure that we don't do it randomly. I have a hugely aligned strategy with technology organization. The development of the delivery capabilities fall in the sun we have here on the table. Next time we'll hear also from some Indian representative Rajeev there. We have Yury and Vasily to make sure that in the U.S. and Europe we're going to have a bespoke application of AI platforms and as of today we want a major program actually Latam as well.

You will not hear from me for a quarter or two that we're going to be cautious, we're going to be aggressive, intelligent and you will hold us back where things have become a little bit more. The way how we've been doing it for last 18 months, even going through a liberation day and all other macro parts and going through ups and downs, it would not deflect our determination then in a modern AI, generic AI, physical AI, the solution practices, we're going to be at the leadership role.

Speaker 2

Okay, thanks Brian.

Speaker 3

Thank you for your questions.

Speaker 0

Brian.

Speaker 3

Next up is Maggie Nolan of William Blair. Go ahead, Maggie.

Speaker 2

Hi team, this is Matt on for Maggie, congrats on the quarter. I wanted to ask about the partner program and the impressive growth there. What's your outlook for partner growth into the second half of the year? Can that continue to accelerate? I guess where are you seeing the most new traction today amongst partners outside of Google and the hyperscalers? Is it primarily, you know, those, those hyperscalers?

Speaker 1

All right, so you kind of accelerated. Matt, the question. That was my agenda for the next quarter. We're going to bring you ahead of the global partnerships to get you very specific details on a partnership program because the mode of operating models have operated today for Grid Dynamics is the focus on innovation, customer partnerships, and wide distribution of the GAIN model. So regions, AI technology, internal platforms, and a scaling partnership. You ask a question, where are we behind beyond hyperscale? First of all, hyperscale is also a partition. They're no longer hyperscalers traditionally fighting for the space on the spending dollars on the cloud platforms only.

They're very actively participating on merging the platforms they built with AI tools they offer. The second part is we are also partnering with the Colossus guys, the major players which enable the foundational capabilities like, you know, like Nvidia of the world because you need to have another layer, you know, without the physical layers, without capabilities, it's hard, it's hard to scale. Now we are partnering with the robotics company. We are participating in a revolutionary way of changing the industrialization and again industrialization, very important. We're building agent tools and agent factories within the clients and partnering with their own teams as well with the third parties which are bringing AI tools, not forget. The fact is there's some of the very, very innovative creative ideas come from this myriad of the new formed AI.

I would call them startups, some of those startups getting capitalization way above our greatest today. This is where I love the VC world, right? People throw money and then something works, right? These guys are brilliant and our job, Eugene's job and some other key people on the team job is to select the ones who actually will make sense. I don't want to offend any VCs. It's great you guys have so much money, but for us we need to select the winners. It's the three ways: the hyperscales into new models, the big players who are bringing their own homegrown models, and it's our customers. We are joining efforts with the partners and their own style. We're helping them to build this solution. The fourth one which is kind of exploding, it's the industrialization part of the world with a physical air.

I just want to add that on the more traditional hyperscalers world, I'm talking from the European perspective, we definitely see traction, for example with Google, right? We are a little bit later compared to the U.S., but definitely I see the traction right now. It's tied to, even with Google, it's tied to both our more traditional search capabilities and collaboration around that. On the other side, that's agentic AI platforms as well. That's definitely a big portion of what we're doing right now. I know you also reported the numbers that we got from the partnerships in terms of the revenue.

Speaker 2

Great color. Thank you guys. Can I follow up with the question on client count? I think obviously declined quarter over quarter and year over year. I think primarily due to the rationalization of your portfolio. How long is that going to take, Anil, and when do you expect we can see stabilization in that line item. Matt, very good question. If you see over a pattern of several quarters, this has been kind of marginally going down. If you look at it, there are a couple of parts to it. The first part is that most of the decline comes from our acquisition-related clients. We've had six acquisitions over the past several years and many of them have smaller clients. Our whole focus is to look at the world through the lens of whether they're an enterprise customer or commercial customer.

Our focus tends to be more on the enterprise, which is where we manage the program. We have more focus, whereas a commercial side of it could be just a cost plus as we had through some of our acquisitions or some of the smaller ones. At this stage what we do is that as those projects roll off, many times we don't invest back in. There are some cases from quarter to quarter, some of our enterprise customers are also falling off. That's not a very big portion of it. We do have a little bit of a flavor of when we even come through the partnerships. There are some clients that try out work with us through the hyperscalers and there's a little bit of an infant mortality there as they're pausing into the next round.

The way we define, we have a little bit of a structured approach towards defining what a client is. If I do not get a dollar revenue in the quarter, I just don't call them a client, although there might be an MSA, there might be something out there, and within a 12-month period, if they come back again, they're not a new client, so to speak. A client can go now, three quarters later they come back, they're not a new client for me, they're within that 12 months. We have a little bit of a strict approach towards this. I think you will continue seeing some of these things. At the end of the day, when you look at our top 30, top 40 customers, that's going to draw most of the value.

Some of these smaller clients over time have come in the top 30 for us, but do expect at least in the near term to see a trend like that.

Speaker 1

Let me just conclude that part, very important message as you go see Grid Dynamics. We believe that AI implementation in various forms will remain to be the key business, and there will be a huge value for the proper combination of the platform and service providers. I would say in the classical form, service consultants with very strong technology flavor. Remember Brian mentioned about what is personalization, how you manage it. We look at some of the clients from the tail, and we just don't invest into that relationship too because we see they don't have capabilities to become a viable player in the near future, it doesn't mean we just tell them goodbye. If they don't fit in a model of the new AI era and we try very hard to convince them there, they just don't have that type priority from all folks.

You will see that some of the clients will grow exponentially because you know, it's a meeting of the mind. Some of the clients either stagnate or may fade as we go forward.

Speaker 2

Thank you very much.

Speaker 3

Thank you, Matt, for your questions. Next up is Surendra Singh of Jefferies. Go ahead.

Speaker 1

Surrender.

Speaker 3

Surrender.

I get the video here, guys.

Speaker 1

Okay.

Okay, big picture question here. Leonard, as you look forward to all of the changes that you guys are making, the transformations, what is the scenario that you're actually solving? Meaning, what is the level of AI capability? Are you planning for a scenario where 50% of software development, 75% is done by AI? Like, what are the kind of the framework of what you're moving towards?

First of all, social development is not the only area of AI.

That's as an example, right. That's a conceptual idea of the environment because one of the things that's happening is change is happening very rapidly, right. If you're solving for something here in X, but by the time you get to X where at Y, you're going to be faced with a constant evolution. How are you thinking about the evolution of the firm over the next three to five years?

Yeah. The evolution will take more than three quarters. This is going to be, you know, it's a combination of adoption of the technologies, capabilities of the distributed systems, and ability to generate a value on each individual. In each individual case, 50% is just a number. 30, 50, you know, 80. I'm used software development. Please, in my opinion, again, it's a small percentage of the change. There's a change of creating the value for the business than just trying to improve the code. I think the human tonic will continue to be a big part of all the key decisions, but it's going to be in different forms. Now writing the code is a lowest level and I think Eugene can comment more on that.

There is ability to understand the deployment of the systems, reverse compatibility of the systems, security to manage and control the future expansion of the systems. We will have to nail on each of them separately. On a low level it's going to take way more. It will take way over than 50%. It's going to go substantially large percentage of the code development. As we continue to monitor and expand on the capabilities, the progression will take a much longer time than some of those people want to make sure they have instant conversion. The people, the humans who are properly trained and assistance will have to define with ability to what is the future. Otherwise we're going to move with a.

We will have to face the moving target, which is not a good solution because you continuously invest in something which is going to be aged in six months. To summarize that, on the basic coding level it's going to be way more than 50%. On a system management integration, data compliance is going to be lower. The effect has to be proven on analytical part of the systems. It's going to be always a combination of people and projects. Just another point, when people talk about tasks, some of them be 100% tasked by the agents. When we talk about the total system implementation, the percentage would be lower. I think it would be a good segue that, you know, Eugene, you can make commodity of the experience.

Yes, of course. I understand that currently Internet is full of the examples of live coding and creating full fledged Facebook clones in 15 minutes. Anybody who really kind of perform production bound projects understands that building a prototype and putting something in production under load for 20 provision critical systems is very different things. What we observe in our business is that I'm in charge of pre sales, for example, in the company. Our pre sales is completely transformed by AI-first developed. We are able to turn really very good prototypes and pilots very, very quickly to the customers. We are going into the real thing in implementation of the scalable system, implementation of the system under load in secure environment with the deployment and scaling requirements which are needed for production. It's completely different ballgame.

Even the most sophisticated AI agents are very quickly losing their context and starting to float to the sides. They still need a lot of their human supervision and human design and thinking and creativity behind them to steer them. Very simple. Like we are savants, right? We are smart but aimless. This is why we are still kind of belief in.

Vasily wants to echo, you opened the Pandora box. This is our strive for excellence.

Speaker 0

Yeah, we had multiple conversations on the topic, and one color I wanted to add is that AI has different flavors, and it's in different stages of adoption because things like, for example, Copilot, when still an engineer writes a code, but AI suggests things, it will be widely adopted. Maybe if it's not 100%, maybe 95% or whatever. It is more kind of dependent actually on the security protocol within the customer, whether they want to be exposed to external LLMs. This thing is like it's a done deal. What Eugene and Len was talking about is more of a kind of agentic AI coding, and that's kind of a more complex topic, which will pass through the kind of adoption curve for sure.

Okay. I appreciate the time. That was my main question here.

Speaker 1

Thank you so much.

Thank you.

Speaker 0

Very good.

Speaker 3

Ladies and gentlemen, this concludes the Q and A session of our call today. I'll now turn it over to Leonard Livschitz for closing comments.

Speaker 5

As we conclude our second quarter earnings call, I want to leave you with three key takeaways. Number one, Grid Dynamics AI-first strategy is driving our growth.

Speaker 1

The AI and data initiatives now account.

Speaker 5

For a quarter, organic revenue in the first half of 2025 is growing nearly three times faster than our overall organic business. Number two, AI is fundamental to driving our clients' business forward. Enterprises are seeking AI-native partners with the expertise to lead AI adoption at scale. This is Grid Dynamics' strength. Our expanding pipeline aligns with enterprise investment, and finally, Grid Dynamics is built for sustained differentiation. We have a proven track record of emerging stronger through industry transitions based on re-accelerating client demand. We're confident in our outlook and our ability to empower Fortune 1000 enterprises and their AI journey. We're excited about the path ahead and the value we're creating. I look forward to giving you an update on the next earnings call.