Grid Dynamics - Q3 2023

Transcript

Bin Jiang (Head of Investor Relations)

Good afternoon, everyone. Welcome to Grid Dynamics' Q3 2023 Earnings Conference Call. I'm Bin Jiang, Head of Investor Relations. At this time, our participants are in listen-only mode. Joining us on the call today are CEO, Leonard Livschitz, and CFO, Anil Doradla. Following their prepared remarks, we'll open the call to your questions. Please note, today's conference 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 have just described in the investor relations section of our website. With that, I will now turn the call over to Leonard, our CEO.

Leonard Livschitz (CEO)

Thank you, Bin. Good afternoon, everyone, and thank you for joining us today. As you have seen from our published results, Grid Dynamics' third quarter revenue and non-GAAP EBITDA were within guidance range and exceeded Wall Street expectations. Our results reflect the company's unrelenting commitment to our existing clients and our continued ability to execute to our stated goals. There was a lot of activity during the quarter. This includes strong momentum with new clients, great traction with artificial intelligence projects as it continues to garner significant interest across our customer base, and progress with our GigaCube initiatives as we continue to operationalize it across the company. On a macro, the demand environment points to a level of stabilization. While we still have some ways to go before calling it a strong snapback or back to normalized levels of demand, I'm more optimistic than I was three months ago.

In many ways, this is what not expected, as enterprises need to spend toward their business imperatives that include digital transformation initiatives. In other words, for enterprises to remain competitive, they need to spend on crucial business digital transformation needs. Over the past three quarters, you have seen that our revenue has been flatish. As we highlighted before, the general trend we encountered are from the headwinds with a handful of customers, which offsets by other existing customers and new logos. Going forward, we observe the headwind trend reversal. This is incrementally positive, and we anticipate company's growth in 2024. Now, if I were to look at the billable headcount trends, some positive trends are emerging. Over the past six weeks, we have seen a steady rise in a billable headcount. Additionally, the demand for these billable headcounts started coming from existing logos.

Last, but not the least, new logos and recent logos continue to trend in the right direction. Once again, the underlying fundamentals are pointing in the right direction, which leads us to be incrementally positive. So in summary, I would like to leave you with three thoughts on the demand environment. First, the magnitude of resets across our customer is diminishing. Secondly, for the vast majority of the accounts, business is stable. And third, momentum with our new engagements is robust. Now, coming to the fourth quarter. We're more than one month into the fourth quarter, and the summary thoughts I have shared with you today extend to the fourth quarter as well. Our billable headcount continues to grow, our AI activity is robust, and the magnitude of declines from the handful customers continue to diminish.

We continue to invest in our engineering resources toward building new R&D artifacts, accelerators, and AI capabilities. During the quarter, there was a lot of activities with our technology organization, including pitching interest in our broad technology offering, including AI. During the quarter, we completed multiple enterprise AI and generative AI projects. With our generative AI efforts, our R&D initiatives resulted in several new solutions. These include GenAI for intelligent document processing and GenAI for software development. With our billable projects, we continue to be engaged across the spectrum of our clients with a multitude of solutions. These projects are at the different stages of development that include global financial institutions, retailers, hotel chains, and automotive suppliers. Our strength has always been our engineering training around leading technology specializations. To support the strong demand for AI skill sets, we have established a comprehensive AI training program.

Our AI curriculum is segmented across three tracks and ranges from introductory AI to more advanced features. Engineers are going through the rigorous program, which takes up to several quarters to complete the entire curriculum. As a reminder, Grid Dynamics AI engagements are based on more than seven years of internal research and successful implementations. With our generative AI offering, we partner with customers to employ large language models and prompt-guided image generation for the applications in product design and visualization, knowledge retrieval, wealth management, and customer support. On the GigaCube initiative, we continue to make good progress. As you know, GigaCube is our strategic blueprint that lays out a framework for our company toward a billion-dollar revenue goal. During the quarter, we made some key hires across our CT organization and sales organization. Our effort continues to focus on industry verticals such as manufacturing, pharmaceuticals, and BFSI.

In the quarter, there were several trends, and I want to share with you some of the notable ones. Logo momentum. In the third quarter, we signed 10 new enterprise customers. This brings the new enterprise logos added in 2023 to a total of 28. We believe Q3 client acquisition is a further testament of our competency and the confidence for large global enterprises to sign up with us in the current environment. Some of the more notable ones to mention include a global food company, global automotive parts supplier, a large direct-to-consumer home improvement solution provider, a large office supply retail company, a U.S.-based insurance company, and European tax advisory company. Our strong momentum is the testament of our differentiation and value we bring to our customers. Delivery location support. We operate in 18 countries spanning across North America and Europe.

We also continue to expand in India and adding another engineering center location, which is a testament to Grid Dynamics being a truly global company. Our follow-the-sun strategy enables our clients to be supported in uninterrupted fashion around the clock. Clients embrace our geographic diversification and choice of locations for their engineering support. During the quarter, we're able to quickly put together and ramp up dedicated teams across our global delivery locations for some of the new and recent clients. Additionally, our integration with NextSphere and Mutual Mobile is in full swing, and we have started to implement synergies across engineering, operations, and dedicated offices going into the joint sales activities. European business. During the quarter, we made a good progress in expanding our footprint across industry verticals with the new European clients.

We completed a major digital commerce platform for a global footwear company, delivered on time and within the budget. We're leveraging experiences to develop similar competencies across other industry verticals. Additionally, we're implementing a large composable commerce modernization platform for a global specialty auto parts company in a mission to modernize their B2C business. Leveraging our expertise, partnerships, and references, we expect to expand our brand in the market. For a large medical device company, we're launching an initiative in data engineering and generative AI to tackle challenges related to data inefficiency and governance, and the goal is to enhance the efficiency of sales reporting process. Partnerships continue to be a vital part of our growth and have become increasingly important in our long-term plan toward becoming a billion-dollar company. We currently have over a dozen partners with whom we work.

Of these, only half of them contribute revenue meaningfully on an individual basis. This also means that there is a significant scope to scale as we tap into this large opportunity in the partnership ecosystem. We have extended our partnership with the hyperscalers to their AI and GenAI offering, and we are actively developing solutions and accelerators on Bard and Vertex AI from Google, Azure OpenAI from Microsoft, Amazon Bedrock from AWS. Additionally, we continue to invest in growing independent software vendor partnerships in supply chain, digital experience, marketing, and commerce domains. This effort aims to enhance the value we provide to executives in the C-suite, including CEOs, CMOs, and Chief Product Officer. In the third quarter of our 10 new enterprise logos, three came from our partnership relationships.

In addition, last quarter, we announced a significant global partnership with Google Cloud to develop and implement innovative generative AI solution. We have been diligently working on leveraging Google Cloud's Vertex AI, a platform that incorporates powerful foundation models, large language models, and advanced image generation capabilities. Building on that, this quarter, we were invited to participate in Google's Next Leadership Forum, where we expanded our business relationships. During the quarter, Grid Dynamics delivered some notable projects. In manufacturing, for one of the world's largest tire manufacturer, we piloted an AI-based platform for tire recognition, health evaluation, and predictive maintenance. The platform is based on deep learning and was delivered as a cloud-based solution to the dealers. The goal of this solution is to significantly increase the productivity of their service centers, simplify predictive maintenance, and enable seamless integration with downstream applications.

For one of the world's largest technology company, we successfully designed and implemented a cutting-edge intelligent tool for measuring and allocating computing infrastructure that combines on-premises data centers with public cloud. Our solution measures resource utilization across department, associated costs, and produces 360 view on spending. This framework empowers our client with substantial savings in their cloud and on-premise infrastructure spend. At a leading European-based footwear manufacturer, Grid Dynamics was selected as the primary technology partner for their high-profile composable commerce replatforming portal. By seamlessly integrating best-of-breed cloud-native products, we leverage AWS platform to architect a cutting-edge solution that boasts scalability, flexibility, and future-proof capabilities. Our solution will enable the client in addressing creating key capabilities that will drive customer acquisition and retention, branding, as well as process efficiency optimization.

At one of the largest beverage distribution company in North America, Grid Dynamics built a framework for a new enterprise cloud platform. This significant program will be the basis for the company's multi-year digital transformation strategy. The program intends to enhance user experience across multiple sales channels, ensure dynamic scalability, and technology readiness for building custom applications to enable new business capabilities. With that, let me turn the call over to Anil, who will discuss Q3 results in more detail. Anil?

Anil Doradla (CFO)

Thanks, Leonard. Good afternoon, everyone. Our third quarter revenue of $77.4 million was within our guidance range of $76 million-$78 million and exceeded Wall Street expectations. On a sequential basis, our revenue grew modestly and was down 4.6% on a year-over-year basis. Relative to last quarter, we saw greater stabilization across the majority of our accounts. During the third quarter, retail, our largest vertical, representing 34.3% of revenues, increased by 2% on a sequential basis and grew 5.1% on a year-over-year basis. Within retail vertical, on a sequential basis, we witnessed growth from areas such as home improvement, department stores, and specialty retail. TMT, our second-largest vertical, represented 30.7% of our third quarter revenues, decreased by 1.5% on a sequential basis and 9.9% on a year-over-year basis.

On a sequential basis, we witnessed continued caution at some of our larger TMT customers. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 12.5% of our revenue in the third quarter, a decrease of 11.1% on a sequential basis and 39.8% on a year-over-year basis. The decline on a sequential and year-over-year basis came from some of our large customers as they readjusted their spending levels to the current macro environment. That said, at our largest CPG customer, we're witnessing stabilization, and this should benefit us in the fourth quarter. The finance vertical represented 9.4% of revenue, an increase of 8.2% on a sequential basis and 20.2% on a year-over-year basis.

The growth in the quarter came from a combination of financial technology customers and new logos. And finally, the other segment represented 13.1% of our third quarter revenue and was up 6.1% on a sequential basis. The strong sequential growth was driven by both from new logos and existing customers that spanned across healthcare, distribution, and the restaurant industries. We exited the third quarter with a total headcount of 3,823 versus 3,862 employees in the second quarter of 2023, and up from 3,746 in the third quarter of 2022. At the end of the third quarter of 2023, our total U.S. headcount was 322, or 8.4% of the company's total headcount.

This remained at the same level compared to 8.2% in the second quarter of 2023, and slightly decreased from 8.6% in the year ago quarter. Our non-U.S. headcount located in Europe, North America, and India, was 3,501 or 91.6%. In the third quarter, revenues from our top five and top ten customers were 36.8% and 54%, respectively, versus 44.5% and 61.1% in the same period a year ago, respectively. We witnessed continuous diversification and greater contributions from our recently acquired logos. During the third quarter, we had a total of 224 customers, up from 216 in the second quarter of 2023 and up from 200 in the year ago quarter.

The increase in customers on a sequential basis was largely from our core enterprise business. Moving to the income statement, our GAAP gross profit during the quarter was $28.2 million or 36.4%, and remained almost unchanged compared to $28.3 million or 36.6% in the second quarter of 2023, and down from $32.7 million or 40.3% in the year-ago quarter. On a non-GAAP basis, our gross margin was $28.7 million, or 37%, versus $28.8 million, or 37.3% in the second quarter of 2023, and down from $33 million, or 40.7% in the year-ago quarter.

The decrease in gross margin as a percentage on a year-over-year basis, both for GAAP and non-GAAP, was largely due to a combination of FX headwinds, cost associated with expansion in new geographies, and investments in AI-related expertise. Non-GAAP EBITDA during the third quarter that excluded stock-based compensation, depreciation and amortization, restructuring and expenses related to the geographic reorganization, transaction and other related costs was $10.7 million, or 13.9% of sales, down from $12 million, or 15.5% of sales in the second quarter of 2023, and down from $17.1 million, or 21.1% of sales in the year-ago quarter.

Our GAAP net income in the third quarter totaled $0.7 million, or $0.01, based on a basic share count of 75.5 million shares, compared to the second quarter income of $2.6 million, or $0.03, based on a basic share count of 75.1 million, and a loss of $6.7 million, or a loss of $0.10 per share, based on 68.6 million basic shares in the year-ago quarter. The year-over-year increase in GAAP net income was largely due to lower levels of stock-based compensation and significant decrease in geographic reorganization expenses.

On a Non-GAAP basis, in the third quarter, our Non-GAAP net income was $5.9 million, or $0.08 per share, based on 77.3 million diluted shares, compared to the second quarter Non-GAAP net income of $7 million or $0.09 per share, based on 76.9 million diluted shares, and $11 million or $0.15 per diluted share, based on 71.9 million diluted shares in the year-ago quarter. Coming to the balance sheet, on September 30, 2023, our cash and cash equivalents totaled $253.7 million, up from $246.2 million in the second quarter of 2023. Coming to the fourth quarter guidance, we expect revenues to be in the range of $76 million-$78 million.

We expect non-GAAP EBITDA in the fourth quarter to be in the range of $10 million-$11 million. For the fourth quarter, we expect our basic share count to be in the range of 76-77 million shares, and diluted share count to be in the range of 78-79 million. That concludes my prepared remarks. Bin, we're ready to take your question.

Bin Jiang (Head of Investor Relations)

Thank you, Anil. At this moment, once we start the Q&A session, I will first announce your name, and please unmute yourself and turn on your camera. Our first question comes from the line of Mayank Tandon from Needham. Please go ahead.

Mayank Tandon (Managing Director)

Thanks, Bin. Good evening, Leonard and Anil. Good job on the quarter. Let me start with just the guidance and then any framework for how to think about fiscal 2024. I imagine you have maybe a few less billing days in 4Q, so that would suggest clearly stability from 3Q-4Q. But then as you look ahead into the early part of 2024, I imagine 1Q has higher billing days, so trying to get a better read on what you expect in terms of recovery as we go into 2024.

Anil Doradla (CFO)

So Mayank, thanks for your question. You're right with your observation on Q4 versus Q3. And if you look at Leonard's comments about billable headcount, which is a steady increase, our flattish outlook suggests, or you can extrapolate from that, is that we expect these trends to play out. So, if you look at the foundations of our business, core enterprise business, we're seeing across the board stabilization. We're seeing, you know, increased headcount. So right now, when we look at it, we're incrementally bullish. Now, as you know, Mayank, we do one quarter at a time. So let's come back in, you know, three and a half months and give a lot of incremental color on Q1. So for now, let's just deal with Q4. Leonard?

Mayank Tandon (Managing Director)

Got it. Okay. I'll save my GenAI questions for the analyst today, so I won't go there. My next question-

Anil Doradla (CFO)

Feel free to ask if you want. Feel free to ask, Mayank.

Mayank Tandon (Managing Director)

I'll save them for that. You know, I want to focus more on just some of the financials. So Anil, kind of related, and maybe Leonard too, just on the both revenue and then, of course, the effects profitability too, is where's utilization today? And how much gas do you have left in the tank to expand utilization before you really have to crank up hiring when demand does come back to hopefully pre levels sometime in 2024?

Anil Doradla (CFO)

So, Mayank, in terms of utilization, we've done a good job in general. So utilization numbers obviously, you know, have held up, you know, within our range, and it hasn't changed, you know, from quarter to quarter. As you know, we've seen... We've put in place a little bit more disciplined approach towards we look at our engineering headcount and as well as non-engineering headcount. Now, you're right, it's a very good question. As some of the demand trends unfold, and we'll of course see how it plays out, the hiring, the acquisition of talent, these are important elements. And, yes, we are looking at that. But again, we're—it's one quarter at a time, right? We have to plan on that.

We have, in all these countries we're now, we've got teams, and we are, you know, constantly focused on some of these, you know, movements, and depending upon that, we will act upon. So but, yes, this is something we're discussing.

Mayank Tandon (Managing Director)

Got it. Well, thank you so much. See you in a few weeks.

Bin Jiang (Head of Investor Relations)

Thank you, Mayank.

Mayank Tandon (Managing Director)

Thank you.

Bin Jiang (Head of Investor Relations)

... Mayank, thanks for your question. Next question comes from the line of Josh Siegler from Cantor Fitzgerald. Please go ahead.

Josh Siegler (Equity Research Analyst and Head of Crypto & FinTech Research)

Yeah. Hi, guys. Thanks for taking my question today, and congrats on the results. Leonard, on the call, you mentioned that you've grown more optimistic over the past three months. I was curious, are those more positive discussions with some of your logos largely driven by AI demand? Or is there a broader, you know, thought process about returning to that general digital transformation spending?

Leonard Livschitz (CEO)

Well, Mayank mentioned that, we'll have much more deep, debrief on the AI just in two weeks in New York on the, you know, Analyst Day, and we'll have a very large team there. So I will save a little bit of mystery of that, but, fundamentally, it's a great door opener at this point. There are multiple projects. If you notice, there's something unusual, even in, Anil's statement in, financial, that there's some additional investment in going on of training people. And by the way, that's also kind of address potential growth, because, you know, we take more senior people, retain them, and, you know, we build even more capable teams.

Because, in our assumption that, more juniors who were trained through internships or direct hire will be easier to attract, to scale, maintain the large core of the technology people. So that's about AI. In terms of my confidence level, you know, basically, again, Anil mentioned it one quarter at a time. But what happens is, you know, we keep very careful statistics, not only on a rate of change of the billable people, but the content of the project. So AI was one part, but, you know, we're doing so much more complex work, not only in retail in the past and, you know, and CPGs, but in the broader base of the market, in manufacturing, in, you know, pharmaceutical. We're in insurance business. We're going into this, you know, the life science.

We're doing so much more, and we are able to start converting our horizontal expertise into vertical recommendations. So I see a deeper level of discussions. In addition to that, we've become a little bit more selective. I mean, you know, there is always expression that, you know, beggars cannot be choosers, right? We've been going through a lot of, frankly, tough times with the clients. Now, we see that as we plan our business today, going into 2024, we'd like to bet on partners who will carry the implementations of complex systems throughout the bigger project. We expect that our commitment is gonna be matched with their commitment to the business. So that gives me a little bit more, you know, I would say, complex, comprehensive, positive outlook.

Josh Siegler (Equity Research Analyst and Head of Crypto & FinTech Research)

Understood, and that's great to hear. Clearly, as you alluded to, there's a lot of organic reinvestment going on in the business right now with the accelerating billable headcount. But I was also curious if you could give an update on how you're thinking about the M&A environment right now and any, you know, updates on that regard.

Leonard Livschitz (CEO)

Yeah. So, it would be nice to tell you we have a deal coming right at the closing tomorrow, but it's probably not there yet. I'm not gonna come and be on tomorrow. But in reality, again, the market is very interesting. We are becoming more selective with the deals. As I mentioned, we did a couple deals in India, and then we start doing broader. We look at Europe. We look at the depth of the relationship with the potential, you know, best for clients. We look at Latin America. We're not giving up, of course, on the Indian part, but we have a bigger roster with a deeper engagement. We are also, you know, attracting more like advisory side. "Don't call me every day now," the bankers, you know, offering the services.

We're becoming more selective and, you know, the capital we will deploy, as you can, you know, imagine that, you know, the cost of capital has increased, right? So, we would like to make sure we are gonna get the right targets. But I'm actually, again, I see a little bit of a turn to the good, what I say, better targets right now.

Josh Siegler (Equity Research Analyst and Head of Crypto & FinTech Research)

Understood. That's very helpful. Thank you very much for taking my questions, and looking forward to the Analyst Day.

Leonard Livschitz (CEO)

Thank you so much.

Bin Jiang (Head of Investor Relations)

Thank you. Thank you, Josh. Next question comes from the line of Bryan Bergin from TD Cowen. Please go ahead.

Bryan Bergin (Equity Research Analyst)

Hey, guys. Good to see you and good to hear the momentum here. Thanks for taking the questions. I want to start on the new logos, the new enterprises that you're bringing in. So can you just talk about, you know, when some of these new enterprise logos this quarter will begin to ramp, and then any change in the pace or really the starting point from some of those other attractive large logos that you signed earlier in the year?

Leonard Livschitz (CEO)

Mm-hmm. Mm. Well, again, Bryan, what Anil mentioned, there are some additional revenues start coming, what he called recent logos. Remember, from the very old time, I was talking about, you know, 85, 10, 5, where start getting more dynamics in a similar fashion. So there is... There are some payouts already happening. Also, some of the more, older, more mature logos are coming back. The inventory of the technology development, which happened, let's say, a year ago, start getting to deplete, and they return back for competitive positioning in their corresponding fields. So that's kind of one thing. The other one is how to turn that big enterprise logo of the consistent long-term deployment and make sure it doesn't happen just by staffing.

So, again, we see more and more engagements are coming in a form of the partnerships, and that's been consistently a good story for us. In addition to that, we invested into SMEs, and we do quite a bit of white papers and also educating our clients on the relevancy on the specific initiatives. So that's number two. And number three is we are playing a very broad-based relationship as we invested in the more sophisticated sales force, which you haven't heard from me probably ever, but I'm getting finally a little bit more satisfied. So all three things, combined with what we invested into R&D and, you know, and accelerators, start crunching on a bit more confidence of acquisition. Because, you know, it's not just momentum, it's just higher, you know, you got a logo, and it goes away.

No, we see more traction than stability.

Bryan Bergin (Equity Research Analyst)

Okay. Okay, that's good to hear. And I'll do a follow-up here on, on kind of two of your key industries, or ones that have been a little more variable for you. So as we think about tech and CPG, just on tech, can you talk first about how the conversations with some of those large tech clients are evolving and, and how is the outlook there? And then for the CPG, I heard the comment about the largest CPG client stabilizing. Do you have visibility to the balance of that book of business stabilizing and other CPG and manufacturing clients yet?

Leonard Livschitz (CEO)

Yes. Let me start with the second. It's easier. We see more RFPs, and we see more, you know, QBR discussions, and they're not just discussion on the formal level, you were doing a good job. The attendance of those discussions is overwhelming. Because we, in a time of a drought, invest in a relationship with the broader-based teams, not just engineering team, but also the logistics guys, the marketing team, experience team. So there's a broader base of interest for us. So, and it's not just with the top one. With the top one, it's a notable difference indeed, but we see others are becoming more diversified in terms of what conversation they have with us.

Bryan Bergin (Equity Research Analyst)

Okay.

Leonard Livschitz (CEO)

So that's kind of a broader base, right? And I forgot, sorry, the first one.

Bryan Bergin (Equity Research Analyst)

That was the CPG half of that question.

Leonard Livschitz (CEO)

It was.

Bryan Bergin (Equity Research Analyst)

The large PMC ones. Yeah.

Leonard Livschitz (CEO)

Yeah. So that part, you know, the reason I forgot, because nothing extraordinary bad is happening, right? So I usually, the only time people run to me when something happening, and the number one is doing very well, and we are capturing more and more position there, and, and, you know, we're we're a preferred supplier to some extent. And again, I want to be very modest. Preferred supplier for the giants, it's still not a dominant force, it's just a more contributing value for us. But the other one also start, you know, there were projects which were won recently. That's another interesting thing. You remember I mentioned to you that there was a rapid change?

Bryan Bergin (Equity Research Analyst)

Yeah.

Leonard Livschitz (CEO)

Their own change and their own layoffs. Again, if you're patient enough and you retain relationships, we, you know, you win some programs. Now, that's a, that's an inviting change. It's not projects, it's programs, but it puts more responsibility on us. And that's what, again, Anil said, like one quarter at a time, and, you know, we have a few more weeks this time to talk, because we want to make sure that those programs are financially successful. And I mentioned before, as you see, right, we, we really play a much more deep dive on the sustainability of those relationships. It's, it's very important that it's not just, you know, give a few people and hope for the best. I, I think there's much more sustainable analytics beyond the relationship.

Bryan Bergin (Equity Research Analyst)

Okay, that's clear. Thanks, guys. See you in a couple weeks.

Leonard Livschitz (CEO)

Thank you.

Bin Jiang (Head of Investor Relations)

Thank you, Bryan. Next question comes from Maggie Nolan, from William Blair. Maggie, your line is open.

Maggie Nolan (Partner and IT Services Equity Research Analyst)

Thanks, Danny. I know. Hi, Leonard. I wanted to dig into that more positive outlook comment as well. I'm curious if there's any nuance between how you're looking at Europe versus North America, maybe over the next couple of quarters, just given that Europe is becoming a larger part of your business.

Leonard Livschitz (CEO)

Yeah. So, we still have bets in Europe. You know, there's always a cycle, right? So we put a lot more investment into U.S., too, because it's a larger portion. We're investing into Europe, but, I would tell you that I will drive success when we are gonna be significantly diversified from U.K. Now, again, now everyone can say, the good thing and a bad thing, right? So we, we love our U.K. clients, but it's awfully similar to the distribution of the business in the U.S. in the early days, right? So we are, now working with automotive supplier, manufacturing supplier, insurance companies, those businesses which will make it much more distinct in terms of the position in Europe.

So, some of the projects in Europe that were a bit rolled off, some new projects started, but I would say that, there's a little bit of a uncertainty. Of course, you know, the political situation, the Middle East, in addition to Eastern Europe, puts a little bit extra pressure as well. I'm positive. We just came back from Europe. We met quite a few customers. I'm positive on the growth, but I would be a little bit more cautious on the near-term growth in Europe compared with my more bullish positioning on our main clients in the United States.

Maggie Nolan (Partner and IT Services Equity Research Analyst)

Got it. That's helpful. And then you've made some recent investments in the sales force. Can you just talk about how you're incentivizing wins at existing clients versus new logos, particularly in this type of environment? And then, in general, just how the integration of some of those new hires is going.

Leonard Livschitz (CEO)

Okay, very good. So, again, I invite you, even though you're... Well, maybe the snow will chase you to New York. But and you know, the investor and Analyst Day, in addition to great spiel about technology, we'll talk about the other aspects, and sales is not the least one, right? We actually have quite a good representation of sales. Look, salespeople, in my opinion, and you know, I'm not gonna take the whole story of this, because you know, they're divided into hunters and farmers, right? So the people who work on existing accounts, and we've done quite well on existing account relationship. We could have done better, and we're doing better. But speaking to the new clients and expanding new clients and positioning, that's in you.

That's something we invested in, you know, we recently brought a head of the hunting sales in the United States, and that start picking up as well. So the quality of approach start turning on. Now, incentives, you know, it's certainly a very different disposition than regular account management or, you know, the account performance itself. It's a very much driven by incentives on the performance. Now, I'm very excited about it because I like to see when people put more bets aligned with the company, so they would like to get rewarded, as my executive team rewarded on something you guys never liked, it's stock-based compensation. I see salespeople we have, they must put more emphasis on the reward, on the performance of their accounts. So again, please join us on the 16th.

We'll do more, but I just feel much more engaged. I mean, I love my old experience with the big companies like HP and Philips, and I've seen some amazing people in the hardware business, but it's. We're not in a product, and we're not in a hardware, and I see that level of quality is coming back.

Maggie Nolan (Partner and IT Services Equity Research Analyst)

Thank you. See you soon.

Leonard Livschitz (CEO)

Thank you.

Bin Jiang (Head of Investor Relations)

Thank you, Maggie. Our next question comes from the telephone line from Ryan Potter from Citi. Ryan, please go ahead. Ryan, can you hear us? Okay, not sure about the technical issue from telephone line. Let's switch to the next, analyst. Next one is from Puneet Jain, from JP Morgan. Puneet, please go ahead.

Puneet Jain (Executive Director and Senior Equity Research Analyst)

Hey, thanks for taking my question. So Leonard, can you talk about like, the potential of 28 new enterprise customers that you added this year? Looks like, like these are large companies, but is the scope and nature of work any different from what you would have done in the past? And should we expect like maybe higher contribution from such clients than typical 85, 10, 5 model?

Leonard Livschitz (CEO)

Well, I would not run ahead of the numbers, right? That's expectations. But remember mentioning before, Puneet, that we need to make sure that the programs are performed, right? So we have more client commitment to us, and we have a higher commitment to the clients, but it means that the deployment of the projects are longer and the performance of these projects are required, you know, the proving the pudding. Not everybody will survive. Obviously, there are some people are a bit also jittery about technology. Now, again, in some cases, we go with our partners. We wanna make sure our partners also sustain their value. But in many cases, our clients look at Grid Dynamics, what I always dreamed about. Okay, well, you come with a partner, but what's your point of view on the world?

You know, we make an agreement that it's a Grid Dynamics business. We're obviously gonna promote where we came from, but we're building much more comprehensive roadmaps. So I will not promise you that next quarter I can definitively say that all 24 or 28 clients will be there. Expect some level of informality, because there are too many of them, very good ones. But I would say that mid-next year, I think that contribution may grow. Now, that's the 10%. Remember, it would not be the 5%. It would be increase of this kind of recent acquisition, which has to be, because if you really think about it, the 85 would not work anymore. We had one year of stagnation, right? So we're gonna maintain the same course.

We're gonna go on a much slower ramp up when things become more aggressive. So the combination of the technical capabilities, technical pre-sales, you know, programs with the clients, and the relevancy of the logos should give us the boost into this middle recent clients to be able to achieve this desired two-digit + growth, as we always expected from ourselves.

Puneet Jain (Executive Director and Senior Equity Research Analyst)

Got it. Now, thanks for explaining that. And many of your peers have talked about seeing margin headwinds from pricing and wage inflation dynamics, which could potentially continue into next year. So can you share your thoughts, what you are seeing at your client base?

Leonard Livschitz (CEO)

So, first of all, now we have a very angry Anil. And, so your friend is becoming much more clear in terms of the very detailed action items going into next year. You know, you don't always take the wishful thinking for implementation. I mean, we moved from Russia to, you know, some countries in Central Europe, right? There was a bump, right? We moved, and we continued to expand in India, and, we need to see that margin profile to capitalize, because still there is a significant contribution to India comes from the acquisitions. It's growing organically, and that's why... Remember, I spoke, let me prove that I can do more organic before I can keep job in adding companies. But you probably noticed we mentioned the third center, right? I mean...

I'm sure you know, you don't have to be a super genius to know where the third city is. If you were in Chennai, we're in Hyderabad, it's Bangalore, right? And there's a good reason why it's Bangalore, right? So it gives us the momentum on this margin profile, because we need to address this follow the sun strategy. The other thing is, when we expand in Europe, we're becoming more selective on not going to many digitized countries. You know, it's a tough call, right? I mean, people love to collect the countries, and we have 18, right? But, you know, smaller is merrier. We can control the internship programs, training programs, maintain the depth in the offices where we are. I think that's another way. But now go back to the most, the hardest part. It's the pricing, right?

So, we start making some calls, and those are tough calls. Again, you know, there's always a balance. In my life, I've seen multiple times. You can chase revenue, you can chase profits. Neither is successful. So the, the way to chase revenue is to chase stable, long-term revenue, at least how you plan it, and then bring the value to the clients, then they actually pay for it, right? We signed some really interesting contracts, but I'm not a little boring guy, too. I'm, I'm trying to be honest, and I want to make sure Grid Dynamics brand remains, that we are going into the fair relationship. So that means a few of the project could have been, you know, the feathers may not be there because we wanna start on a, on a proper, pricing position.

But in some cases, we had to do some more aggressive investment into the... And I don't like the word investment, because to me, investment, it's technology, it's people. When you invest in a customer, you invest in their ROI, not of the discount.

Puneet Jain (Executive Director and Senior Equity Research Analyst)

Agreed. Thank you so much.

Leonard Livschitz (CEO)

Of course. So maybe, we could go back and see if Ryan, Ryan is still there.

Bin Jiang (Head of Investor Relations)

Sure. Let me try one more time. Ryan, can you please try your telephone line, see if it works?

Mm.

Oh, I guess there's some technical limitation for Zoom panelist. Okay, at this moment, that will be all of the Q&A session for today. I will now pass the call back to Leonard for the closing remark.

Leonard Livschitz (CEO)

Thank you, everybody, for joining us on the call today. I'm more bullish than I was three months ago. Our core business is rebounding, and revenues from our new logos and recent logos continue to grow. Our goals are clear: to leverage our GigaCube roadmap to become a billion-dollar revenue company. We're diligently focused on executing the stated goals. More importantly, our clients continue to place their confidence in Grid Dynamics' abilities. This is a testament of the hard work across the entire company, and I truly appreciate the contribution from each and every of employees. On November sixteenth, we'll be hosting our first investor and Analyst Day. I would highly recommend you to attend in person. It will be a great opportunity to meet the expanded management team. We plan to delve into our capabilities and our service offerings.

We plan to have demos around generative AI that will provide some insights into our technology leadership. I also believe the investors will find the event insightful. I'm looking forward to seeing all of you in two weeks. Thank you.