Grid Dynamics(GDYN) - 2023 Q4 - Annual Report

Part I Business Grid Dynamics offers technology consulting and engineering services, specializing in enterprise AI, cloud, data, and customer experience - Grid Dynamics provides technology consulting, platform engineering, and advanced analytics, distinguished by over 7 years of Enterprise AI experience[20][21] - Core service areas include Cloud Platform, AI/Machine Learning, Digital Engagement, and Supply Chain/IoT engineering[32][33][35] - As of December 31, 2023, Grid Dynamics employed 3,920 personnel across engineering centers in 12 countries[45][57] - The company competes with emerging digital services firms, global consulting firms, India-based IT providers, and in-house IT departments[55][58] - In 2023, one customer accounted for 10% or more of revenue, a decrease in top-client concentration from prior years[54] Revenues by Vertical (2021-2023) | Vertical | 2023 Revenue (in thousands) | 2023 % of Revenue | 2022 Revenue (in thousands) | 2022 % of Revenue | 2021 Revenue (in thousands) | 2021 % of Revenue | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Retail | $102,551 | 32.8% | $99,681 | 32.1% | $61,717 | 29.2% | | Tech, Media and Telecom | $98,830 | 31.6% | $98,334 | 31.7% | $67,689 | 32.0% | | CPG/Manufacturing | $42,861 | 13.7% | $61,216 | 19.7% | $43,461 | 20.6% | | Finance | $28,842 | 9.2% | $21,893 | 7.1% | $17,515 | 8.3% | | Other | $39,826 | 12.7% | $29,358 | 9.4% | $20,898 | 9.9% | | Total | $312,910 | 100.0% | $310,482 | 100.0% | $211,280 | 100.0% | Risk Factors The company faces risks from client concentration, the Ukraine conflict, macroeconomic pressures, intense competition, and talent retention - Revenue concentration remains high, with the top 10 clients accounting for 56.1% of revenue in 2023[81] - The military conflict in Ukraine impacted operations, leading to employee relocation and cessation of Russian Federation operations[88][89][90] - Macroeconomic conditions, including inflation and rising interest rates, could adversely affect client spending and growth[93] - Intense competition comes from global consulting firms, digital transformation providers, and India-based IT service providers[96][97] - Failure to attract and retain highly skilled IT professionals poses a significant risk to operating costs and project delivery[100][101] - Risks include security breaches and cyberattacks that could lead to unauthorized data access, liability, and reputational damage[108] - Social, ethical, and regulatory issues concerning AI use could lead to reputational harm and decreased demand for AI solutions[105][106][107] - Strategic acquisitions like Tacit, Mutual Mobile, and NextSphere carry integration risks and may not achieve anticipated goals[156] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[218] Cybersecurity Grid Dynamics maintains an established cybersecurity risk management framework, overseen by the Board of Directors - The company has established policies and processes for managing cybersecurity threats, integrated into its overall risk management system[219][220] - Cybersecurity governance is managed by a CISO and management committee, with Board audit committee oversight[227][228] - The COO reports quarterly to the audit committee on cybersecurity risks, incidents, and system testing[230] - No cybersecurity incident has had a significant impact on operations or financial standing[225] Properties Grid Dynamics leases all of its 23 facilities across 12 countries, with its principal executive office located in San Ramon, California - The company operates 23 leased facilities in 12 countries, with its principal executive office in San Ramon, CA[231] Legal Proceedings The company is not currently a party to any material legal proceedings and is not aware of any material legal or governmental proceedings contemplated against it - Grid Dynamics is not currently a party to any material legal proceedings[232] Mine Safety Disclosures This item is not applicable to the company - Not applicable[233] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Grid Dynamics' common stock is listed on NASDAQ under "GDYN"; no cash dividends are expected - The company's common stock has been listed on the NASDAQ under the symbol "GDYN" since March 6, 2020[236] - The company has not paid cash dividends and does not expect to in the foreseeable future, retaining earnings[238] Stock Performance Comparison (March 6, 2020 - December 31, 2023) | Company/Index | 03/06/2020 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Grid Dynamics Holdings, Inc. | $100.00 | $107.60 | $324.25 | $95.82 | $113.83 | | S&P 500 | $100.00 | $129.07 | $166.12 | $136.04 | $171.80 | | Peer Group | $100.00 | $154.70 | $237.79 | $154.37 | $190.69 | Reserved This item is not applicable - Not applicable[244] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Grid Dynamics reported $312.9 million in revenue, a slight increase, with a significantly reduced net loss Fiscal Year Highlights - In 2023, revenue increased by 0.8% to $312.9 million, while GAAP gross margin decreased to 36.2% and net loss significantly decreased by 94.0% to $1.8 million[249][250] Summary of Financial Results (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $312,910 | $310,482 | $211,280 | | Gross profit | $113,146 | $120,590 | $87,728 | | Income/(loss) from operations | ($5,580) | ($21,008) | $50 | | Net loss | ($1,765) | ($29,214) | ($7,700) | | Diluted loss per share | ($0.02) | ($0.42) | ($0.13) | | Non-GAAP EBITDA | $44,246 | $58,213 | $39,077 | | Non-GAAP net income | $25,077 | $36,627 | $24,160 | | Non-GAAP diluted EPS | $0.32 | $0.51 | $0.36 | Recent Acquisitions - On April 18, 2023, the company acquired NextSphere Technologies Inc. to enhance technical offerings and expand its global footprint[252] - On December 23, 2022, the company acquired Mutual Mobile Inc. to accelerate strategic expansion into India[253] Key Performance Indicators and Other Factors Affecting Performance Personnel by Region (as of Dec 31) | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Americas | 567 | 521 | 386 | | Europe | 2,806 | 3,034 | 2,888 | | Rest of the world | 547 | 243 | — | | Total | 3,920 | 3,798 | 3,274 | Revenue Concentration by Customer Group | Customer Group | 2023 % of Revenue | 2022 % of Revenue | 2021 % of Revenue | | :--- | :--- | :--- | :--- | | Top one customer | 14.4% | 12.6% | 11.6% | | Top five customers | 37.0% | 43.5% | 43.9% | | Top ten customers | 56.1% | 59.7% | 60.4% | | Top twenty customers | 68.3% | 72.6% | 72.5% | Results of Operations - Revenue increased by 0.8% to $312.9 million in 2023, with Retail growing 2.9% and CPG/Manufacturing decreasing 30.0%[284][286] - Gross margin decreased from 38.8% to 36.2% in 2023, primarily due to increased cost of revenues from acquisitions and higher compensation[289][290] - General and administrative expenses decreased by 24.7% to $79.8 million in 2023, driven by lower stock-based compensation and reorganization costs[296] - Other income increased to $10.4 million in 2023 from $0.6 million, mainly from money market funds and a $4.2 million write-off[299] Non-GAAP Measures Reconciliation of GAAP Net Loss to Non-GAAP EBITDA | (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | GAAP net loss | ($1,765) | ($29,214) | ($7,700) | | Depreciation and amortization | $8,926 | $6,626 | $5,049 | | Provision for income taxes | $6,603 | $8,761 | $5,248 | | Stock-based compensation | $35,516 | $60,968 | $33,036 | | Geographic reorganization | $1,858 | $11,023 | $0 | | Transaction and transformation-related costs | $2,038 | $604 | $942 | | Restructuring | $1,488 | $0 | $0 | | Other (income)/expense, net | ($10,418) | ($555) | $2,502 | | Non-GAAP EBITDA | $44,246 | $58,213 | $39,077 | Liquidity and Capital Resources - As of December 31, 2023, the company held $257.2 million in cash and cash equivalents, primarily from operations[311][312] Summary of Cash Flows (in thousands) | Cash Flow Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $41,093 | $31,652 | $17,973 | | Net cash used in investing activities | ($25,950) | ($16,323) | ($35,366) | | Net cash (used in)/provided by financing activities | ($16,321) | $97,758 | $49,134 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is foreign currency exchange rate fluctuations, impacting a significant portion of operating expenses - The company faces foreign currency risk, with 37.9% of combined cost of revenue and operating expenses in 2023 denominated in non-USD currencies[321][322] - A 10% decrease in Polish zloty against USD would increase income from operations by $3.7 million[323] - The company does not currently hedge foreign currency exposure but aims to minimize it by matching expenses to revenue currencies[325] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2021-2023 - Grant Thornton LLP issued an unqualified opinion on the company's financial statements and internal control over financial reporting[330][331][337] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[514] Controls and Procedures Management concluded that the company's internal control over financial reporting and disclosure controls were effective - Management concluded that the company's internal control over financial reporting was effective as of fiscal 2023 end[517] - The evaluation of internal control excluded NextSphere Technologies, Inc., acquired during 2023[516] - The CEO and CFO concluded disclosure controls and procedures were effective as of December 31, 2023[518] Other Information The company reports no other information for this item - None[521] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[522] Part III This section incorporates information by reference from the company's upcoming Definitive Proxy Statement for the Annual Meeting of Stockholders Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's upcoming Proxy Statement - Information for this item will be incorporated by reference from the company's Proxy Statement[524] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's upcoming Proxy Statement - Information for this item will be incorporated by reference from the company's Proxy Statement[526] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's upcoming Proxy Statement - Information for this item will be incorporated by reference from the company's Proxy Statement[527] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's upcoming Proxy Statement - Information for this item will be incorporated by reference from the company's Proxy Statement[528] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's upcoming Proxy Statement - Information for this item will be incorporated by reference from the company's Proxy Statement[529] Part IV Exhibit and Financial Statement Schedules This section lists documents filed as part of the Annual Report, with financial statements referenced under Item 8 - All financial statement schedules are omitted as not required or included elsewhere in the consolidated financial statements[532] Form 10-K Summary The company has not provided a summary for this item - None[537]