Grid Dynamics Holdings Inc

NASDAQ:GDYN

Good afternoon, everyone. Welcome to Grid Dynamics Fourth Quarter and Full Year 2023 Earnings Conference Call. I'm Bin Jiang, Head of the Investor Relations. At this time, all 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 will 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.

Thank you, Bin. Good afternoon, everyone, and thank you for joining us today. As you have seen from our published results, Grid Dynamics fourth quarter revenues were above our guidance range and exceeded Wall Street expectations. It was another quarter of solid execution and continued focus on our stated goals. The quarter witnessed a lot of opportunities, both in sales and CTO organizations, the 2 key areas within the company where we invested significantly in 2023. On the sales side, our industry-centric efforts are paying off across all the verticals. In 2023, we added 33 new logos, which is a strong testament to our differentiation in a year where customers were more selective toward business traditional providers. With respect to the CTOs, our scientists and our [index] are heavily engaged with clients across the spectrum of innovative solutions including AI to drive meaningful business outcomes. To that end, we released several new functional accelerators across industry verticals, which have resulted in greater engagements across both new and existing customers. In supply chain, manufacturing, pharmaceutical and financial services, which is an area of focus with our GigaCube initiatives, the ability to offer unique and differentiated offerings has resulted in accelerated acceptance across a wide range of customers. To support the strong demand for AI skills, we established comprehensive AI training programs. I'm happy to report that over 25% of our engineers are trained in generative AI. Our AI curriculum is rigorous and is segmented across 3 tracks ranging from introductory AI to more intense topics. It may take up to several quarters to complete the entire curriculum. On the macro front, I'm happy to report that the demand environment is improving. The demand trends are directionally consistent with my commentary over the last couple of quarters. While we're yet to get back to normalized levels of growth, we're moving in the right direction. In many ways, the sequential growth with our first quarter revenue guidance reflects our sentiment. We also see the positive trends with our 4 company specific factors. First, we see customers either choosing to maintain their current level of spending or moderately improve with increases in investment. While we witnessed a similar trend last quarter, the fact that the customers demonstrate more stability is an important step in getting back to historically normalized levels of worth. This is reflected in the steady rates and billable headcount trends from our existing logos. Second, drops in revenue across some of our large existing customers are moderating. To put it in perspective, in 2023 the consumer revenue headwinds we faced were limited to a handful of existing customers. We anticipate this trend will diminish in 2024. This bodes well for the company's growth in 2024. Third, our partnership-driven revenues are growing steadily. In 2023, roughly 13% of our revenues came from partnerships. They accelerated the investment into partnership programs a couple of years ago. I'm bullish on expanding and monetizing more partnership opportunities in 2024 and beyond. And final and fourth, our new logo momentum. In 2023, we accelerated investment in the broader industry specific created dedicated sales team to pursue new logos and opportunities. We expect this to continue to be an important component of our growth in 2024. Our Follow-the-Sun strategy has been successful with our clients. Today we serve our customers from 18 countries and our global footprint fully aligns with our customer needs. Now coming to the first quarter of 2024. We are almost 2 months into the quarter, and the character that I shared with you today extends to the first quarter too. Our global headcount continues to grow. Our AI activity is robust and the headwinds from a handful of the clients continue to diminish. We believe underlying trends are moving into the right direction. As we enter 2024, our CTO organization is highly focused on expanding our capabilities related and our [DOQ] strategy. This includes building new R&D innovations, accelerators, and AI solutions. During the fourth quarter, we made good progress with approval concepts and customer pricing related to artificial intelligence. Our internal R&D innovation lab, which we call Green Labs, has generated several functional accelerator and AI-related artifacts. To date, AI is infused across practices in industries as well as customers representing over 80% of our revenues are engaged with Grid Dynamics on AI initiatives and more than 50% of our new engagements have an AI component. These include industry verticals beyond which we've historically installed, such as supply chain and manufacturing, financial services, and pharmaceutical. Some of our new AI innovations include pricing applications, Internet of Thing Analytics, visual quality control, and industrial vision large language mines. As a reminder, Grid Dynamics engagements are based on more than 7 years of internal research and successful implementations. With our generative AI offer, we partner with the customers to employ large models in a variety of applications. This includes [try-on guided] image generation, product design and visualization, knowledge retrieval, wealth management, and customer support. In the fourth quarter, there were several notable trends and I want to share with you some of them. Logo momentum. In the fourth quarter, we signed 5 new enterprise customers. This brings the number of new enterprise logos in 2023 to 33 wins. This is a record number of new logos for us and is a testament to our reputation with large global enterprises. Of the new enterprise customers we signed in the quarter, one is the largest omnichannel specialty retailer. One is a large insurance company, and one is a software company focused on revenue management for the healthcare industry. The other location support. Our Follow-the-Sun strategy continues to be guiding principle in enabling our clients to be served in an uninterrupted fashion around the cloud. I'm proud of our ability to serve our customers across 18 countries, spanning across North America, Europe and India. In India, I'm happy to report that we are opening an office in Bengaluru. This brings the total number of Indian offices to 3, which includes Hyderabad and Chennai. Our clients have successfully engaged with Grid Dynamics in leveraging our presence and expansion in India. In Europe, we continue to expand our footprint in Poland and Romania. In Poland, our growth is increasingly driven by partnerships with the client local centers. With respect to our recent acquisitions, we completed all the engineer integration by the end of Q1. European business. Europe continues to be strategic to our growth. In 2023, our revenue from Europe was roughly 20% of our total revenue with customers across industry verticals. During the quarter, we made good progress in expanding our footprint across industry verticals that are existing European clients. To highlight some normal achievement during the quarter, let me point out that we're the leader in legal and tech services who are partnering to use GenAI technology and build a global data platform to accelerate their ability to serve their customers with reviews and publishing of contracts. In a large U.K.-based retailer, we signed a multiyear contract to modernize their e-commerce platform. At a global auto part company, we expect to roll out their composable commerce modernization platform across other brands within Europe. For a large medical device company, we are launching initiatives in data engineering and generative AI. The goal is to enhance the efficiency of sales reporting processes. And finally, at a large clean energy company, we're enhancing their sustainable ESG initiative. Partnerships. As I highlighted before, partnerships are increasingly playing an important role in our growth and our long-term plan for becoming a $1 billion company. Let me remind you, in 2023, partnerships contributed to 13% of our overall revenue. Again, this is impressive given that we embarked in the strategy in 2021 and within a short period of 2 years, we have achieved such impressive results. Notably with our partners, AI is becoming a core element of our joint go-to-market strategy. Looking forward to 2024, we have strong momentum with hyperscalers and linear digital commerce SaaS companies as well as other specialist software providers. Our focus is to capture greater voltage. GigaCube initiative. With GigaCube, we continue to make good progress. As you know, GigaCube is our strategic blueprint that lays out a framework for our company toward $1 billion in revenue. We've operationalized the GigaCube via 4 key areas. Knowledge management, partnerships, new vertical focus, and winning larger deals. In each of these fronts, we made progress, both in Q4 and in full 2023. With our knowledge management efforts, we have channeled over 100 important delivery case studies that are being used across presales, sales, and delivery organizations. This is important. We accelerate the proliferation of our learnings from each project and program to ensure that the whole company benefits from it.During the quarter, Grid Dynamics delivered some notable projects. For a leading global technology company, Grid Dynamics enhanced their recommendation engine, one of the largest online streaming services. We're successfully implementing category machine learning characteristics techniques to enhance the quality of the data used by recommendation engine. Our engagement covers end-to-end machine learning processes, including model engineer, evaluation, deployment and postproduction efficacy monitoring. This resulted in significant improvements in the relevancy recommendations and the systems' capability to self-adjust in real time. For one of the largest auto part distribution retail company, Grid Dynamics has been actively engaged in the modernization of their product catalog, which enables search and browse functionality. Our solution uses generative AI to correct product images, generate descriptions, correct categorization, enhance attributes, and highlight discrepancies in a product image. As a result, this client expects to improve customer conversion and user experiences, leading to increase in sales across both B2B and B2C channels. For a multinational financial service provider, Grid Dynamics leads a cybersecurity program to onboard over 400 custom-built applications to sell point and data IQ platform. This solution enables our client with a full life cycle of identity and access management, ensuring proper duty separation to meet the latest security and compliance standards. We expect to expand this project during the next phase and port another over 1,000 applications to this platform. For a global automotive manufacturer, Grid Dynamics developed a cloud native e-commerce platform based on robust microservices architecture. This platform enables an intuitive end-to-end user experience and promotes in-house financing to car shoppers, which anticipates to increase the vehicle sales through the digital channel. With that, let me turn the call to Anil, who will discuss Q4 results in more details. Anil?

Thanks, Leonard. Good afternoon, everyone. Our fourth quarter revenue of $78.1 million was slightly ahead of our guidance range of $76 million to $78 million and exceeded Wall Street expectations. On a sequential basis, our revenue grew 0.8% and was down 3.1% on a year-over-year basis. Relative to last quarter, we saw greater stabilization across the majority of our accounts. During the fourth quarter, retail, our largest vertical representing 31.5% of our revenues, decreased by 7.4% on a sequential basis and by 4.2% on a year-over-year basis. On a sequential basis, the decline was largely from specialty retail offset by strength in home improvement. TMT, our second largest vertical, represented 31% of our fourth quarter revenues, grew 1.9% on a sequential basis, and decreased by 10.9% on a year-over-year basis. On a sequential basis, the growth was largely driven by some of the large technology customers. Here are the details of the revenue mix from other verticals. Our CPG and manufacturing represented 12.4% of our revenue in the fourth quarter, flat on a sequential basis and a decrease of 31.3% on a year-over-year basis. During the quarter, we witnessed stabilization at our largest CPG customer and growth at other customers. The finance vertical represented 10.6% of revenue, an increase of 13.4% on a sequential basis and 32.6% 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 14.5% of our fourth quarter revenue and was up 11.5% on a sequential basis. The sequential growth was driven by strength across multiple customers, some of them in healthcare and restaurant industries. We exited the fourth quarter with a total headcount of 3,920 versus 3,823 employees in the third quarter of 2023 and up from 3,798 in the fourth quarter of 2022. At the end of the fourth quarter of 2023, our U.S. headcount was 331 or 8.4% of the company's total headcount. This remained on the same level compared to the third quarter 2023 and slightly decreased from 8.9% in the year ago quarter. Our non-U.S. headcount, located in Europe, Americas and India was 3,589 or 91.6%. In the fourth quarter, revenues from our top 5 and top 10 customers were 39.7% and 55.3%, respectively, versus 43.2% and 60.4% in the same period a year ago, respectively. We witnessed continuous diversification and greater contribution from our recently acquired logos. During the fourth quarter, we had a total of 218 customers, down from 224 in the third quarter of 2023 and flat in the year ago quarter. The declines were largely from our commercial customers, offset by growth in our enterprise customers. Moving to the income statement, our GAAP gross profit during the quarter was $28.1 million or 36% and remained flat compared to $28.2 million or 36.4% in the third quarter of 2023 and down from $32.3 million or 40.1% in the year ago quarter. On a non-GAAP basis, our gross profit was $28.6 million or 36.6% versus $28.7 million or 37% in the third quarter of 2023 and down from $32.7 million or 40.6% in the year ago quarter. The decrease in gross margin as a percentage on a year-over-year basis, both on a GAAP and non-GAAP basis, was largely due to a combination of segments, costs associated with expansion into new geographies, and other investments. Non-GAAP EBITDA during the fourth quarter that excluded stock-based compensation, depreciation and amortization, restructuring expenses related to geographic reorganizations, transaction and other related costs was $10.7 million or 13.7% of sales versus $10.7 million or 13.9% of sales in the third quarter of 2023 and down from $16.5 million or 20.4% of sales in the year ago quarter. The year-over-year decline in non-GAAP EBITDA as a percentage was largely due to a combination of decline in gross margins, increase in operating expenses related to acquisitions, and investments into our sales organization. Our GAAP net income in the fourth quarter totaled $2.9 million or $0.04 based on basic share count of 75.7 million shares compared to the third quarter income of $0.7 million or $0.01 based on a basic share count of 75.5 million and a loss of $6.7 million or $0.09 per share based on 74 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 costs. On a non-GAAP basis, in the fourth quarter our non-GAAP net income was $5.7 million or $0.07 per share based on 78 million diluted shares compared to the third quarter non-GAAP net income of $5.9 million or $0.08 per share based on 77.3 million diluted shares and $10.5 million or $0.14 per diluted share based on 76.5 million diluted shares in the year ago quarter. On December 31, 2023, our cash and cash equivalents totaled $257.2 million, up from $253.7 million in the third quarter of 2023. Coming to the first quarter guidance, we expect revenues to be in the range of $77 million to $79 million. We expect our non-GAAP EBITDA in the first quarter to be in the range of $9.5 million to $10.5 million. For Q1 2024, we expect our basic share count to be in the $76.5 million to $77.5 million range and our diluted share count to be in the $78.5 million to $79.5 million range. That concludes my prepared remarks. Bin, we are ready to take questions.

Thank you, Anil. As we go to the Q&A session of this call, I will first announce your name. At that point, please unmute yourself and turn on your camera. Our first question comes from the line of Maggie Nolan from William Blair.

I appreciate the update. The business sounds really solid, so congrats. I know you only guide one quarter at a time, but at this point in the year, I'm wondering if there's any visibility, anything you can share with us either quantitatively or qualitatively, about how the second quarter is coming together and beyond if there's anything to comment there?

Thank you for your question. Well, it's interesting to start the wrap-up of '23 talking about 6 months going forward. But you probably sensed the total conversation that we are a bit on a rebound, and we do sound optimistic. I would say that without going into all the details because the environment is still a bit complex, I would say that I expect Q2 to be our new high watermark in terms of our revenue position. It's all time now. It doesn't sound a lot today, but if you looked at the last 12 months, I think we are kind of getting ourselves back to shape to the normalized growth.

Okay, great. And then great to see that new logo commentary, the additions that you've had. I'm curious what we can expect from those in terms of the revenue ramp and the margin contribution as we see those accounts ramping.

As you know, our model, the problem is it's a little bit beat up right now, it's 85/10/5, right? But this 5% is starting to be a little bit more predictable. And to some extent, the 10% as well. The larger logos, which we grab upon now last quarter, the quarter after, they ultimately are a bit more defined in terms of the project-based rather than program-based. We have a little bit better anticipation of the ramp-up of their logos. Saying that, again, that gives me the confidence for some of the upstream for the company. But also, I see the return back to the positive momentum on our existing logos. I think the question on the new enterprise logo, the wins in late 2023 and what we already have actually, 2024 combined with some of the wins with the larger existing customers, boost that level up.

Next question comes from Ryan Potter from Citi.

Good quarter here. I want to start on headcount. It was good to see headcount growing sequentially on an organic basis in the quarter. But can you help reconcile the flattish sequential growth in the 1Q outlook versus this headcount growth? Does it attribute more as a sign of you see a demand recovery coming later in the year? And then also, any color you can give in terms of where you're growing headcount the fastest, whether it be India or any other GOs?

That's a lot of questions in one. You're getting demanding, right? Let me start with the last because it kind of rolls back. You know this from even our press release, we indicated a bit of a shift in terms of the diversification. We see more on the rate of growth in what I say nonretail verticals or nonretail customer verticals. It doesn't mean we are moving away from B2C, its old B2B business. But the skills and capabilities and the more traditional skillsets in data management, cloud migrations, the bespoke tooling partnerships mentioned that, combined with the new developed applications related to the AI technologies -- and that's a separate point of discussion, everybody's asking that. This gives us a bit more upswing on a fintech, a pharma, we see more in a TMPL tech segment. So that gives us a bit more of I would say continuation of the growth. And again, those sectors are a little bit less volatile even though the economy has not been stable again. And the first part of the question, I believe you wanted to know specific headcounts. Can you just give me a little bit more?

The headcount growth versus the flattish outlook sequentially, if it's a sign of demand to come later in the year.

Right, right. This is about reading on tea leaves, right? The growth of the headcount happens in India. That's one area, as we mentioned again, is picking up. I think our customer base has grown with understanding of our versatility of the Following-the-Sun strategy. What it means, it means that Grid Dynamics provides the same quality level of services, whether we're in Europe, in Latin America, or in India. And access to talent in India is quite larger from the market, but everybody is there. You see a little bit of a part of it that it's a little bit longer time to bring the talent in India. We need to start building the pipeline there. Not saying we're going to reshuffle some of the people in Europe. There are many activities there, but that's where the growth comes in and it just requires a bit more the capable people. And also notice, we talk about in our presentation about rigorous training. I mentioned that it takes sometimes a quarter to bring the talent up to speed with the new tools and capabilities specifically in (indiscernible). It's an investment of the I would say rounding the people and building the pipeline of capable technical execution folks and India is a problem.

Got it. And actually, it was good to see the sales momentum continue in the quarter. But as the demand environment stabilizes in your existing client base, should we foresee any changes to your sales strategy in '24? We have to shift more sales work more to kind of expansion with clients versus hunting new logos? Or are you able to continue to balance both efforts?

Well, that's one of the areas which you again notice from our conversations was the point of investment in 2023. It's a bit I would say sometimes ambiguous when the company invests into R&D and sales during the year have been flat, right? But at one point of time, it's beneficial to reach for the resources when they're available in the market, right? When the market is a bit stagnant, you have a broader selection of the talent. On the R&D side, it takes more time for people to come to speed both on the architecture side, SME side, make the materials industry-specific artifacts, accelerators. When we talk about sales, it's a combination of sales and technical presales and first-level engagement. When it comes to the funding per se, we actually have a hunting capability for the first time. Typically, as a company, have been -- we're still relatively small compared with many, many others, so we focused on the diversity of the responsibilities for the same individuals. Right now, we have a dedicated salesforce, particularly in the United States, with hunting [equivalents]. But we also doubled down on farming of the new business lines within existing large accounts. That's pretty much this now. The proof is in the pudding, but I think even though we a little bit sweated the margins last year, I think that gives us a bit more runway. Not just kicking the can to the second half of the year, talk about 2025, but more immediate targets as early as now.

Next question comes from the line of Zach Ajzenman from TD Cowen.

Zach Ajzenman for Bryan Bergen. First question we had was just on the overall demand backdrop. Good to hear more of the stabilization commentary in the Q1 guide. I was hoping to further dig into the dynamics that have actually changed from 3 months ago. Is it just a higher prevalence of more optimistic client conversations? Or have you seen a change in actual signings or willingness to go ahead with new programs? Just trying to get a better sense of recent client behavior and how that's informing your view into 2Q, which sounds like it's going to be even better than what we're seeing into 1Q.

Well, you have to fill big shoes because Brian is one of the most talented analysts, so welcome. The question is about what is really happening in the forefront of our business. And as you know, traditionally, at least from Grid Dynamics' perspective, from our client perspective, there is always what I call the bit of a turnover from the projects and business directions between the late Q4 and early Q1. That's kind of -- I wouldn't call it a pitstop, but it's really more than just budgets. It's the reassessment of their own performance, tuning the business, a lot of disruption happened with AI tools. We had to go last year and start making a lot of proposals how to get viable conversion of their topline with more economic budget leveraging various AI technologies. And again, it's not just you plug in and it gives you more money, right? It's a very complex process of using private data and public access tools, various clouds, our Grid Dynamics know-how and understanding of their business based on a previous expertise, even in machine learning, traditional machine learning to AI. We see the conversion on a contractual base. I think that's very important. Not just the awards. Again, we're still in February, and we are not completely out of this period of retooling of our clients. But the new logos and existing logos on the demand side are contractually driven. We're not talking just about the proof of concept, let's run another 1, 2, 3 months of the test. What are the initiatives to trend out? This is on the B2C business. On the B2B business, it's a bit different. Because there's no more like people understand that new technology first and foremost, need to bring the better results. And their model is not as trivial because it's a complex supply chain, logistics, the demand on the various products. That business probably going to kick in a little bit more on a later part of this year because they're still more in a steady state learning and adoption. But because we have both markets, we see an immediate remuneration as well as potential upside with existing plans.

That's helpful. Maybe moving over to margins, we were hoping to dig into the factors that have been weighing more recently. How long are these items expected to be headwinds? And what are the controllable levers that Grid can pull to partly insulate, including maybe any color around pricing or utilization?

Sure. Zach, again, that's a loaded question. There are many moving parts of it, from a COGS point of view and OpEx point of view. I'll let Leonard talk about the pricing, but let me talk about a couple of moving parts as we move in the course of the year. Now year-over-year, you've seen the difference on our gross margins. Half of it came from FX. The other half of it came from the fact that we've expanded into some of these new geographies and there's a certain cost structure there. If you look at our OpEx, 2023 as Leonard pointed out, was a year of investment because we are investing into our future. As we move in 2024 and beyond, let me talk about OpEx and we'll talk about COGS. On the OpEx front, the focus for me internally is to keep the growth rate lower than the revenue growth rate. You're going to see leverage on that front. Now, there will be times when we'll have to invest, but that is my focus right now. On the COGS side, as you can see, we're in all these different geographies. We're scaling in each of these geographies. And as we scale into some of these geographies, some of them identified in Follow-the-Sun strategy, you're going to get some benefits there. But as far as the focus, again, is obviously go back to customers. But operationally, also reorganize ourselves. We have T&M, we have pods, we have fixed price. We have the pyramid. There are so many operational aspects which we can work on. And Leonard, do you want to talk about pricing?

You just covered it. I don't want to double down. Actually, I want to walk you a little bit, Zach, on a visualization of pricing to cost and back. Because there are 2 things actually very well connected with each other. In order to us get to the higher profitability, it's not directly margin related, but it's a contract related. Pods, fixed bids, delivery performance associated with a certain major milestone, expanding budget, signing now longer-term budgets, we see that happening. It doesn't mean that individual rates for example are going to be aggressively moving up. I mean, the market is still I would say demand-driven and supplied. And the value we're bringing, while we are increasing some of the basic rates, we're offering more and more system which I just described with which Anil pointed out, which ultimately brings a better architecture of the team structure. In other words, within the team, our cost benefit is evident to us. But for the customer, it's result driven. They're getting better efficiency with understanding their pocketbook spending without constantly going back and forth and looking at each individual rates. In many cases also, we gain the trust of the customers sufficiently that they allow us to pick up proper information and it's getting more and more on the scale. That also helps. Still, all the evils, moving from Eastern Europe to Central Europe, scaling the number of offices, opening new offices in India, that's well understood. But our model of 40/20 no matter how difficult it sounds today with where we are, it's our relentless pursuit. And I see the trend is coming. The numbers I can't say there yet, but judging by the countries we're signing, I'm quite bullish.

Next question comes from Puneet Jain from JPMorgan.

I wanted to ask about GigaCube. It looks like great progress in Financial Services, the vertical was up nicely. Can you also share like the contribution from other verticals such as healthcare? And do you plan to share progress like you make in India and in Europe as well as smaller verticals on a quarterly or annual basis there?

Right, why don't you talk about --

As you see, the other segment was about 14.5%, right? And that had a nice growth. What you're going to see starting from next quarter, we're going to break down the other segment because we're going to have the healthcare part. Healthcare, life sciences, that's becoming an increasingly bigger part. That has actually been one of the contributors in our growth. And as we evolve in the course of the year, some of the sectors that you talk about, financial services, I mean there's a lot of activity going on there. And we're bullish on that.

Puneet, that's a formal way, informal way. I like to have statistical significance before I claim the flag at the top of the hill. I can tell you with confidence that in the fintech world, our investment is turning to the factual material improvement. When we talk about pharma and healthcare, the number of accounts is growing. But I can't say that we are a dominant player yet. We understand the capabilities with our new ways of adding business value. You will see that trend. The wealth management and insurance part of BFSI, you know for a long time we had one very large partner in the wealth management. Those segments will grow too. And why we will grow it because you guys to some extent helped us to assess 4 years ago what does it mean to be a public company. That you need constantly to challenge yourself not just on growth, but on the hedge. How you build the business. We were very heavy depending on the brick and mortar, so that's a long history we were having depending on certain brands. Again, it's a history. The tech is also diversifying. But I would give the more specific material content when I see at least 2, 3 quarters of consistent signing of the new plans. And I think the biggest right now division for me is B2C application/B2B application. We will continue to break it down, as Anil said, as we feel that they are statistically significant.

Okay, got it. No, that's very helpful. And let me ask second question. Now that that macro wind appears to be behind you and you're seeing stabilization in some of the large customers, some of those, like the largest of your large customers, I think they peaked at somewhere around $30 million, $35 million, maybe $40 million. How high is addressable market at those clients? How large those customers can get given your current service mix?

Yes, you're getting me into trouble, right? All right. There is quite a bit of a ceiling on those clients. Why? Because we're changing our tire too, right? I mean that the market cap is still not there, but we're a much more mature company. Not just from a performance perspective, but a stable capability perspective and resilience perspective. Every client, every large client, they look not just into the supplier capability, but it's again, hedging against unforeseen events. I think they're getting more comfortable without a reach and without touch. I would say that the ceiling is less driven by our capabilities which are proven and more opening up when people are starting to become comfortable that, coming back to the GigaCube strategy, one day we are a $1 billion company. So yes, if you judge from that perspective, I'm not going to throw numbers of $100 million account today. Again, it would be a bit premature. But there is nothing stands between us and having a number of accounts which are in that $30 million to $50 million range now and then that will tell how much we can go further. I mean just one account being so much bigger than everything else, that's another bit of a challenge. We've seen others struggling. We want to do not only diversification on the verticals and the skillsets, but having large driven partners to be somewhat diversified as well.

Yes, Noritake I think had multiple clients that are comparable in size. I think we totally get it. I appreciate that comment. Thank you.

Next question comes from Josh Siegler from Cantor Fitzgerald.

Nice to see the strong KPIs in the quarter and business stabilization throughout this more difficult macro period. I wanted to touch on the partnerships specifically because they seem to be a big contributor over the past year. How are you thinking about how partnerships will contribute as we progress through 2024 with a more positive macro potentially at our tailwind? Thank you.

Well, I'm glad you pointed out that. I mean, we try to repeat the February number, 13, long enough for people to memorize. It would be not as exciting if it was 12 or 14. But anyways, the factor what Anil mentioned of having just a few years behind the belt is not truly about the partnerships per se. I mean we always have partnerships. I think there are a couple of fundamental changes happened a couple of years ago. The number one is we realized that sitting only on an open source is not enough to increase the breadth of the customer relationships. We need to become a bit of an advisory on a buy and build as a combination. It's basically a stage of maturity. Everything requires investment. It's not only about hyperscale. It's also about ability to stage multiple sorts of products. We started with areas where we have done most of the work, which is commerce. We've done major progresses both in Europe and the U.S. And we're expanding the number of products we are worth. That part is very clear. It's not just open source as a combination. The other one is going back to hyperscalers. The hyperscalers represent a very complex system. And you come in, knock on the door and ask them give me the clients, typically it goes backwards. You bring the clients, we'll see, right? I'm happy to report that it goes 2 ways. When you do in 2 ways on top of building the capabilities attributed to the hyperscalers themselves, then you start getting the tractions because it's a joint client effort. Not only understanding the systems, but understanding the customers' ability to have us as a partner of choice, not just an integration partner. That just added this number. Now, how big is the number going to be? Honestly, I can't tell because we are going into new verticals, and again, it's investment. Because you can't just come with the open source and drop all these ideas on the laps of the big decision maker in other verticals. But it's certainly the model which we are expanding at this point.

Understood. I appreciate that color there. And then, Anil, real quickly, can you give us an update on how you're thinking about capital allocation as we progress through the year?

Well, look, I mean the focus obviously is M&A internally. And I know this is a question that comes up very often. At any given point, we're evaluating. Obviously, we will tell you when we actually get something done. But the priority obviously is our cash usage is going there. Beyond that, it's all about cash generation. It's all about ensuring that we get back to our 40/20, and we convert it. As you know, we don't have any debt on our balance sheet, but it's -- these are the 2 elements in terms of how we're looking at our balance sheet.

And just to give a little bit of color on M&As, I know you've been patiently waiting for us. I mean, it's been a long time since we collected enough funds. And our cash generation exists for this, but it's not super large. But we sit on a nice pile of cash. We completed all the conversions. Again, from the -- if you look at our press release and reported ones, we have no lingering issues or necessary investments into any of those 4 in the acquisitions we've done. It's all integrated, knock on wood, by now. And what I mean integrating, you need to integrate both sales and engineering. Engineering sometimes takes a little bit longer on the skillsets. We are exploring deals across all these verticals and geographies. Again, there's a range. Obviously, we're not going to burn all the money in one swoop, but it has to be more focused on skill development. We're digging out to train people in what we know. Some customer acquisition obviously is good, but we really want to add the skills and the AI revolution part. There are new areas which open up by building those skills. It's not about just the marketing business. We understand what we are good at and whether it wouldn't make sense for us to complement from acquisition. That's kind of a shift you may see from like 6 months ago.

Next question comes from Sam Salvas from Needham.

Most of my questions have been asked, but are there any AI-related metrics or anything you can share in terms of the number of projects or engagements or both? Just any color you can give us to get some kind of sensing for the demand you guys have seen from AI?

The question, Sam, was what are the AI-related metrics, right? And Leonard is the AI expert, but I'll tell you that from my point of view, when I look at the activity, we talked about at the Analyst Day, in the press release also we talked about, there's a lot of activity going around with both existing and some of our new. What I am very impressed with is that many of our new engagements have some level of AI component to it. There is a lot of interest. We're -- AI is infused across our practices, but if you're talking about when are we going to reveal the stand-alone revenues and everything? When the time is right, we'll do that. But AI is pretty active across the company.

Well, I'm glad that Anil stepped in because I wasn't sure exactly what you were asking. Sorry about that. Now what I know, I can tell you much, a little bit more color. First of all, the areas where we have progressed a lot, it's conversational AI. It's recommendation AI, catalogs, compliance. We do quite a few of the form solutions. What happened is, having expertise in the verticals, especially things related to e-commerce but now it's growing, helps us to tune the proper models, help to get the visual parts, help us to guide the internal client marketing and business teams, to understand the ability to reach certain business results. The number of cases is growing for a very simple reason. They are factual. The models change. The conversion rates are changed. We could not promise results unless the client understands the reasonable target. The catalog and understanding their existing environment, cleaning up their code, sometimes switching from their old models to the modern. First, we need to get the code capable of accepting the new things so we do that at conversion to augmentation. And of course, very close work with all the old frames from the AI models in the cloud as well as the government and private standalone solutions. I'm sure we'll do more presentation webinars. You guys can look at our website. We have a ton of demos. But those demos typically are something open to people to look. I had a question why one of the press releases we did with certain clients and certain project, and mainly because a lot of the work is so cutting edge at the front of the customer DNA that we are grateful the ones who are willing to open to share. But many more are preferring to maintain the total proprietary approach to their development.

Yes, okay. Yes, that's helpful, and ditto on the commentary there. And then just one quick follow-up for me. The weakness in the retail vertical this quarter, was that one larger specialty retail client or was that kind of broad based actually?

The question, Sam, because the volume was not clear, your question was we talked about --

How many retail clients, was that the question?

Yes. The weakness in the retail. Like was that one big client, or --

Oh, it's not a weakness of retail. It's just others growth faster. It's not an absolute dollar situation in general. I mean you see the trends, but there's more investment to the modernization where we are participating as a way -- I mean again, I mentioned people who work with us know that brick-and-mortar business was a dominant part of our business. And then it becomes brands and CPGs. We are not dismissing this business, but we put eggs in different baskets. Many years ago, when we had market dependency in retail, like 3/4 of our business, people were saying, can you grow and bring the market to 20%? We're not there at 20%, but we are certainly in much more comfortable position. We want to grow it numerically as the company grows, but we want to focus on the proper brands which have the growth capabilities, and also, on various platforms related to retail. Because platforms also come and go, you're probably aware there's a big reshuffling in the industry going on right now. We're actively pursuing value-add businesses like home improvement businesses, various products and services which are growing in the industry, both in the United States and in Europe. But we are a little bit less excited to go into something we developed 6, 8, 10 years ago because that market is a bit diminishing. I think that's a better scope for what's happened.

Ladies and gentlemen, that will be all of the Q&A session for today. I will now pass the call back to Leonard for the closing comments.

Thank you, everybody, for joining us on the call today. We entered 2024 with a marked improvement in sentiments from a year ago. We are focused on our goals of getting back to our long-term model, both from a growth and profitability perspective. The last 12 months have proven that Grid Dynamics is adept in navigating uncertainties. Existing customers appreciate our value. And in 2023, we established a record number of new customers. I'm getting more and more bullish. I'm looking forward to see you all in the next quarter. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect.