GDYN - NASDAQ

Good afternoon, everyone. Welcome to Grid Dynamics Second Quarter 2023 Earnings Conference Call. I'm Bin Chiang, Head of 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 for 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 uncertainties 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 Dynamic's second quarter revenue was in our guidance range and non-GAAP EBITDA significantly exceeded expectations. Also, on a GAAP basis, we achieved record net income since becoming a public company. Our results are commendable and reflect the company's un-relentless commitment to our clients. There were some noteworthy trends, including strong new logo wins, meaningful contributions from logos that we won over the past couple of quarters, and deeper relationships with our partnership ecosystem. This has been a recurring theme for the past several quarters and reflects the strengths of our offering. Additionally, a significant interest and engagement with our clients on artificial intelligence initiatives continued to positively impact our business. With our GigaCube initiative, we operationalized many KPIs across the company. On the macro, our opinions have remained unchanged. During the quarter, with many of our clients, we witnessed continued recalibration of spending priorities and investments. Also, customers continued to transition their projects from higher cost locations to lower cost offshore locations. And this is in plain to our favor, as we have a global delivery footprint in locations of choice for our clients. During the quarter, we ensured our spending level aligned with the current demand environment and this discipline paid off with our second quarter profitability. We're also witnessing three important trends that lead us to the incrementally positive conclusions. These trends are expected to play out in the third quarter too. First, the magnitude of resets across our customers are diminishing. Second, we're seeing stabilization in business across the majority of our accounts. And finally, thirdly, our forms of new engagements, both with the new clients and existing clients, are on the rise. This includes enhanced activities with partnerships, engagements on artificial intelligence, and willingness of new logos to work with us on their digital transformation needs. While certainties persist, and it's too early to make any definitive commentary around the demand snapback, we believe underlying trends are moving in the right direction, leading us to the incrementally positive view. Yet, we remain conservative in our third quarter outlook. As I highlighted in the past, coming out of economic cycles, Grid Dynamic's is stronger as the company proves to be a reliable partner in delivering our customers' business objectives in an efficient manner. Also, the current economic cycle has provided us a great opportunity to realign and organize according to our GigaCube initiatives. This includes adding new talent across different industry verticals, both in sales and city organizations. We're also witnessing great access to high quality talent as our strengths and differentiation became more visible across the industry. Over the past couple of quarters, we have incrementally invested in our engineering resources toward building new R&D artifacts, accelerators, and artificial intelligence capabilities. There are many positive trends with our technology organization. This includes several exciting opportunities with AI. Generative AI has been front and center across a broad range of clients, and we're witnessing exponential interest in our enterprise AI solutions, particularly in generative AI, including conversational AI, data harmonization solutions, and others. We're currently engaged in multiple billable projects and have created a robust portfolio of demos, capabilities, and solutions. R&D organization completed nine AI projects during the quarter and we're currently involved with over 20 enterprise clients. 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 to the application in product design and visualization, as well as knowledge retrieval, wealth management, and customer support. During the quarter, we announced a significant global partnership with Google Cloud to develop and implement innovative generative AI solutions. This partnership will result in incremental customer wins for Grid Dynamics in the second half of 2023 and beyond. Also, this partnership is a reflection of Grid Dynamics' position as an industry leader in AI. Grid Dynamics will leverage Google Cloud Vertex AI, a platform that incorporates powerful foundational large language models and advanced image generation capabilities. With this partnership, we expect to significantly accelerate and develop innovative AI solutions across the financial services and insurance manufacturing and life science pharma industries. On the GigaCube initiative, we continue to make good progress. As you know, GigaCube is a strategic blueprint that lays out a framework for our company to over $1 billion revenue. It involves all parts of the organization that includes sales, R&D, marketing, operations, as well as M&A. We made some exciting additions to our team. This includes a senior sales leader and specialist sales executive across automotive, Pharma and insurance. These additions will accelerate our new industrial vertical penetration highlighted in our GigaCube initiatives. In the quarter, there were several notable trends and I would like to share with you some of them. Logo momentum. In the second quarter, we signed nine large enterprise clients. This brings the new enterprise logos added in 2023 total to 18. Additionally, we added new customers from our recent acquisitions. We believe Q2 client acquisition is a further testament of competency and the confidence for large global enterprises to sign up with Grid Dynamics in the current environment. Some of the most notable ones to mention include a leading digital payment service company, a global consumer health company, a global athletic wear company, a global hotel and hospitality chain, and a North American art and craft change. We're very proud of our achievements and this is a testament of our differentiation value we bring to our customers. Delivery location support. Moving to our delivery operations, our execution remains flawless. At some more recent logo wins, we were able to quickly put together and ramp up dedicated teams across our global delivery locations. Additionally, our integration with NextSphere and Mutual Mobile is in a full swing and have started to implement synergies across engineering operations and other back-end functions. Today, our customers have a choice of over a dozen countries across North America, Central Europe, and India. Our follow the sun strategy enables our clients to be served in an interrupted fashion around the clock. Clients support our geographic diversification and choice of locations for engineering support. European business. During the quarter, we made good progress in expanding our footprint across industry verticals with our European clients. As a global specialty automotive part company, we're implementing a major composable commerce modernization platform. At another global automotive entire company, we're involved in a significant digital transformation initiative tied to automotive tire wear and their predictive maintenance using data engineering and analytics. With artificial intelligence, we're also engaged with a high-end apparel company in Netherlands in our domaining process description using product attributes and images. And finally, with European-based global truck manufacturer, part of our growth and have become a significant contributor to lead generation. In addition to the generative AI partnership with Google Cloud that I spoke a few minutes ago, we're also working with many of our clients across industry verticals as they move from advanced rule concepts to real world business transformation solutions. Our relationship with Microsoft Azure and AWS are expanding in the future. Grid Dynamics has been recognized for its advanced specialization by Microsoft, which earned us the membership of Microsoft Azure migration and modernization program. Additionally, we continue to invest in growing number of independence of vendor partnerships in supply chain, digital experience, marketing, and commerce domains. We're expecting and enhancing the value we deliver across the entire C-suite. We're engaging with Chief Operating Officer, Chief Market Officer, Chief Product Officer, and others. M&A. With M&A, the integration of our acquisition of NextSphere Technologies, which we acquired April 18, 2023, is working well. To remind you, this acquisition strengthens our presence in strategic verticals such as healthcare, fintech, and manufacturing. I'm happy to report that in a short time of three plus months, we were able to integrate the operational backend functions. Additionally, we're able to relocate the employees in Hyderabad to the new constructed Grid Dynamics office. We also have an office in Chennai as well. We're currently working on a business development synergies and expect to start cross-selling across our customer base in the next couple of quarters. Beyond our recent acquisitions, the pipeline for M&A opportunities is robust. We're actively working on multiple opportunities and we'll be happy to provide updates as the time becomes right. As a reminder, our M&A focuses on capabilities, key clients, and delivery locations. During the quarter, Grid Dynamics delivered some notable projects. At the renowned financial services and wealth management firm, we're piloting an innovative AI-based knowledge management platform. This platform offers thousands of financial advisors with direct access to the firm's best enterprise data via natural languages. Leveraging retrieval augmented generation technology and leading large language models, the platform will improve productivity of financial advisors and help them to create highly personalized updates and offerings to their clients. We're a leading global technology company. We successfully executed a massive migration of user segmentation pipelines to a new cloud data platform. These pipelines play a crucial role in processing an extensive range of data signals, encompassing diverse aspects such as user demographics, spending deciles, usage frequencies, and more. This solution ensures better scalability to address growing amounts of data and fault tolerance. At a prominent membership-only chain, we modernized their mobile app to enable and enhance better security, frictionless payments, and user experience. The effort resulted in an increase in the browse-to-pay conversion and substantially reduced the uninstalled rate by a factor of 7x. Currently, the mobile app is serving tens of millions of shoppers in the United States. For a major CPG brand, we delivered a solution that significantly shorted checkout time in their physical stores, even for orders with many small items. It uses existing security tags to scan shopping bags and requires minimum modification to their store layout or POS hardware. Once deployed across the client's 900-plus stores has potential to significantly decrease labor costs and increase customer satisfaction. With that, let me turn the call over to Anil, who will discuss Q2 results in more detail. Anil?

Thanks, Leonard. Good afternoon, everyone. Our second quarter revenue of $77.3 million was within our guidance range of $76 million to $78 million that we provided to you all in our earnings call in May and reiterated it on June 6. On a year-over-year basis, both on a reported and constant currency, the growth was flat as the impacts of currency movements were negligible. On a sequential basis, our revenue declined by 3.4%. During the quarter, we witnessed headwinds from some of our customers as they continued to rationalize their spending levels. During the quarter, new logo revenues contributions offset macro-driven caution from others. During the second quarter, retail, our largest vertical representing 33.7% of our revenues, increased by 2.5% on a sequential basis and grew 2.3% on a year-over-year basis. Within the 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 31.2% of our second quarter revenues, decreased by 10% on a sequential basis, and grew 3% on a year-over-year basis. On a sequential basis, we witnessed continued caution at some of our large TMT customers. This was offset by growth both from existing and new logos. Here are the details of the revenue mix of other verticals. Our CPG and manufacturing represented 14.1% of our revenue. In the second quarter, a decrease of 14% on a sequential basis and 32.4% 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. The finance vertical represented 8.7% of revenues, an increase of 3.6% on a sequential basis, and 33.7% on a year-over-year basis. The growth in the quarter came from a combination of financial technology customers as well as new logos. And finally, other segments represented 12.3% of our second quarter revenue and was up 10.1% on a sequential basis. The strong sequential growth was driven by growth at our healthcare and pharma customers. We exited the second quarter with a total headcount of 3,862, up from 3,744 employees in the first quarter of 2023 and up from 3,763 in the second quarter of 2022. The sequential increase of 118 employees, or 3.2% was largely due to our recent acquisition of NextSphere Technologies, which we acquired in April. At the end of the second quarter of 2023, our total U.S. headcount was 317, or 8.2% of the company's total headcount. This remained on the same level compared to 8.1% in the first quarter of 2023 and slightly decreased from 8.7% in the year-over-year quarter. The year-over-year slight decline as a percentage of total revenue was largely driven by growth at our offshore locations, resulting in greater mix of non-U.S. headcount. Our non-U.S. headcount located in Central Eastern Europe, India, UK, the Netherlands, Mexico, and other locations was 3,545, or 91.8%. In the second quarter, revenues from our top five and top 10 customers were 37.6% and 56.6% respectively versus 44.2% and 60.2% in the same period a year ago respectively. During the quarter, we had a total of 216 customers, down from 220 in the first quarter of 2023, and up from 208 in the year-ago quarter. The decline in customers on a sequential basis was largely from our commercial business, which focuses on smaller customers. During the quarter, we signed nine new logos from our enterprise business. Moving to the income statement, our GAAP gross profit during the quarter was $28.3 million, or 36.6% versus $28.6 million, or 35.7% in the first quarter of 2023 and down from $28.9 million, or 37.3% in the year-ago quarter. On a non-GAAP basis, our gross margin was $28.8 million, or 37.3% versus $29 million, or 36.3% in the first quarter of 2023, and down from $29.1 million, or 37.7% in the year-ago quarter. The increase in gross margin as a percentage on a sequential basis, both on a GAAP and non-GAAP basis, was largely due to higher utilization of engineering resources. Non-GAAP EBITDA during the second quarter that excluded stock-based compensation, depreciation and amortization, restructuring, and expenses related to geographic organizations. Transaction and other related costs was $12 million, or 15.5% up from $10.8 million, or 13.5% in the first quarter of 2023 and down from $13.3 million, or 17.2% in the year-ago quarter. The sequential increase in non-GAAP EBITDA was largely due to a combination of higher levels of gross margin as a percentage compared with lower operating expenses. On a year-over-year basis, the decline in non-GAAP EBITDA was driven by increase in operating expenses from our recent acquisitions. Our GAAP net income in the second quarter totaled $2.6 million, or a $0.03 based on a basic share count of 75.1 million shares, compared to the first quarter loss of $8 million, or $0.11 based on a basic share count of 74.5 million, and a loss of $13.2 million, or loss of $0.20 per share based on 67.1 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 sequential basis, the increase in GAAP net income was largely driven by a reduction in stock-based compensation expenses. On a non-GAAP basis, in the second quarter, our non-GAAP net income was $7 million, or $0.09 per share based on 76.9 million diluted shares, compared to the first quarter non-GAAP net income of $6.5 million, or $0.08 per share based on 77.1 million diluted shares, and $8.2 million, or $0.12 per diluted share based on 69.9 million diluted shares in the year-ago quarter. The increase in non-GAAP net income from the second quarter was largely due to higher gross margins and lower operating expense. The decrease in the non-GAAP net income in comparison to the year-ago quarter was largely from higher levels of operating expenses. On June 30, 2023, our cash and cash equivalents totaled $246.2 million, down from $258.4 million in the first quarter of 2023. The key reason for the decrease on a sequential basis was due to the all-cash acquisition of NextSphere Technologies, which was made on April 18. Coming to the third quarter guidance, we expect both revenues and non-GAAP EBITDA to be at similar levels to what we guided for Q2 in May. We expect revenues to be in the range of $76 million to $78 million, and non-GAAP EBITDA to be in the range of $10 million to $11 million. For the third quarter, we expect our basic share count to be in the $75 million to $76 million range, and for diluted share count, we expect it to be in the $78 million to $79 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, I will first announce your name. At this moment, please unmute your line and turn on your camera. Our first question comes from the line of Puneet Jain from JPMorgan. Please go ahead.

Hey, thanks for taking our question. Leonard, like you talked about like 20 clients who you are providing some sort of AI services, which I believe is out of a total of 100 enterprise customers, so that would be like 20% of total customers to whom you are providing generative AI services. So can you talk about what type of services you are providing to those clients in AI? And since some of these customers also outsource to your peers as well, how are you going to win share in AI at those clients?

Hey, Puneet. Well, it's quite a comprehensive question, so thank you for pointing out the percentage to. We're quite proud that we're still basically at the cradle of AI expansion revolution, so we already captured a substantial percentage of our client base. The projects we have started, some of them actually run from before the AI was defined as a modernization of technologies. We've been knowing of our own investments in machine learning, data science, large models, data formatting, and other features. So now when it kind of becomes more as a part of creating some tangible monetization for the clients, we've seen some trends where we actually participate. First and foremost, generative AI is only a subset of what we do. Since we are focused on large enterprises mostly, the ultimate definition for us, is the enterprise artificial intelligence, which comes with a supply chain of predicted models for the supply and demand, logistic travel, the variances of the forecast, and others. When it comes to the wealth management financial companies, it's basically accelerating the adjustments, which relate to the personal bespoke portfolios. When we talk about medical clients in areas of pharmaceutical life science, those relate to their own models, which help them to accelerate the decision on certain internal critical development, and so on and so forth, not to forget about our beloved consumer world, where most of the work is B2C. So far, I've mentioned B2B mostly. In the B2C world, it's a lot of customer and consumer behaviors, which are scaling to the very large amount of the preparation. We anticipate a significant cost savings associated with those businesses. Now, in terms of our competition, it's absolutely true. I mean, everybody stands up and says, we are the leaders in artificial intelligence. We are taking a more modest approach. We're looking at more and more proven cases of the ROIs, in other words, where the customer financial gains start to become intangible. So, we do quite a few proper concepts, but I think one of the key advantages of to Grid Dynamics, since we started this initiative over seven years ago, some of the proven convertible analytics comes into fruition even as we speak. So, we'll continue to update you if we need a new team, and we look very bullish on expansion in the United States.

No, thanks for a comprehensive answer as well. So, let me ask about a new logo contribution you have talked about in the past 85-15, 85-10-5 model. So, given like the strong client activity, new logo contribution that you are seeing, is that at a point where you'd expect to be in any normal year, like the new client contribution? And I understand the remaining 95% of business is weak, but our new clients are at a point where you'd expect them to be in a normal year?

Very good question, very good memory. The reality is, you know yourself well that some of the traditional clients, which started at a high a year ago have reduced their spending, right? So, the reason why it's important that we reported 18 new clients in enterprise level since the beginning of the year, we expect that second half of the year monetization will come at a full swing. Now, we tend to be continuously cautious because the first projects were not all of them, but quite a few of them were still in the lend and expand mode. There are hyperscaler engagements for their cloud transformation with some notable ISVs. Some of them come into the work related to the defined project, like in the payment systems, but there are a few we started much higher level. So, we see that the numbers are increasing, but I want to make sure that five is beaten, not because the 85 goes down, but because the absolute value returns. So, but the answer is, yes, more likely we'll see the higher contribution.

Thank you.

Thank you, Puneet. Our next question comes from Josh Siegler from Cantor Fitzgerald. Please go ahead.

Yes, hi. Thanks for taking my question today. First, I'd like to start on AI, just given its significance, and obviously it's gaining a lot of traction. So, are you seeing any specific interest from any 1 vertical over another for AI solutions, or is it broad demand? And further, you know, is Grid's AI solutions helping to provide a nice strong pipeline for future new logo additions?

Okay. Well, the area we've been known for a very long time with the retail, the bespoke brands, the more of the B2C side of business, the momentum is enormous, because the results are easy to verify on a very short-term, right? So, we've been leaders in natural language processing for a long time, and now when it comes to large language models, we continue to be in a leadership position. So, that space, just from the percentage of our businesses, is pretty significant. The upcoming and expanding the business in the supply chain, that's obviously, it's a subset of the manufacturing, it's becoming more and more substantial for us. We see the notable momentum in the life science, that's certainly a big momentum, which is going to be what I tell my team, with or without us. So, we'd better be sharpening our pencils with a custom bespoke models for them, which we are in the early stage, but it's working. And the area of the, pretty much everything by, but the tech itself, and the reason I want to emphasize the tech part is, because we are together partnering to provide the solutions for the enterprise AI. So, enterprise AI really falls on the enterprise side, the tech companies have their own models, right? So, there is a combination of the open source models, and the proprietary models with the manufacturing, and the fintech, and what I said, the life science is becoming more and more trend. Those two would be very competitive races, which would participate on both sides with the partners. And the other part which becomes very critical for us is actually cybersecurity. We've been investing into cybersecurity for a while, now it becomes even more critical where some of the notable AI discoveries are happening simultaneously with a massive number of data sets being provided. And finally, the cloud is one part of it, but a lot of computational and capable capabilities will run on a defined and continue to grow enterprise. And working on enterprise capabilities become more and more critical. So, it's really attacking from all the fronts, and we are very bullish in terms of our positioning with our partners.

Understood. That’s helpful color. Thank you very much. And then in your prepared remarks, I believe you mentioned driving higher utilization from your employees, which is helping to foster those higher gross margins. Can you provide some more color on this? And do you expect these levels of elevated utilization to remain as we move into the back half of 2023?

Well, it's never good enough, right? You're building your business momentum and you always think about what is going to be the business momentum to the next level when the inflection point does hit a material return to growth. So, we are doing massive retraining of the people. But at the same time, our own predictable models, which we build internally in terms of understanding the probability and variance of the business, help us to tailor better the skill sets of the people. So, in other words, when we get projects going, we have much lower level of delays between turning people into profitable business versus the involvement then into intro to new project. And it's notable when you get a new enterprise clients, you can't wait for months till the people become trained and capable to implement. So, that's probably the biggest impact, which will continue to foster internally how to fit the training and capability of our engineering workforce on the project level, the system level with the clients.

Just adding one statement to that, Josh, I think that's a very key statement that Leonard put, because that's the leverage in the model going forward, right? We have the resources. We have the capabilities, and as we see some of these demand trends come back, you'll see all these people put to work and then that will have an impact, a positive impact.

Understood. Thank you very much. Appreciate it.

Thank you, Josh for your question. Our question comes from Maggie Nolan from William Blair. Your line is open.

Hi, Leonard. Hi, Anil. So, on AI, it's pretty clear that you have years worth of expertise kind of building up to this moment. Should we expect to see any perceptible pickup in dollar spend or investment in AI or Gen AI, and then what would that look like in terms of magnitude?

Yeah, so, the magic wand is here, but the crystal ball is not. So, we do have all the tools necessary to scale the business. It's really how it's become more as a consultancy, right? Because the ability to build the model, scale the model, creating the predictable recommendation is there. Depending on the business, the financial benefit may vary because it takes some time not only to train the model, but verify the financial impact. Because there are other variances besides just optimization of the forecasting and other stuff. For example, the market trends, the competitive trends for all clients. So, what they try to do, they try to take projects rather than massive transformation at this point, and they want to run those cases, at least what we are involved. So, there are sizable dollars, but I almost remember when we moved the cloud transformation from on-prem to a private cloud, to hybrid cloud, to the public cloud, now kind of reversing the trend for a lot of those computational capabilities. So, I see that we're going to have a bit of a step function. Right now, we're in the early stage where dollars are still limited, but the projects are notable, but I think it's going to roll up into the sizable part of the business, which means one of the important factors for us, there are many questions I ask, what's the role of the software engineers? Will the future require less of IT people, and how would those IT people look like? And we would not call Grid Dynamics, IT engineers. We are highly trained, intellectually developed professionals in a data and software development space, in a cloud space, which means that while the industry goes through transformation, we are expanding more and more into meeting the match from the capabilities, and it's relatively beneficial to us versus some more traditional IT suppliers.

Thanks, Leonard. And Anil, the margins were strong this quarter. I'm wondering, if you can talk a little bit about specific drivers of operating expenses. Is there a possibility that these trend lower over the next couple of quarters?

Thanks for the question. Maggie, so, as you saw, this quarter, we had roughly almost 200 bps of expansion on the EBITDA side, right? We saw gross margin expanding, driven by comments that we had in our prepared remarks around greater utilization of engineers. And then also, on the operating front, you saw it go down by about a million dollars, largely driven by the fact that given the environment that we're in, we're just prioritizing our investments and spend. Now, as we go into the back half of the year, our approach continues to be cautious on the spending. But that said, certain initiatives and projects that we deem as essential are being prioritized. So, we will see how things play out on the revenue side, on the demand side. Obviously, there's going to be a lot of leverage there. But, you know, we'll go one quarter at a time. And the hope and the aspiration is, from a margins point of view, we should see some tailwinds.

Thank you, guys.

Thanks, Maggie. Next question comes from Bryan Bergin from TD Cowen. Please go ahead.

Hey, guys. Good afternoon. Good to see you. Wanted to start on kind of existing base and industry expectations as you go into the next quarter. So, can you talk about what you're seeing in the existing client base, whether you are seeing signs of stabilization that are becoming a little bit more broad-based? And specifically, if you can kind of key in on TMT and CPG as you plan for the third quarter?

So, Bryan, I would not select any specific vertical. I think it's pretty much goes across all of them at this point. We do see stabilization. On the technology space specifically, it's a little bit more client to client, very, but mostly because they're giants, right? So one department goes a little bit more active in spending, the other one takes a little bit backseat. But from the CPG, it's no different than manufacturing or life science. We see that dynamics of conversations start becoming more deterministic by dollars for investment. And recently, we won a couple of very notable RFPs, which is kind of great for us anyways, because that's something we are doing a little bit more aggressive. And we see that the companies start preparing, there's anticipation, then there will be an inflection point in Q4, and maybe even late Q3. But those are a little bit more speculative. We reflect our guidance based on the facts. But I would say that, from the dynamics of the engagement with existing customers, because new customers you already know we're doing fine, but it doesn't create that, inflection from the short-term revenue perspective. So, we do believe there is going to be some positive momentum coming in.

Okay. That's good to hear. And then a generative AI question for you, but more so internally. So, can you just talk a bit more about how you're applying generative AI, obviously early proof of concepts internally, any early measures of success you can share around developer productivity? And I also wanted your viewpoint on really a high-level question, whether you think that this technology can potentially reduce the competitive benefits of scale? Meaning, do you see this as an opportunity for some of the smaller, more specialized vendors to have a leg up in competitive positioning versus some of the large-scale global players?

Well, let me start with the last one. Of course, I would love to tell you there is nobody in the world better than us, right? That saying, the big guys can invest big dollars. Big dollars can lead to big failures, because this is not the time to compete on the size of investment per se. It's how smart you invest. The models must be proven. You can't prove the models till there is a, sizable result in the industry, and you need to remove the bias, the noise. I hope anybody who's done their modeling, they realize that how sensitive the environment of the forecasting to the boundary condition, to the variance, and all this stuff. And you need to really look at the consistent correlation. So that's on a more technical side. See, I do believe on a laser-focused engagement rather than a broad-based announcement that we're going to put X billion of dollars. Now, seeing what we do internally, there are a lot of things happening. So first of all, on the code itself, it's not a secret. People say, you know, the code can be developed -- with natural commands, with, augmentation of the code, the quality controls, the automation to the next level where there's, I would say, artificially driven factors. Again, internally, it always works great because, you know, we're paying for ourselves. But the importance to test those samples of the codes with the clients what did say, and I mentioned just before you asked this question, in terms of the productivity, in terms of selection of skill, I mean, the skill set map, which we've been using for a long time, there's a lot of guesswork there. I think it's becoming a little bit more deterministic by using the stochastic processes on the large models. So we do believe that internal productivity increases, but our focus is on experimenting the models, also on code substitutions and the ability to implement the, independent software vendor products into the major stream.

Okay, that's clear. Thank you.

Thanks, Bryan.

Thank you, Bryan. Our next question comes from Ryan Potter from Citi. Please go ahead.

Yeah, hey guys. Thanks for taking my question. I wanted to start on pricing. I was wondering if you could give some color on how pricing trends have kind of evolved over the past few quarters. Are clients pushing back more on price, or is it becoming more of a paring criteria in the new logo wins? And have you also seen any increased adoption of your fixed fee or pod models? Yeah.

Sure. Thanks for the question. Look, this is a question that we've answered in the past, and there's no exception to that even today. Clients always want better price, right? I mean, that is always one of those internal themes. I think what we go back to every client is value per dollar spent, whether it's on some of these cutting edge technologies, whether it is some of these difficult problems to solve. And time again, we prove ourselves to be a partner of choice where the value of dollar that they spend is high. Now, in the current environment, as we have macro headwinds play out, as we've seen in the past, if there is some incremental pressure with the clients, we have a talk with them on one-on-one basis. We have sometimes short-term arrangements where we accommodate some of their requests, and then we revert back to historical levels. I would say that from a pricing point of view, nothing has fundamentally changed long-term. But in the short term, there's a little bit of a give-and-take as some of our clients also face pressure, and we being good partners of them, help them out. I don't know, Leonard, whether you want to add something.

Yeah, I think the color is probably on the back of the mind of all you guys. How are we dealing with the pricing coming out of India? Did I take it out of your mouth or I'm just volunteering too much? Because it's no secret when you move your force from Central Eastern Europe and you scale India, the biggest question becomes, what's your pricing position? Well, we've done a few acquisitions already. We're expanding an existing team. I think we're holding the pricing well, and this is because our teams are extremely well-trained and intervined. We hire good quality people intervined with European organizations. So we don't necessarily run just projects from one region. We're truly global, follow the sun strategy. As we're getting more and more involved with the Indian offices of our clients, which is, by the way, a great addition to our business, we'll see how it's going to hold. But we maintain the focus on hiring top people, creating the consultancy approach that all people kind of work the same quality around the world, and also maintaining the high quality of the interns. So, right now it's fine. I think what Anil was telling you, it's a generic trend, but I'm quite proud that we implement our GigaCube approach with the follow the sun very consistently across all the regions.

Got it. A follow-up on delivery and GigaCube, in the earnings deck, it looks like you added 5 additional countries to your delivery mix, like Spain, Portugal, Turkey, were these organic additions, or did they come through acquisitions? And then more broadly, can you kind of discuss your strategy around delivery expansion and diversification?

Well, we have not added these countries as a big centers of engineering yet. There is a mix of local hires with some of the relocated people. And we review each center with a great filter in terms of the synergies with other locations. And we also have a lot of people who are locations. And I recently visited pretty much all of the countries you just named. And I'm not a collector of the geographies. It's one of those things you put a, you walk with a suitcase, which has a little sticker from every country you visit, right? That's for the tourists, not for the business. We need to make money in every place we go, and we need to bring the value with the local partnership. So number one guiding factor for the new countries is the relationship with the universities, that's in the early stage, we met some very key notable universities. And as those relationships will prosper, then we can say definitively how scalable those new countries will be. But certainly the young talent is there. I would say that, as I repeated multiple times, we're not creating shelters for people to relocate. I mean, that's just the one part. We need to be a homegrown organization with a homegrown relationship with universities. So I will stop and we'll keep you updated. But right now, the focus from the overall growth is unquestionably India, Mexico, and in Central Europe is going between Poland, Romania, and Serbia to some extent. We have a good team in Armenia, we have a still good team in Ukraine and a few other places. But as we expand, we need to take all these factors into consideration. But we'll keep you posted.

All right. Thanks.

Thank you, Ryan.

Thank you, Ryan. Our next question comes from the line from Mayank Tandon from Needham. Please go ahead.

Thank you. Good evening. I had a couple of questions. First was, you didn't comment on the fourth quarter specifically. So just curious, are there fewer billing days as we're modeling our fourth quarter revenue off the third quarter? Just want to make sure we check on that one. And secondly, we've been hearing from certain companies, some of your peers, that there's that potential for a budget flush given the sort of pent-up demand that's building. Any comments around that to help us frame the fourth quarter?

Sure. So you bring two things which have opposing effects, right? You're absolutely right. You're absolutely right. Fourth quarter tends to be from a billing based point of view across the industry. And we're no exception. Now, in the past, being a smaller company with high growth, one-off climb, if they start growing, also the timing of some of these projects can actually impact the movement from Q3 to Q4. But in general, yes, from a number of days point of view, there's a little bit of a decline. Now, the second point that you bring up is budget flush, which is a very good point. And that is something we all have to see as an industry. Like what we saw in previous cycles, if you don't spend it, you lose it, right? There's a little bit of that going on. So I don't want to comment upon, Q4 at this stage, right, we're doing one quarter at a time. But these two points that you bring up are very valid and is part of our planning process as we look into the business.

Yeah. One more discreet comment on that. In the very early of this session, Puneet asked a question about the contribution of the new clients. So that's one of the areas where we see also the contribution later in the year, whether it's going to be a larger or medium time will tell be a larger or medium. Time will tell in a month or two, so we'll talk about this in November. And from the existing customers, I would not call it the budget flush. And the reason being is we find that more and more as we grow through the diversity of the industries, they tend to have fiscal years not necessarily aligned with calendar years. What we do see for the Q4, it's what's missing from the investments earlier in the year, they may consider to start this slightly earlier. But again, as Anil said, it's a bit speculative, but it's not without a reason.

That's a helpful color. Then my second question is really more housekeeping. One, Anil, what was the revenue contribution from the acquisition in the second quarter? Was that for the full quarter? And then also, really good to see the stock compensation expense come down as a percentage. Should we assume that is the run rate going forward or should we expect further drops maybe more in line with industry peers?

So I'll start with the second question. Yes, the way you should model is, I'll leave seven-- we had about 7.1 at the end of this quarter, right? So plus minus around that range for the remainder of the year. So that's a good observation that you made. In terms of the new logos and I mean new acquisition revenue contribution, as you know, next year was acquired on April 18, right? And as we said in the last quarter too, kind of, low to mid-single digits is what you should be looking at for my contribution.

Sorry, just to be clear, low single digits in terms of absolute dollars, right?

Percentage.

Got it. Great. Thanks so much.

Thank you.

Thank you, Mayank. Thanks for your question. Ladies and gentlemen, that will be all of the Q&A session today. At this moment, I'll pass the line back to Leonard for closing remarks.