GDYN - NASDAQ

Good afternoon, everyone. Welcome to Grid Dynamics Third Quarter 2025 Earnings Conference Call. I'm Cary Savas, Director of Branding and Communications. [Operator Instructions] Joining us on the call today are CEO, Leonard Livschitz; CFO, Anil Doradla; SVP, Head of Americas, Vasily Sizov; and SVP, Global Head of Partnerships and Marketing, Rahul Bindlish. Following the prepared remarks, we will open the call to your questions. Please note that today's conference call is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainty as described in the company's earnings release and other filings with the SEC. During this call, we will discuss certain non-GAAP measures of our performance. GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and the 8-K filed with the SEC. You can find all the information I just described in the Investor Relations section of our website. I now turn the call over to Leonard, our CEO.

Thank you, Cary. Good afternoon, everyone, and thank you for joining us today. Our third quarter revenue of $104.2 million was another all-time high, fueled by AI demand. AI grew 10% on a sequential basis and contributed to over 25% of our third quarter organic revenue. New business resulted in the highest engineering billing headcount. We remain committed to disciplined capital allocation. I'm happy to report that the Board has authorized $50 million share repurchase program, which we announced in today's press release. This represents about 15% of our company's cash. The buyback reflects our confidence in the long-term prospects of the business and commitment to investing in ourselves. We believe Grid Dynamics shares are undervalued at current market prices, making the repurchase an attractive use of capital. In Q3, we have the strongest pipeline of new large enterprise logos since the beginning of the year. Customers are regaining confidence and beginning to accelerate their strategic initiatives. We're encouraged by the quality and duration of the new engagements. New programs are multi-quarter in nature and with budget extending well into 2026. This is a substantial improvement from the first half of 2025. Our partnership influence revenue continued to grow and exceeded 18% of our third quarter revenue. Investments into partnerships are driving faster growth, stronger opportunity pipeline and deeper engagement with new and existing clients. Grid Dynamics helps customers to build advanced AI and digital capabilities. In addition to the hyperscalers, we are also enhancing our efforts around AI-centric independent vendors or ISVs. In the third quarter, we added 5x more billable engineers than we added in the second quarter. In the fourth quarter, we expect net billable engineers added to be at the similar levels as in the third quarter. This is indeed a remarkable achievement given year-end seasonal trends. We also grew our average revenue per person by 4% on a sequential basis in third quarter. We continue to rationalize our overall headcount as we align our skill sets and geographies. And this will result in greater efficiencies and higher utilization. As a result of the strong momentum in the second half of the year, we expect to end the year with a materially higher billable run rate, positioning us well for the growth in 2026. Our 2026 revenue growth will build on the top of this higher baseline, providing a strong foundation for the continued expansion and operating leverage. I'm also happy to share that we're in the midst of a company-wide initiative to expand our profitability and margins. Over the next 12 months, we expect to improve our margins by at least 300 basis points. We'll achieve our goals through several initiatives that we are currently operationalizing. This includes efficiency improvements with a focus on higher-margin geographies, leveraging enhanced pricing with our AI offering, rebalancing our portfolio of lower-margin business and embracing technologies with our AI-first initiatives. In particular, we found that the AI tools and frameworks used by our engineers in software development life cycle, or in other words, SDLC are making them materially more productive. In short, they're able to produce more code of better quality in less time. We now have an opportunity to monetize this boost in productivity. AI is the fastest-growing practice in our company, acting as a powerful flywheel for our business. I'm delighted to share our progress as Grid Dynamics advances its transformation into AI-first company. Our technology vision is clear and structured across 3 horizons: AI-first delivery, Agentic AI at scale and physical AI. This framework guides how we embedded AI into every facet of our operations and service delivery, ensuring our clients receive the most advanced production-ready solutions. AI First delivery is centered on transforming our engineering and delivery capabilities. This is about operationalizing AI in our core processes. The adoption of AI in SDLC has exploded and our Grid Dynamics AI native service offering known as GAIN is at the heart of this transformation. We're seeing strong adoption of AI First SDLC methodologies with active pilots at major clients, including a leading home goods retailer, a major financial technology company, a prominent health care revenue management provider, a global food distributor and a multi-brand restaurant company. AI First SDLC fundamentally changes project economics and delivery time lines. It enables us to take on labor-intensive legacy modernization projects that were previously inaccessible, substituting extensive parallel human efforts with specialized teams equipped with AI agents. The impact on our presales process is equally transformable. Our ability to create full-fledged proof of concepts in hours instead of weeks provides a game-changing advantage, improving conversion rates and accelerate sales cycles. As we deploy these solutions, we see leaders emerging across industries verticals who are driving measurable ROI through new AI capabilities. While some enterprises are finding success, the vast majority are waiting for commercial off-the-shelf software solutions to become available. It's evident that to achieve meaningful ROI, custom solutions must be engineered for specific business processes, leveraging the foundational capabilities provided by AI leaders such as NVIDIA, Google, Anthropic and OpenAI. This has been the core strength and DNA of Grid Dynamics. We're a trusted engineering partner that builds from AI-first principles, and this positions us perfectly to help the clients to succeed in this new era. Our second horizon focuses on deployment of Agentic AI platforms for customers and our employees. We are partnering with large enterprises to build bespoke Agentic platforms. This platform-first approach creates significant expansion opportunities. Our clients engage Grid Dynamics to architect their foundational platform and leverage the expertise to develop sophisticated AI agents for customers and employees, including automated operations with human in the loop. These initiatives drive Agentic customer engagement and enhance decision-making across enterprises. Our third horizon is Physical AI. It involves integrating AI with the physical world through technologies like digital twins, collaborative robotics and edge computing. The rise of Physical AI is fundamentally transforming the industrial robotics landscape, leading to the replacement of the legacy robotics platform with modern AI-enabled solution. We're advancing our Physical AI initiative through new partnership with selected robotics platform providers. Our recently announced SmartRay software for robotics world inspection marks an important step forward in our strategy to combine AI with robots. We plan to expand these capabilities further in the coming quarters. The key to success in enterprise AI programs is not just deploying new technologies. It's about having a deep understanding of the business and leveraging technology to solve real-world high-impact problems. Many companies are realizing that the value of AI comes from rethinking processes, data flows and decision logic around business outcomes rather than pure technology capabilities. This is precisely where Grid Dynamics excels. Our teams combine strong technical expertise with domain influence, enabling us to translate complex business challenges into scalable AI-driven solutions that deliver measurable financial results. AI projects and engagements serve as a critical entry point for the clients opening the door for larger, high-value platforms and modernization programs. We are seeing a familiar pattern where initial AI engagement such as search or personalization, expands into a broader work across data platform and cloud modernization. We're capturing a higher share of these initiatives, high-margin projects as clients deploy ROI-driven AI initiatives. We're also capitalizing as the market shifts from experimental proof of concepts to enterprise scale implementations that deliver measurable ROI. Our game framework continues to gain strong traction with the clients. The model goes well beyond simply layering tools like OpenAI's Codex or Anthropic's Claude Code for the existing engineering teams. The framework rethinks team composition, engineering workflows and best practices to maximize the productivity impact of AI. The goal is to bring substantially higher efficiency gains than just utilizing stand-alone tools. Over the past quarter, we scaled our expert team dedicated to advancing gain, further strengthening our competitive edge in the AI native engineering space. And now, I will turn the call over to Vasily Sizov, our Senior Vice President of Americas, to discuss some notable projects highlights from this quarter.

Thank you, Leonard. Good afternoon, everyone. As Leonard highlighted, we are seeing a clear change in customer tone compared to the beginning of the year. Clients who were previously focused on near-term risk management are now taking a more constructive and strategic view, thinking about how to position themselves for growth in 2026 and beyond. This shift from caution to controlled optimism gives us confidence that the current demand recovery is structural, not temporary. In fact, several of our key customers begin their fiscal year on October 1. Contract renewals we observed and new committed budgets at or above prior year levels indicate maintenance of the momentum. A significant portion of this activity is centered around AI business cases, initiatives designed to drive tangible operational and financial outcomes. As we mentioned in prior quarters, we are already executing on 2 large-scale platform programs with Fortune 500 clients that are implementing Agentic AI across the enterprise. We are now seeing a much broader wave of discussions of similar nature and the results to date have been very encouraging. The ROI profile of these AI initiatives looks more attractive than that of traditional digital transformation programs. Unlike gradual multiyear modernization efforts, these AI business cases often target specific pain points with measurable improvements, revenue uplift, cost reduction or conversion rate gains that become visible within quarters, not years. This creates a strong feedback loop as clients see real results, their interest accelerates and demand begins to snowball, which we observe in our pipeline. With that, I would like to highlight some notable projects from the quarter that illustrate these trends. First, we are developing an AI-driven bug triage solution for a leading multinational technology company. Our approach integrates advanced noise reduction, deduplication and intelligent routing with deep analytical models, custom lock processing and robust domain knowledge base. This combination directly addresses the challenges of engineering operations in bug triage and routing. By automating complex analysis and decision-making, the solution is expected to reduce triage time by up to 70% triage, while significantly improving accuracy and replacing the traditional manual approach for bug triaging. Second, for a leading technology company, we've developed a system to support compliance with the Digital Markets Act by shifting data processing from server site to on device. Using modern mobileto-edge data processing workflows, the system delivers server source data to user devices for local transformation, a critical requirement under DMA, which prohibits certain server side joints and aggregations. The platform processes billions of records daily across a wide range of business domains and data sets. This initiative has significantly strengthened compliance by enabling privacy preserving non-identifiable consumer data collection at scale. Third, a leading financial and investment services firm is modernizing its advanced search platform used daily by over 10,000 financial advisers for efficient search of the client data. The legacy interface required navigating nearly 500 filters and understanding of SQL queries and logical expressions, creating complexity and inefficiencies. The enhanced solution leverages AI and natural language processing to enable advisers to query the firm's databases using simple conversational language. This AI-driven search experience delivers faster insights and an estimated 10% boost of financial advisers' productivity. And the fourth example, a leading U.S. automotive parts provider had a plan to replace an outdated solar-based search engine with a goal of improving online revenues by at least 3% without disrupting operations. Great Dynamics partnered with them to implement a Google Verdicx AI search solution and successfully accomplished the project with results exceeding the expectations, a 3.33% uplift in revenue per search, generating over $600,000 in just 2 weeks at 50% traffic, outperforming their legacy system by 5%. Looking ahead, we plan to expand Vertex AI search to B2C and in-store channels with content enrichment and cloud migration. Now, let me turn the call to SVP Global Head of Partnerships and Marketing, Rahul Bindlish. Rahul?

Thank you, Vasily. Our partner influence revenue has grown to over 18% of total company revenue, underscoring the value of our ecosystem-driven approach. Our partnership framework is purpose-built to advance our mission of enabling enterprises to develop world-class AI and digital solutions. As AI continues to redefine enterprise transformation, we expect these partnerships to play an even more central role in our growth, driving continued expansion in both our pipeline and market opportunities. We organize our partners into 2 primary categories. First, platform partners. This group includes the hyperscalers, our core cloud partners as well as leading data and analytics platforms like Snowflake and Databricks. These collaborations keep us at the forefront of modern enterprise infrastructure, ensuring we deliver cutting-edge cloud, data and AI capabilities to our clients. With the hyperscalers, we are strengthening relationships through targeted investments in AI and Agentic platform capabilities. This includes expanding certifications, earning specialized badges and building new joint solutions, complemented by coordinated go-to-market initiatives such as joint marketing and sales campaigns. We are expanding these initiatives from the U.S. to other regions, including Europe, LatAm and South Africa. Second, ISV partners. These partners bring deep domain-specific capabilities essential for enterprise transformation. Through these specialized ISVs, we deliver tailored best-in-class solutions aligned with specific business needs. Within the ISV ecosystem, we have expanded our partnership with leaders in middleware and workflow orchestration that underpins reliable, durable execution for Agentic platforms. Our blueprints for Agentic AI platform, incorporating such middleware developed from real-world enterprise deployments address critical challenges in scaling and managing AI workflows. We have also expanded our platform partnerships to include NVIDIA. We are actively developing solutions on NVIDIA's advanced software stack, including Omniverse to deliver high fidelity industrial-grade digital twins and simulations. For example, earlier this year, we launched the Interalogistics optimization starter kit on NVIDIA, enabling retailers, manufacturers and logistics companies to optimize facility layouts and picking paths, boosting warehouse efficiency and reducing labor costs. With that, let me turn the call to Anil, who will talk about our financials. Thank you.

Thanks, Rahul. Good afternoon, everyone. We recorded the third quarter revenues of $104.2 million, slightly higher than the midpoint of our $103 million to $105 million guidance. On a year-over-year basis, this represents a growth of 19.1%. On a year-over-year basis, there were roughly 40 bps of FX-related tailwinds. Non-GAAP EBITDA came in at $12.7 million within the higher end of our guidance range of $12 million to $13 million. In the third quarter of 2025, there was a negative impact from FX fluctuations on our costs, both on a quarterly and year-over-year basis. Grid Dynamics is exposed to a currency basket across Europe, Latin America and India. While we have a natural hedge against some of the currencies and a hedging program with other currencies, the net impact on our EBITDA was approximately $0.6 million or $1.3 million on a quarter-over-quarter and year-over-year basis, respectively. Looking at performance of our verticals. Retail remained our largest vertical, contributing to $27.8 million of our total revenues in the third quarter of 2025. Revenues in this vertical decreased by 2.1% and 2.9% sequentially and year-over-year basis, respectively. The sequential decline came primarily from a handful of large retail customers, while some of them have returned to growth. TMT, our second largest vertical accounted for 27.4% of total revenues for the quarter with growth of 13.5% and 18.2% on a quarter-over-quarter basis and year-over-year basis. This growth was primarily driven by our largest technology customers. Finance vertical accounted for 24.6% of total revenues in the quarter. Revenues were slightly up sequentially and grew 81% on a year-over-year basis. The substantial year-over-year growth was primarily driven by increased demand from our fintech customers, along with contributions from our 2024 acquisitions that brought in global banking customers. Turning to the remaining verticals. CPG and Manufacturing represented 10.5% of quarterly revenues and grew by 3% on a sequential basis and grew by 11.3% on a year-over-year basis, primarily due to contributions from our recent acquisition. Other vertical contributed 7.4% of total revenues, reflecting sequential decline of 1.6% and 10.5% increase compared to the third quarter of 2024. The year-over-year increase primarily came from customers tied to delivery, service providers and acquisitions. And finally, health care and pharma made up 2.3% of our revenues for the quarter. We ended the third quarter with a total headcount of 4,971, down from 5,013 employees in the second quarter of 2025 and up from 4,298 in the third quarter of 2024. During the quarter, we increased our billable headcount meaningfully. That said, we rationalized our overall headcount as we aligned our skill sets and geographic mix. At the end of the third quarter of 2025, our total US headcount was 370 or 7.4% of the company's total headcount versus 8% in the year ago quarter. Our non-U.S. headcount located in Europe, Americas and India was 4,601 or 92.6%. In the third quarter, revenues from our top 5 and top 10 customers were 40.1% and 58.3%, respectively, compared to 39.8% and 59.2% in the same period a year ago, respectively. During the third quarter, we had a total of 186 customers, down from 194 in the second quarter of 2025 and 201 in the year ago quarter. The decline in the number of customers was primarily driven by our continued efforts to rationalize our portfolio of nonstrategic customers. Moving to the income statement. Our GAAP gross profit during the quarter was $34.7 million, or 33.3% compared to $34.5 million or 34.1% in the second quarter of 2025 and $32.7 million or 37.4% in the year ago quarter. On a non-GAAP basis, our gross profit was $35.2 million or 33.8% compared to $35.1 million or 34.7% in the second quarter of 2025 and $33.3 million or 38% in the year ago quarter. On a year-over-year basis, the decline in gross margin was from a combination of factors that included FX headwinds, higher utilization, lower working time and mix shift from our U.K.-based acquisition. Non-GAAP EBITDA during the third quarter that excluded interest income expense provision for income taxes, depreciation and amortization, stock-based compensation, restructuring, expenses related to geographic reorganization and transaction and other related costs was $12.7 million or 12.2% of revenues versus $12.7 million or 12.6% of revenues in the second quarter of 2025 and was down from $14.8 million or 16.9% in the year ago quarter. The decrease of $2.1 million on a year-over-year basis was largely due to higher operating expenses and FX headwinds. Our GAAP net income in the third quarter was $1.2 million or $0.01 per share based on diluted share count of 85.8 million shares compared to the second quarter net income of $5.3 million or $0.06 per share based on a diluted share count of 86.4 million and a net income of $4.3 million or $0.05 per share based on 78.8 million diluted shares in the year ago quarter. On a non-GAAP basis, in the third quarter, our non-GAAP net income was $8.2 million or $0.09 per share based on 85.8 million diluted shares compared to the second quarter non-GAAP net income of $8.3 million or $0.10 per share based on 86.4 million diluted shares and $10.8 million or $0.14 per share based on 78.8 million diluted shares in the year ago quarter. On September 30, 2025, our cash and cash equivalents totaled $338.6 million, up from $336.8 million on June 30, 2025. As Leonard mentioned, the Board has authorized a $50 million share buyback, which we announced in today's press release. This represents roughly 15% of our cash. M&A continues to take priority in our capital allocation strategy. We are committed to augmenting our business organically through our acquisitions that strategically enhance our capabilities, geographic presence and industry verticals. Coming to the fourth quarter guidance, we expect revenues to be in the range of $105 million to $107 million. In the fourth quarter, all our business will be considered organic in nature. We expect our fourth quarter non-GAAP EBITDA to be in the range of $13 million to $14 million. For the fourth quarter of 2025, we expect our basic share count to be in the range of 85 million to 86 million and our diluted share count to be in the range of 86 million to 87 million. Based on our fourth quarter revenue outlook, we expect our full year revenue outlook to be between $410.7 million to $412.7 million. This would represent a 17.1% to 17.7% growth on a year-over-year basis. That concludes my prepared remarks. We're now ready to take questions.

Thank you, Anil. [Operator Instructions] The first question comes from Puneet Jain of JPMorgan.

So, it was good to see increase in number of billable headcount this quarter, which you also expect to continue into 4Q. Talk to us like about the trends you are seeing for 2026? Like can growth rates next year meaningfully accelerate from like the broad set of clients compared to what you are guiding for 2025?

Thank you, Puneet. It's good to talk at the time when we can be comfortable to discuss the growth. First and foremost, we are the highest billable headcount in the history of the company. The rate of growth has also picked up quite a bit, and we see that going into the Q4. But why we're comfortable looking forward for the next year at this point? First and foremost, the programs we have recently renewed or we signed for are longer in nature. They're not going on a short duration. They're going on multi-quarters. The second part of that is that the programs are related to the AI initiatives, a lot of technology application, which brings the core of us bread and butter of our business. The other part, which is important is that we don't get only stuck with the traditional renewals in the beginning of the year because some of our clients now have the sliding schedule for the new fiscal year. So notable clients had their fiscal year starting in October, which means that we are very comfortable to see the growth coming through, again, longer duration. And finally, as we have told you guys before, we have a number of our top 10 clients who elect Grid Dynamics to be a preferred vendor. It wasn't as evident in the last few quarters because they were a little bit slow on expanding their technology investments. Now they're full swing, and we're taking advantage of that benefiting from being a preferred partner.

Understood. And then a question on Agentic AI, like the benefits to clients from transitioning to Agentic AI-based solutions, it's clear. But perhaps talk to us about the constraints that are limiting adoption? And what will change that? Like could that unlock higher level of discretionary spend among clients for the overall IT services companies next year?

Very good. I would let Vasili talk about some specific cases because obviously, we're in the midst of the big transformation. And there are a lot of talks about what agentic AI can do. And cannot remember, it's our Phase 2 of horizon, the AgenticI is at scale. So, Vasily?

Yes. Thank you, Puneet, for the question. Yes. So Agentic AI and AI in general is the fastest-growing practice for us. So -- and we definitely see the expansion with the business cases, which we already kind of applied during the last few quarters. But the technology doesn't stay on where it is and it continuous evolving. And we are expanding our capabilities to a broader spectrum of business problems to solve. And there are a few notable examples, which we already mentioned during the prepared remarks. And some of them, for example, apply to the cases where lower skilled employees can be replaced with higher skilled employees in a lower number of, I would say, people augmented by sophisticated AI solutions. And for one of the core clients of us, we are implementing right now the Bug Triage Solution, which is basically assumes a small number of highly expert team augmented by AI, replacing hundreds of engineers of low skilled who are basically don't possess enough skills to requalify and can be really replaced by the more sophisticated processes and solutions.

The next question comes from Bryan Bergin of TD Cowen.

I wanted to follow up actually a little bit on that last question as it relates to the Agentic work and some of the TAM expansion. So particularly this Agentic managed services activity that seems like it's brand new as far as an opportunity for you versus the custom build activity that you're known for. When you think about the work, the Agentic work that you're doing for clients, is there a way to segment how much of it is in this kind of new managed services area versus what would be kind of just SDLC-enhanced Agentic activity? Because I think, obviously, that's a huge market, the IT managed services industry that you could penetrate here in a new way.

Yes. So, thank you so much, Bryan, for the question. I would say, currently, majority of the revenue, which we see are actually related to solving the business cases. As SDLC, I would say, expansion of existing programs and helps to open new accounts, but this is broad in nature. So, it's actually -- it goes through majority of our engagement. So, it's very difficult to discern what exactly would be the incremental gain, I would say. It just fuels overall growth, which we saw in Q3 and was significant.

Yes. So just to comment more specifically, the complexity of scaling the business with the Agentic AI lays in the fact that we cannot just take off-the-shelf program and apply it to the client. When we talk about AI first deployments or more commonly known as forward deployed engineers, it's more or less straightforward. The Agentic AI unveils a very strong combination of the traditional hyperscalers, with their tools, solutions, their ISVs or some specialty tools and there are -- tools created in-house by Grid Dynamics. And mind you, quite a few initiatives are actually driven by Grid Dynamics to be the client zero, which is now very popular within the company. So, we train the programs within the company on a business process as an example, and then we carry out to the clients. So, we're expanding rapidly the market because it's a combination of our traditional kind of open sourcing world, but with embracing the partnership and a big players. That's, by the way, one of the reasons I brought Rahul to the call because the success of enrollment into broader base and Gen AI application is driven by how many cable solutions are developed by our partners in conjunction with us doing something in the middle of their preparation for releases.

Okay. That's helpful. That's clear. My follow-up, I'll touch on the numbers here. So just help us with reconciling the 4Q growth view that comes in here a little bit below versus what the prior implied would have been on the fiscal '25 outlook. With all the optimism you're conveying here on billable base on client behavior, is there -- is it just some of the signed work is not immediately starting and it's kind of '26 and thereafter? Is it any client-specific issues? Just anything just on the near-term numbers set up.

Yes. So Bryan, very simple. It's a timing thing. So, there are three layers of this timing. The pickup in ramp, right? We thought it would be a little earlier. It just was a little delayed, but we're getting to the same point. Second thing is that in the year, we had 2 significant clients that had an impact on us. That was about, what, $25 million, $26 million roughly there. And these 2 things -- and the third thing was that if you look at the high end, there was certain M&A also plugged in. So, when you look at these 3 things, there's nothing structural. As a matter of fact, one of the client, a top 10 client that gave us a little bit of a headache early in the year, that's coming back strong. So, it's all about timing. And that's why when Leonard started off with his opening question, what we are seeing right now going into the fourth quarter sets up very well as we get into '26.

But just to clarify, Bryan, even when we were meeting with you a quarter ago, we could not pinpoint exactly the time of the inflection point. We were reliant first on some time during Q2, then we were not sure. And then finally, the second half of Q3, it happened. So, when Anil refers to the timing difference, if you trace the rate of growth, not from Q1 to Q1, but from Q2 to Q2, you will see significant upside. And what's very important, again, what Anil said, taking away these 2 clients and some delays we had with them, we're in a fantastic organic rate of growth. Now there always something happens. So, we can't say it will never happen with anyone again. Of course, it happens. But what really carried us out into the more success rate of growth is a broader base of clients. With the application of technology tools we were less dependent on certain variations, especially from our traditional legacy retail and the service business around retail customers as a total.

Okay. Just one clarification. Did you scale that engineering base, the billable base that's up? I know you've got some things flowing through the net headcount from 3Q. Did you scale the engineering side?

So this is very, very simple because when we do reporting, we're trying to follow the same numerical disclosures, right? So, if you look at the number of the billable headcount, it's significantly higher. So, what happened? -- there are 2 things happen. Number one, we're much more aggressive of optimizing the OpEx, right? The other -- so OpEx is really a big thing. So, we're reducing the bench or anything like that. The second part is it's a small variance of our internship programs. We continue to hire interns, but it happens in the beginning of the quarter. So, when they come to the end of the quarter, it's really not less meaningful, but we really have a robust pipeline of projects and also trained engineers, both from the internship program, Grid Dynamics University, et cetera. But it really -- it looks a bit weird because how you can grow when you have overall headcount. But when you see our engineering headcount, building headcount, utilization, we're extremely positive going forward.

The next questions come from Surinder Thind of Jefferies.

I'd like to start off with a question about the partnership program. Can you talk a little bit about -- when you think about the future of where those numbers could get to, I feel like we've been kind of stuck in the 16%, 17%, 18% range as a contribution or a percentage of revenues. Can you talk about where we are in that process and where you think you can ultimately get to and why the numbers are what they are today?

Thank you for that question, Surinder. A little bit about myself. I was the first salesperson who joined the company more than a decade ago, and we started the partnership program about 4 years ago with the intention to grow our business, increase pipeline, accelerate the sales cycle. And we are doing pretty well on all those parameters. Now, specifically in terms of percentage of revenues influenced by partnership, we have grown pretty nicely to about 18%. We started off with a goal of getting to about 21-odd percent. But given the growth we have had, I do expect in the long term, we'll end up somewhere between 25% and 30%. Now, you did make a statement that we have been stuck between the 16%, 18%. In fact, if you look at the trajectory, we are growing from 16% to 18%. If you look at we have also done acquisitions. And a lot of our acquisitions, when they come in, they don't come with partner influence revenues. So, our overall percentage is still growing on a total basis, including acquisitions. Effectively on a dollar basis, our rates are significantly higher.

And then maybe a question on the decision to go with the share repurchase program. Any color there in terms of -- I realize it's not a very large percentage of the cash. But for a growth company, just can you talk about that and what you're trying to signal there? Obviously, I think people recognize valuations are generally depressed, but what's the benefit here?

So Surinder, I think the first and foremost thing is a signal that we're sending to the markets. We believe that we -- our deployment of this capital at these levels is a clear good return on investment. You're absolutely right. We are a growth-oriented company. So, there is a second aspect of our whole story, which is M&A. And we're fully committed towards M&A. This year, we thought we'd close 1 or 2 deals. It took a little longer. But the second aspect of our capital allocation is definitely M&A.

Just to add on this point, I think it's very important. We believe we really passed from the trough. We're in a clear growth inflection point. And we listen to our investors. We understand the market trends, and we believe it's a value which we will coordinately bring to the market, to our shareholders while maintain a very good position on the cash. And also, there's another added factor. We believe we'll generate more cash as the business grows. And those questions are related to how we're going to improve our EBITDA margin. Why is it important? Why we specifically said something in our commentaries about how actively we're going to do that because we're not just giving away cash. We're making a business-wise decision while demonstrating ability that we'll replenish the cash as we grow with the M&A process forward.

The final quick question here. Just on the margins and the idea of generating 300 basis points of expansion over maybe the next 12 months. I understand this was a year of investment, but can you put that into context why now? Why not continue to invest given all of the change? And is that kind of a onetime step function change that we should then build off of? Or how do we think about the decision to kind of focus on margins at this point in the cycle?

Yes. No, no, great question, Surinder, and that's a perfect question. Look, there are a couple of things that are going on here. The first thing is the timing of it. So, on that one, we believe that the macro is going to be what it is. And we're assuming that we're taking a little bit of a conservative outlook on the macro front and saying that given what it is right now, let's look at the way the business is. We've also reorganized our headcount. There was many non-repeatable one-off things, whether it is a sudden expansion of geographies, whether one-off discounts as we went through vendor consolidation with some of our big clients and nonrepeatable events, which we've landed with. So, we're taking a look at that. And the final thing is that, we're embracing these new technologies. So, as we embrace many of these new technologies, we believe that we could get some of the returns. So, where we are on the macro front, on almost like now we are in this new world where we're at 19 countries. Remember, about 3 years ago, we're at 7. We rapidly expanded. So, we're now taking a look at, okay, how should the company look like? What is the optimal model. And we're looking at it on an account-by-account level or region-by-region level.

Let me just add more strategic comment on that. So, there are 3 ways you can manage cost. Number one is on the pricing side. Number two, on the cost. And in this case, Anil alluded to specific regions, which have been affected by the unfavorable exchange rate, and also the transition we had to India as an example. And the third one is a technology investment. And I think you alluded to make sure that we understand how to balance it. So, answering that question. We are definitely bringing the value to the clients, which is reflected in our new contracts. We're bringing our game model, which helps us to identify the business solutions, which is giving us a bit more run rate on the favorable pricing. The cost is what priority is for Anil to work on. We're not slowing down on a technology investment. Had we slowed down technology investments, it will be a significantly higher number. But my goal in life to bring in Grid Dynamics in the future of the growth with the same or better technology improvements as we had before. So out of those 3 elements, we pursue first 2.

The next question comes from Mayank Tandon of Needham.

Great. I had a couple of quick ones. First is, are you getting any indication from your clients around a potential budget flush in 4Q? If there is upside to your numbers, would that be the main driver? Or are there other factors that could also be potential upside catalysts based on your guidance?

So, Mayank, this is a question that I challenge our teams internally, right, in the timing of it. So, some very interesting things are happening here. Number one is that -- and the gentlemen have alluded to, but let me rehash it. Number one, if you look at all our new deals that we're signing, we're signing at levels, the pricing at that level or higher. Second thing is that all these fiscal lending deals, we're now talking about 2026. So, people who are starting the new fiscal year, that's a very fundamental thing. And the third thing, which Leonard pointed out, see, the year of 2024 going into '25 was all about vendor consolidation. And in some many cases, we went from several to a handful and we've succeeded. We had to give one-off discount. But now they are looking at ramping us, and we're talking about 2026. So, if you look at my top 10, top 15, which is what, 50% to 80% of my revenues, we're now talking about 2026. That is a fundamental thing. But you're absolutely right, this is something I challenge the team. At this stage, we do not believe it's a budget flush. I'm sure there might be some marginal things, but our fundamental tone here is driven by what we're seeing in '26.

And what's more important from the business standpoint, this is a financial -- very good financial from the business support, we open new programs. When you have traditional what you define as a budget flush, it's unused funds, which are used for some existing projects. This is not the case. We're opening big multi-quarter programs now, which tells you that it would be very difficult for people to appropriate sums just related to the end of the year. So, we're very bullish that this is not a just budget for short term.

Got it. That's very helpful. And then just a quick follow-up on margins. I wanted to just clarify. So, the 300 basis point expansion that you're calling for in 2026, is that gross margins? Or is that EBITDA margins? And then, Leonard, you did go through the levers. Could you just go through them again? I think you went through them a little bit quickly for me, at least. So, I would love to get a little bit more granularity on what the drivers are.

All right. So, I'll let Anil first talk about his favorite topic. Gross margins with EBITDA margin. He loves to talk about it. I'm the one who needs to make it happen. Let him talk about.

All right. Well, look, at the end of the day, Mayank, EBITDA margin -- the gross margin is part of the EBITDA margin, right? So, look, we are looking at the whole P&L holistically, including the cash generation. So, we're looking at the costs. We're looking at the OpEx. We're looking at capitalization. We're looking at every aspect of it. We have at least 300 bps that we're talking about, so by the fourth quarter of next year. We have some aggressive internal targets, and we're balancing that with some of our investments in technologies. So, I don't want to say it's coming from this, this and this. It's coming from everywhere. And the bottom line is that you'll see expansion. The bottom line, I'm hoping that expansion both on gross margin and EBITDA margin, but we'll see the final numbers.

So now I'm going to repeat what I tried to say to Surinder with a little bit more granularity. So be a little bit patient with me. So, there are 3 elements. One of the pricing increase. The second is a cost optimization. And the third one is the technology investment, okay? So on the pricing side, there are a couple of elements which are critical. One of the main one is application of our game model. game model for us as we talked about it before. It's all about Grid Dynamics AI application solution enhancements. We talked with Brian about ageentic AI and other elements. So ,some of the programs we're signing now become more favorable. It's not because we're just hammering on the dollars per employee. I mean, that happens or some renewals, but it's not the most effective way. You actually need to make sure that ROI plays a huge role. And ROI was a bit up term for a long time because when you have a traditional T&M business, what is ROI. Now when you start applying the business solutions and business practices and eliminating a lot of waste on the client side, it becomes tangible. So that's on increasing the profitability of the pricing side. On the cost side, you asked a very important question. And on the 2 parts, on the gross margin part, Obviously, with -- especially with the dollar versus euro swing, some of the European locations, particularly in European Union zone, become less favorable. So, we're looking at that, how we're going to improve our gross marginality. Of course, you increase the price, but you also look at some of those less favorable locations of the business. That's one of the part. The second part is, if I mentioned before, if you recall, Grid Dynamics is a client 0. For a lot of internal initiatives, we're testing efficiency on our own business process, and then we transfer to the clients. It would be unreasonable for us to just investigate them and don't take advantage of it. So that's an operational efficiency. that operational efficiency in HR, recruiting, hiring, finance and all these elements of the business, which don't fit traditionally into the COGS, it's all OpEx. So that's an element. The second big part of element of the cost efficiency. We are putting a lot of effort here because we see that the trend for Grid Dynamics in recent months and quarters after the start of the war, 3 years has been there already, has not been favorable. And it's time for us to tighten the balance from the operational efficiency, but more importantly, the tools. We have a lot more tools. So, it's not just say, okay, you just get rid of this group of people and hire this group. It's a lot of more intelligence. The third part, we're not touching. -- actually, we're increasing the investment. And again, Surinder asked this question. He wanted to make sure we are not stopping deployment of cash into our technology area. For one way or another, there is -- it's a full P&L. So, whatever we invest in technology is a part of the same EBITDA margin, right? And we invest into all 3 horizons, including the third horizon, which is the physical AI, robotics automation. We work with on the proof of concept and some first project with a very large industrial companies that all takes investments. The partnership work takes investments. So, we are investing in technology, partnership, 3 horizons of AI, maintaining a strong focus on innovation while looking at the efficiency, both on our COGS and OpEx, and we're pushing the game model to improve the rates on the client side. If I'm still slow, I think we need to talk offline.

The next question comes from Matt Dezort from JPMorgan.

No, no, from William Blair.

Sorry, from William Blair.

William Blair. Matt, you just got bumped up to JPMorgan. Is that an insult or is that a complement?

It's Matt on for Maggie Nolan over at William Blair. I guess to ask another one on margins, Anil, maybe a slightly different way. I guess it doesn't sound like it, but is it -- is that 300 basis points of expansion dependent on your growth reaccelerating next year? Or can you guys expand margins even if budgets and growth remain constrained into next year?

Look, there is some leverage that you get and benefit from a top line growth, right? But as I said in the opening comments, we're not assuming anything much on the macro, not a big positive, not a big help, so to speak. So even if the macro -- even if the demand environment stays the way it was in 2025, we think we -- yes, we are going to expand at least 300 bps.

Right. And I think what's important, again, and you mentioned it before, Matt, we have actually stated this is kind of a bare minimum. So, the market favorable conditions should lift it further. The technology optimization lifted further. It's -- we look with Anil today, it's our 24th earnings call together. It's the first time we're so specific on the margin part because we believe that Grid Dynamics kind of been looked a bit on a negative front from the margins and kind of a little bit tuned down our technology excellence. And we'll look at that and we say, look, we want to make sure that investors truly understand from the granularity how we're going to move forward with a growing business, improving our technology and become really rigorous on our cost-effective initiatives.

Makes sense. Congrats on 24 calls together. Maybe as a follow-up, can I ask about your guys' AI advantaged? I guess, within AI, where does your competitive advantage come from versus your peers? Is it gain? And I guess, is that helping drive the outsized traction and pipeline within any specific verticals where you guys have historical expertise like e-commerce, for instance?

Thank you, Matt. Our history of utilizing AI and in the past, everyone was talking about data analytics, predictive analytics and machine learning. The story started from 2012 when we first started implementing natural language processing for the search engines for the biggest e-commerce and retail companies in the United States. In 2017, we wrote the first book on AI called Marketing. And we have a long story and a lot of investment into building this expertise, and that's what creates a differentiation for us. So, when the truly AI boom started, we were ready. We had business cases. We had accelerators, blueprints, understanding on how to implement that technology on scale. And essentially, with utilizing LLMs, it's just another tool in our toolbox, which helped us to tackle things which were not possible to tackle before. So, I would say that, that's the key differentiation. Right now, we are embracing more and more different business cases, different verticals with specific solutions, specific applications of the technology, I would say. And right now, it's difficult to say which industry benefits the most. I would say, everywhere where we are present, we understand how the technology can help and help with figuring out the strategy and the road map for the implementation of AI technology and going more and more into implementing AI platforms, which can help to implement AI technology on the scale of the enterprise.

So just to also look at the bigger picture, Vasily was very good to define some of the application part. You're absolutely right, you have to start from something. And e-commerce and foundational part of the retail business drove us to expansion into the other areas like CPGs, which is very similar in the application side. But if you look at the recent -- more recent growth, where the applications of AI are becoming more and more prudent, we'll start looking at our growth in a technology TMT segment. We're looking at definitely in fintech. That's been a very successful endeavor for us to expand. And now it's picking up on the industrial side. So, it started from the foundations, but now it expands in the area. And the second part to your question, look, everybody tells that they have the best position for AI. You can talk to the company which is now valued $5 trillion, or you can call a company which values very little today from what it's supposed to value, which is Grid Dynamics. And everybody tells you almost the same thing, maybe not the jacketed the leather. But the thing is we are very, very laser-focused on the key technology foundational elements, which, as you alluded, was built in the past 12 years, 13 years. So, we're not going for the super broad-based clients. We're always on a top 1,000 clients in the world. And you can see that, we are tailoring to the programs with the scale in our past experience can benefit the most to the client. So, you have somewhat narrower band at some of the bigger guys who we're competing with. But where we get into the business, we are getting an excellent job and partnering. And that's where the partnership program also expand us, because we started with Google, Microsoft, AWS and NVIDIA. We have those fantastic partners. And when they see the value of Grid Dynamics, then it really speaks for what we are. But the time will tell who is going to be better. So, we're very bullish, but thank you for checking on this point because you need to be us and everybody else honest how good we and others are at AI.

Thank you to our analysts for all your insightful questions. With that said, this concludes the Q&A session for today. I will now pass it over to Leonard, our CEO, for closing comments.