Grid Dynamics Holdings Inc (GDYN) 2020 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Grid Dynamics Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn this call over to [Ms. Lilia Chernova] of Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Grid Dynamics' Fourth Quarter and Full Year 2020 Earnings Conference Call.

Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations and beliefs, including our first quarter 2021 financial guidance, the growth of Grid Dynamics business, our objectives and business strategies as well as other forward-looking statements.

You can refer to the disclosure at the end of company's earnings press release and Form 8-K filed with the SEC today for information about forward-looking statements that will be made on this call.

All statements made today reflect our current assumptions only, and we undertake no obligation to update any statements to reflect the events that will occur after this call.

You can learn more about the specific risk factors that could cause our actual results to differ materially from today's discussion in the Risk Factors section of the company's Form 10-Q filed on November 5, 2020, and in subsequent periodic reports the company files with the SEC.

Also, during this call, we will discuss certain non-GAAP measures for our performance. GAAP and non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and in the 8-K filed with the Securities and Exchange Commission.

This call is also available via webcast. You can find the information I have just described in the Investor Relations section of Grid Dynamics website.

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.

With that, let me turn the call over to Leonard.

Thank you, [Lilia]. Good afternoon, everyone, and thank you for joining us today. I'm excited to share my thoughts on how the company is making strides across its business and highlight the progress we have made since we spoke with you all several months ago. More important, on this call today, I will share my perspective on the full year 2020, how it had shaped us as a company leading to the present and why the future is exciting as we are all set well for 2021 and beyond.

In many ways, 2020 was a unique year. Grid Dynamics went public on March 5, and in a very short time of 2, 3 weeks after going public, we had faced an unprecedented crisis from the global pandemic. Many of our retail customers were severely impacted, especially brick-and-mortar department stores. As the second quarter results highlighted, the retail business was down 75% sequentially and on a year-over-year basis with brick-and-mortar department store customers were down even more substantial.

Despite the headwinds, we bounced back, and underpinning the strong recovery, we took some very important decisions. Our immediate focus was to preserve our core engineering teams and prepare for possibility of a prolonged impact from the pandemic.

We accelerated the business development efforts to our nonretail opportunities. We initiated a number of strategic R&D projects and co-invested with some of our larger clients. Each of these actions paid off. The R&D projects gained the attention of new and existing clients, and a strong growth in our CPG manufacturing vertical was a consequence of our co-investment decision as well as client trust in our capabilities. Our quick rebound resulted in cash generation and profitability on an ongoing basis.

To give you a perspective of how far we recovered our current billable head count. Today, it's almost double of what we were at the [bottom] in May 2020.

Unlike the retail vertical, which we witnessed a year ago over year decline in 2020, other industries grew in 2020. Noteworthy among them were our technology, which grew 40% and CPG manufacturing vertical, which grew over 190% on a year-over-year basis, respectively. At 21% for the full year and 37% for first quarter 2020 revenues, technology was the largest vertical and we expect it to remain so in 2021.

More importantly, we exited 2020 with 2 10% customers, both of which belong to technology vertical. Within this vertical, we continued to witness greater levels of engagement with global technology brands as they increasingly become appreciative of our differentiated skill sets. The emergence of technology is our largest in the industry vertical marks an important step in the diversification of the company away from our historically retail-focused markets. Our technology clients are market leaders with most of the revenue derived from digital sales, and they are very resilient to market volatility.

The 21% of our 2020 revenue, CPG manufacturing was the fastest-growing vertical in 2020. In each of the 4 quarters of 2020, this vertical grew over 10% sequentially and over 100% on a year-over-year basis. The catalyst of such strong growth was our success with one of the largest global CPG brands. More importantly, at this brand in the fourth quarter, we won key strategic programs, which incrementally contributes not only to 2020, but to the expanded business in '21 and beyond.

I'm very proud of what we accomplished in 2020 and thank the hard work and dedication of each who are into this. But equally important and worthy of mention is the strength of our technical capability that appeal to customers across all industry verticals.

I would like to mention the following core strengths centered around the areas of, first, our expertise in cloud transformation initiatives as we build, reengineer and modernize these applications and systems at large enterprise customers. Second, extensive experience in extracting meaningful insights for our customer data via data science and machine learning. These insights help our customers in optimization of their operational KPIs. And third, our focus on customer experience that extends well beyond the front-end user entities. We use our deep knowledge around artificial intelligence at leading consumer-facing brands to solve and streamline customer journeys.

Our core strengths and capabilities are not just tied to any given vertical, the testament to our competencies evident in 2020 as we quickly reassigned and pivoted away from retail to other verticals.

Such important aspect of our company gives us the confidence of our progress in the years to come.

On December 14, 2020, we announced our first acquisition of Netherlands-based Daxx in an all-cash deal. Headquartered in Amsterdam and employing over 500 engineers and engineering centers across Ukraine, Daxx brings more than 20 years of experience in delivering software services to their clients across a wide range of industry verticals. In addition to high-end software development, the company consults in the field of agile process engineering, lean development and DevOps. Daxx serves customers in Netherlands, Germany, Israel and the United States and has focused on a new tier of high-growth start-up markets. [Through this acquisition for expansion here], complementary services, market-driven customer acquisition model, leveraging one of the most successful search engine optimization.

Daxx provides exposure to new customer logos, immediate access to a large pool of talented engineers and scaling our existing Eastern European delivery centers. When we started leveraging relationships at the customer level, both the sales teams and the marketing are starting directly around pursuing needs and opportunities.

Now coming to the fourth quarter. In the fourth quarter, our revenues of $30.1 million included roughly $1 million of revenue from Daxx. Excluding the contribution from Daxx, our fourth quarter revenue of $29.1 million grew 11% sequentially and was higher in our previous guidance of 6% to 9%.

Most importantly, the underlying trends that shaped the fourth quarter, both from the customer demand and the delivery front, were very encouraging, setting the stage to a favorable first quarter and full year 2021.

[Although with] remaining positive trends, I wanted to share some key highlights. Initially in the 3 months of the fourth quarter, our revenue grew sequentially with December being the seventh consecutive month of revenue growth. More importantly, the first 2 months of 2021 are trending in the right direction, leading us to be confident in our Q1 outlook and momentum toward expansion beyond pre-COVID levels in the near future. This is even without our recent acquisition. Furthermore, in Q4 2020, we witnessed [heightened] customer especially with the new programs and initiatives.

In terms of skill sets, we witnessed great demand for data science specialists and big data engineers. We expect to benefit from this strength as this has been one of our core TAM capabilities and expect to meet the demand going forward.

We have increased our focus on hiring, expanding our intern offering and training our engineers. During the fourth quarter, we had a total of over 200 engineers compared with quarter #3, excluding our recent acquisition of Daxx. Including Daxx, we added roughly 700 engineers. This increase comes after 2 quarters of sequential decline in the second and the third quarter of 2020.

In the fourth quarter, we continued to witness greater willingness from some of our larger customers to engage with our offshore locations. A combination of continued focus on cost efficiencies, great examples of (inaudible) and ability to staff and skill delivery teams quickly have been our factors to increase our capability and customer engagement. Although this trend was present in the third quarter, it picked up in the fourth quarter, especially at some of our technology customers. In some cases, we have taken the relationship to a new level with dedicated offshore centers.

During the quarter, we added 5 new logos, all of them contributing revenues in the fourth quarter. One was a global insurance, 2 in technology space, one was an international online marketplace platform and one was industrial client. Revenues for our top customers in the quarter was 56%. This was down from 64% of the revenues in the same quarter a year ago. Within the top 5 clients, 2 are technology, one was banking, one was CPG and one was retail. More importantly, in the fourth quarter, none of the top 3 customers were traditional brick-and-mortar department stores retailers, and they were significantly different from 2 -- when 2 of our top 3 customers were department store retailers in the first quarter of 2019.

During the quarter, we delivered some of the notable projects. For a large global technology company, our engineers integrated its SaaS products to a popular e-commerce platform. This integration is expected to generate revenue for the global technology company that gets exposed to a larger audience. The solution is expected for pilot release in the second quarter of 2021. At the same large technology customer, we implemented a front-end capability with fraud detection and protection system. This interface allows to label transactions and create ML models training accordingly to different risk profiles. The solution ultimately allows the client to use the underlining platform for a broader variety of use cases.

At a global CPG company, our engineers developed a tool that allows customers to search and discover product more efficiently. The tool will improve the overall customer experience and ease of use and also capture incremental revenues, better product placement and conversion rates.

As a global industrial technology company specializing in diagnostics, repair technology and mobility solutions, our engineers created automated platform that detects and identifies different anomalies at fuel stations. This allowed our customer solution to identify leaks, tests and dispense errors of the fuel at the stations. Unlike the test where this part was largely done manually, the new automated platform, not only save customer resources, but it's also more accurate. This solution has been deployed across fuel stations in the United States and Europe.

And finally, at a global food delivery company, we applied data analytics technology to migrate their existing inventory and procurement systems to a more efficient platform. We created a fully automated inventory and supplier management web application system, which allows the customer to manage all data and information in one place.

With that, let me turn the call over to Anil who will discuss Q4 results in more detail. Anil?

Thanks, Leonard. Good afternoon, everyone. Let me start by summarizing our fourth quarter 2020 results. Total revenue for the fourth quarter was $30.1 million that included roughly $1 million from our recent acquisition of Daxx. Excluding revenues from Daxx, revenues in the fourth quarter of $29.1 million increased by 11% on a sequential basis and declined by 9% on a year-over-year basis and exceeded our guidance range of $27.7 to $28.7 million.

Other than our technology medium and telecom, commonly referred to as technology and financial verticals, all segments grew over the third quarter with strong quarter-over-quarter growth coming from CPG, manufacturing, retail and the other segment. Similar to the last couple of quarters, our technology vertical was the largest vertical in the quarter.

Excluding the contribution from Daxx in the fourth quarter, our nonretail business now representing 73% of revenues in the fourth quarter, was up 6% on a sequential basis and 49% on a year-over-year basis.

During the fourth quarter, and excluding Daxx, our retail segment, representing 27% of our revenues, grew 26% on a sequential basis. The growth in the quarter was largely driven by one of our top e-commerce-friendly retail clients, and to a lesser extent, by other retail clients. In spite of a 26% quarter-over-quarter growth, retail was down 56% on a year-over-year basis. Within this segment, while we are seeing a steady comeback from some of our retail clients, we are not witnessing a return to pre-COVID levels of business from some of our historical top customers.

Our outlook and forecast for 2021 takes this factor into consideration, and our forward guidance is not predicated on the comeback from these retail clients.

Our technology vertical, excluding Daxx, represented 37% of our fourth quarter revenues and grew 21% on a year-over-year basis, but was down 16% on a sequential basis. The key reason for the sequential decline was greater shift towards off-shoring at some of our larger technology clients.

And although the head count increased during the quarter, it was not enough to offset the revenue decline. We expect the off-shoring trends at our technology customers to continue on over the next couple of quarters and expect continued head count increase.

Here are the details of the revenue mix of other segments. Excluding the contribution of roughly $1 million in revenue from Daxx, our CPG and manufacturing represented 21% of our revenue in the fourth quarter and grew 84% on a sequential basis and 252% on a year-over-year basis. As Leonard pointed out in his opening comments, the strength came from our engagements with a global CPG brand that is in the midst of ramping key digital transformation programs.

Going forward, incremental program wins, combined with ramping of existing programs at this client, make us bullish on this segment in 2021.

Financial represented 10% of revenue and declined 5% and 20% on a sequential and year-over-year basis, respectively.

And finally, the other segment represented 5% of our fourth quarter revenue and was up 41% on a sequential basis, largely from faster-than-expected ramps at some of our recent client wins.

We exited the fourth quarter with a total head count of 1,894. Excluding the head count contribution from Daxx, we exited the fourth quarter with 1, 402, employees, up from 1,204 employees in the third quarter of 2020 and down from 1,430 in the fourth quarter of 2019. The 16% sequential increase in head count was largely a reflection of the improving demand environment.

Excluding the head count from Daxx at the end of the fourth quarter of 2020, our total U.S. head count was 259 or 18% of the company's total head count, while our non-U.S. head count, which we sometimes refer to as offshore located in Central and Eastern Europe locations, was 1,143 or 82%.

Excluding the contribution from Daxx in the fourth quarter, revenues from our top 5 and top 10 customers were 56% and 76%, respectively. During the same period a year ago, our top 5 and top 10 customer concentrations were 67% and 87%, respectively.

We exited the quarter with 43 paying customers, up from 41 in the third quarter of 2020 and up from 38 customers in the fourth quarter of 2019. As a reminder, we only count the revenue-generating customers in the quarter and do not include customers who are inactive during the quarter.

Relative to the third quarter, we added 5 new logos, one of these were in the insurance segment, 2 in the technology segment, 1 in the CPG and 1 in the retail segment.

Moving to the income statement, including our recent acquisition, our GAAP gross margin during the quarter was 40.7% or $12.3 million, down from 42.4% or $11.2 million in the 3 months ended September 2020 quarter and up from 39.6% or $12.7 million in the 3 months ended December 2019. On a sequential basis, the decline in gross margin as a percentage was a combination of factors that included headwinds from fewer working days, increased head count costs from hiring and our recent acquisition of Daxx, which has operated at lower margins.

On a non-GAAP basis, our gross margin was 41% or $12.4 million, down from 42.6% or $11.2 million in the third quarter of 2020 and 41% or $13.1 million in the same year ago period. The sequential decline in non-GAAP gross margin as a percentage was driven by the same factors highlighted earlier.

Adjusted EBITDA during the quarter that excluded stock-based compensation, transaction- and restructuring-related costs was 13.7% or $4.1 million, down from 16% or $4.2 million in the 3 months ended September quarter and down from 22% or $6.7 million in the year ago quarter. The sequential drop in EBITDA as a percentage of revenue was due to lower gross margins, combined with higher operating expenses as compensation levels were fully reinstated. On a year-over-year basis, the decline was mainly due to lower revenues, combined with increasing operating costs, such as public company costs.

Our GAAP net loss in the fourth quarter totaled $4.7 million or a loss of $0.10 per diluted share based on 49.7 million shares compared to a GAAP net income of $2.1 million or $0.09 per diluted share based on 22.7 million shares in the fourth quarter a year ago.

On a non-GAAP basis, in the fourth quarter, our net income was $2.2 million or $0.04 per diluted share based on 54.9 million shares compared to $3.7 million or $0.16 per diluted share based on 22.7 million shares in the year ago quarter.

The decline in the GAAP and non-GAAP income was due to a combination of reasons highlighted earlier, both on the gross margin and the operating expenses front.

Our cash, cash equivalent and short-term investments totaled $113 million, down from $126.5 million in the third quarter 2020 and up from $42 million as of December 31, 2019. The sequential decline in the current quarter was largely due to the acquisition of Daxx, which was paid in cash. The significant increase from the December 31, 2019, level -- balance was primarily due to the successful merger between ChaSerg and Grid Dynamics on March 5, 2020.

Now I'll provide you some guidance for the first quarter and for the full year. Coming to the first quarter guidance, we expect revenues to be in the range of $35 million to $36.5 million. This includes $5.5 million in revenue contributions from our recent acquisition of Daxx. We expect our adjusted EBITDA in the first quarter to be in the range of $2.4 million to $3.4 million.

For the full year 2021, we expect our revenues to be at least $156 million. This includes a contribution of $22 million from Daxx.

For Q1 2021, we expect our basic share count to be in the 52 million to 53 million range and our diluted share count to be in the 58 million to 60 million range.

For the remainder of 2021, here are some modeling parameters for the diluted share count. As you know, we went public on March 5, 2020, as part of this back process. As part of the deal, there were $11.35 million warrants outstanding. On February 19, 2021, we issued an 8-K where we exchanged $6.4 million or roughly 56% of the outstanding warrants for common stock. This exchange resulted in roughly 2.1 million common shares.

Depending on how the remainder of the $5 million warrants are retired, there are different scenarios of dilution in 2021. Based on our estimates, we believe it may vary approximately in the range of 2 million to 5 million shares.

That concludes my prepared remarks. Operator, we are ready to take questions.

(Operator Instructions) Our first question comes from the line of Mayank Tandon with Needham & Company.

Congrats, Leonard and Anil, strong close to the 2020. I wanted to just start with the demand. Curious in terms of the pipeline and the pace of deal conversions relative to, say, maybe a few months ago. As you've gone through the budgeting cycle with clients, what are you hearing now from customers in terms of their visibility and propensity to spend on digital projects?

Thanks. This is Leonard. Thank you for question. I would say there are 2 parts of the answer. The first part is we definitely see the uptick and uptick in a number of verticals. So we do have engaged ourselves in a broader number of opportunities. On other hand, I would say, we'll get a much better visibility on the conversion as the first quarter transitions to Q2. As you know, Jan and February, it's a lot of conversational time, there's a lot of projections. Like I said, we're excited about setting the funnel, but we'll have a much better visibility as we move to Q2.

Got it. Then I just wanted to switch over to -- obviously, revenue looks really good. On the EBITDA side, I know you mentioned a few factors. Obviously, the Daxx acquisition does have some dilution in terms of profitability. How should we think about EBITDA trajectory beyond the second quarter -- sorry, the first quarter into 2Q?

And then really in terms of framing the EBITDA outlook for the full year, any guidance around that?

Sure. Thanks for your question, Mayank. So let's just kind of break the whole kind of EBITDA cushion to a couple of parts. So when you look at our guidance for the first quarter, it's around 7% to 9% or 8% at the midpoint, right?

So a couple of assumptions that we had there. As you know, Q1 tends to be -- a seasonal factor comes in. We typically start off at a lower level and work our way up. So in a nutshell, the answer to your question is we're going to start off here, and as the year progresses, we're going to see expansion.

So also in Q1, just to give you a little perspective, we have fewer working days. The holiday season in the Central and Eastern Europe are in early January. Also, there's been a little bit more robust hiring going on because the demand environment is shaping up well. And obviously, that all works in.

Finally, we've got our acquisition of Daxx, which has lower gross margins and EBITDA margins, and we'll have a full quarter. Also, as we've said over the past couple of quarters, we've got some strategic plans. We're going to be building up our sales force. We're building up our training internship programs. So those are kind of the investments from the growth point of view. But as we come out of Q1, you should start seeing expansion as we go into Q2 onwards.

Great. And then just, finally, in terms of revenue, again, a very healthy outlook on an organic basis as well. How should we think about the breakdown between the various levers that you have in terms of pricing, utilization and then head count growth?

And given the recent hiring trends, it would suggest that hiring is probably back to some level of normal levels for you, but just would love to get a breakdown of those 3 drivers of revenue for 2021.

Sure. Well, anytime you look forward, there are some ambiguities. And remember, a year ago, we were very excited on March 5 and then March 17 happened. So let me be a little bit more subtle to restrain my excitement. But I would say that our hiring right now, it's above traditional level. There's a lot of demand, especially if you think about it, our 3 key areas of our capabilities and growth, one is related to the cloud migration, digital transformation area. The second one is the -- related to the customer data relationship and data science and machine learning. And the third one is related to the areas of customer experience, which is the end user experience comes with great capabilities and artificial intelligence. So all these areas require not just robust pipeline, but a significant investment and growth in the technology capability of our workforce. So I would say we are growing fast.

In terms of the utilization levels, I think we're back to normal again. And if you look at where we were last year, we were a little bit behind some of the areas where we had to make an investment so I don't see a problem there.

And what was the third area, I'm sorry. You said -- you asked about head count utilization and?

Leonard, just your comments around pricing, what are you seeing on the pricing front in terms of trends?

Thank you. So well, a lot of customers have different approach to what pricing is. If you look at the areas where we excel the most, there's a huge demand for the capabilities. We offer the solutions, we offer the accelerators, we offer our pods, as a team, excels from just regular engagement. So I would say that we have -- we see a healthy uptick in our pricing relationships as well.

Mayank, I just wanted to give you a little bit of perspective for everyone on the full year. So if you look at our core Grid growth, that's at least 21.5% at [$134 million] , if you do the math, right? We're starting off the year, and obviously, we'll have incremental updates in the course of the quarter. We did a bottoms-up analysis. And when we actually looked at our full year, the commonly 85-10-5 Rule that we usually talk about, the year is going to be shaping out more or less like that in the sense that, as you know, our -- most of our revenues come from customers who have been there for some time.

Just to give you a little bit more color there, we do expect technology to do well. We expect it to be the largest. We're very bullish on CPG and some pickup on retail. But we'll see how retail plays out for the full year. But yes, I mean, the overall environment looks good and we'll obviously give you updates.

Our next question comes from the line of Joseph Vafi with Canaccord.

Great results. Nice outlook. Just wondering if we could talk on the business development front a little bit. Any progress or anything notable in Q4 relative to sales force hiring or development there?

And then maybe some commentary on, I think you said you had 5 new logo wins. Maybe a little color on how those deals came about? And then I have a follow-up.

Sure. Sure. Well, we talked about it last quarter. Since that, we added more capabilities on the sales side in the various regions, particularly in the South and Texas. We're adding more capabilities in the Midwest, in the East Coast. So certainly, the investment is there and started paying off.

In terms of distribution of the customer base, I already said that they came from basically a number of different verticals. And again, I would not totally say that we are absolutely vertical-agnostic. But if you kind of summarize the areas of our expertise, anybody right now who moves into the broader digital world drives about the same level of demand. So our skills are universal.

And we also added to our business development process some of the additional [requests] with respect to the competencies in specific specialization areas. So we're kind of working as a cross-functional business development approach, which combines the business competency and technical competency in particular areas and industries combined with the total presence in a relationship (inaudible) development.

And finally, we significantly see an uptick from our marketing campaign. We see that our positioning from (inaudible) we resumed our direct dialogue with the client. So it's a very growth initiative-based and we see the progress pretty much in each area.

Okay. And then on the Daxx front, if I recall, I think they have a more European customer base. I was wondering if now Daxx has been part of the company for a little while, what you see as opportunities in leveraging them in terms of joint sales capabilities or how you see the growth in the Daxx business in 2021 relative to how they might have been as a stand-alone?

And then just one more on Daxx. I know the margins are a little lower, if there's a strategy for lifting that this year and moving forward.

Well, Joe, it's a dissertation. Well, let me do the highlights. First and foremost, you're absolutely correct. The focus in Europe has been a very strong EBITDA point for Grid Dynamics to pursue the acquisition. If you look at the ownership -- previous ownership structure of the company, there are several individuals from Netherlands so the Netherlands position has been historically strong and they have sales presence in the country. So that helps, followed by, I think, Germany would be another good example where they build good reputation.

The way how we cooperate, it's number of points. First and foremost, we specialize in a system approach, not just the implementation part, but also the project management, the technology leadership, the architecture work. So we are able to complement and expand their services that comes beyond just viewing capabilities.

The touch points are different. They focus on technology start-up, they focus on broader based customers. They have great SEO engine. So they definitely help us with the landing part. And we are starting to work to do the expansion. We have a couple of good examples.

On the other hand, cooperation backwards works well, too, because if you look at some of the opportunities with our clients, we need less touch and more qualified technical engineering that Daxx capabilities and very good hiring machine works as well.

Those are kind of highlights in terms of the cooperation near term. There are more plans, but it will be early to say. We've been less than 3 months together. So far, it's been very positive.

If you think about being under, call it, limitations, we all are having the engineering team in Ukraine, they've been very beneficial. They have a management team in Ukraine. So I would say the integration is going well.

And the final point is on their U.S. customers, definitely we're helping to take the lead as well.

(Operator Instructions) Our next question comes from the line of Bryan Bergin with Cowen.

I wanted to follow up on head count. So certainly a big increase on an organic basis that you had in the quarter. Can you talk about how you thought the operating model performed when you were onboarding that many? Anything to call out there? Were you comfortable with that rate of expansion? And what locations specifically are you increasing that offshore presence in?

Bryan, you always smartly position questions. Okay. Well, we can share some of the part of our kitchen, but Grid Dynamics has its own very appropriate methods of bringing up to speed capabilities of people. And one of the very key element is real practices. So when we have technology practices in the offshore locations, it's easier to absorb and integrate people. As we mature, they have basically -- the training information are regularly available for them to get up to speed much quicker. So if you think about onboarding people, the process is faster in general.

The other part is we start getting a good workforce influx from our graduated people from the internship program. Again, this program is gaining momentum. So then people who have been with us on the training for some months and they get into the workforce faster. Some of the additional attributes comes from, obviously, Daxx and Daxx helping us in some areas.

If you look at geography, it's pretty much across all the Eastern and Central European countries. Part of it is because some of our large clients in the time of the existing work becomes more comfortable with Grid to extend our part, our technical teams globally. So we are able to scale the momentum by extending more of the international teams rather than concentrating as we've done in the past at the customer location.

So in general, it works well. I think that we will be preparing for that. And just -- the results of this year will say. I think the rate of growth will only accelerate, mark my word.

Okay. That's good. And then on -- just one on margin here. So the composition of your margin assumptions, taking Daxx into account, how should we be thinking about gross margin levels as you get a full quarter here in 1Q? And then as you walk through 2021?

And then also further down, how should we be thinking about the pace of G&A operating leverage as you scale?

Yes. Thanks for the question, Bryan. So look, I mean, as we get a full quarter of that, the margin impact is going to be there. If you look at the differential between them and us well, both the gross margins and operating margins or EBITDA margins are lower than Grid. On the gross margin front, the differential is more than the EBITDA margins, largely because their business model is slightly designed differently.

So as we fall into Q1, we'll have a full quarter of impact. And obviously, you have a seasonal impact from our core business so that's why you're going to see a little bit more kind of near-term movement on the gross margin front.

But as we go into the second quarter onwards, there's obviously leverage in our model and that will offset. And then over time, as we understand some of the more nuances and subtleties of Daxx, there's going to be some leverage there.

But as we've also seen, there's just so many moving parts right now because we're having the off-shoring trend, which should be a tailwind, right, and that's going to be there, plus then we've got all the investments that Leonard talked about for our growth.

So when I look at the gross margin, yes, we're going to see a downside in Q1. It's going to be lower than our Q4, but then from there we're going to pick it up. And the leverage in the model over time, obviously, is going to come from, as you know, we have several million dollars of public company costs, which is there. Daxx is primarily located in the Ukraine area. So there are some levers there that we could be exploring that will actually play out over the course of the year.

Okay. One last clarification. Just on the tech clients you mentioned and the sequential decline from 3Q to 4Q, that was entirely due to the shift to more offshore? So just the per capita impact, no other changes in relationships?

So from a relationship, the relationships are as robust, Bryan. As a matter of fact, they're going deeper. And we had -- if you look at the year-end, of course, for some of these larger tech clients, they're in furloughs, too, right? They're in shutdowns. There is the off-shoring component, which kind of a redesignation of the benches, so to speak. There is a little bit of a movement there. But as we go into our Q1 onwards, we're going to see a pickup. So we're very bullish of the sector and the relationships.

Leonard, do you want to add anything to that?

Yes. There's one other subtle factor, which you need to take into consideration. If you guys recall, going through some of the challenges of 2020, we made some of the aggressive temporary cost reduction by reducing the compensations, foregoing bonuses and other stuff. And in Q4, we came back to the full compensation model, right?

So there's some transition related to that as well.

So I think it's not unusual when you see a little bit of a Q4 kind of situation. So as you know, it's very late of the year, early next year where all these combined. And specific Q4, again, we have grown fast, but there was cost added because we restated our full compensation.

Our next question comes from the line of Maggie Nolan with William Blair.

Great to see the positive trends. I'm wondering are you expecting to see a change in the mix going forward between onshore versus offshore delivery, given that you've just kind of moved work from that tech client to offshore?

And then how willing are your clients to embrace offshore delivery? And does that typically change over the life of the relationship?

Thank you, Maggie. We don't have a crystal ball to see what the future is going to do for us. We've been trying to convince a number of customers for a long time that their own offshore combination could be more favorable from the performance and efficiency perspective. Some they were a little bit resistant to that. They tried this year, it works. What is going to happen when a country will come back to the normal operating mode and people will come back to the offices, I would say there would be some kind of uptick back to try to bring more people in either their offices or same time zone. So there may be some return to the previous model, but I don't think it's going to completely move back to the very concerted onshore approach. I think we proved ourselves to be very efficient, very supportive of customer trends, meet their demand, respond to their other areas of operation as well as client management, data management, et cetera.

So I actually like the balance. We still need to have onshore presence. I've always been saying that having some good quality top leadership on engineer architecture, important that management is very helpful to have communication in a most efficient way. So we'll continue to invest in onshore hire, we don't stop. It may not be at the customer offices, but still in the United States or near-shoring. However, they'd definitely welcome that. For now, the trend is that we grow fast in our offshore locations.

And then after what period of time are your sales professionals really truly productive?

And with that sales force ramping and you're starting to see those investments play out, should we expect to see a meaningfully higher level of new logo additions in 2021?

Well, this is -- to answer myself, I really don't like answering. It depends, right? We've put a lot of effort to do the best we could bring onboard. So the fruits of their relationships still require some engagement time because of the Grid Dynamics model. It's high quality. It's specialized services. It's especially what we do.

So I would say, 6 to 9 months, it's the kind of range where we still see some good traction. Again, remember, we are not picking some very low, small engagement. We're looking for the top technology companies, the enterprises, global businesses. So I would say that's an average. Sometimes, we're likely to get some of the customers, sometimes it takes a little bit longer. But again, it's -- we invest into the long-term relationship. So far we've been satisfied with what we invested.

Our next question comes from the line of Tim Savageaux with Northland Capital Markets.

I have some questions on the acquisition, on the Daxx acquisition, and really how indicative we should consider that as in terms of what you might be interested in doing heading forward? Or is this kind of more of a one-off opportunity? And I say that just because of some of the metrics here. I mean you look to have paid something around the revenue level that you're guiding for, for next year. Assuming that's the case, you're obviously trading at several times that. Same thing with regard to enterprise value per employee in terms of acquisitions, you're maybe paying 1/10th of what you're trading. On the other hand, revenue per employee has seemed to be lower than historically where you'd like to be.

So with all those in mind, are there opportunities to bring those revenue metrics up in line with where Grid is historically? And from your perspective, as you look at it now, are there a bunch of other Daxx-es out there?

Well, thank you, Tim. I'm thinking about the best way to describe the situation. As you might have known or not, we looked at Eastern Europe and Central Europe for the acquisitions for quite a long time. This is not the first time we had a conversation. We have been having conversation with Daxx. We met some time ago earlier.

We look at very different set of metrics for a number of acquisitions. We cast our net wide. The areas where we are looking for usually include European market -- European-friendly location for engineering. But there also are some specializations, some software packages, some features on the new off-shoring, there are some features related to the strategic verticals.

I think it's like -- it's very difficult to guess the next step if you're just trying to make a conclusion based on this one acquisition. We obviously continue to be aggressive as our competitors. This is a great market to find some good companies. I would say that there no such thing is many Daxx, and I think this acquisition has its own flavor. But when you see us bringing the next one and after that, there will be different profiles. Like I said, our strategy was mapped a few years ago. Now we're trying to get our balance sheet in the most efficient way to extend the company and grow. And it's very, very important to diversify type of investments, which you will see.

The one important point I just want to make also, the revenue metrics of dollar per employee at Daxx is a little bit harder to gauge because they are pretty much -- all of their work is done in Eastern Europe. So when Grid Dynamics was doing work and it did work with combination in the United States and Eastern and Central Europe, they're doing it in Eastern Europe. Also, their business model is a little bit different.

So it's a great acquisition. Very excited about it. And we got great people. And at the time of COVID, we've got very friendly relationship between those integration groups, but you will see some of the different phenomena going forward.

Great. And if I could follow up quickly and I think you may have alluded to this earlier, I'm not sure I quite got it, though. But as you add the acquisition revenue in, how does that impact your mix across verticals? It seemed like technology was a big focus there, but I just want to make sure I got that right.

Yes. So Tim, if you look at Daxx's exposure, just to give you kind of a sense, roughly 60% of their business is in the TMT space. They tend to be more kind of areas like high-tech software, cybersecurity. Logistics and retail is about 12%, give or take. Financial service is about 10%. And they've got other areas such as health care, life cycle -- life sciences, energy and other things. So they're more diversified, but the -- most of their revenues come in their TMT.

So coming back to your question, as we look into 2021 and beyond, that's why we feel incrementally confident that our technology vertical will continue to be the largest in 2020 months.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Leonard Livschitz, CEO. Thank you for closing remarks.

Thank you, everybody, for joining us on the call today. 2020 will be remembered as a dramatic year for all us in many ways and that goes even for our company. We're [infected], we persevered and recovered. And it was a year where the company was tested under unique situations. And as our results over the last 4 quarters have shown, we are successful in managing. While the pandemic is not yet over, as we enter 2021, there are many reasons to feel positive, to feel excited. With the pandemic slowly receding, as many people are get vaccinated and the global economy recovers, businesses get back to normal level of operations, we feel confident in Grid Dynamics' prospects in 2021.

We look forward to sharing with you the business update in May during our next quarterly earnings call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.