Executive Summary / Key Takeaways

• AI-First Strategy Driving Outperformance: Grid Dynamics is rapidly transforming into an AI-first digital engineering powerhouse, with its AI and Data practice growing nearly three times faster than its overall organic business, contributing 23% of organic growth in the first half of 2025. This strategic pivot is enabling the company to defy broader industry caution and secure innovation-led projects.
• Record Financial Performance & Robust Outlook: The company achieved record quarterly revenues of $101.1 million in Q2 2025, marking its third consecutive quarter above $100 million. Management maintains its full-year 2025 revenue outlook of $415 million to $435 million, signaling confidence in a seasonally stronger second half driven by a robust pipeline of large AI and data projects.
• Differentiated Technology & Operational Excellence: Grid Dynamics leverages its proprietary AI-centric GAIN engagement model and deep expertise in ML/AI (since 2017) to deliver quantifiable benefits like improved conversion rates (over 5% for AI search), accelerated time-to-market (90% reduction in integration cycles), and enhanced operational efficiency for clients.
• Strategic Global Expansion & Partnerships: Acquisitions like JUXT and Mobile Computing have bolstered its "Follow-the-Sun" delivery model and vertical expertise, particularly in Finance, while strategic partnerships with hyperscalers are proving critical channels for new AI opportunities, influencing nearly 18% of total revenue in Q2 2025.
• Competitive Edge in Niche, High-Value Segments: Despite its smaller scale compared to industry giants, Grid Dynamics' agility, specialized technical talent, and focus on complex, high-impact AI implementations allow it to outpace peers in growth and capture strategic market share, even amidst ongoing client rationalization efforts.

Setting the Scene: The AI-First Imperative

Grid Dynamics Holdings, Inc. (NASDAQ:GDYN) stands at the forefront of enterprise digital transformation, evolving from its 2006 founding into a specialized technology consulting and engineering firm. The company's journey has been marked by a consistent focus on advanced analytics and machine learning, notably publishing its first book on AI in 2017. This early embrace of cutting-edge technology laid the groundwork for its current strategic pivot: an "AI-first" approach. This strategy permeates every facet of the business, from go-to-market initiatives and service offerings to delivery and talent management, positioning Grid Dynamics to capitalize on the profound impact AI is having on enterprise operations.

The industry landscape is undergoing a significant shift. While traditional digital transformation spending faces increased scrutiny and caution from clients, innovation-centric initiatives, particularly those involving AI, are being prioritized. Enterprises are actively seeking "AI-native partners" capable of driving and leading large-scale AI adoption, often finding their internal functional structures ill-equipped for the cross-functional decision-making required for AI implementations. This dynamic plays directly into Grid Dynamics' strengths, as the company aims to empower organizations to accelerate AI adoption at an enterprise scale.

Grid Dynamics' overarching strategy, dubbed "GigaCube," is built on five pillars: leveraging data and AI for productivity, expanding its portfolio of accelerators, increasing industry diversification, strengthening its "Follow-the-Sun" global delivery model, and deepening hyperscaler partnerships. This framework has enabled the company to grow its annual revenue from approximately $100 million when it went public in early 2020 to achieving $100 million in quarterly revenue by Q4 2024—a milestone it has now surpassed for three consecutive quarters. This rapid ascent underscores its ability to translate strategic vision into tangible financial results, even as it navigates complex macroeconomic and geopolitical environments.

Technological Moats: Engineering the Future

Grid Dynamics' competitive advantage is deeply rooted in its differentiated technology and engineering-led approach. With eight years of experience in ML and AI development, the company possesses "deeper expertise and proven methodologies for implementing AI at enterprise scale" compared to many peers. This foundation allows Grid Dynamics to embed AI capabilities from the ground up, rather than as an afterthought, across its operations and service delivery.

A cornerstone of this technological moat is the proprietary Grid Dynamics AI-Native (GAIN) engagement model, introduced in June 2025. This AI-centric framework is engineered to deliver "the next level of agility, quality, and accelerated time-to-market for Fortune 1000 enterprises." GAIN enables Grid Dynamics to expand into "previously inaccessible market segments," such as labor-intensive legacy modernization projects that were once "economically unfeasible." The model has already "dramatically improved our presales and client acquisition," allowing the creation of "high-quality proof of concepts and prototypes in hours, not weeks, significantly boosting conversion rates and shortening sales cycles." This translates directly into more competitive fixed-price engagements and is expected to "substantially increase revenue per person."

The company's AI and Data practice exemplifies this technological prowess, growing "almost 3x faster than our overall organic business" and contributing "23% of the company's overall organic growth" in the first half of 2025. Specific, quantifiable benefits from Grid Dynamics' AI solutions include:

• AI-based search solutions: These are a key entry point for new clients, "routinely yielding conversion improvements of over 5%." This success often leads to "follow-on engagement that average 2, 3x the initial project value." For a luxury retail client, implementing Google (GOOGL) Vertex AI Search led to a 9% increase in conversion rates, a 21% rise in click-through rates, 3% more orders, and a 9% boost in revenue per visit.
• Agentic AI platforms: For a major financial services company, an Agentic AI system is "expected to free up about 20% of seller capacity," accelerating time to revenue by automating intelligent processes.
• AI-enabled development tools: Optimizing an ML compiler for a multinational technology company "accelerated the client's product roadmap, reducing time to market from two years to one." Similarly, a data pipeline management solution for a multi-chain restaurant "reduced the development life cycle for new pipelines or migrations, cutting it from days to hours."
• Physical AI: Grid Dynamics is actively transforming the industrial robotics landscape, collaborating with partners like Wandelbots to enhance offerings with advanced AI components for inspection, welding, and precision manufacturing. This represents a "new and promising revenue stream." The company also released an Intralogistics Optimization Starter Kit for NVIDIA (NVDA) Omniverse to improve warehouse efficiency and reduce labor costs.

Beyond client-facing applications, Grid Dynamics leverages its in-house Agentic AI platform to automate internal operations, including knowledge management, talent sourcing, and HR functions, yielding internal productivity gains. These technological differentiators are not merely buzzwords; they are the core drivers of Grid Dynamics' competitive moat, enabling higher average selling prices, lower delivery costs, and ultimately, better margins and sustained market leadership.

Strategic Expansion: Global Reach and Vertical Depth

Grid Dynamics' growth trajectory is also underpinned by its strategic global expansion and deepening vertical expertise. The company's "Follow-the-Sun" delivery model is a guiding principle, enabling uninterrupted, around-the-clock client service. This model has seen its geographic footprint expand to 19 countries, with India emerging as a top two country by headcount in Q2 2025 and a hub for multi-agent, multi-modal platform engineering. India's growth is driven by its ability to attract talent and upskill engineers in AI-assisted accelerated delivery, complementing the company's operations in Europe and the Americas.

Strategic acquisitions in 2024 further solidified this global reach and diversified expertise:

• JUXT (September 2024): This UK-based acquisition significantly elevated Grid Dynamics' expertise in banking and financial services, particularly in risk platforms, structured products, and financial reporting. JUXT's capabilities are highly complementary, strengthening Grid Dynamics' go-to-market positioning in the Finance vertical and attracting interest from global U.S.-based banks.
• Mobile Computing (October 2024): This Argentina-based acquisition expanded Grid Dynamics' "Follow-the-Sun" capabilities in the Americas, enhancing talent acquisition efforts and supporting U.S. enterprise accounts. Management expects to "significantly scale operations in 2025" in Argentina.

These acquisitions are performing well, generating "immediate, scalable synergies." For instance, acquisitions contributed $12.8 million to Q2 2025 revenues and $25.4 million for the first six months of 2025.

Grid Dynamics is also actively managing its customer portfolio. The company has undertaken "continued efforts to rationalize our portfolio of nonstrategic customers," leading to a decline in total customer count (194 in Q2 2025, down from 220 a year ago). This strategic decision reflects a focus on enterprise customers with higher long-term value and potential for AI-driven engagements. As CEO Leonard Livschitz noted, "AI implementation in various forms will remain to be the key business... Some of the clients will grow exponentially because it’s a meeting of the mind. Some of the clients either stagnate or leave -- fade as we go forward."

Partnerships, particularly with hyperscalers like Google, are another critical channel for growth. Partnership-influenced revenues reached 17.9% of total revenue in Q2 2025, and management anticipates this contribution to accelerate. These collaborations are crucial for seizing opportunities in AI and Generative AI, with Grid Dynamics actively deploying its AI/GenAI accelerators across hyperscaler platforms and marketplaces.

Financial Performance: Translating Innovation into Results

Grid Dynamics' financial performance in Q2 2025 reflects the early success of its AI-first strategy and strategic expansions. The company reported record revenues of $101.1 million, slightly above the midpoint of its guidance and representing a 21.7% year-over-year increase. Organic revenue growth, excluding acquisitions, stood at a solid 6.3% year-over-year. For the first six months of 2025, total revenues reached $201.5 million, up 23.7% year-over-year.

Profitability metrics show a mixed but improving picture. GAAP gross profit for Q2 2025 was $34.5 million, translating to a 34.1% margin, a 1.5% decrease from the prior year quarter. This sequential decline was attributed to FX headwinds, increased engineering headcount for future growth, and the timing of costs from fixed-price contracts. However, on a year-to-date basis, gross margin showed positive trends, reaching 35.5% for the first half of 2025, up from 35.1% in the prior year period.

Operating expenses reflect strategic investments. Engineering, Research, and Development expenses saw significant growth, increasing 63.4% year-over-year to $6.7 million in Q2 2025 and 55.7% year-to-date to $13.2 million. This surge is due to "ongoing investments in customer delivery operations and internally developed software aimed at enhancing our long-term scalability and competitiveness." Despite absolute increases, Sales and Marketing and General and Administrative expenses declined as a percentage of revenues, indicating improving operational leverage.

The company posted a GAAP net income of $5.3 million ($0.06 per diluted share) in Q2 2025, a substantial improvement from a net loss in the prior-year quarter. For the first six months of 2025, net income was $8.2 million ($0.09 per diluted share). Non-GAAP EBITDA for Q2 2025 was $12.7 million, or 12.6% of revenues. While this was a sequential decline from Q1 2025 (14.5%), it was up from Q2 2024 (14.1%), primarily due to higher revenues partially offset by increased operating expenses and FX fluctuations.

Liquidity remains robust, with cash and cash equivalents totaling $336.8 million as of June 30, 2025. The company generated $23.7 million in operating cash flow for the first six months of 2025, an increase of $9.8 million year-over-year, driven by working capital management. Grid Dynamics has no outstanding debt under its revolving credit facility, which was recently extended to March 15, 2028, and management believes its current cash and operating cash flows are sufficient to fund operations for the next twelve months.

Competitive Dynamics: Outperforming in a Shifting Landscape

Grid Dynamics operates in a highly competitive IT services and digital transformation market, vying with larger, more diversified players like Accenture (ACN), Cognizant (CTSH), Infosys (INFY), and EPAM Systems (EPAM). While these giants command significantly larger market shares (ACN at 10-15%, CTSH at 5-8%, INFY at 4-6%, EPAM at 2-4%), Grid Dynamics distinguishes itself through a focused strategy and specialized technological capabilities.

Grid Dynamics' core competitive advantages, or moats, include:

• Niche Technical Specialization: Unlike broader IT service providers, Grid Dynamics focuses on enterprise-scale digital platforms, with deep expertise in AI, data analytics, and complex software engineering. This allows for qualitatively superior efficiency in areas like search automation and rapid prototyping, where it can deliver solutions "in hours, not weeks."
• Agility and Innovation Speed: Grid Dynamics' higher R&D investment as a percentage of revenue (around 5-7% compared to ACN's 2-4%) fuels faster innovation. This agility enables the company to quickly adapt to emerging technologies like Agentic AI and physical AI, often leading to faster deployment cycles in enterprise platforms.
• Senior Talent Focus: The company's workforce pyramid is "more weighted towards senior more experienced engineers," which aligns well with the industry's shift towards AI-centric roles. This allows Grid Dynamics to provide high-value, complex solutions that require deep expertise, differentiating it from competitors that may rely more on a junior-heavy, cost-arbitrage model.
• Client-Centric and Collaborative Model: Grid Dynamics emphasizes a "whatever it takes dedication to client success" and a "products over projects" ethos. This collaborative approach fosters deeper client relationships and higher loyalty, which can lead to sustained engagements and expansion opportunities within existing accounts.

Despite these strengths, Grid Dynamics faces competitive vulnerabilities, primarily its smaller scale. This can result in "materially higher operating costs" and lower operating margins (1.4% TTM) compared to ACN (15%), CTSH (15%), INFY (21%), and EPAM (12%). This financial disparity could impact Grid Dynamics' ability to compete purely on price against cost leaders like Infosys and Cognizant. Furthermore, while the company is actively diversifying its customer base, its relatively high customer concentration (one customer accounted for over 10% of Q2 2025 revenue) poses a risk of revenue volatility if a major client reduces spending.

However, Grid Dynamics' growth trajectory is notable. Its organic revenue growth (6.3% YoY in Q2 2025, 10.1% in Q1 2025) outpaces many larger peers, reflecting its agility in capturing emerging market opportunities. The company's strategy to rationalize non-strategic customers and focus on enterprise clients with long-term AI potential is a direct response to competitive pressures and aims to improve its overall value proposition. By winning "many more large RFPs" and securing "big deals" with longer tenures, Grid Dynamics is strategically positioning itself to gain market share in high-value segments, leveraging its technological edge to offset its scale disadvantage.

Outlook and Risks: Charting a Growth Trajectory

Grid Dynamics' management is optimistic about its future, maintaining its full-year 2025 revenue outlook of $415 million to $435 million. This represents a robust year-over-year growth of 18.4% to 24.1% (21.2% at the midpoint). This outlook is particularly compelling given that it accounts for an "estimated low double-digit annual percentage reduced revenue from cautionary spending on traditional business" due to macroeconomic uncertainties. The company's confidence stems from its ability to continue "winning innovation led projects and grow overall revenue."

For Q3 2025, Grid Dynamics expects revenues to be in the range of $103 million to $105 million, with recent acquisitions contributing approximately 12% of the total. Non-GAAP EBITDA is projected to be between $12 million and $13 million. Management anticipates the second half of 2025 to be "seasonally stronger" than the first, driven by the ramp-up of recently signed deals and a "very robust" pipeline, especially for data and AI platforms, which are growing "3x more than regular business." The low end of the full-year guidance is supported by expected working time benefits, high single-digit organic growth, and continued acquisition momentum.

Despite this positive outlook, investors should be mindful of several key risks:

• Macroeconomic Headwinds: Persistent global economic uncertainties could lead to further caution in client spending, particularly in traditional digital transformation areas.
• Geopolitical Instability: The ongoing military action in Ukraine and broader geopolitical tensions in regions like Armenia and Serbia could disrupt operations, impact service delivery, and affect financial transactions.
• Talent Competition: Significant competition for skilled IT professionals in Grid Dynamics' operating regions may increase costs and impact gross profit margins, despite the company's strong retention efforts and talent development programs.
• Customer Concentration: While efforts are underway to diversify, a high reliance on a few large customers could lead to revenue volatility if any of these relationships face challenges.
• Foreign Currency Volatility: Fluctuations in currencies like the Polish zloty and Mexican peso against the U.S. dollar can impact profit margins, as a significant portion of costs are denominated in non-USD currencies. The company plans to adopt new hedging strategies but is not currently hedged.

Conclusion

Grid Dynamics is charting an ambitious course, transforming itself into a specialized AI-first digital engineering partner for Fortune 1000 enterprises. Its strategic pivot towards innovation-led projects, underpinned by proprietary technologies like the GAIN model and deep expertise in AI and data, is enabling the company to outperform many of its peers in growth, even as the broader IT services market faces caution. The company's global "Follow-the-Sun" delivery model, bolstered by strategic acquisitions and expanding hyperscaler partnerships, provides a robust operational framework to scale its high-value offerings.

While Grid Dynamics' smaller scale and current profitability metrics present vulnerabilities compared to industry giants, its agility, specialized talent, and focus on delivering measurable business outcomes through AI are powerful differentiators. The maintained full-year 2025 guidance, despite macroeconomic headwinds, underscores management's confidence in its strategic direction and the robust pipeline of AI-driven opportunities. For investors, Grid Dynamics represents a compelling opportunity to gain exposure to a company uniquely positioned to capture significant value from the accelerating enterprise adoption of artificial intelligence, translating its technological leadership into sustained financial performance and market expansion.