Nagarro SE (NA9) Earnings Call Transcript

Good afternoon to everyone. Welcome to Nagarro SE's Retail Investor call following today's earnings release for Q2 2024. You should have received a copy of the earnings release for Nagarro's Second Quarter 2024 Results. If you have not received the press release, a copy of the release as well as this presentation is available on nagarro.com in the Investor Relations section. Representing Nagarro on today's call are Manas Human, Co-Founder and Custodian of Entrepreneurship in the Organization; and Gagan Bakshi, Custodian of Strategic Finance. Before I pass you over to Manas, I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties as described in the company's earnings release. Additionally, please also refer to the earnings release for the notice on reported results that are non-GAAP measures. As in our previous retail call, we will have a short presentation at the beginning and then move on to a Q&A session where you can ask your questions. Nagarro is happy to partner with NetRoadShow for today's call again. Let me briefly explain how to raise your questions. [Operator Instructions] With that, it's my pleasure to hand over to Manas Human.

Thank you, Elliot, and thank you, everyone, for joining this call, this call that is specifically meant for retail investors to ask their questions. We shall have a short, short presentation, because many of you have also joined the analyst call, so I will not spend too much time on the presentation. I'll just show a couple of slides and go straight to Q&A. I'm sure you all have many questions. The headline news is that Nagarro had a fairly good quarter under the circumstances, but we're still waiting for a proper recovery in the demand environment. In Q2, we had the feeling that the demand recovery was around the corner. Again, we had hoped from Q2 results -- in Q1, we had this -- I'm sorry, I maybe misspoke. In Q1, we had this sense that the recovery was around the corner. In Q2, again, we had hoped, but the recovery is not here yet. And all indications are that this is imminent, but when exactly it will arrive is difficult to predict. And in the meantime, we are using this downtime that we have or slow period that we have in the company to improve quantitatively and qualitatively across various dimensions. We are delivering very high levels of customer satisfaction. We are continuing to expand our influencer clients and our footprint of clients. And we feel well positioned to take advantage of the data-led and AI-led transformation that we are quite sure will be coming and will take place across various industries in the coming years. The next slide, please. So just a few -- a quick look at the numbers. I'm sure you've looked at the numbers already, but just a quick look at the headline numbers. Revenue for the quarter was EUR 244 million, it grew 2.1% quarter-on-quarter in constant currency and grew 7.6% year-on-year in constant currency. And the gross margin, as per the new method of calculation, was 30.0%. And as per the previous method that we had used in 2023, the gross margin was 25.6%. Adjusted EBITDA was EUR 35.5 million, and the -- in terms of regions, the rest of the world grew fastest year-on-year at 11%, while Rest of Europe was in last place and de-grew by 2.5%. We ended the quarter with a cash balance of EUR 121.4 million. The number of accounts that generated over EUR 1 million in revenue over the trailing 12 months was 184 at the end of June, which is up significantly from 168 a year ago. Meanwhile, our Net Promoter Score in the Q2 customer satisfaction survey was 62. Our last guidance for 2024, which was issued on the 20th of February was for approximately EUR 1 billion revenue and 14% adjusted EBITDA margin, and we have no guidance update at this time. With this quick summary of the quarter for those who did not join the analyst call, I would just go straight to Q&A, and I'll hand it back to Elliot to guide us to the Q&A.

[Operator Instructions] We have a text question submitted. Manas, I think the organic year-on-year and Q-o-Q growth has been good compared to peers and the sector situation. And I appreciate that you are cautious with the guidance and tone of the call. But I wonder, would you consider this Q2 better or worse versus Q1, and why? Lastly, in the previous call, you said you have increased the number of employees in countries that are considered a bit more risky for geopolitical reasons. Could you elaborate a bit more on that?

I would say that Q2 was slightly better than Q1. As I said on the last call, and I don't want to refer too much to the last call, but as I said on the last call, I think we were more optimistic into Q1, but the comfort level in Q2 was a little bit more. I think that there is the feeling that there is also the fatigue in under investment in technology, and you start to see companies trying to move. It's still very, very early days. But I would just -- for me personally, I feel that Q2 was -- it just felt a little bit more comfortable than Q1. Coming to the number of employees in areas -- in regions that are affected geopolitically. It's not that we are adding people there, but it's just that our clients are sometimes choosing to cut back in those regions, causing this sort of mismatch between supply and demand. That's what we are currently trying to address in various different ways. Thank you for your question.

Our next text question reads, could you please elaborate on your strategy or initiatives you follow to gain market share in times of weak demand?

Yes, that's a great question. And I think that there is a lot of work that we have been doing and continue to do to improve how we gain market share in times of weak demand. So there are a number of initiatives, and the biggest ones are the ones that maybe I have spoken about earlier, which is about moving up and across. So we call it up and across together. But up is moving up the value chain at our clients and trying to be more in CXO conversations and guide CXO conversations. I think we have CXO-level access at most of our clients or many of our clients. But we are -- it's more of a review kind of access where you meet for reviewing the good work done typically or maybe once in a rare case, once in a while there's something that we need to work through. But it's not a consistent narrative of driving this CXO agenda. And I think that's something that we are working on through a variety of different initiatives. There are also other initiatives that we are trying to build, like what we call the growth support program, which identifies relatively slow-growing accounts with a lot of potential and tries to bring some specialized capabilities to bear to help that -- those accounts to grow. So that's just a couple of the points. I think our total list of things that we are trying to achieve is a lot longer. But the clear objective here is to be able to grow significantly even in slow-growing periods. Thanks very much for your great question.

Our next text question is, thank you for your presentation. Regarding the days sales, outstanding compared with 1Q '24, do you see an increasing trend for the future? Why has there been an increase in this quarter?

So the short answer to your question is that no, we don't see a trend. There is just a lot of noise. I mean, this is ultimately a number that's produced from the outcome of what's happening at scores of hundreds of clients. And there is occasionally some large clients, which has a little bit delay in making payments or whatever, or a few large clients. So there is always some noise. If you go back historically, you will see a significant amount of noise. So that's the main reason we don't see any trend. Thank you for your question.

Our next question, thank you for the presentation and congratulations for your work, Manas, and the rest of the team. You say that the return of demand is near. What is your time frame? Do you see -- do you foresee an increase in demand by the end of the year?

That's a very good question. I do feel it is near, but I don't know whether we can predict when. It's really difficult. I mean the market is very unstable. As you could see, even for the last couple of weeks of doubt and fear in the markets, that we recovered from subsequently, or almost recovered from, but this sort of uncertainty is all over the economy. So I would be a fool perhaps to predict when this recovery will come. But we do expect that it is -- it will occur. And we do expect that, if we have built right, positioned right and ready to ride that wave, it will be a very interesting time for us, a very positive time for us. Thank you for your question.

[Operator Instructions] We have another question. I would like to dig in on the demand progression in the top accounts that you saw over the last 3 months, as well as just how you see the top clients, particularly the top 5 to 10 performing in the second quarter and then the rest of the year. What are the implications for Nagarro of increasing the clients with projects over $1 million?

So the top 10 or top 5 is not a very important barometer for us because they account for a relatively small part of our overall revenues. So we don't obsess about the top 5 or top 10 clients. As you know, the top 5 account for just 14% and the top 10 for just about 25% altogether. In general, the clients are fairly in good shape. I mean there's obviously some variance from period to period, but the clients are all in robust. In terms of the $1 million benchmark, the thesis, which has been since proven by data, is that once you get to over $1 million run rate at a client, you tend to be very sticky with the client. And this has something to do with the fact that over $1 million annual run rate to the client, the procurement of the client gets involved and you have to jump through several hoops to sort of get accredited and down-selected into the preferred vendor category or whatever that supply category is. And once you are there, our experience is because of our superior delivery and superior intimacy and quick turnarounds and our enterprise, plus engineering, with the agility that we bring, a whole enterprise agile work, we never leave a client, right? So the actual attrition of the client base over $1 million is almost -- is very, very small, very low, almost 0 in fact. So once we have these clients, the opportunity for us is that we can bring new topics to these clients. We can scale at those projects. We can scale into the programs. We can scale to other programs. We can scale to other countries. We can scale to other divisions. And most of these clients or many of these clients that are over $1 million are very significant companies and leaders in their own space. So we have a chance to really ride their growth but also our growth within them. So I think that this is a huge opportunity for us. So for us, that is a big KPI -- a very important KPI for us. Thank you for your question.

Our next text question is, could you give some color on geographical expansion plans as well as if there's any particular focus on the fast-growing GCC countries UAE, KSA, et cetera?

Thank you for your question. The expansion plans for the UAE and KSA -- the region, the Middle Eastern region, has already been some years in the making. And you would have seen that we invested in S4M, Farabi where we have really been able to leverage network and the feet on the ground that, that company had, and now as part of the combined Nagarro, we have been able to really drive growth in the region. And some of our rest of world growth is really pointing to that success. We are trying to do something similar with Japan, not necessarily through the M&A route. But we already have some Japanese clients which are international clients in Japan. But we see Japan perhaps at the same place where Germany was some years ago, with limited global services and very limited digital engineering exposure. And we think that our experience in Germany can be used to work through similar opportunities in Japan. And we are working there with a new leadership that we are very excited by. And we are working also to recruit the kinds of skills that we need to use that -- to that position in Japan, with the existing international clients, and then to grow out from there. We also hope to be able to leverage our China, Philippines and India delivery centers to drive Japan growth. We are talking about partnerships to possible partners that would be game changers for us. So I think that is definitely in motion. When it comes to the existing geographies, the U.S. and U.K. are important for us. We have some strategies that we talked about, moving up the value chain, hiring, potentially acquiring some companies. If you noticed that in the last couple of years, we have done more acquisitions in the U.S. than we traditionally have done. So there are a bunch of these different aspects of our work that are already in motion, and we'll continue to drive them. Thank you for your question, though. I think the KSA and UAE context, I mean, KSA, we have also got some traction now. You may have seen some of that in our social media. But I think that in general that geographical expansion in the Middle East is a good example of how Nagarro continues to look at new markets and tries to find partners and leaders to grow these markets.

Our next text question is, given the attraction value at which Nagarro is trading, have there been any conversations about possible share repurchases? If not, could you elaborate why?