Nagarro Se

Good afternoon, everyone. Welcome to Nagaro's SE Retail Investor Call following today's earning release for Q1 2024. You should have received a copy of the earnings release for Nagaro's first quarter 2024 results. If you have not received the press release, a copy of the release as well as this presentation is available on nagaro.com in the investor relations section. Representing Nagaro on today's call are Manas Heeman, co-founder and custodian of Entrepreneurship in the Organisation, 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 the Q&A session where you can ask your questions. Nagaro is happy to partner with NetRoadShow for today's call. Now let me briefly explain how you can raise your questions. If you would like to ask a question and have joined the call via Zoom, please press the raise hand icon on your screen. Alternatively, you can use the Q&A chat box to submit a question. And if you have joined the call on the phone, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure that your line is unmuted locally. We would kindly ask you to stick to two questions. However, you may re-enter the queue If there is time, we will come back to you or follow up on any unanswered questions after this call. With that, it is my pleasure to hand you over to Manas Heeman to begin.

Thanks, Preka, and welcome all of you again to this special earnings call for retail investors for Nagaro for quarter one, 2024. And on behalf of all my Nagaro colleagues, some of whom you see in this picture. I would like to thank all the retail investors who have put their faith in us and actually continue to hold on despite a fairly wild ride in the industry as a whole. The idea today is for us to briefly describe how Q1 went and then to have more time set aside for questions so you can have your specific queries answered. In general, quarter one 2024 was a quarter in which we tried to prove that we can play defense as well as we can play offense. So after a couple of years of very rapid growth in 21 and 22, our focus in 23 and especially towards the later part of 23 and into Q1 2024 has been on profitability. And we have worked on a couple of concepts to drive that, including the organization bonus that we have talked about earlier, but also this aspect of a margin support program, which is a way for us to have our business units take a little bit more responsibility on how the margins are delivered by the company. So the focus is on profitability, but We are also happy that in an otherwise challenging time from the demand perspective in our industry, Nagato has still continued to do fairly well on the demand side. We are happy to say that our clients remain very engaged, energetically engaged with us on existing topics or new topics. And our client satisfaction, as reflected in our net promoter score, remains very high at 66%. There's a lot of conversation and a lot of projects around data and potentially AI, but more around data at this point. Attrition is at historical levels. And in terms of cash conversion and in terms of our cash levels, because our growth has moderated, we have been able to have a better cash conversion and have better cash levels. So that's the general context. You have probably seen the numbers for the quarter already. It's 238 billion of revenue, 8.7% of quarter-on-quarter revenue growth in constant currency, 5.0% year-on-year revenue growth in constant currency. The gross margin figure needs some explanation. You should look at the footnote. We have historically put all the costs that we incur into our global business units as our cost of revenue, which means that it's taken out of our gross margin numbers or gross profit numbers. But as our company has become more mature and has scaled globally, our BUs are also now global. So they've also become more sophisticated in selling. So a lot of our sales costs are now within the GBUs and not outside the GBUs. So we have actually consulted with one of the top consulting firms to re-establish a definition for gross margin, which is more in line with our industry peers, because otherwise you were seeing the shrinkage of gross margin, which was not actually reflecting what was happening at a project level, but it was just reflecting the fact that our GBUs are now moving their sales in from regional structures back into the BU and more consultative selling. So our gross margin as for the previous method for the quarter was 26.8%. Our gross margin as per this new method is 30.9%. We end the quarter with a cash balance of 126 million, and we retain our guidance at roughly 1 billion euro in constant currency terms for 2024, and an adjusted EBITDA margin projected at 14%. So that's kind of where we are, and I would suggest we go straight to questions so that we are able to give more time to the questions. But what I will also do is just tell you that this presentation is also on our website, and you can go and refer to it at any time. With that, Breika, maybe you can repeat the instructions for the questions once more, and we can dive into the questions directly.

Thank you, Manas. We will now begin the question and answer session. If you would like to ask a question and have joined the call via Zoom, please press the raise hand icon on your screen. Alternatively, you can use the Q&A chat box to submit a question. And if you have joined the call via the phone, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure that your line is unmuted locally when speaking. We would kindly ask you to stick to questions. However, you may re-enter the queue and if there is time, we will come back to you or follow up on any unanswered questions after this call. We will pause for a moment whilst questions are registered. We have a text question from Arturo Lopez. Good afternoon, Manus. Congratulations on the results of Q1. I would have two questions, if you would be so kind. What lessons have you learned during the difficult year 2023, and what lessons do you keep for the future? What is your perspective on Gen AI? There is a lot of talk about its inflammation in enterprises and the huge productivity

improvements it will bring but it seems that implementation is slower thank you very much for answering our questions thank you very much those are two great questions i will start with the first one the lessons learned in 2023 you know there are probably lots of lessons that uh i learned but i think the biggest one was that the the coverage of uh dagaro in the press uh in some sections of the press and the short sellers attacks on Nagara, which it seemed to happen about the same time at the beginning of last year. I think they distracted us a bit from the real business. I think if it were ever to happen again, we would be less distracted by them. So that's a personal lesson for me. But apart from that, I think every interaction Every bit of progress that Nagaro makes or we make at Nagaro also has lots of lessons. And each lesson translates into strategies for the future. So the two strategies for 2024 and beyond, as far as we can see, are for Nagaro to go up and across. And what we mean by that is to move up to the boardroom at our client's to help them think about their business strategy with respect to technology. I think they're doing very well at the engineering aspects. We are really, I think, creative and innovative on the engineering, but how to really link it with the business side, I think is one thing that, one lesson that we learned is that we can do better at that. And the other is across to the US. You know, we have picked up a lot of case studies and testimonials and capabilities in Europe, in Asia. But we have a long legacy of working in the U.S. And I think that one of the big opportunities is to do more in the U.S. And that's another lesson that we have learned in the last few months. I wouldn't say it's precisely this quarter, but it's in the last couple of quarters and in 2023, as you said. On Gen AI, I think the perspective is very profound and there's barely anything other that one can say. But just as with all of human innovation, we learn to make it routine. It's like the internet was a huge revolution and now it's routine. And so have many other revolutions come about in technology and especially where it It relates to IT and the work of software. There are just a lot of productivity enhancements, a lot of innovations, and Gen AI is obviously a big one among them. We believe that this will, of course, improve productivity, but not at once because there are lots of privacy, intellectual property, and other legal aspects that companies have to consider before they really embrace this So it will be a gradual move. And I think on the other side, there are lots of technical challenges to harnessing the data that companies have, and that would drive hopefully a lot of data-based or data-relevant business into our industry. So that's kind of, I think, the two sides of the coin with GenAI. I think adoption is slow because large companies in particular are very concerned that they will make a misstep. A colleague at a client put it very well when she said that, Gen-AI seems to be at its Napster moment. We have to wait for the Spotify to come. And I think that's kind of what large clients are seeing and being wary about. Thank you for the questions.

Thank you. We have another text question from Manuel Perez from ESO. Good morning. How do you see Nagaro's non-hierarchical and work-from-home culture evolving as you are growing? Do you think it is sustainable to add value in the future? Thanks.

Thanks, Manuel, and thanks for this question. I would treat these two quite differently. The non-hierarchical part I think is fundamental. I think it's fundamental to the culture of many new age companies. And I think it's very, very important also for the world that we live in that we don't need another hero. I'm reminded of that song that we don't just build up larger than life figures. We are able to question authority. I think it's very important for the world in general. So I think that part is likely to go on, increasing monotonically. We have almost 20,000 people today. So at 20,000 people, I think we have faced all the challenges to scaling this non-hierarchical culture, and we have overcome them. We, of course, have to keep ever watchful to make sure it doesn't lapse back. But I think we are on a good track there. And of course, a lot more to do always, but relatively on a good track. The work from home aspect is slightly different, right? So I think there will be people who will be working from home most of the time. But there is also this push by the industry and by clients to have some more face time. of teams with each other, of teams with other colleagues. And I don't know where this will lead. We are a player in the market. I think we do believe in individual choice to the extent that's possible. And we do like to work hard to preserve the choice. But at the same time, I think it's pretty common in the industry now to suggest that people should be at least a few times a month in the offices, meeting each other, learning from each other. And there's some aspect of that that you can't really take away, you know, which you can't really duplicate trivially in a virtual setting. So it's more difficult to predict how that would look like in the next quarters or years. But the non-hierarchical part is very much, I think, valid despite everything that we have seen so far. Thank you very much for the question, Mr. Perez.

Thank you. As a reminder, if you would like to ask any more questions and you have joined via Zoom, please press the raise hand icon on your screen. Alternatively, you can use the Q&A chat box to submit the question. And again, if you have joined the call via the phone, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure that your line is unmuted locally. And we do remind you to ask two questions. And if you did have any more to get back in the queue.

While we wait for the next question, I can share a tidbit of information that is pretty interesting, I think. This call is being handled by NetRoadShow, which is a leader in its space. And Nagaro has been building the platforms and products for NetRoadShow for many, many years. So, you know, we often claim that our software touches your lives somewhere or the other through your day. And this is an example of that. You would never know that this is software that Nagaro has worked on. We reached out to the senior leadership at NetRoadShow and suggested that we can mention this on the call. And they were very enthusiastic and supportive of this. But it's a great company and we are really happy to be involved with them and to support them in their leadership, just like we do with many, many other clients. So just a piece of information for you. Do we have any other questions, Rekha?

We have a text question from Aika Aragon from IEDH. Good evening, Manas. Congratulations for the Q1 results and for taking my question. Where do you feel are the gaps, strategically, organizationally, or otherwise, to fulfill your idea for Nagaro in the future and its key different ages?

That's a great question, and I think it's the kind of question that I really appreciate because that's what I think – investing should be about, the long-term strategy rather than what happened in the last two weeks. So first, I would just like to say that while you congratulate us and I would accept that, I do think that these are not spectacular results. I think they're okay results. It is a difficult time for the market and they're good. But I think that these are results that are fairly pedestrian, you know, and we will do better as the market picks up. In terms of the overall strategy of the organization, I think that the two parts that I talked about earlier are where we are really focused. We want to be more strategic for our clients. We have started many, many years ago as a small company, as Nagaro myself, but also my other entrepreneur colleagues who are co-founders of Nagaro, They started their own small companies and have managed to win business, usually by consulting with senior people on the client side and building some software to follow. But for a small company to play in a crowded IT space, it has to be able to really connect business problems with technical solutions. And I think that's our DNA. But as we have scaled as an engineering organization, I think we have become experts at the engineering. We are like the world's best at building solutions that are very complex in a fast way. We are really very good at that. But we have maybe not asserted ourselves as a business transformation partner with our clients as much as we should. So this up and across that I referred to in the previous question, the up is to be able to work with the CXOs on their business strategies. We do have access to them. We are friends with them. We know them. But we are not maybe supporting them as much as we can. So that's one big part of our strategy. And the other is this U.S. aspect. Across to the United States, we have Some of our oldest clients, some of our biggest clients have been in the US. And we have a long history, me and many of my colleagues, of living there, working there, winning business there, delivering great solutions there. But I think that being part of Algaia and being a German listed company, a lot of our acquisitions and a lot of our focus was still on Europe. but the U.S. does remain the world's largest IT market, and we believe that we bring a differentiated offering to this market. So that's the second part of the strategy, and that's what we want to really drive. From an organizational standpoint, I think we are doing very well. I think these little tweaks that we are putting in for the margin support program or the org bonus, I mean, that's all we have to do. A couple of tweaks in each year to just make sure that the organization is self-running and not one that has to be where you engage with every scenario on an ad hoc basis, but rather than there are systems that just auto-correct, there are guardrails and systems. So that's kind of the organizational aspect. I think we're doing pretty well in that. And we spent a lot of time trying to refine that and not react to individual issues, but to actually build control policies and control frameworks for the long-term value creation in the company. Thank you very much for your questions.

Thank you. We now have Arturo Lopez with RR. If I may ask you one more question, could you elaborate a bit more on the consulting business you want to develop further with clients? An example would be wonderful.

Okay, great, great. That's a great question, Mr. Lopez. So, It's a – I would not call it a consulting business just yet because it's not that we expect this to be directly built for driving a lot of revenue. But let me give an example, right? So let's say in my own company in Nagaro, let's say – let's say employee engagement is a topic. Let's say that's a business priority for me. Let's suppose we are working in a very aggressive job market and it's very difficult to attract talent and to hold on to talent and so on. So I don't want to get an IT vendor that comes to me and says, tell me what to build to solve your problem, right? I want someone who understands my business need, which is to attract the right talent, which is to retain the right talent, and can think up all the different aspects of it, can think up, you know, what does that mean for your digital marketing strategy? What does it mean for your employer branding? What does it mean for your internal employee engagement platforms? What does it mean for your ginger-like, you know, the nudges that you can, the data that you provide to employees, the transparency, the nudges, and so on. And I'm taking this particular example because it's an example of what we at Nagarov have worked on. So today we can go to a client and say, look, if you have this particular problem, then we have a view on how you can think about it, how you can address it. And it may require many different blocks of technology, some of which you may have, some of which we can add, but we can bring it all together. So this is slightly rising up from the engineering into addressing the business problem tightly coupled with engineering. It's not to be another McKinsey, that's a slightly different positioning, but just to couple the business problem with the engineering solutions and to go about it like Elon Musk would do, to go about it with quick prototyping, to go about it with tech-first kind of solutions. So that's what we want to be. And I think if we can improve on this, we will be a far more formidable company in the coming years because there's a large piece of this that we have really developed and are very, very strong at, but this allows us to play at the next level. So that's the example. I mean, whether or not we actually build those consulting hours as consulting, or we just are able to fund it through the additional business that we receive, that's still to be seen, but it's the way we want to drive. Thank you for the question. It's really a good one. Thanks.

Thank you. As a reminder, to ask a question on Zoom, please use the raise hand icon on your screen. Alternatively, you can use the Q&A chat box to submit a question. And if you have joined the phone, please press star followed by one on your telephone keypad now. We have a text question from Evian Medina Hernandez. Good afternoon, Manas. Thank you for taking my question. Some peers have been facing issues regarding the location of delivery centres and client demand for a transition to lower cost regions. You are well positioned in India. What importance do you locate to diversifying the location of service delivery centres and how does this affect how you think about M&A opportunities? Thank you very much.

Thank you very much, Yvian, for the question. I think that it's fair to say that India remains one of the deepest IT markets or markets for IT talent. And you can scale up in India faster than you can scale up anywhere else. If you look at all the big tech companies, even the large American ones, for example, They have a strong India presence, and a lot of the engineering is done in India. That's not to say that there are not other locations around the world. And today, although over 13,000 of our people, or roughly 13,000 of our people, may be in India, but we do have 5,000 other locations. We have a lot of people in Romania, a lot of people in the Philippines, in China, in the Middle East, in Germany, in... the U.S., in Mexico, and so on. So in Canada now. So I think the way we look at this in Spain as well, the way we look at this is that we are trying to make sure that regardless of the client's needs, we are able to meet them. Or for diverse clients, whether they want a team that's very local to them or they want a team that's kind of mixed, or they don't care where the engineering is coming out of, we are able to satisfy their needs. So most of our acquisitions now are done more from the perspective of access to clients and potentially access to some niche that we haven't still covered, but not as much from the perspective of delivery centers. Talking of delivery centers though, I just realized I forgot to mention Turkey. In the Middle East, maybe you can count Turkey. But occasionally we would do something like that, you know, which gives us like a springboard to a fast-moving market that there's a possibility of driving, you know, some business in that region. But largely it's now more for client access, I would say. Hope that answers the question, Evian. Thank you.

Thank you. As a reminder, this is your last chance to ask a question. And I do remind you to please use the raise hand icon or the Q&A chat box if you have joined via Zoom. And please press star followed by one if you have dialed in on the phone line. We have a text question from Jaco Insulin of Valencia. Hi, Manas. What percentage of your work is billed on time-based method versus a project-based method? Would there be a benefit to move more to a project-based billing method?

Thanks, Sharth. That's a great question. So roughly between two-thirds and three-fourths of our business is billed in a time-based method versus a project-based method. I think the two are fairly equivalent We don't really prize one over the other. But the kinds of contexts in which we engage with clients typically decide which method is being used. Sometimes it's from the client's perspective. There are some clients like in automotive in Germany, for example, who are used to doing things with RFPs and on fixed bids, that's the procurement process. philosophy of the vertical and they would prefer to work in that way even for this kind of business. However, a lot of digital engineering work that we do is highly dynamic and projects start before they are properly defined and the parameters are always changing and it's very difficult to engage in that kind of dynamic situation with fixed width. So clients obviously want to know that you are productive enough and you're not padding your estimates and not padding your work. So very often they will start with us with fixed bid projects. Let's do this little piece and that little piece. But as they get to know us, as they get to trust us, as you become genuine partners with them, they would like to move to a time-based approach so that they are able to be rapid because The whole reason you select Nagaro is because you want to bring about great business impact in a very short time. And that is not done by writing all the specifications up front and all the boundary conditions and then bidding it out and getting a fixed bid response and then selecting a vendor. and then having change requests flow through the system, that's very painful. So if you want to move fast, you want to have a partner that you work with on a time-based payment basis. Thank you very much for the question.

Thank you, Manas. We now have Luis Lopez. Hello, Manas. Could you give more color about what the six, five millions of upper operating income are, please?

Would you, Dagan, would you like to take that, please?

I don't have the detail for this particular one, since we generally disclose this in each report in general, but we can get back to Luis with this, please.

Yeah, we'll have to get back to you on that. We would have more detail in the H1 report.

Thank you. I would now like to hand it back to Manas for some final remarks.

Well, it was great to take these questions. I think that these are more interesting questions than what I had in the more formal analyst call. I think the analysts are looking at the quarter-by-quarter development of the company. I could see that the questions on this call were a bit more strategic and for me more interesting as a result. Again, thank you very much for taking the time and really appreciate your sticking with us through these complex times. I think we remain one of the world's top digital engineering companies. And in fact, we have cemented our position through these tough times. And we expect that as things get better in the economy, we will be ready to tee off and grow again at the kinds of speeds that we are used to. And we have demonstrated over the last two and a half or three decades. So thank you all very much for joining and have a great rest of the day. Take care.

Thank you all for joining the Nagaro Q1 2024 Retail Investor School. I can confirm that The call has now concluded and you may now disconnect from the call. Goodbye.