Nagarro Se

Good afternoon to everyone. Welcome to Nagaro's SE's Retail Investor Call following today's earning release for Q2 2024. You should have received a copy of the earnings release for Nagaro'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 nagaro.com in the investor relations section. Representing Nagaro on today's call are Manas Heumann, 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 risk 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. Nagara is happy to partner with Netrojo for today's call again. Let me briefly explain how to raise your questions. If you would like to ask a question, please press the raise hand icon or Q&A box found on your screen if you have joined the call via Zoom. If you have joined us on the phone, please press star one on your telephone keypad. We would kindly ask you stick to two 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 question after this call. With that, it's my pleasure to hand over to Manas Heumann.

Thank you, Ilyas, 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 today. 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 Nagarov 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 have hope 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 have hope, 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 influence at clients and our footprint at 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 244 million Euro. It grew 2.1% quarter and 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 35.5 million Euro. And in terms of regions, the rest of the world grew fastest year-on-year at 11%, while the rest of Europe was in last place and deep grew by 2.5%. We ended the quarter with a cash balance of 121.4 million. The number of accounts that generated over 1 million euro 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 1 billion euro 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 hand it back to Ilyas to guide us to the Q&A.

Thank you. As a reminder, if you would like to ask a question, please press the raise hand icon or Q&A box found on your screen if you have joined the call via Zoom. If you have joined us on the phone, please press star 1 on your telephone keypad. When preparing to ask your question, please ensure your line is unmuted locally. We have a text question submitted. Hi, Manas. Thank you very much for taking my questions. I think the organic year-on-year and UOQ growth has been good compared to peers and a 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?

Thank you for your questions. I would say that Q2 was slightly better than Q1. As I said at the last call, and I don't want to refer too much to the last call, but as I said in the last call, I think we were more optimistic in 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 underinvestment 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, David. Coming to the number of employees in Q2, 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 questions.

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's 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've 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 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 the 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 – called 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 those accounts to grow. So that's just a couple of the points. I think our total list of things that we plan to achieve is a lot longer. But the clear objective here is to be able to grow

significantly even in slow growing periods thank you very much for your great question our next text question is thank you for your presentation regarding the day sales outstanding compare with 1q24 do you see an increasing trend for the future why has there been an increase in this quarter so uh 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's occasionally some large client which has a little bit delays in making payments or whatever, or a few large clients. So there's 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 text question. Thank you for the presentation and congratulations for your work, Manda, and the rest of the team. You say that the return of demand is near. What is your timeframe? 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 they recovered from subsequently or almost recovered from. But this sort of uncertainty is all over the place. economy so I would be a fool perhaps to predict when this recovery will come but we do expect that it will occur and we do expect that if we are 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

As another reminder, if you'd like to ask a question, please press the raise hand icon or Q&A box found on your screen if you have joined the call via Zoom. If you have joined us on the phone, please press star one on your telephone keypad now. We'll pause for just a moment. We have another question. I would like to dig in on the demand progression in the top accounts that you saw over the last three months, as well as just how you see the top clients, particularly the top five to 10 performing in the second quarter and then the rest of the year. What are the implications for Nagaro of increasing the clients with projects over $1 million?

So the top 10 or top five 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 five or top 10 clients. As you know, the top five 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 shape. In terms of the 1 million benchmark, the thesis which has been since proven by data is that Once you get to over a 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 a 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 the supplier 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, our whole enterprise agile work, we never leave a client, right? So the actual attrition of the client base over a million is very, very small, very low. Almost zero, 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 a million are very significant companies and leaders in their own space. So we have a chance to really write 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. You know, 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 the network and the feet on the ground that company had, and now as part of a combined Nagaro, 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 to 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 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 US and UK are important for us. We have some strategies that we talked about, moving up the value chain, hiring, potentially acquiring some companies. If you notice that in the last couple of years, we have done more acquisitions in the US than we traditionally have done. So there are a bunch of these different aspects of our work that are already in motion, and we will 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 is in the Middle East is a good example of how Nagaro continues to look at new markets and tries to find partners and leaders to grow these markets.

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

So, you know, all I can say is that, you know, as a management team, we are constantly having to look at allocation of capital and different possibilities for deploying the funds we have. And, yeah, the repurchase of shares is one of those options. But beyond that, I would perhaps not comment at this point. Thank you. Thanks.

Our next text question in regards to the margin program you have implemented. have there been any business units that has needed intervention? If so, has the result of the program been what was expected?

Great question. And I can only say that there are business units in the program, and we have a two-stage program. There are business units. And I think the outcome has been fantastic. So there's been – you know, we are a company that has been – is very lightly regulated. The working of the business units is very tightly regulated in some aspects when it comes to compliance, when it comes to talent allocation, when it comes to hiring, when it comes to all these topics. But when it comes to the conduct of business, there's been a relatively decentralized, the idea of being entrepreneurial and being able to make your own bets on what businesses are likely to succeed, what price points are likely to succeed, and so on. But the idea of the margin support program is to bring some more support to the analysis that you are doing, maybe some external view via spotting partner. And I think the results have been very good. I think that some of the results will take some time to flow through because merely making a business unit lean is not very effective if that excess capacity is still in the company and not redeployed to other business units. But once it starts to get redeployed, you will start to see the value of that work. So, yeah, great question. Thank you.

Our next text question, do you think you can improve EBITDA margins versus Q2? I understand that the utilization has slash will affect positively or negatively, but could you further adjust some expenses, for example, freelancers?

Personally, I don't think we have, or as a company, we don't think we have very large room to improve EBITDA margins via freelancers. There are relatively few in the company, and there has already been some attention on that. I think that you've seen our guidance for the whole year, and that presumes that we don't have much happening in the next second half to increase EBITDA margins. So that's the best I can say at the moment. But we continue to work on all the different levers that we do have to see what we can achieve. Thanks for the question.

Our next question is, do you see opportunities for M&A during 2024?

Yes, I can say that we are always looking at acquisitions. We have a pipeline. Whether any of these will actually be consummated in this year or not, it's not something that I would guess at or state. But yes, we are constantly looking at acquisitions of all in different regions with different capabilities and with different contexts.

Thank you. Our next question, are you concerned about the possible theft of the labor force by peers as they are trying to move to India?

The short answer is no. India is a huge talent pool. If you take what Accenture or any of the large India-based firms employ, they just employ people in the hundreds of thousands each. So there's absolutely, you know, a few thousand here and there doesn't change the dynamics of talent in India. So I think that the worry on that score is very limited.

Our next question. Thank you for answering, Manas. What are clients saying about the conditions under which they would ramp up IT spending or start new projects in 2025? What are these decisions tied to? is there any relation with the macro or the gen AI?

Thanks for the question. So, you know, this is a very, very tricky question because there are different dynamics playing out to different clients. You know, there are clients in industries that are doing okay. There are clients in industries that are not doing so well. There are clients in industries that feel that they have overspent in recent years on tech or spent liberally on tech. I should not say overspent. There is no such thing. But they spend liberally. The other clients will feel that they have not spent enough and they need to spend to catch up because they are under threat from maybe pure digital native kind of companies. They are under threat from other competing players. And I'm thinking of specific examples as I say this. There are companies that are actually in the stage of moving from the wild west days of very fragmented spend to more consolidated spend. So there's companies at every stage of every possible type of context. I do get personally biased because I do end up meeting a lot of clients who are looking to spend now. That's who the team puts me in front of. So I do get biased. But in general, I do feel that there is the feeling that if enough is not spent or enough work is not done on some of the more fundamental aspects of data and preparation for new kinds of experiences that AI would enable for end users or customers, new kinds of personalization, new kinds of contextualization, new kinds of responsiveness and efficiencies and so on, then they may miss a trick. So, I mean, we all feel that. I mean, even Nagaro as a company feels that, that we need to do more and do more faster internally to just become more efficient with many of our supporting processes, for example. So I think there's that feeling across our client base. And that's why I say that I think that when things become better, there will be that ramp up. But to your specific question, no, I don't know if I can say that there are these one, two, three things across the entire client base that every client is looking for to pick up spending. I think it's very contextual. Thanks for your question.

We have no further questions. So I'll hand back to you, Manas, for any final remarks.

Well, thank you all for joining the call and thank you for your support on Legaro. We specifically appreciate the interest and backing of our retail investors and hope to continue to do right by you in the coming quarters and years. Thank you very much.

Thank you, everyone. This concludes today's webinar. You may now disconnect from the call. Goodbye.