Nagarro Se

and I'm part of the investor relations team at Nagarro. I'm delighted to moderate today's call. You should have received a copy of the earnings release for Nagarro's third quarter 2024 results. If you have not received the press release, you can find a copy along with today's presentation in the investor relations section of nagarro.com. Representing Nagarro on the call today are Manas Heumann, co-founder and custodian of entrepreneurship in the organization. and Gagan Bakshi, custodian of strategic finance and head of investor relations. Before I pass you over to Manas, I'd 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 refer to the earnings release for the notice on reported results that are non-GAAP measures. Nagarro is happy to partner with NetRoadshow for today's earnings call again. Let me briefly explain how you can raise your questions. If you have joined the call via Zoom, you can use the Raise Hand button on your Zoom toolbar. We will open your line for you to ask your question verbally. Those joining the call via Zoom can also submit written questions using the Q&A button, also found on your Zoom toolbar. If you're dialing in over the phone today, please dial star followed by one on your telephone keypad to register a question. Please note that we will accept questions from sell-side analysts as well as institutional investors. Nagarro's retail investors will have a chance to ask questions in a separate call scheduled today at 2.30 p.m. CET. We would kindly ask that you stick to two questions. However, you may reenter the queue, and if there is time, we will come back to you. With that, it is my pleasure to hand you over to Manas.

Hello, and welcome to this earnings call for Q3 2024. Thank you for making time to attend this call. We really appreciate your support. We are also very happy, as Michael said, to host this call on NetRoadShow, a platform that Nagaro has, in fact, helped build. Nagaru's Q3 performance was robust. Although there was no clear recovery in the demand for digital IT services, existing clients continued to be loyal and new clients were acquired. We continue to push forward in cutting edge areas of technology and deliver business value to our clients. Our revenue growth in Q3 was 5.6% year-on-year in constant currency and 3.7% year-on-year in Euro terms. Organic year-on-year revenue growth for the quarter was 5.0% in constant currency, which translated to 3.0% organic year-on-year revenue growth in Euro terms. Compared to quarter two of 2024, revenue grew 0.5% quarter on quarter in constant currency and reduced by 0.5% quarter on quarter in Euro terms. As our growth has moderated, given the slow demand environment, our cash flow has predictably improved. Our operating cash flow in nine months 2024 was 64.9 million Euro. Operating cash flow adjusted for changes in factoring, including interest on factored amounts, was 70.6 million in nine months 2024 as compared to 61.7 million in nine months 2023. I think we have by now firmly put to rest some investor concerns around the ability of the business to generate cash, which arose during the years when the business was growing very fast. Therefore, we also feel that the restrictions that we have voluntarily placed on our factoring programs can now be lifted, since these were purely in response to investor concerns. Due to growth being slower than expected, there was some pressure on margins in Q3, which was alleviated to a considerable extent by the cost optimizing measures that we have introduced to tide over these challenging times. Accounts generating over 1 billion euro in revenue over the trailing 12 months were at 186 at the end of September, up from 176 a year ago. This, as you know, is a very important metric for us. Meanwhile, our net promoter score in the Q3 customer satisfaction survey was at 59, which is a slight decrease, but still an excellent number. We issued revised guidance for 2024 on October 15th, based on September revenues, but also on utilization and hiring trends. The new guidance was for approximately 960 million Euro of revenue for the full year in constant currency terms and not including any acquisitions subsequent to that date. We guided for a gross margin of 30% under our new method of stating gross profit and 26% under the previous method. And we guided for a full year adjusted EBITDA margin of over 14%. Here's a deeper look at the key numbers. Revenue for Q3 was 242.9 million Euro, growing as we said 0.5% quarter on quarter in constant currency and growing 5.6% year on year in constant currency. 31.5 is the gross margin number based on a revised method for calculation of gross margins. For now, we will continue to present the gross profit and margin with both the current and previous methods to allow for better comparisons. So while the gross margin for Q3 was 31.5% under the new method, it was 27.4% under the previous method. Adjusted EBITDA for the quarter was 34.6 million euro. Our top performing industry in Q3 on a year-on-year basis was public non-profit and education, which grew 38.8%, although of a lower base. Our most challenged industry in Q3 was somewhat predictably horizontal tech, which de-grew by 11.3% compared to Q3 2023. In terms of regions, North America was a surprise recovery. It grew fastest year on year in Q3 at 9.5%, while the rest of the world was the slowest for once, degrowing in Q3 2024 by 5.4% over Q3 2023. We ended the quarter with a cash balance of 141 million euro. We already spoke of 2024 guidance. Since we listed in December 2020, we have experienced huge swings in the demand environment for digital engineering services in both directions, up and down. These swings have had, of course, implications on revenue growth, but also on margins. While we continue to be optimistic about the eventual recovery of the demand environment, we cannot predict exactly when that will happen and exactly to what degree. So based on a strategic review with some external sounding that we have conducted at this time, and given the uncertainty that we see in our markets, we request you to disregard our past statements on Nagarov's outlook beyond 2024. Instead, the consensus estimates or the financial analysts covering Nagaro are currently seen by the management board as a fair estimate of how the company may perform beyond 2024. We remain committed to diversification across industries since we believe in the convergence of technology and user experience and ecosystems and solutions across the traditional industry silos The best performing industries in the quarter on a year-on-year basis, as we said, the best performing was public nonprofit education. And a long way behind that was retail and CPG. The weakest performing industries were horizontal tech and life sciences and healthcare. We have remained low in terms of client concentration as always. In Q3, our top five client accounts were only 15% of our revenues for the quarter and clients six to 10 accounted for just 9% of our revenues. For quarter three, North America accounted for roughly 88 million of revenues. Central Europe accounted for roughly 69 million. Then came rest of the world in third place with roughly 57 million. And finally, rest of Europe with about 29 million euro. We continue to look to expand our global footprint. In the last few weeks, after the end of the quarter, we have announced the partnership with the Japanese company Marubeni and the acquisition of Forwardview in the UK. In terms of people, our headcount reduced further by 363 this quarter, mostly by attrition that was not backfilled to 17,938. Now, over to Gargan to say a few words on our financial position at the end of the quarter.

Thank you, Manas. Hello, everyone. A quick look at our financial position at September 30th, 2024 shows financial liabilities of 280.5 million euros, cash balance increased materially to 141 million euros implying a much lower net leverage of 183.9 million euros as well as a lower net leverage ratio of 1.3 x the company's liquidity position at the end of the nine month period was comfortable with a working capital of 248 million euros a few words on our cash flows for the nine month period ended september Our total cash flow was an inflow of 33.1 million euros, which is a big improvement versus a cash outflow of nearly 16 million euros for the comparable period last year. Operating cash flows for the current nine-month period were a strong 64.9 million euros, which is an increase of 23.5 million euros versus the comparable period last year. The higher cash flow was mainly due to an increase in EBITDA by 11.9 million euros. We were also able to reduce the utilization of funds under the factoring program by 14.7 million euros during this nine-month period. This reduction is also reflected in the slight increase in our days of sales outstanding, which have increased slightly from 84 days at the end of last year to about 86 days at the end of September this year. Kindly note that the DSO is calculated based on quarterly revenues and includes both the contract assets and trade receivables. Cash flow from investing activities for the current nine-month period was an outflow of 6.2 million euros, mainly due to payments of 9.7 million euros towards contractual obligations from older acquisitions. CapEx was 3.8 million euros, which is only half a percent of the nine-month revenues and reflects our asset-like model. Cash flow from financing activities for this period was 25.5 million euros, which was attributable to outflows of nearly 19 million for lease payments and 13.6 million for interest payments. These were offset by cash inflows from bank loans of 7 million euros. From a capital allocation perspective, we're happy to report the acquisition of Forward View on October 30th. A UK-based company, Forward View is recognized for its expertise in delivering data-driven solutions to the financial services industry. This strategic acquisition enriches Nagaro's portfolio in the financial services sector and further solidifies our market position in the UK. We have consolidated Forward View from November 1st. With this, I hand over back to Manas. Thank you.

Thank you, Gagan. We're now going to move to Q&A. But before we start, some of you may be aware that about a month ago, a Bloomberg article had reported that some private equity firm was weighing a possible buyout of Nagarov. That same day, Nagarov had issued an ad hoc statement. We have said all we wanted to via that statement, and nothing more must be said today. So I would abstain from answering any questions related to this topic and hope for your understanding and forbearance. With that, we can get into the questions.

Great. Thanks, Manas. Again, if you have any questions and you've joined via the Zoom call, we'd like to ask, and you'd like to ask a question, please use your raise hand button on the Zoom toolbar. And for written questions, please use the Q&A button also found on your Zoom toolbar. Again, if you're dialing in over the phone today, please dial star followed by one on your telephone keypad to enter the queue for questions. And we'll pause just for a moment to assemble our roster of questions. And the first question today will come from Andreas Wolff. Please go ahead, Andreas.

Thank you for taking my question. It seems like the audio works. So here's my question. If I look at your full year guidance, Manas, or your targets and look at Q3, which against the recently revised outlook was pretty favorable. I'm just wondering if there are any special topics that we should bear in mind going into Q4. At least in Germany, we have many working days in Q3. That's not the case globally. So at least from that perspective, Q4 shouldn't be that much different from Q3. Anything else that we should bear in mind with regard to the last quarter? And then, Manas, as we are approaching 2025 pretty quickly, you have already issued your thoughts on the analysts. the analyst estimates. Do you already see more traction from the customer side with regard to projects for next year? And are there specific industry that are already raising their head and saying, okay, we want to invest more next year. And maybe in that context, you could also comment on horizontal tech which in the last quarter, if I saw it correctly, was still in the degrowth mode. Thank you.

Thank you very much, Andreas. Thanks for your questions, as always. So in terms of the quarter four, what we see is that we have a fair number of holidays in different regions. You may be right that in quarter three, there are not so many maybe working days in Germany, and quarter four may not be so different. But in many regions, Q4 is significantly heavier in terms of holidays than Q3 is. Also, we have an increasing trend of clients actually turning off their entire sourcing and projects for a couple of weeks to the end of the end of the year. And this is not very many clients, but you can imagine that if some clients turn off everything for a couple of weeks, it does have an impact. So I think that's the usual thing, nothing out of the ordinary this year. But Q4 is generally a little bit challenged in terms of the number of hours we can put in and the amount of work we can do. Coming to your question on 2025, I expressed some thoughts about the analysts' estimates. We also, of course, will start and run a bottom-up estimation for 2025. And as usual, we will give out some guidance towards the end of the year for the next year. But in general, what we see, more than horizontal trends, I think we see it's not an uncomfortable position, but we don't see a recovery in the way that we have been waiting for a while now for a step recovery. I think it's nothing to be too nervous about, but at the same time, the recovery is still not fully there. I think we wait and see how things shape up. But at the moment, I think the analysts are pretty much where we are in terms of sentiment of where revenues and earnings will trend in the coming years, and especially for next year.

Thank you, Manas. Just a quick follow-up. What is clients holding back of being more optimistic and more resolute? Is it the geopolitical situation right now that they might not know whether they will be impacted by terrorists whatsoever or are there other topics that they are bringing forward?

This has been an interesting period where everyone has a different story. And we've talked in the past of this rolling effect across different industries and so on. At the moment, for example, I was in Singapore earlier this week meeting a client. And their bigger challenge is coming from just a general slowdown in their revenues due to consumer spending in China and elsewhere. So I think it's a very complicated world situation with a number of parts that are... not at the best levels of performance. And I think that each client has a slightly different story. So we don't see broad trends, but we don't see that big jump back into spending.

Thank you.

Thank you, Andres.

There are no additional questions at this time. Great. And with that, why don't I turn it back to Manas?

Well, thanks for joining us on this earnings call. We have another retail investor call in a little bit and really appreciate your support and thank you and have a great rest of the day.

Great. Thank you, everyone. This concludes Nagarose's Q3 2024 earnings call. Thank you all for joining in. You may now disconnect your lines.