Nagarro SE (NA9.DE) Earnings Call Transcript & Summary

Hello, everyone, and a warm welcome to Nagarro's First Half 2025 Retail Investors Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I would now like to turn the call over to our host, Michael Knapp. Please go ahead, Michael.

Great. Thanks, Emily, and good afternoon, everyone. Welcome to Nagarro SE's retail investors call following today's earnings release for the first half of 2025. My name is Michael Knapp, and I'm part of the Investor Relations team at Nagarro, and I'm delighted to moderate today's call. You should have received a copy of the earnings release for Nagarro's second quarter 2025 results. If you have not received the release, you can confirm -- you can find a copy along with today's presentation on the Investor Relations section of the Nagarro website. Manas Human, our Co-Founder and custodian of entrepreneurship, and I will be representing Nagarro on today's call. Before I pass you over to Manas, I'd like to remind you 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-IFRS measures. As in our previous retail call, we will have a short presentation at the beginning and then move to the Q&A session, where you can ask your questions. [Operator Instructions] And with that, it's my pleasure to hand you over to Manas.

Thanks, Michael, and everyone, thanks for joining the call, and welcome. So today, we're going to talk a bit about Q2 and about H1 2025. In general, we are making good progress in what is a relatively slow demand for IT services. In terms of operational efficiency, we are actually performing better than it seems. It's been currency fluctuations and impacts on the revaluations of internal loans and bank deposits that are masking some of the structural improvements that we have driven. We'll talk more about that in a bit. We're also going to talk a bit about the way forward for Nagarro. We have -- we are seeing a slight pickup in activity in topics like data and cloud and AI. And we also see some new investments. But I think in general, our approach is that we just don't want to write this growth of our subsector. We want to, in fact, layer on new opportunities to accelerate this return to double-digit growth. And to achieve this, we have talked earlier about some strategic initiatives and partnerships that are gaining momentum. I'll share updates on that shortly. And we are also strengthening our governance -- corporate governance trying to be really good at everything we do, and I'll talk a little bit more about that as well. And then, of course, we will take questions. Next slide, please. So let's dive in. We continue to push forward despite the global situations with moderate growth, but strong operational performance. As I said, some of what we have done operationally has been obscured by foreign exchange movements. And primarily, the pronounced weakening of the dollar against the euro has led to a revaluation of our loans and our deposits and it's creating this noncash accounting losses, which is impacting our bottom line and making it look that the company is not doing so well even when the underlying business has actually improved over the year ago period. Meanwhile, we continue to have clients that are sticking with us, clients with over EUR 1 million is now 188. And these are companies that all -- for whom we are all strategic. We want to keep -- continue to do more and more with them. We're also encouraged very much and this is quite important. I think that to see that now more clients are comfortable with and have a clear understanding -- clearer understanding of the benefits that they can achieve with AI. And this is leading to a ramp-up of our internal design activity, our internal reinvention of Nagarro activity, which we believe will start to contribute to our business later this year and in the years to come. Now coming to quarter 2 results. We had revenue of EUR 252 million and an adjusted EBITDA of EUR 30.5 million with adjusted EBITDA margin of 12.1%. Gross margin reached up from 30.0% a year ago to 33.2%, as we benefited from our productivity gains under the margin support program launched about 1 year, 1.5 years ago. The company displayed excellent operational efficiency in this first half year. And without the currency effect, we would have delivered adjusted EBITDA margins at the high end of our range. However, because of these devaluation losses we talked about, we had an impact of EUR 18.0 million of -- just from these devaluations, which is a huge number on adjusted EBITDA and we are exploring ways to mitigate these impacts in the future. Although this currency movement is really massive and doesn't happen every day. Based on what we have delivered to date as well as the current demand trends and the expected trajectory of the costs, we are fine-tuning our guidance for the full year. In January, we had projected our revenue for 2025 to be between EUR 1,020 and EUR 1,080 million based on the then prevalent exchange rates, we now expect revenue to come in near the lower end of that guidance. We had targeted a gross margin in the region of 30%. We expect to maintain that. We had targeted adjusted EBITDA margin between 14.5% and 15.5%. And while operating aspects wise, we are right on target and actually doing well against the target, because of the currency devaluations, we expect -- currently expect based on the current currency rates, adjusted EBITDA margin to be between 13.5% and 14.5%. So these -- by the way, these revaluations are kind of onetime. So if currency remains flat, then they will not recur in the subsequent quarters. Coming back to Q2, our best-performing industry cluster is management consulting and business information, while telecom, media and entertainment is under pressure. Central Europe grew 9%, lots of SAP work also in there. North America declined slightly, partly due to currency. Our NPS for the quarter was 66. And as I said, we have 188 clients, which are an important part of our footprint. We have very little churn in this set. We have a few new members this year. We continue to drive this. We expect to keep delighting these customers and doing more business with each one of them as we help them win in their markets. We remain diversified across industries, across clients, which enables us to deliver solid performance in good times, but also to deliver derisked performance in difficult times. But it's also an offensive strategy because part of what we are bringing to our clients is the ability to create ecosystems for them, ecosystems that may cut across industries or cut across traditional ways of thinking and allow our partners and clients to explore whole new business models. So for example, I will just talk about an example that's just from a couple of weeks ago, Nagarro has launched this -- supported this launch of a fully autonomous S market grocery store concept by SAP and a well-known contract food service provider. In less than 3 months, the team tells me 2.5 months, Nagarro helped pull together half a dozen shopping hardware solutions, various SAP and other software products, including our own NAVI platform for electronic shelf label integration in the retail setting and to sort of build this whole new ecosystem concept. And this is where Nagarro really shines. There are many more such examples. Our ability to execute complex ecosystem projects with speed and innovation around the world whether in Waldorf or in Bengaluru is what makes Nagarro really special. Anyway, coming back to the numbers, we have seen significant growth year-over-year in automotive, manufacturing and industrial and in management consulting and business information. We see a large opportunity in the digitization intelligence of -- and new intelligence in manufacturing and supply chains around the world. And especially in Europe, if you see the latest Der Spiegel article about how AI might actually do special things in Europe because AI in the U.S. is more geared towards consumer. AI in Germany, for example, may be much more geared towards manufacturing. So I think that also holds true for Japan, by the way. And I think you see that also in our own partnerships with Siemens and SAP and Advantech and others that we are sort of also steering a little bit in this direction. We continue to see declines in our Horizontal Tech industry, which we have sort of kind of -- we've personally moved away from in the last 10 years. Our customer diversification still remains. Our top 5 clients represent only 15% of total revenue in Q2. Similarly, regional diversity of revenue has been critical for us and for stability and growth. And we also find in environments that are problematic economically, where you have heightened policy uncertainty and trade tensions, it really helps to have this diversification. We continue to see, for example, excellent traction in the Middle East, winning some new prestigious logos across public and private sectors. And that's kind of what we also want to do with other regions as maybe some regions are slower, we are able to move faster in some other regions. In our last earnings call, I had said that we are determined to get growth back into double digits soon regardless of how our industry subsector performs. We are now totally focused on that. We have, as I mentioned in the last call, some initiatives to layer on these lines of growth over the normal subsector growth. And I can give you an update on some of these. The first of this is Japan. In the last months, we have continued to develop our partnerships targeting Japan and targeting Japanese companies throughout the world. We are working with multiple partners and have several dozen distinct business opportunities, small ones, bigger ones. It's really -- the groundwork is going very well. It's also reflecting in revenue increases that are fast, but from a tiny base. So it will take some time to get some impact. We want to do in Japan, what we did in the Middle East, land and expand via organic and small inorganic moves potentially. As I said in the last call, Japan is one of the world's largest economies, largest IT markets. It's -- the economy is changing of late. The mindset of the large Japanese companies is advancing, Warren Buffet is investing. There is a digital debt coming due, and the country really wants to leverage AI. All of this leads to a very exciting market. The second area was the German Mittelstand. I had mentioned that we work a lot with SAP in the German Mittelstand, but not so much in digital. That is starting to change, and that is also moving along fairly well. The third is Edge AI and IoT rooted primarily but not only in the partnership with Advantech that we had announced. Here again, we have a couple of dozen joint leads, and we are excited about what this partnership will mean for us next year onwards. What's not on the slide yet, but which is very important is data engineering and AI. As I said earlier, we are very encouraged to see that our clients now have a clearer view of the benefits that they can achieve through AI and a better idea of how they can derisk the challenges that AI imposes. As an engineering forward firm that is just not too big, not too small, we feel that we have an excellent chance at success in this new phase of transformation at our clients. We are big enough to be -- to have a seat at the table and small enough and engineering focused enough to be able to give the confidence that we can drive this forward in a humanistic pilot and expand and in a sensible cost-efficient way. We are redesigning our offerings. Therefore, we are redesigning our positioning. We are redesigning how we work internally for this next phase so that we can contribute -- we can have this new era -- we can launch this new era for the company and have this data engineering and AI contribute much more meaningfully to our revenue in the rest of the year and in the years to come. We will talk more about this in our coming earnings calls, I'm sure. Michael, with this, could you please hop in and say some words about the balance sheet and cash flows.

Sure. Thanks, Manas. The chart on the left here shows our financial position at the end of June 30, 2025. The financial liabilities were EUR 300.7 million and lease liabilities were at EUR 66.9 million. Cash balance remains strong at EUR 121.8 million, implying net liabilities of EUR 245.8 million, and net leverage ratio of 1.8x. The company's liquidity position at the end of the 6-month period was comfortable with working capital of EUR 206.9 million. For cash flows for 6 months ended June 30, 2025, we show total cash outflow of EUR 74 million versus an inflow of EUR 8.8 million for the comparable period last year. Our operating cash flow for the 6-month period decreased slightly to EUR 26.1 million versus EUR 27.6 million for the comparable period last year. And this was primarily due to the increase in payment of income taxes of EUR 8.7 million and other noncash incomes and expenses of EUR 9.1 million. Our days sales outstanding improved from 88 days at the end of the year of 2024 to 85 days at the end of June. And you can note that we calculate DSO based on quarterly revenues and include both contract assets and trade receivables. For cash flow from investing activities for the 6-month period, we saw an outflow of EUR 4.3 million. CapEx was EUR 3.7 million, which is less than 1% of our 6-month revenue, and that continues to reflect our asset-light approach. For cash outflow from financing activities for the 6-month period was EUR 95.8 million, mainly due to the purchase of treasury shares amounting to EUR 50.1 million. We also had a net repayment of bank loans of EUR 24.9 million, lease payments of EUR 11.3 million and an interest payment of EUR 9.6 million. If we move on to our capital allocation initiatives that are designed to create shareholder value. We bought back a total of approximately 684,000 shares as of June 30, 2025, for a total of EUR 50.1 million. We also announced a dividend of $1 per share, which amounted to EUR 12.6 million or 13.1% of our 2024 EBIT. This was declared during our annual meeting, which was held on June 30, 2025. And as Manas noted earlier, we also announced in April, the business transfer of Notion Edge France, which was an SAP gold partner that specializes in SAP customer experience. And this expands our offerings to keep players in retail, CPG, manufacturing as well as in other sectors in France, and we expect to continue to make acquisitions in the coming quarters as well. So with that, I will hand the call back to Manas.

Thanks, Michael. As you all know, in the last AGM, we had 3 new members join our Supervisory Board. I just would like to say a few words about the roles that they are playing and the subcommittees that we have set up. Martin Enderle, who is Chair -- was still recently Chair of the Supervisory Board at Delivery Hero, and he's also now the Chair of our Nomination and Remuneration Committee; Hans-Paul Buerkner, who has been Global CEO, Chairman and Chairman Emeritus of BCG is now Chair of the Strategy Committee and an excellent sparring partner with us on our -- on the reinvention I talked about, Nagarro's reinvention; and Jack Clemons, who has been Global CEO at Bata and has been on various other Boards, including being Chair of the Audit and Risk Committee of the Worldwide Fund for Nature, is now Chair of our Audit Committee. So we have had a couple of Board meetings. We've had some committee meetings after the AGM. And I'm just very happy with all the discussions and ideas and experience -- the wealth of experience of these members as well as the existing members earlier, the previous members of the Board are contributing. So we have a lot of energy and momentum on this side. We are also in the late stages of our search for a custodian of finance for the organization, our CFO. And we will talk more about that when we have concrete news. Well, that's that for the wrap-up and update for Q2 2025. We will now transition to the Q&A.

[Operator Instructions] Over to you Michael.

I'm not seeing any questions at this time. Can you confirm on your end?

I can see certain questions. Should I just -- how do you want to do this?

I can read the questions -- the first question comes...

Let me just take the questions and then answer them. I can just do that. I have them open in front of me, I can just answer that. So we have 10 minutes, so let me just make good use of the time. There are a couple of questions around buybacks and why we are not doing buybacks, even when the share price is relatively low? And I'll just say this that we remain prepared for buybacks, where we have certain covenants with our banks around our equity positions and all the fluctuation of these currencies, we are trying to be a little bit -- play a little bit on the safe side because currencies could really fluctuate some more. So -- but it's just that. We continue to keep that as a as part of the policy, and that is something we keep looking at opportunities to buy back shares. Michael, are you now back on the questions or if that's -- or Maria, either of you?

Yes, I'm still not seeing questions, but bear with me. Okay. I now have them as well. Okay. Why don't we move on to Andreas who asked, could you please elaborate on what drove the substantial improvement in gross margins? Is this tied to internal efficiency projects or only one-off? And should we expect the same level of gross margin in the coming quarters?

So it is tied to structural improvements in the way we work. I think that we are not promising that we will exceed our guidance on gross margin. But in general, we are comfortable with the guidance that we have. And the reason we say that we are not guiding above it above the original guidance is because we want to have the flexibility to reinvest. We're required in the areas of data engineering and AI. So -- but what we can say is that our margin support program has really gotten our business units, trying to trim the fat, if you will, and improve utilization. And I think we're doing a lot better now. And this is not a one-off result. It's something that we expect to persist in general. I mean the trend in general should persist, but we may reinvest some of that back and some work within the BUs on AI and data engineering. Next question, please?

Great. Next question comes from [Alessandro], who asked in addition to a question about the buyback. Will we add a CFO role in the company, it was announced last quarter?