Nagarro SE (NA9) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Nagarro SE Retail Investor Call following today's earnings release for Q1 2024. You should have received a copy of the earnings release for Nagarro'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 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 the Q&A session, where you can ask your questions. Nagarro is happy to partner with NetRoadshow for today's call. [Operator Instructions] With that, it is my pleasure to hand you over to Manas Human to begin.

Thanks, Brieka, and welcome, all of you again to the special earnings call for retail investors for Nagarro for Quarter 1 2024. And on behalf of all my Nagarro 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 1 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 otherwise challenging times from the demand perspective in our industry, Nagarro has still continued to do fairly well on the demand side. We are happy to say that our clients, they are 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 EUR 238 million of revenue, 8.7% of Q1 -- 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 of the costs that we incur in 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 about global. So they have 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 reestablish a definition for gross margin, which is more in line with our industry peers. Because otherwise, we were seeing the shrinkage of gross margin, which was not actually reflecting what is happening at a project level, but it's 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 EUR 126 million, and we retain our guidance at roughly EUR 1 billion 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, Brieka, maybe you can repeat the instructions for the questions once more, and we can dive into the questions directly.

[Operator Instructions] We have a text question from [ Arturo Lopez ]. Congratulations on the results of Q1. I would have 2 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 GenAI? There is a lot of talk about its implementation in enterprises and the huge productivity improvements it will bring, but it seems that implementation is slower.

Thank you very much. Those are 2 great questions. I will start with the first one, the lessons learned in 2023. There are probably lots of lessons that I learned. But I think the biggest one was that the coverage of Nagarro in the press -- in some sections of the press and the short seller's attacks on Nagarro, which 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 Nagarro makes, or we make at Nagarro, also has lots of lessons. And each lesson translates into strategies for the future. So the 2 strategies for 2024 and beyond as far as we can see are, for Nagarro, to be -- to go up and across. And what we mean by that is to move up to the boardroom at our clients 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 U.S. 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 GenAI, I think the perspective is very profound, and there's barely anything other than 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 evolutions come about in technology and especially where it relates to IT and the work of software, there are just a lot of productivity enhancements, a lot of innovations. And GenAI 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 will drive, hopefully, a lot of database or data-relevant business into our industry. So that's kind of, I think, the 2 sides of the coin with GenAI. I think adoption is still low because large companies, in particular, are very concerned that they will make a misstep, a colleague at a client put it very well, which he said that GenAI 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.

We have another text question from Manuel Perez from ESO. How do you see Nagarro's nonhierarchical and work-from-home culture evolving as you were growing? Do you think it is sustainable to add value in the future?"

Thanks, Manuel, and thanks for this question. I would treat these 2 quite differently. The nonhierarchical 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 got almost 20,000 people today. So at 20,000 people, I think we have faced all the challenges to scaling this nonhierarchical 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 an 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, which you can't really duplicate typically in a virtual setting. So it's more difficult to predict how that would look like in the next quarters or years. But the nonhierarchical part is very much, I think, valid despite everything that we have seen so far. Thank you very much for the question, Mr. Perez.

[Operator Instructions]

While we wait for the next question, I can give -- 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 Nagarro has been building the platforms and products for NetRoadshow for many, many years. So 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 a software that Nagarro 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, Brieka?

We have a text question from [ Eika Aragon from IEGH ]. Manas, congratulations for the Q1 results. Where do you feel other gaps strategically, organizationally or otherwise to fulfill your idea for Nagarro in the future and its key different natures?

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 2 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's just a -- it is a difficult time for the market, and they're good. But I think that these are results that are fairly pedestrian and we will do better as the market picks up. In terms of the overall strategy of the organization, I think that the 2 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 Nagarro, myself, but also, my other entrepreneur colleagues who are Co-Founders of Nagarro, they have 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 U.S. 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 Allgeier 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 spend 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.

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. That's a great question, Mr. Lopez. 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 Nagarro, let's say, user -- 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 very -- 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 of 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 -- the nudges that you -- 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 Nagarro, 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 if we 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 an Elon Musk would do. To go about 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 to be -- still to be seen, but it's the way we want to drive. Thank you for the question, Arturo. It's really, really a good one. Thanks.