Nagarro SE (NA9) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Nagarro SE's Q2 2026 Earnings Call. [Operator Instructions] And with that, it is my pleasure to hand you over to Michael.

Great. Thank you, Adam, and good afternoon, everyone. My name is Michael Knapp, and I'm part of the Investor Relations team at Nagarro. If you have not yet received a copy of our earnings release, you can find it as well as a copy of our half yearly statement and today's presentation in the Investor Relations section of nagarro.com. Joining me today is Manas Human, our Co-Founder and Custodian of Entrepreneurship; and Prateek Aggarwal, our Chief Financial Officer. Before we begin, please note that some of our statements made during this call may be forward-looking and are subject to risks and uncertainties as outlined in our financial reports. Additionally, please refer to our half yearly statement for important information regarding non-IFRS measures. And with that, I'm pleased to hand you over to Manas.

Thanks, Michael. Once again, welcome, everyone, and thank you for joining us on this earnings call. Let me start this call by talking a few minutes about the topic of the day, AI. It is now becoming very clear that enterprise AI transformations will have to be anchored in excellent engineering. The challenge with AI, as we are hearing about every day, is to make it work consistently, dependably and safely across complex mission-critical environments, and that is primarily an engineering problem. This is now becoming very obvious to our clients. So it is very exciting and very validating, if I may say so, that the capabilities that Nagarro has developed over the years and over decades are now an excellent fit for this new world. Nagarro brings deep engineering depth across data, AI, platforms and products. And on top of this engineering, we bring strong client intelligence and client context developed over long-term relationships with these clients that stretch over years and very often decades. And having worked so long in digital transformations at those clients, we bring the capability to navigate those clients to navigate the enterprise complexity across business, tech and operations. We have always been helping clients go from strategy to execution. We work routinely with the world's leading consulting firms to bridge the gap between that strategic advice and the engineering execution. Hence, today, when our clients want to scale AI and create value with responsible guardrails and with safety and trust, we believe Nagarro is the right engineering partner for them. So beyond the results of the quarter just gone by, which we'll get into in a moment, this is the overall context that as we stand at the starting line of this AI revolution, we feel that Nagarro is a very strong contender. Now with those introductory words, let's get into the quarter. There have been many exciting developments since the last earnings call. I will start with the most important among them, our potential combination with Persistent Systems. On June 26, Persistent and Nagarro signed a business combination agreement to form the Persistent Nagarro Group, a global leader in AI-led digital engineering. Following up on that, on August 4, Persistent announced that the shareholders have approved the proposed acquisition of Nagarro SE in their AGM. Following the authorization by BaFin, Persistent's voluntary public takeover offer for all of Nagarro shares is now open. You can find the details of this offer at www.galaxy-offer.com. Please note that several mandatory regulatory approvals are still not in place and still awaited, and the teams are working hard to procure these. Please also note that some hours ago, Nagarro's Management Board and Supervisory Board have issued the joint present statement on the voluntary public takeover offer, which supports and welcomes the offer as being in the best interest of Nagarro and recommends that the Nagarro shareholders accept this offer. This is just a gist of the joint reason statement. The entire joint reason statement can be found on our website. We will not be taking any questions here about the proposed combination on this call since the joint reason statement is out there in all its glorious detail, and we can't really add to it with our answers. So please bear with us on this. We will not be taking any questions. You are please invited to refer to the joint reason statement. Moving on to other exciting developments in this quarter. Nagarro's quarterly NPS has hit an all-time high of 70. Our NPS has mostly stayed in the 60s, dropping below 60 only once. But to have it up at 70 for the first time is very gratifying. I would like to congratulate all my colleagues who are doing great work for all our clients and also thank our clients for their trust and collaboration that's delivering this joint success. In 2026, Nagarro participated in the ISG Digital Engineering Services survey for midsized providers for the very first time, and we were ranked #1 globally in customer satisfaction and delivery execution, which got us the CX Star Performer Star of Excellence. Importantly, the Star of Excellence recognition is based on independent customer feedback, which makes it particularly meaningful and gratifying. So this is a high honor that correlates very nicely to the point above on our high NPS. In addition to the CX Star Performer recognition, we were recognized as a leader for Europe in the ISG Provider Lens. Finally, we signed on many incredible new clients this quarter. These include an iconic global sporting event that takes place every 4 years. By the way, we also work with another iconic global sporting event that takes place every 4 years, but this one is a new client. One of the hottest -- it includes one of the hottest U.S. brands of running shoes and includes a leading European insurance group, a Middle Eastern government health services department, a leading U.S. roofing maker, a leading tiling and flooring maker from the Middle East, a leading auto company in Japan, an iconic apparel group in Australia and many others. In fact, even after the end of Q2, there have been many similarly exciting new client wins between July -- June 30 and today, but I will leave these for the next earnings call. Now let's get into the quarter. I will turn my camera off so you can focus on the numbers. We delivered a decent financial performance in the first half of 2026, generating revenue of EUR 501 million, representing 4.2% constant currency growth year-over-year. Q1 was 6.5% constant currency growth, whereas Q2 was slower at 2.0% constant currency growth. Comparing H1 2026 to H1 2025 across our top 5 countries, in constant currency, it is interesting that revenues have grown strongly in 3 of the 5 largest countries for us. In constant currency, revenues from the U.S. grew 9.0% from H1 2025 to H1 2026, India revenues grew 14.7% in this same period and UAE, the Emirates revenues grew 16.8%. But revenues from Germany declined 3.8% and Austria declined 5.0% due to a couple of specific client and engagement context. We see these Germany and Austria scale downs as temporary and are working to reverse them. Overall, what we are seeing is that the broader demand environment for digital services remains muted as the clients still work through and think through the implications of AI on digital build. Against that muted demand scenario, our results demonstrate the strength of our customer relationships and the power of diversification. Gross margin exceeded 32% in Q2 with a healthy mix of business, strong delivery execution and ongoing operational discipline across the organization. At the same time, adjusted EBITDA margin reached 15.0% in Q2 2026, although assisted by some FX movements. We see still large, significant low-hanging opportunities to improve sustainable profitability through improved utilization and streamlining investments. We now have a new CFO. We are working on those and expect to see results by Q4. Customer engagement and satisfaction, of course, remain key indicators of the health of our business, and we continue to see encouraging results in this area. As I just mentioned, our customer satisfaction metrics are excellent. Our CSAT score of 93.2 and an NPS of 70. These underscore the trust our clients place in us and the value they see in our partnership. We believe that these customer outcomes are a direct reflection of our strategy with people, our culture and our commitment to delivering measurable business impact. The number of clients generating more than EUR 1 million of revenue in the trailing 12 months increased to 184, up from 179 in the first quarter. With that, Prateek, would you like to discuss the balance sheet and cash flows? Prateek, if you're speaking, you're on mute. Go ahead, please.

Yes, sure. Sorry. I would be happy to. The chart on the left shows our financial position as at June 30, 2026. The financial liabilities were EUR 310.5 million and lease liability were EUR 67.4 million. Our cash balance remained strong at EUR 131.3 million, in fact, grew versus the previous -- in the last 6 months, implying net liabilities of EUR 246.6 million and a net leverage ratio of 1.7x. The company's liquidity position at the end of the 6-month period was comfortable with working capital of EUR 236.2 million, which of course, includes EUR 131 million of cash. Total cash flows for the 6-month period ended June 30, show a total cash inflow of EUR 4.6 million versus an outflow of EUR 57.7 million for the comparable period last year. Operating cash flow, OCF, was -- for Q2 was EUR 29.8 million. For the 6-month period, OCF was EUR 29.5 million, decreasing by EUR 12.9 million from EUR 42.4 million in H1 of 2025. This was primarily due to pending collections from some clients, which we are confident of collecting in Q3. The first 1.5 months of Q3 have already been very productive, and we are promised very good numbers for the quarter -- upcoming quarter. Working capital was also impacted by increased payments related to trade payables and statutory dues as compared to H1 2025. Days sales outstanding increased from 85 days at June 30, 2025, to 86 days at the end of June '26, which we are confident of bringing down in Q3, as I mentioned earlier. As you all know, we calculate DSO based on quarterly revenues and include both contract assets and trade receivables. Cash flow from investing activities for the current 6-month period was an outflow of EUR 2.9 million, and CapEx was just EUR 1 million, less than 1% of the 6-month revenue, reflecting our asset-light model. Cash outflow from financing activities for the current 6-month period was EUR 22.1 million as compared to EUR 95.8 million in H1 last year. Cash outflows decreased mainly due to a decrease in the purchase of treasury shares amounting to EUR 47.8 million and a decrease in net repayment of bank loans of EUR 23.9 million. With that, I'll hand the call back to Manas.

Thanks, Prateek. Before we conclude and before we go to Q&A, I'd like to leave you with a few thoughts on why I'm so excited about the future. We believe that this potential combination of Persistent and Nagarro represents a unique opportunity to create a truly differentiated global leader in AI-led digital engineering. The strategic logic is very compelling. We have laid out in public the complementarities in terms of geographical presence, the complementarities in terms of industry footprints and the complementarities in terms of our offerings as well. And even beyond that -- while these complementarities are very important, even beyond that, what is equally important is that this combination will bring together 2 organizations that share similar ethical values, a strong heritage in engineering and a long-term commitment to clients and associates around the world. So that's what is very, very exciting for us. But meanwhile, regardless of that process and regardless of those outcomes, Nagarro remains fully focused on serving our clients and executing our strategy for transformation, growth and leadership in this new AI world. Thank you for your continued support, your engagement and your confidence in us. And with that, we can now transition to Q&A. As I mentioned before, we will not be taking any questions related to the potential business combination with Persistent. Over to you, Adam.

[Operator Instructions] And our first question today will come from Martin Comtesse from Jefferies.

Yes. So I just wanted to touch quickly on the respective regions. I can see that -- and you mentioned that Germany, in particular, stood up as a negative in the second quarter, but also in the first half, while the U.S. accelerated. Can you just point out as specific topics or reasons why that is? Or is it really just a geographical difference in terms of how early cyclical the markets are? And in that regard, maybe also touch on the status quo of your initiative with German Mittelstand, but also maybe with Japan as a new focus area because that's been quite a highlight in the past. And the second question would be on pricing. Can you mention how pricing has evolved since your debates evolve much more around AI and how you work that into your offering in the tender process?

Thanks, Martin. Thanks for the question. So our results in Germany are affected by the planned ramp down of some SAP projects, so -- among other things. So I think it's a little bit temporary and not necessarily structural. On the other hand, in the U.S., especially our management consulting-related work is increasing. And this is, again, tying back to what I just said about the link between strategy and engineering execution. I think we do that very well, and that is actually playing out well in the U.S. as companies are trying to move faster on AI. In terms of the Mittelstand, I think our progress has been strong in the SAP space. Beyond SAP, we have had some progress, but it's still been not moving the needle as much as you would like it to. In Japan, I think we have started to increase our footprint, our head count, our number of clients. But again, like Europe, it's a geography where progresses takes time and takes the building of trust and relationships. So we, again, have some work ahead of us. Coming to pricing with AI, of course, the models are still evolving. When it comes to fixed bids and long-term engagements, clients are expecting the productivity gains of AI to be factored into those long-term models. That is not a very large part of our business, I must say. And in the time and expense part of our business, there's a lot of room to design it in different ways, and you must have heard about it from all the industry players. And we see a large variety of different plays there. But in general, the pricing pressure is less on the time and expense side of things. In fact, we don't feel it as much there at all.