Manas Human - Co-Founder & Custodian, Entrepreneurship:

Hello, and welcome to the Nagarro Q1, 2025 Retail Investors Call. Thank you all for joining us today. At this time, I would like to turn the call over to Michael Knapp at Nagarro to begin. Please go ahead.

Great. Thanks Harry, and good afternoon to everyone. Welcome to Nagarro's retail investors call, following today's earnings release for Q1 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 first quarter 2025 and full year 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 in today's call are Manas Human 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. As in previous retail calls we'll 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 again with NetRoadshow for today's call. Let me briefly explain, explain how to raise your questions. If you've joined the call via Zoom, you can use the raise hand button on your Zoom toolbar and we'll open your line for you to ask your question verbally. Those of you 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. We would kindly ask that you stick to two questions, however, you may re-enter the queue, and if there's time, we'll come back to you for follow up. It is now my pleasure to hand you over to Manas.

Thank you, Michael. And thanks everybody for joining this call. From past experience, we know that a lot of you have also joined the previous call that we have, the earnings call. So, as in past, earnings calls, we will keep this a little brief by way of presentation and open up more time for Q&A. So with that, maybe we just go straight into quarter one, and the results are quarter one. We have revenue of €247 million and adjusted EBITDA of 30.2 million which is an adjusted EBITDA margin of 12.2%. And as I said on the, on the earnings call, the performance is in fact a little better than it looks for a couple of reasons. One, we have a few million of deferred revenue from this quarter, what we call deferred revenue is when we have done the work, but the contracting isn't completed, maybe because the client is in a hurry to move forward with the work, but we are not ready to invoice it and not ready to book revenue yet. This is not unusual in our business, but our deferred revenue has gone from about €2 million at year end in December 31st, 2024, all the way up to €5.5 million at the end of Q1. So the delta is an amount that if we actually had recognized that, that would bolster both the top line and drop directly to the bottom line. We also have significant negative currency effects on adjusted EBITDA in Q1. The change in exchange rates, especially the Euro U.S. exchange rates, leads to a €5 million negative impact on the adjusted EBITDA as we define it. Roughly €4 million of that is due to reevaluation of intercompany loans, and roughly €1 million of that is from reevaluation of the money that we hold in banks. So taken together, Q1 was stronger than the numbers would suggest, and based on the demand evolution that we have seen so far, and also the trajectory of our costs, we do not make any changes to our guidance for 2025 and it stays in place. We are also seeing more activity in the markets, you know, with, we believe that with GenAI there was a time of paralysis when people were afraid to work on the new technology. It was not clear where this technology was going to impact IT spending. I think we are past that stage, and it's now a more mature technology and the action in IT services around data and cloud and AI and this interconnected threesome is, has really begun. And we also believe that a lot of industries have some companies that are leading the way in the use of data and AI and when you have these success stories -- once you have these success stories, I think that the adoption across these industries and the sudden race to invest will come. It's a bit like, I think with post-COVID when everyone had this aha moment and everyone was like, we need to get more digital. I think you'll see this point when you have the first few, successful stories that everyone will want to get much more AI intensive. So, coming back to Q1, our best performing industry was management consulting and business information. While horizontal tech continued to be under pressure. We have been diversifying away from horizontal tech over the last many years, so that's a positive. Although we do see some signs of life again in this sector. But in Q1, we had North America fairly steady, partly because of its exposure to horizontal tech. While Central Europe grew 8%. Our NPS for quarter one was very high at 69, but I would caution you to read the, the footnote below. We have always excluded some very small projects from the surveys that we set out because it's very tedious to go and follow up with very small projects about replying to these surveys. And people also don't necessarily appreciate it to be constantly reminded to send this, these answers in. If the projects are of a very small size, we have adjusted this threshold of size a little bit upwards because we were really struggling to get back our responses for very tiny projects. But you can read more about that in the Q1 report, there's more detail around that. Moving to the next slide, which shows the breakup of our industries, you can see that, we continue to remain very diversified, and this diversification across industries and clients means that we are not at risk from one industry slowing down or one client really dropping off. So you can see that our top five clients account for still just about 15% of our revenue, and we have maintained this degree of diversification. But this industry diversification is also of great value to us as we work with our clients. So for example, we were able to work with Siemens to get Siemens products and services into an automotive company in Saudi Arabia called Ceer Motors and Ceer Motors. The, you can see the case study on a website. But Ceer Motors is like the, the pride of Saudi Arabia automotive, trying to build a new electric vehicle platform. And you know, based on the BMW platform but it's a very interesting case study. And we were able to do this because we were able to bring many different capabilities. We can bring capabilities like SAP, we can bring capability like automotive capability. We can bring capability like PLM or manufacturing, which is product lifecycle management or manufacturing execution systems. And this ability, which is sort of comes from the various things we do, acquisitions we have done, like --or mergers or acquisitions we have done. Turkey brings a strong SAP for automotive capability. We have ATCS in the past with strong auto automotive, with the German -- for the German companies we have Infocore with strong PLM and MES capability. So stringing all this together to deliver value to a client, and then to be able to add on a partner, a client, and a partner like Siemens, and to bring it together. I think that's the kind of diversification we are talking about. It's not passive diversification, but rather very active offensive, aggressive diversification. So this work with Siemens to get into Ceer, meant that we were the only partner really, you know, put, put forward by Siemens in the Transform Nina event in Dubai. It was a, it was fantastic to be there, but also at the Hanover, we were given a kiosk in the, in the Siemens booth. And this is the kind of partnering and joint selling with our customers that we are trying to graduate to as the company gets more mature and is really able to help our clients to also grow their revenue and their business around the world. And when I said around the world, this is around the world. We are very much around the world, as you know, and sometimes we get some flag for it. But the reason we were able to bring Siemens into Ceer Motors was because we were already in Saudi Arabia, and we were already in Saudi Arabia because we did this very small acquisition, you know, from the, compared to the size we are at, which was Farabi and we got some great people along with that. And with that, we have been able to really grow our business in the Middle East, we’re based mainly out of Dubai, but now moving to other cities in the region, including in Saudi Arabia. So this diversification, regional diversification in the last slide we talked of in industry and client diversification. This regional diversification is also very important for our clients because they're large multinational. So we are showing up with them in different countries around the world and following them around the globe and supporting them around the globe, and also helping them adapt to different contexts, right? And this diversification also diversifies our risk from national level economic trends or currency movements. So this is a bit of a natural hedge, right? So that's, that's the story of our diversification by region. I will jump -- you'll see the full slide deck on our website with, with a few more slides, but I want to leave time for questions on this call. So you'll know that we have, you're doing a lot by way of capital allocation initiatives to add more value to our shareholders. We have share buybacks that we are doing, we have bought back 556,000 shares by May 9th. We have a, a dividend policy now, we have proposed a dividend of €1 a share to the AGM we will propose it to the next -- to the coming AGM. And we also have our inorganic growth as part of our capital allocation strategy. And we’re primarily focused on both on acquisitions, but also open to doing the occasional, more strategic acquisition. Moving on from there, I'd like to talk a little bit about the initiatives that we have for growth, because ultimately we are a little bit I would say eager to break out of this industry level growth. And for that, we need to not just stay with our current clients, but find some new channels of growth. And we think partnerships are a big part of it. And you would've heard in the last few months, if you're following our press notes or press releases, that we are struck up a couple of these partnerships that we are quite excited about, and there are others that we want to strike up and deepen and broaden. So the first is about Japan Inc. Right? So Japan Inc. is extremely exciting right now. The economy is a very big economy, one of the biggest purchases of IT services, but it has a lot of digital debt. So digital transformation has not really been rolled out across Japan like it has over other -- across other companies. So there is this opportunity. We also have this pivot from Japan towards the west and to India, for example, for geopolitical reasons. You have a country that really wants to ride this data AI wave. It feels it missed the digital transformation wave a bit. There is a new excitement in the capital market, the Berkshire Hathaway and Warren Buffet are investing in some of the large trading houses. The economy is changing and, and growing. So this -- it's a very interesting, context. We have some history of working a different language other than English, in the German context, for example, where we started working 10, 15, 20 years ago. As you know, my part of Nagarro. So we are very excited about Japan. We have excellent leadership from Nagarro which is focused on Japan. We have a new global business unit focused on Japan, a new center of excellence to help our other business units work with Japan. So Japan is a very big area. You know, we have announced one partnership some months ago. We will have much more coming and we are very excited about this being about the drivers of our growth, not necessarily this year, but, but next year for sure. I mean some, a little bit this year, but much more next year. The second topic is Edge AI and Edge Computing. And we think that in the future there will be a lot more synergy between hardware and software. So today we make mostly software projects, but there are companies like Advantec, which are leaders in mostly hardware delivery. And we are now working with Advantec. I'm in Taiwan next week for COMPUTEX TAIPEI to announce some of the work that we are planning to do together. But we have this opportunity to really lead in the various parts around the hardware to build, not just the edge AI kind of solutions that can power this over the hardware. Because the expectation is that Edge Computing and Edge AI will grow at high double significant double digits for the next few years. So that's a big part of what we are trying to do, but also to take to our clients more integrated solutions to take to Advantech’s clients integrated solutions, hardware, software, solutions. So this is the second big area where we want to invest in and to create a separate layer of inorganic growth. And the third, but not the least is the German Mittelstand, which is the mid-market. We work -- we always thought that we would really be able to ride this Mittelstand, and we do really excel here in the SAP business unit, but somehow we have not been able to do that much on the digital engineering side. And now, with the benefit of a couple of years of not being able to do much, we realize what the problem was, which was that each global business unit had so many opportunities in the U.S. in the Middle East, in Asia, that they were not necessarily investing enough in German located capabilities. And the Mittelstand more than the large companies, more than the Lufthansa’s, more than big car companies needs the German language connect. So we have created this business unit focused on providing that interface to the other business units. It's called the Hidden Champions, or which are the Mittelstand business unit. And we believe that in this segment as well, the largest German services companies, IT services companies, one of the largest listed companies in Germany. We have the right to win. So this is the third layer of growth that we want to layer over the general growth trajectory of the sub-sector that we operate in. So that's, that's one whole part of the story. The other part is we also have 186 clients where we do more than a €1 million. How do we up the game there? And the big meta trend, or the meta story is that we have worked with a lot of decentralization of business units. We believe that we are at a, at an interesting time right now. One, because of AI, there is a need to coordinate a bit more across business units. The technologies are changing very rapidly. We are seeing the need to build some IP, and we don't want to build it in 20 different places. We want to build it in a way that's more -- at least more coordinated. And for that, we have a lead CTO designated who is our AI leader to sort of coordinate the spend on AI platforms. But, we are also trying to up the go, move up. We call it the strategy up across together. The up is the together part is, for example, on the, on the IP spend. The up part is to move up into the boardrooms to actually have more CXO connects. We have many new people that we have joined us that we are very excited about to drive this. And we are also creating topics that are cross BU and more centralized, like supply chain to add on to supply chain consulting to add on to what we are already doing by different BU separately. So there's a whole lot of push to try to get the quality and, quantity of our engagements with our existing clients up. So, and part of this is driven by the fact that we feel the organization and the uniqueness of the experience that we are trying to drive, that is more or less established. So if you look at the NPS that I just talked about, Net Promoter Score of 69, that means that our clients are largely happy with us. And what we have to do -- or delighted with us, rather. What we have to do is to put more clients, which is the first part, top part of the slide, and then to do more with existing clients, which is the bottom part of the slide. So we feel that the org is quite mature and some of the central, coordination is, is now possible, without damaging the, the uniqueness of the organization. And also in line with these initiatives with the same context, we are in line to hire this year our first custodian of finance in the organization, or CFO. And we feel, again, as I said, that the org is now mature enough to be able to be optimized a bit in this way. Coming now to one more aspect of our maturing as a company. We have an excellent supervisory board today with people who have put in a lot of effort and a lot of time and blood, sweat, and tears to help steer the company or to help us steer the company or to play the role of governance and oversight, going through with this new auditor, for example, and just a lot of work. But we also have now some very exciting changes to this, or additions to this Supervisory Board. As you know, George, who was Chair of the Supervisory Board had stepped down from the Chair position for personal reasons. He's happy to return to the Board, but doesn't want to return as Chair. So we will be proposing him to the AGM -- I mean, the Supervisory Board and Executive Board, strictly speaking, will be proposing him at the AGM as a member of the board. But we also have three very exciting new colleagues who I'm looking forward to working with. We have Martin Enderle, who was still recently and for many years, the Chair of the Supervisory Board of Delivery Hero, and has earlier been the CEO of Scout24. We have Hans-Paul Burkner, who's been the global CEO of BCG and the global Chairman of BCG and Chairman Emeritus of BCG. So a very credentialed, person as far as professional services are concerned. And then we have -- and consulting and strategy are concerned. And then we have Jack Clemens, who has been Global CEO at Barta and has been global CFO at Barta before that and he has been on many other boards, including -- and I like this very much, the Chair of the Risk and Audit Committee of the WWF, the WorldWide Fund for Nature. So we have a lot of capability that this Board is bringing. I think that investors can just feel a lot more comfort that there is a strong supervisory board to coordinate the running of the company in the future. But for us, for the management board, it's also a lot of fun to look forward to having more diverse perspectives and diverse experiences to inform our decision making going forward. Hans-Paul Burkner for example, has been part of the enormous growth of BCG over the last years. And I think that's the kind of growth that we want to mimic at Nagarro. So that's, that's all we have in terms of the slides that we're presenting for this retail investors call. And maybe we can go from here to the Q&A.

Okay. Thank you, Manas. Again, if you join the call via Zoom and you'd like to ask a question, please use the raise hand button on your Zoom toolbar for written questions. Please use the Q&A button, also found on your Zoom toolbar. And 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're paused for just a moment while we assemble our roster of questions. And our first question comes from Arturo, the question is. Hi, Manas. I appreciate that the company is taking the right initiatives to enhance the value of the company. What is the company's view on a shift that is being talked about in the industry to move to a platform business and less services business, with no need to increase headcount in proportion to revenues? Will Nagarro start developing more IPs to sell to customers such as Ginger, Inspector, or Yeti?

thanks, Arturo. I think that this is a complex question. I think that the -- what's actually happening is that, I think existing large products are also being challenged because the same functionality can be built more custom, more tailored. So, that's one I think one trend that is possible that we will see. But the idea of building platforms over which you are customizing or over which you are building out more specific client specific functionality, I think that is obviously there. So as a company, we are doing a bunch of that. And as I said earlier, we want to make it a lot more coordinated across business units. But definitely it'll be more of an area of growth, but we stay flexible and not ideological about this. We would like to do what makes sense for our clients at, at that point in time. And we will keep reevaluating it. And I believe that this will change dramatically from year to year, because this is a very fast changing environment right now. But yes absolutely, we stay open to that. It's not a major -- it's not something that you will start to see affect our core dynamics from next quarter or something like that. It's something that we are definitely reorganizing to take full advantage of.

Great. Thank you, Manas. Our next question comes from Luis. The question is, could you please dive deeper into the Saudi Arabia market? It's a fast growing country with many investments in digitization. Could you please elaborate on Nagarro’s market strategy in terms of increasing brand awareness and being considered in different RFPs in the region that might be usually targeted by big brands like Oracle or Accenture? Thanks.

Yes. So I think that in general, that brand awareness of Nagarro is something that we keep working on. But there's a long way to go, and especially in a new market which is more brand conscious perhaps. It's more likely that the first vendors that come to mind would be some of the better known companies. But that said, what we are trying to do, for example, with Siemens in the market and what we are able to do with some of the clients that I mentioned -- some of the case studies I mentioned is very interesting. So I think that we are not that far away from a time when we will have our own networks of people who would've seen that they would get better outcomes with Nagarro, just like we, we have done in different parts of the world. So, it's a very interesting market. It's a -- let me say, a market that is in the process of becoming mature, so there's a lot of fast movement, but also a lot of zig zigzagging. But I think it's a great opportunity. And in fact, in general, what's happening in that country more broadly is also very exciting, just for the planet I would say. It's very exciting.

Thank you. You Manas. We have a follow up question from Arturo. The question is, do you have any kind of strategy in Germany in order to benefit from the increase in public spending planned under the new government? Is this linked to the increase in growth that is the German Mittelstand that you are aiming for?

Arturo, possibly, yes. But I will admit that we have, as of now only a limited direct exposure to the public expenditure in Germany. And it's something that we have tried to remedy with M&A, but not been able to get the right company to team up with. But it's something that it's on our mind, but I hope that the Mittelstand it becomes a proxy for this public spending. But even outside that, I think the German Mittelstand is really one of the forces of -- economic forces on the planet. And the kind of work that they do is really incredible. And I think we would love to bring our capabilities to supplement that, to help them grow their businesses. So I think it's sort of linked to public spending, but not totally dependent on public spending. And nor is it a substitute for having a direct public sector revenue in Germany.

Thank you, Manas. The next question comes from Alejandro. The question is regarding the recent margin decline. Could you elaborate on contributing factors? Was increased price competition a significant driver?

Hi Alejandro. As I mentioned in the Q1 description, it's coming from a couple of things, it's not really big a decline as it seems at first sight because of the currency impact of -- negative currency effects about €5 million from just the reevaluation of intercompany loans and bank deposits in dollars, for example. There is an impact of the increase in deferred revenue in this quarter, which again would drop a few million to the bottom line. So it's not really that significant. I think the pricing context is competitive, but it's not the reason for the margin decline.

Great. And maybe just a follow on is, how competitive is the market currently, and what is the major risk that you envision to sustaining your margins?

So the market remains competitive. I think that's kind of like, it's always been competitive, and it remains that way. I think the margins are not at risk in my view from the competitiveness of the market. I think what we typically see as pretty standard in this industry over -- it varies from quarter to quarter. But in the general context, what you have is that the wage inflation, the currency exchange rates and the rates that clients are willing to pay, they kind of move in tandem, and they all tend to balance out each other, especially with regards to some of the bigger currency payers that are used in global services, like, dollar to rupee -- Indian rupee for example. So it's kind of like self-maintaining. So I don't think that's like a big threat for margins at the moment.

Great. And one last question from Alejandro. We concerns the automotive sector a key area for Nagarro. How will tariffs affect it?

So I think we are at a point where we are not very sure how tariffs will affect anything, and we are not sure what the tariffs will be. So I think there is a lot of uncertainty here. But, I think that -- we are hopeful that things will stabilize and we will have a way forward that everybody in the economy is looking for. And you can see that there's already a lot of balancing and stabilization and walking back some of the more extreme ideas. So we are positive. I think the, the U.S. economy in particular has a tendency to bounce back. And the U.S. in general is a very much market driven country where things can't be out of whack for too long. So we are hopeful that things will stabilize, which will obviously flow through to the automotive sector. But again, no one really knows at this point.

Great. Thank you, Manas. There are no additional questions at this time.

Great. Thank you all for joining and thanks for your support and look forward to our meeting you on the next earnings call or in other forums. Thank you very much.

Thank you everyone. This concludes Nagarro's retail investors' call. Thank you all for joining in, and you may now disconnect your lines.