In the third quarter of 2024, Nagarro SE (ETR:NA9n) (Ticker: NGR), a global leader in digital IT services, reported a steady increase in revenue and a strong cash position despite headwinds in the tech sector and ongoing economic uncertainties. Co-Founder Manas Human attributed the company's robust performance to its diverse portfolio and strategic acquisitions, such as the UK-based FWD View, which bolsters Nagarro's financial services offerings.
The company revised its full-year revenue guidance to approximately €960 million and reported a gross margin of 30% using a newly adopted calculation method. Despite the positive outcomes, Nagarro faces challenges in the fourth quarter due to seasonal slowdowns and anticipates cautious spending from clients in the face of geopolitical and economic concerns.
Key Takeaways
- Nagarro SE reported a 5.6% year-on-year revenue growth in constant currency, totaling €242.9 million for Q3 2024.
- The company revised its full-year revenue guidance to around €960 million with a 30% gross margin.
- Operating cash flow for the first nine months of 2024 was €64.9 million, an increase from the previous year.
- Nagarro's cash balance grew to €141 million, with a reduced net leverage ratio of 1.3x.
- North America emerged as the fastest-growing region with a 9.5% revenue increase.
- The company acquired FWD View, enhancing its financial services portfolio.
- Nagarro faces Q4 challenges with expected seasonal slowdowns and cautious client spending.
Company Outlook
- Nagarro SE anticipates a revised full-year revenue of approximately €960 million.
- The company advises stakeholders to rely on analyst estimates for performance projections beyond 2024.
Bearish Highlights
- The Horizontal Tech sector experienced an 11.3% year-on-year decline.
- Nagarro expects Q4 challenges due to increased holidays and client project pauses.
- A lack of significant recovery trends for 2025 is noted, with analysts sharing cautious sentiment.
Bullish Highlights
- Organic year-on-year revenue growth was 5.0% in constant currency.
- The Public sector saw substantial growth of 38.8%.
- Strategic acquisitions, such as FWD View, are expected to enhance service offerings and market position.
Misses
- The company faces potential productivity impacts in Q4 due to seasonal factors and client behavior.
Q&A Highlights
- Manas Human discussed Q4 expectations, noting possible decreases in working hours and project activity.
- For 2025, the company is conducting a bottom-up estimation and will provide guidance by year-end.
- Clients exhibit caution in spending due to factors like economic slowdowns in regions such as China.
Nagarro SE continues to navigate a complex global market landscape with strategic initiatives and a focus on maintaining financial health. While the company remains resilient in its performance, it acknowledges the challenges ahead and prepares for cautious spending patterns from clients in various sectors and regions. The Q3 2024 earnings call concluded with an acknowledgment of the ongoing support from stakeholders and a commitment to transparency in forecasting and operations.
Full transcript - None (NGRRF) Q3 2024:
Operator: [Technical Difficulty] 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 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 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 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. [Operator Instructions]. 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 will kindly ask that you stick to two questions. However, you may re-enter 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.
Manas Human: 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 Nagarro has in fact helped build. Nagarro'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. 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 risk some investor concerns around the ability of the business to generate cash, which arose during the years when the business is 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 million 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 15 based on September revenues but also on utilization and hiring trends. The new guidance was for approximately €960 million 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 stealing 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, 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 our 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. 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 in year-on-year in Q3 at 9.5%, while the rest of the world was the slowest for once de-growing in Q3 2024 by 5.4% over Q3 2023. We ended the quarter with a cash balance of €141 million. 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 an 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 founding 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 Nagarro's outlook beyond 2024. Instead, the consensus estimates or the financial analysts covering Nagarro are currently seen by the management Board as a clear 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 were -- was the best performing was Public, Non-profit and 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 6 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. 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 FWD View 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 Gagan, to say a few words on our financial position at the end of the quarter.
Gagan Bakshi: Thank you, Manas. Hello, everyone. A quick look at our financial position at September 30, 2024, shows financial liabilities of €280.5 million. Cash balance increased materially to €141 million implying a much lower net leverage of €183.9 million as well as a lower net leverage ratio of 1.3x. The company's liquidity position at the end of the nine-month period was comfortable with a working capital of €248 million. 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, which is a big improvement versus a cash outflow of nearly €16 million for the comparable period last year. Operating cash flows for the current nine-month period were a strong €64.9 million, which is an increase of €23.5 million versus the comparable period last year. The higher cash flow was mainly due to an increase in EBITDA by €11.9 million. We were also able to reduce the utilization of funds under the factoring program by €14.7 million 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 mainly due to payments of €9.7 million towards contractual obligations from older acquisitions. CapEx was €3.8 million, which is only half a percent of the nine-month rents are asset-light models. Cash flow from financing activities for this period was €25.5 million, 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. From a capital allocation perspective, we're happy to report the acquisition of FWD View on October 30. A UK-based company FWD View is recognized for its expertise in delivering data-driven solutions to the financial services industry. This strategic acquisition enriches Nagarro's portfolio in the financial services sector and further solidifies our market position in the UK. We have consolidated FWD View from November 1. With this, I hand over back to Manas. Thank you.
Manas Human: 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 Nagarro. That same day, Nagarro had issued an ad hoc statement. We have said all we wanted to via that statement and nothing do 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.
Operator: Great. Thanks, Manas. [Operator Instructions]. And the first question today will come from Andreas Wolf. Please go ahead, Andreas.
Andreas Wolf: Hi, thank you for taking my questions. It seems like the audio works. So here's my question. If I look at your full year guidance, Manas, 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' estimates. Do we already see more traction from the customer side with regard to project for next year? And are there specific industries 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 de-growth mode. Thank you.
Manas Human: 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 were 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 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, we have -- we just -- I expressed some thoughts about the analyst estimates. We also, of course, will start and run a -- we have started and we are running 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 are -- have been waiting for a while now for a step recovery. I think it's not very -- it's not -- nothing to be too nervous about, but at the same time, the recovery is still not fully there. So 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.
Andreas Wolf: 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 tariffs, whatsoever? Or are there other topics that they are bringing forward?
Manas Human: 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 just -- it's a very complicated world situation with a number of parts that are not in the -- 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 just we don't see that big jump back into spending.
Operator: There are no additional questions at this time. Great. With that, why don't I turn it back to Manas?
Manas Human: 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.
Operator: Great. Thank you, everyone. This concludes Nagarro SE's Q3 2024 Earnings Call. Thank you all for joining in. You may now disconnect your lines.
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