Earnings Transcript for NGRRF - Q4 Fiscal Year 2022

Manas Human: A word about Nagarro. For those who are new to Nagarro, and maybe a reminder for those who already know the company, we are a leader in creating digital products and digital solutions for blue chip companies throughout the world. We are a global company domiciled in Germany. We have an unusual highly differentiated organizational design and culture that delivers agility, entrepreneurship and a global mindset. Next slide, please. Next slide, please. Is it just me or -- Kyle, can you please advance the slide? Okay. Perfect. Thank you. So this mix of agility, entrepreneurship and a global mindset has once again delivered excellently for Nagarro in 2022. Our revenue grew from €546 million to €856 million, up 56.8% from 2021. In constant currency, it was 48% and 39% in organic constant currency. These, you will agree, are simply great growth numbers. Wage inflation and attrition declined in '22 in general. We ended the year with a gross margin of 28.9% and an adjusted EBITDA margin of 17.3%, which translates to an adjusted EBITDA of €148 million. And today, we reiterate our guidance for 2023, we still feel comfortable about it

Gagan Bakshi: Thank you, Manas. And while we wait for the slide to come up, you've just heard about our Q4 '22 and FY '22 prelims. To support our rapid growth from a balance sheet perspective, our focus is to maintain a balanced net leverage position while ensuring adequate liquidity. In the left-hand chart, for the 12 months ended December 31, 2022, we're showing financial liabilities of €216.5 million. This amount consists of our syndicated credit facility, various working capital facilities, bank loans and liabilities for factoring. Our lease liabilities were €55.8 million, that's the green bar. And with a positive cash balance of €110.2 million, our net leverage stood at €162.2 million at the year-end 2022. With an adjusted EBITDA of €148.1 million, as mentioned before, our net leverage ratio is at 1.1x. So the company's liquidity position at year-end 2022 is comfortable. Now on to our cash flows. These numbers are shown on the right-hand chart. For the year FY 2022, the total cash flow was a positive €9.2 million against a negative €8.8 million in the previous year. Our operating cash flow in FY '22 increased to €82.3 million from €44 million in FY '21, primarily on the back of our record growth year-to-date. Cash outflow from investing activities for '22 was €44.8 million as outflow as compared to a cash outflow of €52.8 million for the comparable period last year. And finally, the cash outflow from financing activities was €28.3 million this year. Overall, we had another solid operating performance in FY '22, which reflects our strong organic growth and continued commitment to M&A. With this, I hand over back to Manas. Thank you all.

Manas Human: Thanks, Gagan. So this slide that we have here is the Nagarro investment highlights, and it's mostly unchanged since we listed in December 2020. And it's worth going over it once again line by line to see how Nagarro has performed in these 2 years and lived up to its promise. We said that we were engineering DNA digital leaders. We said that we had an enterprise agile approach, And this was really tested during COVID and post-COVID. And I think we did well. We said that we had large blue chip clients. And in these 2 years, we have added more logos, we have added more case studies, we have added more testimonials. You may have seen them on the Internet. We said that we were a differentiated agile, entrepreneurial and global company. And as we have doubled in size in terms of headcount and as we have worked remotely, you have seen how that has come into play. We said that we could grow organically, and we have shown that we can grow organically. I mean, 40% -- nearly 40% organic constant currency growth this year is just as an example. We said we could grow via M&A, and we have done 5 acquisitions in these -- at least significant acquisitions in -- since spinoff, maybe a couple of smaller ones, including the 2 recent ones

A - Unidentified Company Representative: Yes, Manas Human and we're waiting to get the first question.

Manas Human: I'm sorry. I still asked it earlier perhaps and people could have put the questions in.

Unidentified Company Representative: [Operator Instructions]

Manas Human: And while we wait, I would also like to offer that I'm in Europe a few times this month. I'm in Frankfurt this evening or -- and tomorrow morning. If anybody wants to do dinner or breakfast, we can meet. We're also in London, Gagan and I, a couple of times for two conferences this month, the JPMorgan Small-cap/Mid-cap CEO/CFO Conference in London and then the Jefferies Pan-European Mid-Cap Conference also in London. So -- and then we also do a virtual conference, the ODDO BHF TMT forum. So either at these conferences or on the sidelines, or outside the conferences, I would -- we'd be very happy to meet up with you if you have any need for physical meetings. Maybe someone from Lumi can step in and make clear the instructions of how to -- how people can ask questions. Perhaps there's a little bit of doubt.

Unidentified Company Representative: We still have people joining the queue as we speak. Just taking them a little bit longer than anticipated.

Manas Human: We still have 20 minutes so we have time for a lot of questions.

Unidentified Company Representative: So let's take the first question which comes from Momentum Financial.

Unidentified Analyst: Can you hear me? Hello?

Manas Human: Yes, we can.

Unidentified Analyst: Well, first of all, I want to congratulate you not only on the results that I think are impressive, but also on the response to this kind of [sort attack]. I think it's important to set a really good tone, and I think that you did it. And you were addressing all those kind of concerns without overreacting. So congratulations on that. And then my question would be around the factoring. Because I saw one slide where you are referencing that the factoring. But I don't know, and maybe today is not the day, but when you provide the detailed results, if you can provide more color on the levels of factoring and the interest paid, I think it's something that not a concern as such, but I think it's something very, very useful. Because, of course, with the interest rate hike is something to consider.

Manas Human: Yes, absolutely. Gagan, do you want to say a few words to that?

Gagan Bakshi: I'd like to say that the most important piece of factoring is that it is a nonrecourse financing. And that's important for us because with nonrecourse, all risks and rewards associated with ownership are transferred to the factor. These are solid clients that we are factoring. Now only it's a small percentage of our total revenues. It's one of the ways -- one of the many ways for us to manage liquidity along with our bank credit facilities or lease facilities, and it's a working capital financing mix, if you may say. There is a full description of our facilities and how we do it on Page 72 and Page 73 of our Annual Report 2021. Obviously, when we come out with full details in our new annual report, we will discuss it further.

Unidentified Company Representative: All right. Let's take the next one, which comes from Andreas Wolf from Warburg.

Andreas Wolf: Congratulations on '22 and the growth that you have achieved. Given the improvement in free cash flow that we've seen, especially in the last quarter and in '22 over '21, would you consider buybacks going forward? Or do you see M&A as being still more attractive to further build your business? So that's my first question. And then the second is on the growth trajectory in '23. If I look at the sequential employee growth, it was 1%, if I'm correct. Your full year guidance for '23 implies 19% revenue growth if I did the math correctly. So how shall we compare those 2 numbers? Should we expect employee growth to accelerate going forward? Or are you comfortable with the current employee numbers to be able to carry out the services that you have to carry out in order to achieve this revenue that you have targeted for '23? And then maybe related to the remarks that you made before. So given the, let's say, views on how a company -- or how close the company should be to their clients, maybe you could also -- it might sound a bit basic, elaborate on how clients actually find you and make sure that you are considered in the tenders. Obviously, Nagarro has a good track record here, just to provide more clarity here.

Manas Human: Thanks, Andreas, for the questions. They're all great questions. Let me start with the third one because it's the most exciting one about how clients find us. Clients find us sometimes they -- very occasionally, a client will find us on the Internet and hear about us and come reach out to us, maybe somehow. But mostly, clients come through referrals. Either they come -- people who have worked with us, changing jobs or new clients hear about what work we are doing elsewhere or 1 of the big 3 consulting companies referring clients to us. So that is one big channel. But we are also, of course, always out there chasing clients, right? So I was this Monday at Barcelona at the Mobile World Congress. We had a booth there. We had a speaking slot there. We're just meeting a lot of potential new clients. We were also, I think, either last week or this week at this aviation festival. And pretty much all throughout the year, pretty much every week, we are meeting clients either at these events. We are either going in to their offices, setting up meetings, So there's just a lot of activity and some of it is on our LinkedIn pages, et cetera, but there's just a lot of activity in outreach to clients, right? So that's the first -- that's your third question but I answered it first. About buybacks. Our lawyers tell us that with the preliminary numbers that we have released, we are not free of insider information and we are still in a quiet period till the annual report comes out. So not only can we not do buybacks, we could also not comment on buybacks, right? So it's a quiet period. So let's just -- unfortunately, I can't answer that question. And then in terms of employee growth and the growth trajectory of the company, last quarter of last year was a bit like entering a bend in a car at high speed. And you don't know what's on the other side of the bend and you had to just figured out how hard to tap the brakes. And we took it a little cautiously. And I think that caution will overflow -- the effect of that caution will spill over into Q1. But I think we are very well set up to both resume hiring. Starting, let's say, Q2, the numbers are starting to add up. And also we have people, especially youngsters, who are available to sort of deploy into projects after being trained. So I think that while the Q4 hiring numbers look low and maybe Q1 will also be subdued, but we are well on track to -- we feel very comfortable about meeting our targets for the full year. Thanks, Andreas, for your questions and thanks for the support.

Unidentified Company Representative: All right. Let's move on to Adrian Pehl from Stifel.

Adrian Pehl: I hope you can hear me well.

Manas Human: yes.

Adrian Pehl: First of all, I would like to start with financial questions. So looking at your numbers and listening towards peer companies have said, could you describe a little bit the situation as regards pricing? So should we take it that price increases are still coming through? Is that kind of a subsequent movement that we see here actually? And the second question is related a little bit again to the hiring pattern. So I know you're not frequently publishing attrition rates, but maybe from an incremental basis, could you give us an idea how the last maybe 2, 3 quarters have fared on this? And then I probably have some governance-related to questions, but maybe we'll start with that.

Manas Human: Okay. Great. So in terms of pricing, the -- we have a mixed kind of situation where many clients are okay with supporting price increases to reflect our increased costs. There is the occasional client that is not. So it is, for us, at the moment more or less like a regular year, I would say. So nothing too wild in either direction. And we also have a rather a regular year in terms of wage inflation. So I think that's one part. I think attrition, our attrition is a again also back more or less to the regular levels. And it's no longer a problem. And actually, by the way, to the previous question that Andreas had that why did your hiring slow down so much, I mean, again, we are also trying to predict attrition. And attrition is surprisingly very much normal. It's neither too low nor too high. It's very much like a normal year. So -- which obviously is in the range of 12% to 15%. But.. [Technical Difficulty]

Adrian Pehl: Can you hear me?

Manas Human: Yes, we can.

Adrian Pehl: Okay. Perfect. I would also like to come back to the question of the first question about the factoring. So -- if I look into the Q3 report, we can see also a positive effect in terms of operating cash flow from factoring. So can you provide us some details if you had also some positive effects in Q4 from factoring?

Manas Human: Yes, we have had -- again, I'll speak a bit in general terms. I think we have to wait for the final numbers to have the exact numbers out. But while there has been an effect of factoring in Q4, the larger effect is not factoring. So factoring is a smaller effect compared to the overall improvement of numbers.

Unidentified Company Representative: Okay. Let's move on to Nicolas David from ODDO.

Nicolas David: Congrats for this very good year and all the best for '23. My first question is regarding M&A. Could you comment on strategic rationale about the acquisition in Turkey you did recently? Because it's a kind of a volatile market in terms of political and monetary environment. So -- and what is the rationale here? What kind of clients are you pursuing here? My second question would be on your EBITDA margin guidance because you ended up the year pretty strong in terms of gross margin and you had a strong EBITDA margin in '22. So what would prevent you to keep a good margin or a strong margin in 2023? I mean, you're expecting 2 points of margin decline, which is pretty high. And maybe linked to that, did you estimate the potential impact of the working days on your margin for '23. And then the -- yes, my last question would be, if you look at Q4 -- sorry, if it's a question that has already been asked because I had some problem to connect. But regarding the main sectors where you saw some slowdown in Q4 and early '23, could you comment on that? Which sectors are going very fast and which are slowing down a bit?

Manas Human: Great. Thanks, Nicolas, and thanks for the wishes. So the first question is about the strategic rationale for acquiring MBIS in Turkey. And there are 2 or 3 different aspects to it. One is that the Middle East is a very fast-growing market for us and for the whole IT industry, and there's lots of money being spent in upgrading companies throughout the region. And Turkey is an excellent takeoff point for that market. And this company is a strong SAP company. It's a little bit countercyclical -- or countercyclical is maybe the wrong word, but it's a little bit stable in terms of volatility, services like SAP services. And this company is excellent at its own proprietary developments, and that we can leverage in other parts of the world. So its clients have mostly hard currency denominated sort of rates with MBIS or whether it's explicit or it's implicit and revised frequently, we are protected from some of that. It's a company with 5 founders who have been with the company more or less throughout. Very, very impressive people. So that's what we are trying to build off and try to build Turkey as a base for the region, and yes. So it's a very exciting deal for us. Now the second, on the EBITDA margin. I think we have said this a few times that we in the short term are more or less targeting like a minimum of 15% EBITDA margin and trying to maximize growth based on that. Now the environment itself is very, very unpredictable. You have, as Adrian said, pricing possibilities, changes in pricing, you may have changes in currencies. You may have changes in wage inflation. So when we forecasted -- project our numbers, we forecast what we think we can accomplish at a minimum. So that's the reason why we have a 15% out there. In the medium term, we are -- we have said this before. We want to raise this EBITDA margin to higher levels. And as the volatility of the past few quarters and years maybe passes through, then we can do it in a more stable way. Finally, in terms of the slowdown, I have actually -- we have been talking about this for a while, that we have -- in fact, I was going through our presentation from the listing. And we said that we are a company that plays at the intersection of 2 spaces

Unidentified Company Representative: Okay. And we have one final question from [Joaquin Iredea].

Unidentified Analyst: Manas, I would like to congratulate you on the last quarter results and for the full year. I would also like to congratulate on the excellent reply to that article. And regarding that article, I would like to point out that they raised some doubts about the auditor. Do you plan to change the auditor? And the second one regarding the auditor, what do you think about the post on their LinkedIn? They post a lot about Nagarro.

Manas Human: Who post on LinkedIn?

Unidentified Analyst: Yes, the auditor sends a lot of post on the LinkedIn about analytic results. So what do you think about that?

Manas Human: Okay. I don't know the last part, I will take it up and maybe get back to you after the call. But this is a good question. First of all, I think that -- I must say that it is the job of journalists to investigate. So I appreciate the people are just doing their job, and thank you for your compliments and how we have handled it. I think that the -- or the auditor, I will just say this, that the Supervisory Board is very satisfied with Lohr & Company, who have been with Allgeier and then Nagarro for a long, long time and have been very diligent and very professional over all these years. Very, very professional. But that said, it is my understanding that for some time now -- and not triggered by recent events, but for some time now, the Supervisory Board has been planning to launch the legally required process for the change of the group auditor for Nagarro for 2024. So this is not actually a Management Board topic. It's a Supervisory Board topic, but I can confirm that the Supervisory Board has been planning to launch this selection or whatever the required process -- legally required process is for this change of group auditor for 2024. So that's all I think we had time for today. Thank you all for supporting us and being there for us. As I said, we are -- I'm in Frankfurt today and tomorrow morning and in London a couple of times, Gagan and I are there a couple of times this month. So if you would like to set up meetings, please just ping us. And thanks once again, and the company will just continue to do its job regardless of what else is happening around us. Our job is just to deliver on results and performance, good performance, and that's what we will keep at. Thank you very much, and have a great day.