Good afternoon, ladies and gentlemen, and welcome to the Nagarro SE earnings call regarding the Q2 and H1 2021 results. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now hand the floor over to Christian Bacherl.
Thank you, Beatrice. On behalf of Nagarro SE, allow me to extend a warm welcome to you. You should have received a copy of the earnings release for Nagarro's Q2 2021 results. If you have not received the press release, a copy of the re-release as well as of this presentation is available on nagarro.com in the investor relations section. I am covering for Christopher Große, and with me on today's call are Manas Fuloria, Custodian of Entrepreneurship in the Organization, and Gagan Bakshi, Custodian of Strategic Finance. Before I pass you over to Manas Fuloria, 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.
With that, it is my pleasure to hand you over to Manas.
Thank you, Christian, and welcome to all of you from around the world to this earnings call. I'm going to assume that you all have been following Nagarro closely and have seen the Q1 results, I will focus more on Q2 than on the entire H1. Of course, you now also have the H1 report for your reference, Gagan and I will be happy to answer any questions. Q2 has been a bit of a landmark quarter for Nagarro in a couple of nice ways. First, all through the spin-off and listing process, we have been saying that Nagarro's historical organic growth rate is close to 20% and that our intrinsic capability to grow organically is also in that region.
Because of the early impact of the COVID-19 pandemic, plus the management being a little distracted by the spin-off and the listing, you have had to wait to see this sort of growth. Now, in Q2, we have reached the 20% level of organic revenue growth for the first time, recording a 21.1% organic revenue growth. Second, for the first time, we are able to present revenue growth in constant currency. This, in fact, improves the organic revenue growth number, you know, in constant currency, which is now then 25% almost. The story of this quarter is mainly a story of growth. We also added over 1,150 net new Nagarians in this quarter, which is again, a sort of record number for us.
This growth rate that you see has nevertheless been constrained by the supply side. As you must be aware, the demand for engineering talent, and in particular, the demand for the top digital talent has skyrocketed globally. There is also significant wage inflation as companies compete for scarce talent. On the positive side, we believe our business is rather price inelastic. We believe that the work we do is so important that clients should be happy to support reasonable margins for us. There is a time lag between the wage inflation when it happens and the impact of the remedial measures, like going back to clients for price increases. You will see the results of that. The background to this entire quarter has been the COVID-19 pandemic. The second wave hit India especially hard, and we lost several colleagues. We also lost a lot of working hours.
Despite this, client satisfaction remained at top levels. In fact, remote working has become a way of life for us, and we are now doubling down on this digital-first work-from-anywhere Nagarian experience in a variety of ways. One more important development in this quarter was the work towards the rollover of minority interests from the Nagarro Holding level to the Nagarro SE level. A lot of work has been done and the stage has been set, and the next steps will be taken in the coming weeks and months with the AGM and beyond. This should also insert some more liquidity to the share. That's the summary for the quarter. We get into a look at the quarter by the numbers. The revenue that we did in quarter two was EUR 127 million. We talked already about our revenue growth.
The quarter-over-quarter revenue growth was 10%. The gross margin was 29.9%, which includes some forward investment in hiring people fresh out of college, which impacts your gross margin negatively in the short term, but in the long term it's positive for gross margin. We had adjusted EBITDA of EUR 19 million, with the largest adjustments being related to the one-off costs for the rollover and stock option expenses. In terms of the industries, we had the maximum growth for the automotive, manufacturing and industrial industry vertical. Followed very close behind by retail and CPG, as might be expected. The worst performing industry was telecom, media, and entertainment. We think not because of any structural reasons, but because of more individual client-related reasons.
In terms of segments, we continue to grow fastest in the rest of the world and slowest in Central Europe, which is also recovering from certain industries being more impacted by COVID-19. Our client concentration remained roughly what it used to be. Cash balance was EUR 102 million at the end of the quarter, and our customer satisfaction score is almost constant at a very high 95%. We retain our guidance for the year, and we will touch on this later in the presentation. Coming to the revenue by industry, we already spoke about, you know, the two verticals that have done exceedingly well. Close behind them are the public, nonprofit, and education vertical, particularly the U.S. public sector, the horizontal tech vertical, and the energy utilities and building automation vertical, which has bounced back.
The three verticals that I just mentioned have roughly 30% growth from Q1 2020. If you look out on the right at the revenue by customer, as I said, you know, the more or less the revenue concentration has remained unchanged. Growth has been largely broad-based, although some verticals are growing a little faster than others. If you go to revenue by client region, again, you know, the rest of the world is the fastest-growing segment, and we have growth in every segment overall. We have in terms of personnel, as I mentioned, we added over 1,150 personnel this quarter, net of attrition.
I might just point out that some of these new hires in this quarter are fresh graduates who will be trained further and are not likely to be immediately deployed on client projects. They're more of an investment for the future. This is another view of our revenues and gross margin by segment. The gross margins for Q2 2020 are not very reliable comparison for comparison purposes. Because if you remember last year, we had salary cuts to prepare for the effect of the pandemic. Rather than looking at them as comparison numbers, I think it's better to just look at the gross margins for Q2 2021 independently. You can see that we have been growing across all segments, but the rest of the world has been growing the fastest. North America also has healthy growth.
The slowest growth has been Central Europe, partly because, as I said, of the industries in which to which Central Europe was exposed. Some of them have been more impacted by COVID. Coming next to Now, I spoke a bit about last year not being a very good comp. The same holds true for cash flows. Before I hand over to Gagan, maybe I just speak for a little bit on the operating cash flow in particular. As I mentioned, the H1 2020, and here we're talking about half year numbers. H1 2020 was affected by salary cuts. It also had almost no growth, and we also went into an emergency cash conservation mode to prepare for the pandemic.
On the other hand, in H1 2021, what you have is a fairly high EUR 8+ million payout of spin-off and listing costs. Still carrying some of that impact on the cash side of spin-off and listing costs. Plus a lot of working capital tied up in the rapid growth that we are seeing. You know, overall, the conversion of EBITDA for net cash, once you adjust for these effects, is fairly normal. Maybe, Gagan, you can speak a bit about the balance sheet and the rest of the cash flows.
Okay. On the left-hand chart, we can see the liabilities position at year-end 2019 and year-end 2020, and also at June 30, 2021, which is the rightmost bar. Now in that bar, the purple segment shows financial liabilities of EUR 180.1 million, which are essentially syndicated credit facility, working capital facilities, et cetera. The green segment shows lease liabilities of EUR 56.1 million, and the gray segment represents the cash, which is EUR 101.9 million. Liabilities adjusted for cash give the company a net debt of EUR 134.3 million. Given the adjusted EBITDA for 12-month period ending June 2020 of approximately EUR 78 million, the net leverage ratio remains 1.7x.
As a headline, the company's liquidity position at the end of H1 2021 was comfortable, with current assets of EUR 220 million and current liabilities of EUR 107.7 million. The right-hand side chart shows the cash flows for H1. Since Manas has already discussed the operating cash flows, let's focus on the remaining two parts of the cash flow statement. The cash flow from investing activities is an outflow of EUR 6 million. The two main components are an outflow of EUR 1.8 million from CapEx and an outflow of EUR 4.1 million to meet contractual obligations of previous acquisitions. Cash flow from financing activities is an outflow of EUR 6.3 million. This is primarily due to outflows from lease payment of EUR 9 million, interest payment of EUR 2.7 million, and repayment of bank loans of EUR 2 million.
These outflows are offset by inflows of EUR 3.1 million for proceeds from shareholders of Nagarro or stock options, and inflows of EUR 2.9 million for funds received from non-controlling shareholders.
All right, thanks, Gagan. Just a few words now on our outlook. As I mentioned right at the beginning, we are holding steady to our revenue and EBITDA outlook for the year, but we are revising our gross margin outlook downwards conservatively. This is again in keeping with our view that the impact of the remedial measures that we are taking, like price increases, will lag the wage increases by several months. Many of the price increases that we are already in the process of negotiating will come into force from early 2022, typically in January. Despite the drop in margin, potential drop in margin, we still feel we have the levers to shoot for an adjusted EBITDA target of 15%.
Some of you may feel that our revenue target is now looking somewhat conservative. That is true, but we are not revising it given the uncertainty around subsequent waves of the COVID-19 pandemic. We do continue to believe that in the medium term, we can grow organically at around 20% and keep an adjusted EBITDA of 15%. We're not just talking about wild times like this one, but even in a more stable markets that we continue to believe that we can grow at 20%. Finally, you know, when we presented ourselves to the investment world in our first capital markets day, back in September 2020, it seems like a lifetime ago. We said that we had these strengths. You know, we said that we had a unique positioning.
We said we had very good clients, a great client base. We were an agile organization that could, you know, morph and change with the times. We felt that we had, you know, good financials, robust financials, and the ability to grow both organically and through acquisitions. I'm happy to say that despite all sorts of upheavals that we have had in recent months, we remain on track. We are building on these strengths. As the Nagarro brand gets better and better known globally, and as we continue to work on strengthening our core internal processes as well, we feel more and more confident about our goal to be a true global scale digital services players in the coming months and years. That's it for the presentation.
Now I will hand it over to Beatrice, and we can take some questions.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please press nine and star to register for a question. We already have a few questioners in the line. First up is Marc Langbein from Commerzbank. Over to you.
Yes. Good afternoon, gentlemen. Marc Langbein from Commerzbank. Thanks for taking my question. The first is on your demand environment. As we are now in the middle of Q3, have you noticed any significant change in the good Yeah, sales momentum in Q2? As you mentioned, mounting uncertainties due to COVID-19 and furthermore, in the risk section, you mentioned factors that could affect your ability to service the customer demand. Could you elaborate on these risk factors in greater depth? The second set of question relates to the labor supply constraints. Could you also elaborate on the situation here on the labor supply constraints and have these risks further intensified going into Q3? Last question for the moment is on pricing actions.
Could you explain the measures you have taken to compensate for this higher wage inflation? Will these package of measures be sufficient enough to fully offset the mounting headwinds that we are seeing on the gross profit margin side? How many months will it take until we see the first positive effect? Thank you.
Thanks, Marc, for all these questions. Very pertinent questions. Let me take these one by one. On the demand side, you know, we see steadily strong demand. As before, we have thousands of positions open for hiring and are, you know, with this, just so much work to do and high quality work and, we really have the chance to move the needle for our clients. More and more clients are taking up this digital transformation as a CEO priority. Being a relatively well-known now or at least better-known company in this space, we are getting a lot of inbound interest and both from existing clients and from new clients. Our biggest concern right now is how to do right by clients in terms of servicing them with the resources that we have.
The demand side remains pretty strong, and there's an emerging consensus in the industry that this is likely to stay this way for several quarters. It's not going to go away very soon. That's one part of the picture, the demand side. When we talk of risk factors, right? I mean, there is always the risk that I mean, the macroeconomic risks to hyperinflation or whatever, right? I think that you probably understand as well or better than I do. I think that in our industry, the biggest risk is from the supply side, and this is of two parts, right?
I think there's, of course, the risk that there are subsequent waves of the pandemic that will lead to our engineers not being well or having to take care of their family or, you know, hopefully this will not hit us as badly this time as it did last time. We're trying our best to get people vaccinated and families vaccinated, and hopefully this will not affect us. I think also, at least in India, where we had the worst of the second wave, the government is also probably wiser and the conditions are maybe a little bit better than they were for the second wave. That's one part of it, right? We do keep that, we do keep that option or that possibility at the back of our minds.
The second, more likely, progression of supply side challenges is on the talent availability side. This is an interesting problem because, you know, depending on the type of talent we're talking about, the challenge is different. For more traditional technologies, talent is still available and in fact, there isn't that much of a scramble for this talent. At the high end for the digital technologies where we typically work, there is of course a huge scramble for talent, right? This doesn't show any signs of abating. I would say perhaps it's stopped spiraling, and it will probably also be helped by the fact that gradually our offices will start to open.
While we are going to stay in a work from anywhere mode, we do expect at least a third of our people or half our people to occasionally come into our offices, and that helps bring back some of the, you know, the bonding that keeps people together in a company. Also, we do expect that the rapid job changing will not slow down. I see on my message that, am I audible?
Yes. You're still audible. Sure.
Oh, I'm sorry. I saw someone or a fellow moderator say that they could not hear me, so that got me thinking. Anyway. Yeah, we do see this continuing to be a challenge, but maybe not spiraling out of control. On the other hand, on our side, we have made a lot of different attempts to address this, both on the hiring side, on the Nagarro experience that I briefly mentioned in the initial slide. We are now preparing ourselves to think of the company as a digital-first company. Let me expand a bit on that.
The idea being that just like when you are on Netflix or when you are on Amazon, the company is trying to do the most it can with you, through that little window it has into your time. In the same way, from a conventional way of thinking about a company and its relationship with its employees, we always were a little bit, I would say modern in this area, but we wanna take it to an extreme now in thinking of a digital-first employee experience that is absolutely the best in the world, right? Or among the best in the world. There's a lot of effort that we are putting in, which will pay off in the next months.
With that, we expect to be able to tackle this aspect even when people are in a work from anywhere sort of mode. Coming to pricing, which you also touched upon. I think the pricing The work that we are doing on pricing can be broadly classified into two areas. You know, one is, of course, you want to now choose new work more based on pricing than you had done in the past. You want to prioritize work that is actually paying better, and there's plenty of that. You also want to go back to your clients and inform them about what's happening in the job markets. Luckily for us, every client is more or less aware because most clients are themselves facing this, these challenges.
So that work is ongoing, and a number of clients have already agreed to price increases. Now, in terms of, you know, how does this offset fully the wage increases and how long will it take? You know, I think we stay positive that across the different measures we are taking, we will offset these. When I say that it may take a few months, I'm basically trying to see through to the end of the year. There may be months or quarters, a quarter in between, where it's not really offset.
Overall, across the pressures that we are hiring out of colleges, across the efforts that we are making to in utilization and the efforts we're making in price increases, we do not see any major, we do not foresee any major disruptions in our ability to deliver 15% adjusted EBITDA.
Okay. Understood. Thank you. Follow up on pricing actions, that means, if I put the things together, we would have to assume that gross profit margins would not become better before Q4 of this year, right?
Yes. The gross margin may not become better before Q4 of the year, right. Yes.
Okay. Understood. Thank you.
We're also being a bit conservative. I may also just add, you know, there's also some conservatism, but, you know, it's, it is what we have put down, and we would rather err on the side of conservatism on that.
Now we're coming to the next questioner. It is Martin Comtesse from Jefferies. The floor is yours.
Yes. Hey, Manas and Gagan. Thanks for taking my questions. I would like to just get some more understanding around your hiring at the moment, 'cause I think that's really the center of the debate. You were hiring 1,150 people net in the Q2, which is in absolute numbers a bit higher than Q1, but in relative terms it's actually a sequential step down, a small one, from 13% in Q1 to 12% in Q2. Can you just give us a feeling for what would your ideal number of people be, you know, if you had the, you know, possibilities to hire people? Would you hire 2,000 people or 'Cause many of your competitors guide for sort of a desired number of hires.
Any color around that would be appreciated. Can you also give us the share of fresh graduates in these people? Just approximate. I would follow up with another question if you let me.
Sure. You know, I think in terms of how many we would like to hire, we would like to hire several thousands. A few thousands at least. I mean as I said, we have a few thousand positions open constantly, and I don't have the exact number, but my guess is upwards of 3,000. We definitely can do with a lot more people, right? And deploy them almost immediately. This is really supply constraint. And when I say supply constraint, I mean absolutely choking for people. The only escalations we're getting are about the availability of engineers, right? That's the biggest challenge.
In terms of the breakup of people from colleges versus people hired laterally, I think there's, you know, it's a little bit complicated of course, because there's also some attrition, and the attrition rates are different and so on. Just roughly speaking, maybe about half and half, right? Just maybe around half and half. Maybe a little bit more lateral, but roughly about half and half. If you were to just pick a number. Yeah. I think hiring has really stepped up, but this is a challenging environment to hire in. We continue to look for ways to take it to the next level.
Yeah, we will keep coming back to this group with updates as and when we get there.
Perfect. That was very clear. Thanks. My second question would be on the gross margin, and that ties into my first question actually. You were basically referring to an inflation in wages, which I think is understood, and the other part of higher costs is your not utilized staff, right? So the graduates that are currently sitting on the bench. You had a drop of around 400 basis points on gross margin year-over-year. Could you try to quantify sort of what share comes from higher wages and what share comes from an underutilization? Or maybe just give some color around the staff utilization at the current point in time.
Yeah, I can give you some color. I think it's not a good idea to compare it with last year. As I said, last year had a different dynamic altogether. We had, I think, two months in the quarter with salary cuts and significant salary cuts. It's not probably a good comparison. I would estimate that roughly 1% of margin is going towards these youngsters, maintaining these youngsters and training. On the other hand, just to be very transparent, we are also not running a typical bench, right? There's a number of different factors that are at play in this sort of very unusual environment, and we are trying to find the right balance, right? It's a balancing act.
We've always said that we shoot for 15% EBITDA, and we try to grow as fast as we can till we reach that, right? That's kind of the way we are looking at it. We are not trying to maximize EBITDA. We are trying to just grow as fast as we can while keeping to the 15% adjusted EBITDA.
Okay, a last follow-up on this. You also mentioned COVID-19 disruptions on the gross margin. Can you specify what you mean by that?
Yes. The numbers for the quarter were definitely impacted by the fact that, maybe between EUR 1 million or EUR 2 million, and I'm just approximately speaking, you know, of billing was lost because people were away on COVID situations personally or with their families. There's some of that impact in there as well, right? We're not quantifying it precisely, but there is that impact. On the other hand, there are some other effects like people not taking leave in a typical way that, you know, because they have nothing to do because of the lockdown, and they'd rather be working. There are a number of factors that are working in different directions.
Overall, we do feel that the net effect in Q2 was also there was a depressive effect on margin because of COVID-19, the second wave in particular.
All right. Thank you.
Thanks, Martin.
Next up is Andreas Wolf from Warburg Research. Over to you.
Yes. Hi. Thank you. Hi, everyone. I have a few. One, Manas and Gagan, is relating to growth. Could you specify which fields are driving growth in particular, in terms of technology? Is it cloud? Is it more custom software development? Maybe you could provide some insight here. I guess it's across all fields that you are providing to the clients, but some additional insight would be helpful. The second is on price negotiations with the clients. I assume that you have observed similar behavior among competitors. Is this right? The third question is relating to the P&L items that you expect to compensate for the gross margin impact that you've seen coming from wage inflation and underutilization.
Is it basically some cushion that you had in the guidance or is it lower travel and expense costs? I saw that vehicle costs and land and building costs have declined in a year-on-year comparison. Maybe, maybe you could shed some light on the positive factors supporting the adjusted EBITDA margin guidance. It's probably kind of related to the targeted number of people that you have. Maybe you could provide some insight into the order book situation that you have. How has that developed year-on-year or, yeah, what's the book-to-bill ratio? If you have a figure comparable to that, if there is something that you track that you could share with us, that would be helpful. Thank you.
Thanks, Andreas, for the questions. Let me see if I can address them one by one. The first, you know, in terms of the fields of growth, I think we are seeing a lot of growth in pretty much every type of area, but led certainly by e-commerce and consumer experiences, whether it's in retail or in life sciences or in automotive, et cetera. I think that is a big area. The e-commerce side. There's a lot on the cloud as a precursor to digital transformation. A lot of work on companies getting more serious about the cloud and building on top of that for digital transformation. Even areas like SAP, et cetera, are seeing strong growth.
It's quite In terms of technologies, it's quite across the board. There is also, of course, a lot of interest in AI and a lot of smaller projects in AI and analytics and ML. I think there's just in general a refreshing of the question: What can we do with technology as a company? Whether you are a bank or a auto company or a, you know, a retail company, I think there's just a lot more of thinking and money that is ready to back that thinking on what can be done with technology.
I think we're seeing a lot across the board. Then when it comes to price negotiation, you know, we don't typically know what competitors are doing, in the sense that we're not in the accounts, you know, tracking what each competitor is doing. We don't have at least transparent information on price negotiations, for example. It is obvious that competitors will also need to go back for price increases. I can't give a definitive high-quality answer on that, Andreas, unfortunately. My understanding is that this is what's gonna happen for most of the companies in our space, that we have always felt that we can go back to our clients, at least the ones who are doing more digital work.
I think it's still going to be tricky on the, you know, more commodity work. Conversely, it's also true that the wage inflation in the commodity work is relatively low. There is this sort of market mechanism at play, and I do believe that all the players who are into digital transformation work will go back and get price increases from clients. I think this is quite likely to happen. An excellent question on the P&L compensation part, right? I think that's an excellent question. You know, I think the general approach that we had when we laid out our guidance, we did not expect things to go this way. We didn't foresee this situation. We actually expected that we would be able to increase our gross margin because of higher billing rates.
We had felt that because of our new branding and our new listing and our new sort of presence in the market, we would be able to increase our revenue and gross margins as a result, and therefore also have more money to spend on more activities in, you know, SG&A, right? What's happened actually is that we've been sort of squeezed on the margin side, but we also don't see the need now of some of that spend, right? Partly, you know, for example, sales, right? We have more sales than we need, right? Or more incoming interest than we need at the moment, right?
In terms of, you know, we also have some of these, travel, as you said, but also some other cushion that we had built in into the adjusted EBITDA being conservative. A bunch of different things are adding up to give us this feeling that we can, you know, hit the adjusted EBITDA number, without too much difficulty. That's kind of where it is. It's, it's a mixed answer. I think it's, There is, some, pressure, I will, admit that. It's, doable without actually cutting into any of the, growth, sustainable growth, aspects of the company.
Finally, you know, I think that when it comes to the order book, We don't actually track our order book in the way that we that some companies typically do because the nature of our engagements is a bit different. We typically have, you know, clients that we work for year after year. More than a particular order, what we have is visibility into what they would like to have from us for future initiatives that they are building, so very much in a co-creative mode. We do have the demand coming from the projects as our guide towards hiring, for example, and that demand is extremely high. As I said, you know, it sort of mirrors the hiring demand, it runs into the thousands.
The demand for projects for billable people to put onto, you know, onto these, quite critical projects with clients is very high, just to give some color, you know? Again, you know, I'm being called more and more into CXO-level calls with clients, and the client is trying to persuade us to somehow, you know, find the people to execute their work, right? It's a very, very dynamic environment, I think across the industry. For us, you know, the order book is at the moment and for the foreseeable future nothing that we need to worry about. Andreas, I hope that answered your questions somewhat.
Yes. Thank you. Just to clarify, you've basically also postponed the expansion of the sales force that you alluded to previously, I guess, because demand is high anyway. At least you're expanding it at a less faster pace than assumed previously, I would guess?
Exactly.
Okay.
Yeah.
Great. Thank you.
Thank you.
The next question comes from Lukas Spang from Tigris Capital. The floor is yours.
Yes. Hi, good afternoon, gentlemen. Just one follow-up question on the personnel, numbers. In your pre-presentation, you described this also as a kind of investment. If we look on personnel costs, this was also kind of, part of the margin dilution. How long do you need to bring all the new people into projects and so fully utilized?
That's a great question, Lukas. You know, even this is evolving, right? Historically, we have not been hiring so many youngsters, but when we have been, we have been quite patient with how they get trained, and it's typically been over a year when people are getting deployed. In this environment, it's even this is changing, right? The change is being supported by many of our clients who are eager to have more hands on deck, even if they are not totally, you know, they've not been trained for a year plus. I don't have an exact number. We're not sharing exact numbers. This is a fast-changing situation, and we are deploying more and more of them as time goes by.
I think it's fair to say that, there are at any time or there were at any time in this, in this quarter, you know, between, somewhere between 500 and 1,000 of these people who are not deployed, right? There's a fair amount of bench strength, if you will, that still has to be and can be and will be deployed in the coming months.
Can we assume that due to the high increase in people in the H1 of the year, that at least Q3 and probably also Q4 will be higher in revenues than Q2?
At the moment, you know, I will just go back to the guidance. I do appreciate that it looks like very conservative guidance. At the moment, we just go back to the guidance. You know, Q4, I would also just caution, is a holiday quarter for a number of our countries. Q3 is typically a better quarter and sort of equivalent in terms of number of days to Q2 in a typical year. We do expect to see strong Q3 and Q4 numbers, but I will not I'll have to stay with the guidance. You know, I'm very much concerned about potential subsequent waves of the pandemic in particular. We that's why we're sticking to the guidance as of now.
Yeah. Okay. Okay. That's from my side. Thanks.
Thanks, Lukas.
We have a follow-up question from Marc Langbein from Commerzbank. Your line's open again.
Yes. Hello again. I have three more questions. The first is on the decline in operating cash flow. Can you give us more color here about what has driven your working capital requirements in H1, which has weighed on operating cash flow here, and what is your view on that over H2 2021? The second question is on attrition rates and project executions. On the last earnings call, you referred to attempts that had been made by bigger tech firms to poach some of your senior staff. In the risk section now you have noted that attrition rates have also increased for top talent in this quarter. Could you remind us here on the attrition rate in H2 compared to the level of attrition rate in the last year?
You had also, have you furthermore witnessed any disruptions from a project execution perspective during Q2 because of these higher attrition rates? Be the first. Second question I have so far. Thanks.
Thanks. Thanks for the questions. Let me just address them in reverse order, if you will, because it's perhaps easier to deal with the shorter answers first. In terms of project execution, no project has been, no project that I know has been in crisis because of attrition. We don't disclose the exact attrition rates, but, you know, we did say at the time of the spin-off that 15% was our typical rate, you know, of people who would join and actually not the first few weeks, but who would actually stay on. 15% was what we would target as a reasonable rate. We have gone a little bit north of that. Not too much, but just a little bit north of that.
This is an area of, you know, that we are concerned about and watching all the time. You know, it is something that hasn't reached unprecedented levels. It is still in the range that we have witnessed from time to time. For example, when, you know, a well-funded dotcom comes and parks itself at the office down the street, and this has happened in the past. We are at that kind of, you know, those kind of levels. But yeah, we don't disclose exact numbers, and it varies also, you know, widely from week to week and from country to country.
Coming to the operating cash flow, maybe I can say a few words here, and maybe Gagandeep can jump in after that if there's something to be said, to be added, right? You know, we have, just to look at the numbers here. If you take EBITDA. EBITDA is roughly EUR 33 million. You know, in that the change in accounts receivable plus the change in contract assets, which is all sort of related to growth topics, is about EUR 11 million of that. You know, you have this EUR 8+ million of spin-off and listing costs that are being paid out now.
There's EUR 5 million in taxes, roughly speaking, and then a couple of million EUR, you know, delta extra to get to the EUR 7 million in operating cash flow. You can see that the spin-off costs, of course, are a one-off. You know, I think that in general, we, you know, this, these, the increase in AR is more or less in line with. In fact, it's a bit less than proportional to the growth the way we see it. Contract assets, there are a couple of cases, individual cases, related to public sector in the U.S., for example, and something in the Middle East that are driving it a little bit higher. There is a little bit of, you know, one-off noise in that as well.
We, we do typically expect to drop, around, you know, convert about 40% or so of EBITDA to net cash. We do expect to keep doing that in the future, you know, even as we, as we grow. How it exactly shapes up will depend a bit on, you know, how fast we are growing and, yeah, if there are any one-offs at all. Hope that answers your question, Marc.
Yes. Understood. Thank you. That means, in terms of your contract assets, you have seen no significant shift in the payment behavior, payment pattern from your customers, right? This was more of a one-off pattern, what you saw in Q2.
Exactly, Marc. No, no shift at all. I mean, in fact, if you were to compare it to last year, it's actually a lot better. I think that there's no. It's just the speed at which we are growing. With existing customers, it's a bit easier, but every time we start a new customer, it takes more time to get to invoicing and billing. There are some things like that that are also at play. The public sector has always been, for us, a little bit of a, you know, a very reliable paymaster. It's sort of, but getting the money out is always a little bit choppy, right? This is basically the U.S. public sector business for us.
Otherwise, there's no reason to feel concerned about the terms. At least so far, we haven't seen any major shift in the terms that people are asking for from Q1 to Q2 .
Understood. The last question that I have relates to M&A. Is there any update that you want to give us on your M&A pipeline over the short to medium term? Because in the notes, it was now written that you are in the discussions with a few potential targets, some of which could materialize in the second half of this year.
Yes. I have to be careful to say the right things here. M&A is a big part of our, you know, our growth story. Has been. Although we started earlier this year with a clean slate, we had no companies in the pipeline. All of us were totally absorbed with the spin-off and listing, and also the COVID pandemic, was having us think defensively. At this point, we have a number of companies in the pipeline at different stages of the pipeline. A couple of them are at, let's say, intermediate stages. We are looking primarily at companies that are between EUR 5 million and let's say EUR 40 million, just as a broad range. Nothing very, very large.
We are looking at companies that can give us access to new clients primarily, but also possibly to new service regions, like maybe an increased presence in Latin America or in Eastern Europe or some other places. You know, this is a little bit opportunistic and we don't want to, I mean opportunistic in the sense that individual candidates may move forward and, you know, or fall out at different points. It's difficult for us to be more specific. Definitely it's something that we have in mind, and it's possible that we would close one or more of them in the second half of the year.
Yeah. Understood. Follow-up on the M&A question here. I mean, would these I mean, these, let's say the majority of these potential bolt-on acquisitions, would they be earnings accretive for the first year of consolidation or might we also see a chance for dilution in the first year following their consolidation? Because the previous communication was that you also want to put more focus on accretion here when it comes to M&A compared to the past years.
Yeah. I think that our goal now is to mostly acquire companies that fall within the broad outlines of, you know, our own profitability and growth so that we aren't diluting our growth story even temporarily or our earnings story even temporarily. Yeah, we will be looking for, and we are looking for companies that are broadly in line with how we see ourselves growing and how we see our profitability. At the same time, we want to be very careful and level-headed about the amounts we are willing to pay for these companies because the market is extremely hot right now.
So we're trying to figure out, you know, what the right companies are and but you won't see any, you're unlikely to see any company that would drag down our profitability or growth story.
Okay. Thanks, Shridhar.
Thanks, Michael.
There are no further questions.
All right. Thank you very much, Petrus, and thanks everyone for joining the call. As I said at the start, you know, I think we have had a pretty momentous quarter and are well set up for the rest of the year and for the future of Nagarro to beyond that. Thank you for supporting us and, yeah, have a great weekend.
Thank you, everyone.