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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
[Call Starts Abruptly]
a lot of questions about. With all the interest around AI on one hand and Nagarro's intrinsic strengths on the other, which are listed here, these are very well-suited to AI interventions. This gives us a great opportunity to get even more strategic for our clients with AI and move up to the next level, with our clients to get to a better client engagement, and move up the value chain.
In fact, as many of you, who have studied the company for some years may know, many of our flagship projects over the years have been around decision optimization and decision support with math and data. For example, factory scheduling and inventory optimization for pharma or supply chain optimization for fashion retail, which is very dynamic, or vehicle routing optimization for logistics or ticket pricing optimization for airlines or process informatics for jet engine manufacturing and so on.
And these case studies, they reflect the backgrounds and interests of some of the early Nagarrians, including myself, my own academic and experiential background is in these areas, and they also reflect some of the latent capabilities in the company. Even internally, our business operating system called Ginger that we talk a lot about, is around data-driven transformation, data-driven decision optimization, using data science, using AI. And in fact, it's now getting traction at clients, as they start to think about what AI can do for them.
So, we have a lot of experience from the past that we are now finding is very relevant for decision AI with how the org dynamics of the client should be orchestrated, how the change management should be run, how data should be handled, how the UX should work and so on. Also, for many years, and again, some of you may know this, we have been investing to build a great AI and big data team, led by Anurag Sahay, who some of you may have heard. He is a total rock star. And we have invested in many client projects to build serious technical capabilities and serious consulting capabilities around these topics. And then on top of that, we have our thinking breakthroughs innovation framework, that we launched several years ago, which by now almost all our accounts are using in some form or the other, which is easily extensible to the subjects of decision AI and generative AI.
So today, the news is that, we are bringing all this together. And we have launched a systematic program to take charge of the AI-related conversations at the CXO level at all our top clients. We are calling this the fluidic enterprise AI initiative, with the fluidic standing for agile, adaptive, experience-led, and personalized. And I won't talk very much about it here, but just wanted to give you a quick taste of that. For our clients, this transformation to embrace AI is, we believe, not a three-month journey, not a 30-year journey, but perhaps, a three year or four-year journey, and we want to be with them all the way and ideally lead the way with them. Show the way for them, right?
And just like I have shown you this slide from 2020 today in 2023, I hope in 2026, I can show you the same slide and just explain how we have achieved, what we set out to achieve, how consistent we have been, and how this has been able to transform not just our clients, but also Nagarro's place in the industry and how Nagarro is perceived in this world of technology services. So that was the, background and context setting.
Now let us get to the higher end now. Let's talk about the highlights of quarter two. We believe that it was Nagarro's diversification that allowed it to continue to grow. It grew 10.7% year-on-year in constant currency of which 8.7% was organic. Most accounts developed well, and we continue to score new wins. And the accounts generating over EUR1 million in revenue over the trailing 12 months. Were up at 168 clients at the end of June from just 131 clients a year ago. Our net promoter score was high at 63, which means this client satisfaction was excellent.
By the way, this client satisfaction also comes out in every client conversation that we have been having, even when clients have had to pull back on some projects, which has happened for some reason or the other, especially in horizontal tech and banking, the client relationships have stayed strong. We expect that we will be able to bounce back at most of these clients once demand returns just as in 2020. And with COVID, we were forced to offer our clients at that time some pricing cards and some concessions on payment terms. But things bounced back in 2021.
Still, that said, the bounce hasn't happened yet and our revenue expectations for 2023 have changed. Foreign exchange has also, rates have also had an impact. So, we have revised our revenue guidance downwards last week. The change in revenue expectations along with a sudden sharp drop in attrition, which is now less than 5%, have left us with more excess capacity, excess production capacity than we had expected.
Now we have taken a long-term view on this, and being a growth-oriented company, we have really put a lot of emphasis on protecting our employer brand and also watching out for the potential resurgence and demand. So, we have avoided dramatic layoffs. Instead, we have taken many small steps to rationalize cost and headcount to where they need to be. The benefits of this cost rationalization will mostly accrue in Q3 and Q4 because there's a little bit of a lag, and then of course, they will carry through carry-over into 2024.
To share one important example of cost rationalization, we actually renegotiated the contracts for nearly 14,000 employees to insert an EBITDA-linked organization bonus into their existing compensation structure, which will give us considerably more flex in future years. The idea is to never waste a good crisis and to emerge systematically improved. Now, we could have cut deeper if we had made a temporary cut, but we decided instead to make a shallow cut and make it a forever thing, a flexibility asset for the future. Now, on this slide, we have spoken about the Fluidic Enterprise AI initiative already, so I won't go into that again. Let me talk a little bit about ESG.
On ESG, we improved our efforts across multiple areas. Professor Vishal Gaur was voted onto our supervisory board. Vishal is the dean of Cornell University's SC Johnson School of Business, and a professor of topics very relevant to the gallery today, especially when it comes to creating solutions around data and AI for clients. For those of you who do not know that Cornell Business School, it was ranked by the Financial Times the ft, as one of the top 10 business schools in the world, and Vishal is the dean there. The supervisory board now has four members and three of the four are independent.
Also, on ESG, we have been stepping up our engagement with ESG rating agencies such as CDP, EcoVadis and ISG, and also with industry initiatives such as supplier assurance for the automotive industry. We have just recently announced that EcoVadis has upgraded Nagarro to Bronze Medal status, and we expect other agencies to also reevaluate us in due course.
Now moving to the quantitative view of the quarter, revenue for Q2 2023 was €227 million, gross margin was 25.3%, accounting for the excess capacity in the bench and in the business units, adjusted EBITDA was €28.9 million. In general, we felt that the more traditional industries did better. The rest of Europe grew fastest year-on-year on a small base, while North America was affected by its exposure to horizontal tech. Our top five clients counted for just 14% of revenues. We ended the quarter with a cash balance of €99 million. Last week, we put out a revised guidance for 2023 of €915 million, revenue 26% gross margin, and 13% adjusted EBITDA margin. And we'll come back to this later.
The best-performing industries on a year-on-year basis were energy utilities and building automation, followed by automotive, manufacturing and industrial, and life sciences and healthcare. The weakness in horizontal tech we have already spoken about. Now, you will may notice some changes in public non-profit and education, but these are mainly due, in our opinion, to some lumpy demand timing kind of thing, and should not be systemic.
We remained low in terms of client concentration, as always, our list of top clients from the -- from a year ago is more or less the list of top clients now, barring the one special client situation that we have described in the H1 report. In this top-clients list, there has been very little movement -- there's been some movement up and down, but all these relationships are very good and very strong. So, if you think about it, we keep adding more clients at one end of the funnel, but the existing ones also keep growing and the churn is very low.
You can see that the development of the different client regions has for us been more or less driven by the dynamics of the industry the verticals. North America has lost its place, because of its exposure to horizontal tech, and also as I said, because of some demand timing in the public sector, and accounted for just 35% of revenue in Q1. But we all know that business in North America bounces back rather quickly. We are waiting for that bounce. In terms of people, we have had almost zero net hiring, because we already have significantly excess production capacity. And the increase in headcount in this quarter is almost totally due to acquisitions.
Now, over to Gagan to say a few words on the balance sheet and cash.
Thank you, Manas. Hello everyone. Let's first review the balance sheet. In the left-hand chart, you can see the balance sheet position. On June 30th, 2023, we reported financial liabilities of €273.6 million, which consists of our syndicated credit bank loans, and liabilities. [Technical Difficulty] Lease liabilities stood at €52.2 million and with a positive cash balance of €99.3 million, our net leverage was €226.4 million. Given our LTM EBITDA of €139.7 million. Our net leverage ratio came out at 1.6x at June 30th. The company's liquidity position at the end of June was comfortable with a working capital of €167.1 million.
Now onto our cash flows, which are shown in the right-hand chart. For the six-month period ended June 2023, our total cash flow was negative €16.2 million as against negative €26 million for the comparable period last year. Let's break it down further. Our operating cash flow for the six-month period ended June was €15.4 million, as against €15 million for the comparable period last year. There was a reduction in net cash flow from factoring of €11.5 million and an increase in trade receivables and contract assets of €7.8 million relating to new acquisitions. These of sales outstanding, which are calculated based on the quarterly revenue, and include both contract assets and trade receivables were at 79 days at the end of June.
Cash flow from investing activities for the six-month period ended June were €51.2 million, and this outflow was mainly due to payment obligations for new and old acquisitions. The outflow of cash in the comparable period last year was €39.2 million. We also reported a CapEx of approximately €2.5 million for the six months period, which is only 0.5% of our six-month revenues.
And finally, our cash inflow from financing activities for the six-month period ended June was €19.6 million as against a cash outflow of €1.8 million in the comparable period last year. Major items of cash inflow were net proceeds from bank loans of €52.7 million, which were offset by cash outflow of €12.2 million for lease payments, €5.2 million for interest payments, and €16.4 million for share buybacks.
A quick update on our ongoing share buyback program, under which we have approval to purchase up to 350,000 shares in three tranches of €10 million each and subject to a €30 million limit overall. We are glad to announce that two tranches of the buyback have been completed, and the third tranche is well underway. Also, as mentioned earlier in the presentation, we are happy to report that, the accounts for the three latest acquisitions in Infocore, MBIS, and APSL were consolidated in Q2.
With this, I hand over back to Manas. Thank you all.
Thank you, Gagan. So, now this is our guidance again, and we have already referred to it, and I expect there will be a fair number of questions around it. This is a slow year for sure, but we remain very bullish for the medium-term, and we would like to reiterate our expectation that, this company can grow at 20% organic revenue growth in a typical year in the medium-term. And we reiterate our commitment to push towards 18% adjusted EBITDA in 2026.
So now this guidance slide, I think sets us up very well for the Q&A, which I expect you all will be waiting for. So, let me hand these things back to the moderator to run the Q&A. Over to you Dan.
Thank you, Manas. [Operator Instructions]. I will introduce or read out the first question. Our first question is from Retoras Jovan, who is an Individual Investor.
Hi Manus. And the team. I was wondering if you are considering any new potential acquisition target during the second half of the year. Thank you. Thank you, for the question. Yes, we continue to look at interesting companies that can add value to Nagarro's growth story. And we don't have any concrete plans, but we do have several companies in the pipeline that we are evaluating.
The next question is again, from Retoras Jovan. In the press release, you said that you will defer salary increments from August to the end of the year. How do you expect this to impact your ability to remain attractive in order to keep and recruit new talented people?
I think, there won't be a significant impact. The labor market is a little bit more employer-friendly than it has been. As we said, attrition is at an all-time low, almost. With just below 4% actually. So, we do think that we will retain the ability to attract talent and people will understand that we are in a tight position as an industry and we are also sharing the pain in some way.
The next question is a phone question. It's from Andreas Wolf at Warburg Research.
Thank you. Congratulations on this, on achieving growth in a difficult environment. My question is regard the visibility for the remainder of the year. So. I would assume that given the fact that we're already in August, visibility should be pretty good and clients should have committed to the project that they would like to carry out with Nagarro. That's my first question. The second is on the type of discussions that you've had over the last couple [Technical Difficulty] headwinds, or is it mainly large clients being more cautious? If I look… [Technical Difficulty] mainly bigger,
Andreas, I think, you would have to repeat the second question because your voice was failing in and out. If you can just repeat the second question, please.
You are having with your clients, is it mainly the bigger clients cutting back their it spending? If I look at your one to 10 biggest clients it seems like it's mainly the big clients who are cutting back. And then in general on the EBITDA link that you have now implemented… [Technical Difficulty].
I think we will have to maybe wait for Andreas to call back in. In the meantime, maybe I can answer the questions that he has raised that I think he has raised that I could fully grasp. So, the first question is around visibility for the remainder of the year. And we think we have good visibility through the remainder of the year, but there is of course the uncertainty around how the project staffing levels will run.
So, I would say we have fair visibility. I would not emphasize this too much that we have superb visibility, but it's fair. And in terms of our -- which clients are cutting back, as I mentioned in the first slide, and in our H1 report, there is a very specific case of inherited build operate transfer clause with one of our clients, one of the big clients that came to us through an M&A.
And we don't typically do such clauses, but we had this one with this particular client. And this client had also a particular situation, a pre-IPO situation, where they wanted to pull in their team. So, this has impacted us, in a way that is not actually -- there's no other client in our portfolio that has that, but in general, what we're seeing is it's more of a vertical thing. It's more a horizontal tech thing or a banking thing, typically, but not so much a large client versus a small client. So, I think that pattern is not so easy to discern.
Andrea, sorry, I think I got your questions. I'm not totally sure I got them all right. But Dan, maybe we can move to the next question.
The next question is from Nicolas David. He actually has two questions.
The first question is, could you please comment on SE's sequential evolution of the demand in Q3 versus Q2, generally speaking, and more specifically in the tech sector? His second question is, should we expect some exceptional charges linked to the measures taken in order to reduce the production overcapacity? Thank you.
So, as a policy, we are trying to minimize adjustments to our EBITDA, and where we just have a two-month notice period that will -- we will not -- we don't plan at the moment to take exceptional charges for that, but where it involves further restructuring, more deeper restructuring, we might take those charges. But at the moment, we have not factored any of those in.
In terms of the evolution of demand from Q3 -- Q2 to Q3, this is typically quite consistent, and there are no significant trends. What is more important is the number of working days in each month and things like that. But we don't see any particular trend from Q2 to Q3 that is work highlighting here. Thanks, Nicolas.
The next questions are from Martin Jones at Lion Trust PLC.
Says, hi there. Can you please give some additional color on the particular geographies and sectors where you are seeing weakness? Given your past experience, could you see these areas recovering? The second question is on capital allocation. Can you reiterate your thoughts on future debt reduction versus further share repurchases?
Okay, sure. So, I have addressed the demand patterns in different sectors, especially the ones that are not living up to expectations. Horizontal tech and banking, for example. And in terms of geographies, what we are seeing is that the vertical play is dominating and the vertical effects are dominating. And geography like the U.S. is a little bit slower because horizontal tech has a disproportionate presence there, so -- or at least the clients which are pulling back are disproportionately in the U.S. sector.
In terms of capital allocation, I would not like to, just rule out any further share buybacks. But at the same time, I can say that the share buybacks that we had planned are almost over. And, yeah, we don't have any in our future plans, at the moment. That's all I can say. Thanks, Martin. Thank you.
They're written questions, so perhaps that will fill in what we missed on the last one. If we look at the future development of personal expenses, what will be the fixed component and what could the variable component in percentage look like?
Okay. Sure. So, the variable component that we have introduced is, at the moment, not across the entire company, but it covers around 14,000 people. And it is a few percentage points. I would rather not disclose the exact way it's sort of distributed across the 14,000 people. But it does give us some flexibility in future years when we hit a slower period to also automatically, reduce our costs.
So, I think that it's a big asset for the future in terms of cost control whenever the revenue slows down. So, it's an automatic kind of system.
Okay. The next question is a verbal question from Lucas Spang at Tigris Capital. Lucas, we are now activating the microphone. Please go ahead.
Yes. Hi. Good afternoon, Manas. I have actually three questions, concerning the outlook is the first question. So, I got to try it, the outlook on the revenue side is still, just, about organic growth. So, you did this, M&A which should come then on top. There is the question. How much revenue do you expect from the M&A you already did this year? The second question is also a follow-up on the questions from Andreas versus -- concerning visibility.
It seems to be that visibility is a little bit limited when we look at your -- which is very close to your reporting date. So, is there First, what do you think, what's behind this maybe limited visibility? And is there a way to have better visibility in the future and maybe, concerning client behavior?
And a third question is about this special client, you mentioned also in your previous answer, which is also mentioned in the report. Is there a chance to get back business with this customer or how do you see this going forward? Thank you.
Thank you, Lucas, for these questions. The first answer or the answer to the first question is that our outlook as revised is it includes the acquisitions that we have already made. It doesn't include future acquisitions, but it does include the acquisitions we already made. And you can estimate the impact of those acquisitions from the data in the Annual Report, but my guess is it's just a little bit over €20 million. But don't follow me to that. It's somewhere in that range expected in this -- within this Guidance that we have given out.
The second question is, regarding visibility and why we had to ad -- we have had, scale backs in certain projects, as you've said, and this can happen from day to day. So, that's why I'm a little bit hesitant on visibility. It's not that the projects are not continuing, but just the ramp-ups that were expected are being delayed or the ramp-downs may be temporarily incorporated. So, we are seeing some of that, right? And we also had some, as I said, some demand shifting, a change in demand timing in the public sector, which is actually not affected by the slowdown at all, but it's just a matter of sort of coincidence.
And as I said, with these delays in orders, we even have some RFPs, which we have won, but we don't have the project started yet. So, all of this is creating some sort of uncertainty around the demand that has affected us in the past. We hope this is the last of it. We have more visibility or our visibility proves to be our demand proves to be strong and solid for the future.
But it's not -- there's no easy way to improve visibility because what you do have is a changing environment and people are all reacting based on their company's context. So, I think that as Nagarro, we have decided to be focused on digital transformation kind of opportunities and now AI-led opportunities. So, that is the kind of work we do, it's not like a hundred million AMSs kind of project.
We are doing more of the digital work, and this work is a little bit more discretionary for our clients, and we have to live with that. It's a great thing when they are out to build new stuff and when they're really cutting back, then maybe it's a little bit easier to cut back on.
The third question on the special client that you mentioned, can we get back with this client - back up again with this client? It is theoretically possible, but I wouldn't bet on that. I think that we have anyway, a lot of other places in horizontal tech, but I think we can get back on and sort of grow, bounce back at these clients very rapidly. But for this particular client, I would not put too much store set, too much store by that. Thank you very much Lucas for your question.
So, the next question is a written question once again from Retoras Jovan.
He asks, could you please provide some color as to why our DSO growing quarter on quarter from 69 days in Q1 to 79 days in Q2? Thank you.
Thanks. So, in the last, in one of these calls, I don't remember which one, we showed the evolution of DSOs over several quarters. And if you refer to that, you will see that the current level of DSOs is actually not that unusual, but I will. So, it is within the band where DSOs tend to fluctuate for us, but there is also a special technical impact of a certain M&A, which maybe Gagan, you can say a few words on.
We just lost Gagan so I can say it. So yeah, it's that we have, we have consolidated these acquisitions in the last month of the period. So, we have taken on the receivables and the contract assets, but the revenue that we have consolidated is only the last month revenue, which also has an impact. So, that's the technical thing that is also affecting DSOs. Thank you very much for your question.
The next question is from Emilio Jose Rodrigo Para an Individual Investor.
Hi, Manas. I would like to ask about debt and factoring. You are reducing the use of factoring as working capital needs are reducing, but debt is still increasing. Are you seeing further M&A opportunities down the road? Should we expect more debt increase?
Thanks for the question, Emilio. So, we of course are also generating earnings, but we are not likely to do any large transformative acquisitions, but we are fully open to smaller acquisitions that add a lot of synergistic value to Nagarro. And as if you look back over the last years, the 15-odd acquisitions that we have done have brought great talent to us, have got great capabilities and client access to us, and we do see the need to continue to do this.
We will, of course, keep an eye out for our leverage ratios. Of course. Thank you for your question.
So, at this point, we do have no further questions. I will just pause for an additional 15 seconds to ensure that we do not have any further questions. Okay. We have received another question. This is from Antonio Carrizosa, a Private Investor.
Good evening, Manas, and congratulations on your hard work. As we progress through the second half of 2023, could you please give an update as to whether the tender process for the auditing of the 2024 financial statement is progressing smoothly? Also, is there any possibility that the deferral of the salary increases programmed for 2023 will have an impact on the attrition rates? Thanks a lot.
Thanks for the question, Antonio. Yes, the -- we are -- as we have said before, planning to effect a change in our auditor ecosystem both for 2023 and 2024. And the process of evaluation is continuing. The supervisory board is seized of it, and working on it, and we are talking to the top four auditors and getting proposals and things like that.
So, all that is in action. And in terms of our -- the impact of our salary changes on our attrition, we have been very cautious. We are expecting demand to bounce back. We are very keen to be leaders in this space, and we are not going to give up our growth ambitions for because of a few slow quarters.
So, all the steps that we have taken, we have taken them very, very carefully. We have explained them very transparently to our colleagues. And I believe that this will not make any significant dent in terms of our ability to staff our projects to hire new people or in terms of our attrition. So, you can believe -- you can be sure that we are very, very careful about how we are steering through this with a view to the long-term future of the company.
Thank you, Manas. I can confirm that there are no further questions, so I hand back to you to conclude the call.
Okay, great. Thank you all for attending this call and for being supporters for Nagarro for through these years. Let me just add that we have a couple of conferences that we are going to show up at. So, I would like to call out, especially the Commerce Bank conference on the 5th of September. And then in November, the Eigenkapitalforum, or the German Equity Forum, will be there as well.
So, hope to meet some of you there and have a good day, all of you. Thanks.
Thank you, everyone.