Good morning and welcome to the Endava Q4 and Fiscal Year 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the conference over to Laurence Madsen, Head of Investor Relations and ESG. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's fourth quarter and full fiscal year 2023 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava's Chief Executive Officer, and Mark Thurston, Endava's Chief Financial Officer. Before we begin, a quick reminder to our listeners. Our presentation and our accompanying remarks today include forward-looking statements, including but not limited to statements regarding our guidance for Q1 fiscal year 2024 and for the full fiscal year 2024, ability to grow revenues and, in particular, growth and expansion in our industry verticals, our combined business optimization actions, enhancements to our technology and offerings, the impact of adverse macroeconomic conditions, and our business strategies, plans, and operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and we undertake no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. For more information, please refer to the Risk Factors section of our annual report filed with the Securities and Exchange Commission on September 19, 2023. Also, during the call, we'll present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Reconciliation of such non-IFRS measures to the most directly comparable IFRS measures are included in today's earnings press release, which you can find on our investor relations site or on the SEC website. A link to the replay of this call will also be available on our website. With that, I'll turn the call over to John.

Thanks, Laurence. I'd like to thank you all for joining us today and hope that you're all well. We're pleased to be here to provide an update on our business and financial performance for the three months ended June 30th, 2023 and for the full fiscal year 2023. Despite the challenging macroeconomic environment, we reported a good quarter, with revenue totaling GBP189.8 million for Q4 of our fiscal year 2023, representing a 5.2% year-on-year increase from GBP180.4 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of GBP38.3 million, representing a 20.2% adjusted profit before tax margin. For the full fiscal year 2023, our revenue totaled GBP794.7 million, representing a 21.4% year-on-year increase from GBP654.8 million in fiscal year 2022. We ended the year with an adjusted profit for tax of GBP164.2 million, representing a 20.7% adjusted profit before tax margin. It's now 23 years since we started Endava, and we've grown with tremendous momentum since then and through cycles and changes. Macro and IT services have been challenged over the last three quarters. And banking, financial services, insurance, and Europe has been challenged, as we all know, giving significant headwinds to the business. But I didn't start this journey imagining that we would always have a tailwind. We see tremendous opportunity going forward and are managing for the long term. And I'm committed to continue to execute on our vision. Our strategy remains the same, but it is also expanding given our success and the opportunities in front of us. We're focused on diversification of our verticals and client geographies, expansion of our delivery to be more global and continued innovation around new technologies and solutions for our clients. We have a strong track record on…

Thanks, John. Endava’s revenue totaled GBP189.8 million for the three months ended June 30th 2023 compared to GBP180.4 million in the same period in the prior year, a 5.2% increase over the same period in the prior year. In constant currency, our revenue growth rate was 4.8%, including a 3.7% inorganic contribution during the quarter. Profit before tax for Q4 fiscal year 2023 was GBP24.9 million compared to GBP32.5 million in the same period in the prior year. Our adjusted profit before tax for the three months ended June 30, 2023, was GBP38.3 million compared to GBP36.2 million for the same period in the prior year. Our adjusted profit before tax margin was 20.2% for the three months ended June 30, 2023, compared to 20.1% for the same period in the prior year. Our adjusted diluted earnings per share, or EPS, was 57p for the three months ended June 30, 2023, calculated on 58.1 million diluted shares, as compared to 51p for the same period in the prior year, calculated on 58.0 million diluted shares. Our adjusted diluted EPS at 57p for Q4 was much stronger than anticipated due to a number of one-off items in the quarter and a lower-than-expected tax charge. These items accounted for 10p of adjusted diluted EPS and our adjusted diluted EPS for Q4 after adjusting for these items would have been about 47p. Revenue from our 10 largest clients accounted for 35% of revenue for the three months ended June 30th 2023 compared to 32% for the same period last fiscal year. Additionally, the average spend per client from our 10 largest clients increased from GBP5.8 million to GBP6.6 million for the three months ended June 30th, 2023, representing a 13.7% year-over-year increase. In the three months ended June 30th, 2023, North America accounted…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Bryan Bergin with TD Cowen. Please go ahead.

Hi, thank you. I wanted to start here on the fiscal '24 outlook and try and unpack it a little bit. Can you talk about what you're expecting out of the PE backed client cohort and payments versus the balance of the portfolio? And if you can really talk about the PE client behavior that you've seen progress here over the last several months.

Hi, Bryan. So PE is behaving as we expected. As you remember, we had a slowdown from Q3 to Q4 when we lost about sort of GBP10 million of quarterly run rate to mid GBP30 million, GBP35 million odd run rate. Q4 ended up basically where we expected. At the time of giving that guide, we did anticipate PE coming off slowly into Q1, so getting into the sort of low 30s. Basically, we're not assuming any pickup from that level of activity through FY '24, although we are starting to see some activity in our due diligence components of the portfolio, although that is a very small percentage of revenue. So we're taking a conservative view through the balance of FY '24 as regards to PE.

Okay. And my follow-up on margin here. So Mark, can you talk about -- some of the cadence was helpful there. Can you talk about just adjusted PBT level expectations? And you mentioned investments, obviously, with lower revenue growth, you have the utilization headwind here. But can you quantify how much of the pressure here, maybe investments that you're ramping in accelerators in the AI solution development you discussed versus lower utilization versus any other factors? And just as a starting point, what are you baking in, in 1Q as you ramp forward?

Why don't I start there? So our Q4 adjusted PBT was 20.4%. I called out a number of one-offs. I can touch on those at a later stage, you won't need to follow up. But basically, we have normalized adjusted PBT of about 17.5%, which is roughly what we were guiding implied in our 45p guide for Q4. Now for Q1, it is going to come off as reflected in the EPS going down from, let's call it, a normalized 47p, 45p to 35p is mainly being felt on the revenue and gross margin. So our gross margins are contracting going from Q4 to Q1. Part of that is what are those exceptional items reversing, which captured 1% of marginal decel. And the rest is basically utilization. It's a mixture of slightly increasing bench investment in accelerators. So we're deploying people on the bench to work on some of those accelerators, and also, we've seen a higher level of holiday taken as well. And then the balance to bring this down to Q1 is on SG&A, basically, where we see a sort of rebuilding in commission and other costs. Basically, that's a low point, if I could call it that, on adjusted PBT. We may see a bit of pressure on that as we go into Q2 because the revenues are going to be flat, and we do continue to invest mainly in sales and marketing in Q2, but also in our integration activities for Asia Pac in particular. And then as we see sequential sort of recovery as we go into Q3, Q4, gross margin starts to rise as we utilize the bench and get back to more normalized levels. To anticipate exiting Q4 at the levels of gross margin that we've typically seen in the past around 39% and our adjusted PBT come back up to that 19.5%.

Okay, very helpful. Thank you very much.

Thank you. And our next question today comes from James Faucette with Morgan Stanley. Please go ahead.

Thank very much. I wanted to follow-up once again on the outlook. You talked about better sales pipeline, et cetera, particularly going into next year. And I guess, just a couple of questions there. First, how should we square that with kind of what you're seeing in terms of some ongoing cancellations or pushouts? Just trying to figure out kind of how to put those together and what's driving that decision making. And then another common question that we get is, clearly, your fiscal year and where you're looking for acceleration bridges into next year, and a lot of your customers really won't be setting budgets until late this year or early next year. So what are the things that you're looking at that's really giving you the incremental confidence that those will be able to be delivered as expected early next calendar year? Thanks.

Yeah. Thanks, James. So the outlook as we're looking forward, we're seeing the context of the historic headwinds that started at the end of March, that wave of caution that followed [SVP] (ph). And of course, particularly BFS [Technical Difficulty] the portfolio to slow down that Mark was touching on. And that had a full impact in Q1, partial impact in Q4 as they were ramping down. And so that's part of the macro that is feeding through into the Q1 numbers. And we've adopted a cautious view on that, as Mark was touching on, so they're not seeing a pickup through the financial year. So it's then the significant new opportunities that we're seeing that we're looking to drive growth, particularly in the second half. Now many of those we've actually started work on, and we're doing early-stage architectural studies or aviation work with clients. The challenge that we have is it takes a while for those to ramp significantly into revenue. Now historically, for us as a business, that has given us a huge level of confidence as we forecast and look forward and has given us a lot of consistency in the forecast we provided to market because we've seen those opportunities working through the system and growing steadily. In this situation, that is what's giving us the confidence as we look to H2 that those opportunities are starting and are ramping. It's just the time it takes for them to get to sufficient scale to have the noticeable impact on revenue. So that's what we based our forecast and our confidence on. The work, most of it is not related to calendar year '24 budgets. It is work where clients are picking off that work now. They have budget for us, and that's the foundation of the guide that we put looking forward.

That’s great. That’s really helpful, John. Thanks.

Thank you. And our next question today comes from Bryan Keane with Deutsche Bank. Please go ahead.

Hi, Mark. I was just going to follow up there and hoping you could maybe quantify the AI investments, and are those investments that are going to weigh on the margins? It sounds like it's a onetime investment maybe for three to six months and then it goes away, so has the margins come back by Q4?

Yeah. Let’s search and build on it. But, we're basically holding people for the work that we see in the second half. But we're actually deploying them on internal accelerators that John touched on in his comments. It probably is, I'd say, about a percentage of gross margin stemming through Q1 and Q2, and then as the opportunities return, we will rotate those people into doing [doable] (ph) work. If you want to add anything to that.

I think you captured it there. Essentially, we're taking the opportunity of having some good people on the bench to actually build some stuff in an interesting area to the market, and that's helping to ease out some of the early-stage sales opportunities that we'll get into over the next quarter or so.

Got it, that's helpful. And then just looking by region, it looks like North America has been a little bit weaker than, obviously, Rest of World has been really strong for you guys. North America, though, has been a weaker region. Just trying to understand why North America versus maybe Europe, UK, Rest of World, doing a little bit better. Is there anything to read into that?

Our experience in North America, particularly US, has been that the recession rate pressures started earlier there. So actually, we started seeing clients, West Coast Tech, we talked about quite a bit some of the retail banks, et cetera, are pulling back even as far back as Q2 last financial year. And actually, that's what's then impacted, because obviously that feeds forward into following quarters. That's what's impacted both the full year and the Q4 numbers. Having said that, we also are seeing the US starting to pull through stronger now and start to see getting to the other side of the recessionary pressures, with West Coast Tech starting to talk about budgets. They are talking about calendar year '24 budgets, and some of the other parts where we're strong in the US, banks and so on are also looking at budgets for next year. So the US, we're starting to see conversations around moving beyond these recessionary pressures, and we're seeing that ahead of the UK and Europe. Rest of the World is actually pretty strong across the board and that has been true in an organic sense as well as, obviously, the M&A work that we've done out there in the last few quarters.

Got it. Thanks for taking the question.

Thank you. And our next question today comes from Moshe Katri with Wedbush Securities. Please go ahead.

Hey, thanks for taking my question. You mentioned some of the larger deals that are taking longer to close or maybe to convert. Is there anything different in the nature of some of those larger deals that you're taking? Are you maybe focusing more on transactions that are more focused on cost synergies, cost takeouts, et cetera, versus what you've done in the past? Any color on that would be helpful. Thanks.

Yes. So we're actually seeing a number of opportunities. I say seeing, a number of them, we've actually started work on with architecture studies and so on. One of the themes is platform consolidation, where we're seeing clients sometimes through M&A, sometimes through developing things in parallel, where they have multiple platforms for similar product areas and actually are wanting to consolidate those into a single platform. Often very large multiyear transformations, but ones in the current environment where they're choosing to get on with it because it is a route to substantial cost savings. So that's one of the big areas. We're also seeing, as I touched on in the opening remarks, opportunities in the Middle East around new digital banks kicking off new financial products being created and new digital services into the market. So across those areas, we're seeing projects kick off, which is these opportunities that we need to ramp on.

That's helpful. And then just a follow-up. Any view on the budget cycle for calendar '24? Do you feel internally that the budgets or the budget decisions may be delayed for next year?

So, I mean, the signs that we're seeing are that people within organizations are wanting and hoping that there is going to be budget coming back in calendar year '24. We haven't really based our guide on that happening. We've been more conservative than that and based it on what we can see shaping up. So there is potential upside if budgets are released for calendar year '24, but we've not booked that into our guidance page.

Understood. Thanks a lot.

Thank you. [Operator Instructions] Our next question comes from Maggie Nolan at William Blair. Please go ahead.

Thank you. You mentioned kind of the hints of the beginning of a recovery in the US. I'm wondering if you can contrast that a little bit more for us with the UK and Europe. Are you expecting incremental pressure from here in the UK and Europe or rather a steady state from these levels?

So I think the US, we think, is going to start to make a recovery quicker than Europe and UK. We can now start to come through, think about Q2. And largely driven, I think, by the recovery of TMT that we're seeing. In terms of Europe and the UK, it is a much more subdued picture. I'd say that Europe looks a little bit more robust than the UK at the moment, but really showing sort of meaningful sort of uptick in Q4. And it's a similar narrative for the UK as well. So Europe [stand back] (ph) from it, including Europe and the UK, it looks as though it's going to be quite subdued basically until about Q4 next year. North America, we think, starts to come by about Q2, Q3 this year, and I'm talking about our fiscal year here.

Thank you. And then on AI, we understand that a lot of companies may not be ready to actually apply artificial intelligence within their businesses. So we're curious if there's any kind of demand for adjacent services or other areas that you may have expertise in as companies come to you and try to consult on Gen AI and how they can move their businesses forward in light of this trend?

Yeah. So good question. I've touched on that a little bit at the last earnings call and also in my opening remarks this time. So one of the areas is all around data and preparing your data, getting data lakes ready, et cetera, that actually give you the foundations of information upon which to train models and so on. I touched on earlier, the synthetic data which covers the areas where it's very difficult to get real data to actually train models in order for models to be excellent, they need huge volumes of data, as you know. And when you're training edge cases, such as that manufacturing example that I gave, where there's actually very few production defects you're trying to get a machine to spot, then the use of synthetic data helps with that. So you put those together, and there's quite a lot of foundation work that we're seeing come through. We are seeing work come through and a lot of interest from clients. It's more at the ideation phase in terms of actually using some of the AI models in order to look at things like claims management and so on across their organizations. And we do think that will start to scale as clients get their heads around what's possible. There's also still a huge nervousness in the market around IT liability for using someone else's IP and inadvertently or losing your own IP because you get absorbed into a model in some way. We do believe that that the market will get through that fairly quickly as the AI models advance. The other area that we're very excited about is the other aspects of AI rather than just generative AI, and whether that's computer vision related activities and so on, and we're seeing as much -- probably more actually activity in those other areas of AI than in just the generative AI space, which, of course, has historically been true as well until the generative AI hit market recognition back in November.

Thank you very much.

Thanks, Maggie.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Thank you, and thank you all for joining us today. We're excited actually about the market opportunities over the medium to long term from all of the technological waves that continue to emerge, some of which we outlined on this call, and we're gearing Endava to continue as a leader as these tech waves gather strength. I look forward to speaking to you again at our next earnings call.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.