Good morning and welcome to the Endava First Quarter Fiscal Year 2024 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 IR. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's first fiscal year 2024 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 Q2 fiscal year 2024 and for the full fiscal year 2024, the improvements in the overall headwinds facing our industry, and the impact of such changes on our ability to grow revenues, and in particular, growth and expansion in our industry verticals, our continued business optimization actions, enhancements to our technology and offerings, the impact of adverse microeconomic 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 the 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, as well as the investor relations, both of which you can on our investor relations website 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.

Thank you, Lawrence. I'd like to thank you all for joining us today and I hope 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 September 30th, 2023. We reported revenue totaling GBP188.4 million for Q1 of our fiscal year 2024, representing a 0.6% year-on-year decrease in constant currency from GBP196.2 million in the same period in the prior year. Sequentially, revenue was up by 0.2% in constant currency on the previous quarter. We ended the quarter with an adjusted profit for tax for the period of GBP29.8 million, representing a 15.8% adjusted profit for tax margin. On our last earnings call in September, I mentioned that we're inherently conservative, but are seeing real signs of improvement, which should impact our second-half of fiscal year 2024. Whilst the world has become more unstable over the past two months, we continue to see sizable new opportunities entering and progressing through our funnel, as well as new assignments commencing and scaling. I will shortly go through some case studies, and a number of these illustrate work, which starts small and ramps as we move to production environments. Mark will come to our guidance later, which we have broadly maintained on the basis that the uplift in the second-half continues to firm up. We continue to prioritize our efforts on larger relationships that can grow and scale. We have a total of 145 clients, each paying us in excess of GBP1 million per year in the quarter just ended, compared to 140 in the same period last year, representing nearly a 4% year-on-year increase. Additionally, we had 33 clients, each paying us in excess of GBP5 million per year in the quarter just ended, compared to 25 in the…

Thanks, John. Endava's revenue totalled GBP188.4 million for the three months ended September 30, 2023, compared to GBP196.2 million in the same period in the prior year, a 3.9% decrease over the same period in the prior year. In constant currency, our revenue declined 0.6%, which reflects a 7% positive inorganic contribution during the quarter. Sequentially, revenue was up by 0.2% in constant currency on the previous quarter. Profit before tax for Q1 fiscal year 2024 was GBP17.3 million compared to GBP38.6 million in the same period in the prior year. Our adjusted profit before tax for the three months ended September 30th 2023 was GBP29.8 million, compared to GBP39.5 million for the same period in the prior year. Our adjusted profit before tax margin was 15.8% for the three months ended September 30, 2023, compared to 20.1% for the same period in the prior year. Our adjusted diluted earnings per share was GBP0.39 for the three months ended September 30, 2023, calculated on 58.4 million diluted shares as compared to GBP0.54 for the same period in the prior year, calculated on GBP58.1 million in shares. Revenue from our 10 largest clients’ accounts for 35% of revenue for the three months ended September 30, 2023, compared to 33% for the same period last fiscal year. Additionally, the average spend per client from our 10 largest clients increased from GBP6.4 million to GBP6.5 million for the three months ended September 30 of 2023, as compared to the three months ended September 30th 2022, representing a 2.3% year-over-year increase. In the three months ended September 30 2023, North America accounted for 30% of revenue, compared to 35% in the same period last fiscal year. Europe accounted for 25% of revenue, compared to 22% in the same period last fiscal year. The U.K.…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ashwin Shirvaikar of Citi. Please go ahead.

Thank you. And thank you for all the incremental details with breakdown that you provided. I guess the first question, I have is with regards to the higher visibility that you seem to allude to, is there a way to perhaps quantify that in terms of how much is already contractually lined up, so to speak, versus how much more needs to get sold and get ramped? And then a related question is, obviously, in the last fiscal year, you had a couple of very idiosyncratic impacts to your revenues, for example, FIS in the PE situation, if you can provide an update on what's included in your outlook as it relates to those?

Yes, thanks Ashwin. I'll just give a little bit of headlines to frame it and then Mark will come in with a little bit of detail. So from a client point of view, we're basing it on our sort of historic visibilities that we've had coming through the pipeline. Now that's always been a mixture of contracted business, committed business, and pipeline business that's coming through. And we're following the normal patterns that we've had in terms of assessing that. Now, what we're seeing and what we were reporting last quarter and continue to see growing is quite a lot of strength in terms of new opportunities coming into the top of the pipeline and advancing through the pipeline. And it's based on those with appropriate levels of probability, using the same ones as we've applied historically, that we're basing the uplift coming through in the second-half of our financial year, so we followed the normal pattern. I think to frame it, we essentially see a pre-COVID world returning. It's highly competitive as it's always been, but it's a context where we do well as a business with the opportunities that are coming through with our differentiated products and services to clients. And it'll take a while to work out of a system the nine months or so of pause in client decision-making, which is what's essentially created headwinds for us over the past three quarters. But as that works through, we see the normal patterns coming through in the pipeline that we're seeing coming through our system. Mark, any more color on there?

Yes, I think just to back up what John was saying, we forecast business bottom up every month. We scrutinize the pipeline and the conversion rates from contracted into committed. The pipeline is firming, which means it becomes a smaller proportion of the guided revenues for Q3, Q4. So the contracted and committed revenues is stepping up as a proportion from the previous guide. And then if you -- I think you asked about the in the idiosyncratic elements previously as well, so like MasterCard and FIS. So again, we have not changed any of the assumption that we had there, which is basically that MasterCard was going to step down in terms of activity in Q2, which is embedded in the guide. It's no different from the initial guidance, and we relatively flat as we go into the second-half, as we pivot onto new types of work with them. And again, with FIS, basically we are flatlining that in terms of the outlook, and that is no different from what we said last time, although with the change in ownership, we would anticipate that we would get additional work with them, but we have not factored that into the guide. And then the final point I think you touched on PE, again we have not changed that assumption that we had in the initial guide, which is basically that PE business for us will be flat throughout the year.

Appreciate that. And then the second question is with regards to headcount -- in the quarter headcount down sequentially. Obviously, you have pretty meaningful sequential growth in the second-half of the year? How quickly can you pivot, I guess, headcount to go to appropriate levels of headcount increases when you see the demand come through?

So we would expect to be able to ramp the headcount pretty much a month or two ahead of the projects that are coming through. In the current environment it isn't as tough as it has been historically to recruit and bring good people in. If it starts to toughen up, you know, we will just ramp ahead of that. It's pretty easy for us to respond as we have done over all of the years of growing the business on ramping headcount alongside the demand from clients. And we don't anticipate being able to do that as we go into the second-half. But in Q3, we still have a bench which we would burn through, so it'll be a Q4 issue as it emerges.

Understood. Thanks, and congratulations. Good work.

Thanks, Ashwin.

The next question is from Bryan Bergin of TD Cowen. Please go ahead.

Hi, thanks. This is Zack Ajzenman on for Bryan. First question we have was on the demand side. Can you maybe provide some more color on these larger deal opportunities that support your optimism in the second-half of the year? Are there certain common factors driving this influx of activity and how would you characterize the pace of these deal ramps versus more normalized times?

Yes, so, I mean, we're seeing it in a number of areas. The pace and the demand actually is strong, compared with our pre-COVID situation. But we maintain an element of conservatism, just given what's happening in the wider macro. The sorts of things that we're seeing coming through are our traditional digital transformation services. I touched on a whole bundle of those around the embedded finance area in my opening remarks, and we're certainly seeing a lot of activity coming from that. We're also seeing platform transformation type work where clients have ended up with multiple platforms and they're looking to get some economies out of consolidating those, perhaps pushing them a little bit harder into the cloud space with some of the benefits that come from that transition, a little bit more than the lift and shifts that one has seen historically. So those are the big areas where we're seeing a step up. I think another aspect is there is definitely some supplier consolidation going on in the market. And we are being a beneficiary of that in seeing some of that consolidation come our way. That's probably a new thing for us. That didn't really occur for us pre-COVID. Just weren't at the scale where we were picking up that sort of step-up. But we've seen quite a lot of activity with clients where they're consolidating and we're benefiting from it.

Got it. And shifting to margins, so it looks like there were some upsides in the quarter. What were the drivers here? And how does it inform your view over the coming quarters?

Yes, so the gross margin was basically the driver of it. So we had slightly better revenue that fell through to the bottom line. The gross margin was better than anticipated. Utilization was slightly up, so gross margin was better than anticipated. And we spent marginally less on SG&A as well. So the EPS against the guide was up quite significantly, but the main drivers being sort of gross margin to do that. But having said that, given the guide for Q2, we do see further gross margin compression, which is what we guided at the end of our fiscal ‘23 back in September. So it is anticipated that we get that and basically that is further sort of bench that we're carrying and investing in as we get ready for the pick-up in demand that we see in the second-half. And we continue to invest as well in SG&A, mainly in our sales and marketing area, but also in our integration work that we're doing in Asia Pacific with our newly acquired businesses. So there's no real change in the margin profile that we outlined at the time of giving guide to Q1.

Got it, thank you.

The next question is from Maggie Nolan of William Blair. Please go ahead.

Hi, thank you. Maybe just to build on that margin question a little bit, as you're starting to think about some signs of stabilization or improvement and you think about maybe beyond the quarter that you just commented on, what are some of the levers that you're going to start to push on to drive those margins back up to your long-term levels, and do you think margin will recover in conjunction with, kind of, demand and revenue recovery, or do you expect a lag a s you start to see that demand?

I'll start and then John can comment. I mean, I think things are stabilizing, despite there being some unstable times. But the recent history in terms of our rate per day has been new to, we haven't seen much weakness in it. It's a mixed picture at the moment. But it's basically sort of stable. And part of the recovery that we see, and it's probably beyond this fiscal, will be the pick-up in the day rate as demand sort of recovers. But whilst we're waiting for that to come through more strongly, it’s looking at the cost of the business, mainly through delivery and the wage costs that we have in the business. So we have to make sure that we balance the demand that we see and affordability in the marketplace with the levels of pay awards that we're making. So we're going to be vigilant on that. And again, we are going to play close attention to SG&A. We are investing at the moment basically in our sales activities to grow us for when the recovery comes. But we will continue to watch that. So I think as we grow out of this fiscal year, and particularly get back to normal sort of run rates or more normal by Q4, that we will build a gross margin back to the levels that we've seen historically, which is high-30s, and then get that leverage over SG&A.

Yes, I think the big step up from where we are now into the second-half will be as we drive utilization higher. We're carrying a substantial bench, compared to our historic levels, which we've hung onto on the basis of the work that we see coming through. And as we deploy those people, we'll see the gross margin move back up as Mark has outlined and then cascade through to sort of the EBITDA levels that we've had historically.

That's helpful. Thank you. And then I know you commented on FIS and MasterCard specifically, but could you talk a little bit more broadly about spending and demand trends at your payments and FinTech clients, any differences that you're seeing between the U.K. and Europe and the U.S. And what expectations for these groups you've factored into the full-year guidance?

In terms of, there's little change from the initial guidance actually. I mean, payments is going to be a tough year for us. So, year-on-year, we'll see a decline of something like 14% we think. But that hasn't changed from the outlook from Q1. Again, I think the banking capital markets will be sort of stable. Again, we haven't seen any sort of change from that outlook. But insurance actually looks like a relative sort of bright spot. TMT is slightly weaker than anticipated, but it's just at the margins. And that is actually across most of the geos, whether it's North America, U.K. and Europe. And again, we're not really seeing much change in terms of the geo outlook. I think North America will start to recover more strongly than the U.K., actually if you look at it quarter-on-quarter, but it will still not be a sort of strong year for North America in terms of year-on-year growth. And so there's no real change in what we were saying eight or so weeks ago in terms of that color.

Just a couple of things to add to that, we -- the dynamic, as we see it, is much more sector-driven and geo-driven. So the sector fluctuations are driving what's happening in the geo rather than the other way around. So Europe has been relatively strong, largely because of the geos are strong in Europe rather than because of macro what's happening in Europe. The other thing is we're talking about payments going down as a vertical, but actually if you look at what we're doing as a business, it's because it's becoming more of a horizontal. And some of those services that we were talking about getting embedded into the solutions that retailers and so on are offering means we're still pretty busy from a payments point of view is just going into other verticals. And actually that's a real strength for us, because it helps us to break into other verticals with quite strategic conversations with clients. And then we're able to build out from that as we expand into other verticals outside of our traditional strength in the financial services space.

Thank you.

Thanks, Maggie.

[Operator Instructions] The next question is from Bryan Keane of Deutsche Bank. Please go ahead.

Hi, this is Nate Svensson on for Bryan. I was hoping that you could give us an update on how the Mudbath and DEK acquisitions are performing versus your expectations when you made those acquisitions? So how is integration work going and then maybe how do you feel about the long-term opportunity ahead of you in APAC? And then relatedly, I think you mentioned that inorganic contribution in the quarter was 7%. Just wondering if you'd give us an update on the expectation for inorganic contribution for the remainder of the year?

Yes, so the deals that we've done in Asia Pacific are all going very well. The Lexicon one from last, well, just over 12-months ago. Mudbath and DEK, both settling in well, actually seeing growth coming through with their existing client base, but also winning new business. So, you know, we feel we've established a very strong position rest of the world. You can see it's up to 10% of our revenues now. The team is coming together really strongly. And we see great opportunities that convert into organic growth in that part of the world. Obviously, with DEK as well, we got the Vietnam delivery capabilities. And we're starting to deploy that into some other Endava clients, and so spreading our footprint from the Central Europe and Latin America capability that we have historically. Vietnam, in particular, we're seeing demand from some of our global clients, who were keen to have services in the Asia Pacific arena and those clients are following through on their asks before we did the deal and actually starting to put teams together in that part of the world. So it's executing well. We're very pleased with it. Mark, did you want to put some color on the inorganic?

Yes, yes. So you're right, Nate. 7% in the quarter was the contribution from M&A. It will diminish as we go through the year, as we do the full 12-month cycle on them. So for the full-year, similar to what we said last time, contribution from M&A will be about 5% of the 2.5% cost and currency in the guide.

Got it, all very helpful. So I don't think there's been a question in the Q&A on generative AI, so I will take the opportunity to ask that one, so can you tell us, like how much of the sales activity and pipeline that you're seeing is explicitly AI-related. I know some competitors in the space have talked about a lot of activity, but sort of not a lot in terms of actual bookings and booking size? And then also in your prepared remarks, you mentioned your internally developed AI platform. So maybe can you give a little more color on that platform and what differentiates it from other platforms that you see in the market? Thank you.

Yes, so thanks for that. Congratulations on the first question on generative AI in this call. Yes, we're seeing a lot of interest, a lot of conversations in the market. I think similar to other organizations, the challenge has been converting those into scaled projects. And one of the reasons for taking you through our internally developed platform is that is all about how you convert the ideas and the opportunities from generative AI into enterprise-scale deliverable solutions. So our platform essentially uses existing open source and fast solutions. So we're not creating the generative AI capability. But we're putting those onto a platform that actually enables well-engineered solutions to be put together very quickly and in a fashion that could be integrated into an enterprise environment and therefore enabled to scale. And I think it's that engineering capability which is going to be crucial to actually seeing these opportunities and these solutions brought to life and scaled in clients, which is why we've invested in that space and brought it to life. It also has benefits in the sales cycle, in the sense that we're able to sandbox very quickly solutions that relate to client workflows and actually bring those to life rather than some sort of PowerPoint, this is what could be done type discussion. And that helps clients go down the learning curve of value generative AI and how it can impact their organization. So that's why we call that out. We like the phrase MLOps that brings to life the engineering related to putting these machine learning capabilities into client solutions, similar to the DevOps capability that got built around implementing cloud solutions.

Thanks, appreciate the color.

Thanks.

The next question is from James Faucette of Morgan Stanley. Please go ahead.

Hey, guys. Good morning. This is Antonio Jaramillo on for James Faucette. I have one question. I'm just curious if you guys could more broadly talk about your capital allocation strategy going forward? I know that, like you guys have had a concerted effort in the APAC region and just curious on that first?

So the broad principle is that, you know, we've looked at buybacks that concluded that actually we're better conserving our capital for the right M&A opportunities. M&A that is going to push us down that diversification route. We're still -- for many years ago, diversifying out of financial services and out of the U.K. And we continue to push on that M&A is one of the really helpful routes to achieving that diversification. So our capital focuses around using that to drive M&A. And the areas that we're particularly keen to grow on are the U.S. at the moment, but also some of the countries in Europe where we don't have a presence as we see opportunities there. So that's what we'll be focusing on in terms of where we put our money.

Got it, that's all very helpful. And then for my second question, I know that you had mentioned that in your guide, you're sort of flatlining your private equity activity, but have you seen any meaningful activity in that group? And if you could touch on that, that'd be great?

Yes, so I mean, the PE space, our approach to market is that we have a diligence business that engages with PE’s early in their diligence process around acquiring businesses. And through doing that, we help them frame their investment thesis and what they want to do from a technology point of view, as well as all the other aspects of why they're buying the business. And through that, that then leads to downstream work as we help them execute on those transformations. Now, that's actually been pretty quiet. The last three or four months, we have seen a significant pickup in that diligence work and some of those deals getting executed upon. Now it is a long cycle sales process, because we work with the PE's in shaping the investment thesis. They then execute on the deals. They normally have some work that they want to do with the management teams in terms of shaping the strategy up around that investment thesis. And then putting their business cases together and then executing on it. So it can be six, 12 months downstream before that work starts to come through. But we're seeing those early signs of activity in terms of deals happening and that work going on. We wouldn't expect it to have a significant impact on this financial year, but it's a good sign for the next financial year.

Perfect. Thanks, guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Cotterell for closing remarks.

So thank you all for joining us today. We're excited about the market opportunities over the medium to long-term from all of the technology waves that continue to emerge, some of which we've outlined on the call. We're gearing Endava to continue as a leader as these tech waves gather strength and look forward to speaking to you on our next earning call in February.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.