Endava plc

Good day, and welcome to the Endava third quarter fiscal year 2023 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lawrence Madison, head of investor relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's third quarter of fiscal year 2023 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cottrell, 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 our guidance for Q4 fiscal year 2023 and for the full fiscal year 2023, our ability to grow revenue, and in particular, growth and expansion in our industry verticals, the company's continued business optimization actions, enhancement to our technology and offerings, the impact of adverse macroeconomic conditions, and other forward-looking statements regarding 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 October 31st, 2022. Also, during the call, will present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is 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.

Thank you, Laurence. 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 March the 31st, 2023. Despite the challenging macroeconomic environment, we reported another solid quarter with revenue totaling 203.5 million pounds, the Q3 of our fiscal year, 2023. representing a 20.3% year-on-year increase from £169.2 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of £43.4 million, representing a 21.3% adjusted profit before tax margin. While the near-term outlook might be more challenging, We are managing the business for the long term. We remain very focused on our vision 30, which is our planned scale up as we head to 2030. And we are gearing in Darva for exciting market opportunities. Post COVID, we experienced an increase in demand, which made it difficult to undertake some business optimization actions required to deliver on this vision. The recent cooling down in demand has given us a chance to recalibrate the business and to better position ourselves for continued growth into the next decade. Over the past three years, we've been building our industry vertical focus, establishing teams who market, sell, ideate, and deliver into specific industries. This enables the incubation of technologies and capabilities attuned to the specific needs of clients and differentiates our solutions from generic horizontal technologies. We have now reorganized internally into our industry verticals and continue to invest in talent to help our clients adapt to the new disruptive technological waves, including AI and ML. As I highlighted in our last earnings call, last December we saw a change in behavior as some clients added another level of due diligence to their decision-making cycles, slowing the commencement of new projects, and in some cases, pausing existing spend as they reassessed their priorities. I also noted that we'd seen an uptick in activity in February, which resulted in March being our highest revenue month in our history. Unfortunately, the recent bank failures triggered another wave of caution, and as a result, the momentum going into March stalled, and we now see lower demand than our previous guidance. To give this some color, the banking failures triggered a significant change in behavior in our PE portfolio company clients, where they curtailed spend sharply. The drop in revenue in Q4 from Q3 is down to PE portfolio company reductions, with the rest of the business flat allowing for lower working days in Q4. We believe that this now pent up demand will return when economic conditions recover. In the last quarter, our revenue growth year on year was driven primarily by both the expansion of work for our existing clients and the acquisition of new ones during the quarter. We continue to prioritize our efforts on larger relationships that can grow and scale. As a result, we continued growing the number of larger clients, with a total of 155 clients each paying us in excess of £1 million per year, compared to 118 in the same period last year, representing a 31% year-on-year increase. We also saw the cohort of our largest clients, those who each spend over £5 million per year with us, grow by 35%, from 23 in the same period last year to 31 last quarter. Moving on to technology, it will be of surprise to no one that data and AI-related work has been an important part of our business for a long time and has continually grown in scale, value, and complexity as we engaged in larger and more involved pieces of work for our clients in recent years. Today, I'll highlight some of the work we've been doing using this technology. It's important to note that the inherently exploratory and iterative nature of generative AI work aligns with Endava's natural way of working. We strive to work in an exploratory way with our clients from ideation to production, working iteratively to understand their needs and opportunities, applying the right technology in the right way and deepening our knowledge and the client's understanding as we progress together. This allows us to achieve a rapid time to initial value, but also lasting and sustainable value for the client in the long term. We deliberately bracket data and AI together, as AI is dependent on data to train its models to extract patterns and insights. So our skills across the data spectrum directly support our work in the AI field. Our work in data and AI is varied, both in business domain, where we work across a wide range of industries, and in the technical nature of the work. This area is varied, being a continuum from traditional BI-based data work at one end to AI-based analytics and generative AI at the other, with the different aspects complementing each other. Our projects vary from data warehousing and reporting through modern data engineering where we solve the big problems clients have in organizing their data so that it can be used profitably, through building leading edge data platforms to provide clients with environments to exploit the potential of their data. We also provide advanced analytical work to unlock the value of data and AI projects, where we harness the latest advantages in AI technology to solve practical problems in ways that simply wouldn't have been possible a few years ago. The first example I'd like to share is work we did for a dynamic New York-based digital marketing agency who were struggling to manage and capitalize on the large amount of data they were collecting. We created a cloud-based data platform to allow advertising budget allocation across different marketing channels based on real-time channel performance during an advertising campaign. This revolutionized our clients' understanding of their in-flight campaigns avoiding the long delays associated with traditional approaches by providing immediate insight into campaign performance through visual dashboards and analytics, allowing them to seize opportunities by responding immediately to trends and insights. In a completely different domain, we created a novel solution for bad debt collection for an international insurer. Our client recognized an opportunity to improve the bad debt collection process by analyzing data from a range of older systems. We implemented a data platform solution that materially improved their understanding of this difficult part of their business by providing analysis and visualization of patterns and trends in bad debt collection. This allows tactical response to immediate problems, as well as strategic optimization of the process. Sophia Genetics, a global cloud-native data-driven software company in the healthcare space, engaged us to optimize a federated data query processing implementation to increase throughput and lower cloud costs. Our team did a cost performance comparative analysis between various technologies and designed the architecture and implementation. Moving on to a more AI-centric example, We applied modern AI to a very traditional industry when we worked with a central European bank, NLP Banker, to supply AI to modernize their retail banking experience. Our client's goal was to make their customer's financial management insight proactive, engaging, and empowering. To do this, they needed a powerful mechanism to classify banking transactions. We created a crash categorization engine that classifies very large numbers of retail bank transactions into categories, such as grocery, shopping, health, and leisure, adapting the categories over time by learning from customer input. The categorization is an important component of the bank's new digital customer experience, driving customer loyalty, a push for new customers, and new cross-selling opportunities by allowing the bank to better understand their customers and the customers to understand and optimize their spending patterns. We've also done ideation work in the AI area. For example, we completed a project for a management consultancy firm to encode data from medical records into knowledge graphs, which could then be analyzed using a graph neural network for anomaly detection. This is designed to drive better patient outcomes and help medical practitioners to improve their medical practice. by identifying potential mistakes in treatment and insights into physician behavior and decision-making. Another advanced project example is one of our internal R&D projects in the area of generative AI, which developed a system to allow game designers to generate 3D visual assets, such as characters and gameplay environments using natural language, significantly improving the productivity of the game designers by providing them with a rich source of inspiration, as well as an artistic digital assistant to rapidly perform many of the routine graphical design tasks for them. Indaba is currently engaged in the development of two distinct accelerators, concentrating on large language models. Leveraging our partnership with Google, we've been given early access to their enterprise generative AI tooling. We've applied this against the insurance industry. successfully demonstrating the practical utility of generative AI within a business environment. We developed an interactive workshop highlighting the optimization of interactions between brokers, underwriters, and compliance officers by employing instruction-based tasks and chain of thought reasoning prompts. This innovative approach has the potential to transform complex business processes. ultimately enhancing clients' operational efficiency and positively impacting their bottom line. The second accelerator involves a comparative analysis of cost, performance, features, and industry-specific capabilities of various commercial and open-source LLMs. Endava is currently evaluating models from OpenAI, Google, and open-source within the context of three industry verticals. healthcare, financial services, and insurance. The analysis evaluates the strengths and capabilities of each model in relation to industry-specific client implementations. The knowledge we gain from this exercise is foundational in delivering effective applications of AI for our clients because the nuanced understanding we are gaining of how the different models behave in different industry scenarios will allow us to apply the right technology to each client scenario. so de-risking the work and avoiding lengthy experimentation phases for model selection. The hunger for data to train computer vision-based machine learning models has prompted us to build a synthetic data generation accelerator. This highly customizable pipeline can generate tens of thousands of uniquely rendered images tailored to specific scenarios all geared to accelerate the training and continued performance enhancement of these models. Paired with our comprehensive data science and machine learning expertise, this new capability has opened up new opportunities with both existing and new clients. Finally, we're working with large language model technologies like ChatGPT and GitHub Copilot, trialing them within the firm and building proof of concept applications with them to explore their potential, understand their limitations, and identify the problems that we can apply them to in our business and with our clients. In summary, data has been an important area for us for a long time, and we see more and more interest and an increasing variety of work in this area, which is being accelerated further by the recent advances and interest in AI, which we are well-placed to respond to. We believe these latest technological developments will be an important source of additional work opportunities for Indala. Clients will spend less on legacy work, leaving larger budgets for complex transformation work that will continue to need delivery by experienced high-performing cross-functional teams who will deliver results faster using generative AI tools. Additionally, this new technology will improve productivity across the board, allowing for higher spend And finally, we expect lots of high-value projects to emerge as our clients try to apply generative AI to their businesses for which they are likely to need our help. I'm excited about our recent acquisition of Mudbath, an Australian-based technology firm specializing in strategy, design, and engineering services. Mudbath partners with businesses to build new digital solutions, enhance user experiences, and accelerate digital transformation programs across enterprise systems, web, and mobile products using their proven, agile delivery methodology. Mudbath's clients span broad industry verticals, including retail, mining, and adjacent activities, including rail and tools, health, insurance, banking, and travel, and will help in our strategic intent to diversifying away from the UK and from payments and financial services. The acquisition follows our organic entry into Australia in 2021 and the acquisition of Lexicon, an Australian based consulting design and engineering firm in 2022. We continue to see Australia as a growing and attractive market with strong demand for high quality technology product creation delivered both onshore and near shore by multidisciplinary delivery teams. Mud bath teams and strong client relationships are expected to complement Endava's expanding nearshore capability in Malaysia and Vietnam to continue to deliver innovative high quality digital solutions. I remain excited about our growth prospects in the Asia Pacific region. We're delighted to share some highlights of our WeCare sustainability approach over the past few months. To mark International Women's Day throughout March, we recognized the impactful work and contribution of women across our global organization. We featured some of these amazing women and their stories internally and on social media. We also organized internal and external events to support our women in tech focus. We brought together some of the most senior women at Indava across geographies and business functions to talk about the importance of diversity. the role women play in the working world, sharing some of their career journeys and giving advice to women in the tech space. To celebrate Earth Day, we rallied behind this year's theme, Invest in Our Planet, which highlights the importance of dedicating our time, resources and energy to understand and address climate change and other environmental challenges. As an example, we started to engage with our suppliers for awareness and joint actions reduce the environmental impact of our operations. We ended the quarter with 11,742 employees, a 6.7% increase from 11,001 in the same period last year. We've made the strategic decision to increase our selectivity regarding our recruitment efforts and are focusing on areas of strong demand plus sales and marketing. In summary, despite the recent challenges, Based on our conversations, we believe clients continue to prioritize digital transformation in their IT budgets. I'll now pass the call on to Mark, who will walk you through our financial results for the quarter and provide guidance for the coming quarter and the fiscal year.