Endava plc

Good morning and welcome to the Endavo Q4 and 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 star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. As a reminder, this event is being recorded. I would now like to turn the conference over to Lawrence Madsen, Head of Investor Relations and ESG. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to NDAAVA's fourth quarter and full fiscal year 2023 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cottrell, NDAAVA's Chief Executive Officer and and Mark Thurston, and that is 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 the 30th, 2023, and for the full fiscal year 2023. Despite the challenging macroeconomic environment, we reported a good quarter. with revenue totaling £189.8 million for Q4 of our fiscal year 2023, representing a 5.2% year-on-year increase from £180.4 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of £38.3 million, representing a 20.2% adjusted profit before tax margin. For the full fiscal year 2023, our revenue totaled £794.7 million, representing a 21.4% year-on-year increase from £654.8 million in fiscal year 2022. We ended the year with an adjusted profit before tax of £164.2 million, representing a 20.7% adjusted profit before tax margin. It's now 23 years since we started Indaba, 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 organic and inorganic investment, and we'll accelerate that as we move forward. We're inherently conservative, as you know, but are seeing real signs of improvement, which will impact our second half of fiscal year 2024. We have a fiscal year that ends in June, so our guide for FY24 continues to be constrained by the slower start in H1 and doesn't reflect the full year pickup that will become visible for calendar year 2024. A little more on the current situation. The wave of caution, particularly in banking and financial services and private equity portfolio companies, continues to impact revenue in the short term. However, in parallel with this, we continue to see high levels of new business shaping up, continuing from the Q4 bump highlighted in our last call. These new opportunities will take a while to ramp and hit revenue at scale, but they give us confidence in a return to growth and are the reason for our confidence in H2 of fiscal 2024, which Mark will discuss in our guide. As a result of our long-term outlook, given these immediate market dynamics, we're taking the opportunity to invest in the future. Firstly, we continue to expand our sales and marketing activity and to push into our target growth areas in the US, Europe, and rest of the world. Secondly, we're investing in and building strong AI propositions, including accelerators, in our target industry verticals. More on each of these areas later. In the last quarter, we continued to prioritize our efforts on larger relationships that can grow and scale. with a total of 146 clients each paying us in excess of £1 million per year, compared to 134 in the same period last year, representing a 9% year-on-year increase, with the biggest increase coming from clients who paid us over £5 million per year. This cohort increased by 38% to 33, compared to 24 in the same period in the prior year. In fiscal year 23, we had one client with billings of just over 10% of our revenue, namely Mastercard. Having worked together with Mastercard for more than 20 years, we're thrilled to announce the extension of our longstanding partnership with a new five-year MSA that will strengthen and deepen the strategic relationship between Endava and Mastercard. This agreement will see Endava continue to help Mastercard deliver and evolve their market-leading suite of global payments products and platforms. We continue to see great demand for modernization and innovative solutions across the payments domain, and we're excited to continue partnering with Mastercard, a global leader in payments technology, to bring this next generation of payments products and platforms to market. As noted earlier, we're taking the opportunity of lower utilization to invest. In particular, we're investing in AI propositions for different sectors and have built accelerators, which are reusable assets to accelerate implementation timescales. I'd like to give some examples of these assets and how we use them. In our financial vertical, we've built a generative AI-based assistant for wealth managers that combines information from client data sources with information found from internet searches and proprietary databases in order to build a picture of a potential client. The assistant provides a question and answer interface, similar to chat GPT, to allow the wealth manager to quickly learn more about the client. Using the information it has gathered, the assistant can also identify discussion topics and generate a set of talking points for wealth advisors to use in discussion with clients. This accelerator helps wealth management organizations understand the potential of generative AI in their specific environment. Our insurance team has an acceleration program focused on how claims management will be transformed by the use of AI, advanced automation, and modern customer experience technologies. none of which are widely used in claims management applications today. There are also many ways for us to use AI in our own business and in client delivery. The Endava Coding Assistant is an example of using an exploratory prototype to understand the potential of a new technology and exploring ways of using it that differ from the features of commercial products, like GitHub Copilot in this case. The tool provides us with a way to increase our developers' productivity whilst meeting specific client needs related to training data sets and data privacy. We're also investing in developing an internal AI platform to showcase the potential of AI to our clients, acting as both a scalable open-sourced accelerator and a business transformation tool. By integrating our internal generative AI accelerators, we're building a diverse AI catalog, enabling swift prototype developments and tailored solutions for demonstrating business needs. We believe that this platform approach will enable us to demonstrate to our clients the ability for AI transformation at scale. The growth of AI is also creating demand in adjacent spaces One of which is synthetic data to train machine learning models where real world data is not readily available to privacy or regulatory restriction in frequency of events or safety challenges in data collection. The Endava synthetics team joined us from Microsoft where they were responsible for all aspects of synthetic client delivery. We are already helping clients build more robust machine learning solutions by providing tailored synthetic data built to tackle complex challenges, optimize performance, and unlock new opportunities. In one project, we collaborated with a client in the manufacturing sector who sought to utilize synthetic data to generate observations of rare defect types in their production line Due to the scarcity of real-world observations, the client previously struggled to effectively train a neural network to detect these specific defect types. By leveraging the client's existing CAD parts files as a starting point, we designed procedural systems to artificially generate large-scale variability of anomalies. As a result, the client was able to train models that achieve a 96% detection accuracy when evaluated on real data, greatly improving production quality. In another example, due to the privacy restrictions associated with utilizing real world data for model training in the retail sector, we enabled a client to leverage synthetic data to produce an array of machine learning capabilities, such as people counting and entrance stroke exit tracking. This enabled a deeper understanding of customer interactions within their physical spaces and the ability to harness these insights to enhance the efficiency, i.e. queue management, and effectiveness, product layouts, of the retail experience. In healthcare, our industry experts are working on a generative AI-based synthetic data generator specialized on clinical data. allowing testing of healthcare systems without the need to use confidential, real clinical data. We believe there are many other industries with similar constraints where this know-how can be applied in the future. On the partnership side, we continue to invest in the build-out of our Alliance ecosystem, working in collaboration with industry-leading technology companies, to support our clients' digital transformation ambitions. We continue to build on Endava's heritage in payments and were awarded Stripe's UK&I Partner of the Year Award and have established a strategic partnership with Checkout.com. We are leading the way in cloud across all hyperscalers. Endava successfully achieved the AWS Migration Competency working in partnership with AWS to accelerate our clients' time to value when shifting workloads to the cloud. Our work with Google continues with the expansion of our Google team into the US. And with Microsoft Azure, Endava achieved the Azure data and AI and Azure digital and app innovation partner designations. Lastly, our partnership with Salesforce is growing significantly. as we align to their industry cloud strategy, focusing initially on the financial service cloud and automotive, where we support clients in areas such as specialty insurance, retail banking, and the switch to electric mobility in the automotive sector. Over the past 12 months, we have invested significantly in expansion in the Middle East and Asia Pacific. This has taken rest of the world to 8% of revenue in Q4 FY23 and enables a genuinely global delivery capability to be deployed. Given the global footprint of many of our largest clients, this is a key strategic step from which we are now seeing the benefit and increased demand. In FY23, as part of our focus on rest of the world, we completed three acquisitions in Asia Pacific. starting with Lexicon last October, Mudbath in May, and more recently, the DEC acquisition that was completed in June. DEC develops cutting-edge software solutions across a range of applications, including embedded systems, real-time solutions, telecoms, and data communications. The acquisition brings around 660 operational employees along with a delivery location in Vietnam. We ended FY23 with over 1,000 endowments in APAC compared to less than 50 in FY22. With these acquisitions and our own organic growth, we believe we have built a solid foothold in the region, and we are now at a scale which should help us become a significant provider of software services to clients in the region. We believe APAC is a region with great potential, and we're excited about our growth prospects. I'd like to take this opportunity to highlight some of the work we're doing for clients in both the Middle East and Australia. In the Middle East, Endava has been working with businesses based in the Kingdom of Saudi Arabia for over five years now, and over the last 12 months has been supporting a digital bank being launched as part of the kingdom's 2030 vision. Endava's analysis, architecture, and engineering teams are working closely with the bank's product, technology, and business departments to both design and build Greenfield retail banking capabilities, as well as supporting the bank in reaching the necessary compliance standards set by the industry and the local financial authorities. Endava supported a leading payment processing and gateway service provider for the MENA region across several key technology initiatives. The client's mission is to empower online businesses with a simple, affordable, and trusted payment experience. The Endava team provided payments domain expertise and engineering capabilities to enhance the client's existing platform with new SDK and plugin functionality. in addition to reviewing and redesigning their existing API capabilities to reflect a world-class developer experience. These additional capabilities and improved developer experience are expected to offer our clients' customers a more intuitive and flexible user experience, as well as giving our client additional revenue opportunities through additional e-commerce channels. In Australia, Endava is working with Seeing Machines, a leading supplier of driver and occupant monitoring system technology. Seeing Machines' mission is to reduce the number of injuries and fatalities on the road caused by driver fatigue or distraction. We are helping develop proprietary software based on sophisticated algorithms able to preempt driver fatigue and detect distraction. Developing software to run on lower cost hardware and data annotation for machine learning and AI are some of the areas that we are involved in. Again, in Australia, we are working with a leading global life sciences company that provides scientific instruments, software and services used in research laboratories and other scientific applications, primarily serving the pharmaceuticals and biotechnology industries. Over the past decade, our proven expertise in designing and developing software for highly regulated industries has led us to work with them on numerous projects, from designing and developing new products to quality assurance. Moving on to the US, this summer, we announced our official partnership with Toyota Racing Development North America. The goal of this partnership is to help deliver the best experiences possible to Toyota racing teams, partners, and fans, both on and off the track. One of the first programs we're embarking upon aims to create new digital experience for Toyota's North America Driver Development Program. We're growing our activities in North America with our recent acquisition of TLM Partners. TLM provides outsourced development services across design, engineering, art, and animation for PC and console video games and other digital entertainment. TLM has particular expertise in highly complex areas of cross-play, middleware, physics, engine level tools, and technical art, and has an impressive list of clients in the gaming sector. TLM is credited as a co-developer on many AAA franchises including Immortals of Avium, Call of Duty, Marvel's Midnight Suns, and Gotham Knights. Jake Hawley, the founder and CEO of TLM, and his leadership team bring huge gaming experience and strong industry relationships. Today we publish the third edition of our sustainability report, which can be found on our website. I'd like to share some of the highlights from our latest report. Our RISE mentoring program, specifically targeted for the advancement of women in senior level roles, is showing excellent results. Over 60% of the individuals who completed the program since it was launched in November 2021 have received a grade promotion or had an increase in responsibilities or change in role. We're also proud of the impact we have through our Endava Tech campus. which brings together all the tech education projects that we support. I'm also delighted that by delivering consistent and valuable experiences to our customers, we continue to improve our customer satisfaction scores. We also provide examples of our work to help clients build sustainable business models, such as teaming with Grameen America to provide better support to underserved women entrepreneurs in the U.S. We're also advancing our environmental agenda. We had our scope one and scope two greenhouse gas emissions data assured by PWC and aim to set our science-based targets initiative in 2024. I'm proud to share our progress and our stories as we continue on our sustainability journey. We ended the quarter with 12,063 employees. a 1.8% increase from 11,853 in the same period last year. In the current environment, our recruitment is focused on areas of strong demand as well as continuing to strengthen our sales and marketing team. In summary, despite the recent challenges and based on our conversations, we believe clients' activity in exploring and commissioning new product will overtake the headwinds over recent quarters and see us return to growth. I will now pass the call on to Mark who will walk you through our financial results for the quarter and of the last fiscal year and provide guidance for the coming quarter and fiscal year.