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spk09: Good day and welcome to the NDAAVA's fourth quarter and full year 2024 results conference call. All participants will be in a 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 a touch-tone phone. To withdraw your question, please press star then two. Please note 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.
spk08: Thank you. Good afternoon, everyone, and welcome to NDAAVA's fourth quarter and fiscal year 2024 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cottrell, ANDAVA's Chief Executive Officer, and Mark Durton, ANDAVA's Chief Financial Officer. Before we begin, a quick reminder to our listeners. Our presentation and accompanying remarks today include forward-looking statements, including but not limited to statements regarding our guidance for Q1 fiscal year 2025 and for the full fiscal year 2025. the impacts of headwinds facing our industry and business, our ability to capitalize on market opportunities and trends in our industry, including with respect to development of artificial intelligence, our expectations regarding the impact of our recent acquisition of Galaxy on our business, announcements to our technology and offerings, demand from clients for our technology services, our ability to create long-term value for our clients, our people and our shareholders, and our business strategies, plans, and operations. These statements are subject to risks and certain 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 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, 2024. 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. Reconciliations 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 presentation, both of which you can find 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, Florence.
spk02: And I'd like to thank you all for joining us today, and I hope you're all doing well. Now, for over two decades, Endava has been successfully partnering with our clients to guide their digital transformation journeys. by combining our deep industry expertise with outstanding ideation to production capabilities. This experience allows us to recognize the disruptive impact AI is having on businesses and the technology landscape. We're excited about the opportunities AI presents, enabling us to help our clients evolve and thrive in this digital shift. But this shift presents some real challenges. challenges with our clients understanding the technology, challenges in market dynamics, and in some cases, businesses' reticence to spend until the path forward becomes clearer. Let's look back and reflect on the past 12 months. It's been a challenging year for Endava, and it's been a period of substantial repositioning for our business. Our revenue has experienced headwinds due to the challenging macroeconomic backdrop, slower spend for IT from some of our larger clients, and more recently, the impact of AI, which has elongated clients' planning work and caused delays before scale production-ready projects can be commenced. Our concentration on payments as a vertical and on our UK client base has, for many years, driven significant growth for our business. And of course, this is where the business started, so perhaps that has not been surprising. However, over the past 12 months, these two areas have experienced significant headwinds. Looking forward, we plan to continue to diversify our industry verticals and client geographies, moving towards a more balanced and less cyclical business model. Finally, during the last 12 months, we have broadened our delivery presence. evolving into a truly global delivery organization with significant capabilities across all time zones. As of Q4 FY24, 17% of endowments were based in APAC compared to 9% at Q4 FY2023. As we have entered our new financial year, we continue to invest in the people and skills required to support this next wave of digital transformation. We have launched DavaX, where we provide tailored expertise to help clients embrace and implement technologies rapidly and at scale. These hyper-focused specialist areas represent emerging and established technologies and the strong capabilities clients have access to when working within Dava. The areas of specialism covered by DARPA X are AI and data, core modernization, cloud, cybersecurity, embedded software, sustainability, physical computing, and quantum. We've strengthened our team through key hires and an internal reorganization to ensure we are fully focused on delivering the best outcomes for our clients. We also invested in tools and technology for enhanced efficiency. Over time, this investment is expected to shift towards revenue generating efforts, paving the way for improved margins in the future. I'm very excited about our acquisition of Galaxy and the integration is going according to plan. We're seeing a significant number of cross-sell projects and I'll give some examples shortly. And now let me share a few thoughts about some of the most exciting achievements and advances from Endava's recent months. While the AI-driven digital shift offers exciting opportunities, we are earnest in our emphasis of upskilling people and businesses to leverage technological advancements to drive meaningful and impactful outcomes. To maximize the potential of AI, organizations should move away from seeing AI merely as an add-on to existing systems and start considering it as a versatile tool capable of driving holistic transformation across the enterprise. To present an example, we're deeply engaged with a leading insurance company on this very journey. We carried out an in-depth analysis of the organization's technology landscape to identify the use cases that could be transformed by AI. This resulted in a roadmap that we believe provides the guide for years worth of technology transformation opportunity and sets the foundation for the path forward. This is an approach we have honed over decades and proudly present to our clients as a way of transforming their businesses whilst minimizing risk. Another area where we see continued opportunity is in helping our clients move beyond proof of concepts and towards more scaled production systems. This is particularly relevant to the work we're doing with AI, as the technology presents significant engineering challenges building production scale systems. To address this, we're working closely with our clients on ideating through use cases focused on the business problems they have, as opposed to simply proving they can use the technology. A few examples from across the various industries we work in include helping an airline client leverage AI to better service clients, helping an insurance client optimize the claims process by embedding AI, and using automation to enhance document validation for a client in the healthcare space. I'd also like to share some progress on some of the exciting in-house solutions we have developed to help our clients through this digital shift. You may remember a previous announcement about our proprietary agentic AI solution called Morpheus. We continue to advance this solution and our clients are showing interest in leveraging it to enhance their business. As an example, we are currently using it to help deliver the creation of code for a client in a highly regulated healthcare industry. Working with the client, we use Morpheus to create AI agents focused on assisting their teams with delivery of complex workflows. These agents can play specific roles, access tools, and collaborate to reimagine complex business processes. In a recent project for a global pharmaceuticals company, Morphy has helped reduce a business process from five days to less than 10 minutes and is expected to deliver annualized savings of more than $10 million. We believe this particular use case is applicable to over 50 similar organizations. We've received incredible feedback from leaders in the AI ecosystem that Morpheus's potential is truly transformational. It's great to see how it is helping our clients achieve their objectives in embracing AI. And we will continue to develop the capabilities of Morpheus in line with our client needs. In addition to the examples I've already mentioned, we continue to see demand from our clients to leverage AI across many other use cases as well. For example, we are currently working with a medical examination provider to optimize their processing workflow and reduce the cost by enhancing their document validation and quality assurance with AI capabilities. To help them achieve this, we developed an AI-driven solution using GPT-4 and cloud-based cognitive services to verify fields, check grammar, and assess responses via a user-friendly web app, improving the accuracy and efficiency for medical professionals while performing their daily tasks. As a final example of just how broad the opportunity for AI is, we also recently worked with a large furniture supplier in Europe to create an AI-powered solution to assist the client in building furniture catalogs by forecasting item attributes. performing domain-specific translations between multiple languages and analyzing material images for accurate labeling. For this particular project, we used a slightly different technology, in this case, OpenAI and Microsoft Azure Cognitive Services, which demonstrates how we can adapt to the client's technology needs. As we know, the industry's fast changing landscape has been fueled by this disruptive tech wave driven by AI. This requires businesses to not only embrace innovative technologies, but also look into their core systems and shift towards a truly digital core that enables the rapid and efficient delivery of new initiatives. That is one of the reasons we are integrating the Galaxy Core Modernization approach with our existing capabilities. and with positive feedback from clients so far. Many of our existing clients have expressed significant interest due to their need to transform their core legacy applications to enable the next wave of digital transformation and integrate with AI capabilities. We are seeing this trend across many of our clients, but most significantly in finance and healthcare. I'm proud to share a few examples of early success stories from our cross-selling efforts. The first example of our work is for a leading financial services company where we embarked on a project to analyze their existing technology platforms and rationalize them down to an optimal future state design that was much more efficient to run. We used our automation tools to help perform the analysis and identify the impact of specific business requirements on the target state design, the components that would need to be changed, and the impact to the regression test scope and specific use cases, all of which helps to create transparency and builds confidence in the likelihood of success for the transformation. Next, we worked with an energy supply and logistics company to complete a post acquisition integration projects in which we documented their internal tech and disaster recovery process using our automation capabilities. Additionally, we are working with a biopharmaceuticals services company to help them on a critical project to redesign how they store and access data. To achieve the desired results, we're helping them manage data across different teams and business areas to form a more cohesive view of key business and operational data. Another great example of our work is for a national drugstore chain in the US where our latest projects involve discovery work on how to modernize a two decade old application. That system was built to handle the filling of prescriptions across their retail locations and is a major part of the business that needs updating. Lastly, for one of our large payment clients, we are working to update a number of their existing platforms. using our core modernization capabilities. In parallel, we are beginning to incorporate other AI tools like GitHub Copilot to help enhance and de-risk the changes that are being made. All of these examples leverage a combination of the traditional digital transformation capabilities we are known for, as well as the core modernization capabilities we've gained through the incorporation of Galaxy. Moving on, I'm pleased to share that this July we announced a strategic deal with OpenAI to deploy ChatGPT enterprise licenses to all of our employees globally. A team of ChatGPT champions from across the business are already developing GPTs and passing on best practice to deeply embed AI within all areas of our business. We're integrating the technology with internal systems to establish best practice and pave the way for seamless company-wide integration. We are already seeing the power of this technology, with a number of specialized GPTs being created and deployed to enable our teams to be more productive. To ensure employees maximize the benefits of this powerful tool whilst using it responsibly, we have established an AI committee to define and refine our AI use policy, and we have implemented a mandatory training module on the use of AI for all staff. Now, an exciting piece of news. Today, we announced a partnership with the Phoenix Suns and Phoenix Mercury to elevate their fan engagement through personalized digital experiences. The collaboration, Endava's latest in the global professional sports market, will bring our technology to the Suns and Mercury's marketing efforts to provide increased data insights. It's a really exciting project. And we're looking forward to tip off our partnership with the Suns and Mercury. I'm pleased to share that today we've published our 2024 sustainability report, which is now available on our website. We've made significant progress with our environmental agenda and our SBTI targets were officially approved in July. NDARVA has approved near and long-term science-based emissions reduction targets and an overall science-based net zero target. Additionally, our report also focuses on how we support our clients in their sustainability journeys, fueled by our industry expertise, ESG partnerships, and green software capabilities. In the same breath, I'd like to touch on our commitment to continuing to invest in meaningful partnerships that bolster our existing ecosystem and ultimately better support our clients An example of this was a recent panel discussion with Endava's partners from Snowflake, Guidewire and Stripe, diving into how strategic partnerships can drive client centricity and creativity. Wrapping up, we ended the quarter with 12,085 Endavans on board, which represents a 0.2% increase from the same period last year. Looking forward in the current environment, we're prioritizing recruitment in high demand areas. I'd like to take this opportunity to thank all endowments for their commitment and determination as we're navigating the challenges and moving towards new opportunities together. We will continue to manage the business for the longterm, maintaining our culture and organizational health and creating exciting technological solutions that empower our clients and their clients to thrive in this next wave of AI driven digital transformation. Now, I'll hand over to Mark, who will walk you through our quarterly financial results and offer guidance for the upcoming quarter and new financial year.
spk01: Thanks, John. Andava's revenue totaled £194.4 million for the three months ended June 30th, 2024, compared to £189.8 million in the same period in the prior year. a 2.4% increase over the same period in the prior year. In constant currency, our revenues increased 3.5% from the same period in the prior year and reflected a 15.6% positive inorganic contribution during the quarter. Sequentially, revenue was up by 11.4% in constant currency on the previous quarter, including a 13.5% inorganic contribution primarily related to the impact of the Galaxy acquisition. The contribution of Galaxy drove increases to revenue in our North America and primary healthcare verticals within other, which were partially offset by decreases in our UK geography and payments vertical respectively. Loss before tax for the three months ended June 30th, 2024 was 0.4 million pounds, compared to a profit before tax of 24.9 million pounds in the same period in the prior year. Our adjusted PBT for the three months ended June 30th, 2024 was 14.9 million pounds compared to 38.3 million pounds for the same period in the prior year. Our adjusted PBT margin was 7.7% for the three months ended June 30th, 2024 compared to 20.2% for the same period in the prior year. Profit before tax and adjusted PBT were impacted by decline in operating margins. As mentioned previously, we expect these margins to normalize in future periods following the integration of Galaxy and the business optimization initiatives we undertook during the fiscal 2024. Our adjusted diluted earnings per share was 22 pence for the three months ended June 30th, 2024, calculated on 58.8 million diluted shares as compared to 57 pence the same period in the prior year calculated on 58.1 million diluted shares. Revenue from our 10 largest clients accounted for 34% of revenue for the three months ended June 30th, 2024, compared to 35% the same period last fiscal year. The average spend per client from our 10 largest clients increased from 6.6 million pounds to 6.7 million pounds for the three months ended June 30th, 2024, as compared to the three months ended June 30th, 2023, representing a 2% year over year increase. In the three months ended June 30th, 2024, North America accounted for 38% of revenue, Europe for 25%, the UK for 30%, while the rest of the world accounted for 7%. Revenue from North America grew 28.9% for the three months entered June 30th, 2024, over the same period last fiscal year. Comparing the same periods, revenue from Europe grew 8.5%, the UK declined 19.2%, and the rest of the world declined 13.0%. As mentioned earlier, North America was boosted by the contribution of the Galaxy business. while the UK was partially impacted by the decline in the payments vertical, which I will discuss shortly. Revenue from payments declined 30.5% for three months ended June 30, 2024, over the same period last fiscal year, and accounted for 19% of total revenue. Revenue from banking and capital markets grew 10.7% for three months ended June 30, 2024, over the same period last fiscal year, and accounted for 17% of total revenue. Revenue from insurance grew 13.9% for the three months ended June 30th, 2024 over the same period last fiscal year and accounted for 9% of total revenue. Revenue from TMT grew 0.4% for the three months ended June 30th, 2024 over the same period last fiscal year and accounted for 21% of total revenue. Revenue from mobility declined 11.7% three months ended June 30th, 2024 over the same period last fiscal year and accounted for 9% of total revenue. Revenue from other grew 58.8% for three months ended June 30th, 2024 over the same period last fiscal year and accounted for 25% of total revenue. Regarding payments, the decrease has been driven by slowing activity of a few of our larger clients compared to the prior year. Meanwhile, the increase in revenue from other was driven by increased revenue in the healthcare vertical following the Galaxy acquisition. Our adjusted free cash flow was 6.6 million pounds for the three months ending June 30th, 2024, compared to 31.5 million pounds during the same period last fiscal year, which included 6.3 million pounds of exceptional restructuring costs in a period. Our cash and cash equivalents at the end of the period totaled 62.4 million pounds at June 30, 2024, compared to 164.7 million pounds at June 30, 2023. The net change in our cash equivalents was primarily impacted by payments for acquisitions. including the Galaxy business in Q4, offset in part by the proceeds from the drawdown of our evolving credit facility in Q4. Our borrowings were £144.8 million at June 30th, 2024. Capital expenditure for three months ended June 30th, 2024 as a percentage of revenue of 0.8% compared to 1.0% in the same period last fiscal year. I'd now like to move on to some highlights for our fiscal year 2024. Endava's revenue totalled 740.8 million pounds for the fiscal year June 30th, 2024, compared to 794.7 million pounds in the previous fiscal year, a 6.8% decrease over the prior year. In constant currency, our revenues declined 4.5% from the same period in the prior year. and reflected an 8.2% positive inorganic contribution during the fiscal year, primarily related to the impact of the Galaxy acquisition. As we've noted before, we're still facing challenging macroeconomic headwinds and a backlog of work as clients continue to delay spending decisions, which has continued to impact our revenue performance. Profit before tax for the fiscal year entered June 30th, 2024 was 27.0 million pounds compared to a profit before tax of 114.2 million pounds in the prior year, largely as a result of a decline in the adjusted PBT margin. As mentioned earlier, we expect these margins to normalize in upcoming periods. Our adjusted PBT for the fiscal year 2024 was 83.0 million pounds compared to 164.2 million pounds in the prior year. Our adjusted PBT margin was 11.2% for the fiscal 2024 compared to 20.7% in the prior year. Our adjusted diluted earnings per share was 112 pence for the fiscal year 2024 calculated on 58.7 million diluted shares as compared to 228 pence for the previous fiscal year calculated on 58.1 million diluted shares. Revenue from our 10 largest clients accounted for 32% of revenue for the fiscal year 2024 compared to 33% for the previous fiscal year. The average spend per client from our 10 largest clients decreased from 26.0 million pounds to 24.1 million pounds. for the fiscal year 2024 as compared to fiscal year 2023. In terms of geographies, on a year-over-year basis, North America was down 6.4%, Europe up 4.7%, UK down 20.0%, and the rest of the world up 34.9%. As with the Q4 numbers, our UK segment was impacted by the broad decline in payments and to a lesser degree, the decline in TMT. On a year-over-year basis, revenues from payments decreased 23.0%, banking and capital markets decreased 14.0%, insurance increased 13.4%, TMT decreased 2.7%, mobility decreased 8.3%, and other increased 17.2%. As noted earlier, payments was impacted by reduced activity from a few significant clients compared to the prior year, whereas the increase in other was boosted by the contribution from the Galaxy acquisition. Our adjusted free cash flow was 58.4 million pounds for the fiscal year ended June 30, 2024, compared to 111.5 million pounds during the same period last fiscal year, which included 13.6 million pounds of exceptional restructuring costs in the period. Capital expenditure for the fiscal year ended June 30th, 2024, as a percentage of revenue was 0.7% compared to 1.7% in the last fiscal year. Before I turn to the guide, I would like to make a couple of points. Since we exited fiscal year 2024, the US dollar has weakened against the British pound from 126 to 131, which adversely impacts the revenue guide. And I will set this out when giving the revenue ranges and growths. Additionally, as John highlighted, we're investing in our teams in anticipation of the next wave of digital transformation. So whilst our restructuring in FY24 has created savings, we continue to invest in people, technologies and the Galaxy integration in FY25 in readiness for the longer term opportunity. These investments are impacted in our adjusted PBT margin by about 2.5% during FY25 and are reflected in the guide below. Our guidance for Q1 fiscal year 2025 is as follows. Endava expects revenue to be in the range of 194 million pounds to 195 million pounds, representing constant currency revenue growth of between 4.5% and 5.0% on a year-over-year basis. In the absence of US dollar weakness, Q1 FY25 would have been 1% higher than Q4 FY24, resulting in 196 million pounds at the top end of the guide. M&A contributes 13% of growth to the constant currency year-on-year guide. Endava expects adjusted diluted EPS to be in the range of 21 to 22 pence per share. Our guidance for full year fiscal year 2025 is as follows. Endava expects revenue to be in the range of 800 million pounds to 810 million pounds, representing constant currency revenue increase between 10.0% and 11.5% on a year over year basis. Again, in the absence of US dollar weakness, the full year figure would have been 2.5% higher than the top of the guide range, resulting in an 826 million pound at the top end of the guide. M&A contributes 11% of this constant currency guide. Endava expects adjusted diluted EPS to be in the range of 112 to 170 pence per share. This above guidance for Q1 fiscal year 2025 and the full fiscal year 2025 assumes the exchange rates on August 30th, 2024 when the exchange rate was one British pound to 1.31 US dollars and 1.19 euro. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.
spk09: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Jonathan Lee with Guggenheim Partners. Please go ahead.
spk06: Great. Thanks for taking our questions. Your outlook implies slight sequential improvement through the year. What's driving your confidence in that dynamic, and how much visibility do you have at this point in the year?
spk02: Thanks, Jonathan. Yes, there is some sequential improvement. Mark will touch on that in a moment, but it's not high. It's pretty conservative. As you look at the business, we've been talking about the importance of core modernization to us and how that's driving activity as clients look at how they can plug AI into their core and get access to data and so on. Those are quite big projects and it's driving a lot of pipeline activity and conversation with clients. So that's one aspect. The second area is now that we have a footprint in India, we're starting to see some clients, some existing clients, talking to us about work that we previously wouldn't have been considered for, but where we're well positioned in terms of our industry vertical know-how, et cetera. And so that's opening up another little avenue for growth. And then the third key aspect is the cross-selling opportunities that we're getting with Galaxy, with their clients and then with us. And once again, I covered quite a lot of The areas where we're seeing some cross-selling opportunities in the opening remarks, you put those together and we're feeling that the outlook for the year should be showing some growth. So we believe that that's the right thing to do.
spk01: Yeah, and in terms of the quarter on quarter cadence, you're right, there is quite a short move up from Q1, relatively modest though, I have to say, around about the 2% or so at the top end of the guide quarter on quarter. The visibility point of question, as you expect, the visibility to December is pretty solid. The second half is relatively limited in terms of how we look at it as a proportion of contracted and committed pipeline. But I think the important thing is that the business mix, you know, has changed quite markedly with the acquisition of Galaxy. So we're less exposed to payments and less exposed to the U.K. So we're seeing more solidity come through than any other industry verticals.
spk06: Thanks for the detail there. I mean, given some of the payment softness you called out, can you talk us through what you're seeing across your top two customers and what's contemplated in your outlook across those two?
spk02: Can I just clarify, Jonathan, who you're thinking of as the top two customers?
spk06: We would point to MasterCard and WorldPay.
spk02: Okay. The reason for asking is that we have a different customer in that second slot. I didn't want to confuse, so I just wanted to make sure. So as we look at those two, The revenue from one continues to do the crossover where we've got a large program that continues to drop steadily. And that is offset by other revenues in the client that are building up. And the buildup side is actually very strong from a lower base, but it's now catching up fast. So we would expect that client to stabilize stroke slightly fall in the outlook that we have. The second client is actually picking up over the year. They got private equity investment into the business, and that's kicked up a transformation program, which we are participating in, and that's seeing ramp up through the period.
spk06: Appreciate the call. Thanks, guys. Thanks, Jonathan.
spk09: The next question comes from Brian Virgin with TD Callen. Please go ahead.
spk04: Hi, all. Good morning. Good afternoon. Thanks for taking the question. John, I wanted to just kind of double-click on the comments you had on AI-driven sales elongation. So just considering how early it still is in enterprise adoption, Gen AI with most just testing POCs, does this mean you may face a more extended recovery to a new normal on growth profile? Just how are you thinking about that?
spk02: Yeah, I mean, we're definitely seeing the sales elongation. And, you know, that's driven some of the expectations that we set in the guidance that we're not seeing a huge jump forward in that over the next 12 months. I mean, it's probably worth me expanding a little bit on what we're seeing in the marketplace. You know, as organizations came out of COVID where where their IT spend was, shall we say, a little uncontrolled. We've had macro uncertainties build up, interest rates have gone up, and CFOs have raised the bar on business cases, added extra level to sign off quite often on new projects. You put that higher bar alongside an emerging technology where the benefits and the engineering challenges are still being worked out, And CIOs are finding it harder to give certainty of outcomes in that context. So you have this context of a higher bar and a tougher challenge in proving out the technology and what it's going to deliver. And that's causing a hiatus in this decision making that you're referring to. So the projects are there, but they're needing a lot of additional prototyping, development of the business case. It's creating a much longer decision-making and sales cycle for us. We are seeing projects emerging from the tunnel and go into production build, and many others continue to advance. But we're not seeing the myths clear and the volumes come through sufficiently to start pushing it into our guide in any strength.
spk04: Okay, understood. And then Mark, just shifting over to margins here. So appreciate you quantifying the reinvestment level this year. Can you give us a sense on kind of the path to gross margin recovery as 25 unfolds and just maybe digging a little bit on any aspects around pricing dynamics in the market?
spk01: Sure. So, you know, obviously we went through our restructuring to right size demand supply within the business. But we are reinvesting that margin improvement, as John outlined on the script, in DAVA-REx tools and technologies. And that investment will weigh on our adjusted PVD margin, basically through the first half of fiscal 25. And then we'll start to improve as we come through in Q3, Q4. In terms of that gross margin, that adjusted PBT margin improvement, we're assuming pricing remains flat for us. there is no sort of leverage from that perspective. And in terms of the other side of the equation, which is, you know, pay rises, we will have to see, you know, recovery in demand at a heightened level and see whether the pricing that we're seeking to secure from clients comes through to justify, you know, the pay rises that we'd like to put through. So I think the margin improvements comes basically from those investments, which are basically through the first half, maybe a little bit into the third quarter as we migrate Galaxy onto our systems to weigh on us a little bit. But Q4, we will see an uptick.
spk04: Okay, I appreciate the detail. Thanks.
spk00: Thanks, Brian.
spk09: The next question comes from Puneet Jain with JPMorgan. Please go ahead.
spk00: Hi, thanks for taking my question. I just wanted to follow up on the prior question on visibility to fiscal 25 revenue. So what does the guidance assume for client budgets next year? Are there any early signs that you are seeing that might suggest some level of improvement? in next calendar year or in second half of the fiscal year guidance?
spk02: So we're not basing the guide on significant change in client level budgets. As I touched on, it's more based on these expanded service capabilities, the India footprint and the cross-selling. that gives us the confidence that that's expanding us into new client spaces within our existing client base and new clients as we expand that service offer around core modernization. We're seeing the pipelines around that, and that's what we've based the slide growth that we have in the guide on.
spk00: Got it, got it. And can you also double-click on Galaxy integration plans, like where you are, like you mentioned, like some of your existing customers are looking at Galaxy's India capabilities. So maybe if you can talk about cross-sell opportunities, synergies that we can expect this year.
spk02: Yeah, I mean, the Galaxy integration is going well, and Mark will touch on the investment and so on we're doing in that. If I can just pick up on the customer facing side, we are seeing significant cross-selling opportunities, a strong pipeline that we're monitoring and working on together around the core modernization space. We've integrated their capabilities into the approach that we had previously had in that space and created a very, very powerful proposition that we're going to market with. That is getting a lot of interest from customers both existing and new. It's an interesting space because as the AI market develops, the need to be able to modernize your core, move towards having a more digital core, so that you can exploit the benefits of cloud and AI becomes more and more crucial. And the approach that we have, which includes accelerators and productivity tools to be able to really dig into the core effectively makes it a powerful proposition in that space. And a lot of that has come through integrating Galaxy into the capability that we had in that space. So we're getting a lot of cross-sell opportunities out of that. The second one that I touched on a moment ago was that we're also seeing opportunities to do some delivery out of India for existing clients where we wouldn't have been considered for the work previously. But actually, given the relationship that we have with them and the footprint that we now have in India, we're actively seeing opportunities coming through the pipeline around that. So lots of cross-selling opportunities with Galaxy, you know, well into the old digits that we're working on. Mark, anything on that?
spk01: I'm not going to quantify. I mean, there's the really straightforward, which is migration onto our systems and processes, which will be heavy through Q2 and Q3 when we anticipate that done. But outside that, there is sharpening up the go-to-market. We have the cross-selling opportunities, but it is to embed it very strongly in the offering that Endava has to the market, which will also require investment.
spk00: Got it. Thank you.
spk09: The next question comes from Brian Keene with Deutsche Bank. Please go ahead.
spk05: Hey, John. I just want to ask about Gen AI and when you think it becomes a little more material to the revenue base. you know, is this a couple years out? Is this a, you know, a fiscal year 25 phenomenon? How do you think about it? Maybe any leading indicators you're going to watch to give you signs that it's more material?
spk02: Yeah, I mean, I think the lead indicators are going to be how we see our pipelines progress rather than any sort of macro sort of external look. You know, we are seeing things move forward. You know, as I touched on on the call, focusing on the real use cases that are going to make a difference to our client businesses has definitely accelerated the discussions that we're having with them. I think, you know, what the market is starting to understand and learn about is that the engineering around implementing Gen AI is actually pretty complex. The idea that you could take it out of the box, put it in an organization, and somehow it would work out by itself how to integrate and optimize processing and all the rest of that is clearly not true. The opportunity for Endava is that we're the organization, ourselves and our peers, who can actually solve those engineering problems. and actually help clients move to a place where the business cases stand up, where the cost of implementation versus the benefits in efficiencies and so on that you're going to get downstream actually stand up, and where customers have the confidence in the engineering to believe they're going to get an outcome. These are not small projects. And, you know, hence they're getting a lot of scrutiny. Often, as I touched on a moment ago, they have to go in and modernize the core alongside implementing the AI engineering. And that's a lot of work. And it's something, you know, over the last 20 years of digital transformation that clients have managed to avoid doing, building their digital transformation around the outside of the core. As we go forward, You know, AI really requires getting at the data and the processes in the core. So that core modernization work is also required. So they're big projects with long sales cycles. Now, we are seeing them progress through. I don't think we'll see the 20% plus growth come through in our financial year 25, which is why we've kept the guide where we have.
spk05: Got it. And then just on the payments market, looking beyond the two major players in your client concentration, is the outlook for payments, I guess one, just trying to understand the softness there. Consumer spend has been relatively resilient, so I'm a little surprised to see the sector get hit as hard as it has. Or is that just more of the client concentration? And then I guess the second piece of that is that outlook going forward, I assume that it won't have that much of a negative hit in fiscal year 25 in the payment sector.
spk02: Yeah, I mean, the good news looking forward is that we are much less exposed to payments than we were historically. It's come down to 19% of the business. And the top two clients that you're touching on remain resilient, not showing strong growth as they previously did for many years, but they're not going away in terms of falling like a stone. And the other thing that I would say about the payments market is that we focus on the payments processes. as our payments market, it's becoming more competitive, and you're seeing some of the spend, you know, investment in payments move into the banks, even some into the retailers and so on. And so we're seeing a diversification of our payments capability into other markets, which, you know, payments, so payments as a horizontal is not as weak as payments as a vertical for us as a business, and that some of those other markets are investing quite strongly in payments. So it's very difficult for us to pull that out because that's a horizontal view that we don't really analyze. It fits within the banking spend that clients have, for instance. But yes, I think those two things put together are creating a more competitive market for the payments processes. and that's pressurizing their margins rather than their volumes, which cascades through into the investment cases that they make, just to put out the underlying dynamics of what I think are driving the macro in payments.
spk06: Got it. Thanks for taking the questions. Thanks, Paul.
spk09: The next question comes from James Fawcett with Morgan Stanley. Please go ahead.
spk03: Thanks very much. Just a couple of follow-up questions. When you talk about customers having kind of elongated decision cycles, et cetera, is this specific to projects that would incorporate AI, or is it more generalized because maybe they don't know where they want to use AI-type tools, et cetera, so that's leading to an elongation everywhere, or just looking for a little bit of clarification on on where you're seeing that elongation and if we can isolate it to types of projects or customers.
spk02: So I would say that it's creating some elongation right across their discretionary spend. They're still pushing other projects that, I don't know, manage services in nature or, you know, outsourcing in nature to drive costs down. And those are, you know, following more normal decision cycles, but also not an area where Dalva plays hugely. Whereas, you know, the CFOs raising the bar that I was talking about earlier and adding extra levels of sign-off is expanding the cycle on the rest of discretionary stand. but the areas that have seen the longest decision cycle are the AI core modernization-related activities.
spk03: Got it, got it, got it. Okay, thanks for that, Culler. And then back to Galaxy, you know, certainly looks like a good acquisition. Can you give us a sense of how much, and it seems like you're getting some incremental, and you've talked about some cross-sell benefits or potential there, but how should we think about at least, at this early stage, how quickly Galaxy's type of work is growing within Endava. And how should we be thinking about that in terms of what's being pricing driven and impact that that could have on some KPIs like revenue per head, et cetera? And how do you anticipate that playing out more over the medium term beyond just this fiscal year?
spk02: So let me pick it up at high level. The cross-selling opportunities, we have landed two or three, which we are billing clients for now. But most of it is still pipeline and still proving that we will win together in that space. So it is good early signs that we have that we can go to market with here that is going to be very powerful, but we're still proving it out, which is why we've just put a smidgen into the guide.
spk01: I think it's too early to give you sort of indicators on revenue per head. James, basically. I mean, as I said, we're investing in our go-to-market and sharpening up that offering to market, which will be a combination of the two businesses. So I think it's too early to say what it will do to the operational metrics in terms of revenue per head, et cetera. We obviously have a lot more clarity as we get towards the full integration, which will be in an early FY25. We will probably be able to update you more on this when we have our next quarterly call with you.
spk03: That's great. Appreciate all the color, Mark and John. Thanks, James.
spk09: The next question comes from Maggie Nolan with William Blair. Please go ahead.
spk07: Hi, everyone. It's Kate on for Maggie. Mark, you mentioned some of the investments that will impact adjusted PVT margin. Can you please expand on those a little bit more?
spk01: Well, It is mainly across a number of items. I mean, as John outlined, it was DARPA X, where we are investing in tools and technologies around our delivery and wanting to be offering to the market. It is also sharpening up the go-to-market around the industry verticals. We are, as John said on the call, investing with a partnership with Chachi PT, which is heavy on licenses. And also there's the Galaxy integration costs, which are pretty heavy. I think the other thing to sort of mention as well is we didn't pay out any bonus last year. because of the performance and we anticipate paying a bonus based on good performance this year. So those elements are weighing on the margin. Of course, they're investments and we expect them to pay back in terms of return. I think the return in terms of improving margin will come through towards a quarter of the fiscal year.
spk07: Great. Thank you. That's helpful. And then, John, you mentioned a continued priority to invest in meaningful partnerships. Are there specific partnerships that you think could provide Endava with substantial opportunity in the next year?
spk02: Yes, there's quite a few. I have to take a list of them all, but maybe I just should. So obviously with Google on the cloud, AWS, Microsoft through the Azure space, critical hyperscaler partnerships where we work very closely with them. We then got partnerships with Snowflake, Stripe, in the payments arena, taking payments into wider markets and a number of others. So it's an area that we've invested in quite considerably over the last two or three years and are starting to see the benefits of partners who we can incorporate into our technical solutions and make a real difference to clients, but also who will, where appropriate, bring us in as the engineers who can make things work in real-life situations. So, you know, in both those arenas, we're seeing real benefits from the sorts of partnerships that we have.
spk07: Great. Thank you, Guy.
spk00: Thank you. Thank you.
spk09: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks.
spk02: Thank you all for joining us today. As I mentioned in my prepared remarks, we continue to invest in the people and skills that are required to support this next wave of digital transformation. We've strengthened our team through key hires and an internal reorganization to ensure that we're fully focused on delivering the best outcomes for our clients. We've also invested in tools and technology and accelerators for enhanced efficiency. And over time, this investment is expected to shift towards revenue-generating efforts, paving the way for improved margins in the future. I look forward to seeing you all on our next earnings call in November. Thank you.
spk09: The call has now concluded. Thank you for attending today's presentation. You may now disconnect.
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