All right, we're going to get started here. I'm Brian Bergin from TD Cowen. I cover payments and IT services. Thank you all for joining us. With us today, we have Fireside with Endava. Endava is a digital engineering provider with over 11,000 global professionals. Its heritage base of operations is in Central Europe, but it's grown increasingly global with employees across 29 countries now. It also includes a more nascent growing base in APAC, and we'll certainly get into that. The company's been focused on industry and client diversification. With us from Endava is CFO Mark Thurston. Mark, thanks for being here.
Not a problem.
I was looking back since 2015, 10 years in April.
Yeah, yep, long time.
Happy anniversary.
Thank you.
We also have Laurence Madsen here, Head of IR and ESG in the room. Thank you for being here. I think the most important question for all of us is demand, right? Current demand. Let's get right into that and on growth. Mark, if you can discuss what you're currently seeing in client demand, just walk us through how you planned for demand as you entered fiscal 2025, how that evolved before the U.S. election, and then what's transpired since.
We thought we were going to see a sequential modest growth quarter on quarter when we were guiding back in September. It started to flatten. We could still see the pipelines that are opportunities that sort of supported the original guide. We trimmed it in February. We were going sort of flatter, but we expected an inflection point in Q4. What we were seeing was more geographical than anything. We were seeing sort of weakness in the U.K., which is one of our biggest markets, and Continental Europe. This is all pre-Trump's election. We saw weakness, but we thought we had sort of trimmed it enough. I think what we had seen since, you know, we put our figures in mid-May, is North America go very sort of soft on us.
Partly because of where the dollar is at the moment, we're a GBP report, so that hurts us. I think particular sort of sectors in North America were banking, capital markets, and mobility, and sort of healthcare for us. I think some of that might have been reaction to discussions around sort of tariffs, certainly on the automotive sort of side. It wasn't just North America. We saw some weakness in what we call the rest of the world, but mainly Asia-Pacific. The other thing which we've also found difficult, we've sort of moved more focused into bigger deals. They have longer sort of duration. I'm sure we're going to touch on it later. Actually, the cadence in which they move through the pipeline, which has been difficult anyway over the last two years or so, has been extremely elongated.
We were not seeing opportunities that we thought would land. We took the guide down quite strongly in Q4. Since the earnings call, there has not been any sort of significant change. I mean, there has been a lot going on in terms of conversations, et cetera. It just adds to the uncertainty, basically, that is out there. I think with the guide that we have given, it is de-risked.
Okay. As you think about those conversations you've been having in the last couple of weeks, just what does that tell you about the second half of 2025, just kind of the budget potential? Do you think it's just kind of a slower progression until those are there?
I think so. I mean, I think I got to alter our sort of guidance methodology. Typically, what we've done, we do a very sort of granular bottom-up forecast. This is, let's call it, the traditional sort of business, and take a view on it and try and layer in some conservatism around that, which hasn't been conservative enough. You layer on the timing of these larger deals, which we're finding difficult to sort of predict. You've got another layer of sort of uncertainty. I think the approach that we'll be taking is looking at the run rate of the business, certainly as we come out of the quarter of June, and coming to a view about what's the run rate on it. Is it 1% sequential, zero?
We won't be, I don't think, putting in anything for a big deal unless we've actually sort of landed it, because they do step change. So we'd have a run rate and they would step. We're presenting the budget to the board. I'll be using a similar sort of methodology when I'm taking them through what the budget figure we want for the year is. We will take a different approach, and I think it's the right one in this market. We see some real evidence that pipelines are moving and the cadence that we used to see is returning.
Okay. Let's double-click on the large deals. They've become a greater focus for you, I guess, over the last two years or eight months, right?
Yes.
Talk about why that is and how does that differ versus the heritage pursuits in digital engineering.
I think it's a function of size. We're about a GBP 1 billion revenue. You're going to make those step changes with fewer larger clients. We do have larger clients anyway. We've got strengths in payments for the likes of Mastercard and Worldpay. Those engagements are typically different to what we're envisaging with what I call sort of big deals now, where they've been framework agreements. They've been minimum commit, but essentially a big function of it is time and material. I think the market is changing somewhat, certainly that larger type of engagement where a client will want more certainty around spend and outcome. What are they going to get? You've got a change in the way at that end the market is buying, which we're responding to. I think the other thing as well, we've got a confluence with AI being a disruptive technology.
We're sort of convinced that enterprises will get the best value out of the solutions by actually dealing with the core, the core systems, because the data is siloed. All those benefits will come through that. That's part of the sort of reason for the Galaxy sort of acquisition. Unleashing the benefits of AI is going to come through those larger, deeper engagements. That's our belief. That's why we sort of pushed more recently, in the last 12 months, on the core modernization prop. I think the way that we will do things will change as well. We're tooling with AI. I think there's still a lot of time and material in terms of, let's call it the digital transformation work that we've always done, but it will migrate to something different over a period of years.
Okay. All right. So an evolution of the company naturally with size, the way clients are buying, and just AI being more incorporated into what you've called core modernization.
Yes.
Okay. I guess just for context from a large deal standpoint, what is a threshold for a large deal that we're talking about here, and how does that compare to an ACV level of past?
We tend to look at anything as a minimum, which is quite small, like GBP 5 million or GBP 10 million. The deals that sort of sit in there have a variety of tenure. You have some that are five years, seven years, three years. They could be EUR 90 million. They could be GBP 50 million, GBP 50 million. There is quite a range. They tend to be more at the bigger end now, actually. One of the also the changes over the last sort of two years is we go to market through industries. We have pulled out what we're calling a strategic deals team to think about how you formulate these commercial constructs that will excite a client because of our technology sort of smarts, but how are we going to give them the outcomes they want at a reasonable sort of price.
They sort of sit outside the industry verticals, but they help the industry verticals land those larger deals and manage the process.
Is that typically newer clients you're going after, or is that new and existing?
It's a mix. We can have deals with some of our larger clients. They're not exactly sort of renewals because the shape of it is sort of changing. Some of them are with clients where they've started small through the usual sort of TNM work, and the client has seen what we can do and then wants to make the next big sort of step. We've seen that in a number of sort of sectors. There are others where they are brand new, where it's coming from reputation. Mainly, I'd say on that part, it's financial services, which is our sort of heritage. Why it's been quite difficult for us, certainly sort of payments over the last couple of years. It's a mixture of all of the above, basically.
Okay. You talked about the pipeline growing, just the conversion being slow on these. You've signed some in year or so?
Yes.
Do those contribute to this year, or is it more so a story for next year and beyond?
They're mainly a story for next year. I think we expected we've got, I think at the moment, probably about 24 live. This was back in a couple of weeks ago. We expected since February about 10 of these deals to convert, about five did. The 5 that didn't are still there, painfully sort of going through the process of contract negotiation. They won't produce anything meaningful until FY2026, which is post-June.
Okay. All right. You mentioned, let's pivot to guidance framework. You mentioned some changes there. Can you kind of build that up for us as far as, first off, what are you assuming from a client standpoint, macro backdrop standpoint? What do you have in there as far as backlog coverage, contractor work, things like that?
When we go into any year, we split our forecast into contracted and committed revenue. Basically, it's backed up by a backlog of work that we think will burn at a certain rate. Sometimes it doesn't, which is what we've seen over the last sort of two years. That underpins the visibility that we have. Then it's about the pipeline opportunity. These are either opportunities in existing clients. We discussed the bigger deals. We grade them by where we think they are in the pipe, basically. Are they things that we know the client is wanting to do? We know they're on their backlog. They're not typically competitive, although we can get surprises. They may delay the progress.
We characterize the pipeline in terms of, I'll call it certainty or weighting, and incorporate that into our bottom-up sort of forecast. We've been doing it for a long time. We have, until very recently, had a very good track record of beat and raise. It's then looking at those proportions of what is contracted and committed, i.e., the backlog, proportion of the revenue that we can see, and then that weighting of those sort of pipelines. I think we will go through that same process that we've always done. I think there's going to be a high level of skepticism, which we've tried to apply as we've gone through our fiscal sort of 2025. It's getting a sense from conversations with clients about where they are in terms of their commitment to spend, et cetera. The clients do need to spend.
This is the frustrating thing about the big deals. We're told they need savings this year. They need to progress. There is this reticence to actually proceed, which is highly frustrating.
Yeah, that's, I guess, a key question. What's just going to get clients over the line here? Because a lot of vendors are talking about building backlogs, not talking about cancellations, things like that. Is it just time, you think?
I think it is. I think uncertainty is high. I mean, macro is a sort of broad term, but it does sort of weigh on decision-making. I think the technology weighs on decision-making as well. I think certainly in terms of AI, I think euphoria has come off, and there's talk about it in the trough of despair. I think maybe overstating it a little bit. There is an issue about how you get a disruptive technology like AI enterprise-wide and actually delivering benefits. I think people will pull back a little bit to see, but they're going to have to move at some stage or else they're going to lose a competitive advantage.
Yeah. So we think about this group historically. It was a 20% kind of consensus growing group or better. As you kind of step back and think about some of the trends, whether how clients are buying in these larger deals, AI being incorporated around them, do you think there's a structurally different trajectory for the industry going forward?
I don't think so. It might sound a little glib. I mean, what Endava has been very good at is engineering solutions for clients and delivering sort of benefits. I think with AI, I don't think clients will be able to hire some smart people and deploy the technology at an enterprise level. There's going to be a big engineering challenge to do it, and they will need expert help, which is what Endava sort of does. It's part of its DNA. I think it will come back, whether it's 15%-20%. I don't think it fundamentally sort of changes that thesis.
Okay. Okay. I guess as it relates to your fiscal year, you'll be reporting in, I guess, September, so you'll at least hopefully have some time here to get some macro uncertainties abating.
Yes.
Okay. Let's talk about pricing and kind of deal economics. There have been some peers that have noted more competitive behavior in the market. For those that do not accommodate on that, it certainly can drive slower growth. What are you seeing there as it relates to pricing and deal contract terms in the market?
I think it is competitive. We have seen some players being very aggressive. I think you can see it in their margins. Our sort of stance is we have kept it stable. When I say stable, and it is still talking about the sort of TNM work, time and material, based on an average workday rate, it is basically flat for us for about eight quarters or so. We tend not to sacrifice margin if we can possibly help it. It will depend on the deal, whether it is key to a particular industry vertical or it establishes our credentials. We take those sort of softer criteria into account. Our sort of experience is that if we do give way on price and we try to move up price later, it is very difficult to do that. It comes back to what do we think about the cycle?
Will it come back? I think it will. You will find it very difficult to move prices up when it does come back.
Is that differing by geography or vertical? Anything to call out?
No, not particularly. Not particularly.
Okay. Galaxy. The largest transaction that Endava has done. Let's talk about rationale there. What did that kind of fill from a capability set for you?
When we tend to buy businesses, it is to extend the geography of the market we're selling into. Galaxy was North America. North America is the biggest market for IT services. We wanted to diversify away from financial services and payments in particular. Galaxy is predominantly sort of healthcare. Looking at it from a geography perspective in terms of where the work is delivered, it is India. Endava is quite unusual, given the size we are, of not having an Indian component, as we sort of call it, which makes us attractive to our existing clients and new clients as well. Those are the geographic aspects of it.
The technical part of it is Galaxy had a number of, they didn't call it this, but we call them accelerators, which are using a word we're debating internally about, automations to deliver work quicker in terms of work on legacy core systems. Now, they didn't really have a core modernization prop, as we would call it now, because we're using our own tools, such as Chronos, which tells you where a core is hot or cold in terms of people going in and using it, but also bringing in AI to take the artifacts from those accelerators to then build out workflows and plans, et cetera, from it. The accelerators were very interesting to us as well. We looked at it and thought, this is an adjacent market.
In terms of the sort of big theme about where AI is going, where we no longer really possible to work on the periphery of the core, which is what Endava has additionally done, it took us into the core and added capability for us. So strategically, a good deal for us.
Okay. Since the deal's been closed, talk about integration and performance of the business.
They've performed as expected. It has come off, I think, because of the uncertainty in the macro, et cetera. Actually, they've held up pretty well. We haven't uncovered any surprises after the initial sort of integration phase. They have gone on to our Oracle platform. It might have been a bit risky at the quarter end, March, with no drama. They are getting into the cadence in which Endava works. We have one way of doing things. There is a modification in terms of forecasting and the grading of people and how we shape work together. That will sort of come. Those are the softer sort of integration facets as we go through fiscal year 2026. So far, it's worked well. We're not fully integrated from a work process. Galaxy tends to use its people for delivery at the moment.
We do use Endava staff for some of the newer proposals. We are sometimes also using some of the Galaxy workforce and some of the Endava props. This is a false way of looking at it. It's all Endava. We're not fully integrated from a sort of delivery model yet.
How long do you think that is going to take? I guess as you go forward, are you going to be delivering on an engagement from multiple geographies, or is it components of work that you kind of break apart?
I think it's going to be multiple. I think we can ultimately get the blend of onshore, nearshore, offshore, but it will depend on what the client wants. The things that we're seeing at the moment, it tends to be either it's sort of offshore part of it or it's nearshore. I think it's like blending that overall sort of solution.
Okay. As you do that and as we think about kind of the historical profitability of the business at optimal growth, 40% plus gross margin, right, and 20% plus PBT, is that something you get back to with this new model? Does it differ?
I think what will be different is AI and tooling and agentic AI in particular. I think when we IPO'd back in, I think, 2018, we always thought we would get to a high 30s and a mid-teens, and we sort of went straight through that. I think it's going to be at that level. It's sort of the high 30s, and I think the adjusted PBT in the mid to sort of high teens. I think the 40, 20 was quite a high automatically.
Accelerated growth, yeah. Okay. Let me just pause here, see if there are any questions in the audience. All right, let's key in on GenAI. As far as what you're seeing in client engagements, how prevalent is demand and kind of what is most common, I guess, as you work through some of these client engagements? Understanding it's still early.
Yeah, I think it's definitely coming. It's moved out of pilot into production, but it's still small, basically. It sometimes feels like two steps forward, one step backwards as well sometimes with clients in terms of their confidence to proceed with things. I'd say it's broad areas that we're working on. We're sort of working in healthcare, banking, capital markets, insurance, a range of projects. There can be back office sort of efficiency. Some can be running clinical, pharma, for instance, clinical trials more efficiently for the regulator. Some can be onboarding. It's a complete sort of spectrum. It's not all about back office efficiency, et cetera. I think it will start to pick up. I think the bigger opportunities, going back to what we were talking about earlier, is around sort of core modernization.
Achievable, then.
Enterprise-wide, open up the core systems, the siloed data, and get real sort of benefit from it. I do not think we are there yet. We have some deals or engagements we are calling core modernization, but it is not that sort of North Star yet. It is coming, is my sort of sense.
Okay. When you think about the impact on various services activities because of GenAI, I know areas like testing have been called out, right?
Yes.
How do you think about the net impact here for you, and where are those areas that will see pressure versus where you'll be able to grow through it?
Yeah, it's interesting. Before AI, we used to have automated and manual testing. Manual testing has gone. I think we will start to substitute certain roles with agents, basically, in the process. We're not doing it at scale at the moment. We're exploring it. It will take out roles. When people are buying teams, there will be, let's call it the human component, roles being performed by humans, and there will be an agent in there as well. Our experience at the moment is we're not looking at the pricing yet. You pay for a certain human, and you pay something else for an AI agent. I think the way that longer term, the industry sort of has to price for it is around outcomes, basically. What are you getting, whether it's velocity of work or whatever? What are you getting?
What's your value that you're getting and price on that? Then it's up to the services business how they sort of deliver it. You'll always have a little bit of tension. I've been around in this game long enough. When people find out where you're delivering work from and try and get underneath the covers, they try and argue about sort of price. The art in terms of the commercials is to what value do you want to get, what velocity, and we'll deliver it to you with the quality, et cetera. I think we're on that journey.
Okay. So even in the furthest along relationships, contracting terms haven't, you're not even there yet on that?
No.
Okay. Interesting. Okay. In the market, there's certainly the existential fear in services because of the risks of cannibalization, right, of certain activities. What's your perspective on that topic?
I don't think it does. I think the technology enables technology. Things will get faster. Throughput will pick up. Productivity will pick up. I think where we have to get to is break this algorithm between inputs and outputs, basically. The client is getting faster, better quality engineered products combining best-of-breed technology, and it's Endava's job to deliver on that and capture as much margin as possible, obviously in a competitive marketplace.
Yeah, yeah. Choppy macro doesn't help all that while that's going on.
Yeah.
All right. All right, very good. I know we're at time now, so Mark, I appreciate the conversation. Thank you.
Not at all. Good to talk about it.
Thank you.
Thanks for.