Endava plc (DAVA) Earnings Call Transcript & Summary

Good afternoon. My name is Puneet Jain. I'm from payment processing and IT services team here at JPMorgan. Glad to have here with us, John, Endava's President and CEO; and Matt, the company's CTO. The format of this presentation is going to be fireside chat. I'll start with a few questions, and then we'll open the floor for questions from audience. So welcome both of you. Really appreciate you joining us and the dinner as well last night.

So John, maybe I'll start with you. So you reported your first quarter results yesterday, where you talked about you're seeing some stability near term and expect improvement in the second half of this fiscal year. So maybe if you can briefly recap your results and share like the trends that you're seeing across your clients?

Sure. So I mean, probably the most useful way of looking at it is in a quarterly sequential basis. So we reported a 0.6% drop in what is our Q1 against the Q4 of last financial year. If you look at it on a constant currency basis, we were actually up 0.2%. So I think that probably lines up with the word stability, in the sense that the dip that has been going on has flattened off. Looking forward to the guide, we are seeing streams of work coming through, many of which we are in the early stages of working on, which had led us to -- on a quarterly sequential basis, again, seeing things step up in Q3 and Q4, which is January through June of next calendar year. So that's the general context of what we see happening in the business.

No, that's great. So how much visibility you have like on the projects that you expect to ramp up in second half? And can you give us an example of the type of work that clients are committing right now that should ramp up later on.

Sure. I mean we -- when we look at our forecasting, we actually look at all of the elements of existing business and the pipeline that's coming through. We attach weightings to the pipeline on the basis of how well-progressed it is through the pipe and, therefore, our likelihood of actually winning and closing that business. All of that gets put together. We reforecast the whole business every month, and that gives us a really solid view of what's coming through off the base of that. With a little bit of conservatism added, obviously, we then produce the guide that we put out to market. And the sorts of projects that are coming through are actually the typical projects that we've been working on for many years since the foundation of the business. Most of them are actually in the -- someone described it to me in the offensive space as in about growing the top line, adding capability to a client's business. There is a little bit of the cost-saving stuff, but we don't see as much of that or as many of other organizations that have been sitting in this seat. That is good news from our point of view because, ultimately, we see the revenue driving projects as being the longer-term, more sustainable ones. As you build new products for client and expand it successfully in their marketplaces, it drives ongoing growth. Historically, for us as a business, where we deliver 20%, 25% organic growth, we'll see 18% to 20% of that being existing clients spending more with us. So that's why it's so important to us that we're helping build new products. In terms of the specific areas, one of the big areas of growth for us is embedded finance. Now the thing about embedded finance is it takes a banking product that, traditionally, you would go to a bank and they would process it within their system and come back to you maybe days or weeks or months later whether they would -- what that product would look like and how much it would cost and all the rest of it. Embedded finance is all about making that available through an API to other organizations who can then build it into their own customer journeys. So an example would be, I'm hiring a scooter for 10 minutes and I want to buy some insurance, how do you get a quote for that insurance that can get put in front of the consumer and they can spend that money instantaneously and be insured for 10 minutes.

Got it. So is it fair to say like the pipeline or the movement of deals in the pipeline is better now than what it was 6 months, 9 months ago and that should drive...

Definitely. I mean no comparison. The way that I would characterize it is we went through the COVID exuberance of people spending lots of money on technology. As headwinds started to come into economies and people were uncertain about the outlook, the finance directors have grabbed back control of budgets, prioritization, which projects do we want to do as opposed to doing most projects. And we want proper business cases attached to those projects. And that, 6 months ago, was adding levels of diligence to project sign-off that meant almost nothing was coming through. You put that alongside some of the projects that were coming to an end, and that's what drove the dip in our revenues that we were seeing 6 months ago. That dipping has slowed down. And in fact, I'd largely say it stopped, and is being overtaken by the new project work that's coming through. So off the stabilization, the baseline that we've had over the last couple of quarters, we expect to see, as we get into Q3, the work picking up through this new pipeline that's coming through.

And how strong like is this imperative among your clients to execute some of these projects? So let's say, we are heading into client budget cycle. So if in 2 months, 3 months, like if macro remains uncertain or if there is another macro issue that drops, whether it's geopolitical and macro economy, could that macro realities force finance function to pull back that spending again? Or do you think the strategic imperative to do these projects, among business leaders, to invest in technology strong enough to overcome those headwinds?

Yes. I think the dynamic of a hiatus around what are our priorities, which is what we've been through over the last 9 months, is a little bit different to the macro should we be adjusting our overall budget up and down. And as we see it, having prioritized the projects that we are kicking off with clients, they will follow through on that. If they want to make budgetary savings, they will make that on less high-priority projects. So at Endava, if the market grows by 2% or shrinks by 2% is not such a material impact on our growth rate because we're about taking the priority projects and market share through that.

Got it. No, that makes sense. So let's talk about like the verticals, like -- and it was great to see increased disclosures yesterday. So you talked about embedded finance as one area. Who's like a typical client? And is it like the scooter company in that example? Or would it be an insurance company or the payments company?

All of the above. So if you look at embedded finance, we end up working with the providers of the service, the bank or the payments company, to put that service together and make it available with contracts, et cetera, across the API. And then we work with the organizations that are going to consume that product across many industries. So insurance, we see it in health, we see it in the mobility space, not just the scooter type example but also how you put payments in cars, et cetera. We see it in retail, whether that be online or in-store. There are many ways in which you can see the customer journey across many industries kind of buy an embedded finance product as part of the customer journey, which is then more profitable for the retailer or the merchant that's consuming it and adds a new revenue stream.

And can you also talk more about mobility, like it seems like it's 10%, 11% of revenue right now?

It is. I mean mobility, we see as a long-term technology wave. You stand back from it and you go over the next 20 years, autonomous vehicles are going to completely transform mobility. Logistics, automotive, travel, the way in which that is delivered to people, the business models attached to it are going to completely change, and is already changing as people anticipate those trends coming through. I don't know whether you want to expand on that a little bit?

Yes. And as John said, there are so many different opportunities that emerge when you actually take a step back and you consider it. So we can look at it from a horizontal perspective and enabling a payment flow. But you've got to kind of question even some of the kind of like fundamentals around transport at this particular moment in time in terms of, if we're surrounded by autonomous vehicles, do you need car parking spaces? If you are in a position where you can rent and transport for short durations of time, what does that do in terms of insurance companies? So there's so much that we see can be impacted by the mobility wave that we're really excited about where it's taking us.

Yes. And how are you investing to prepare yourself for those eventual use cases? Like in what form those investments look like? Is that more like the hiring consultants or folks who can help think and offer those use cases to your clients?

Yes. I mean definitely, within the industry verticals, it's about having subject matter experts. And subject matter experts for us are people who have been there, done that, got the T-shirt. The people who are thinking in new and creative ways inside of that space, not just people who are used to producing a PowerPoint deck and saying here's what I think is going to come next. I think if you take those subject matter experts within that field and then you apply great engineering talent behind it, you've got an opportunity to really ideate new things with your clients in a very short period of time, and that creates a very virtuous flywheel in terms of, okay, I can see that Endava is an organization that can help us think about exploring a new space because you bring all of the thinking and the engineering talent together in one place. So right now, from an investment perspective, it's finding those subject matter experts who can help us direct ourselves within that broad vertical and on that technology wave, and it's the continued investment in our engineering talent.

Yes. And continuing on the theme, like I wanted to ask this question for GenAI, but it's applicable here as well. So all those folks, like the foot soldiers, like the Endava -- thousands of people like who interact with your customers on day in, day out, how do you train them like if you think of new use cases, whether it's of generative AI or of mobility or any of emerging technology?

Ironically, it's probably more about trying to contain their enthusiasm to a certain extent. I mean when you take 8,000 or 9,000 engineers and new technology is constantly appearing, one of the challenges you have is how do I stop 10 generative AI proof of concepts around the same topic from occurring. We've always been very proud around how we invest internally, and we've just completed our innovation event, which is run globally. Each country goes through an activity of teams given -- being given time and opportunity to come up with ideas, to explore both technology but also business problems. And then we collect them together in one location where they effectively get to pitch their ideas. That's great because there's lots of new things that we've never thought of. This year's winner was in the life sciences space, which is definitely going to give us an example that we can now go and talk to our clients about and say, have you thought about this application of technology in that space. But what it means is there's a constant desire in our engineering teams to learn, to adapt and to go on that continuous evolution that's required.

And that's how I imagine you share like the best practices and knowledge from one vertical, from one part of Endava across others.

Correct. So as much as we focus on our verticals and our industries from a go-to-market perspective and being able to really highlight that we know something very well from an industry perspective, we view engineering as a very broad capability. And that's very much a part of our own culture inside our organization, where there's a constant flow both within geographies, but more broadly in terms of sharing that expertise and knowledge with one another. As I said, it's more about trying to make sure that it's coordinated than trying to foster the fire, so to speak.

No, that makes sense. Let's officially talk about GenAI. So what's your sweet spot like in that? Like what is a typical GenAI project or engagement looks like?

Yes. So I'll take one step back and then I'll answer the question on generative AI, which is generative AI or AI technology is something that's been around for 30-plus years. I mean you and I were talking before we came on stage. And within Endava, we've actually been solving problems for our clients using AI technology for a number of years. And therefore, GenAI is great, and it's providing a new kind of model of interaction and it's definitely an impressive piece of technology. But we saw it coming. We have people who are involved in the early prototypes of GPT-2 and even 1. And as John and I were talking the other day, last -- this time last year when we were going to talk at our earnings call, we wanted to go and talk about GPT-3 and what we could see coming on the horizon, and we would tell that it was all going to be too confusing for people to talk about these large language models. 12 months later, it's all anyone can talk about. In terms of what are we doing with our clients right here right now, we've gone beyond the stage of just having kind of curious conversations to getting down to specific use cases. And we break those down really into 3 specific areas. One is around manual efficiency, how can we help a single individual be more efficient within their role. The next one is around process augmentation. So within an overall business process, what can be enabled by an AI process, what can be used to actually help deliver that overall overarching business process. And then the most advanced conversations are around autonomous agents. It's the idea that you have 1 or 2 or more artificial intelligent agents interacting with one another, with the humans supervising the input and output between those various models. Most of the conversations and the contracts we're signing go in, let's say, number one. But we're definitely moving closer to having those, let's say, level 3 conversations with clients and actually being very realistic in what can be delivered and achieved.

And that's great. So it's been like almost a year since the ChatGPT or GPT-3 was launched. The clients have like 1 year to understand and to test like various applications of generative AI in their business environment. So what needs to happen next for them to invest in a big way or for the investments of the spending to match the hype?

Yes. I think initially, there was a -- to the hiatus that John was talking about, there was a have I just been introduced to a technology, that means I have to rip up my entire road map the vision of where I'm going with my organization and my products over the next couple of years, and do I just need to see what happens next. I think we've moved beyond that stage. And what people are realizing is it's about a productivity gain, it's about an improvement, it's not about necessarily replacing people with the technologies that exist right now. When we talk to our clients, there's effectively a bifurcation of thinking around data and what needs to be done. There is a school of thought and a school of clients who are very keen on sorting out the underpinnings of their organization. So data projects, sorting out data lineage, data strategies, all of these type of capabilities before then applying generative AI on top of it. And the other school of thought and other client conversations revolve around the fact of, I have such a mess, can I just not put generative AI over the top of that mess and somehow rationalize the output that comes out of it. And we're helping clients kind of like move through those kind of 2 worlds. And you might say why 2, why not be definitive and pick 1 or the other. I think that's part of the excitement of the technology. Who knows what we could be able to do by applying a model over something that's quite messy and what comes out as a result. So that kind of space of an investment and what clients have to do next. But I would kind of conclude by saying, as is always the case, what is the benefit that you're trying to deliver for your client. You can't just use a technology for the purpose of using a technology, what is the thing that you're actually trying to make better.

Yes. I think just one thing that I'd add to that. So Endava has always been about pulling together the human and the technology dimensions of these things. And the issue emerges in the AI space just as much as other areas of technology, which is how can this be done in a way that people are going to trust and they're going to find it instinctively usable, et cetera. In the -- as we get into the AI space, you're going to hear regulatory issues. There have been some IP issues that are hopefully getting fixed. Does that mean our IP disappears into helping train these models? All of these have been concerns that enterprises have. I think the IP one is getting fixed. The regulatory one is probably growing in terms of needing to understand how regulation is going to hit the space and what it's okay to do and what it isn't okay to do as a result. More visible over the pond in Europe perhaps than in the U.S. at the moment, but it's starting to become visible here.

Got it. Got it. No, like that's like one thing that we often wonder about, debate internally, like is -- like our clients at a point that they realized that they need to rip their old legacy IT systems and replace them with more modern like -- and generative AI drive this wave of core modernization. And is this like the -- whether it's the interest rates being high because that will involve CapEx. And like this current macro environment, is this the right environment for clients to do that. And I think, like you said, like the answer is both.

It is. I mean I think around that kind of modernization question, we all know when we look inside enterprise organizations, there is still technology lurking around from the '70s and '80s, which has proved very difficult to extract out of the organization. And as smart as the technology around generative AI is, it's as good as the models have been trained on, so the underlying data sets. So being able right now to be able to reason with the large language model around kind of like a COBOL system and kind of connect direct this and the underlying underpinnings of how that all works, it's highly probable the large language model has never seen that. So that technology isn't going to solve that problem for that client. So actually, the core of I need to go through a transformation, I need to understand with people who understand the business process to go and look at it and lift it up is still core to what you're going to have to do. It's just not capable within the models that exist today.

Yes. It's very rare in our industry that you just tear up the existing and do something completely new. An evolutionary approach that's going to take you there step by step is much more viable. If you do rip up and try and do something completely new, you tend to end up with a massive program. It takes too long and it's not conducive to success. I don't think GenAI is going to help fix that problem.

Got it. Got it. At this time, are there any questions from audience?

I'm wondering if you could just talk a little bit more about the payments vertical and kind of what's doing well there, what the demand environment is like and maybe outside of embedded finance if you consider it within there.

Sure. So one of the things that I would say about payments vertical is that through trends like embedded finance, through open banking, et cetera, it is spreading more horizontal than the vertical that it used to be. So I expect over time that we will see payments as a vertical decline slowly. It won't be because we're doing less payments work, it will just be spreading horizontally across our other verticals. The -- if you look within the payments vertical, I think there's a shift from a growth market and market share to a value-add equation, and therefore, how you can protect your pricing and your margins within the business. And that's where the investment space that we're finding opportunities with clients sits.

Similar question in embedded payments and embedded finance. If the traditional players have more legacy systems and they're trying to open up and amplify their platform, does that create more work to -- for you to do the -- to help these companies get there? I'm just curious about their preparedness.

Absolutely, it does. And that's part of what we've been doing for the last 10, 15 years with clients. The -- you always get a mix of -- it's the second question that we were just tackling, which is do you build and evolve the existing legacy, if you like, systems or do you create a new product with a completely new infrastructure and leapfrog what you've got. And we see both of those trends happening with clients, and have been over the last 10 years or so. The -- and we see that happening today with some of the very large products that we're creating are completely frog-type mindsets, that the organizations are at a scale where they can do that.

When you guys went public, you talked about a long-term revenue growth rate of kind of 20% plus. Since then, obviously, we've seen growth accelerate and cloud modernization is pushed. I guess as you guys think about that growth rate over the long term, and perhaps organization is doing more internally and being more traded on the cloud side, is there a risk that the long-term growth rate comes down from that? And I guess if that were to happen, what would be the primary driver to kind of bring long-term growth below your long-term model?

So our thesis and what we're focusing on in terms of scaling the business is to get back towards 20% plus organic with some M&A layered on top. What do we think will drive that is all the technology waves that are coming through industries. And those are growing rather than shrinking, frankly. There are more technologies and more opportunities now than there were 5 years ago or 10 years ago, respectively. And so we expect that to drive that trend. It will still be that shift with clients of moving spend from keeping the lights on towards what's the strategic and game-changing technologies that we can adopt in our organizations. And as we are an organization that sits in that latter space, we expect to be beneficiaries of that trend. Now that doesn't mean IT budgets grow at that level. IT budgets go back to growing at a much lower level than that. But because of where we sit, we'll be taking market share and therefore pulling in those higher levels of growth.

To follow up there. How do you think about your growth algorithm within that 20-plus percent? How much is existing versus new clients? And kind of what are the key dynamics behind that?

Sure. I mean -- so this is a metric that we've been monitoring for years. Obviously, it's been a little bit different this year with the hiatus that we've been through. But where we've been putting in 20%, 25% organic growth, between 18% and 20% of that has been existing clients spending more with us, i.e., doubling down on the products that we've helped them create that are succeeding in the market, and upping their spend either to take it into new jurisdictions or to add functionality on an already successful base. And then the new clients have been in the 5% to 7% space of adding new clients in any particular year. That's around the new products, the ideation that we do to get those new pieces of work. And then they drop into the existing client, become part of what we're scaling each year. So it's fundamental to us that we scale the existing client base as the real engine for growth in the business.

I'll ask a mobility question little bit differently than I asked it before. New area and exciting area for you guys. So that strikes me as an area that's got a lot of greenfield opportunity, not very established relative to what it's going to look like. So why have you guys been so strong in that area? And what's your sort of right to win in mobility?

Do you want to...

I'll start.

Okay.

I think around some of our initial client work that we did in the mobility space was definitely enabled through some of the strong relationships that we've actually bought from orthogonal industries. So we weren't necessarily mobility experts or supply chain experts at the point that we started working with the clients, we were bringing traditional core software engineering, architecture, cloud experience into that domain. I think what changed and where the acceleration happened was back to the SME point, where we realized that by investing in key individuals to start helping us think more expansively within that sector, that we could then start increasing and accelerating. And what we found as we started to go on that journey was, whether it was an automotive company, whether it's a shipping or logistics provider or a warehousing company, they were facing a common set of challenges in terms of a very old legacy IT infrastructure that people were very uninterested in because it was seen as being so far away from what was required to operate a business. And actually, there was an epiphany which is kind of where we're going, to quote Back to the Future, "There are no roads." So how are we going to really embrace that technology, what are we going to need to be able to start riding that wave. So I think we probably started off in the sector very much from just being reliant upon being good at what we were good at from a core perspective, but it's that layering that's really allowed us to start accelerating. And we look forward, and it's definitely one where we can see even more opportunity opening up in the greenfields that you're talking about.

And Matt's describing a 10-year journey there.

Yes.

This is not something that started a year ago. So yes, and I think also mobility is one of those areas where the embedded finance, where some of the cross industry things actually really help in developing the story. And so that's given us a real entry point into large customers. There's a lot of very large players in this space. And so once you get a footprint and do a good job, there's a lot of opportunity to scale within the industry.

That's great. On that note, we can wrap up.

Thanks very much. Thank you all for coming.

Thanks for coming.

Thanks very much for having us.