Endava plc (DAVA) Earnings Call Transcript & Summary

Good afternoon. My name is Puneet. I'm from JPMorgan's payment processing and IT services team. Glad to have here with us Endava. We have Mark, who obviously, you all know, CFO of the company; and Al, who's Chief Engagement Officer. If you have any questions on Fintech, feel free to ask him. He's the Fintech guru here. So the format of this presentation is going to be fireside chat. I'll start with a few questions, and then we'll open for questions from audience. Welcome. Thank you, both of you. Appreciate it.

Thank you.

So let's start with like the third quarter results. You reported recently results came in slightly below expectations. So talk to us like what are the trends, high-level trends you are seeing? What were the drivers for the weakness or for the shortfall? And what do you expect going forward?

Yes. So it was mainly a top line hit or miss. We suffered an unexpected credit with a significant client. It wasn't driven by poor performance or delivery issues. It was basically to secure future sort of pipeline of work with them. So it was unexpected, and it was issued after -- or the discussion was entered into after the guide. Now taking the revenue off, it impacted our EPS. It went straight through to the bottom line. So we were just short on the revenue and we would have been in the middle of the EPS for the quarter, if not for that item. Now we did see also some weakness on our non big deal pipeline. So if you recall back in May, we said we were offering guidance but stripping out big deals. So it was just run rate Endava. There was some slight weakness. So we did convert pipeline but not as much as anticipated. And as a consequence, we looked at the rest of year outlook and trim some of that pipeline. It wasn't all bad news. We secured three large deals. So Paysafe, which I can now name since the call, 5-year $100 million deal, which Al is quite instrumental in securing, and an insurance client and Toyota Racing Development as well. And those really add the momentum to the second half of our revenue outlook as they produce step change in revenue. So we -- as a result of that, we have, I'd call it, a flattish quarter ahead, Q2, minus this credit issue. And then the momentum picks up in the second half, basically from those contributions from big deals. And with the sort of operational leverage that Endava has, I'd expect it to be relatively flat from an EPS perspective for the next couple of quarters, but Q4, we start to sort of pick it up.

So let's talk about the credit issue that you experienced like -- first, like I'm assuming like it is nonrecurring, like this is like a onetime thing this client, it should not repeat with any other clients or some -- is it tied to vendor consolidation that many clients are doing? Like, how is it different from that vendor consolidation?

So we don't believe so. So it wasn't do this, and you remain part of the pack going forward. Basically, the client sought similar arrangements, if I can call it that, from the rest of their source suppliers. And made it pretty clear that if we didn't participate, then it would diminish our opportunity of further work or size of work with them going forward. The client we've had experienced previously, but not of this sort of scale and also the sort of downside that they're implying from the discussions. So we think it is one-off in nature. You can never say something won't repeat, but it's pretty unusual. We got notice of it very late, maybe after the quarter was sort of close, but obviously reflected what was going on in the quarter. So we booked it accordingly.

Got it. And then let's talk about -- like on the other side, like the large deals that you're winning. Obviously, we know that you've been trying to pursue those deals for a while. So there is lot of focused effort that has gone in winning those deals. So talk to us like how is like the profile of those deals different from the deals that larger diversified companies like Accenture, Cognizant talk about. And then the size you mentioned [ $100 million ], is that...

They are significant from Endava's perspective, probably not from an Accenture perspective. They don't tend to be managed service structure. We tend to be -- we're known for innovation and driving businesses for transformational. These engagements that we are securing, and there's a lot of appetite, so it's a very strong pipeline that we have, but it's not in the guide as we may sort of clear. They are quite heavy in financial services, and that has been picking up. Paysafe been a sort of example of that. They tend to be also multiyear. So we want to lock in a transformational journey and partnership with large clients for at least 3 to sort of 5 years. Now these arrangements are -- can take time to negotiate and agree. Most of them have the nature of actually starting almost like immediately. So we announced deal with Reed Exhibitions, I think, back in sort of September. Now there's a lead time whilst there's a discovery phase and then the services sort of start from the 1st of January. Most of these deals do start in the new sort of calendar year. So there isn't the profile of a gradual ramp typically. There are service that starts and we start to deliver that service. And maybe, Al, you'd like to talk about Paysafe in particular because it's typical of the arrangements that we're trying to put in place with these big deal structures.

Yes, happily. I always get confused because I'm a simple rugby player, which is -- you talked Q3, which obviously are...

Q1.

Q1. Yes. And interestingly, in this industry, you get the sort of end of year, start of year thing, and we fall between 2 stores. So it's quite an important thing to remember when we talk about ramp-ups as well and people spending budget sometimes a year. But I think there's 3 elements to a deal that is going to really matter to investors in companies like Endava, which is, a, are we starting to see AI creep into the delivery? So Endava has built an incredible track record of an amazing Net Promoter Score over the years of being a great delivery engine. All the customers are very satisfied. That was in the agile period, and now we're talking about an AI period. So we haven't lost that muscle memory. The 12,000 Endavans are all still completely committed to deliver it. The second thing is how meaningful is the commitment? So rather than the sort of SOW, I've got a project, it's a race to the bottom, you're competing against other outsourcers. Those aren't really the deals that interested -- well, we're much more interested in -- you make a commitment, we'll make a commitment, build a joint team and go and get stuff done. So that's important. And then the third piece is time. And I mean it's interesting today to be here when certainly back in my home country in the U.K., the headline news is the Alphabet CEO talking about maybe a correction, maybe a bubble in AI. It's fascinating to me. There's this sort of gap between the practitioners in AI, the developers of AI, the people invest in trillions of dollars in AI, and then your average company that is trying to deploy AI. And there's no one really bridging that gap and being acting as a bridge between the AI technology and the business outcome. And if you think of the amount of data that certain companies hold, if you can apply AI to that, you're going to transform that business. So the third piece to these strategic deals is longevity. Because if you go back a year, ChatGPT 3, 4, now 5, the world is evolving very quickly. But if you've locked in a partnership, and I don't say locked in, in a negative way, I mean, in a commitment way, then you're really well placed to learn. And I think most of the C-suite that I talk to are getting quite fatigued about the silver bullet pitch. AI is going to transform your business. It probably will, just like mainframe to blade frame, did machine learning, did -- but there's not one silver bullet, so they're looking for partners. So I think you'll see Endava, as we've done with Paysafe, do far more long-term committed partnerships with the leading companies.

So 2 questions on that. So some of these deals like the multiyear deals, like -- so the AI can have the 2 types of applications. It can help improve an operation, right?

Correct.

Business operation, you don't need making up an example, tellers and replace them with AI or augment them with AI or AI can make coding more efficient. You can create an application much more faster efficiently using AI. So what's the bigger driver using AI to transform your operations or AI to improve your coding...

I think, well, let's go back to a couple of the transactions that are like Reed Exhibitions and others where you get a step change. So basically, I think as Al was point out, there's a lot of disruption caused by AI. The technology future is uncertain. If you've got to navigate that as a corporate, that is quite challenging. I know a lot of corporates are engaging with AI, but I think the key issue is then how do you roll it out on an enterprise level. You have it into the core systems. You are not exactly future proofing, but how do you navigate your way through a big sort of change? And I think how -- certainly in some of the engagements that the clients are approaching it, is they want to give us the problem in some respects. So you take elements of my IT function. A lot of it will be development and innovation, and I want you to navigate that path for me. And what I as a client get out of is a certainty in terms of cost, I want quality and innovation as part of that. But Endava, it's up to you. Now that is reliant on us interpreting what AI can do. We need to drive efficiencies and improvement. And that's where we talked about methodology, Dava Flow comes into that. So it's outsourcing in some respects the issue for us to manage. Now that's how some of these engagements are starting to be sort of formulated. And I think that's the early stage. So it's effectively, I think, cost efficiency. But I think it will develop more widely than that, to what Al's point about sort of partnership.

Yes, I'm using American term because I'm here in New York, but like a great American football team, it's defense and offense. So I think a lot of clients are saying, I'm hearing, I have -- no one's proven it to me yet, but I'm hearing that AI is going to create efficiency in my cost base, in my management of data, in my clarity of data. So I'd like to do that because that always helps my numbers. But also, are there new propositions? And are there new mousetraps? And are there new things that I can do. I mean, I think we live in a fascinating era of colliding industries. If you look at payments, an industry that I've been close to for many years, as a horizontal, payments is touching everything. Government transformation, global movement of money, right down to efficiency in your local government, in your towns and your cities. So I think that Endava's track record of being able to, as Mark put it, take over pieces of work for our clients, prove that you can get efficiency, but then add into that a bit of sizzle and say, here's a new proposition. Here is something you could do with that data that you couldn't have done before. That's where we've got to be positioned. And in many ways, our size is very helpful as a company. I think you mentioned -- I think if you're a company of hundreds and hundreds of thousands of people, that's a long journey. That's a long transformation. We've spent the last 2.5 years making sure every Endavan is fully compliant with the ability to make AI useful. So I think we're in pretty good shape.

Yes. And I think certainly, John was here. We're not a product company, but we have a methodology about how we build and deliver. And the agile world, it was teams and teams. It was the distributed agile way that we delivered. Now it's Dava Flow, that is essentially what our thought product or our unique positioning is going to be in this AI-driven...

And talk to us like governance issues. Like the clients we often hear the reason, many of those AI pilot projects are stuck in that phase is because clients are not comfortable with data security, change management because AI -- future AI is going to interact with their employees, customers. So talk to us like how can Dava handhold your clients in overcoming some of those challenges?

I think as we've had to overcome those issues ourselves around security compliance. I mean we operate in financial services, which is heavily sort of compliant. So we know the benchmark that is required and taking clients on that journey. And they does start off small, Puneet. It's not going to be a big step into Endava Flow. You have to show what it can do, a glimpse of what it can do. You do need a pilot or proof of concept to onboard a client with -- and that's how you build the trust around. And the governance guard rails need to be in place. But if you can demonstrate that knowledge upfront that you know where the pitfalls and bare traps are, it gives confidence in clients to make those bigger sorts step forward.

So that becomes like a way for you to win share by helping clients get there?

Yes. And I think our approach, we think, is differentiated with Dava Flow because it's basically building on the legacy of, let's call it, ideation to production that you've heard us sort of talk about. But it's in an AI world. So it's -- I think we call it signals the start of this whole process. So there's -- the stages that you should see as you go through the life cycle using Endava Flow. And it has a componentized structure to it. So it's not like we've invented Endava Flow, we push everything through the sausage machine. You can take elements of it out and use it in the T&M world. And I think that's the sort of beauty of it. It's sort of flexible like agile is. And I think it's quite differentiated from what I understand others have been talking about.

Yes. So core modernization, like helping clients modernize their data move to cloud and whatnot to be ready for AI. That has to be even of your core competencies. So talk to us like the traction that you are seeing whether through Dava Flow or otherwise from clients in those services? And why are we not seeing like -- and it's not just for Dava, it's for everyone else to not improve growth rates as clients are spending on core modernization to be ready for AI.

And I think it's one of the big prizes certainly for Endava. It's a big increase of share of wallet. We've typically historically worked outside core legacy sort of systems and plugged into them. I think with Dava Flow, the transformation of the core to make AI enabled into the cloud is the big prize for us. Because I think using the accelerators, is the term we use, but the automations, the tools to do it, the speed at which it can be done, the reduced cost that can be done, the visibility about the progress that make those big monolithic changes feasible. Now it hasn't moved at the rate that we thought it would do based on the comments we were making 12 months ago. And I think there's this -- I think the whole AI journey is sort of settling down. I know the technology is moving very quickly. But I think enterprises understand where they are at the moment. I think they understand that they're going to need help from firms like Endava to make those enterprise-wide step change, they need to. And part of that enterprise-wide step change is helping them out with the core. So I don't think anybody has moved on it, but that is the big prize for us. And I think using Endava Flow and our accelerators will give certainty and they give clients the confidence to do it so that they can meet at the end of the day, their requirements in terms of return on capital. They're going to have to invest to do this.

I think just to add in there. So we're absolutely clear. The question is the right one, which is why aren't -- why is our industry not seeing the numbers come through. But we have to represent at these events also the conversations that we're in. And a year ago, everyone, it was almost impossible to get through the internal person that have been promoted to the head of AI. Who were saying, I'm making a religious bet. I'm the expert. I used to be a risk manager now wear jeans and a T-shirt, and I'm now an AI person. I think the C-suite is starting to get pretty frustrated with that. And we've seen that in every single cycle. So yesterday, at the London Stock Exchange, we launched a new initiative called Dava.Rise, which is basically a platform, an accelerator, a lab, if you like, where we can bring in some of the most exciting scale-ups in the world, and present them to the Fortune 500, and then utilize our AI tools to demonstrate how we can accelerate their growth because a lot of big companies are saying, "show me, don't tell me, and I don't want to go and fight the budget internally until I've seen it work. So I think that was quite a clever move, but someone who was talking the yesterday, very successful U.K. entrepreneur, which is like hen's teeth, obviously. But this person was talking about, every time you set up a company and you exit it, you start at the beginning again. What's so nice about Endava to your previous question is the ticket to the game already exists. Are you compliant? Do you understand governance? Can I trust you to look after regulated data in the Middle East where we have a strong practice now in financial services? Do you want to understand hybrid cloud, sovereignty of data? They are things that are just muscle memory to this company. So the stuff that comes after that. Now I'm not sure that many people in our space can say that. They're talking about AI as the solution to everything. We're saying, no, you get into partnership with Endava, the cheques already written, like the mortgages covered. It's now what you do next to the business. So I think that's quite important.

That's interesting. So let's talk about like the AI use cases. There's so much focus on efficiency, whether it's -- it can read documents faster, it can automate customer care. Everything is about efficiency. You talked about earlier about adding some small sizzle. Like, is that extra sizzle? Is that related to at all about consumer-facing applications of AI, things can help your clients grow revenue?

Just look at Agentic AI, Agentic Commerce. So if you're a MasterCard at the moment, and they've made -- this is all public, they've made these announcements recently. We're moving now to instant tokenization of consumer data anonymization and the ability to make payments within ChatGPT or within app or whatever it might be, without ever having to go through that whole. Mother's maiden name in a [ thorough ] measurement process. That is a vision, a glimpse, if you like, of what's coming next. That's true in every industry. So Toyota, who, Mark mentioned earlier, Toyota have just had the -- Toyota Racing in North America have just had their most successful season for years. Now we were heavily involved in building some of their AI capability and predictability of race circuits and all -- these are the things that are going to come above the surface. We weren't hired for those. Endava is hired to bring efficiency into the back office. We were hired to try and help them take out costs. It's then when we start to build these longer relationships, we can come up with ideas and ideation. So with one of our med tech clients at the moment, we've taken out a huge amount of time in that Phase I process of data assimilation. Now that won't make the drug any quicker to bills, but it will get you to the start line quicker. So I think all these are examples within the business of where we can now build throughout the sizzle.

And that's what Endava has always done. We sort of landed and then people have seen what we have done and taken us into new areas. So it's building on what we've always done.

Yes. And I'll open the floor for questions from audience after this. I'm sure there'll be many questions on Agentic Commerce. But can something like that drive the step change in your AI adoption as well as in your growth rate?

I think we've been in Endava, I'm only 9 months in, but I've been a client of Endava for 16 years, a very happy client. I think we've purposefully not made very big public bet on AI per se. We've talked about learning it because any student should go and learn what the latest doctrine is. I think we've talked about business outcomes. I think Endava has been very good at saying we listen to our clients. We're agnostic of technology. We don't make big religious bets. But when our clients are ready, we'll then take them on the journey they need to go on. Some of that might be taken over an inefficient technology department and making it more efficient. We're not ashamed of that. That's a great business for us. But we'll only do that nowadays, if that also involves them getting glimpses of our new capability. But we are definitely not out here, and I'm very proud of that out here saying, 1 day, we're going to flick a switch and everything is going to be AI [ F8 ]. We're here saying we serve our clients, they serve their clients, and that's why they keep hiring us. And so Mark and I were talking about this actually earlier today. I believe when we're here next time, we'll be demonstrating a huge acceleration in these conversions and all rest of it. But most of the deals that I'm seeing in the market today still start with -- I've got this year's budget. I need to get this efficiency. I'm excited about the future, but can you guys do what we've always known you can do. And our job is to blend into that some of this.

Right. Any questions from audience?

I did indeed want to ask about Agentic Commerce. You touched on it a little bit, but maybe just within the payments vertical overall, could you talk about how important that is from a use case standpoint and maybe even broader than that within the payments vertical, kind of what are you seeing? Any trends beyond Agentic Commerce that you can call out?

Yes, of course. I mean and you'll be all over this anyway, but it's taken a Dodd-Frank and other -- it's taken a while for the regulatory shift interchange to really come into force, but it's really arrived now. And we're seeing that in loyalty schemes, how do you fund them. Lots of banks saying, well I used to use interchange to fund those sorts of things. So what's the new model for that? You've then because of the global volatility in the payment space and certainly the geopolitical space, we were moving to this sort of 1 size fits all payments model. Now we're looking at much more innovation islands. Lots of national governments looking to put real-time payments in place. Lots of leaders of nations saying solvency of data is incredibly important. I think a lot of people speculating that the fact both Visa and Mastercard are U.S. -- perceived as U.S. companies, does that create challenges for them? I think those are brilliant businesses. The 4-party model is a pretty hard thing to pull down. But a huge percentage of the work that Endava has done, hence the reason I was a big client over the years has been to enable this shift in payments or payment gateway accelerators, what we're doing to help people modernize their platforms. And I only see that getting faster and faster at the moment. The thing is if you look at most industries, and you say, here's a new incumbent like a Revolut or a Stripe or an Adyen, as soon as these companies have got through the governance or the firewall of regulation because their platforms are so much more fit for purpose, they've just accelerated to enormous scale very, very quickly. And so the incumbent, whether that's a bank with the merchant acquiring business or whether that's a Fiserv or whether that's an FIS or a global or a Worldpay, having to react. And the difference is these aren't start-ups, these are $100 billion companies. And so we are in that space, particularly super well placed, I believe, it's 30-plus percent of our revenue. And we've got teams that have built real-time payment systems for many, many companies. So I think for us, it's good. And then to answer your question more on the themes I'm seeing, I'm certainly seeing people look at sovereignty of data in payments as a way to create local jobs and help local companies, particularly in Asia, particularly in South America, some in Europe, but probably more so in those first 2 markets.

Yes. Premise is about 15%, just to correct.

Well, banking and capital markets...

As a follow-up to the payments question, the other kind of big buzzword and payments aside from Agentic Commerce is Stablecoins. Can you talk about what your clients are or if they're trying to incorporate stable coins into their kind of payments workflow and what applications you see as being kind of most relevant for these companies over the next 3 to 5 years?

Yes. I mean I think, candidly, we don't profess to be an expert in that particular area, but we have enough people in our payments practice that understand it well enough [indiscernible]. So we are talking to lots of our banking clients, lots of our government clients about what -- in fact, I have posted a very VIP delegation from Vietnam a couple of weeks ago, it's public, so it's not new news, who came to the U.K. who are doubling down on crypto as a nation. And we were advising them on applying right touch regulation and rules of law to that environment. That for us is an in for Endava. That's a way of demonstrating that we understand what it means to run a regulated payments environment. I think on the individual technologies itself, the U.K. has been a bit behind the curve on this for me, which is why I spent most of my time. I think the U.S. is opening up to it more now. But yes, I can ask one of my team if it's helpful. Andy Davis probably is the right guy to help you with that.

Can I circle back to the Dava Flow platform and ask you to just explore the potential economic impact of clients shifting more towards Dava Flow for their engagements with Endava?

It's not a platform. I'll call it a methodology all way of working. It's basically using agents to deliver work of what would have been humans, one of a better word. And maybe just to simplify it, we sort of envisage where a scrum team to deliver what would have been 8 people. The new scrum team would be like 4 people and 4 agents. But it's the whole sort of methodology about how that work is delivered to governance because it can move very quickly through each of the phases. There's no equivalent in an Agentic AI world of daily stand-ups, feedback loops, the testing scenarios. It flows very, very, very sort of quickly. So thinking through the whole process from initiation right through to the production phase and not getting in the way of it, but having the right governance and checks around at the human in the loop. So it's a methodology. It's a proprietorial methodology using agents. And these are our tools and accelerators as well. So it's how do you orchestrate them and put the right balances and checks them.

And I think it's -- I agree, it's a movement. And because John and Mark logged before I arrived, took the right decision, no question to invest heavily in this area by going AI native ourselves. We -- across Endava, if you come to the locations, everybody is using AI. And so when we talk to clients, there's a real authenticity about it because we're saying this is the -- and you've seen some of the costs that we've been able to take out of the business, some of the efficiency that we're getting by using it. And I think that makes the job much easier for me, engaging with clients and saying, now here are the examples that have worked for us. So do you want to go on that journey. But it's -- as Mark says, it's called Dava Flow because it is a movement, it's a behavior, it's not a platform, and it's not a product. And I think that's resonating quite well because everyone's been asked to pick -- make a religious bet at the moment.

Just one more question, [ Friedman ].

So you're in an organization that's dominated by technology people, engineers, et cetera, et cetera. And so generally, the natural reaction to seeking growth is to come out with a thing. It's say here, we have a better thing now. And sometimes there's opportunities in commercial execution. We just get better at the soft side of the business in some respects, who we're targeting, getting higher up in the organizations. There's probably 50 things under that stack of things. Are you working on that as well, too? Because I know we haven't asked any questions in that area. So I was just curious about the execution side.

Are you asking about the go-to-market or...

And also how that affects the culture?

Yes. So we've always been industry-led. So it's about what are the -- how is technology going to impact the industries that we serve. What we're focusing on now is to take it up a level to the C-suite in terms of what are the big issues that need resolving at that level with our propositions. So it's always proposition led. It's the outcomes in terms of what is led. The technology is almost all secondary in that respect. Where the technology is important because it's driving some of these themes of disruption and change in the industries and AI is causing big disruption, and we are feeling it ourselves, but it's causing issues with clients. So it's how do we create solutions for clients to do that well. So we advise them, but we can go beyond that and also sort of build. So it's solution-driven, market-driven, but you have to have technical competence, engineering capability. We have a very strong engineering sort of heritage, which is very sort of valuable. But it's how do you hone it and build the solutions that the client wants and the outcomes the client wants is the key.

And let me add to that. So -- and this isn't perhaps always understood about Endava. The culture in Endava, is a superb question. 11,000, 10,500 of the Endavans are in what we call our locations, 62 locations from Eastern Europe to Vietnam to South America, okay? Vietnam [ is paying now ]. These are people who, when you go and visit these locations, the mayor of the town turns up because we're the biggest employer. The embassy will turn up because it's very important. We're giving these people incredible lives. In many cases, in Romania and Moldova, 100 clicks from a war zone. So this is really material to your question because these are hungry-driven people. They're not fascinated by the technology per se. They're excited about working on projects that are exciting. So when Toyota -- so we have an internal channel called Dava Studios. So when we can show that Toyota have just had their best season on the racetrack and show the Toyota car winning because we built the AI dashboard, that's what motivates them. So they're motivated by working on cool stuff. And what I say to the engagement team, the growth team, is if we're not explaining why we got the CEO's attention in that organization and why they chose Endava, then we're letting our teams down because they're working on game-changing stuff. And so I think that's the other thing. Endava, and I will say this because John is a good friend of mine. John, by his very nature, he's a very humble guy, and Endava had many, many great years as a very humble organization, delivered well in agile. But we have to get above the parapet and point out to people some of the stuff that we're working on. The numbers are a consequence. They will come through. It's actually about working on brilliant stuff that other people want to replicate.

All right. Thank you so much.

Thank you.

Very good. Thanks, guys. Thank you.