All right. Well, we'll go ahead and get started here. Thanks to everybody for joining us this afternoon for this conversation with Endava. We have Mark Thurston, CFO, joining us, so appreciate it. I'm James Faucette, Senior Research Analyst here at Morgan Stanley. Before I get before I get started, I just quickly have to read this important disclosure. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. Mark, thanks for joining us. Thanks. You know, we're on the clock. Let's get started. I guess, let's start with kind of comments and following up from comments from your most recent earnings call. During that call, you noted seeing some changes in customer behavior during December, where clients were, at the very least, adding some extra levels of due diligence that resulted in some projects maybe not proceeding and others getting delayed. However, it seemed like that started to improve a little bit in January and February. Can you kinda walk us through what you were seeing in December, and then how that started to change in January and February and kinda what's happening? Yeah. We saw latter part of December, the pipeline not converting. Mm-hmm into revenue, basically sort of projects not starting. As we went through January, like weeks one, two, three, we were seeing that same sort of dynamic. There was basically a customer holdback, is our sort of sense. We tend to see this a little bit around December transition into January, tied basically to the budget process. Got it. from a fiscal perspective. It was certainly very much more, you know, amplified with us. Basically had the impact on the quarter to March basically, where we're missing about five, six weeks worth of revenue. Those pipeline items are now proceeding. The projects are starting. That was basically the sort of basis of the guide that we've given. It's still a sort of subdued market, I would say. Okay. We're seeing different behaviors. We've seen some PE-backed businesses sort of delay further in terms of they are holding off to get increased sort of visibility. On the other hand, we're also seeing some clients sort of accelerate in certain areas. It's a bit of a mixed picture at the moment. I guess it's understandable, like, the PE-type backed firms might be delaying and kind of figuring out what their funding state's gonna look like, et cetera, and calibrating their trajectory accordingly. What about the other customers that you're talking about that are looking to accelerate or move forward? Like, A, what kinds of companies or verticals are those in, and what are the types of projects that they're trying to take on? Well, it's interesting because, you know, we've certainly called out some weakness in payments... Mm-hmm we've seen. We're actually seeing some clients accelerate in that space. Oh, really? Okay. Yeah. I think that's basically a sort of orientation into, we'll call it the sort of newer technology, so the sort of open banking real- Right. Right. real-time sort of payments, areas. In TMT space, we're seeing, clients in the sort of media space, we're building product for them. They are not holding back on that product development. Mm. 'cause it's impactful to their top line. Again, it's a bit of a mixed picture. We see some sort of slow decision-making, a bit of caution, should I say? Right. Right. Right. People will have budgets, and we're told they've got budgets, but they don't wanna start spending it yet and while they read the runes ahead. Right. Right. Other areas where they are doubling down. Interesting. Then, you know, back on, I think this point of due diligence and kind of extra due diligence maybe that some of your customers are engaging in, like, how does that change your go-to-market and your sales cycle strategy? Like, what do you have to provide for those customers? There's no real shift in that, our go-to-market sort of strategy. We're all about providing solutions to clients. We have an industry vertical focus. None of that has changed. It's just an added layer of caution from clients in terms of sort of committing, is what we have experienced. It is just getting clients, you know, comfortable from the perspective of what the technology is going to deliver for them. They obviously have to go through their own decision-making. Right. S ort of process. Wherever we can be helpful with that's what we do. It hasn't had a tremendously different impact in terms of how we approach the situation. You kinda ran through, just a moment ago, some of the different verticals, like, you know, you're seeing some payments weakness, but others come through, et cetera. Can you kinda go through and help us parse a little bit, not only by vertical, but also geography? Are you seeing much difference? Yeah geographic behavior as well? Yeah. Yeah. I mean, we anticipate, funnily enough, North America will be quite weak for us in the near- term. Mm. The sort of drivers for that is, you know, West Coast tech, but TMT more generally. Weakness in financial services, mainly sort of payments, but then some recovery we think in Q4. Right. U.K. is gonna be flat for us, sequentially going into Q3, largely sort of payments driven, again there. We then see some recovery. Funnily enough, Europe continues to be relatively robust at the moment, and it's across all sectors, and that's quite different to what people or many commentators were thinking about. Right. Right. I don't know, November last year. Yeah, for sure. For sure. No, that makes sense. It is different. Back on the PE-backed firms you called out, like, hey, you know, they're kind of evaluating. Or do you feel like... Like, how quickly are their plans getting set? How does that impact, like, what you're expecting from them? You know, is this just like an assessment period, and then they move forward? Or, you know, if there is like a sustained period of less new capital coming in, does that change the type of projects they'd be looking to do with you? I think, there's definitely been a slowdown in new projects. We do work around the due diligence before investment, that has definitely sort of slowed. Mm-hmm. When I'm making comments about PE, and it's about 1% of our revenue at the time. Okay, 1%. Oh, so it's small, yeah. When I'm making comments about PE, we work with portfolio companies. Something like 23% of our revenue is portfolio companies. Okay. It's where they are making decisions to the portfolio company about slow the burn rate on cash. Now, I think it is delays rather than curtailment. We are building typically product for these companies. Right. Right. Right. It is basically, a delay on bringing on stream, a revenue, stream for them. I think it's a, it's a question of delay. I think it's, them assessing sort of macro sort of position, before they move ahead with it. I think that is what is the nature of it. Got it. Got it. You know, I've got my own list of questions here. If anybody in the audience has questions, please raise your hand and we'll get you a microphone. We have a question up here in the corner. Maybe we'll just jump over there. I'm just curious on the European piece, what do you think explains that outperforming kind of everyone's expectations? I don't know really. To be honest, inflation is high in Europe. We've certainly been thinking more from a sort of labor perspective for ourselves. We've been going through our main pay round for which is January, where we have not been giving inflationary matching pay increases basically because we're cognizant of the market. The demand is relatively solid, basically, and that's across all of our industry verticals, whether it's payments or financial services, TMT, other as we call it, which covers things like mobility and health tech, et cetera. We have seen weakness in retail isn't a big deal for us. It's about 5%. We've seen that across the sort of piece. Retail is the only place where we've seen a bit of a slowdown, actually. Other areas, you know, continue to be good. Anybody else at this point? Like I said, as we go along, if you wanna ask a follow-up, just raise your hand. Thanks. My question is, as you sort of talk to customers, I think it sounds like you saw some customer behavior change. Have they signaled, like are there, call it, like checkpoints throughout the year where they'll reassess given the like sort of weirdness of the year or anything like that? No. No. No, they haven't said, let's see what things are like at Easter. They're a little bit, let's see how things unfold, whether it's week to week or month to month, basically. What do you think kind of explains the improvement you saw when you did? Well, I think it was just a delay. I mean, people have to get on with things. Think about what we do, is we're building product, which is around sort of acceleration. It's top line rather than, you know, bottom line efficiency. If they're gonna proceed, they need to proceed, and it's basically the rate at which they do it. Thanks. Got it. You know, back on, you mentioned and you'd called out the softness in West Coast tech, et cetera. I think that's understandable, especially when we read the headlines about like this company, that company, et cetera, and what they're doing with headcounts, et cetera. Is that all there is? Another question that we get is, like, is there something that's happening competitively for Endava? Are you seeing newer players or at least other players that you hadn't been running into as frequently before expanding into the space or anything like that? Competitively, no. I think the, let's say, activity levels have come down basically, so you'd expect it to get more competitive. It isn't. We're not seeing more of the peer group. We're not seeing new players, you know, come into the space. It's, it's mainly sort of client driven in some respects. Right. Right. Right. Right. Right. When we see sort of, these sort of situations, we tend to get more, it's more of a volume thing. Okay. It's the rate at which they proceed with things, rather than, you know, push back on rates. 'Cause I think if people, in a sort of situation, it's rates about who, you know, who would they go to to sort of, you know, displace us, so to speak. Right. Right. We haven't seen any of that activity. Back on the payment space, you mentioned like, you know, there'd been some weakness, but others coming back. How much are new initiatives driving the conversation and the engagement right now? I'm thinking of things like whether it be the concepts around open banking and APIs or FedNow is also, you know, supposed to start to roll out at least for some member banks starting in June and July. How much what are the kind of the buzzwords, if you will, that are driving engagement and interest right now? There's definitely as a backdrop, given the sort of. Mm. in the payment space. There seems to be a rotation out of, let's call it older technologies like, merchant acquiring platforms where, clients are increasingly talking to us about, real-time banking. Right. Right, right, right. Right, right, right. Right, right, right. Right, right. Those new technologies, which is where Endava tends to focus. We tend to focus on acceleration and change. Mm-hmm. We're in the right sort of space for that. We've seen a rotation off and when people are rotating from older into new technologies, they don't tend to invest in the older technologies. Right. That's right. It's a, it's a maintain sort of level. It's a, it's a natural thing that happens with us anyway, where a change to top line growth, enable a company. As that sort of change in demand happens, it's natural. What happens with those, they're not legacy, but they're older technologies. Mm-hmm. There's no investment. The client can either decide to maintain them themselves or somebody else sort of does it. Okay. We sort of move on to the new. Got it. Got it. What other types of projects are you seeing clients prioritize right now? I mean, we hear a lot about cloud optimization initiatives in our conversations, but, you know, how are you at Endava equipped to capture some of this demand? You know, are you seeing those kinds of requests like cloud optimization or what are the things people are asking for? We've always sort of operated in cloud. Okay. of the solutions, we provide. We haven't really done lift and shift, for want of a better word. When we're working on a solution with a client, it will always include, cloud because- Okay. It's part of, the experience for clients and customers. It's, it's not new. I mean, there's definitely talk about, it's probably not the right word, but overcapacity in cloud. It's like the engineering sort of- Mm. platform and surplus capacity. I think it's now moved on to how do clients and customers get the best out of the cloud, which is what Endava does. When you start to look at those solutions, does it make much difference when they're trying to optimize on cloud? Like, are they trying to optimize on cloud from a single cloud, public cloud vendor or maximize across? Does that make much difference to Endava, you know, in terms of the types of solutions that you can help develop for customers? Not really. I mean, we have relationships with all the big. Okay. -cloud providers, and we're advisor first and foremost. We're agnostic basically. Right. Right. the solutions that we recommend even though we do have these relationships. There hasn't been any real change in that. Right. Let me ask about where now the rubber starts to meet the road in terms of pricing. You've mentioned that you've seen some price increases coming through. I mean, I can't imagine that clients are always receptive to that. No. you know, I think there also has to be an acknowledgment like, "Look, this is the world that we were in, where we're in now. Yep. Yep. what you have to do." What are clients leaning into versus pushing back and how, I guess more importantly, is that contemplated in your outlook? It's not as positive a pricing environment as it was last year. Okay. We think we will get price improvement. I mean, in terms of the guide we factored in, no price increase in the current quarter as of Q3, but we will get pricing as we go out. It just won't be at the level that we've seen it historically. Historically, we've seen sort of quarter on quarter... Right. Right. Right. Right. increase in, you know, rate per man day. What's important for us is to get the cost base right, basically. We make that decision when we do the main pay rise every sort of January. We're no longer in a hot labor market. Mm-hmm. Mm-hmm. We, as I was saying earlier, we've just done the main pay rise. We have not paid at the level that we did last year, despite levels of inflation being high in the countries that we operate in, because it's based on what we think we can recover through rate-. Right. Right. Through the rest of the year. We think we can get rate increases, although they are gonna be modest. When we get pushback, from clients and you do because they're facing headwinds. Right. in a sort of macro, what we tend to lean on is can we get more commitment from you, which is volume. Right. which is multi-period, and then we can have that conversation about rates. What about your customers like... I can imagine, I don't know this, which is why I asked the question, but I can imagine a scenario where like if I'm a customer, traditional customer of Endava and I'm looking at, hey, you know, I was consistently being outbid for engineers by Google and Facebook, et cetera, maybe there are projects or types of projects that I might wanna consider or think about insourcing versus turning to somebody like Endava. Are you seeing that much in terms of your conversations with them and how does that impact the type of work that maybe customers are looking to Endava to do? I think it depends on the situation. It depends on their cost model. Mm. fixed cost or variable costs, we're variable costs. I tend to think of Endava as providing innovation at scale at reasonable price. Right. Right. When we're building product for clients. We could be, I don't know the exact figures, but we could be like 30% of their cost base, or we could be 90% or 80%. It will depend on the philosophy that client has, basically. Right. Clients can change their mind. They can have a change in, you know, the team. Yeah. They may decide that they want to take it, you know, in-house and manage it, then we will have to flex down, then we will have to, you know, redeploy, you know, to other sort of clients. It's a philosophy for clients to do. I think the thing that when they do that is they sometimes struggle because we may be and we're quoted as sometimes being expensive. What we're able to do is provide this innovation at scale, and we provide very good value. The managing of the in-house people is difficult to do. Right. Right. Right. Because, you know, you have to manage attrition, you have to keep balanced teams, and you have to keep the workforce sort of motivated. It's surprising how difficult clients find that. Got it. You mentioned on the last call that FIS remains a top 10 client. Any incremental color there on conversations with FIS, at least as it pertains to future opportunities? I mean, I think you called out there may be some long-term opportunities for additional work due to them spinning off Worldpay. Yeah. I think that would make sense. Can you help us think about, like, that and potential magnitude? At the same time, how should we think about potential for at least near-term delayed decision-making? I would think we're in a little bit more of a waiting pattern as it relates to what they do corporately and structurally. Yeah. FIS Worldpay, we do most of our work for the Okay. part of FIS. We're a strategic supplier to them. When they took the cost reduction exercise, we're a strategic partner, we have to help them with that. We've reduced the run rates with them. Instead of being a sort of 7% revenue client, they're 5%, and I think that's what they will be for us under FIS ownership. Funny, we have heard they think they may have cut a little bit too deep. Mm. in the area that we're in. We're doing work in the new product area, it's Open banking, et cetera. Yeah. Yeah. Yeah. The demand is there. We are talking to them about multiyear, you know, sort of contracts. The mood music is very positive. I think with the demerger, we know the guy who is the CEO of the business. Yeah, sure. You do. sure. You do. We've worked with him in the past. Yeah. I think they have a different investment philosophy than they did under FIS. I think it all goes well for us, and we just have to wait to see what plays. I think, certainly, I think the run rate would be as it is at the moment until they are spun out. Okay. I think it's positive for us thereafter. Got it. Turning to the supply side of your business, I mean, obviously, that's the real revenue generation is delivering the supply beyond to the demand at hand. How are the demand dynamics impacting your hiring strategy, particularly given what seems to be have been a buildup in bench? How do you balance that goal with, you know, go to market and trying to acquire experienced talent right now? we always hire into a demand curve that we can see through our forecast in progress. Okay. It's this pipeline thing. If we see pipeline slow like it did before Christmas, you start to build a bench, which is what we've got at the moment. It's higher than we would like it. It's over sort of 10%, which has an impact on margins. Our gross margin will be impacted by that. In terms of going forward, based on what we can see, apply by the guide, we see some sequential growth going on, but we won't grow the headcount into it. Right. Right. Right. Right. We'll have a bench that we aim to sort of burn down. We will still recruit because it'll be recruiting for skills that we can see in that sort of shape, but we will not recruit at the rate that we have done. Looking at that bench, you look at it to assess whether you've got the right skills for the demand that you can see, and, you know, who is being deployed. We look at them as well. It's always a question of looking into the pipeline, the future sort of forecast. Have you got the right shape of teams on the bench to be deployed for that? That is the key sort of driver. If we don't see that pipeline, we slow recruitment. speaking of, you know, just continuing to develop the supply side of things, expansion into Asia-Pacific has been a priority for you. How has the Lexicon integration been, and how do you think about the opportunity incrementally there? It's progressing well. It's a long way away from us and you, but we think it's an underexploited market, certainly, Australia. Okay. We think there have been a number of mid-tier companies that have grown up in Australia. I think it's because they weren't receiving... These are clients in Australia. Receiving the level of service they expect from the bigger players. The Lexicon is primarily onshore, which I think most of the businesses are in Australia because it's a long way from anywhere. Right. Right. They have been looking to develop a nearshore capability, which is places like Malaysia or Vietnam. So they had started to explore Vietnam. Now we are in a modest way in Malaysia and Vietnam, and we would want to build that nearshore capability with us, what we do. We think Australia is an end market, and Singapore are underexploited in terms of what a firm like Endava can have to offer. We can add to it through our distributed agile, you know, methodology through building out basically Vietnam and Malaysia. We're excited by it. We wanna grow Lexicon, and we're looking at, you know, other opportunities in the region as well. On that point, what are you seeing in the acquisition pipeline and, you know, I guess how has the current macro environment impacted your acquisition strategy, but also, what is it doing, any movement on valuations or that kind of thing? Well, there doesn't seem to be much movement on valuations. Not as much as there should be. No, exactly. I mean, we had a very interesting opportunity, just before Christmas, and the multiples were a lot higher than we were prepared. Right. to pay for it was a very nice sort of asset. We weren't prepared to pay. We have stuff in the pipeline that we're hoping to land that will, I think add the additive to Asia-Pacific and also North America, not forgetting. It is one of the biggest markets that we need to establish sort of critical mass in. There's stuff in the pipeline. It's still slightly elevated. Right. Right. Right. than probably you'd expect in terms of multiples. You know, these rare assets, you sometimes have to pay what you need to. On some of those, you know, particularly if it's a, like, a good asset but the valuation's high, like you said, you just said, is that maybe you need to be prepared to pay for things that are particularly good. You know, what's happening with those where you just can't quite reach a meeting of the minds from a valuation perspective? Is it like, well, you know, hey, let's see what happens over the next 12, 24 months and see if there's something that makes more sense? Or- We'd only buy a business that makes sense for us. Right. Then it's, is it sensible in terms of price? The other thing sort of going through everybody's mind at the moment is the macro environment. For sure. If businesses aren't going to meet, you know, what's in their projections, then, you know, are you gonna cause a problem for yourself? We don't buy businesses that are gonna be dilutive. We want them to be. Mm-hmm. Mm-hmm. Mm-hmm. additive. you don't wanna increase the sort of risk by overpaying. I think there's an element of caution. I don't think private multiples have come down enough. Right. Right. Right. I think these expectations are overdone. We will pay for the right opportunity. Right at the right price. Mark, that's all the time we have. We really enjoyed you having been here at the TMT conference, look forward to chatting again soon. Thanks very much. Thank you. Thank you.