Summit. I'm Bryan Bergin, equity research analyst at TD Cowen. Very pleased to be kicking off day two with Endava, a leading digital engineering and increasingly diverse services vendor. With us today, we have Mark Thurston, CFO, and Vince Francis, Global SVP of Strategy. Guys, thanks for being with us today. Not at all. Good to see you. Thanks for having us. Thank you. For the audience, if you want to insert any questions into the conversation, you can do that. Use the MeetMax platform, or you can just email me and I'll work it in. And with that, we're going to get right into it. I think intros are probably make the most sense first. Mark, I think most investors know you and your experience at Endava, but Vince, maybe provide a brief overview of your background, your tenure at Endava, and your current responsibilities. Yeah, absolutely. I hail from Toronto, Canada. I've been with Endava for about three years. I lead our Endava X strategy group. We basically work with customers on a daily basis to ensure that they're looking to brilliantly solve the correct problem. And so we get involved talking through technologies and options and all of the facets that come into a project to make sure they're going to have the best outcome possible. Very good. Mark, how many years is it now at Endava? Blimey, that's asking. It's about nine now, I think. So not as long as John, but getting there. Very good, very good. Let's dig in on core monetization. It's been a big topic, certainly a lot of time spent at the recent investor session dedicated to core monetization. Can you elaborate on what that means and really how is it different from the core software development work that Endava's historically been known for? I tend to think of it as adjacency. I think if you think about the origins of Endava, we have typically, like most digital players, worked around the core. I'm going to start waving some hands around here, so if you think about the core, Endava has usually built at the periphery where we've either been building products, so you can think, say, in the payment space, it's been things like e-commerce gateways and merchant acquiring platforms and connecting into the core, but we would not go into the core, so we've been building the digital products. With the merger with GalaxE, who largely don't do digital work that we do, they tend to focus more on the core using an innovative approach, using tools basically to actually map out what parts of the core does and then how to modify or digitize it over time. Now, bringing it together with Endava, we have our own tools which we have used to get into the core where we've needed to, such as Chronos, and we showcased Morpheus and Compass, which are our AI tools that take the inputs from these diagnostic tools, for want of a better word, so putting the two businesses together from Endava's perspective creates an adjacent sort of market so that we're not only outside the core, we can start to modernize the core. Okay, okay. So the acquisition of GalaxE is really the catalyst that lets you lean into this area. Maybe talk about how you think your positioning is and that kind of right to win question? Yeah, I think it's interesting. Mark hit it a little bit with the tools. So Endava's always worked around that sort of periphery. We have some tools and some history over the years of going into the core, being able to connect up from an API perspective or just from an overall sort of application perspective. When you combine that with the GalaxE acquisition and the toolset that they bring, now we've got an extremely robust offering of what we call accelerators or tools that allow us to get in there. And so there's a lot of IP and there's a lot of patented tools in that space. And when you combine that with our sort of experience across it, it allows us to get in there and manage that whole process of core modernization in a methodology that sort of addresses the risk of core modernization. And so one of the things that historically has happened from a core perspective is when you've had to get in there, it's been a monolithic project where you update the core all at once. And with our toolset, we're actually able to subdivide that core into more manageable bits and address the risk appropriately. When you sort of combine that with Endava's perspective around being a true partner, having industry experts on our staff that actually can know the effect of the changes and know sort of the impact of what we're talking about and allow us to walk a customer through that appropriately, that becomes a huge value sort of opportunity for them. And I think one of the keys is in the name itself. It's not core update, it's core modernization because in that process, there's a new way of doing things. There's new technology, there's new capabilities. The best way to update something is to stop the need to do it entirely, and so being able to walk somebody through that and modify the processes as well is also huge, and I think that combination is why we're positioned well. Okay, okay. That makes sense. So a much broader proposition likely also leads to a much broader set of competitors as you're going after these types of deals. Maybe who are you seeing out there in the market that is different maybe than before? And as you think about, again, the competitive differentiation, what do you have to do differently in order to win against likely larger scale players in the market? Yeah, I mean, it's many of the same. It's EPAM, it's Globant, it's Capgem, it's Cognizant, it's those folks. We come at this though from a practical perspective, right? Engineering is the core of Endava's history. We've been doing it for over 20 years. And so we look at this as sort of a new mechanism for dealing with a problem that's been around forever. So technical debt is something that all organizations have and that sort of has expanded over the years. And the risk-to-reward ratio of addressing that has always been out of whack. It's always too risky to go into a core and adjust the economic engine unless you've got a huge value prop. And so AI is the value prop now. Everybody knows it's a disruptive technology and it's coming in and it's forcing or rather it's sort of driving people to want to update that core, and then in order to look at it, especially from the CFO or C-suite perspective, it's all about risk. And so our accelerators, our data-driven sort of methodology, the fact that we're industry agnostic across that with that toolset and that sort of IP and the patented set really allow us to get in there and offer a risk mitigation strategy. There's an old story about how do you eat an elephant? You eat it one piece at a time, and core modernization is kind of the same thing, right? With our toolset, we allow you to do a piece-by-piece sort of approach through that, and that makes it easier and more palatable to get in and do that. And so it's really a risk-reward conversation. Got it. Okay, okay. Makes sense. Maybe let's talk about the large deal dynamic here. So as you get a broader proposition, you got larger deals that also move through the pipeline. But even before GalaxE, there was talk about larger deals for Endava. Can you just give us an update on kind of what you're seeing as far as closures go and how those are progressing through the pipeline? So the pipeline is, and I'm talking really about the large deal pipeline, is growing. It's marginally up when I look at it over a sort of three-month period. Still moving slowly, which we've seen for most of 2024, where we've had sort of some of those larger initiatives are just slower to land. The decision-making is slow. There was a little bit more optimism in recent weeks from the sales team that it was starting to thaw a little bit. But I think we'd need to see what it feels like in January and February to see whether there's some sort of meaningful sort of movement there. So it's still growing. It's still there. It's about the sort of conversion of it, the speed of it. Okay, okay. That's clear. When we talk about large deals, it does vary company to company. Any sense of size you can give us like ACV and how that compares to history? So I mean, I think one of our larger deals we signed last year with Mastercard was about $140 million, which was over five years. So that is big by Endava standards. The deals that we would call big now are ranging between $5-$50 million, etc. So they have scaled up. And the reason they can move around will be around the period of commitment. So five years, $140 million. Some clients aren't willing to do that. So they may rein it in from a three to two to a one. So that can alter the size of a sort of spend dependent on the appetite to commit, which again, is given the current environment, clients aren't that ready to commit longer sort of term. So the sizes are there. They're similar size to what we've seen historically. Sometimes we're seeing some very big opportunities, but it's actually how they get scoped as they go through that scoping and solutioning phase. It's not that you just wish it would move quicker. Yeah, for sure. Sure. Okay. I guess as it relates to what you're seeing in that pipeline and those conversations of large deals, is it vertical-specific in any way? Are you seeing it happen more in any particular places of the portfolio, or is it kind of a broad-based statement across the industries that you serve? It's pretty broad. We're seeing, funny enough, more financial services, in particular sort of payments opportunities come through, so it's slanting more towards our core sort of strength, which is in the payments and the banking capital markets, but there are some good opportunities that are outside in terms of size that are quite different to financial services, so they will cover mobility, particularly sort of automotive and other segments, so it's a broader mix. It represents sort of mix of business. We have a higher sort of level in terms of the company, and it's more recently, I think, slanting more towards sort of financial services and payments. Okay. Okay. That's good to hear that heritage core really starts to pick up as we go through calendar 2025. Okay. Maybe just we've been talking about large deals, but in general now, we can kind of go at a higher level for demand and current business dynamics. Maybe just you touched on a little bit there. What are you seeing there in the market as it relates to maybe that sentiment, that decision-making, the willingness to actually ramp signed work? What can you say about that right now? It's still subdued. It's still slow progress in terms of getting clients to commit and decide on the exact scope of what they want doing. It is starting to move to the right, which means it's moving towards sort of the contracting phase. It just feels slow, and I don't think any of that has really changed during the course of the current sort of fiscal year. I mean, there might be a slight thawing, but again, I don't want to sort of set expectations because it could freeze again. That's how it sort of feels, so it's broadly the same to what it has been, but the people, certainly the big sales team, big deal sales team, are feeling more positive, but we need stronger data points before we get convinced there's a change underway. Okay. And you've got obviously a June fiscal year end, so you do lap the calendar here. As we think about clients at this time of the year, enterprises having conversations about their budgets for the forward calendar year, where are some of these clients as it relates to their 2025 budget conversations? And generally, when do you see them firm those up typically? We have conversations with clients as we go into the year, but you never quite know where they're going to land. I think about this time last year and actually even the previous year, you will get clients talking about doing work, but then still holding on to budgets as you go through January and February. So it begs the question about whether they actually physically have them or not, or they're just holding off or conserving them. So in terms of any change in sentiment, this signing calendar 2024 and calendar 2025, no. So there's no, we're not hearing things are going to be markedly improved going into 2025, or we're not either hearing that it's going to be any worse. So it feels a little bit like status quo. But we will see actually when they start to spend or otherwise as we go through the early months of FY 2025, calendar year 2025. So it's difficult to read. It typically is around this time of year. You sometimes get some acceleration where people want to spend budgets, or you get some sort of caution that arises as well ahead of actually in the start for some companies in the new fiscal year. Yep. Okay. As you build the forecast for your Fiscal 2025, you do have, I believe, a second half kind of an acceleration or sequential acceleration at some point. Can you just talk about the underlying assumptions in that forecast that you built? Yeah, yeah. So we haven't fundamentally changed the way that we do anything in terms of forecasting. So it comes bottom up. It's split into contracted and committed. And then it is looking at the pipeline of opportunities. And I think what has caught us out during the course of certainly as we went through this period last year was the speed of pipeline conversion slowed. Now, we've taken that on board as we've gone through calendar 2024 that things don't move at the rate that they used to. And so we're applying extra degrees of caution against that pipeline and how quickly it will convert. And equally, in some respects, how quickly some of the work will sort of ramp. So it's going through the same methodology. It's applying a higher degree of skepticism and prudence around it, but it is based on the same metrics. There is a ramp. It's not as significant as you may think. I mean, on a quarter-to-quarter basis, Q1, I think we were on a constant currency basis, about 0.5% up, which is better than a 3% organic downward sequential. The guide for Q2, which is the quarter of December, is about 1.5%. I think we just pick up modestly from there to like 3%-4%. It's an inflection, and it's underpinned by the pipeline. Okay. Okay. Makes sense. Let's dig into payments. So this certainly I want to kind of really get into some of the meat of what's unfolded over the last, let's say, two years or so in this area. Payment certainly was or is a core to the company. And historically, it was like a nice strength that drove good growth in the business. Naturally, certain concentrations always catch up with services companies. And that's certainly happened here over the last two years. So I want to just understand what's unfolded there to have kind of the boom and bust spending behavior in that vertical. So I think there was definitely a boom. I think there was a lot of competition for differentiation in the space. I think the economics of it changed. So whilst volumes were increasing and people were chasing with innovative products, which we helped them build, I think let's call it the price that they were making on those volumes that started to come down. So the economics around the level of spend that they were putting into differentiation caused some players to pull back on product development. And we have seen that I think we're down some like 30% almost sort of year on year over that sort of period. We felt it. There There are different dynamics to a certain extent going on. Overall, it has contracted as a result of that. But if we think about our largest clients, with them, it has been a change in the shape of the product that they're rolling out. So they have paused, let's call it, product development. Outside of that, and it's been real-time payments. And outside of that space, we have actually grown, but it's from a small base. So it hasn't offset that sort of decline from that large client. And then the second largest client in the payment space, it's been the opposite dynamic where the revenues have been quite subdued because of the decisions around product. Now, they have an ownership change where the new owner has recognized that the product set is tired and needs to be brought up to date and invested in. And we are benefiting from that. So there's an element of different companies in the portfolio, maybe at different stages in terms of their sort of product set and where the investment cycle is. So we sort of have a decline coming down from a large one, offset by the second one growing. The third largest client is coming down. And then you have a whole heap actually starting to invest again. So you've got different sort of cycles going on there. But generally, I think there's too much sort of capacity in the sector. And there's been some sort of normalization. I don't think it will be forever. It looks stable now, but it's difficult to see at the moment what the catalyst for increased sort of growth will be. Okay. I mean, yeah, the sector, I guess, it did surprise in the September quarter. It did perform a bit better than I think expectations and certainly what it was doing in 2024 and parts of 2023. Is that sustainable? Is that some of these moving parts that are working themselves out? Maybe just talk about kind of that visibility to this particular subgroup in the course of this fiscal year. I think payments has stronger visibility because we're deeply embedded with those larger clients where we do have multi-year sort of commitments. So we do have insights into the sort of pipeline of work. But we're not seeing any ramping apart from the second one where it is moving up significantly sequentially. But I think overall, it just looks stable. My sense is it is bumping along the bottom, certainly for the next six months or so. That may change. We were talking earlier about as budgets as you get into calendar year 2025, we may get some stronger views about what they plan for the back end of calendar 2025. But certainly at the moment, we're not getting any change in terms of anything beyond being stable. Okay. Okay. Understood. Want to go to a higher level here to talk about kind of the structural demand drivers for the space? So if we step back, this industry and digital engineering, digital services was growing 20% + organically for some time. Obviously, we had a big spike with COVID. We've had digestion after that. As you think forward and you look at the conversations you're having with clients today and assessing that pipeline, are there structural considerations that are different now versus what it was several years ago that were driving that level of growth? I think a big debate for the street is kind of what is that new normal for this category going forward? What are those structural considerations? I don't see any reason why it wouldn't go back to the 20% because I think what we did and others was building out competitive products that gave the customer a differentiated advantage over their peers, and I don't see why that should stop. I think AI potentially has put an overhang on that level of investment, I think, while people have been thinking, actually, what does it do and how do you deploy it at an enterprise level, and certainly, that may have delayed spend that we've normally experienced around digital, but if you think about AI as a disruptive technology and what firms like Endava have done, which is work with disruptive technologies and build products and accelerators for customers, we should benefit from this very strongly. I think we are one of the AI leaders. We'll obviously sort of talk about it, but with agentic AI, I think we're building some exciting sort of proof of concept. So I think we will return to those levels of growth. The question is, when is it going to happen? And I think at the moment, there doesn't seem to be a killer app out there, which is this is the example of where AI has been deployed at scale in an enterprise and the peers have to respond to it. There's not this aha, that's what you do with it. And we need to have that put in place. There's an element going back to the core modernization where people want to be ready for it when that aha moment arises, but we haven't yet seen it, I don't think. Okay. Why don't we dig into that now as far as Gen AI goes? We'll start with demand, and then we'll go into the delivery side after that. As far as the demand goes and the conversations with enterprises, you just talk about how that's evolved over the last 12-18 months. As it relates to the types of programs you're working on with them and the scaling of certain programs, give us kind of the state of the union on the actual Gen AI demand in your pipe right now. Yeah, I think it's safe to say every conversation has an AI component to it, and as Mark is talking about, not everybody is ready to implement AI, but people are talking about it's a disruptive technology to their space, and they need to be ready for it, and so there is tons of conversation around core modernization, making sure that your data set is in good structure, making sure that your business is ready from a process perspective, but there's not a simple binary answer that it's this way or that way. Customers come from us at different starting points. Everybody knows that disruption is going to hit them, and some people, some industries have had the luxury of sort of sitting and not really implementing for a little while because everybody, all the competition in the industry almost sort of paused together. And what you're seeing is as the technology has been maturing, the rate of change from release to release of AI models is that the percentage change is dropping. And so with that drop, you're getting more confidence from a business perspective to start to invest because they're not at risk of sort of being disintermediated by the changes in the technology. What they build on top of it is going to have sort of a lifespan with it. And so you're watching customers now start to either get in and do those proof of concepts around what they want to build out or at least get their house in order so that they're ready and they can respond to it. I mean, like Mark said, there's been no killer app in the space where everybody points to it and go, "Oh, that's exactly what happened and why I have to do it." But there's a number of commonalities, right? We're talking to everybody about agentic workflow. We're talking to everybody about keeping humans in the loop to mitigate the impacts of hallucinations and some of the other problems. Everybody's talking about data maturity and that process optimization. As I talked about before, the best way to optimize a process is to actually not do the process anymore. And so working that through and understanding how to modernize it and what happens from there. But I think the biggest change that we've seen is the understanding that AI has become an additive technology. It's not a replacement technology. People have stopped talking about, "Well, it's going to take an IT department away. It's going to get rid of all developers." They're looking at how can they do more with what's there, either faster, either do more, or either increase their scope, looking to gain further market share or deal with additional capabilities they didn't have before. Okay. Okay. That's interesting. Yeah. That's been at the big two. And in some cases, anecdotes of Gen AI being a substituting other parts of the budget over 2023 and 2024 in services, I guess as education is more prevalent on the space, as people have gone through their science projects and their proof of concepts, they've got a better idea of what they might be able to do with this. As you think about 2025 for client spending, do you think Gen AI is actually going to be driving net new spend in services, or is there still kind of some of that substitution risk in some of these budgets? Yeah. So at the investor day, we had a gentleman from TD actually talking about sort of the impact of core modernization, what happens. And so Endava has typically sort of, if you look at a budget for an organization, they spend about 80% of that budget keeping the lights on, making sure their core systems are up and running, making sure that the functions of the business are still running. And Endava has typically participated in that 20% of the discretionary side. And so what AI is doing is it's allowing us to go into that core modernization and change that ratio. And so if the budgets are staying the same, it's basically extending out that ratio. Maybe we can take it down from 80% to 70% to 60% to 50% with some modernization in there, freeing up additional work for us in the discretionary side. Because when push comes to shove, it's always the discretionary that gets squeezed a little bit, not to keep the lights on, and so if you can change that ratio, you've adjusted the total market for us a little bigger so we can get more in that space. Okay. Okay. Yeah. Good nuance there as it relates to that favorable mix shift in spite of what might be a similar level of overall spend. Okay. Yeah. Let's talk about usage now as far as what you're doing in Endava in the software development lifecycle, the usage of agentic. And how have you approached this build versus buy choice around delivery? Yeah. The reality is that many of the models out there actually function similarly in similar problems at the generic level. And so, of course, there's a step to figure out which model where you're going to go with in the beginning, but to really sort of optimize, it's around the nuances of implementation. It's around the nuances of data. It's around the process modulation that gets in with it. And so that's really the focus where we spend the time working it through. It's not so much as what the model is and where it's starting, but it's the how are you training it, how are you prompting it, and what's the data input that goes into that. One of the things you're seeing in our core modernizations, we have a product called Compass. And so Compass is an LLM overlay on the core modernization process. What we do is we input all of the output actually from our toolset. All of the work that we generate from reviewing the code, looking at the capabilities, looking at the state of what's there, that becomes an input into the LLM. That allows us to drive further capabilities and further value through it. Okay. What about business impact? So if you think about ultimately more and more usage of agentic within the construct of delivery, clients over time will get smart to the amount of productivity that service providers potentially are accruing by using these tools. How does this all evolve? And how are you thinking about, should there be notably different commercial constructs and terms over time in these models? Yeah, I think there will. I think it will be baby steps in some respects. When I say the AI work we're doing is still time and material, and I think it will remain so for a period of time. But I think as we get the, let's call it the efficiency productivity improvements, and therefore you start to break this linkage despite having a human in the mix between the velocity at which you deliver work and the headcount, then clients will, I think, ask more for outcome-based. And it doesn't mean deliver me this for a certain price. It may have SLAs around it. I mean, typically at the moment in our more sophisticated, larger clients, they're not fixed price, but there's an unknown quantity of spend, and the client expects a certain level of productivity, which it doesn't measure in terms of the human hours going into it. It can be volume of story points. So it's basically the velocity at which work or product is being delivered at. So I can see it evolving such that we will have contracts that will be based on, let's call it throughput velocity work. And it is up to the provider, i.e., us, to work out how to do that and capture margin. So the baby steps will come from us as experimenting with agentic AI and how they supplement teams and how we go about that work so that we can be sure that we will do it. Because we're expert practitioners, we should be ahead of clients in terms of being able to price it and maintain margin. All right. Understood. Well, we are up with time. Mark Thurston, I want to thank you for your time today. The audience, I want to thank you for joining us. Everybody, have a good holiday season. Thank you very much, Mark. Cheers. Bye.