Today at the Citi Tech Conference, I'm Brian Keene. I cover IT services for Citi, and we're excited to have Endava here. We have both the CEO, John Cotterell, and CFO, Mark Thurston, who will help us understand the recent results and the guidance. We can go through a list of fireside chat questions. If you have any questions in the audience, just raise your hand and we'll get to you. Gentlemen, thanks for being here. Pleasure. Thank you. John, maybe you wanted to start just high level, thinking about the industry. Obviously, Endava has been around for many years and seen many different cycles. Help us understand where we are in kind of an IT services demand environment over the past few years and where we are today. Yeah, certainly. I mean, it's been interesting. Let me go back to when I started the business. I'll be quick. In the year 2000, we were just coming into the end of the dot-com boom, and things crashed and went very quiet for a while, largely as investors drew back from investing in web solutions in their businesses, et cetera. Then as we got the engineering right, that set off the digital transformation wave, which Endava rode for 20 years through to around 2023. The end of that was a massive boost in spend coming off the back of COVID and all the technology appetite that came through there. As we've got into the last two and a half years or so, we've had a couple of factors. One has been a desire in enterprises to control their technology spend more effectively after the exuberance post-COVID. Alongside that has been the macro getting tougher. We've had AI come through. You pull all of those three things together, there's a big shift going on in people's heads about where they want to spend their money, how they want to spend it, and so on. That's leading to a bit of a hiatus, very similar to that hiatus back in 2001 - 2003 that I was talking about. Would you call it a digital transformation pull-forward due to COVID and some of that spend has to take a few years before that? Exactly. That's exactly how I'd highlight it. CFOs have grabbed control of budgets again greatly following that. You've got a little bit of a conflict where CFOs and our clients are asking for better business cases. At the same time, you've got this massive new technology with all the uncertainty attached to it, making it difficult for CTOs to get those business cases as firm as CFOs are looking for. So. For the larger projects, loads of small stuff going on. Right. In this sector, you know, the sector IT services hasn't been performing well in terms of stock performance. Your peers, obviously, Endava is down towards its lows. The big debate, obviously, is Gen AI. The market is saying at this point that Gen AI must be bad for IT services, and it's going to create further pressure. I don't think you believe that overall. Could you maybe just break out Gen AI's impact separately to the services industry and maybe what it means for Endava? Yeah, I think, just to unpack it, the market uncertainty is, does the productivity that comes from the use of these AI tools mean that fewer people are needed and therefore IT services experiences a headwind? We see quite the opposite. We see a wave of demand that comes through as the engineering gets sorted, as those business cases get firm. There is a lot of transformation work to be done, which is the traditional stomping ground of IT services in general and Endava in particular. We're working on that ideation phase that we've always done through the digital transformation wave. What's changed is that used to be a do the ideation three to six months into that process. Clients would commit and we'd see the production system built with all the expansion in activity come through. What we're seeing at the moment is we do the ideation, OpenAI comes up with a new technology or Google launches Agentic AI or something, and clients go, oh, can you just have a look at that new technology and see whether that's a better route forward? These ideation phases are spinning out, actually some of them into 18, 24 months now. We're still being paid to do that, but we're not seeing the scaling that comes off the back of it. As a result of that, we're confident that there's a lot of work because we're doing all the low-level preparation work. We're just not seeing the button pushed to turn it into the production systems that we saw traditionally over the last 25 years. Some folks will argue that there's just not going to be a lot of transformational IT services work needed to be done for Gen AI, whereas, you know, moving to the cloud or digital transformation created a ton of work because of the automation process, because of the data, use of the data, and the commoditizing of the data. You don't believe that though. You still think there's all through the tech stack, there'll be plenty of work to do for the Gen AI. AI, and particularly Agentic AI, as it comes through, brings even more opportunities. The transformative opportunities off the back of AI are a quantum, it feels like, beyond what we were doing in the digital transformation wave. I mean, just at a very simple level, in digital transformation, we were largely building solutions around the outside of the core. Customer-facing, added value, revenue-driving type solutions, but we didn't go into the core. With AI, you actually need to go into the core because you've got to solve for, AI's got to be able to understand how the bill got created and be able to change it if a conversation with a client requires a change to the bill. Those things are sitting in the core of our clients' enterprises. Actually, the programs that you have to undertake to get the real benefit out of it go much deeper into the client organization, take a lot more engineering. That's part of the reason for the delays in pressing the button. These are bigger programs than we had in the digital transformation wave. I guess the big overriding question is when, when do, and what's holding them back from pushing the button? Some of them are starting to happen. They're not happening in the volumes that we would like to see that are going to push off that next wave with the higher growth rates that we think will come. We closed five of the big deals in Q3. We closed eight in Q4, and that momentum is starting to build. Q4, we had our largest order book ever closed, and it lifted the whole financial year. These things are starting to close. It's not visible in the revenue, and with the macro, we're remaining cautious in our guide. Can you talk a little bit more about the client behavior? I think you've called it before inconsistent, with kind of business priorities shifting. Have you seen any more clarity from some of your clients now? That's where I'm referring to. There is exactly what I was talking about a moment ago with the technology uncertainty. Yeah. Going, actually, we can see a business impact shaping, but just have another look at it again with some new release or some new product that's come. What settled down, if you went back a year ago, people were worrying about security. They were worrying about hallucinations. They were worrying about whether the regulators were going to get on board with what they were doing. They were worrying about scalability. They were worrying about the cost of tokens. Most of those things have gone away from a year ago. You can see significant progress. There's still this high rate of technology change coming through. Yeah. You guys talked about the pipeline and eight large deals. Where is the pipeline now in terms of large deals? I think there was 24 in the third quarter. I don't remember how many there, if you guys are with yesterday, what the fourth quarter is. In terms of, it's not the entire pipeline, but the large deals is, I think we've got around 24, 25. As John said, we closed eight in the quarter, which is part of the guide going forward. The cadence remains. We're hoping that they will speed up, but underpinning basically the guide methodology is where we're not baking in any conversion from those large deals. We've obviously got non-large deals, which is the cadence of their conversion pipeline is in the guide. Those are the subscale sort of deals. The steer we gave basically at Q3 and the preamble for the guide is that the timing is uncertain until we get a better feel for the cadence of those deals coming through. We're not going to put them into the guide. It's more conservative in terms of what we've put out. Obviously, the market has reacted to it. Forecasting when these things are going to land, because they are quite significant, is a significant element in de-risking the guide going forward. You guys measure large deals, how big in size? It tends to be over $5 million. The range is quite big, as you can imagine. Some can be pushing up to $100 million or $50 million, et cetera. That is generally the threshold that we're using. Are there any large deals in the guidance for this fiscal year, or do you wait until you see them ramp before you put them in the numbers? Only the ones that have landed. There's a combination. Some of them are extensions of existing work, so it doesn't change the run rate going forward. Others, it's step change. Some of the deals will impact revenue in the second half, which is why we're sort of seeing that ramp. They will be step change because the revenue starts immediately. Others have a profile where there is that ideation phase, and it starts to ramp gradually. It's a mixture, basically, and those profiles are what we have baked into the guide. What about length of contract? Have you seen any longer contracts or shorter duration contracts in those larger deals? Yeah, so the average is getting a little longer because the larger deals tend to be longer term. I mean, it's one of the shifts that I think is actually really important to just underpin here is that historically, we've had, you know, what is an agile-based delivery method with the best commercial structure for agile-based deals is T&M. You see a lot of time-and-materials business on our books. As you move to Agentic AI type solutions, actually agile is not the appropriate delivery methodology. One of the things that we strongly believe is that, and are actually investing in and seeing a shift back towards in these larger deals, is more outcome-based deals where, you know, using the technology that we're confident in and have a higher degree of confidence in managing risk around it than our clients do, we can actually offer solutions to clients that move towards business impact measures rather than the T&M that was so appropriate in an agile world. That's part of what we're investing in and part of the changing nature of discussions around these larger deals. They tend to have a longer contract firm attached to them as a result. Yeah, I think yesterday you guys were talking about flexible pricing structures and then Endava Flow, which sounds like that's all a part of that. Correct. How does that convert into revenue? Is it quicker into the revenue, or is it going to take a little bit longer to get that full realization, the change in the business model? There will be a balance. Some of them are very quick, and we actually see a very quick step up, not necessarily immediately after signing. We signed one last quarter where the revenue will start in January, but it'll be a step up in January. There will be others that are almost an immediate step up, but then maybe another half will actually be a much slower ramp as we get into delivering the outcomes to the client. Just thinking about the industry in general, as some of the demand has been softer over the last few years, do you still see competitive pricing with some of your peers? Not really. It sounds like a strange thing to say. On average, and it's still using a metric in terms of we're largely T&M and it's the volume of work days we deliver. We haven't seen that degrade significantly. It doesn't mean that pricing isn't competitive. Certainly, in terms of some of the extensions that we've done, we've been pushed on the rate card. Also, some clients are looking for extended payment terms, which was also part of the reason for part of our lower free cash flow in Q4. On average, we're not really seeing it. There's no pricing downward movement and there's no increase. You get circumstances typically with the larger clients where they will push quite hard. That's not unusual, actually. That's always been a cycle that we've seen, that we start off with ideation work on very high margins, very high added value. As you scale in a client, we come under pressure for the volume commitment that we're getting from them to actually sharpen the pricing a little bit. That's not unusual. That's been part of the business model for the last 20 years. We're not seeing quite as much of the new stuff come through for the reasons we've just been talking about. The fact that we're maintaining a stable price in that scenario is actually quite a good sign, I think. Yeah, I think it was pointed out that the number of clients is dropping. I think it was 619, but it sounds like that's part of your guys' concerted efforts maybe to focus on larger clients than the long tail. Is that the way you guys are positioning it? Yeah, definitely. We've had a very long tail, which actually, you know, a lot of smaller clients who are in the, you know, sub-$10,000 type territory who actually cost more to support and operate than we're even getting in revenue. We're starting to trim that down as part of sharpening things up. It's a difficult thing to do when we're under revenue pressure, but we think it's the right thing to do for the business. We're doing that as part of this pivot. The top 10 clients as a% of total revenue, I think was 37% in the end of this fiscal year. That's up obviously from 32%, which is, you know, part of this maybe concentration and focus. Can you talk about what you're hearing from your top 10 clients in terms of spend and outlook? Yeah, so what you can see in there is the top clients are remaining committed to us and continuing their spend levels with us and actually increasing across the top 10. A lot of the larger programs that we're shaping are in that larger cohort client. We're obviously combining that history and experience we have with them with the new transformative opportunities. A fair amount of the much larger deals that are out there are concentrated on that larger cohort of clients. We could see that number accelerate, move up if the right deals, the larger deals come through over the next couple of quarters. I was hoping you actually are totally comfortable with that. It's the right thing for us to do. Yeah, yeah. I mean, we'll see that show up in the numbers, I'm sure, and it's showing up already with the higher%. I was hoping you'd break down maybe first by geography, kind of how you're seeing demand trends, growth trends, and then by vertical. North America, I mean, it looked like sequentially this quarter is down, but it's largely FX movements. North America, I think we've got good momentum. UK and Europe. The rest of the world is a little bit bumpy because of the scale. If big programs come off, the revenue comes off, and it's dependent on, you know, pipelines. Some of our sort of bigger deals that we have not in the guide are in the rest of the world. I think payments continue to be under pressure. Certainly, the outlook for this year implied in the guide is that it would be flat on Q4, which means that it looks like it's down still only about 15%. We are working on large deals, but they're not in that guide. For the reasons I said, TMT continues to be under pressure as well. I think it'll be weaker in the first half, but some of the deals that we've won, the eight and a quarter, will contribute to an uptick in the second half. Banking capital markets is a positive for us. We see that growing at sort of 12%, et cetera. I think mobility and healthcare, again, it will be modest growth. Thinking in mobility, we're seeing some recovery in automotive, but there are concerns around tariffs, et cetera. Some of the programs are coming through. Certainly, one of the big deals in the eight is in the automotive sector. I'd summarize it as both pressure mainly from payments, which we've seen over the last, you know, three years. That will continue. It could change quite quickly if we land one of these big deals and TMT remains under pressure as well. Yeah, I guess thinking high level, it's a little surprising that payments have been so weak. I mean, some of the stocks we actually cover and know performance has been weaker, but has it just been less spend and less certainty from the payments side? What's driving the weakness in payments? The payments arena, and you'll know this, is going through quite a big change in terms of new types of competitor coming into the market. That's creating margin pressure on a lot of the larger, more established players, the more traditional players, shall we say? I think those traditional players have been perhaps going down M&A and concentration routes rather than investing in technology over the last couple of years. The big question that we have, and we're in discussions with a lot of them about, is whether actually they're now starting to shift into a technology investment phase again across their larger portfolios, post mergers, et cetera. If so, that would become a tailwind for us again. For a lot of them, that's still shaping up in terms of their investment cases. We're obviously trying to bring AI into that conversation as to how AI could help them get to their destinations faster and create a next generation type of payment solution. In the competition you're referring to, is it more competition from the real-time networks or more pressure on the pricing of transactions? The real-time networks in some jurisdictions are becoming quite competitive. You have the payment solutions that are embedded into industry vertical software solutions, et cetera. Those are all creating price pressures and competing as well. Yeah. What about the technology vertical? I'm a little surprised they wouldn't be embracing more of some of the AI initiatives. The technology vertical has been one of the more stable ones for us. It has been. We've had particular clients, you know, we talked about it this time last year, I think in November. We had a large media client that was taken over and killed the sort of project work. We've had some, let's call it particular sort of events in the client base that have contributed to that decline. That was on the media side? That was media, basically. Got it. I know headcount growth was down 5%, and as IT analysts, we focus and scrutinize the headcount. How do we think about these new models and thinking about headcount growth going forward in these new models? Will we still grow headcount? Will time-and-materials still be prevalent in most deals at some part? There'll be some of these Endava flow and other parts. Just trying to think about how we model out headcount growth for Endava. I think if you look over the next two to three years, we'll see revenue per head start to move up as we're getting more output per head with the assistance of AI agents, et cetera, that are still delivering the higher levels of value to clients. With outcome-based pricing, we'll be able to capture some of that in a higher revenue per head whilst obviously offering higher value to the client. That's an upside opportunity that the Agentic AI approach and the way that it lends itself towards more outcome-based pricing as opposed to agile with T&M will actually help us to drive higher revenues per head and higher margins on the back of it. That is going to be a two to three-year cycle. There's quite a big shift to the business. I think we're up to 23% outcome-based, probably fixed price, but it's mainly outcome-based, which a year ago was 17%. The shift, I think, will accelerate, but it's going to take a while to get above 50% of our business in that space. Yeah, I was going to say, is that a five-year trend of 50% or how long will it take? I think we'll get 50% faster than five years if you look at the deals that we're working on. What about headcount growth just for this year? What should we expect? We will see some growth. As part of the investments that we're making to become AI native, we're recruiting graduates at scale, basically as part of our DavaX Academy, as we call it. They are critical for embedding flow across Endava. There will be continual headcount, but it'll be at the junior level. We are recruiting as well selectively in the skills that are required at the moment in terms of data and AI. I think we'll still see some sequential headcount increase, and then I think it will slow as we're going into the second half. Mark, I wanted to ask you about the guidance and just the cadence of the guidance. First quarter guide, I think we're talking about down 5% to down 6% on a constant currency basis. For the full year, it's roughly flattish, you know, plus or minus a point or so. Can you just talk about the cadence? How did you set the guide and the water flow and the kind of visibility you have this year? Overall for the year, as you know, we've talked previously, we have contracted and committed revenue, which now includes those eight deals that we've won since we last reported in Q3. Overall, we've got for the year about 70% of our revenues contracted and committed. If you compare it with last year, it was about 60% when we started the guidance this time last year. It's more conservative. The profile for the larger deals is more backend loaded through the year. We've got the sequential decline as we go into Q1, which is primarily a weakness that we're seeing in payments as it steps down and a little bit in TMT. The big deals start to come through in Q2. I think the revenue growth will be quite muted going from Q1 to Q2, something like 1%, 2% or so. It's that sort of profile, probably about 2% quarter on quarter, that is underpinned by those big deals coming in. It looks like a hockey, it's not a hockey stick, but it's an increasing growth profile. It's largely underpinned by those large deals. It's still pipeline because that's just the nature of the beast. It's pipeline at those lower levels, not in the big deals. Where we potentially get an acceleration is the big deal pipeline starts to land. Where we stand at the moment, that is probably going to be in the second half to be revenue impact. Possibly it could be in Q2. I guess it goes both ways. If those larger deals ramp earlier, then it could show up in Q2 and hit the revenue line a little faster. I guess it could, is it possible those deals could slip if there's still economic uncertainty? I don't think so. I mean, most of the deals, the larger deals in the eight are run rate, basically. They're already embedded, they're extensions. The step change ones, we've got quite a lot of certainty around those. Like, you know, we're referring to one deal, it starts in January, and there is a step up in terms of run rate that we know. We're doing the shaping for that work at the moment. The smaller size of the deals in the eight are the ones where you've got a ramping. If they slow or accelerate, I don't think they'll significantly change the cadence of the guide. They could do, but it'll be at the edges. Got it. Got it. The underlying assumption is that the larger deals slip all the way to the end of the year. We haven't put them in. Exactly. The current pipeline of big deals of 2024, 2025 seems none of that goes anywhere. Yeah, it was a good sign that you signed eight of those large deals in the quarter. There seems to be some movement there, and the pipeline stayed about the same, 24. It is. I mean, the average size has gone up since when we last looked at it in May. Obviously, I think eight have landed and we've added to it, as you know, but the size of those deals is increasing as well. Mark, you could just talk through the gross margin cadence and operating margin, adjusted operating margin for this year and how it looks in the first quarter. Yeah. The profitability comes down pretty significantly from Q4 to Q1. We're reestablishing the bonus, which takes about 1% off adjusted PBT, mainly on the gross margin. Our investment in AI is around 2%. 1% of that is in gross margin, which is people and skills. The other 1% is in G&A, which is, you know, the technology and the software around it. Most of our step down in terms of the EPS from Q4 to Q1 is attributed to that adjusted PBT contraction of about 3%. 2% is on gross margin and 1% on SG&A. We're investing steadily through the year, and that is a 3% per quarter headwind on an underlying sort of gross margin that we're expecting. We'll end the year in the guide at about, I think we're about 8% adjusted PBT, which compares with, I think we're about 11%, just shy of it this year. If you have a question in the audience, just raise your hand and they'll bring a mic to you. There's a question here, but before we get to that one, I wanted to ask about the Galaxy acquisition. I know they expanded into the US healthcare area. How is that acquisition doing and what's the appetite right now to add for acquisitions? Galaxy is settling in well. It's pretty stable to growing, making a good contribution to us in the US. It's definitely established us with a good footprint in healthcare that we're building off. We're seeing other opportunities come through, which have landed in the healthcare space and are ramping. It also has a contribution in the banking and capital markets space, and that's actually rounded out our footprint in the US in that space. It gives us a much more solid base from which to expand in that arena. We're positive about Galaxy and the impact it's having. What about appetite for other acquisitions? Appetite for other acquisitions, it would have to be pretty special. We're doing a really hard pivot as a company at the moment, as is visible to all of you. My focus is on completing that pivot rather than looking to M&A to complicate things as we're doing a hard turn. Yeah. I just wanted to circle back maybe on the hesitancy to push the button, right? There's always new tech. I went too far. Yeah, sorry. I couldn't quite. Might just be easier like this. No, no, use the mic. Okay. Okay. The new technology that's coming out, arguably since GPT-3, things have settled down, like four and five were not massive step change. I wonder, when you talk about the new technology that's coming out, what do you, what exactly is different? What exactly causes the change of tech, sort of the hesitancy to push the button? What's the new tech that makes them pause? There are some use cases now that are available, right? It's just maybe they're not good enough or whatnot. I'm curious, just double click on that hesitancy of pulling the trigger. The big one that's been coming through the last six months has been Agentic AI. I don't know whether you've followed that at all, but agentic AI is, I would argue, bigger step change in terms of enterprise applications and the capabilities you can build from it than ChatGPT was in November 2022. Actually, it's basically a higher level of intelligence that you can then work with in terms of creating use cases. It addresses a lot of the issues like hallucinations and so on. Out of Agentic AI, you can create much, much better enterprise solutions. The Gen AI roads that we were on have gone, oh my goodness, we need to actually incorporate Agentic AI rightly into it. A lot of the programs that we're on are focused around the use of Agentic AI. We've got 30 running with Google in the agent space arena, for instance. We got maybe 60 seconds. Just talk a little bit about the partnerships and what you're doing and how that's going to drive the business model as well. Yeah, so that's another big shift for us. All the way through the digital transformation wave, we grew Endava essentially without focusing on industry-level partnerships. We had direct client relationships that we were able to build off, and we introduced technology as we saw the need for it. With this AI wave, a need for partnerships with the hyperscalers and with the LLM providers is much more critical. We've been focusing really hard over the last couple of years on developing that. We're most advanced with Google and with OpenAI, but also we're seeing progress with AWS and Microsoft. You know, that's a big shift for us. As we look out over the next five to six years, we see that partnership arena growing to 25%, 30% of our business in terms of inbound from below 5% at the moment. That's a big shift we're going through. How long will it take to get to the 25% - 30%? Five years or so. Five years, okay. Yeah. All right. John, Mark, thank you so much. Thanks for being here. Thank you. Thank you.