Endava Plc Q2 FY2025 earnings call

• Digital Shift: 98% of senior leaders believe the digital shift has impacted their core business model. Endava is leveraging AI-enabled capabilities like Morpheus and Compass. Gen AI adoption is a key priority for clients, and Endava is positioned to help deliver real business value.
• New Deals: Secured deals with global fintech, financial institutions, healthcare, energy, and insurance clients. Examples include working with a leading global fintech on technology stack refresh, a core modernization project with a North American financial institution, and partnerships with Alexander Mann Solutions and a European commodities trader.
• Gen AI Initiatives: Guiding clients in AI transformation, with examples like working with a pharmaceutical company to improve clinical code processes and an automotive technology provider on facial identification technology.
• GalaxE Integration: Focused on commercial alignment and operational excellence, with client satisfaction survey showing 92% of clients likely to recommend Endava.
• People: Ended the quarter with 11,668 employees, a 1.1% increase, with recruitment prioritized in data, AI, and cloud domains.

Endava's revenue for the three months ended December 31st, 2024 was £195.6 million, a 6.6% increase from the prior year. In constant currency, revenue grew 9.1%. Product segment breakdown: North America accounted for 39% of revenue, Europe 24%, the UK 32%, and the rest of the world 5%. North America's revenue grew 32.7% year-over-year. Europe's revenue declined 0.6%, the UK's grew 1.3%, and the rest of the world's declined 43.5%. Vertical segments: Banking and capital markets were strong, insurance was a source of strength, payments were stable but under pressure, TMT was weakening, mobility was down, and healthcare revenue growth was due to the GalaxE acquisition.

• Q3 fiscal year 2025 guidance: Revenue expected to be in the range of £198 million to £200 million, constant currency growth 13%-14%; adjusted diluted EPS expected to be £0.31 to £0.32 per share.
• Full-year fiscal year 2025 guidance: Revenue expected to be in the range of £795 million to £800 million, constant currency growth 8.5%-9%; adjusted diluted EPS expected to be £1.20 to £1.23 per share.

• Macro-economic softness in the UK and rest of the world leading to client caution and project delays.
• Uncertainty in AI project timelines and client decision-making processes for large-scale AI projects.
• Impact of claims, litigation, and regulatory investigations on financial performance.

Q: On the outlook, can you go deeper into the underlying assumptions informing the 3Q guide and implied acceleration in 4Q sequentially, and color on large deal conversion?

A: Mark Thurston discussed macro effects with North America strong, Europe stable with puts and takes, UK and rest of world negative. John Cotterell mentioned examples like a core modernization deal with a banking client growing from $1.5 million a quarter to 4x that and expected acceleration into Q4.

Q: On large account activity, can you provide more insight into top client behavior and expectations?

A: John Cotterell noted strength in AI-driven, core modernization-driven space, with healthcare client growth from GalaxE work, contrasting stories in payments and banking/capital markets.

Q: On demand related, can you discuss visibility into calendar 2025 budgets?

A: John Cotterell said clients are still settling budgets, with core modernization approach being new and clients understanding art of the possible.

Q: On pricing conversations, are you having to engage in more meaningful pricing conversations?

A: Mark Thurston said there's a slight improvement in pricing, recovering inflationary rises and benefiting from productivity on outcome-based deals.

Q: On recent ramp downs and softness, are they broad-based across client base?

A: Mark Thurston said they've been relatively broad-based, more noticeable in UK and rest of world, macro-driven.

Q: On GalaxE acquisition, how far along is integration and what's baked into profitability expectations?

A: Mark Thurston said well progressed, aiming to cut over end of February, with further cost optimization opportunities ahead.

Q: On bench dynamic and utilization rate, how's it trending?

A: Mark Thurston said bench is stable at low historic levels, utilization expected to move up modestly.

Q: On hiring for AI and data skills, what's being seen in the hiring market?

A: John Cotterell said focus on equipping own people through training, with 80% of ChatGPT licenses used daily, and recruiting in data and advanced AI areas.

Q: On the $5 million restructuring charge, what actions are being taken to improve efficiencies?

A: Mark Thurston said around 200 people were removed before Christmas, focused on simplifying ahead of GalaxE integration, with further cost optimization possible.

Q: On revenue realization and revenue per headcount, any comment?

A: Mark Thurston said revenue per head will improve with modest pricing improvement and utilization moving up.

Q: On macro in the UK, can you elaborate and its impact on guidance?

A: Mark Thurston said macro softness in UK led to client caution, delaying progress and causing ramp downs, weighing on guidance.