Q4 2023 Endava plc Earnings Call
[music].
Yeah.
Okay.
Good morning, and welcome to the end of Q4 and fiscal year 2023 results Conference call.
All participants will be in listen only mode.
If you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
As a reminder, this event is being recorded.
I would now like to turn the conference over to Laurence Madsen head of Investor Relations and ESG. Please go ahead. Thank you good afternoon, everyone and welcome to <unk> fourth quarter and full fiscal year 2023 conference call.
As a reminder, this conference call is being recorded joining me today are John Cottrell, and Davis, Chief Executive Officer, and Maher, Charleston, and a as Chief Financial Officer.
Before we begin a quick reminder, to our listeners our presentation and our eye companion remarks. Today include forward looking statements, including but not limited to statements regarding our guidance for Q1 fiscal year 'twenty 'twenty four and for the full fiscal year 'twenty 'twenty four.
T to grow revenues, and then particular growth and expansion in our industry vertical.
Our combined business Optimate optimization actions and then some in store technology and offerings the impact of adverse macroeconomic conditions and our business strategies plans and operations.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained and needed forward looking statements.
Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements and reported results should not be considered as an indication of future performance.
Please note that these forward looking statements made during this conference call speak only as of today's date and we undertake no obligation to update them to reflect subsequent events or circumstances.
Other than to the extent required by law.
For more information please refer to the risk factors section of our annual report filed with the Securities and Exchange Commission on September 19 2023.
Also during the call well present, both I F. R S and non <unk> financial measures, but we believe the non I F. I R. S financial measures provide useful information for investors.
Presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with I F. R. S.
Reconciliation of such non I S forest measures to the most directly comparable Ifr S. Measures are included in today's earnings press release, which you can find on our Investor relations site or on the SEC website.
A link to the replay of this call will also be available on our website with that I'll turn the call over to John .
Thanks Laurence.
I'd like to thank you all for joining us today and hope that you're all well.
We're pleased to be here to provide an update on our business and financial performance for the three months ended June 30th 'twenty, two 'twenty three and for the full fiscal year 'twenty two 'twenty three.
Despite the challenging macroeconomic environment, we reported a good quarter with revenue totaling 189.8 million pounds for Q4 fiscal year 2023 reps.
Representing a five 2% year on year increase.
From 194 million pounds in the same period in the prior year.
We ended the quarter with an adjusted profit before tax for the period.
A $38 3 million pounds, representing a 22% adjusted profit before tax margin.
For the full fiscal year 'twenty, two 'twenty three revenue totaled $794 7 million pounds, representing a 21, 4% year on year increase.
From 654.8 million pounds in fiscal year 2022.
We ended the year with an adjusted profit before tax of $164 2 million pounds, representing a 27% adjusted profit before tax margin.
It's now 23 years since we started indaba and we've grown with tremendous momentum since then and through cycles and changes.
Macro annuity services have been challenged over the last three quarters and banking financial services insurance and Europe has been challenged as we all know giving significant headwinds to the business.
But I didn't start this journey imagining that we would always have a tailwind.
We see tremendous opportunity going forward.
Managing for the long term.
And I'm committed to continue to execute on our vision.
Our strategy remains the same.
But it is also expanding given our success and the opportunities in front of us.
We're focused on diversification of all verticals and client geographies.
Expansion of our delivery to be more global and continued innovation around new technologies and solutions for our clients.
We have a strong track record on organic and inorganic investment.
And we'll accelerate that as we move forward.
We are inherently conservative as you know.
But are seeing real signs of improvement, which will impact our second half of fiscal year 'twenty to 'twenty four.
We have a fiscal year that ends in June So I'll guide for FY 'twenty full continues to be constrained by the slower start in H one.
And it doesn't reflect the full year pick up that will become visible for calendar year 'twenty 'twenty four.
A little more on the current situation.
The wave of caution, particularly in banking and financial services.
Private equity portfolio companies continues to impact revenue in the short term.
However in parallel with this we continue to see high levels of new business shaping up.
<unk> from the Q4 bump highlighted in our last call.
These new opportunities will take a while to ramp and hit revenue at scale.
But they give us confidence in a return to growth and the reason for our confidence in H two of fiscal 'twenty, 'twenty, four which mark will discuss in our guide.
As a result of our long term outlook given these immediate market dynamics, we are taking the opportunity to invest in the future.
Firstly, we continue to expand our sales and marketing activity.
And to push into our target growth areas in the U S Europe and rest of the world.
Secondly, we are investing in and building strong AI propositions, including accelerators.
And our target industry verticals.
More on each of these areas later.
In the last quarter, we continue to prioritize our efforts on larger relationships that can grow and scale with a total of 146 clients each paying us in excess of 1 million pounds per year compared to 100 and such for the same period last year, representing a 9% here.
The increase with.
But the biggest increase coming from clients, who paid us over 5 million pounds per year.
This cohort increased by 38% to 33.
Compared to 24 in the same period in the prior year.
In fiscal year 'twenty, three we had one client with billings of just over 10% of our revenue, namely Master card.
Having worked together with most called for more than 20 years, we're thrilled to announce the extension of our long standing partnership with a new five year MSA that will strengthen and deepen the strategic relationship between into all the last cut.
This agreement will see and continue to help most called deliver and evolve their market, leading suite of global payments products.
And platforms.
We continue to see great demand for modernization and innovative solutions across the payments Tonight and we're excited to continue partnering with most coat a global leader in payments technology.
To bring this next generation of payments products and platforms to market.
As noted earlier, we are taking the opportunity of lower utilization to invest in particular, we are investing in AI propositions for different sectors and have built accelerators, which are reusable assets to accelerate implementation type scopes.
I'd like to give some examples of these assets and how we use them.
In our financial vertical with Bill to generative AI based assistant for wealth managers that combines information from client data sources with information frown from Internet searches and proprietary databases in order to build a picture of a potential client.
It provides.
<unk> provides a question and answer interface similar to charge G. P T.
To allow the wealth manager to quickly learn more about the client.
Using the information that is gathered the assistant can also identify discussion topics and generate a set of talking points for wealth advisers to use in discussion with clients.
This accelerator helps wealth management organizations understand the potential of change in the.
Specific environment.
Our insurance team has an acceleration program focused on how claims management will be transformed by the use of ally.
Advanced automation and modern customer experience technologies.
None of which are widely used in claims management applications today.
There are also many ways for us to use our own business and client delivery.
And the other coding assistant is an example of using unexplored tree prototype to understand the potential of the new technology and.
And exploring ways of using it to live it differs from the features of commercial products like Github copilot in this case.
The tool provides us with a way to increase our developers productivity, whilst meeting specific client needs related to training data sets and data privacy.
We're also investing in developing an internal AI platform to showcase the potential of <unk> to our clients.
Acting as both a scalable open sourced accelerator.
And our business transformation tool.
Our integrating our internal degeneracy by AI accelerators, we're building a diverse AI catalog, enabling swift prototype development and tailored solutions for demonstrating business nights.
We believe that this platform approach will enable us to demonstrate to our clients the ability for a L. A transformation at scale.
Yeah.
The greater Bay are is also creating demand in adjacent spaces, one of which is synthetic data to try and machine learning models, where our real world data is not readily available to privacy or regulatory restriction and frequency of events or safety challenges.
In data collection.
The indaba synthetics team joined us from Microsoft where they were responsible for all aspects of synthetic client delivery.
We are already helping clients build more robust machine learning solutions by providing tailored synthetic data built to tackle complex challenges optimize performance and unlock new opportunities.
In one project, we collaborated with our clients in the manufacturing sector.
Salt to utilize synthetic data to generate observations of red defect types in that production line.
Due to the scarcity of real World observations. The client previously struggled to effectively train a neural network to detect these specific defect types.
By leveraging the client's existing CAD pause falls as a starting point, we designed procedural systems to artificially generate large scale variability of anomalies as a result, the client was able to train muddles the achieve 96% detection accuracy when evaluated them real data.
Greatly improving production quality.
In another example, due to the privacy restrictions associated with utilizing real world data for mobile training in the retail sector.
We enable the client to leverage synthetic data to produce an array of machine learning capabilities, such as people counting and entrance strike exit tracking.
This enabled a deeper understanding of customer interactions within the physical spaces and the ability to harness these insights.
To enhance the efficiency I E Q management.
And effectiveness product layouts of the retail experience.
And health care all industry experts are working on a generative AI base synthetic data generate a specialized on clinical data, allowing testing of health care systems without the need to use confidential real clinical data.
We believe there are many other industries with similar constraints, where this know how can be applied in the future.
On the partnership side, we continue to invest in the build out of our alliance ecosystem working in collaboration with industry, leading technology companies to support our clients' digital transformation ambitions.
We continue to build on a dog is heritage in payments and we're rewarded stripes U K and a partner of the year Award and.
And have established a strategic partnership with checkout Dot com.
We are leading the way in cloud across all hyper scales and all the successfully achieved the AWS migration competency.
Working in partnership with AWS to accelerate our clients time to value when shifting workloads to the cloud.
Our work with Google continues with the expansion of all Google team into the U S and with Microsoft Azure and <unk> achieved the Azure data and AI and as your digital Linda App innovation partner designations.
Lastly, our partnership with Salesforce is growing significantly as we align to their industry cloud strategy, focusing initially on the financial services cloud and automotive.
Where we support clients in areas, such as specialty insurance retail banking and the switch to electric mobility in the automotive sector.
Over the past 12 months, we have invested significantly and expansion in the middle East and Asia Pacific.
This is taken rest of the world to 8% of revenue in Q4, FY2023.
And enables a genuinely global delivery capability to be deployed.
Given the global footprint of many of our largest clients. This is a key strategic step for them, which we are announcing the benefits and increased demand.
In FY2023 as part of our focus on the rest of the World. We completed three acquisitions in Asia Pacific.
Starting with lexicon last October .
Mud Bath in May and more recently the desk acquisition that was completed in June .
<unk> developed cutting edge software solutions across a range of applications, including embedded systems real time solutions telecoms and data communications.
The acquisition brings around 660 operational employees, along with a delivery location in Vietnam.
We ended FY 'twenty, three with over 1000 Dolphins and APAC compared to less than 50 in FY 'twenty two.
With these acquisitions and our own organic growth. We believe we have built a solid foothold in the region and we are.
Now it is scale, we should help us become a significant provider software services to clients in the region.
We believe APAC is the region with great potential and we are excited about our growth prospects.
I'd like to take this opportunity to highlight some of the work we're doing for clients in both the middle East and Australia.
In the Middle East and David has been working with businesses based in the Kingdom of Saudi Arabia for over five years now.
And over the last 12 months has been supporting a digital bank being launched as part of the kingdom's 2030 vision.
And the others analysis architecture and engineering teams are working closely with the banks product technology and business departments to both design and build greenfield retail banking capabilities as well as supporting the bank and reaching the necessary compliance standards set by the industry and the local.
Financial authorities.
And the other is supported a leading payment processing and gateway service provider for the Mena region across several key technology initiatives. The clients' mission is to empower online businesses with a simple affordable and trusted payments experience.
And the other team provided payments domain expertise and engineering capabilities to enhance the clients' existing platform with new SDK and plug in functionality.
In addition to reviewing and redesigning their existing API capabilities to reflect a world class developer experience.
These additional capabilities and improved developer experience are expected to offer our clients customers, a more intuitive and flexible user experience as well as giving our client additional revenue opportunities through additional e-commerce channels.
In Australia, and the other is working with saying machines, a leading supplier of driver and occupant monitoring system technology.
Seeing machines mission is to reduce the number of injuries and fatalities on the road caused by driver fatigue or distraction.
We are helping to about proprietary software based on sophisticated algorithms able to preempt driver fatigue or detect distraction.
Developing software to run on lower cost hardware and data annotation for machine learning and AI are some of the areas that we're involved in.
Again in Australia, we're working with a leading global life Sciences company that provides scientific instruments software and services used in research laboratory and other scientific applications, primarily serving the pharmaceuticals and biotechnology industries.
Over the past decade, our proven expertise in designing and developing software for highly regulated industries has led us to work with them on numerous projects for designing and developing new products to quality assurance.
Moving on to the U S. This summer, we announced our official partnership with Toyota Racing development in North America.
The goal of this partnership is to help deliver the best experience as possible to Toyota racing teams partners and phones, both on and off the track.
One of the first programs, we embarking upon aims to create new digital experience.
Toyota is North America drive a development program.
We are growing our activities in North America with our recent acquisition of T. L M partners.
T O M provides outsourced development services across design engineering art and animation for PC and console video games and other digital entertainment.
Tail M has particular expertise in highly complex areas of cross play middleware physics engine level tools and technical lot and has an impressive list of clients in the gaming sector.
T O M is credited as a co developer on many AAA franchises, including a multiples of IV in call of duty Marvel's midnight sons, and Gotham Knights.
Jake Holly the founder and C. A T L M and his leadership team bring huge gaming experience and strong industry relationships.
Today, we published the third edition of our sustainability report, which can be found on our website I'd.
I'd like to share some of the highlights from our latest report.
Oh, we're always mentoring program, specifically targeted for the advancement of women in senior level roles is showing excellent results.
Over 60% of the individuals who completed the program since it was launched in November 'twenty 'twenty. One we've received a great promotion or had an increase in responsibilities will change enroll.
We're also proud of the impact we have through our Indaba Tech campus, which brings together all the tech education projects that we support.
I'm also delighted that by delivering consistent and valuable experiences to our customers, we continue to improve our customer satisfaction schools.
We also provide examples of our work to help clients build sustainable business models, such as teaming with Grameen America to provide better support to underserved women entrepreneurs in the U S.
We are also advancing our environmental agenda, we had all scope, one and scope two greenhouse gas emissions data assured by Pwc.
And the aim to set a science based targets initiative in 'twenty 'twenty four.
I'm proud to share our progress and our stories as we continue on our sustainability journey.
We ended the quarter with 12063 employees, a one 8% increase from 11853 in the same period last year.
In the current environment, our recruitment is focused on the areas of strong demand as well as continuing to strengthen our sales and marketing team.
In summary, despite the recent challenges and based on our conversations we believe clients activity and exploring and commissioning new product will overtake the headwinds over recent quarters and see us return to growth.
I will now pass the call onto Mark who will walk you through our financial results for the quarter and.
And the last fiscal year and provide guidance for the coming quarter and fiscal year.
Thanks, John .
And Tavis revenue totaled 189.8 million pounds for the three months ended June 2023, compared to $180 4 million pounds in the same period in the prior year.
Five 2% increase over the same period in the prior year.
In constant currency, our revenue growth rate was 2.8%, including a 3.7% inorganic contribution during the quarter.
Profit before tax for Q4 fiscal year 2023, it was $24 9 million pounds compared to $32 5 million pounds in the same period in the prior year.
Our adjusted profit before tax for the three months ended June two 2023 was $38 3 million pounds compared to $36 2 million pounds for the same period in the prior year.
Our adjusted profit before tax margin was 22% for the three months ended June 2023, compared to 21% the same period in the prior year.
Our adjusted diluted earnings per share E. P. S 67 pence for the three months ended June 30th 2023 calculated on $58 1 million diluted shares as compared to 51 pence for the same period in the prior year calculated on 58.0 million diluted shares.
Our adjusted diluted EPS at 57 pence for Q4 was much stronger than anticipated due to a number of one off items in the quarter and a lower than expected tax charge.
These items accounted for Tempe of adjusted diluted EPS and our adjusted diluted EPS for Q4. After adjusting for these items would have been about 47 pence.
Revenue from our 10 largest clients accounted for 35% of revenue for the three months ended June <unk> 2023.
32% for the same period last fiscal year.
The average spend per client from our 10 largest clients increased from 5.8 million pounds to $6 6 million pounds for the three months ended June 2020.
Representing 13, 7% year over year increase.
Yeah.
In the three months ended June 30 of 2023, North America accounted for 30% of revenue compared to 35% in the same period last fiscal year.
Europe accounted for 24% of revenue compared to 22% in the same period last fiscal year. The UK accounted for 38% of revenue compared to 40% in the same period last fiscal year, while the rest of world accounted for 8% compared to 3% in the same parent last fiscal.
Yeah.
Revenue from North America declined eight 2% for the three months ended June 32023.
Over the same quarter in fiscal year 'twenty to 'twenty two.
Comparing the same periods revenue from Europe .
Teen 0.4% the U K grew 21% and the rest of the world grew 177%.
Revenue from payments and financial services grew seven 2%.
Three months ended June 32023 of the same quarter of fiscal year, 2022, and accounted for 52% of revenue compared to 51% in the same period last fiscal year.
Revenue from TMT declined seven 2% and three months ended June 2023 over the same quarter of fiscal year 2022.
And accounted for 22% of revenue compared to 25% in the same period in the prior year.
Revenue from other grew 13.5%. The three months ended June 32023 over the same quarter of fiscal year 'twenty to 'twenty, two and now accounts for 26% of revenue compared to 24% in the same period in the prior year.
Our adjusted free cash flow was $31 5 million pounds and three months ended June two 2023.
Parents of $43 4 million pounds during the same period last fiscal year.
Our cash and cash equivalence at the end of the period Maine's strong at 164.7 million pounds at June 30 of 2023 compared to 162.8 million pounds at June 2022.
Yeah.
Capital expenditure for the three months ended June <unk> 2023, as a percentage of revenue was 1% compared to 2.1% in the same period last fiscal year.
I'd now like to move on to some highlights for fiscal year 2023.
And Tavis revenue totaled $794 7 million pounds.
Fiscal year 2023, compared to 654.8 million pounds in the previous fiscal year.
21, 4% increase over prior year.
Constant currency revenue growth was 16, 6%, including a 2.3% inorganic contribution during the full fiscal year.
Profit before tax for the fiscal year, 2023 was $114 2 million pounds compared to profit before tax of $102 4 million pounds in the prior year.
Our adjusted profit before tax for the fiscal year 2023 totaled $164 2 million pounds compared to $138 3 million pounds in the prior year.
Adjusted profit before tax margin remained strong at 27% for the fiscal year 2023, compared to 21, 1% from last year.
Our adjusted diluted EPS was $2 two eight pounds for the fiscal year ended June 30 of 2023 calculated on $58 1 million diluted shares as compared to $1 93 pounds for the previous fiscal year calculated on 58.0.
Diluted shares.
Revenue from our 10 largest clients accounted for 33% of revenue for fiscal year ended June 32023, compared to 34% for the previous fiscal year.
Additionally, the average spend per client from our 10 largest clients increased from $22 2 million pounds to 26 million pounds.
17, 5% year over year.
In terms of geographies on a year over year basis, North America was up 13, 2% year over year.
Europe up 32.3% the U K up 14, 2% and the rest of the world up 151, 2%.
On a year over year basis revenue from payments and financial services increased 25, 4%.
PMT increased six 4%.
Other increased 28, 5%.
The year over year growth and other came mainly from mobility and health Tech.
Our adjusted free cash flow.
$111 5 million pounds for the fiscal year ended June 32023, compared to $107 2 million pounds. During the same period last year.
Capex for the fiscal year ended June 32023 is essentially revenue was 1.7% compared to 2.1% during the same period last year.
Now turning to our outlook for Q1 and full year fiscal 2024.
As Joe mentioned in his comments the revenue outlook remains challenging.
Our Q1 revenue outlook reflects further delays in client decision, making that impacted our Q4 FY2023 outlook when guiding in may.
However, we are seeing stronger activity than in recent quarters, especially in large scale opportunities, which will take time to ramp up and produce revenue.
And therefore, we don't expect to see a significant uplift in revenues until Q3, and FY 'twenty four with Q1 and Q2, showing a flat sequential profile.
If you look at this outlook on a near term basis. The guide implies implies constant currency growth of 3%.
On a 12 month basis to December 2023.
We expect to return to high teens growth by Q4, FY 'twenty four.
As concerns profitability.
Adjusted PBT should be subdued compared to the most recent quarter and FY2023 as we maintain a bench and redness when recovery, we have seen develop in each one and build through H T.
We anticipate recovery to historic levels of profitability by Q4, FY 'twenty four.
Additionally, I draw attention to the increase in corporation tax in the UK.
Fact from April 2023, when rates increase from 19% 25%.
As a consequence, our just tax rate is expected to rise from 19, 4% in FY2023 'twenty, 1.3% in the FY 'twenty guide.
With that context, let me now turn to the guide.
Our guidance for Q1 fiscal year 'twenty 'twenty four is as follows.
<unk> expects revenue to be in the range of 186 million pounds to 187 million pounds, representing constant currency revenue decrease of between minus 2% and minus 1%.
And Dominic space adjusted diluted EPS to be in the range that you bought 75 pence per share.
Our guidance for full year fiscal year 'twenty 'twenty four is as follows.
<unk> expects revenue to be in a range of 780 million pounds to 795 million pounds, representing constant currency growth between 1% and 3%.
And Darva expects adjusted diluted EPS to be in the range of 1.52 pounds to 1.62 pounds per share.
This above guidance for Q1 fiscal year 'twenty 'twenty four and the full fiscal year 2024 assumes exchange rates at the end of August 23, when the exchange rate was one British pound one point to seven U S dollar.
1.16 year right.
This concludes our prepared comments.
Alright.
Now ready to open the line for Q&A.
Thank you we will now begin the question answer session.
To ask a question you May press Star then one on your telephone keypad.
Using a speaker phone we ask that you. Please.
Before pressing the keys.
Your question. Please press Star then two.
Today's first question comes from Bryan Bergin with P. D. Cohen. Please go ahead.
Hi, Thank you I wanted to start here on the fiscal 'twenty for outlook and try and unpack it a little bit can you talk about what you're expecting out of that P/e backed Blanco award in payments versus the balance of the portfolio and if you can really talk about the P E client behavior that.
<unk> seen progress here over the last several months.
Hi, Brian so.
P behaving as we expected as you remember we had a slowdown from Q3 to Q School, we know.
Sebastian with $10 million quarterly run rate too.
This $13 million.
35 million run rate Q4 ended up basically what we expected.
It sounds like given that garbage and anticipate ERP coming off.
Slowly into Q1, so getting each of us are loans that is.
I think we are not assuming any pick up from that level of activity through.
FY 'twenty four.
We are starting to see some activity in all geographic regions.
Components of the portfolio, although that is a very small percentage of revenue. So we're taking a conservative view.
The balance of FY 'twenty for US we've got a.
Okay and my follow up on margin here. It's Mark can you can you talk about.
Some of the cadence was helpful. There can you talk about just adjusted PBT level expectations, and you mentioned the investments obviously with lower revenue out there the utilization headwind here, but can you quantify how much of the pressure here maybe investments that you are ramping and accelerators in the AI solution development you discussed versus.
As lower utilization versus any other factors and just as a starting point what are you baking in in <unk> as you ramp forward.
Why don't I stop there so I'll keep for adjusted PBT was 21, 4%.
Called out a number of.
One offs I want I can touch on that later.
He won't be tomorrow, but basically we normalized adjusted PBT of about 17, and a half percentage is roughly what we were guiding implied now 45, a guide for Q4 now Q1 is going to come off and as reflected in the Etfs came down from.
Let's go ahead and normalized 47, and 45 835, it's mainly being felt on the revenue and gross margin so our gross margins.
In fact in going from Q4 to Q.
<unk> one.
Part of that is what are those exceptional items reversing.
<unk> Castle bone percentage margin D cell and the rest is basically utilization moves the mixture of slack.
Slightly increasing bank investment.
Lasers are exploring people on the bench to work on some of those accelerations and also we've seen a higher level.
Wow.
And then the balance is for instance, Q1 is.
On SG&A basically why are we seeing sort of rebuilding a commission order.
Cost I mean, basically that at one point.
If I can pull it back on our adjusted PBT.
P J, we may see.
The pressure on that as we go into Q2.
Because the drug use all guns, a flash and we do continue to invest at 19000 masking huge but also.
Our integration activities for Asia Pac in particular.
And then as we see sequential so recover as we go into Q3 Q4.
Gross margin starts to rise as we utilized more.
More normalized levels. So we anticipate exiting Q4 level.
The levels of gross margin that we've typically seen in the past around 39%.
APG come back up to.
19.5%.
Okay very helpful. Thank you very much.
Thank you and our next question today comes from James Faucette with Morgan Stanley . Please go ahead.
Thank you very much I wanted to follow up once again on the outlook as you talked about better.
Sales pipeline et cetera, particularly going into next year and I guess, just a couple of questions. There first.
How should we square that with kind of what youre seeing in terms of.
Some ongoing cancellations or push outs, just trying to figure out kind of how to put those together and what's driving that decision, making and then another common question that we got as you know clearly your fiscal year and what are you looking for acceleration.
<unk>.
Yeah. Thanks, James So.
The.
The outlook as we're looking forward.
We've seen the context the historic.
Headwinds that started.
At the end of March that wave of caution.
Asphaltite SPT.
And caused particularly B S. S L P.
Equal.
Two slowdown August touch panel.
And that's all.
Full impact in Q1 partial impact in Q4 as they were ramping down.
And so that's part of the macro data is.
Feeding through into the Q1 numbers.
And we've adopted a cautious feel that wasn't what was touching on southern North Sea.
Take up.
Three of the financial year.
So certainly significant new opportunities that we're saying that our actually looked we're looking to drive growth 60 in the second half.
Now many of those we've actually started work all of them are doing early stage architectural studies ideation work with.
With clients.
The challenge that we have is it takes a while for those to ramp significantly into revenue.
Historically for US is a business that does give us a huge level of confidence as we forecast a look forward and that has given us a lot of consistency.
And the forecast we provided to market because we see nice opportunities working through the system and growing.
Steadily.
In this situation that is what is giving us the confidence as we look to add to that.
Those opportunities are.
Starting and all round thing, it's just the time it takes for them to get to.
Sufficient scale.
Yes.
The noticeable impact on revenue so that's what we based our forecast and our confidence on.
The work.
Most of it is not related to.
Calendar year 'twenty for budgets.
It is work where clients are taking all of that work now.
They have budget for us.
And.
That's the foundation.
A steady diet of pumps.
Forward.
That's great that's really helpful. John Thanks.
Thank you and our next question today comes from Bryan Keane with Deutsche Bank. Please go ahead.
Hi, Mark I was just going to follow up there and hoping you could maybe quantify the AI investments and are those investments that are going to weigh on the margins. It sounds like it's a one time investment that maybe for three to six months and then it goes away so as the margins come back by Q4.
Yeah, So John bills.
Simply holding people all the what we see in the second half.
They are actually deploying them on internal accelerates as John touched on.
And he's in his.
Comments.
It's probably it's I'd say about.
Percentage of gross margin.
That being said Q1, and Q2 and then.
The opportunities, which.
We will take those people incident elbow he wants to add.
I think you've captured it.
Essentially we're taking the opportunity of earnings a bit painful on the bench so actually.
Builds and stuff and an interesting areas of the market and that's helping tease out some of the early stage sales opportunities.
That will get into over the next quarter or so.
Got it no. That's helpful. And then just looking by region. It looks like North America, it's been a little bit weaker than obviously rest of world has been been been really strong for you guys in North America, though it has been a weaker a weaker region just trying to understand why North America versus maybe.
Europe UK rest of world doing a little bit better is there anything to read into that.
Our experience in North America, particularly the U S has been that the recessionary pressures started earlier.
So actually we started seeing clients west coast that we talked about quite a bit.
Some of their retail banks et cetera pulling back.
Even as far back as Q2 last financial year.
And actually that will span impacts it because obviously that feeds flawed in following quarters.
Hospitals impacted by this.
The full year and the Q4 numbers.
Having said that we also are seeing the U S starting to pull through stronger now.
So let's see.
Now getting to the other side of the recessionary pressures.
With West Coast tax starting to talk about budgets. They also give out in calendar 'twenty four budgets.
And.
And so some of the other parts, where we're strong in the U S banks and so on also in our budgets for next year.
So the U S. We're starting to see conversations around lean.
Leaving moving beyond the recessionary pressures.
And we're seeing a handoff.
And in Europe .
Rest of the World is actually pretty strong across the board.
And that's been true on an organic sense as well as obviously the M&A work that we've done out there and lost a few.
Equals.
Got it thanks for taking the question.
Thank you and our next question today comes from Moshe country, whereas Wedbush Securities. Please go ahead.
Hey, Thanks for taking my question.
You mentioned some of the larger deals that are taking longer to close or maybe to convert is there anything different in the nature of some of those larger deals that you're taking are you may be focusing more on.
The transactions that are more focused on cost synergies cost stakeouts et cetera versus what you've done in the past.
Any color on that will be helpful. Thanks.
Yes.
Oh, yes.
We're actually seeing a number of.
Opportunities.
A number of them we've actually started.
Work, albeit architecture studies and so on.
One of the themes is.
Platform consolidation.
Where we're seeing clients, sometimes through M&A, sometimes through developing things in parallel where they have multiple platforms are similar.
Alex areas.
And actually wanting to consolidate into a single platform.
Often very large multi year transformations one's in the current environment, but that she didn't get all of that.
Because they either.
Rates at a substantial cost savings so that's one of the big areas.
We're also seeing.
Yeah.
I touched on in the opening remarks.
Opportunities in the Middle East.
Around new digital banks kicking off.
New financial products being created.
And our new digital.
Services into the market.
So.
Loss those areas.
We are seeing projects kick off which is which is these opportunities.
But we need to ramp up.
That's helpful and then.
Just a follow up any view on the budget cycle for calendar 'twenty for the.
Do you feel internally that the budgets or the budget decisions may be delayed.
For next year.
Okay.
So I mean, the signs that we're seeing all of that.
People within the organization.
One thing and I think that that is going to be budgets coming back in calendar year 'twenty four.
We haven't really.
Based off guide on that happening.
Be more conservative.
What we can see shaping up.
So there is potential upside if.
Budgets are released fatality at 24.
But we've not booked antelope.
Understood. Thanks, a lot.
Thank you and ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Next question comes from Maggie Nolan of William Blair. Please go ahead.
Thank you.
You mentioned kind of a hand set at the beginning of a recovery in the U S. I'm wondering if you can contrast that a little bit more for us with the U K and Europe are you expecting incremental pressure from here in the U K and Europe or rather a steady state from these levels.
So.
I think the U S. We think is going to start to move.
Mike.
A very quick other than Europe and UK.
We've seen that start to come through.
Q2.
And Lockheed took nothing by the recovery TNT.
Gene.
In terms of Europe , and the U K is a much more subdued picture say that Europe looks a little bit more robust in the U K at the moment.
It really shows meaningful sort of uptick in in Q4, and it's a similar narrative for the U K spa.
Europe .
I'm back from it including Europe , and the U K it looks like it is going to be quite subdued cancel about Q4 next year.
North America, we think starts to come Q2 Q3 this year until.
Our fiscal year.
Thank you.
Then on AI.
We understand that you know a lot of companies may not be ready to actually apply artificial intelligence within their businesses. So we're curious if theres any.
I'm kind of demand for adjacent services.
Or other areas that you may have the expertise and as you know companies come to you and try to consult on NII in and how they can move their business as far right in light of this trend.
Okay.
Yes.
I've touched on that a little bit last earnings call.
And also in my opening remarks this time.
So one of the areas.
All around data and preparing new data.
Getting data lakes ready et cetera, actually gave you.
The foundations.
All information upon which to.
Train models and so on.
I touched on earlier the.
Synthetic data.
Which covers the areas, where it's very difficult to get real data actually trained models.
And in order to models today.
Excellence they need.
Volumes of data.
And when you're training edge cases.
Such as that manufacturing example, that I gave a weather actually very few production defects, you'll probably get a machine to spot.
And then the use of synthetic data helps with that.
So.
You put you put those together and there's quite a lot of foundational work that we're seeing come through.
Work come through in a lot of interest from clients, it's more the ideation studies.
In terms of actually using.
Some of the AI models.
In order to look at things like claims management and so on across their organizations.
Yeah.
And we do think that will stop that.
Scale.
As clients get their heads around what is possible.
There's also still a huge nervousness in the market around IP.
Liabilities.
Using someone else's IP that personally or losing your own IP because it gets absorbed into our model in some way.
We do believe that the market will get through that fairly quickly.
As.
The.
Yeah, Oh models advance.
The other area that we're very sorry space is the other aspects of alcohol and just generally by airline.
And whether that's computer vision related activities and so on.
And we're seeing as much probably more actually activity in those other areas.
<unk>.
And just the general Ellis.
Yes.
Because it's historically been true as well.
Until January .
Uh huh.
And market recognition back in November .
Thank you very much.
Thanks, Mike and thank you.
This concludes our question and answer session I would like to turn the conference back over to the management team for any closing remarks.
Thank you and thank you all for joining us today.
We're excited actually about the market opportunity over the medium to long term.
All of the technological ways to continue to hedge some of which we outlined at school.
As we get into all that to continue as a leader as these tax ice Gaba strikes.
Look forward to speaking to you again at our next earnings call.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Yeah.
[music].