Q2 2025 Endava plc Earnings Call
Speaker Change: Good day and welcome to the ENDAVA second quarter and fiscal year 2025 results conference call. All participants will be in listen-only mode.
Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would like now to turn the conference over to Laurence Madsen, Head of Investor Relations.
Please go ahead.
Speaker Change: Thank you. Good afternoon, everyone, and welcome to ENDAVA's second quarter of Fiscal Year 2025 Conference Call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, ENDAVA's Chief Executive Officer, and Mark Thurston, ENDAVA's Chief Financial Officer.
Before we begin...
A quick reminder to our listeners.
Speaker Change: Our presentation and our accompanying remarks today include forward-looking statements including, but not limited to, statements regarding our guidance for Q3 fiscal year 2025 and for the full fiscal year 2025.
the impact of headwinds facing our industry and business
Speaker Change: our ability to capitalize on market opportunities and trends in our industry including with respect to development of artificial intelligence
Speaker Change: our addressable market, our expectations regarding the impact of our acquisition of Galaxy on our business.
Speaker Change: our expectations regarding the share repurchase program, including our anticipated receipt.
Speaker Change: of shareholder approval for the share repurchase program, expectation of the effect of ENDAVA's financial condition of claims, litigation, contingent liabilities,
Speaker Change: and the Office of Governmental and Regulatory Investigations and Proceedings, enhancements to our technology and offerings, demand from clients for our technology services, our ability to create long-term value for our clients,
Speaker Change: our people and our shareholders and our business strategies, plans, operations and growth opportunities.
Speaker Change: These statements are subject to risk and uncertainties that could cause actual results to differ materially from those contained in the 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.
Speaker Change: and reported results should not be considered as an indication of future performance.
Speaker Change: 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.
Speaker Change: For more information, please refer to the Risk Factors section of our Annual Report filed with the Security and Exchange Commission on September 19, 2024.
Speaker Change: Also, during the call, we'll present both IFRS and non-IFRS financial measures.
while we believe the non-IFRS financial measures
Speaker Change: provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS.
Speaker Change: Reconciliations of such non-RFRS measures to the most directly comparable RFRS measures are included in today's earnings press release as well as in the investor presentation, both of which you can find our investor relations site or on the SEC website.
Speaker Change: 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.
John Cotterell: Thank you, Laurence, and welcome everyone. Thank you for joining us for our second quarter fiscal year 2025 earnings call.
John Cotterell: We continue to see a fast-changing demand environment with a strong shift from traditional digital transformation services to an AI-led model, what we call the digital shift.
John Cotterell: In a recent company-sponsored survey of 350 tech and business leaders, 98% of senior leaders believe the digital shift has impacted their core business model in the last two years.
John Cotterell: Almost a quarter go so far as to say that their organisation's mission or purpose has also changed as a direct result of the same.
Speaker Change: At our Investor Day back in November, we highlighted how Indava is leveraging AI-enabled capabilities like Morpheus and Compass.
John Cotterell: to accelerate client transformations. Interest in these solutions continues to grow and are contributing to our solid pipeline of signed and potential opportunities.
John Cotterell: That said, these are large-scale projects that require greater business case validation and more detailed prototyping, leading to less predictable decision-making timing and an elongated ideation to production cycle.
John Cotterell: On the technology front, Gen AI adoption is becoming a key priority for clients.
John Cotterell: With our hands-on experience, coupled with deep industry expertise, we believe that we're in a strong position to cut through the hype that our clients are exposed to regarding AI and to work with them to deliver real business value.
John Cotterell: We believe the customization of GenAI for enterprise-level delivery should create increased demand for Indaba and the broader IT services industry as adoption gathers pace.
Implementation of Gen-AI solutions requires a fundamental re-architecture.
Deeper cloud integration, core modernization for full data access
John Cotterell: regulatory compliance, security, resilience and cost-effective scaling of AI processing demand.
John Cotterell: Becoming truly AI native does not happen overnight for our clients.
John Cotterell: It requires thoughtful planning, a clear understanding of ROI, and a willingness to challenge long-standing ways of working.
John Cotterell: We're proud to guide clients as they transform into AI-driven enterprises.
Thanks for tuning in.
John Cotterell: Additionally, today we announced our first share buyback programme, totalling $100 million, as we reinforce our commitment to optimising our capital allocation.
John Cotterell: And now I'd like to provide you with an update on our recent successes in securing larger and longer-term deals.
John Cotterell: On our last earnings call, we explained our focus on these opportunities as a foundation for future growth.
John Cotterell: This approach has allowed us to refine our strategy, concentrating on the relationships that drive meaningful revenue growth, as well as deal size, core proposition and deal structure.
John Cotterell: The three months since our last earnings call have been marked with exciting wins with new customers as well as extended partnerships with some of our long-standing clients.
I'll now share some examples.
John Cotterell: We're helping a leading global fintech and payments provider refresh their technology stack by tackling technical debt and assisting with their data center migration and consolidation.
John Cotterell: Using our Ray and Infra accelerators, we are also providing an independent third-party view of risks, opportunities and strengths of the applications and products they offer to their clients.
John Cotterell: In the first phase, we used our Ray accelerator to create a comprehensive inventory of applications focusing on key outputs such as modernization paths, a risk model, a prioritization model, and a costing model.
John Cotterell: The second phase will build on these outcomes, delivering deeper application-level insights and finalising the frameworks established in Phase 1.
John Cotterell: Using our maps and dash accelerators, we expect to develop a detailed modernization mode map for the organization's core applications, helping them drive transformation with clarity and confidence.
John Cotterell: and these two engagements are illustrative of the scale of spend we can unlock as we apply our accelerators to this space.
Moving on to other industries.
John Cotterell: One of our longest standing customers and a global player in the talent acquisition industry, Alexander Mann Solutions, signed their longest commitment with us, a five-year extension as their key technology partner.
John Cotterell: This is particularly exciting for us, as whilst we continue to maintain and optimise their critical platforms and services, we are also exploring new ways to expand our partnership, driven by our strengths in technology innovation and core modernisation.
John Cotterell: We also extended a multi-year partnership with a major European commodities trader, becoming their prime technology partner.
John Cotterell: Together we are focusing on providing advanced technology and data engineering solutions to meet the demands of the fast-changing global commodities trading markets, including areas like market data, collateral management, trade finance and pricing.
John Cotterell: We're also working on several projects for a global healthcare company.
covering various facets of their operations.
John Cotterell: This includes providing professional services to build out an innovation hub in India.
John Cotterell: And we're also working on modernizing their mobile application for clients and providers to improve the customer experience.
John Cotterell: We continue to win new clients and were selected as the technology partner for a London-based market insurer in a three-year deal to help with the transformation of their technology operating model and their technology estate.
John Cotterell: And in the U.S., we launched a campaign targeting an emerging energy industry need.
John Cotterell: We've just signed Austin Energy, one of several U.S. energy providers we are working with to address a common need to modernize similar legacy technology platforms.
John Cotterell: We're aiming to secure additional U.S. energy providers as clients for this service.
John Cotterell: As I mentioned earlier, Gen AI continues to be a major driver of technological advancement. We're seeing ongoing evolution in the space from more powerful models and breakthroughs in model training from both a cost and a technology perspective.
John Cotterell: to deeper integration into the software delivery lifecycle, advancement in agentic AI, and the increase of available open source models.
John Cotterell: All of this leads to more choice and options to build exciting solutions for our clients.
John Cotterell: But in DAVA, we believe AI is the single most defining technological advance of our lifetimes.
John Cotterell: It has the potential to change every aspect of our professional and personal lives and we are already seeing this impact unfold daily.
John Cotterell: Through cutting-edge innovation, we are guiding our clients on their AI transformation journeys, helping them implement, scale and optimize AI to achieve real business value.
Let me take you through some examples.
John Cotterell: In our ongoing partnership with a major global pharmaceutical business we are working to transform one of their critical clinical code processes.
where consistent and reliable results are absolutely essential.
in an industry where decisions are heavily scrutinised.
John Cotterell: and the AI landscape presents challenges around consistency. The client needed a solution they could fully trust.
John Cotterell: To address this, we developed an innovative consensus mechanism within our Agent Framework, a software protocol designed to validate data by cross-verifying outputs. This approach significantly enhances reliability.
John Cotterell: through multi-shot training, a method that reuses stored data instead of starting from sketch each time.
John Cotterell: The system is designed to reinforce correct behaviours by capturing the best answers and using them as references for future interactions.
John Cotterell: Working closely with the client, we are fine tuning the system incrementally, aiming to uncover previously hidden complexities.
John Cotterell: What is particularly exciting is that this solution has the potential to go beyond the immediate challenge we're solving.
John Cotterell: It offers a versatile approach that can be applied across a wide range of industries and we're eager to explore how it can create value for others.
John Cotterell: In another example, we partnered with a multinational insurance provider owned by a private equity fund.
to help modernize and streamline their operations using AI-driven solutions.
John Cotterell: Their new leadership team wanted to understand how AI could transform their business and so together we identified two high-impact AI projects and a payment processing flow transformation as key focus areas.
Working with the client, we first introduced ChatGPT Enterprise.
John Cotterell: and began training their teams to rethink daily workflows using AI.
John Cotterell: By focusing first on foundational understanding and personal productivity gains, we aim to build a strong base for broader organizational transformation.
John Cotterell: Starting at the individual level allows us to lay the groundwork for reimagining larger processes further down the road.
Another recent project was with a leading golf equipment company.
John Cotterell: They wanted to expand their B2B golfer training business into the B2C space with a direct-to-consumer mobile application.
John Cotterell: However, existing solutions for golfer swing analysis did not meet the quality and precision standards that they are known for. That's where we came in.
John Cotterell: Together, we developed a tailored AI solution that brings their renowned training programs straight to consumers.
John Cotterell: By doing so, the company opened up a new revenue stream whilst allowing customers to benefit from professional grade training programs that were previously too expensive to be accessible.
Thanks for watching!
We've also been working with an automotive technology provider.
John Cotterell: which facing resourcing and time constraints struggle to meet deadlines for developing in-cabin facial identification technology and scaling its internal synthetic data capabilities.
John Cotterell: To help the team overcome these challenges, they partnered with Indava as their technology augmentation partner.
We stepped in with cutting-edge solutions.
John Cotterell: conducting R&D and developing a prototype facial recognition solution that pushed technological boundaries.
to support their synthetic data needs.
John Cotterell: We used advanced 3D graphics tools to create tailored assets and provided technical consultation to optimize and streamline their pipeline.
John Cotterell: This scaled development of pipeline optimization achieved up to a 50% increase in speed, enabling the client to meet project timelines whilst also unlocking greater innovation potential.
John Cotterell: Following positive feedback we're now exploring additional opportunities to enhance their workflows and drive long-term success.
John Cotterell: Also within Indava, the integration of Galaxy is continuing and we are focused on both commercial alignment and a goal of achieving operational excellence.
Client satisfaction is core to our service delivery.
We completed our latest Client Satisfaction Survey in November 2024.
John Cotterell: and I'm happy to report that 92% of our participating clients stated that they would be likely to recommend Indala as compared to 91% in April 2024.
John Cotterell: and 90% stated that they would likely repurchase from us compared to 88% in April 2024.
John Cotterell: And now, moving on to our people, we end the quarter with 11,668 in Darvans on board.
John Cotterell: which represents a 1.1% increase from the same period last year.
John Cotterell: Looking forward, and based on the current environment, we continue to prioritize recruitment in high demand areas, such as around the domains of data, AI, and cloud.
John Cotterell: In closing, I would like to take this opportunity to thank all endowments for their commitment and determination as we are navigating the digital shift and discovering the new opportunities that it brings.
John Cotterell: We will continue to manage the business for the long term, maintaining our culture and organisational health, and creating exciting technological solutions that empower our clients to thrive.
John Cotterell: Now I'll hand over to Mark who will walk you through our quarterly financial results and offer guidance for the upcoming quarter and remainder of the fiscal year.
For more information visit www.fema.gov
Thanks, John.
Speaker Change: Endava's revenue totaled £195.6 million for the three months ending December 31st 2024, compared to £183.6 million in the same period in the prior year, representing a 6.6% increase.
Speaker Change: In cost and currency, our revenue increased 9.1% from the same period in the prior year.
Speaker Change: Profit before tax for the three months ended December 31st 2024 was £2.5 million compared to £10.6 million in the same period in the prior year.
Speaker Change: Our adjusted PBT for the three months ended December 31st, 2024 was £21.8 million compared to £22.7 million in the same period in the prior year.
Speaker Change: Our adjusted PBT margin was 11.2% for the three months ending December 31st, 2024 compared to 12.4% for the same period in the prior year.
Speaker Change: Our adjusted PVT continues to improve when compared to the 9.9% we reported in Q1 fiscal 2025, due mainly to cost control. And we expect a continued margin recovery as we continue to integrate Galaxy.
Speaker Change: and benefit from the optimisation effort we took in Q2 Fiscal 25 which I'll comment on shortly.
Please see the complete disclaimer at https://sites.google.com
Speaker Change: Our adjusted diluted earnings per share was 30 pence for the three months ended December 31st 2024
calculated on 59.6 million diluted shares.
Speaker Change: as compared to 30p for the same period in the prior year.
calculated on 58.6 million diluted shares.
Speaker Change: Our adjusted diluted earnings per share in Q2 was stronger than our previous guide of 24 to 25 pence due to improved cost management largely in indirect costs
Speaker Change: We continue our business optimisation efforts, which have resulted in an exceptional charge in the quarter of £5.5 million due to headcount reduction.
Speaker Change: Most of the exits occurred at the end of the quarter, and thus this latest round of business optimisation has limited impact on profitability in Q2, but should largely benefit future quarters.
Speaker Change: Additionally, the adjusted tax rate in the quarter was 18.2%, down from 21.5% in Q1 FY25.
Speaker Change: UK and Romania agreed on a new tax treaty in November which will exempt ENDAVA from Romania dividend withholding tax.
once it is fully ratified by both countries.
Speaker Change: This charge added one pence to adjusted EPS in the quarter.
Speaker Change: The impact against the statutory APS figure is approximately six pence.
Speaker Change: As a result of this tax change, we now expect our adjusted tax rate to be around 18.5% for the remainder of fiscal year 2025.
Speaker Change: Revenue from our 10 largest clients accounted for 36% of revenue for three months ended December 31st 2024 compared to 34% the same period last fiscal year.
Speaker Change: to £7.1 million for the three months ended December 31st, 2024, as compared to the three months ended December 31st, 2023, representing a 13% year-over-year increase.
Speaker Change: In the three months ended December 31st, 2024, North America accounted for 39% of revenue, Europe for 24%.
Speaker Change: The UK for 32% while the rest of the world accounted for 5%
Speaker Change: Revenue from North America grew 32.7% three months into December 31st 2024 over the same period last fiscal year.
Speaker Change: Comparing the same periods, revenue from Europe declined 0.6%, the UK grew 1.3%, and the rest of the world declined 43.5%.
Speaker Change: North America was again boosted by the contribution of the Galaxy business while the decrease in Europe is mainly due to a slowdown of a client in TMT and an FX headwind
Speaker Change: The decline in the rest of the world is due to several clients and various verticals pulling back on projects.
and John Thurston. Thank you. Thank you.
Speaker Change: Revenue in the payments vertical remains challenged as some of our larger clients continue to reduce spend.
Speaker Change: We saw a strong pick-up in banking and capital markets, driven by some larger projects and expect this vertical to continue growing for the remainder of the fiscal year.
Speaker Change: Insurance remains another source of strength for us and we would expect this vertical to continue to grow for the remainder of the fiscal year.
Speaker Change: In TMT, one of our larger clients in media was acquired in Q1 fiscal 25 and the buyer shut down our project, which explains in part the continued weakness in that vertical.
Speaker Change: The decline in mobility revenue is primarily explained by the planned ramp-down for one large US client project in the last 12 months.
Healthcare revenue growth is primarily explained by the Galaxy acquisition.
Speaker Change: Our cash and cash equivalents at the end of the period totaled £60.1 million in December 31st 2024, compared to £62.4 million at June 30th 2024.
Speaker Change: Our borrowings totaled £123.7 million at December 31st 2024 compared to £144.8 million at June 30th 2024.
Speaker Change: Capital expenditure for the three months ended December 31st 2024 as a percentage of revenue was 0.2 percent compared to 0.8 percent in the same period last fiscal year
Speaker Change: Additionally, as John mentioned earlier, the Board of Directors of Endava approved a hundred million dollar share repurchase program as part of Endava's evolving approach to capital allocation.
Speaker Change: The execution of the share repurchase programme is subject to shareholder approval, which we intend to seek at a general meeting to be held on or around March 14, 2025.
Speaker Change: Before providing the guide I would like to provide some additional details.
Speaker Change: Since the end of the quarter, we have seen increased softness in the UK and rest of world regions.
Speaker Change: due to a worsening macroeconomic environment, leading to increased client caution regarding spend, which in turn resulted in unplanned ramp downs on existing projects and delays in our pipeline.
Consequently, we are pulling back the revenue and growth outlook.
and moving on to the Outlook.
Our guidance for Q3 fiscal year 2025 is as follows.
Speaker Change: and DARVA expects revenue to be in the range of £198 million to £200 million.
Speaker Change: representing constant currency revenue growth of between 13% and 14% on a year-over-year basis.
Speaker Change: EDAVA expects adjusted diluted EPS to be in a range of 31 to 32 pence per share
Speaker Change: Our guidance for the full year fiscal year 2025 is as follows.
Speaker Change: and DARVA expects revenue to be in the range of £795 million to £800 million, representing constant currency revenue increase between 8.5% and 9% on a year-over-year basis.
Speaker Change: and DARPA expects adjusted diluted EPS to be in the range of 120 to 123 pence per share.
Speaker Change: This above guidance for Q3 Fiscal 2025 and for full year Fiscal 2025 assumes the exchange rates on January 31st 2025 and the exchange rate was one British Pound to 1.24 US Dollars and 1.20 Euro.
Speaker Change: This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please hang up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw it, please press star then 2. At this time we will pause momentarily to assemble our roster.
and John Cotterill. Thank you. Thank you.
Our first question today
comes from Brian Bergen of TD Cohen
Please go ahead.
Speaker Change: Hi, thanks. This is Zach Azeman on for Bryan. First question we had is on the outlook. We were hoping that you can maybe go deeper into the underlying assumptions that inform the 3Q guide and the implied acceleration in 4Q sequentially.
Speaker Change: Just hoping for for any more color that you can share on the large deal conversion and kind of what's contemplated there. It sounds like there there was a macro downtick in some geos.
Speaker Change: earlier this calendar year, but just kind of curious what the assumptions are underpinning the March Q and June quarter guides.
Speaker Change: Thanks Zac, quite a lot to cover there. I think Mark's going to kick off with the underlying assumptions around Q3. I'll pick up some of the things driving the acceleration through into Q4.
and she's around large deals so that overlaps.
Speaker Change: Basically, North America remains strong for us, Europe stable with some puts and takes in there.
Speaker Change: but the UK definitely swaying towards the negative side and that's what's...
really force a reduction mainly around sort of financials.
Speaker Change: Payments stable again but there is pressure there and put some takes by geography. On the negative side though you do have TMT weakening and mobility.
Speaker Change: And in terms of the pipeline outlook, that has also had an effect in terms of the judgments that we've made.
Speaker Change: I mean, John can comment on some of the bigger deal pipeline, which is encouraging. It is going to be timing in that instance.
John Cotterell: So John, over to you. Yeah, sure. So, you know, one of the things that's happening under the surface is what we've been talking about for a few quarters.
John Cotterell: which is these larger deals often core modernization related where there's a longer sales cycle.
John Cotterell: The sales cycle being the clients need to actually understand what is now possible.
with the new technologies that we bring to bear.
John Cotterell: AI enabled a lot of it to enable a cost-effective, assured delivery and speedy core modernization program that they've struggled with in the past. Once they get their heads around
John Cotterell: The Art of the Possible. They then need to, you know, and want to prove out the approach, often via trial or a proof of concept. Then they want to raise budgets and get their business cases together.
John Cotterell: Signed deals and then there's a slower Scaling as we we put to the program together because these are large programs And then as you get through that you start to see the revenues ramping through so we get
John Cotterell: earlier visibility on all of that happening than is visible in terms of booking revenue coming through. An example of that is
John Cotterell: We've been working on a core modernisation with a large banking and capital markets client.
John Cotterell: and that started around two years ago. This time last year they were spending one and a half million dollars a quarter with us. It's now four times that and continues to grow.
John Cotterell: And so, you know, looking forward, we see the opportunity for that to grow. And we're seeing many other.
clients progressing down that road.
and, you know, at various stages.
John Cotterell: And as they progress down that road, that informs the forecast that we have going forward. Now, some of that's coming in in Q3, but mitigated by those macro effects that Mark was just taking you through. And outside of further macro, we'd expect to see the acceleration going into Q4.
John Cotterell: pretty strong sequentially, and then some of the volatility called out on the larger payment customer side. We're just hoping to dig in a little bit further as to what some of those conversations and interactions have been more recently.
Mark Thurston: Yeah, so where we're seeing strength is in the AI-driven, core modernization-driven space.
Mark Thurston: So you see that with the healthcare client that was a Galaxy client where they've been doing core modernization work using their accelerators.
Mark Thurston: for years now and that that work continues to flow through with that client and you know is giving growth there which you've you've picked up in the numbers.
Mark Thurston: As you look at payments and the BCM space, they're contrasting stories. The payment side, which to be clear, is focused on the payments processes as clients.
continues to decline a little.
Mark Thurston: It's much more stable than it was, if you look back a year ago when it was declining quite fast, but there's still a slow decline in that space. That is contrasted by very strong growth in the banking and capital markets space.
Mark Thurston: Now the reason I highlight the two next to each other is some of that is payments work that we are doing in the banking and capital market space where where banks are investing in their payments infrastructure.
Mark Thurston: but that isn't visible as payments work because it's it's part of a banking organization of being a payments processor.
Mark Thurston: So, we continue to see demand for our payments capabilities, but it's more appearing alongside many other things.
in the Banking and Capital Markets segment.
Mark Thurston: and we're seeing, you know, huge interest in the banking space around that capability and expect that to be a leading sector for us in adopting our capabilities in core modernization.
I appreciate that, Collar.
Thank you. Cheers, Doc.
Speaker Change: The next question comes from Tyler DuPont of Bank of America. Please go ahead.
Tyler Dupont: Hi, good morning. Thanks for taking our questions. I just wanted to also start with a demand-related question. You know, it sounds like some of your clients, you know, are continuing to either delay or ramp down.
Tyler Dupont: projects, can you maybe just discuss the visibility you have into calendar 2025 budgets given we're, I guess, sort of near the end of February and budgets tend to be set around this time, I guess both on an absolute basis and versus this time last year?
Tyler Dupont: Yeah, so I mean, we're still seeing budgets get settled down. I think part of the reason for that is what I was picking up on earlier around.
our core modernization approach.
Tyler Dupont: which is where we're seeing a lot of demand, that AI-driven approach to core modernization.
Tyler Dupont: is pretty new in the market. It's a pretty unusual and unique proposition that we have. And so, you know, clients...
Tyler Dupont: not knowing that that is available and having confidence in it until they've done the proof and concepts and so on and not sitting on budget going we're expecting to do this piece of work.
Tyler Dupont: The opportunity to do the work opens up as they understand the art of the possible.
Tyler Dupont: And so, you know, with some clients, we're seeing them shape that into their budgets. With other clients, we're still seeing them shuffle budgets around and look for budget in order to get these programs underway.
Tyler Dupont: So that may be specific to where we are with our capabilities and the conversations we're having with clients, which you know as you as we all know is more around the discretionary spend space of what's really going to drive change in client organizations.
Speaker Change: Okay. That's helpful. And then just as a follow-up, I want to ask about any potential pricing conversations you're having, you know, as, you know, we're still, you know, given the continued malaise in spending, particularly on the discretionary side. Are you having to engage in more meaningful pricing conversations to sort of compensate for that pullback, if you will? And if so, sort of where are those more pronounced versus others? Just any clarity there.
Speaker Change: I mean, we're actually seeing a slow improvement in pricing. I mean, this is measured on a sort of...
average, you know, revenue per workday.
Speaker Change: and indeed on a revenue per head basis. I think most of it is us actually recovering inflationary driven sort of rises.
Speaker Change: but we're also I think seeing some benefits from the prerogativity we're achieving on some of our outcome based deals.
Speaker Change: I think the core modernization, I think as we land those bigger deals, there'll be multi-year.
Speaker Change: and will be around us extracting sort of efficiency. So they will play very much to a productivity sort of play and, you know, our use of our accelerators that we've called out, Ray and Dash, as well as, you know, the AI Morpheus and Compass.
I understand. Thank you very much.
Thanks, Tyler.
Speaker Change: Our next question comes from Jonathan Lee of Guggenheim Partners. Please go ahead.
Jonathan Lee: Great, thanks for taking our questions. As you think about some of the recent ramp downs and softness driving the revised outlook, were those more broad base across your client base or are you expecting any incremental challenges some of your large customers?
Speaker Change: They have been relatively broad-based. I mean, they've been more notable for the geographies that we sort of called out, the UK and rest of the world. I guess given our exposure to financial services is where we've seen most of it.
Speaker Change: But it's not, you know, we can't point to one sort of client or a very specific instance for what has caused it. It's general sort of softness.
which we think is...
Speaker Change: certainly, let's call it macro driven, certainly you know the UK
Speaker Change: I can certainly vouch for that at the moment, and we are hearing also about softness.
Speaker Change: Asia Pacific, more particularly sort of Australia. So we have seen some of these unnotified ramps, obviously we get the notice, but we haven't seen them coming. And the reasons are typically sort of budget pressures or uncertainty, which I think is macro driven.
Speaker Change: Understood. And again, in the context of ramp downs, I mean, how should we think about the pace of hiring going forward for the remainder of the year, especially given the sequential ramp that you're seeing in fiscal 4Q?
Speaker Change: So I think with 2.3 coming up we'll see sort of headcounts step down on an average basis when we...
report the number in May.
Speaker Change: But actually, given the sequential increase that we're seeing, you know, it's implied by the back-end Q4, I think it's growth of between, you know, organically about 4-6% year-on-year, we will start to recruit to make that happen.
Speaker Change: I'd just add to that there's a bit of rotation of skills that are going on as we go through this digital shift and that's a little bit of a rotation towards higher value so I'd expect Headtown to be growing slower than the revenue as we look. Yes, absolutely.
and John Thurston.
Got it. Thanks for the detailed commentary there.
Thanks, Jonathan.
The next question comes from James Fawcett of Morgan Stanley.
Speaker Change: Hey guys, thanks for the question. It's Antonio on for James Fawcett. I wanted to ask more on the Galaxy acquisition. How far along are you in that process as far as integration? And what is baked into that increase in profitability that I'm expecting in the back half of the year?
Speaker Change: So we're well progressed, certainly from a systems perspective we aim to cut over the end of this month.
Speaker Change: and, you know, derive our financials. So our operating systems, financial systems will be locked. We are currently working in a joint manner on propositions with the core modernisation proposal that we have out in the marketplace.
Speaker Change: We are, as we're getting closer to integration, I think there will be further opportunities for cost optimisation.
Speaker Change: we have focused more on GNA in the initial sort of stages but as
the two organisations come more closely together.
Speaker Change: I expect more to come from it. So, slowly, we are improving the profitability at Galaxies. We bring the two organisations together.
Speaker Change: and I think there will be more further actual opportunity for that actually into FY26 for us as we get closer and closer aligned and build on the core modernisation prop together.
Speaker Change: Got it, that's helpful. And then as a follow-up I just wanted to ask on your bench dynamic and the rate of like utilization and how that's trending both onshore and offshore. Thank you.
Thank you.
Speaker Change: Bench is stable. It's low by historic standards for us. I think we're operating at around, I think, a six, seven percent. I think we will operate at that level, subject to this sort of integration further with Galaxy. We expect utilization to move up modestly.
Speaker Change: more effective and efficient, and I think it's through adopting some of the tools that we've outlined. We're not making any significant step change because of the use of AI, which we are.
Speaker Change: rolling out across the company, but we see sort of modest improvements from utilisation towards the end of this fiscal.
Got it. Thank you for the color, guys.
Thank you.
Speaker Change: The next question comes from Maggie Nolan from William Blair. Please go ahead.
Speaker Change: Hi everyone, it's Kate Krumstein on for Maybee. Thanks for taking my question. My first question is, you guys mentioned the continued focus on hiring for AI and data skills, and you also talked about the digital skill shift going on in the market.
Speaker Change: Can you talk a little bit more about what you're seeing in the hiring market right now, and how you feel your access to this talent has evolved over the past year?
Thank you.
Thanks Kate
Speaker Change: Yeah, so we've got a big program going on around what we call being AI native.
And we would define that as being everyone using.
Speaker Change: generative AI in their daily work, and I emphasize the word daily, so that you're seeing people use it just as part of how they operate.
Speaker Change: Now a lot of what we're doing in that space is transitioning in Dobbins.
into the AI space as opposed to just recruiting.
Speaker Change: new talent in the market, you know, everyone has gone back to the start from an AI point of view.
Speaker Change: just over two years ago. And so actually the best way of us moving forward is actually to equip our people and retrain them.
Speaker Change: If you look at the chat GPT licences that we have out there, because we have an enterprise licence across the organisation.
we're seeing 80%.
Speaker Change: of those being utilized on a daily basis now and across all in Darvins we're about 60% mark.
Speaker Change: although we are seeing progression in that direction. So, the big push is on developing our own people through training, through
Speaker Change: the Endava University and so on and we're seeing rapid progress there. We are bringing people in you know particularly around the data, data science
and Spice.
Speaker Change: but also you know where we find a few people who've gone further down the road in the use of
Speaker Change: AI, for instance, in the agentic AI space and so on, we snap those people up as well where possible. We're just moving as fast as we possibly can into making AI, you know, completely ubiquitous across the organization.
Speaker Change: Great, that's super helpful, thank you. And then can you guys hit a little bit on the five million dollar restructuring charge that you took during the quarter and actions that you're taking to improve overall efficiencies in the business?
Yeah, so we took out around below 200 people.
Speaker Change: Quite a bit of this is actually anticipating the integration with Galaxy. As I said earlier, we do certainly do our systems switch at the end of
Speaker Change: February. So it was very much focused on removing any sort of duplication and trying to simplify ahead of you know the further integration that will happen from that point forward. I think
Speaker Change: I think there will be further opportunities to take out costs, whether it will be at this level, it's hard to say until we are fully on the systems and fully understand the delivery models on both sides.
Speaker Change: But I think we will, you know, continue to be vigilant on costs, basically, given we still have, you know, this uncertainty, you know, from a macro perspective.
Great, thank you both.
Thank you.
Speaker Change: Our next question comes from Jamie Freedman of Susquehanna. Please go ahead.
Jamie Freedman: Hi, good morning, good afternoon. I was just wondering if you could talk about what you're thinking or contemplating in terms of
Jamie Freedman: Revenue realization meaning like the revenue per headcount because some of the companies are now seeing revenue grow faster than headcount Utilized headcount. So revenue is growing faster than utilized headcount, right? So it's apples to apples. So Any comment on the revenue per headcount at this stage?
Speaker Change: Thanks Jeremy. I think it will improve, basically as we were saying, because we're seeing pricing moderately improve.
Speaker Change: So if you think about that in terms of the workdays
Speaker Change: that we're delivering. We still probably don't need to talk waste time material, although we will increasingly shift with our larger contracts to potentially more outcome-based. For the near term, we're talking waste time and materials. So there is a heavy linkage with the workday delivered and we are seeing some pricing improvement. text on screen.
So if with
Speaker Change: We will see, you know, that revenue per head move up. It is modest, but it is moving up. So I guess with us, I think if you were trying to sort of do a head count, revenue growth...
Speaker Change: what's the right linkage you'll see us run a little bit hot I think towards Q3 Q4
Speaker Change: But I think going forward, if that linkage with headcount and revenue, you know, holds true, which I think will change actually as the big deals sort of come in, you would then start to see us recruit at the same rate.
Speaker Change: Okay, thank you. And then in terms of the concerns, Mark, that you're mentioning with regard to the macro in the UK, could you just elaborate on that when
Speaker Change: Did that starters that More the same and is it? To what extent is it contemplated to weigh on the guidance?
Speaker Change: It does weigh. We basically saw it through, you know, January, February. I guess it's not followed the UK economy that closely in the US.
You know, the inflation is difficult.
Growth is difficult.
Speaker Change: There is some, you know, uncertainty in terms of the outlook and we've definitely seen...
Speaker Change: in some cases, you know, ramping down, you know, existing work and in a similar, you know, position in the rest of the world. So it's something that is materialized as we cross over from, you know, the end of December into January, February.
Great. I'll drop back into Q. Thank you.
Thanks, Jeremy.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Mr. John Cotterell for any closing remarks.
John Cotterell: Thank you and thank you all for joining us today. As I mentioned in my prepared remarks, we're continuing to see excitement in the market about AI enabled capabilities.
John Cotterell: such as Morpheus and Compass on the core modernization side and progress on closing deals and initiating those ramps into production.
John Cotterell: but you know I just want to re-emphasize these are large projects with longer sales cycles and slower paths to scale and so whilst we're seeing that coming through it will take a while to reach revenue.
John Cotterell: The adoption of Gen AI is becoming more top of mind for clients.
John Cotterell: and you know with our hands-on experience with this technology we think we're in a strong position to cut through the hype and focus on delivering tangible benefits from the technology which is which is backed up by our deep industry experience.
John Cotterell: So I look forward to speaking with you all at our next earnings call in May. Thank you.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.