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    Endava PLC (DAVA)

    Q4 2024 Earnings Summary

    Reported on Feb 25, 2025 (Before Market Open)
    Pre-Earnings Price$28.91Last close (Sep 18, 2024)
    Post-Earnings Price$28.90Open (Sep 19, 2024)
    Price Change
    $-0.01(-0.03%)

    What went well

    • Endava's investments in AI and core modernization are expected to drive future growth, as clients seek solutions to complex engineering challenges associated with AI implementation. John Cotterell stated that "the engineering around implementing GenAI is actually pretty complex" and that they are "seeing them progress through", indicating a strong pipeline for AI-related projects.
    • The acquisition of GalaxE is opening new cross-selling opportunities, with early signs of success. John Cotterell mentioned they have "landed 2 or 3" cross-selling projects and see "good early signs that we have product and capability that we can go to market with".
    • Expansion into India and new geographies is providing additional avenues for growth. Endava's India footprint is leading to engagements with clients on work they previously wouldn't have been considered for, leveraging their industry expertise to open new client spaces and support growth.

    What went wrong

    • Prolonged pressure on margins due to significant investments and integration costs, including GalaxE integration costs, investments in Dava.X, and partnership with ChatGPT (heavy on licenses), is expected to impact the adjusted PBT margin by about 2.5% during FY'25. Margin improvement is anticipated only towards the latter part of the fiscal year, indicating ongoing margin pressure.
    • The company's organic revenue growth is minimal, with M&A contributing 11% of the guidance for 10.0% to 11.5% revenue growth in FY'25, suggesting that growth is heavily reliant on acquisitions rather than organic expansion.
    • Elongated sales cycles and delayed client spending decisions, especially in AI and core modernization projects, are causing delays in revenue realization. The higher bar set by CFOs on business cases and additional project approvals are contributing to the longer decision-making and sales cycles, potentially impacting near-term growth.

    Q&A Summary

    1. Revenue Outlook and Visibility
      Q: What's driving your confidence in sequential improvement, and what's your visibility?
      A: We expect modest sequential improvements, about 2% at the top end. This confidence comes from increased activity in core modernization, new opportunities due to our India footprint, and cross-selling with GalaxE. Our visibility into the first half is solid, but the second half is limited.

    2. Impact of AI on Growth
      Q: Will AI lead to extended recovery to normal growth?
      A: Sales cycles are elongating due to AI projects requiring more prototyping and business case development. We're not seeing volumes sufficient to push growth into our guidance for the next 12 months. We don't expect 20%+ growth from AI in FY '25.

    3. Margin Recovery Path
      Q: What's the path to gross margin recovery, and any pricing dynamics?
      A: We're reinvesting margin improvements into Dava.X tools and technologies, which will weigh on margins through the first half of FY '25. Margins will improve in Q3 and Q4. We're assuming flat pricing and will assess pay rises based on demand recovery.

    4. Payment Sector Softness
      Q: What's causing payment softness, and how do top clients factor in?
      A: Revenue from one top client is stabilizing, while the other is expected to pick up due to a transformation program. The payments market is more competitive, affecting processors' margins. Our exposure to payments has decreased to 19% of the business.

    5. GalaxE Integration and Synergies
      Q: Can you discuss GalaxE integration and cross-sell opportunities?
      A: Integration is going well, with significant cross-selling opportunities in core modernization. We're seeing opportunities to deliver from India for existing clients. Investments are being made in migrating systems and sharpening our go-to-market strategy.

    6. Elongated Sales Cycles
      Q: Is the elongation in decision cycles specific to AI projects?
      A: The elongation affects discretionary spend broadly but is longest for AI and core modernization projects. Higher scrutiny and sign-offs are extending cycles, especially where engineering challenges are significant.

    7. Investments Affecting Margins
      Q: Can you expand on investments impacting adjusted PBT margin?
      A: We're investing in Dava.X, industry verticals, ChatGPT partnerships, and GalaxE integration, which will weigh on margins, particularly in the first half. We anticipate paying bonuses this year based on performance.

    8. Investment in Partnerships
      Q: Which partnerships could provide substantial opportunity next year?
      A: We have partnerships with Google Cloud, AWS, Microsoft Azure, Snowflake, and Stripe. These partnerships enhance our technical solutions and bring us into client projects as trusted engineers.

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