Endava PLC

NYSE:DAVA

Good morning, and welcome to the Endava Second Quarter Fiscal year 2024 Results Conference Call. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Laurence Madsen, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's Second Quarter of Fiscal Year 2024 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. Our presentation and our accompanying remarks today include forward-looking statements, including, but not limited to, statements regarding our guidance for Q3 fiscal year 2024 and for the full fiscal year 2024, the overall headwinds facing our industry and business, including adverse macroeconomic conditions and the global geopolitical climate and the impacts of such headwinds on our ability to grow revenue, and in particular, growth and expansion in our industry verticals, the impact of our investment and cost-saving initiatives on our financial performance, our acquisition of GalaxE Solutions, including expected synergies from the transaction and the overall impact on our business, enhancements to our technology and offerings, demand from clients for our technology services, our ability to create long-term value for our clients, our people and our shareholders, and our business strategies, plans and operations.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 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, we'll present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures 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. Reconciliations of such non-IFRS measures to the most directly comparable IFRS measures are included in today's earnings press release, as well as the investor presentation, both of 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.

I'd like to thank you all for joining us today and I hope you're all well. We're pleased to be here to provide an update on our business and financial performance for the 3 months ended December 31, 2023.As we noted in our press release, obviously, the environment continues to be challenging. Our results and guidance reflect headwinds in IT spending, particularly on discretionary projects and in the Payments and Banking and Capital Markets verticals. That said, we believe we have a very well positioned and strong business. We are confident that despite current softness in demand, in the longer term, the opportunity for us is very attractive. We want to make sure Endava continues to be well positioned to create long-term value for our clients, our people and our shareholders.We continue to pursue our strategy to ensure that while we are right-sized for the current demand environment, we are also making necessary investments in our business to position ourselves for when discretionary CapEx picks up again. We're seeing 3 key trends in the market. One, while budgets are up this year and there's a lot of work to be done, in the short term, spend is being deferred as clients continue to be cautious. As one client put it, we have the budget for a substantial ramp-up with Endava, but are going to go slow for now and see how the year unfolds.Secondly, we are seeing deeper demand for vertical and technology expertise. And thirdly, the growing importance and relevance of a broader, diversified delivery footprint. Given these trends, we're continuing to make organic and inorganic investments in a disciplined way to; number one, diversify our revenue, our delivery and invest in technology and domain capabilities; secondly, attract great talent and take advantage of the difficult times many others are facing to invest in and add to our leadership; and thirdly, evaluate acquisition opportunities that help us accelerate our growth strategy. Some of these investments may result in lower near-term margins given the current market environment. As we know, it takes courage to invest in uncertain times, but we continue to make sure we are being disciplined in pursuing our strategic objectives.Moving on to our results. We reported revenue totaling GBP 183.6 million for Q2 of our fiscal year 2024, representing an 8.1% year-on-year decrease in constant currency from GBP 205.2 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of GBP 22.7 million pounds, representing 12.4% adjusted profit before tax margin.Some of the large projects we mentioned last quarter have not scaled up to expectations yet, while others have remained in the pipeline for longer than expected as a result of client hesitancy. We now have numerous projects where discovery work has been done, but clients are hesitating on when to commit the sizable spend needed to build production-ready systems. Alongside this short-term change to our growth expectations, we have started a business optimization program in order to facilitate a return to the medium term to our 20% constant currency, organic revenue growth and 20% adjusted profit before tax margin. We remain focused on investing in growth, while simultaneously reducing corporate complexity and eliminating inefficiencies. We believe this will improve our competitiveness and enable us to further invest in growth.Let me tell you about some of these strategic initiatives where we are investing. We will continue with our global industry focus, which is a key competitive differentiator. Additionally, we are increasing our use of automation and accelerators to deliver outcomes for our clients more quickly. Increasingly, we are being requested to participate in larger scale enterprise systems integration work. And as a result, this will be a focus of activity in the coming quarters.We are bringing together our close-to-client delivery and near-shore delivery teams under one manager per region in order to further build consistency in our delivery capability. We're starting to see the benefits of our combined sales and client delivery operations, resulting in a more cost effective organization, greater collaboration across industries and regions, and the development of senior multi-disciplined leaders that will ensure Endava is able to continue to scale.We're using this slowdown period as an opportunity to invest in senior go-to-market leadership, attracting dealmakers who were difficult to shift in the boom times, and we undertook a rebranding exercise at the end of January, which has been very well received. In the last 12 months, we hired a dozen dealmakers from leading competitors across our industry verticals.On the technology front, we want to help our clients embrace and explore new technologies more rapidly. Therefore, in addition to our core delivery competencies, we are creating new teams called PODs that will be singularly focused on helping our clients accelerate and invent the future around new and emerging technologies. PODs represent an opportunity for differentiation by demonstrating our thought and delivery leadership across industry verticals against a key set of technologies and capabilities.The PODs pull together existing Endava experts with exceptional thought and delivery leadership within a fast evolving technology domain. They will work with our industry teams to establish thought-leading propositions around high momentum technologies and working alongside our delivery locations to ensure that appropriate skills are built and available at scale as acceleration is realized. We are building PODs for AI, cloud, intelligent automation, cybersecurity, quantum, sustainability, embedded and physical computing. We believe this is the right time to invest in these go-to-market technology and sales arenas, and these efforts will lay an even stronger foundation on which to scale as markets return.In addition to the release of our results today, I'm thrilled to announce our acquisition of GalaxE Solutions to strengthen our healthcare vertical, as well as establish delivery capabilities in India. This is our largest acquisition to date, and it aligns with our strategic vision of expanding our global delivery footprint and further diversifying our revenue base.GalaxE was started in 1993 by the CEO, Tim Bryan, and is a leading provider of digital transformation and product development services to blue-chip U.S. companies, with a significant client base in the healthcare vertical and delivery capabilities in India. I met with Tim and his leadership team and visited their delivery centers in India, and I'm excited about the synergies we can create between the 2 companies. This acquisition significantly expands our presence in the fast-growing and exciting healthcare sector in the U.S.Additionally, with GalaxE, our global delivery footprint now expands to India, the deepest IT talent pool in the world where GalaxE has nearly 1,200 employees. GalaxE will strengthen our North American management team and brings decades of offshore delivery know-how to Endava. In addition, GalaxE has developed a strong accelerator enabled capability, facilitating the understanding of existing enterprise systems and enabling change. This capability, alongside of Endava's existing strength in delivering next-generation technology will allow us to open new opportunities and go deeper into enterprise transformation work, delivering more insightful and predictable outcomes. Mark will provide more details on the transaction shortly.I'm excited to share that we announced yesterday that we are expanding our strategic partnership with Equiniti, a leading international provider of tech-enabled shareholder, retirement and remediation services. We have established a 5-year partnership of GBP 75 million to support the delivery of their transformative product and tech roadmap. This deal strengthens our existing 3-year relationship and delivers significant growth for Endava in our capital markets vertical. With the extension of this partnership, Equiniti has become one of Endava's top 10 clients globally. This revenue is net new, and is an example of the sizable project opportunities that are being slower to convert than expected last quarter.I'd like to provide you with an update on projects we are working on in North America. In our Banking and Capital Markets vertical, we are working with early warning services in launching Paze, an easy online checkout solution offered by banks and credit unions. Endava is accelerating speed to market, with the expediting of test environments and the development of an SDK for merchant integrations. We continue to drive market expansion as an integration partner of early warning, enabling Endava to drive value across all verticals.Endava is working with a leading fintech company in the alternative investment space based in North America. Our 2-plus year partnerships started with a platform envisioning project, working directly with their entire C-suite to translate their growth ambitions into executable backlogs in order to jumpstart an actionable delivery plan. We helped build out their Snowflake-based data lake, an end-to-end data pipeline, enabling sales and operational reporting. Additionally, we provide ongoing support for internal integrations with systems and external integrations with reporting providers.Endava is working with the American Endowment Foundation, or AEF, one of the nation's largest independent donor-advised fund sponsors, to help modernize their donor-advised fund platform. We are supporting their leadership team with their digital transformation journey. The goal is to harness technology and automation to optimize the end-to-end fund management process by improving the user experience for firms, financial advisors, donors and internal AEF team members. By curating a seamless interface for both existing clients and prospective partner firms, we will help to scale and streamline AEF's overall internal operational efficiency.In our TMT vertical, we are working for a large U.S. sports media company, organizing their data by building a platform to centralize, monitor and show interactive reports for financial information. The financial data visualizations encompass details relating to ticketing events, payments, customer information, video visualization and streaming. The centralized information allows our client to make real-time database decisions and monitor their top sales indicators.Mobile gaming remains an important revenue contributor for clients in the gaming sector. We are collaborating with a global brand in both the console and casual game market, reshaping their direct-to-consumer platforms to revolutionize their monetization strategy. Through the implementation of streamlined processes, exclusive deals, tailored and compelling transactional interfaces and loyalty rewards programs, we are enticing mobile gamers to explore web platforms, fostering a more immersive, community-focused user experience beyond the confines of the game.In the aviation space, Endava is partnering with Delta Airlines, helping them launch and support Delta Sync, a suite of personalized experiences and offers aimed at creating new ways for customers to enjoy their time on board. Endava worked with Delta to establish a cutting-edge, agile product strategy and design approach, which has improved customer satisfaction, increased member acquisition and delivered value to strategic partners through customer engagement. We'll continue to bring to bear our capabilities in support of Delta's ongoing investment into industry-leading products and the best-in-class customer experience.We are working with many of the leading brands across different segments of the automotive OEM landscape. From back office and plant floor operations to in-car experience, we are helping our clients leverage technology to solve problems and improve revenue. For example, we used optical character recognition and artificial intelligence to digitize paper vehicle documentation, which expedited processing, improved accuracy and reduced manual labor. We used computer vision and synthetic data generation techniques to accelerate and deepen learning for AI models. We are also helping a top carmaker leverage virtual reality and AI to optimize and validate the design of production processes to reduce the time required to commission and build. And lastly, we are helping to design and deploy a scalable cloud architecture to enable over-the-air capabilities for millions of vehicles.On the technology side, we are rapidly moving to the point where AI touches just about every project. We continue to see a wide variety of work in our pre-sales pipeline right across the ideation to operation cycle, and we continue to see a significant increase in client interest in exploring the potential of generative AI. These conversations are becoming more focused as clients want to investigate specific applications for their business. This is happening across several industry verticals, including insurance, pharmaceuticals, technology, gaming, telecoms, banking and capital markets. In many cases, clients are taking steps in exploring potential applications, and we help them do this through workshops and practical proof-of-concept work.We are also seeing some more forward-looking organizations start to actively explore new types of application such as AI agent automation and combinations of generative AI with other emerging technologies such as knowledge graphs. Clients are increasingly looking to us for their AI implementation roadmaps, in particular in the insurance and tech sectors. A few examples of our involvement here include work with a large U.S. insurer to explore how they can use generative AI to grow their business, a workshop to demonstrate how generative AI can help a London market insurer, an advisory engagement to explore personalization of omni-channel customer communication for a large telecoms company, as well as creating a number of generative AI-powered tools for a wealth tech company and also building an evaluation framework for a question answering bot in the gaming industry.We are also pleased with the level of client interest in our in-house generative AI-based platform, which enables the exploration of a wide range of potential applications of the technology through practical prototype implementations alongside of our clients. 2 examples include code generation for pharmaceutical statistics for a global pharmaceutical company, and a multi-agent prototype, which took a claim through multiple stages and scenarios for a large U.S. insurer. Our deep partnership relationships with major technology providers continue to bear fruit.Here are a few tangible examples of projects we are working on, starting with an exciting generative AI-based prototype of a voice and text based call center assistant on Google Cloud for a major U.K. insurer. We recently held a multi-day hackathon at our offices in Charlotte to explore the latest advances in Microsoft Semantic Kernel platform targeting the healthcare industry, and developed 2 compelling prototypes in the areas of pharmacy automation and critical care triage.Internally, we are seeing the early benefits of generative AI in our processes, with production use of tools, increasing productivity in generating sales material, producing client insight for our private equity business, as well as helping to generate insights on our workforce. We recently held our Endava Innovation Lab with a total of 75 teams participating in this global innovation competition. And this year, 80% of the finalists applied AI in some practical way, illustrating how knowledge of AI has spread right across the firm.Globally, our recent acquisitions in Asia Pac and in the U.S. are integrating smoothly, and I'm excited about the prospects of our expanding global footprint. We continue trusted partnerships with NGOs supporting inclusive education, including Niya, an NGO dedicated to bridging the technology skills gap for refugees by providing free training and matching talent with opportunities around the world.Additionally, we are also leveraging our technical expertise to help solve complex environmental and societal issues. We recently teamed up with the Resilient Building Council in Australia to launch a bushfire resilience app tailored for Australians, empowering users to gauge their preparedness in the event of a fire, providing an easy-to-use solution to protect homes and communities.We ended the quarter with 11,539 employees, a 5.3% decrease from 12,183 in the same period last year. In the current environment, our recruitment is focused on areas of demand and, as I mentioned earlier, the strengthening of our senior go-to-market leadership. I'd like to take this opportunity to thank all Endavans for their commitment and determination as we persevere through these headwinds. We will continue to manage the business for the long term, maintaining our culture and organizational health and creating exciting solutions for our clients and their customers. We believe clients' activities in exploring and commissioning new products will overtake the headwinds and see us return to growth.I will now pass the call on to Mark, who will walk you through our financial results for the quarter and provide guidance for the coming quarter and fiscal year.

Thanks, John.Endava's revenue totaled GBP 183.6 million for the 3 months ended December 31, 2023, compared to GBP 205.2 million in the same period in the prior year, a 10.6% decrease over the same period in the prior year. In constant currency, our revenue declined 8.1% from the same period in the prior year, within the range we provided to you last quarter and reflected a 5.3% positive inorganic contribution during the quarter.Sequentially, revenue was down by 3.6% in constant currency on the previous quarter. Profit before tax for Q2 fiscal year 2024 was GBP 10.6 million compared to GBP 20.3 million in the same period in the prior year. Our adjusted profit before tax for the 3 months ended December 31, 2023, was GBP 22.7 million compared to GBP 43 million for the same period in the prior year. Our adjusted profit before tax margin was 12.4% for the 3 months ended December 31, 2023, compared to 20.9% for the same period in the prior year. Our adjusted diluted earnings per share was 30p for the 3 months ended December 31, 2023, calculated on 58.6 million diluted shares as compared to 59p for the same period in the prior year, calculated on 58.0 million diluted shares.Revenue from our 10 largest clients accounted for 34% of revenue for 3 months ended December 31, 2023, compared to 31% for the same period last fiscal year. The average spend per client from our 10 largest clients decreased from GBP 6.5 million to GBP 6.3 million for the 3 months ended December 31, 2023, as compared to the 3 months ended December 31, 2022, representing a 3.1% year-over-year decrease.In the 3 months ended December 31, 2023, North America accounted for 31% of revenue compared to 33% in the same period last fiscal year. Europe accounted for 26% of revenue compared to 23% in the same period last fiscal year. The U.K. accounted for 34% of revenue compared to 39% in the same period last fiscal year, while the rest of the world accounted for 9% compared to 5% in the same period last fiscal year.Revenue from North America declined 14.5% for the 3 months ended December 31, 2023, over the same period last fiscal year. Comparing the same periods, revenue from Europe grew 1.3%. The U.K. declined 22.3%, and the rest of the world grew 44.8%. Revenue from payments declined 20.8% for the 3 months ended December 31, 2023, over the same period last fiscal year and accounted for 26% of revenue compared to 29% in the same period last fiscal year.Revenue from banking and capital markets declined 25.2% for the 3 months ended December 31, 2023, for the same period last fiscal year and accounted for 14% of revenue compared to 17% in the same period last fiscal year. Revenue from insurance grew 10.4% for the 3 months ended December 31, 2023, over the same period last fiscal year and accounted for 8% of revenue compared to 7% in the same period last fiscal year. Revenue from TMT declined 5.2% for the 3 months ended December 31, 2023, over the same period last fiscal year and accounted for 23% of revenue compared to 22% in the same period last fiscal year.Revenue from mobility declined 4.1% for the 3 months ended December 31, 2023, over the same period last fiscal year, and accounted for 11% of revenue compared to 10% in the same period last fiscal year. Revenue from Other grew 3.3% for the 3 months ended December 31, 2023, over the same period last fiscal year and now accounts for 18% of revenue compared to 15% in the same period last fiscal year.Our adjusted free cash flow was GBP 33.6 million for the 3 months ended December 31, 2023, compared to GBP 37.0 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period remained strong at GBP 198.6 million at December 31, 2023, compared to GBP 164.7 million at June 30, 2023. Capital expenditure for the 3 months ended December 31, 2023, as a percentage of revenue was 0.8% compared to 2.0% in the same period last fiscal year.As John mentioned, we announced the acquisition of GalaxE today. Consideration for this acquisition totals up to USD 405 million, primarily in cash with some stock, with $30 million conditional upon future performance. Transaction is expected to close in early April 2024, subject to the completion of customary closing conditions and approvals and therefore, is not contemplated in our current guidance.Now, turning to our outlook for Q3 and full-year fiscal '24. On our last earnings call, we highlighted the number of large deals being progressed and a general strengthening of pipeline. Whilst the large deals pipeline has continued to grow in number and value, they have been slow to progress. In addition, deals that we have won largely remain in the discovery phase and are proving slow to ramp up into the production phase, given the uncertain macro environment creating hesitancy among clients.This has mainly been the case across all industry verticals. This weakness is most pronounced in payments and in banking and capital markets. In payments, companies are taking a very cautious view on the macro environment. This has resulted in slower release of IT budgets, and we are seeing projects being delayed. In banking and capital markets, we are seeing regulatory work to take precedence over a large transformation work. As in setting the revenue guide, we have set a narrow range for Q3, given where we are in the quarter, but set a wider range around Q4, which reflects the uncertainty we are seeing in pipeline conversion.The top and bottom of the range for Q4 would be 7% and 0.5% sequential growth on the midpoint for Q3, respectively. Consequently, whilst this uncertainty persists, our business optimization program that John mentioned earlier will focus on actively managing headcount appropriate in this environment with a particular focus on our seniority pyramid. As a result, we expect to take an exceptional charge in H2 associated with headcount reduction. Guidance has been set with these actions underway and reflects the savings we anticipate achieving.With that context, let me now turn to the guidance. Our guidance for Q3 fiscal year 2024 is as follows. Endava expects revenue to be in the range of GBP 174 million to GBP 176 million, representing constant currency revenue decrease of between 12% and 11% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of 17p to 19p per share.Our guidance for full-year fiscal year 2024 is as follows. Endava expects revenue to be in the range of GBP 722 million to GBP 735 million, representing constant currency revenue decrease between 7% and 5% on a year-over-year basis. Endava expects adjusted diluted EPS to be in a range of GBP 1.09 to GBP 1.22 per share. This above guidance for Q3 fiscal year 2024 and the full fiscal year 2024 assumes exchange rates on January 31, 2024, and the exchange rate was GBP 1 to USD 1.27 and EUR 1.17. This concludes our prepared comments.Operator, we are now ready to open the line for Q&A.

[Operator Instructions] And our first question comes from Ashwin Shirvaikar of Citi.

I was hoping to get some clarity with regards to the implied sequential growth range for 4Q, relatively wide range, so 0% to 7.5% or so. How much GalaxE contribution is included? And then when you look at organic sequential growth, what sorts of course corrections have you made with the assumptions you're making in relation to the conversion of bookings, pipeline to bookings, bookings to revenue and so on?

Thanks, Ashwin. The guide doesn't include any contribution from GalaxE. We said in the prepared comments that we hope it will complete early April. So it does exclude in that respect. In setting the guide, we've obviously had issues with the speed at which pipeline was converted and that's why we put a large range on the guide for Q4. Basically, the assumptions around pipeline conversion for Q4, we have been more conservative at the top end of the guide than we have previously. So when we, at this stage are looking at the proportion of contracted and committed, we would be typically looking at about 70% of the guided figure.We're actually going higher this time around, sort of 80%. And our conversion rate -- and when I talk about conversion rate, I mean, win rate. We tend to win 50% of the [ deeds ] or yields that we go for. The conversion rate is about actually the time it takes from that win to make a contraction with the other party and commence work. So, we haven't changed the assumption around win rates because it's consistent with what we have done. But the actual conversion rate is going to be somewhat slower.And as John said in his comments and I did myself, it's because budgets are either being constrained, certainly through this first quarter of the calendar year and clients are not willing yet to release them, even though they are saying that there is work there for us to do. So, we're taking a cautious view at the top of the range. But if -- actually that is not as conservative, we're basically putting at the bottom of the range where we see little sequential growth going from Q3 to Q4. So the bottom of the range would be something like 176, which is the top of the range for Q3.

Understood. And then there was a prepared remark, which alluded to clients asking for diversified delivery. Hopefully, you can walk through that. Is it more a -- is it now a necessity to have, let's say, India, South Asia, plus LatAm, plus presence in Central Europe sort of? Is that kind of a standard ask from a risk management perspective? Or 2 out of 3 will do? Or what specific sorts of things are clients looking for from a diversification perspective?

Yes. Thanks, Ashwin. Yes, it is. Some of the things that you touched on, essentially, as we're getting into larger projects and larger proportions of the spend that clients have, they want to see that mix of us not just being able to do the more expensive Central Europe, LatAm delivery, but also being able to augment that with some more cost effective delivery capabilities out of places like India and Southeast Asia, and being able to scale that a little bit more so that it becomes part of the mix. It's not a move into a different sort of service. It's just a move to get ability to balance our pricing a little bit more and remain competitive by introducing that. Also the access to the talent pool is another reason why we've been targeting India. We've been hinting at that for a while. With the GalaxE deal, we actually take our first step into India delivering.

So, cost is driving this rather than geopolitical risk? I guess that was the gist of my question.

Yes, it's much more about competitive pricing than geopolitical risk for us.

The next question comes from Puneet Jain of J.P. Morgan.

Follow up to what Ashwin asked. Like, can you talk about like the pricing trends you are seeing? And are you seeing like, on sequential basis, clients continuing to push for like-to-like price declines as well?

So the pricing that we're finding is actually stable. The diversified delivery comment, I was making was the ability to widen our footprint in clients by having a wider footprint in more costs attractive from a client point of view, delivery locations, i.e., It opens up parcels of work that we previously wouldn't have available to us just delivering out of Central Europe and Latin America. But within the zones that we're operating in, we're actually finding pricing is pretty stable, arguably even getting small increases through.

Got it. And can you share more details around the planned business optimization program? Like how many heads you expect to cut, like potential cost savings? And more importantly, how are you going to ensure that, that does not create any disruption in delivery?

So the initial phase, which is going to lead to the termination costs that I sort of outlined in the prepared comments is basically looking at areas of overlap in SG&A and addressing the bench that we have built up as a result of deals and pipelines slipping to the right. So, we're losing about 450 people. There will be a termination cost about GBP 7.5 million and it should generate annual savings of about GBP 23 million. But this is the first part, really, of the program that we want to put in place, where we'll be looking basically at the go-to-market part of the organization, where we're aligning sales and delivery more closely and where we get some overlap in that area, we will seek to sort of streamline. And again, John talked about the PODs on the call as well, which is to push more technology from a horizontal perspective into the industry verticals. And again, as we sort of focus more closely on that, we anticipate that it will drive higher utilization with our staff, our external focusing staff. So it's initially 2 phases. The first phase is to address bench and look at SG&A. Second phase is basically to streamline and simplify by reducing duplication across the board.

The next question comes from Maggie Nolan of William Blair.

This is Jesse on for Maggie. So, first, I had a question about margins. Are you still expecting the fiscal second quarter to be the trough in margins, given the revision to guidance here?

When you say fiscal second quarter, you mean the one we've just reported on, i.e., the quarter to December?

Yes.

I would say we've got a little bit further to go in terms of Q3. I think that is going to be our nadir. We will see a little bit of weakness in the gross margin despite branch reduction exercise that's going on in a quarter, but it is happening in the latter part of the quarter. And we also have some investments that we're making through SG&A. So the nadir in terms of adjusted PBT will be in Q3, so the quarter to March where we'll be probably sub-10%. But then as the program starts to have a more impact on profitability and we see the sequential sort of growth in revenue that we anticipate, gross margin will improve, eventually reduce, and then we will be delivering an adjusted PBT, which would be low double digits.

I mean, it's also worth saying that during this quarter, we're investing pretty heavily. We're bringing in the dealmakers. We're investing in the PODs. We don't carve out our transaction costs on M&A. And so that hits Q3 pretty strongly. So that's all part of the margin pressure in Q3.

Got it. That's helpful and makes sense to me. And then for my follow up. In the past, you've talked about pursuing acquisitions that are 5% of the business, and obviously, this one is a bit larger. Could you talk about how the growth and margin profile compares? And maybe what type of multiple you paid and how you make sure that this one goes well as the others have done in the past?

Yes. Sure. I mean, we talked about 5% to 10%, and we said we'd go over 10% for something that was really strategic. And this is a little over 10%, but it is really strategic for us. If you look at it, it moves the U.S. to being our largest region in terms of client revenues, that is absolutely crucial. It's been a target of ours for a long time and great to see it step up there. The U.S. is the largest market in the world and needs to be our largest.Secondly, it adds the India talent pool, which we touched on earlier in the call, and that's pretty strategic. They bring decades of experience. They've been operating there for over 20 years and that sort of offshore delivery model is pretty crucial. I went out to India with my team. We spent a lot of time with the GalaxE guys out there, really got to grips with how they do it and confident that it's a very strong delivery operation.Thirdly, it's a big step forward in healthcare, takes healthcare to being one of our largest vertical. So, we'll be pulling that out, I'm pretty sure next year, Mark, as a separate vertical, as a result of having done this deal. It's also one of the more stable sectors through this period. So, a great area to invest in. They're a growing business, very healthy, and they have a bunch of accelerators, which fit very, very well with ours. And we spent quite a bit of time as a team working through how they would work.The client calls that I did, which was yesterday were frankly astounding. They're the best set of client calls that I've ever had going through an acquisition in terms of clients belief in GalaxE and their ability to deliver. So, a lot of plans around how we do the integration properly. We've done a lot of work on making sure this is the right deal for us in execution terms, as well as the strategic side that I just went through.Mark, anything on the financials?

No, not really. I mean, the 1,600 odd people that we onboard, a high proportion of them are in North America, about 30% of headcount. They deliver broadly the similar revenue per head that we do, and profitability is similar to Endava, although we will need to invest in their support functions, which as a private business, they have run very lean. But we expect when it does complete, it is likely to add 4% to our guide full-year growth that we've just outlined.

The next question comes from Bryan Bergin of TD Cowen.

On the outlook here, are there also cancellations that have occurred if clients kind of went through their year-end period? Or is this entirely delayed release? Because I heard you mention client IT budgets actually, I guess, potentially up this year. So, trying to understand the aspect of lost revenue versus delayed growth potential. And really, are some of these bigger programs that you expected to help you with that prior fiscal 4Q growth ramp still on the table in calendar '24, meaning potentially they can cross the line for you in the first half of your fiscal '25?

Thanks, Bryan. I'll let Mark do some of the detail on that. But you're right, we are seeing client budgets, IT budgets up. We're just not seeing them spending it yet. And that's where some of our confidence about an upturn later in the year comes from. Because there is backlog of work, there is budget to go against it. We just need to get them through this hesitancy.

That's exactly right. I mean, in the opening question when I was talking about the delays and the conversion of pipeline, that has been our issue. We haven't seen erosion on the base. And actually for us, pricing remains stable despite comments we've heard from other players in the space. And in terms of our sort of larger deals, which for us, we monitor deals that are over above GBP 5 million or GBP 10 million TCV. The volume has gone up in number of deals. When we look at it from when we were talking in the guide in mid-November, we've lost a couple, but we have gained sort of 5.So, we are up in absolute numbers. And the actual value that we now have in the hopper compared with back in November is up by 75%. And there are much larger deals coming into play. I mean, I think John referenced the Equiniti deal, which was something that we anticipated would land before Christmas. And we've only been able to announce it today, which sort of gives an illustration of the issue that we've been facing as we've dealt with the uncertainty of pipeline conversion.

Okay. That's helpful. And then on the margin front, if you could talk about near-term utilization considerations as you move through the second half year. And are you able to quantify the level of investment you're making here in the near term, just to give us a better sense of how much is investment driven versus top line driven?

Yes. So, utilization for the current quarter, which is the quarter to December, was reasonably low, about sort of 67%. We think it will be in Q3 maybe a little bit below that but, say, 66 or so. So the bench will be quite high until the actions that we just announced are going to take effect. It will then revert to something that is more normal as we go into Q4. So, we'll be heading up towards a 68%, 69%.In terms of investments, we continue to actually invest in our sales and marketing activities. So, it is around about the moment, about 6% of revenue. Obviously, with the deal that we have just landed with GalaxE, we've invested quite a lot of money in terms of deal-related fees. So it's pretty crunchy in Q3, and then we have ongoing M&A integration. So, we had 2 before this deal in Asia Pac and North America that we will complete by the year end, but that will continue as we take on board GalaxE, which will roll on into FY '25. And then we're looking also at a simplification of our processes and systems, and that will be a continual P&L investment for us as well. So, we just want to get lean for the future and make sure that we have simplified processes to scale.

The next question comes from James Faucette of Morgan Stanley.

This is Antonio Jaramillo on for James Faucette. I wanted to dig in more on the marquee client spend, namely around Mastercard and also Worldpay. I know previously, you had mentioned that was not contemplated in the guide, but I just wanted to ask about that first. And then I have a follow-up as well.

Yes. So, I mean, we've been facing quite a headwind in payments you'd expect with our 2 largest clients being Mastercard and Worldpay. But they are part of those headwinds. I mean, Mastercard is split into 2 streams that work for us. One, which is Vocalink in the U.K., which came off peak in FY '23. So, it is lower than FY '23, our fiscal '23. That is performing in line with expectations. Where we're seeing headwinds is in the non-Vocalink elements of work where budgets have been set flat or actually indeed below '23 levels. So, we've seen some come off in terms of what we previously anticipated with Mastercard, but we are seeing some areas where we are able to get into new areas of growth, although it's not a level that we anticipated back in November.And Worldpay, again has come off slightly from our view in November. The transaction has gone through with their PE backed backer. And yet, we don't have any concrete plans around the spend that they intend to put in place, but we expect them to pick up investment as we are sensitive. But they have lost ground to their competitors. But again, it is slightly delayed that spend compared to what we anticipated. So again, it is slightly flat there as well.

That's helpful. And then for my follow up. I wanted to ask more on the embedded payments opportunity. I know that you guys have also highlighted that in the past. I'm curious if there's any green shoots in that area and what it looks like for the rest of the year?

Yes. Embedded payments is one of the stronger areas. If you look under the surface with payments, there are areas like traditional acquiring where the investment has been pulled right back. Clients are getting by with their existing systems, rather than pulling them forward and continuing to invest in them. The places where they are continuing to invest is the new areas, the open banking areas, the embedded payments areas and so on, where they have the opportunity for more differentiated, higher-margin proposition in the market. So, that's where we're continuing to see new work coming through.

The next question comes from Moshe Katri of Wedbush Securities.

I just want to go back and just maybe discuss the GalaxE acquisition. You indicated that the revenue per billable headcount and the margins are at par with Endava's. But then you also indicated that you needed to make some investments in the business. Should we assume that the acquisition is at least dilutive, somewhat dilutive for the first year, given some of the investments that you need to make into what you're doing in India?

No. I mean, in terms of, I think the guide on EPS for the full year, I don't think it will make a contribution in terms of improving it, although it will do from a revenue perspective. We have to make some investments basically in their sort of finance function and some of the support functions to take them from the sort of private world up to public company speed. And then again, it is plugging the Indian farshore capability into the Endava nearshore business model. And that will take some investment on our part. So, I think for the near term, which is probably 6 months or so, it won't be earnings dilutive. I think it'll be earnings neutral. But thereafter, we anticipate that it will be earnings positive.

Okay. That makes sense. And then looking at clients budgets and looking at the pipeline conversion here, has anything changed since the quarter ended? Are we still kind of in a wait-and-see mode or things have changed in terms of ramp up?

So, I mean, there are signs as we're getting through February that clients are starting to ease off a little bit. You saw it in the Equiniti deal that we announced yesterday that got signed, wasn't getting signed earlier in the quarter. And the clients are looking at their budgets, looking at the things that they want to do and we're seeing some of that come through. I actually think others across the industry are also seeing that. We're seeing the same trend.

The next question is from Bryan Keane of Deutsche Bank.

Mark, I guess on GalaxE, what's the normalized revenue growth rate of the company and maybe how's it growing more recently? Is it being impacted by the economy?

Well, they have a December year-end at the moment, so they haven't concluded December '23. But the growth rates there, they're [ substantive ], of course, but look about sort of 10%. Their expectation sort of growing into calendar '24 is probably around 10% to 15%. So, they are growing quite nicely, actually. And as I said, their sort of financial profile is similar to us with the one caveat is they don't carry the SG&A that you would expect from an organization like Endava.So the systems investment, I mentioned the finance function, that needs to be put in place, but that won't be prohibitive for us because we will just move them onto our platform. The long caveat is it is in a different continent to us. So, we do need to establish some presence there. So the profitability is good, and I think the growth prospects are good. And I think they probably are going to be better under Endava ownership than they were as they were.

So, on a normalized basis, you think they can grow to somewhere near the 20% constant currency revenue growth outlook that you guys think is possible?

Yes. Absolutely. In fact, we think that as we get together, there's opportunity cross-fertilizing the capabilities of the businesses, the accelerators that I was talking about, to actually see opportunities to accelerate both core Endava and the GalaxE business. GalaxE, because we widen their capability, we give them scale, and they do have large clients who have hesitated to spend more with them because of their scale. Endava, because of the access to these accelerators that will help us drive a little bit deeper into enterprise transformation with our larger clients. So, there's some very good revenue opportunities as we combine the businesses on top of the underlying process.

Got it. And then just on the demand question and timeline and conversions, when do you now guys expect maybe that thought? Do you have any visibility to know is it the beginning of calendar year '25? Is it kind of a TBD environment out there? Just where do you think the environment could improve at this point? Or is it just too uncertain to know?[Technical Difficulty]

The next question comes from Spencer Anson of Susquehanna.

How have you seen the demand environment evolve since macro conditions became more difficult? And what should we watch for to get an indication that things might be standing up going forward? Did you guys hear the question?

Pardon me. This is the conference operator. We seem to be experiencing a technical issue. Please hold while we get the speakers reconnected.Thank you for holding. We do have the speaker line reconnected.

We're back. Can you hear us? Hello?

Spencer, please repeat your question.

How have you seen the demand environment evolve since macro conditions became more difficult? And what signs should we look for indicate that projects might be standing up?

I suppose at the moment, the sort of macros, as we sort of outlined, we've seen it through hesitancy and progressing with work. And I guess it has something to do with our exposure, particularly to Europe and U.K. [Technical Difficulty] giving people [ pull enough ]. And so we're not actually seeing much of a change from that perspective. But actually, the work is building up. I gave it a sort of indication of the pipeline of bigger deals building up, the size of them, a number. It's just the willingness of clients to commit at this stage.

This concludes our question-and-answer session. I would like to turn the conference back over to John Cotterell for any closing remarks.

Yes. So, thank you all for joining us today. As you can see, we're investing in Endava in order to facilitate a return in the medium term to our historical profitability and growth levels. And we're gearing Endava to continue as a leader as tech waves gather strength. We look forward to speaking to you in our next earnings call. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.