Endava plc

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the NDAAVA second quarter fiscal year 2022 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Lawrence Madsen, Head of Investor Relations, you may begin your conference.

Thank you, Operator.

Good afternoon, everyone, and welcome to Endava's second quarter fiscal year 2022 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cottrell, Endava's Chief Executive Officer, and Mark Thurston, Endava's Chief Financial Officer. Before we begin, a quick reminder to our listeners. Our remarks today include forward-looking statements, including our guidance for Q3 fiscal year 2022 and for the full fiscal year 2022, and statements regarding our perceived opportunities and anticipated future growth and geographic expansion, our expectations regarding digital transformation of businesses and industries and other industry trends, the necessity of digital transformation for many companies and Endeava's ability to benefit therefrom, potential technological advances, our expectation for future partnerships and abilities to expand our existing relationships, anticipated client demand for Endeava services, our ability to attract and retain employees and be an employer of choice in multiple geographies, our integration of five and level, and our ability to execute on our sustainability objectives, as well as other forward-looking statements. These statements are subject to risks 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 the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. Please refer to the Risk Factors section of our annual report on Form 20-F, filed with the Securities and Exchange Commission on September 28, 2021, which contains a discussion of important factors that could cause actual results to differ materially from those contained in any forward-looking statements. Also, during the call, we'll present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which you can find on our Investors Relations website. A link to the replay of this call will also be available there. With that, I'll turn the call over to John.

Thank you, Laurence. I'd like to thank you all for joining us today, and I hope you're all staying safe and well. We're pleased to be here to provide an update on our business and financial performance for the three months ended December the 31st, 2021. Endava continues to experience very strong demand for our digital services in all of our regions and verticals. However, the environment continues to be one where demand outweighs supply, and therefore we are having to be very selective in the work that we take on. The situation in Russia and Ukraine is one that we continue to monitor. For Endava, we believe that our direct exposure is low, as we have no people based in Russia, Ukraine or Belarus. Endava reported revenue of £157.7 million for Q2 of our fiscal year 2022, representing a 53.4% year-on-year increase in constant currency from 105.2 million pounds in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of 33 million pounds, representing a 60.4% year-on-year increase from 20.6 million pounds in the same period in the prior year. Our strong revenue growth continues to be driven by the expansion of work for our existing clients and the acquisition of new ones during the quarter. As I've mentioned previously, we continue to see an increasing flow of new client opportunities, which starts small with ideation or proof of concept engagements, and then scale as we move into production system development. The scaling of these projects as engagements expand is now driving the growth of larger clients and the increased spend by these clients. We ended the quarter with 689 active clients, up from 521 at the end of the same period in the prior year, a 32.2% year-on-year increase. Importantly, we grew the number of larger clients with a total of 107 clients who are paying us in excess of £1 million a year, compared to 75 in the same period last year, representing a 42.7% year-on-year increase. The average spend of our top 10 clients continues to grow strongly and was up 40.4% year-on-year in the three months ended December 31st, 2021. Our business in the US continues to expand strongly, helped by the successful integration of our most recent acquisitions, Five and Level. Revenue from North America grew 79.8% for the three months ended December 31st, 2021, over the same quarter last fiscal year. Revenue from the rest of the world is also growing strongly, up 109.1% year on year, driven mainly by the payments and financial services vertical, with existing clients taking us to new countries and clients moving to new jobs and taking us with them. Revenue in our payments and financial services vertical grew by 55.8% year on year, driven by strong growth in all the sub-segments of that vertical. Banking and capital markets grew very strongly, due in large part to investments in consolidated data platforms, cloud migration, and the crypto and distributed ledger technology space. Whilst business-driven initiatives such as advanced trading analytics and digitization, are thriving. Demand in payments is driven by the continued shift to frictionless payments, facilitated primarily by e-commerce, merchant onboarding, and open banking, in combination with real-time payment rails. Across our insurance vertical, we've seen significant growth in delivery of no-code stroke low-code solutions for underwriting and pricing. and in the application of automation to areas such as straight through processing of claims. Our other vertical also grew very strongly, up 58.2% year on year, with mobility being the key driver. Mobility, the movement of people and goods, is experiencing a long-term shift towards autonomous electric vehicles, and we're seeing accelerated demand for last mile logistics, connected vehicle innovation and sharing, and warehouse intralogistics. I'd now like to give some highlights on what we've been doing on the technology front. For many years, much of our business has been serving enterprises or FinTech clients developing software for their own use. More recently, we started working with software product vendors to develop their products, particularly in the financial services and technology industry areas. We have a range of successful ongoing engagements for clients who develop technical software products, such as collaboration platforms or software development tools, as well as some clients who develop well-known products for the capital markets industry. The products we work on are often offered both as packaged software to be installed and operated by the customer, as well as fast solutions run by the product vendor on behalf of their customer. This area has grown strongly for us, and we've found strong demand for our architecture, product design, development, testing, and creative services skills with these clients. Looking at the demand landscape through an industry-based lens, I would like to provide an update on our work in the private equity sector. Work for PE portfolio clients has been a significant proportion of Indava's business over the years. and we estimate that over 25% of our revenue comes from PE portfolio businesses. According to Refinitiv, in 2021, private equity firms began putting to work their record piles of unspec cash at a record rate to account for 20% of M&A activity. These financial sponsors accounted for $1.2 trillion worth of deals in 2021, a 111% year-on-year increase and a new record. We remain confident in our ability to continue to grow this portion of our business. Our acquisition of Intuitus in November 2019 helped expand our PE footprint in the mid-market space. We continue to grow our work with the larger funds as their demand for transformational large-scale IT investments continues to increase. We've seen the opportunity for technology change become a more important driver of the value creation thesis for buyers. And as a result, we continue to find ourselves in advantageous commercial situations where we are advising PE firms on the potential impact of post-acquisition technology transformation activities. Across functional teams of engineers, product strategists, and subject matter experts, a specialist in this field and we're particularly active in sectors where we have deep engineering expertise, such as payments, insurance, and TMT. Here are some specific examples of what we're doing in the PE space. In the past 12 months, we've been asked by multiple funds to help them in their ambitions to acquire payments businesses. Given our deep understanding of the industry, we help validate the growth potential of the targeted companies and our team helps set achievable product and technology roadmaps. For one such fund, we have now kicked off a large multi-year product transformation program. We worked with a global payments business backed by a PE fund on their product strategy work stream, focused on sizing tech effort needed to deliver product propositions leading to an engineering roadmap. During the work, we discovered issues of technical debt and proposed a future architecture. This advisory work has led to a multi-year engagement with multiple engineering teams. Endava is working with a global PE portfolio company that is one of the largest digital real estate organizations. The various brands of this company functioned independently on a primarily national basis and are now being rolled into a single group powered by a single technology platform. Endava is now advising on the architecture, solution design, and overall programming, as well as working alongside the existing technology teams to build out the new platform while enabling the existing business to continue running. One of our clients is a PE-owned technology software company based on the U.S. West Coast who have engaged several LATAM scrum teams. and continue to open up new business units to Endava engagements as we demonstrate our added value. We're also very active with PE investors in retail, particularly focused on target companies with e-commerce ambitions. We've been seeing a growing demand for investments to accelerate the migration to a cloud-native tech stack where packaged business capabilities sit at the heart of a customer-centric omni-channel commerce operations. and our team is helping clients move to this paradigm. Our ability to combine our understanding of the deal drivers with our architecture and product expertise makes us a unique partner for PE houses. Our goal is to scale this model globally, particularly to expand our relationship with US PE firms. As we see an increase in commercial demand across all regions and industries, We've also seen an increase in our growth from a people perspective. I'm excited to highlight that in December, we reached a milestone of 10,000 endowments. This is more than just a number. It's about having a great team doing amazing work for our clients. We ended the quarter with 10,391 employees, a 39.2% increase. from 7,464 in the same period last year. We added 775 net new employees in the last quarter. While competition for talent remains intense, our focus on recruiting the best talent in the countries where we are located is unchanged, and we continue to recruit and retain the people we need. We are also continuing to expand our geographical reach, including Poland and Canada, We are proud to be an employer of choice in Romania, Serbia, and North Macedonia, where we have won best employer awards and where we have more than half our people. We also continue to grow our LatAm presence with over 1,600 endowments in the region at the end of December, up 79% year on year, showing that we continue to be a very desirable employer in that region also. I would now like to provide a bit more granularity on our recruiting program to explain how we continue to be an employer of choice. We have a strong internal referral program, and for the 12 months ended in December, around 30% of our new hires joined Endava through this referral program. This is a strong element of the Endava culture and helps with knowledge sharing and team spirit as we grow. Our internship program also helps us attract talent. And for the 12 months ended in December, 21% of our new hires came from graduate recruiting from partner universities. University graduates begin their professional careers with us and grow into seasoned IT professionals with either specific industry vertical or discipline expertise. We also have a rehiring program, which allows for easy integration as these returning Indarbans are already very familiar with our culture. The balance of the hiring is mainly targeted towards recruitment of senior people. Further, we believe diversity and inclusion are key to our culture. Last year, we established the Indarva Diversity, Inclusion and Belonging Forum to bring together a broad and varied group of passionate Indarbans from across the business to drive and deliver sustainable organisational inclusion. We believe our strong culture is key to our low attrition level of 12.5% as of December 2021. We also continue to introduce new incentives to better align rewards to our people with Endava's growth. As part of our We Care approach to sustainability, We recently announced our focus on achieving net zero emissions from our organization and value chain, accelerating our journey to a net positive impact. These will take time and we will approach our environmental disclosures with the utmost integrity. With this in mind, we recently signed a commitment letter to science based targets, which sees Endava joining the race to zero. Additionally, We celebrated our 10,000 in dollars milestone by planting 10,000 trees, and we have a commitment to plant at least 30,000 trees by the end of our 2022 fiscal year. As a next generation technologies provider, we are mindful of the environmental impact of the software and technology infrastructures we design and deliver. We believe that we have the ability to drive sustainability through digital acceleration and we are proud to help our clients build environmentally conscious solutions. As demonstrated by our financial results, demand for our services remains strong. We're excited about the opportunities in front of us and remain confident in our ability to execute on our objectives. I'll 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 the fiscal year. Thanks, Sean.

DARPA's revenue totaled £157.7 million for the three months ended December 31, 2021, compared to £105.2 million in the same period in the prior year, a 49.8% increase over the same period in the prior year. In constant currency, our revenue growth rate was 53.4%. Profit before tax for Q2 fiscal year 2022 was £19.1 million compared to £10.6 million in the same period in the prior year. Our adjusted profit before tax for three months ended December 31, 2021 was £33 million compared to £20.6 million for the same period in the prior year. Our adjusted profit before tax margin was 20.9% for the three-month end of December 31, 2021, compared to 19.6% for the same period in the prior year. Adjusted profit before tax, or adjusted PBT, is defined as the company's profit before tax adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, and realized and unrealized foreign currency exchange gains and losses, all of which are non-cash IT. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was 46 pence for three months ended December 31, 2021, calculated on 58.0 million diluted shares as compared to 29 pence, the same period in the prior year, calculated on 57.1 million diluted shares. Revenues from our 10 largest clients accounted for 34% of revenue for the three months ended December 31, 2021, compared to 37% for the same period last fiscal year. Additionally, the average spend per client from our 10 largest clients increased from £3.9 million to £5.4 million for the three months ended December 31, 2021, representing a 40.4% year-over-year increase. In the three months ended December 31, 2021, North America accounted for 35% of revenue compared to 29% in the same period last fiscal year. Europe accounted for 21% of revenue compared to 27% in the same period last fiscal year. And the UK accounted for 41% of revenue compared to 42% in the same period last fiscal year. While the rest of the world accounted for 3% of revenue compared to 2%, in the same period last fiscal year. Revenue for North America grew 79.8% for the three months ended December 31, 2021, over the same quarter of fiscal year 2021. Comparing the same periods, revenue from Europe grew 17.1%, the UK grew 46.9%, and the rest of the world grew 109.1%. We grew in all three of our industry verticals during the quarter. Revenue from payments and financial services grew 55.8% for the three months ended December 31, 2021. Revenue from payments and financial services accounted for 51% of revenue compared to 49% in the same period last fiscal year. Revenue from TMT grew 32.5% for the three months ended December 31, 2021. over the same quarter of 2020 and accounted for 25% of revenue compared to 28% in the same period in the prior year. Revenue from other grew 58.2% for three months ended December 31, 2021 over the same quarter of 2020 and now accounts for 24% of revenue compared to 23% in the same period in the prior year. We now turn to our adjusted free cash flow which is our net cash provided by operating activities, plus grants received less net purchases of non-current tangible and intangible assets. Our adjusted free cash flow was 31.2 million pounds for the three months ended December 31, 21, compared to 18.7 million pounds during the same period last fiscal year. Our cash and cash equivalents at the end of the period remained strong at 114.2 million pounds at December 31, 2021 compared to 69.9 million pounds at June 30th, 2021. CAPEX for the three months ended December 31, 2021 has a percentage of revenue of 2.4% compared to 1.6% in the same period last fiscal year. Our guidance for Q3 fiscal year 2022 is as follows. NDARA expects revenues will be in the range of 161 million pounds to 163 million pounds, representing constant currency revenue growth of between 44% and 45%. Endava expects adjusted diluted EPS to be in the range of 42 to 44 pence per share. Our guidance for full year fiscal year 2022 is as follows. Endava expects revenues will be in the range of 636 million pounds to 640 million pounds. representing constant currency growth of between 44% and 45%. And DAVA expects adjusted diluted EPS to be in a range of 1.80 to 1.84 pounds per share. This above guidance for Q3 fiscal year 2022 and the full fiscal year 2022 assumes the exchange rates at the end of January. When the exchange rate was one British pound to 1.34 US dollar, and 1.20 euro. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Ashwin Srivakar from Citi. Your line is open.

Thank you. Good morning, John, Mark, Lauren. Solid quarter, congratulations. I guess my first question relates, John, to how you started your prepared remarks. You said you're being selective in terms of what projects you see can improve. Could you provide some more granularity around that in terms of selective in what way? Are you focused on eventual time? Are you looking at profitability? Could you provide more granularity on that?

Sure. Thanks, Ashwin. So our key is to focus on clients. where we're looking to develop a long-term scaled relationship, and indeed in industries where those prolonged tech transformations that we've been talking about are underway. So we're less interested in working on a single project for a new client if we don't think that the relationship can expand. I mean, that's always a judgment call, but that's the call that we're making. Essentially, with our business model, we want to get in and make an impact on the client's business through the product that we help them build. And then as that product is successful in the market, we see clients coming back for more. So we're looking for the relationships that's going to enable us to progress that model We also, we always have a mind to our desire as a business that I've touched on before around diversifying our geographic and vertical mix of clients. So, you know, so Endava goes down that diversification road. So we essentially put every opportunity into a scoring system because there's a lot of them coming through. in order to prioritize which business we're going to do and to prioritize where we allocate our people.

Got it, got it. And I appreciate the detail on recruiting. That was very helpful. I guess a couple of sub-questions from that. One is the sharp rise in LATAM. Would that be representative perhaps of, you know, more North America companies? opportunity, or is it just par for the course? And then you did mention, obviously, there's no direct impact from, you know, you don't have people in Russia, Belarus, or Ukraine, but given sort of the geography of where Romania is, are you expecting any sort of indirect sort of social pressure or things like that that affect you?

Okay.

So yeah, firstly on LATAM, yes, that is partly tied to the growth that we're seeing in North America. We are pushing more of the growth that we achieve with clients in North America into our LATAM delivery centers. And obviously, it's been a very strong market for us to recruit in. So between those two things, we've seen that sharp acceleration in LATAM. On your question around the sort of central-stroke Eastern European pressures, you know, Romania, we take a lot of comfort from the fact that Romania is a member of NATO, and we have about half of our staff in Romania, just under. So, you know, I do believe that the chances of the pressures that are currently going on in Russia, Ukraine, and Belarus unlikely to spill over into actual NATO territory, given that would engender a sharp response from NATO. And therefore, we gain some comfort from that. I think in some ways it's more likely that we would see work and possibly people actually heading west into our territories in Romania and Poland actually opening opportunities up for us if the situation continues to worsen to the east of us. So it's You know, I hope things don't progress in that way, but it is possible that that would have a small benefit for us.

Understood. Thank you.

Thanks, Ashwin. Your next question comes from the line of Brian Bergen from Cowan. Your line is open.

Hi. Good morning. Good afternoon. Thank you. I wanted to stay on the topic of supply here. So it sounds like attrition remains stable and low. which is good. Have you noted any accelerated competition for talent, though, as some providers may be looking to diversify beyond that current geopolitical footprint they have in Eastern Europe? And how are you thinking about regions you intend to lean into most from a headcount expansion standpoint over the next couple of years?

I mean, recruitment in our markets is always a huge competition, and I wouldn't say that it's been any sharper in the last quarter than we've previously experienced. The numbers of people that we lose to larger competitors is really quite small. We're talking under 5% of the numbers that we actually recruit in a quarter to give some context to it. So it's not a huge factor driving attrition for us. And that is largely down to the strength that we have as an employer of choice in the markets that we operate in. So yes, it's well under control. If you look at some of the markets that we've got our eyes on, I've mentioned that we're moving into Poland and Canada. And we've also established a corporate entity in Malaysia. And so we'll start to scale in those markets as well over the next few quarters. Obviously, they'll start reasonably small. and we'll get the culture well-established so that we progress as an employer of choice in those locations as well before you see a huge impact in terms of acceleration there. But, yes, we are moving beyond our existing geographies, as we've continued to do over the last few years.

Okay. Makes sense. And then just the acceleration in the £1 million-plus revenue clients, I think that may have been a record uptick on a quarter-on-quarter basis for you here. You just talk about the mix of those new large clients. Is it broadly represented across industries and regions or any that stand out for you more so here? And then can you just talk about any changes in sales investment or the go-to-market approach that have really spurred that nice uptick over this quarter and the last several?

Yeah, so, I mean, one of the things that I touched on –

in previous quarters is that within dava we we engage with clients in a proof of concept or prototype type basis doing some ideation work around how technology could be applied to their business and where benefits would come and then as that proof of concept is brought to life it scales into production systems um and you know we've we've been broadening our smaller client base over the past two years. And those 1 million plus clients in the main is those smaller customers bubbling up into production system engagements. And then as we scale our footprint with clients into perhaps other product areas that they have across the business, that is the main driver for the growth in larger clients. The private equity side also does that. We engage with them on a smaller basis as they're considering investing in a prospective portfolio company, and then as they make that investment and some of the technical transformation work to the platforms in those businesses, that then bubbles up into a larger production work in the 1 million plus space. Those are the main drivers that push that growth in the 1 million plus clients. And we continue to see a strong pipeline of those sorts of engagements in the 1 million minus or under a million space that we will be working on growing into that larger client size. All right, thank you. In terms of the sales teams, it largely, you know, the growth in different regions and different sectors largely follows where we put salespeople on the ground. So as you know, a couple of years ago, we put a lot of effort into North America, and that is cascading into North American growth. So the U.S. was up 80% year-on-year last quarter, and And we're just putting people on the ground in the rest of the world, which more than doubled year on year. And actually, we had, from a rest of the world point of view, it was the first quarter where we had a top 10 client from the rest of the world. So it's starting to pull through into the larger clients there as well.

Our next question comes from a line of Mayank Tandon from Needham & Company. Your line is open.

Thank you, John. I was just curious in terms of, as we think about the growth going forward, how should we break it down between just recruiting, so sort of linear headcount growth, versus is there any room for utilization to improve? I know you've been running pretty hot, just given how strong demand is. And also, if you could just comment on pricing power and this very interesting dynamic demand market?

Hi, Mark.

It's Mark here. So a lot of the headline growth that we've had this quarter, 53%. So the average headcount was up 37%. So that drives part of it. We have about 4% added to that from increased utilization. So it's probably around mid, you know, about 70, between 70 and 71, which is in our sweet spot. And then we've had a further sort of 7%, which is a slight tweak in the offshore mix. And then the balance is actually the Monday rate increasing, which is 4 percentage points of growth to 53. Now, going forward, the headcount growth is still going to remain a driver of that growth. We're not going to get much leverage from a utilization perspective. And I also semi-believe that onshore-offshore mix has sort of stabilized. So the growth rates coming forward implied in the guide are going to be headcount related, but also through to passing on that cost pressure that we and others are experiencing through rate rises.

That's a helpful mark. Then as a quick follow-up, I just wanted to get a sense of, as you look at your top 10 clients and you've had again, very strong growth within the top 10 based on some of the metrics you shared. Where are you in terms of maturity with these clients? Is there still plenty of room to grow or do you believe that you've now maybe come to a point where growth will start to maybe plateau and slow down and the growth will be really fueled by the non-top 10 going forward?

So we believe there's lots of room for growth in many of the top 10. They're big organizations in the main where our footprint has got a lot of room for expansion. There's probably a couple in there where we get into the place where it's going to start to plateau, but the remainder offer a lot of room for growth. We do expect that the top 10 as a proportion of our overall business will slowly come down simply because one of our stated aims is to diversify the business. That means we're obviously pushing for other clients to grow faster as part of that diversification into new geographies and territories and so on. But lots of room for growth there.

That's helpful. Congrats on the quarter.

Thank you.

Thank you. Your next question comes from the line of James Fossett from Morgan Stanley. Your line is open.

Thanks very much. Wanted to follow up on the question around hiring. In the past, you've kind of talked about having a normalized ceiling of growing headcount by around 30% per year. Are we in a situation now where you can – competently lift that at least as a potential? Or should we just look at the current rate of hiring as more of a surge and that sustaining that above that 30% is probably going to be difficult and not likely?

Yeah, thanks, James. It's a good question and one that we watch closely. We've always guided that 30% is probably a sensible max. There were a couple of factors coming out of the pandemic that contributed to us being able to push it a bit faster. One of which was that we continued to promote people through the pandemic. And so with recruitment being slower during that period, the organization became more senior. And that gave us an opportunity coming out of the pandemic to expand our faster than our previous maximum that we would have guided at. Secondly, our attrition is low. We're at 12.5% this quarter, which is below the 15% that we target. And lower attrition means that we can grow a little bit faster because the knowledge base within the business of how we operate remains stronger. And so those factors together have enabled us to push the 38% year-on-year growth that you saw in Q2. We do expect that that will start to come down. We may keep that 30% max running a little bit higher, but I don't think it will continue at the 38% level going forward.

Useful color. Appreciate that. And then the other question I wanted to ask was around acquisitions. You know, there's always it seems like maybe an opportunity or at least some benefit from doing tuck in acquisitions of talent and specific skill sets. What are you seeing and thinking about in the current environment, especially with the valuations volatility that we've seen over the last few months? How should we think about that part of capital allocation?

So we are always looking for good opportunities and acquisitions. We have a team that are focused on doing that. And we're seeing a lot of opportunities. We are, however, very choosy around businesses that have the right DNA that are going to integrate well within DAVA, namely ones with an ideation to production type mindset with an agile approach. to the way in which they operate and ones who are utilizing next-gen technology. Obviously, there's nothing that I can report that we're working on right now, but if there is anything material, we would report that. Strategically, where acquisitions work best for us is helping, number one, with the geographic diversification. and pushing into some of the new territories that we want to build up in. Secondly, in the sector acceleration of some of the industry verticals that we're very focused on because of bringing specific experience and capability in that. And then finally, sometimes there's businesses that bring some skills or technology capabilities that just help us boost an area within the business. Of course, sometimes you find a business that brings all three components in the deal. So that's what we're always looking for. The strategy remains the same. And in capital allocation terms, there are some good returns to be had for us in the sorts of businesses that we can buy.

Thank you.

Thanks, James. Your next question comes from a line of Maggie Nolan from William Blair. Your line is open.

Thank you. Congratulations. Could you talk a little bit about the growth drivers in private equity, particularly how the Intuitus acquisition has progressed over time versus the Bain relationships? And then when you do work for PE, does that show up in the financial services vertical regardless of what industry the portfolio company you're working on might be in?

So private equity, as I touched on in the opening remarks, and it's the portfolio companies of private equity owners, is around the 25%, maybe slightly more than that, percent of our revenue comes from those sorts of businesses, which is why we highlight it. The Intuitus acquisition really helped us with the earlier stage conversations with PE firms, i.e., a lot of the work that we're doing with them is actually before they put a bid in and complete an acquisition. And with the focus of it is around how the technology platform can be transformed as part of their investment thesis. And that's attractive to us as well because when they buy a business with that investment thesis, we can help them with the downstream work in transforming it. We report those portfolio companies in the industry segment that the portfolio company sits in. So it doesn't pop into payments and financial services just because it's got a PE owner. And indeed, most of the PEs, even the upfront work when they buy a business, the consultancy type work we're doing upfront, they will book against the portfolio company. So even that will get reported in the wider industry verticals. Where it gets reported into the PE firm and will go against payments of financial services is where they don't win the bid and they carry the cost themselves.

Did I fully cover your question?

Yes, that's great. Thanks. My other question is on the revenue per employee. which has been trending up nicely. Could you just talk about some of the drivers behind that and then how sustainable this trend is in the near to medium term?

Hi, Maggie. So the revenue pair is basically a function of the mandate rates and utilization. So it's sort of been indicating that we're probably in our sweet spot in terms of utilization. We're in that sort of low 70s. It depends on quarter to quarter, whether we are accelerating in terms of building bench ahead of demand, which has an impact. And then it's the mandate rate. So the utilization, I think, will broadly be around where it is, bar those sort of spurts to get ahead of demand a quarter ahead. And then it's a function of pricing. And the pricing in terms of quarterly progression we believe will improve. We're confident in our ability to recover the cost pressures through the battle for talent. So I think there'll be some stability and probably some upward movement on our revenue per head.

Thanks, Mark. Thanks, John.

Thanks, Maggie.

Your next question comes from the line of Brian Keane from Deutsche Bank. Your line is open.

Hi, guys. I want to ask about obviously the tension in Russia and Ukraine. Does that disruption to any of your peers lead to new work potentially for Endava? How do you think about that, John?

Hello? This is the operator.

It looks like we have lost connection with the speaker line. Please stand by. Your line will be placed on music hold until they return. Ladies and gentlemen, thank you for standing by. Your next question comes from the line of Brian Keane from Deutsche Bank. Your line is open.

Hi, Brian. Unfortunately, we dropped just as you were starting to ask your question. So if you could pitch it again, we didn't hear it.

Yeah, yeah, no problem. I just want to ask about the tension going on in Russia and Ukraine. Does that disruption to any peers potentially lead to new work for Endava? Just thinking how this you know, a situation like that when it takes place, what does that mean for your business and what do you think it means for peers? Do peers definitely have disruption issues that lead to more work to endowment?

I mean, I couldn't really comment on peers, but we are certainly seeing some of our clients who have footprint with other players in in those territories um start to have conversations with us about whether um they could build up what they're doing with us a little bit more um just because of the risk sensitivities that they have to um to what's going on um so um you know i wouldn't expect it to be a huge flow of work um and and indeed as you'll have picked up we've already um you know, supply constrained in the work that we're taking on. But if it's the right client and the right opportunity, we'll certainly engage with some of those opportunities that are coming through. I think the other thing is we are starting to see some movement of staff who are currently, particularly in the Ukraine, who are thinking maybe it's time to move to another country. And, you know, that's actually at relatively small levels at the moment is starting to be visibly stronger.

Got it. Got it. And then one question on the guidance from Mark. If you look at the implied 4Q revenue guide, it comes down a little bit from where you guys have been running this fiscal year in 3Q. So just trying to think about when we get to 4Q, I know the comp gets a lot difficult after significant growth rates that started in fourth quarter. How much of the fourth quarter run rate is kind of conservatism, anniversary of acquisitions, just more normalization of the growth? Just trying to think about the factors for 4Q by the time we get there.

Yeah, so I mean, the guide at the top is around 28% per organic constant currency growth. That may look as though it's slowing when you compare it with the quarters, Q1, Q2, Q3, but it is dipping out the M&A impact, as you said. And also our Q4 FY21, our organic constant currency was 35%. offer very sort of strong recovery from COVID. So we have a combination of a tough comp there and also the unwinding of the M&A contribution, which we executed in Q3 last fiscal. But the momentum is very strong. We anticipate keeping utilization where it is, and we're also making some allowance for mandate rate expansion.

Got it. And how much was the M&A contribution for the quarter again, Mark?

This quarter?

Yeah, yeah.

It was about 10%.

Great.

So underlying organic is around 44%.

Got it. Thanks and congratulations on all the success.

Thanks. Thanks, Brian. Your next question comes from a line of Jamie Friedman from Susquehanna. Your line is open.

Hi, good morning. Let me echo the congratulations. I'll just ask my two up front, John, since we have you. How are you thinking about IT budgets for 22 calendar? I realize you guys make your own weather, but in general, how are the budget trends? That's the first one. And then the second one is in your prepared remarks, John, you talked about the insurance vertical. You had an example, but I was wondering if you could elaborate there as to how you're seeing that one evolve. Thank you.

Yeah, you rightly, Jamie, call out that the IT budget spend that clients pushing in our direction, you know, partly comes from their IT world. A lot of it comes from business investment mindset around how technology can have an a real impact on the relevant parts of the business. So we're not as directly exposed to ebbs and flows in IT budgets as some of the more traditional players are. So to me, it doesn't feel like there's any issue. There's plenty of money that clients are pushing in the direction of what we do. But I don't have the same sense of the wider IT budget spending trends that a lot of the more traditional wider based services business would have. On the insurance vertical, a lot of what's happening in the insurance space is around data, around the move to clouds. Data being the ability to create more competitive insurance products. to provide foundations for better use of automation, things like straight-through processing of claims, which we've successfully done with a few clients, as in no human touches the entire process of the claim once the client has entered. There's also a bit of activity around no-code and low-code solutions for underwriting and pricing. that clients are pushing out into the market and quite a bit of direct-to-market website-type capability where more, say, broker-type clients are actually pushing direct into the consumer market. So those are a number of areas across insurance where we're seeing growth and activity.

Thank you for that.

Thanks, Jay. Your next question comes from a line of Mashi Katri from Wedbush Security. Your line is open.

Hey, thanks for squeezing me in and let me add my congratulations to a strong result. Two big picture kind of questions. One, can you give us some color in what you're seeing in terms of wage inflation, maybe in terms of ranges? And then given the supply constraints issues that we're seeing out there, are you having to bump up the number of comp increases that you're doing on an annual basis? Maybe you can kind of refresh, give us kind of a color in terms of how often have you been doing those comp increases on an annual basis? Thanks.

I mean, on the wage inflation, we're seeing slightly our main pay rise has gone through. in January. We don't see any sort of uptick in terms of attrition at this stage. We'll see how we go with that. But typically the average cost per head we've managed to contain with our normal sort of distribution curve. So we're seeing sort of a sequential uplifting cost of about 3% or so when you look at it from one quarter to the other. But actually when it translates into a gross margin impact where you We've lost probably about a percentage when you go from Q2 to Q3. And that's something that we've usually experienced as we've gone through the year. It is our major sort of pay around. It does have that impact. And then we start to recover it through the balance of the year, through discussions with clients around rate increases, around the appropriate renewal stage. I think you had a backup, didn't you? Okay, actually the last question you had.

I'll pick it up. So our annual pay review is the main point at which we do comp increases. The only other significant element is we do have quarterly reviews on promotions across the business and obviously when we promote someone we review their comp at the same time. But apart from that it is mainly the annual cycle. So you see quite a quite a large pay component coming through in our Q3, and then it takes the rest of the year, as Mark touched on, for the price rises to come through that then push the margins back up again. Understood.

Thank you.

Thanks. Your next question comes from a line of Steve Enders from KeyBank. Your line is open.

Hi, great. Thanks for taking the question. I just want to ask a bit about some of the underlying demand drivers you called out in the comments. I think one of the areas was working with the SaaS vendors and some of the package software vendors and helping enable that. So I guess, one, just how are you kind of seeing the underlying opportunity from here to work with that? And how should we kind of think about that as a percent of the mix going forward?

Yeah, I mean, that's something that sits within our TMT space. And we've been very excited to see more work coming through with the SAS technology providers, typically on the West Coast in the US. And the work we're doing for them is around the engineering of the products that they push out there. There are a number of them, and they're a big opportunity for us, so we're excited to see that picking up.

Okay, great. And then you mentioned as well that you're planning to move into Malaysia and establish a new corporate entity there. I think we've talked in the past about some of the plans to enter the Asia market, but has this kind of changed how you're thinking about a build versus a by point of view as you think about targeting Asia more broadly?

So we will look at M&A opportunities. And if we can find the right sort of business, we'll look at M&A as a route to expanding. The Malaysia one, we are building organically. We just have opportunities with clients in the Asia-Pacific region. And we wanted to, a big part of our model is that similar time zone agile delivery capability that we pushed through. And for clients in Australia, as we're scaling beyond early engagements, we really needed capability on the ground in Asia Pacific. So we're not waiting for an M&A opportunity to come through We're going through it organically in Malaysia.

Okay, perfect. Appreciate you taking my questions.

Thank you. This concludes our question and answer session. I will turn the call back over to John Cottrell for some closing remarks.

Great. Well, thank you all for joining us today. As you all have noted, the demand for our services remains strong. and that is across all of our verticals and geographies. And so we remain very positive about our business position. I look forward to speaking to you in a few months at our next earnings call. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.